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, 2006
                               -------------------------------------------------
                                                     OR

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

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


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

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

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

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

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

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

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

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


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

                      APPLICABLE ONLY TO CORPORATE ISSUERS:

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

             Class                        Outstanding at November 10, 2006
-----------------------------             --------------------------------
Common Stock, $2.00 par value                    11,367,487 Shares

<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.

                                    FORM 10-Q

                                QUARTERLY REPORT
             for the Three and Nine Months ended September 30, 2006
                                   (Unaudited)


                                TABLE OF CONTENTS

                                                                      PAGE
PART I. FINANCIAL INFORMATION

   Item 1. Financial Statements:

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

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

   Consolidated Statement of Stockholders' Equity
            for the Nine Months ended September 30, 2006.................4

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

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

   Item 2. Management's Discussion and Analysis of
              Financial Condition and Results of Operations..............29-42

   Item 3. Quantitative and Qualitative Disclosures About Market Risk....43

   Item 4.  Controls and Procedures......................................43

PART II. OTHER INFORMATION

   Item 1A. Risk Factors ................................................44

   Item 2. Unregistered Sales of Equity Securities and Use of Proceeds...44

   Item 3. Defaults Upon Senior Securities...............................44

   Item 6. Exhibits .....................................................44

SIGNATURES...............................................................45

CERTIFICATIONS...........................................................46-48

<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

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


                                     ASSETS
<TABLE>
                                                                  September 30,
                                                                      2006           December 31,
                                                                   (UNAUDITED)           2005
                                                              -----------------   ----------------
<CAPTION>
<S>                                                               <C>                <C>
 CURRENT ASSETS:
      Cash and Cash Equivalents                                   $    869,021       $  1,846,239
      Accounts Receivable                                              288,102            218,087
      Prepaid Expenses                                               1,939,955          1,697,034
      Other Current Assets                                             177,301            524,200
      Assets of Discontinued Operations                                  1,560            401,672
                                                              -----------------   ----------------
           TOTAL CURRENT ASSETS                                      3,275,939          4,687,232
                                                              -----------------   ----------------

 VESSELS & EQUIPMENT
      Vessel - Palm Beach Princess - under Capital Lease            17,500,000         17,500,000
      Equipment                                                      3,884,142          3,334,079
      Leasehold Improvements                                           921,899            988,625
      Vessel - Big Easy - under Capital Lease -
          Not in Service                                            20,305,348         20,305,348
      Vessel Not Placed in Service - Royal Star                      3,054,735          3,007,216
                                                              -----------------   ----------------
                                                                    45,666,124         45,135,268
      LESS: Accumulated Depreciation and Amortization                6,041,832          4,024,434
                                                              -----------------   ----------------
           TOTAL VESSELS & EQUIPMENT - NET                          39,624,292         41,110,834
                                                              -----------------   ----------------


 OTHER ASSETS:
      Notes Receivable                                              14,278,651         14,278,651
      Vessel Deposits - Related Parties                              9,733,136          9,726,377
      Deposits and Other Assets - Related Parties                    4,799,321          4,541,125
      Deposits and Other Assets - Non-Related Parties                1,327,237          1,734,756
      Spare Parts Inventory                                            996,557          1,032,603
                                                              -----------------   ----------------
           TOTAL OTHER ASSETS                                       31,134,902         31,313,512
                                                              -----------------   ----------------

 TOTAL ASSETS                                                     $ 74,035,133       $ 77,111,578
                                                              =================   ===============
</TABLE>


 See Notes to Consolidated Financial Statements.


                                        1

<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

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

                      LIABILITIES AND STOCKHOLDERS' EQUITY

<TABLE>
                                                              September 30,
                                                                  2006              December 31,
                                                               (UNAUDITED)              2005
                                                              -----------------   ----------------
<CAPTION>
<S>                                                               <C>                <C>
 CURRENT LIABILITIES:
      Accounts Payable                                            $  6,244,739       $ 7,310,569
      Accrued Expenses                                               4,210,687         4,519,508
      Accrued Expenses -Bareboat  Charter - Related Party            1,689,167           129,425
      Short-Term Debt                                                4,728,711         4,133,997
      Vessel Equipment Lease Payable - PDS                           1,881,357                -
      Vessel Capital Lease Payable - Current Portion                31,763,818        26,255,439
      Deferred Interest - Short-Term                                   529,860           510,423
      Short-Term Debt - Related Parties                                419,864           531,353
      Liabilities of Discontinued Operations                           413,000           405,802
                                                              -----------------   ----------------
           TOTAL CURRENT LIABILITIES                                51,881,203        43,796,516
                                                              -----------------   ----------------

 LONG-TERM LIABILITIES:
      Vessel Capital Lease Payable - Long Term Portion
        - Related Party                                              3,500,000         3,500,000
      Long-Term Debt - Net of Current Portion                           23,997            93,108
      Deferred Interest - Long-Term                                    840,546         1,239,609
      Long-Term Advances From Related Parties                          508,710           653,571
                                                              -----------------   ----------------
           TOTAL LONG-TERM LIABILITIES                               4,873,253         5,486,288
                                                              -----------------   ----------------

 DEFERRED INCOME                                                     1,505,641         1,559,388

 COMMITMENTS AND CONTINGENCIES                                      -                       -


 STOCKHOLDERS' EQUITY:
      Series A Preferred Stock, $100 Par Value,
         Authorized 500,000 Shares, 362,844
         Issued and Outstanding                                     36,284,375        36,284,375
      Series B Convertible Preferred Stock, $10 Par Value,
         Authorized 500,000 Shares, 500,000
         Issued and Outstanding                                      5,000,000         5,000,000
      Common Stock, $2 Par Value, Authorized 25,000,000
        Shares 12,282,564,  Issued and Outstanding                  24,565,125        24,565,125
      Capital in Excess of Par                                      23,972,884        22,462,582
      (Deficit) (subsequent to June 30, 1993,
         date of quasi-reorganization)                             (73,589,810)      (61,585,158)
                                                              -----------------   ----------------
                                                                    16,232,574        26,726,924
      LESS:
         Treasury Stock, 915,077 Shares                               (457,538)         (457,538)
                                                              -----------------   ----------------
           TOTAL STOCKHOLDERS' EQUITY                               15,775,036        26,269,386
                                                              -----------------   ----------------

 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                        $74,035,133       $77,111,578
                                                              =================   ================
</TABLE>

 See Notes to Consolidated Financial Statements.

                                       2

<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

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

<TABLE>

                                                             Three Months Ended                 Nine Months Ended
                                                                September 30,                     September 30,
                                                     ---------------------------------   ------------------------------
                                                            2006            2005              2006            2005
                                                     ---------------- ----------------   --------------- --------------
<CAPTION>
<S>                                                     <C>              <C>              <C>              <C>
 OPERATING REVENUES:
      Gaming                                            $  5,892,368     $  6,232,595     $  21,029,556    $ 21,935,263
      Fare                                                   479,591          627,080         2,092,120       2,457,928
      On Board                                               413,995          467,529         1,277,135       1,580,807
      Other                                                  146,596           63,863           355,290         297,001
                                                     ---------------  ---------------    --------------  --------------
           NET OPERATING REVENUES                          6,932,550        7,391,067        24,754,101      26,270,999
                                                     ---------------  ---------------    --------------  --------------

 OPERATING COSTS AND EXPENSES:
      Gaming                                               2,694,223        2,142,029         8,473,346       7,026,588
      Fare                                                   685,918          975,632         2,157,815       3,340,143
      On Board                                               199,772          218,295           655,864         753,889
      Maritime & Legal Expenses                            1,979,905        1,846,962         7,108,141       5,375,756
      General & Administrative Expenses                      754,226          611,824         2,725,017       2,135,224
      General & Administrative Expenses - Parent             360,525          573,730         1,750,681       1,541,231
      Ship Development Costs - Big Easy                            -        2,332,773                 -       6,715,465
      Ship Carrying Costs - Royal Star                       418,621          350,569         1,317,521         528,408
      Development Costs - Other                               41,956          241,504           341,502         476,682
      Equine Costs                                                 -          274,019                 -         722,008
      Depreciation & Amortization                            584,235          657,198         2,264,713       1,686,604
      Loss on Impairment of Assets                                 -                -           400,000         150,000
                                                     ---------------  ---------------    --------------  --------------
           TOTAL OPERATING COSTS AND EXPENSES              7,719,381       10,224,535        27,194,600      30,451,997
                                                     ---------------  ---------------    --------------  --------------

 OPERATING (LOSS)                                           (786,831)      (2,833,468)       (2,440,499)     (4,180,998)
                                                     ---------------  ---------------    --------------  --------------

 OTHER INCOME (EXPENSE):
      Interest and Financing Expenses                     (1,895,768)      (1,321,432)       (6,624,598)     (2,451,756)
      Interest and Financing Expenses - Related Party       (533,171)        (151,438)       (1,649,247)     (1,069,300)
      Cost of Warrants Granted for Financing                (437,204)               -        (1,510,302)              -
      Interest Income                                          1,681           13,667             4,478          37,005
      Interest Income Related Parties                         71,865           72,888           215,516         205,992
                                                     ---------------  ---------------    --------------  --------------
           TOTAL OTHER INCOME (EXPENSE)                   (2,792,597)      (1,386,315)       (9,564,153)     (3,278,059)
                                                     ---------------  ---------------    --------------  --------------

 (LOSS) BEFORE TAX PROVISION                              (3,579,428)      (4,219,783)      (12,004,652)     (7,459,057)
       Income Tax Expense                                          -            7,000                 -          97,000
                                                     ---------------  ---------------    --------------  --------------

 NET (LOSS)                                             $ (3,579,428)    $ (4,226,783)    $ (12,004,652)   $ (7,556,057)
                                                     ================ ================   =============== ===============

 NET BASIC AND DILUTED (LOSS) PER COMMON SHARE               $ (0.31)         $ (0.40)          $ (1.06)        $ (0.72)
                                                     ================ ================   =============== ===============

 WEIGHTED AVERAGE COMMON
    SHARES OUTSTANDING - Basic & Diluted                  11,367,487       10,567,487        11,367,487      10,567,487
                                                     ================ ================   =============== ===============
</TABLE>

 See Notes to Consolidated Financial Statements.

                                        3
<PAGE>
                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                  FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006
                                   (Unaudited)

<TABLE>
                                                               Series A            Series B Convertible
                                                              Preferred                 Preferred                  Common
                                                       -----------------------  -----------------------  -------------------------
                                                       Number of                Number of                Number of
                                                       Shares        Amount     Shares        Amount     Shares          Amount
                                                       ---------  ------------  ---------   -----------  ---------    ------------
<CAPTION>
<S>                                                    <C>        <C>           <C>         <C>          <C>          <C>
BALANCE - DECEMBER 31, 2005                            362,844    $ 36,284,375  500,000     $ 5,000,000  12,282,564   $ 24,565,125
   Warrants Issued as Compensation                           -               -        -               -           -              -
Net (Loss) for the Nine Months Ended September 30, 2006      -               -        -               -           -              -
                                                        ---------  ------------  ---------   -----------  ---------    ------------
BALANCE - SEPTEMBER 30, 2006                           362,844    $ 36,284,375  500,000     $ 5,000,000  12,282,564   $ 24,565,125
                                                        =========  ============  =======     ===========  ==========   ============
</TABLE>

<TABLE>
                                                       Capital                            Treasury
                                                       in Excess                          Stock
                                                       of Par            (Deficit)        At Cost            Total
                                                       ------------     -------------     ----------      ------------
<CAPTION>
<S>                                                    <C>              <C>               <C>             <C>
BALANCE - DECEMBER 31, 2005                            $ 22,462,582     $ (61,585,158)    $ (457,538)     $ 26,269,386
   Warrants Issued as Compensation                        1,510,302                 -              -         1,510,302
Net (Loss) for the Nine Months Ended September 30, 2006           -       (12,004,652)             -       (12,004,652)
                                                        ------------     -------------     ----------      ------------
BALANCE - SEPTEMBER 30, 2006                           $ 23,972,884     $ (73,589,810)    $ (457,538)     $ 15,775,036
                                                        ============     =============     ==========      ============
</TABLE>

      See Notes to Consolidated Financial Statements.

                                       4

<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
                                   (Unaudited)

<TABLE>
                                                                                 Nine Months Ended
                                                                                   September 30,
                                                                        -------------------------------------
                                                                             2006                    2005
                                                                        -------------            ------------
<CAPTION>
<S>                                                                     <C>                      <C>
 CASH FLOWS FROM OPERATING ACTIVITIES:
      (LOSS) BEFORE DISCONTINUED OPERATIONS                             $ (12,004,652)           $ (7,556,057)
      Adjustments to reconcile income (loss) to net cash (used in)
          provided by operating activities:
           Depreciation and Amortization                                    2,264,713               1,686,604
           Expense of Options/Warrants Granted                              1,510,302                 191,243
           Interest Added to Capital Lease Debt - PDS                       5,508,377                       -
           Impairment of Assets                                               400,000                 150,000
           (Decrease) in Deferred Income                                      (53,747)                (53,510)
           Changes in Operating Assets and Liabilities -
              (Increase) Decrease in Accounts Receivable                      (70,015)                542,785
              (Increase) Decrease in Other Assets                             346,899                (169,044)
              (Increase) in Prepaid Expenses                                 (242,921)               (595,861)
              Increase in Accounts Payable and Accrued Expenses             2,066,450               4,076,030
                                                                        -------------            ------------
      CASH (USED IN) OPERATING ACTIVITIES BEFORE
         DISCONTINUED OPERATIONS                                             (274,594)             (1,727,810)
      CASH PROVIDED BY DISCONTINUED OPERATING ACTIVITIES                        7,200                  87,802
                                                                        -------------            ------------
      NET CASH (USED IN) OPERATING ACTIVITIES                                (267,394)             (1,640,008)
                                                                        -------------            ------------
 CASH FLOWS FROM INVESTING ACTIVITIES:
     Purchase and Improvements of Big Easy - Related Party                          -              (6,230,505)
     Purchase and Improvements of Royal Star                                        -              (1,689,798)
     Purchase Options in Big Easy - Related Party                                   -              (2,973,575)
     Note Receivable Collected - Related Party                                      -               2,600,749
     Advances -  Related Party                                                      -              (2,246,355)
     Livestock Expenditures                                                         -                (328,247)
     Capital Expenditures                                                    (624,328)               (357,706)
     (Increase) Decrease in Other Investment Activity                         407,183                 250,639
                                                                        -------------            ------------
      NET CASH (USED IN) INVESTING ACTIVITIES                                (217,145)            (10,974,798)
                                                                        -------------            ------------
 CASH FLOWS FROM FINANCING ACTIVITIES:
     Funds Received from PDS Notes & Other Lenders                                  -              10,829,417
     Proceeds from Sale of Series B Preferred Stock                                 -               2,959,500
     Fees Paid on Sale of Series B Preferred Stock                                  -                (244,500)
     Proceeds from Related Party Loans                                              -               2,651,558
     Financing Costs                                                                -              (1,120,240)
     Principal Payment on Stock Purchase Note                                       -              (1,241,669)
     Advances (Paid) Received (to) From Related Parties                        (9,978)               (104,612)
     Principal Payments on Short Term Notes                                  (393,350)               (340,002)
     Principal Payments on Long Term Notes                                    (89,800)               (374,727)
     Decrease in Balances Due to/from Discontinued Subsidiaries                 7,313                  86,853
                                                                        -------------            ------------
      CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
        BEFORE DISCONTINUED FINANCING ACTIVITIES                             (485,815)             13,101,579
      CASH (USED IN) DISCONTINUED FINANCING ACTIVITIES                         (7,313)                (86,853)
                                                                        -------------            ------------
      NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES                    (493,128)             13,014,726
                                                                        -------------            ------------
 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                        (977,667)                399,920
           LESS CASH AND CASH EQUIVALENTS  FROM
             DISCONTINUED OPERATIONS                                              449                     111
      CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD                  1,846,239               1,640,895
                                                                        -------------            ------------
      CASH AND CASH EQUIVALENTS AT END OF THE PERIOD                    $     869,021            $  2,040,926
                                                                        =============            ============
      Supplemental Disclosures of Cash Flow Information:
           Cash paid during the period for:
           Interest                                                     $      47,257            $  6,375,772
           Income Taxes                                                 $      78,130            $          -

</TABLE>

     Supplemental Schedule of Non-Cash Investing and Financing Activities:

     During the Nine Months ended  September 30, 2006, the PDS interest  expense
          for the period in the  amount of  $5,508,377  added to the  short-term
          principal balance of the respective leases.

 See Notes to Consolidated Financial Statements.

                                       5

<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

(1) BASIS OF PRESENTATION AND GOING CONCERN

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

     In an audit opinion report dated April 13, 2006 on the Company's  financial
statements   for  the  fiscal  year  ended  December  31,  2005,  the  Company's
independent  auditors included an explanatory  paragraph  stating:  (i) that the
Company  sustained  recurring loses from operations of approximately $21 million
during its last three  fiscal years  ending  December 31, 2005;  and (ii) was in
violation of its loan  covenants with its major lender until March 22, 2006 when
it entered into a  Forbearance  Agreement  with its primary  lender,  PDS Gaming
Corporation  ("PDS").  During the nine months  ended  September  30,  2006,  the
Company  sustained  additional  losses  from  operations  of  approximately  $12
million.

     During the nine months ended  September 30, 2006, the Company was unable to
make the monthly  payments due under the  Company's  outstanding  debt and lease
obligations  to PDS.  During our first  quarter ended March 31, 2006, we entered
into a  forbearance  agreement,  subsequently  amended  during our third quarter
ended  September  30,  2006,  with PDS which  expired on August 29,  2006.  Both
agreements  deferred the monthly  principal and interest payments under our loan
agreement and monthly rental payments under our equipment  leases.  We agreed to
retain a  financial  advisor  to  analyze  and  pursue  strategic  alternatives,
including the sales of one or more assets.

     On October 3, 2006, we received notice from PDS that it had accelerated the
maturity of our obligations and declared all amounts  remaining unpaid under the
Loan  Agreement and the Note dated June 30, 2005,  immediately  due and payable.
PDS has demanded the payment of all unpaid  obligations  and all amounts payable
under our equipment leases with PDS. As of October 1, 2006, we owe approximately
$35.6 million under the loan agreement and note and  approximately  $4.5 million
under the equipment leases.

     The Company does not currently  have the means to satisfy PDS's demands and
is  currently  negotiating  with PDS for an  amicable  solution.  The Company is
continuing  to analyze and pursue  strategic  alternatives,  including  sales of
assets.  No assurances can be given that the Company will be successful in these
endeavors.  If we are  unsuccessful  in resolving  this  matter,  we believe the
lender will take action in an attempt to foreclose against our assets.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     (A) Nature of Operations -  International  Thoroughbred  Breeders,  Inc., a
Delaware corporation ("ITB" and together with its subsidiaries,  the "Company"),
was incorporated on October 31, 1980. Its principal  operating  subsidiary,  ITG
Vegas,  Inc. ("ITG Vegas") is currently  engaged in an entertainment  cruise and
casino  ship  business  under a  bareboat  charter  of the vessel M/V Palm Beach
Princess (the "Palm Beach Princess").  The Palm Beach Princess performs fourteen
cruises weekly from the Port of Palm Beach,  Florida,  that is, a daytime and an
evening  cruise each day. Each cruise is of five to six hours  duration.  During
each cruise, the Palm Beach Princess offers a range of amenities and services to
her passengers,  including a full casino,  sit-down buffet dining,  live musical
shows,  bars and  lounges,  swimming  pool and  sundecks.  The  casino  occupies
approximately   15,000  square  feet  aboard  the  ship  and  is  equipped  with
approximately 425 slot machines, 24 table games, including blackjack,  craps and
roulette, 5 poker tables, and a sports wagering book.

     Using the funding provided by the PDS Transactions (see Note 3) and working
capital,  our  subsidiary,  ITG  Palm  Beach,  LLC,  began  making  alterations,
retrofits and  improvements to a second vessel,  the Big Easy, to prepare it for
use as a casino cruise ship.  After numerous  delays caused by start up problems
and hurricane  Wilma, we began limited regular  passenger  service also from the
Port of Palm  Beach,  Florida on  November  12,  2005.  On  February  1, 2006 we
indefinitely  suspended operations of the Big Easy after two and one half months
of operations because the

                                        6

<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

Coast  Guard  removed  the  vessel's   Certificate   of  Inspection   until  the
installation of an insulating bulkhead was completed. The February 1, 2006 Coast
Guard  decision was the last in a series of  unforeseen  business  circumstances
which limited  management's  ability to introduce the Big Easy to the market and
necessitated   the  suspension  of  Big  Easy   commercial   cruise   operations
indefinitely.

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

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

     (D) Revenue Recognition - Casino revenue consists of gaming winnings net of
losses. Net income is the difference between wagers placed and winning payout to
patrons and is recorded  at the time wagers are made.  The vast  majority of the
wagers  are in the form of cash;  although,  to a  limited  extent,  we do grant
credit to our customers.  Fare revenues  consist of admissions to our vessel and
are  recognized  as earned.  On board  revenues  consist  primarily of ancillary
activities  aboard  the  vessel  such as the sale of food and  beverages,  cabin
rental,  gift shop,  spa  activities  and skeet  shooting.  These  revenues  are
recognized on the date they are earned.

     (E)  Accounting  Periods - The  subsidiaries  which  operate the Palm Beach
Princess and operated  the Big Easy until  February 1, 2006 end their  quarterly
accounting periods on the last Sunday of each quarter. These end of the week cut
offs  create  more  comparability  of the  Company's  quarterly  operations,  by
generally  having  an equal  number  of weeks  (13)  and  week-end  days in each
quarter.  During the quarter ended September 30, 2006, these accounting  periods
ended on October 1, 2006 as  compared  to October 2, 2005 in the  quarter  ended
September  30,  2005.  Since our  accounting  periods  consist  of a 4-4-5  week
quarter, from time to time an additional week is included in the first period to
adjust our period ends to more closely  match a calendar  year end. For example,
the period ended March 31, 2005  contained 14 weeks  compared to the 13 weeks of
the period ended March 31, 2006.

     (F) Spare Parts  Inventory - Spare parts  inventory  consists of  operating
supplies,  maintenance materials and spare parts. The inventories are carried at
cost.  It is necessary  that these parts be readily  available so that the daily
cruise  operations are not cancelled due to mechanical  failures.  The inventory
was purchased  from Palm Beach Maritime  Corporation  ("PBMC") at a time when we
were operating the Palm Beach Princess under a bare boat charter with PBMC. PBMC
is owned by Mr.  Francis W. Murray.  Fair value of this inventory was determined
by  actual  invoice  prices  and  estimates  made  by the  Palm  Beach  Princess
engineers.

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

     (H)  Depreciation and Amortization - Depreciation of property and equipment
were computed by the  straight-line  method at rates  adequate to allocate their
cost or  adjusted  fair  value  in  accordance  with U.  S.  generally  accepted
accounting   principles  over  the  estimated  remaining  useful  lives  of  the
respective assets.  Amortization  expense includes the write off of major vessel
repairs and  maintenance  work completed at dry dock period.  These expenses are
written  off during a two year period  following  the dry dock  period.  For the
three  months  ended  September  30, 2006 and 2005,  the  amortized  expense was
$76,539 and $44,976,  respectively  and $245,809 and $135,058,  respectively for
the nine month comparable periods.

     As a result of the PDS  transactions  (see  Footnote  4) we are leasing the
vessel  M/V  Palm  Beach   Princess  and  the  Big  Easy  under   capital  lease
arrangements.  The Company began depreciating the M/V Palm Beach Princess during
our  previous  fiscal year end of June 30, 2005 and began  depreciating  the Big
Easy when it was placed in

                                        7

<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

service on October  18,  2005.  As a result of the Big Easy being  removed  from
service  during the quarter ended March 31, 2006 and the  unlikelihood  that the
vessel  will be  returned  to  service in the  immediate  future,  we  suspended
depreciating  the vessel.  Financing fees in connection with the PDS financings,
are being  amortized  over the life of the  loans.  For the three  months  ended
September 30, 2006 and 2005, the amortized expense associated with these finance
costs was  $132,573  and  $118,846,  respectively  and  $361,051  and  $293,063,
respectively for the nine month comparable periods.

     Long-lived assets and certain identifiable intangibles held and used by the
Company are reviewed for impairment  whenever events or changes in circumstances
warrant  such a  review.  The  carrying  value of a  long-lived  or  amortizable
intangible asset is considered  impaired when the anticipated  undiscounted cash
flow from such asset is  separately  identifiable  and is less than its carrying
value.  In that  event,  a loss is  recognized  based on the amount by which the
carrying value exceeds the fair value of the asset.  Losses on long-lived assets
to be disposed of are  determined in a similar  manner,  except that fair values
are reduced for the cost of  disposition.  Beginning  with fiscal years starting
after December 15, 2001, SFAS 142 requires an annual  impairment review based on
fair value for all intangible assets with indefinite lives.

     (I) Net Assets of  Discontinued  Operations  - At  September  30,  2006 and
December 31, 2005, the remaining net assets and liabilities of Garden State Park
and Freehold Raceway were classified as "Assets of Discontinued Operations." and
"Liabilities of Discontinued Operations."

     (J) Recent Accounting Pronouncements

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

     In  December,  2004,  the FASB issued  Statement  No. 123  (revised  2004),
"Stock-Based Payment" (SFAS 123R). This statement replaces SFAS 123, "Accounting
for Stock-Based  Compensation",  and supersedes APB Opinion No. 25,  "Accounting
for Stock Issued to  Employees"  (APB 25). SFAS 123R is now effective for public
companies for the first interim or annual  reporting  period of the registrant's
first fiscal year  beginning on or after June 15, 2005. In  accordance  with the
new rule,  the  Company  will begin to  expense  the cost of  employee  services
received in exchange for an award of equity  instruments based on the grant-date
fair value of the award,  effective July 1, 2005. Until July 1, 2005 the Company
accounted for stock option grants using the intrinsic-value method in accordance
with APB 25. Under the intrinsic-value method, because the exercise price of the
stock  options  granted  was equal to or greater  than the  market  price of the
underlying  stock  on the  date  of  the  grant,  no  compensation  expense  was
recognized. No options were granted during the nine month period ended September
30, 2006.

     (K) Income Taxes - The Company has adopted the  provisions  of Statement of
Financial  Accounting  Standards No. 109,  "Accounting  for Income Taxes" ("SFAS
109").  SFAS 109 requires a company to recognize  deferred tax  liabilities  and
assets  for the  expected  future  tax  consequences  of  events  that have been
recognized  in its  financial  statements  or tax  returns.  Under this  method,
deferred  tax  liabilities  and assets are  determined  based on the  difference
between the  financial  statement  carrying  amounts and tax basis of assets and
liabilities. Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment. The Company has provided
a valuation  reserve  against the full amount of the net operating  loss benefit
because in the  opinion of  management  based upon the  earnings  history of the
Company, it is more likely than not that the benefits will not be realized.

                                        8

<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

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

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

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

     (O)  Deferred  Income - The gain  from the sale of our  Garden  State  Park
property on  November  28, 2000 in the amount of  $1,439,951  has been  deferred
until  such  time as the note  receivable  on the sale  has been  collected.  In
connection   with  the  PDS  Transaction  we  have  deferred  the  gain  on  the
sale/leaseback of equipment of $101,522 over the term of the equipment lease.

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

     (Q) Goodwill - Through the purchase of Leo Equity,  we purchased the assets
and  operations  of GMO Travel which was a 100% owned  subsidiary of Leo Equity.
GMO Travel provides reservations and travel services for our Palm Beach Princess
subsidiary and other non-ship related travel activities. Travel services for the
Palm Beach Princess  include  reservations  and travel services for its numerous
foreign  employees and our customers,  some of which rely on air travel to reach
our location.  The goodwill  recorded in the amount of $193,946  represents  the
fair value of GMO Travel based on its  discounted  cash flows and the  synergies
and cost savings  gained by the Palm Beach  Princess.  The Company  accounts for
goodwill in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 142,  "Goodwill and Other  Intangible  Assets".  In accordance with SFAS No.
142,  amortization  of  goodwill  is not  required.  Goodwill is tested at least
annually for  impairment by comparing  the fair value of the recorded  assets to
their carrying  amount.  If the carrying amount of the goodwill exceeds its fair
value, an impairment loss is recognized.

(3) PDS TRANSACTIONS

     On  October 3,  2006,  the  Company  received  notice  from PDS that it had
accelerated the maturity of our  obligations and declared all amounts  remaining
unpaid under the Loan  Agreement  and the Note dated June 30, 2005,  immediately
due and payable.  PDS has demanded the payment of all unpaid obligations and all
amounts  payable under our equipment  leases with PDS. As of October 1, 2006, we
owe  approximately   $35.6  million  under  the  loan  agreement  and  note  and
approximately  $4.5 million  under the  equipment  leases.  The company does not
currently  have the means to satisfy the  creditor's  demands  and is  currently
negotiating  with PDS for an amicable  solution.  The Company is  continuing  to
analyze and pursue strategic alternatives,  including sales of assets. If we are
unsuccessful in resolving this matter, we believe the lender will take action in
an attempt to foreclose against our assets. (See 3 (K))

                                        9

<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

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

     (A) On July 7, 2004 PBMC and its  affiliate  company,  PBE, the Company and
our  subsidiaries  ITG Vegas and ITG Palm  Beach,  LLC  closed on a $23  million
transaction  with PDS. The transactions  were structured as a sale/leaseback  by
PBMC and PBE,  although,  as to $20  million of the $23  million  total,  it was
effectively equivalent to a secured loan against the Palm Beach Princess and the
Big Easy  vessels.  Of the $23  million,  $14 million was advanced to PBMC by an
affiliate of PDS as purchase  price in purchasing the Palm Beach  Princess.  The
PDS affiliate leased and chartered the Palm Beach Princess back to PBMC and PBE,
which then subchartered the vessel to our subsidiary, ITG Vegas, Inc. Another $6
million of the $23 million was  advanced for the benefit of PBMC and PBE for the
purchase and  retrofitting of the vessel Big Easy,  which vessel PDS (through an
affiliate) leased and chartered to PBMC and PBE, who, in turn,  subchartered the
Big Easy vessel to ITG Vegas,  Inc. and a new wholly-  owned  subsidiary  of ITG
Vegas,  ITG Palm Beach,  LLC ("ITG Palm  Beach").  The  remaining  $3 million of
funding from PDS is for ITG Vegas and ITG Palm Beach's lease of gaming equipment
for use on the Palm Beach Princess and Big Easy vessels.

     All of the outstanding capital stock of PBMC is owned by Francis W. Murray,
our  Chairman  and Chief  Executive  Officer.  PBMC owns 50% of the  outstanding
capital stock of PBE. The remaining 50% of the outstanding  capital stock of PBE
is owned by Raymond  Parello and has been pledged to us to secure  certain debts
owed to us as described below under "Prior Operations - Sale of Las Vegas Note."

     Sale-Leaseback of the Princess. Prior to the closing of the PDS Transaction
(the  "Closing"),  the Palm Beach Princess was owned by PBMC.  PBMC was indebted
under the Ship Mortgage  Obligation in a principal  amount of  $12,000,000  plus
accrued  interest.  The  Brennan  Trustee  was the  holder of the Ship  Mortgage
Obligation,  and our  subsidiary,  ITG Vegas,  had agreed to  purchase  the Ship
Mortgage   Obligation  for  a  purchase  price  of  $13,750,000  (the  "Purchase
Obligation")  in order to obtain  rights to operate the vessel  under a bareboat
charter. In addition, we were indebted to the Brennan Trustee in connection with
our repurchase of 3,678,145  shares of our common stock (the "ITB  Obligation").
As of  Closing  of the first PDS  transaction  on July 7,  2004,  the  aggregate
outstanding   amount  of  the  Purchase   Obligation   and  ITB  Obligation  was
$7,916,451.71,  for all of  which  PBMC,  ITG  Vegas  and ITB were  jointly  and
severally  liable.  At the  Closing,  Cruise  Holdings  I, LLC  ("Cruise  I"), a
subsidiary of PDS Gaming Corporation ("PDS"),  purchased the Palm Beach Princess
from PBMC for  $14,000,000,  $7,916,451.71 of which was paid by PBMC directly to
the Brennan Trustee to satisfy the Purchase Obligation and the ITB Obligation.

     Also at July 7, 2004,  Cruise I entered into a Bareboat  Charter and Option
to Purchase (the "Princess Charter") and a Master Lease Agreement (together with
Lease Schedule No. 1 thereto,  the "Princess Master Lease") to charter and lease
the Palm Beach Princess to PBMC and PBE for a period of five years.  The charter
hire/rent payable by PBMC and PBE was $178,500 per month for the first 12 months
and $391,762.80 for the remaining term.

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

                                       10

<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

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

     Acquisition  of the Big  Easy.  On  March  1,  2004,  PBE  entered  into an
agreement to purchase the Big Easy from Empress Joliet Corporation at a purchase
price of  $3,800,000.  At  Closing,  PBE  assigned  to Cruise  Holdings  II, LLC
("Cruise II"), a subsidiary of PDS and affiliate of Cruise I, all of its rights,
title  and  interest  in and to the  Big  Easy  Sale  Agreement,  and the sum of
$6,000,000  was  deposited  in a blocked  account to be used to pay costs of the
alterations,  retrofit and improvements of the Big Easy. Such deposit was funded
to the extent of $2,880,652 by ITG Vegas.

     Also at Closing,  Cruise II entered  into a Bareboat  Charter and Option to
Purchase (the "Big Easy  Charter")  and a Master Lease  Agreement to charter and
lease the Big Easy to PBMC and PBE for a period of five years.  The charter hire
was $82,695 for the first 12 months and $171,702.54 for the remaining term.

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

     PBMC and PBE also  entered into a  Sub-Bareboat  Charter to charter the Big
Easy to ITG Vegas and ITG Palm Beach for a five year  period.  The charter  hire
payable  by ITG Vegas and ITG Palm  Beach  under the Big Easy Sub-  Charter  was
$100,000  per month ($1.2  million per year) plus one percent  (1%) of the gross
operating revenues of the Big Easy. Under the Big Easy Sub-Charter,  PBE granted
to ITG Vegas and ITG Palm Beach an option to purchase PBE's right to acquire the
Big Easy at the end of the term,  for an exercise  price equal to the  appraised
value of the Big Easy, to be determined following  commencement of operations of
the Big Easy, to which certain amounts were to be credited.

     Lease of Gaming Equipment. At Closing, ITG Vegas and ITG Palm Beach entered
into a Master Lease,  together with three Lease Schedules (the "Gaming Equipment
Lease"),  to lease certain new and used gaming equipment from PDS for use on the
two vessels.  A portion of the  equipment was  previously  owned and used by ITG
Vegas on the  Princess  and was sold to PDS at Closing,  for  $500,000  and then
leased  back  pursuant to a Gaming  Master  Lease.  Each  Schedule of the Gaming
Equipment Lease had a term of three years. Aggregate rent during fiscal 2005 for
all  gaming  equipment  was  approximately  $1.4  million  per year  under  this
agreement.  ITG Vegas and ITG Palm Beach have an option to  purchase  the leased
equipment  at the end of the term for a purchase  price equal to the fair market
value of the equipment at such time.

     (B)  On  January  5,  2005,  Royal  Star  Entertainment,   LLC  ("RSE"),  a
wholly-owned  indirect subsidiary of ITB, borrowed $2,850,000 from PDS. The Loan
was evidenced by the Note and was to be repaid on January 17, 2006.  Interest on
the Loan was payable monthly at a rate of 10% per annum. At closing,  RSE paid a
closing  fee to the  lender  in an  amount  equal  to  $78,375  or  2.75% of the
principal  amount  of the  Note.  The  proceeds  of the loan  were  used to make
improvements  to the vessels Royal Star and Big Easy.  Also at the closing,  RSE
entered into an equipment  lease with PDS providing for the lease by RSE of slot
machines to be located on the vessel Royal Star. The term of the Lease was three
years,  with rental  payments of $11,879 per month for the first four months and
$95,351.73 for the next thirty-two months. RSE paid a closing fee of $57,020.74,
and a security deposit in the amount of $95,351.73.

                                       11

<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

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

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

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

     Equipment  leases  taken  during our fiscal  year ended June 30,  2005 will
remain the same and the terms of the  equipment  leases and the loans,  taken in
January and April will be extended until July 1, 2009.

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

     Under the Loan and  Security  Agreement  signed on June 30,  2005 with PDS,
upstream  payments by the  Borrowers to the Company were limited to $150,000 per
month plus amounts of ITG Vegas'  income tax savings  attributed to inclusion in
the Parent Company tax return.

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

     The PDS  indebtedness  is secured by mortgages  on the Royal Star,  the Big
Easy and the Palm Beach  Princess,  an assignment of our  promissory  note dated
November 29, 2000 payable by Realen-Turnberry/Cherry Hill, LLC in

                                       12

<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

the principal amount of $10 million, an assignment of our promissory note, dated
May 1, 2002,  payable by OC Realty in the principal  amount of  $2,021,176,  and
stock in certain of our subsidiaries.

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

     (E) Placement Fee Agreement

     On September 1, 2005 the Company  entered  into a Placement  Fee  Agreement
with PDS Gaming Corporation.  In consideration of PDS providing $29.3 million in
funding and lease  agreements to the Company  during our prior fiscal year ended
June 30, 2005,  ITB agreed to pay a Placement  fee of $750,000 for such funding.
The  agreement was verbally  agreed to between the parties  during the period of
our negotiations with PDS Gaming, which resulted in the additional loan proceeds
given to the  Company  in the amount of  $2,158,166  and a  potential  agreement
wherein PDS would loan an  additional  $3.2  million in the fall of 2005,  which
loan was never completed.  ITB has made a deposit of $50,000 and the balance was
to be paid monthly  beginning  March 1, 2006 with  monthly  payments of $58,333,
without  interest,  until  February 1, 2007.  The Placement  Fee Agreement  also
permitted  the  Company to cancel an  equipment  lease it had signed with PDS on
April 5, 2005.  The original  amount of the  equipment  lease was $1.5  million.
Under the Placement Fee Agreement, the Company was permitted to cancel the lease
after paying the $250,000 rental for the period to the date of cancellation, the
equipment  was returned to PDS and the  Placement Fee Agreement was put in place
of the equipment lease. Subsequently,  on December 29, 2005 PDS Gaming agreed to
accept the Company's  common stock,  valued at $2 per share,  in full payment of
the placement fee.

     (F) Deferral of Principal Payments on PDS Financing

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

     (G) December 2005 Transactions

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

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

                                       13

<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

     (I) Forbearance Agreement

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

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

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

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

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

     (J) First Amended and Restated Forbearance Agreement

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

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

     The  Company  also  agreed to pay,  as damages to PDS on account of default
interest  that  it in  turn  is  required  to pay to its  financier,  additional
interest at a rate of 2-1/2% per annum above the  interest  rate  already  being
charged

                                       14

<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

to us on our principal and delinquent interest payments under our loan agreement
with PDS.  Therefore,  the effective  rate of interest we are required to pay on
the unpaid principal  balance plus delinquent  interest payments which are being
capitalized  totaling  $35,086,495 as of September 30, 2006 is approximately 22%
per annum.  As of September  30, 2006,  the amount of such  additional  interest
which we agreed to pay to PDS is $1,281,755.

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

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

     After  expiration of the forbearance  period on August 29, 2006, we did not
make our monthly loan and lease  payments.  We also were not able to  consummate
the sale of any of our vessels,  the Original  Cherry Hill Note or our operating
business within the time period permitted by the Forbearance Agreement.

     (K) Default Notice from PDS Gaming Corporation.

     On  October 3, 2006,  we  together  with  certain of our  subsidiaries  and
certain  companies owned or controlled by Francis W. Murray,  our CEO, all being
the same companies  which entered into the Loan and Security  Agreement with PDS
received notice from PDS that it has accelerated the maturity of our obligations
and declared all amounts  remaining unpaid under the Loan Agreement and the Note
dated June 30, 2005, and all amounts payable under our equipment leases with PDS
immediately  due  and  payable.  As of  October  1,  2006,  the  borrowers  owed
approximately  $35.6 million under the loan agreement and note and approximately
$4.5 million under the equipment leases.

     We have been in default in payment of the principal and interest  under the
note,  and in default in payment of the equipment  rentals under the PDS leases,
in each case since January 2006. The forbearance  period under such  forbearance
agreement  mentioned  above  expired  on  August  29,  2006.  As a result of the
acceleration,  the rate of interest  payable under the note  increased by 5% per
annum above the rate in effect prior to our default.  We do not  currently  have
the means to satisfy the creditor's  demands and are currently  negotiating with
PDS for an amicable solution.  We are continuing to analyze and pursue strategic
alternatives,  including  sales of assets.  If we are  unsuccessful in resolving
this  matter,  we believe the lender will take action in an attempt to foreclose
against our assets.

(4) DESCRIPTION OF LEASING ARRANGEMENTS

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

     The charter for the Palm Beach Princess, which is currently in service, has
been  accounted  for as a capital  lease.  Principal  payments on the Palm Beach
Princess  portion  of the loan ($14  million)  will  reduce  the  capital  lease
purchase  liability  and the interest  portion of each  monthly  payment will be
expensed.  Depreciation  expense  will be recorded  for the Palm Beach  Princess
using an  estimated  useful life of 20 years.  Charter  hire fees of $50,000 per
month plus 1% of gross  revenues of the Palm Beach  Princess have been accounted
for as additional interest payments on the capital lease and will be expensed as
incurred. The lease for the gaming equipment currently aboard the vessels

                                       15

<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

and the lease for new gaming  equipment  will be  accounted  for as an operating
lease.

     The  transaction  described in Note 3 also  included the charter of the Big
Easy and a lease for gaming  equipment  aboard that  vessel.  As a result of the
June 30, 2005 PDS  transaction,  we have accounted for the Big Easy charter as a
capital  lease.  Principal  payments on the Big Easy  portion of the PDS loan of
$12.6 million will reduce the capital lease purchase  liability and the interest
portion of each monthly payment will be expensed.  The transaction  described in
note 3 also permits the Company to purchase the Big Easy for the appraised value
of the vessel which shall be determined  upon the refitting and  refurbishing of
the vessel. The Company has determined the value of the Big Easy by capitalizing
the total of: 1) the costs it had incurred for  improvements  it had made to the
Big Easy; and 2) the present value of the payments required under the PDS Gaming
loans on the date we recorded the capital lease.

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

     Vessels,  plant and  equipment at September  30, 2006 include the following
amounts for capitalized leases:

     Vessel, Palm Beach Princess                  $           17,500,000

     Vessel, Big Easy                                         20,305,348
                                                       -----------------
     Less: allowance for depreciation                         (2,971,910)
                                                       -----------------
     Capital Leases                               $           34,833,438
                                                       =================

     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, 2006:


Period ending September 30, 2006                        $   43,399,378
                                                         -------------
Total minimum lease payments                            $   43,399,378

Less: amount representing interest                         (11,635,560)
                                                         -------------
Present value of net minimum lease payment              $   31,763,818
                                                        ==============

The  following is a schedule of capital lease  liabilities  due at September 30,
2006:

                                                September 30, 2006
                                     -----------------------------------------
Vessel                               Short-Term      Long-Term        Total
---------------------------------    -----------     ----------     ----------
Palm Beach Princess              $    16,539,762  $           -  $  16,539,762

Big Easy                              15,224,056              -     15,224,056

Royal Star                             3,322,677              -      3,322,677
                                     -----------     ----------     ----------
Amount due to PDS for vessels         35,086,495              -     35,086,495

Less: Royal Star Note shown in
 Notes Payable (See Note 10)          (3,322,677)             -     (3,322,677)

Fair Market Valuation -
 Palm Beach Princess                           -      3,500,000      3,500,000
                                     -----------     ----------     ----------
Total Short and Long Term Vessel
 Leases Payable                  $    31,763,818  $   3,500,000  $  35,263,818
                                     ===========     ==========     ==========

                                       16

<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

(5) SERIES B PREFERRED STOCK

     On July 13, 2005 the Company began accepting subscriptions for the purchase
of shares of the  Company's  Series B  Convertible  Preferred  Stock,  par value
$10.00 per share (the "Series B Preferred Stock").  The subscriptions for Series
B Preferred Stock were received by the Company as part of a private  offering of
500,000  shares of its Series B  Preferred  Stock,  at a  subscription  price of
$15.00 per share. As of December 28, 2005 the Company had accepted subscriptions
for the purchase of 295,033 shares of Series B Preferred  Stock and had received
approximately  $4  million  in net  cash  proceeds.  On  December  29,  2005 our
Chairman,  Francis W. Murray,  purchased all of the remaining Series B Preferred
Stock which had not previously been sold in the private  offering,  amounting to
204,966  shares of Series B  Preferred  Stock,  on the same terms as the private
offering.  We sold the  Series B  Preferred  Stock to Mr.  Murray in  payment of
$3,074,500 of debt which the Company had owed to Mr. Murray. This amount has not
been included in the net cash proceeds amount of $4 million as indicated above.

     Subscribers  also  received  warrants for the purchase of 1.2 shares of the
Company's  common stock for each share of Series B Preferred Stock purchased (an
aggregate of 600,000 shares of the Company's  common stock based on purchases of
all 500,000  shares of the Series B Preferred  Stock).  The exercise price under
each  such  warrant  is $3.25  per  common  share,  and the  warrants  issued to
purchasers of the Series B Preferred  Stock are  exercisable for a term of three
(3) years beginning one year after issuance.

     The Series B Preferred  Stock will  automatically  be converted into common
stock upon the effective  date of a Registration  Statement  covering the common
shares issuable upon conversion which was filed with the Securities and Exchange
Commission on December 30, 2005. The initial conversion price is $2.00 per share
of common stock,  declining by $.02 for each full calendar quarter elapsing from
July 1, 2005 to the date on which the conversion  shall occur.  Upon conversion,
each share of Series B Preferred Stock will be converted into a number of shares
of common stock determined by dividing the subscription price, $15.00 per share,
by the conversion price then in effect. The Company will need to file an Amended
Form S-1 in the near future and if the registration  statement becomes effective
during the quarter ended June 30, 2007, the  conversion  price will be $1.86 and
the  outstanding  Series B Preferred  Stock will be  convertible  into 4,032,258
shares of additional new common shares.

     During the  quarter  our net loss was  increased  by a non-cash  expense of
$169,780 as the result of the  accounting  for the sale of Series B  convertible
preferred stock. This non-cash item, known as a "Beneficial Conversion Feature",
is the result of the  application  of the Emerging  Issues Task  Force's  (EITF)
Issues 98-5 and 00- 27. The beneficial  conversion feature was calculated as the
difference  between  the  effective  conversion  price and the fair value of the
common stock, multiplied by the estimated number of common shares into which the
security is  convertible.  The number of common  shares the  Preferred  Stock is
convertible  into has been  increased  during the  current  quarter,  assuming a
delayed  conversion  before June 30, 2007,  at a price of $1.86 per share.  Upon
conversion,  each share of Series B  Preferred  Stock will be  converted  into a
number of shares of common stock determined by dividing the  subscription  price
of $15 per share by the  conversion  price then in effect.  If these  shares are
issued before June 30, 2007 a total of 4,032,258 shares of Common Stock would be
issued upon conversion of all the Series B Preferred Stock,  which represents an
additional  282,258 shares above the original  number had the price been $2. The
value assigned to the beneficial  conversion  feature on the Preferred Stock was
credited to paid in capital and charged to earnings as interest expense.

     Pursuant to the Subscription Agreement, the Company also agreed to increase
the size of its Board of Directors from four to seven  members,  and to fill two
of those  vacancies  with one person to be  designated  by MBC  Global,  LLC, an
Illinois limited  liability  company which has served as a financial  advisor to
the Company, and a second person to be designated by another group of purchasers
of the Series B Preferred Stock.

     The  majority of the net  proceeds of the sale of Series B Preferred  Stock
was used for working capital of the

                                       17

<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

subsidiary companies which operate the Big Easy and the Palm Beach Princess, and
a portion of the proceeds was used for the Parent Company operating expenses.

(6) NOTES RECEIVABLE

     (A) Original Cherry Hill Note

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

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

     (B) Second Cherry Hill Note

     A portion  of the  proceeds  from the sale of the  non-operating  former El
Rancho  Hotel and  Casino in Las Vegas to  Turnberry/Las  Vegas  Boulevard,  LLC
("Turnberry")  on May 22, 2000 was used by us to purchase a  promissory  note of
the buyer in the face amount of $23,000,000 (the "Las Vegas Note").  On June 16,
2004,  the  Company  sold the Las Vegas Note to Cherry Hill at El Rancho LP (the
"Buyer"),  a limited  partnership  which is affiliated with the maker of the Las
Vegas Note.

     In exchange for the Las Vegas Note, the Company received cash payments from
the Buyer of $2.8 million, a non-recourse loan from Turnberry Development,  LLC,
an  affiliate of the Buyer,  in the amount of $5 million and a  promissory  note
issued by Soffer/Cherry  Hill Partners,  L.P. ("Cherry Hill Partners"),  another
affiliate of the Buyer,  in the  principal  amount of  $35,842,027  (the "Second
Cherry Hill Note").  The principal amount of the Second Cherry Hill Note equaled
the unpaid principal plus all accrued and unpaid interest (at 22%) under the Las
Vegas Note,  less the $2.8  million in purchase  price  payments  and $5 million
non-recourse loan paid to the Company.

     The Company is not liable for  repayment of the principal of the $5 million
loan,  however,  the Company is  obligated to pay interest and fees on such loan
aggregating $600,000 per year ($50,000 per month) for five (5) years. Due to our
negative  cash  position,  we have not made the $50,000 per month  payment since
January 2005.

     The Second Cherry Hill Note received by the Company  matures in 2015 and is
similar to the Las Vegas Note which was sold,  in that it  generally  is payable
prior to maturity only from distributable cash of the maker. The maker under the
Second  Cherry Hill Note is one of the  principal  partners in the entity  which
purchased the Garden State Park

                                       18

<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

real  property from a Company  subsidiary in November of 2000,  and such obligor
will only have funds with  which to pay the Second  Cherry  Hill Note out of its
profits from the  development  of Garden State Park.  The  development of Garden
State  Park,  located in Cherry  Hill,  New  Jersey,  was delayed as a result of
community opposition to certain elements of the development plan, and, while the
Company believes that the development plan is now moving forward, the timing and
amount of profits there remain uncertain. The Company already holds a promissory
note in the face amount of $10 million,  received  from the  purchaser of Garden
State Park in connection with the sale of such real property,  which the Company
expects will be fully paid in time.  While the Company expects that  $10,000,000
note to be fully paid, it was not  optimistic  that this Second Cherry Hill Note
will be fully paid, and accordingly, during the fiscal years ended June 30, 2004
and 2005 the  Company  wrote  down the Second  Cherry  Hill Note on its books to
$4,278,651.

     The  Second  Cherry  Hill Note is  secured  by a pledge  of stock  owned by
Raymond  Parello,  an  affiliate  of the  Buyer,  in Palm Beach  Empress,  Inc.,
representing  fifty  percent  (50%) of the  stock in that  company.  Palm  Beach
Empress,  Inc. is the entity  formed to acquire the Big Easy,  the second vessel
which is chartered to a subsidiary of the Company. The other fifty percent (50%)
of the stock in Palm Beach Empress,  Inc. is owned by PBMC, a corporation  owned
by Francis W. Murray, the Company's Chief Executive Officer.

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

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

     Fair  value  and the  collectability  of the  Second  Cherry  Hill Note was
determined by 1) assessing  the present value of the Big Easy vessel,  since 50%
of the stock in the  company  which owns it (PBE) is pledged as security of this
note; 2) and the present value of a $483,000 payment due us from the sale of the
El Rancho property.  When the fair value of this note was originally computed we
assumed  50% of the  value  of the Big  Easy to be  $5,000,000,  based  upon the
estimated value of the Big Easy at the time.

                                       19

<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

(7) DEPOSITS AND OTHER ASSETS - NON RELATED PARTIES

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

                                     September 30, 2006    December 31, 2005
                                     ------------------    -----------------
Long-Term Prepaid Loan Costs -
 Net of amortization in the amount
 of ($819,796) and ($362,424),
 respectively                       $           922,030   $        1,411,976

Port Lease Rights                               250,000              250,000

Other Misc. Assets                              155,207               72,780
                                     ------------------    -----------------
         Total                      $         1,327,237   $        1,734,756
                                     ==================    =================

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

     (A) Vessel Deposits - Related Parties

     Beginning  on July 7, 2004,  we entered into  Sub-Bareboat  Charters of the
vessels Palm Beach  Princess  and Big Easy with  entities  (Palm Beach  Maritime
Corporation  and Palm Beach Empress,  Inc.) owned or controlled by our Chairman,
Francis W. Murray.  Pursuant to our June 30, 2005 refinancing and  restructuring
of the PDS transactions, we now charter the vessels, Palm Beach Princess and Big
Easy directly from Cruise Holdings I and Cruise Holdings II, respectively, which
companies are owned by Palm Beach Maritime  Corporation  and Palm Beach Empress,
Inc. Pursuant to the new charters,  we pay Cruise Holdings I and Cruise Holdings
II, as owners of the  vessels,  charter  fees of $50,000  per month for the Palm
Beach  Princess and  $100,000  per month for the Big Easy,  plus 1% of our gross
revenues from operation of those vessels.  We have the right to purchase  either
or both vessels,  at our option, for $17.5 million in the case of the Palm Beach
Princess (representing its appraised value at the time of $17.5 million) and for
fair market value (to be  determined  by appraisal) in the case of the Big Easy.
Once we pay off the loans against the Palm Beach  Princess and Big Easy, we will
be entitled to substantial credits against the purchase prices of the vessels: a
$14  million  credit in the case of the Palm  Beach  Princess  and a $6  million
credit in the case of the Big Easy,  representing the original principal amounts
of the July 2004 sale - leaseback  transactions involving those vessels; as well
as  credits  for  our  investment  in  the  net  Ship  Mortgage   Obligation  of
approximately  $7.2 million which can be applied to the purchase price of either
vessel;  and a  credit  for  the  portions  of the  costs  of  refurbishing  and
retrofitting  the Big Easy in excess of $6 million  which we paid,  amounting to
approximately $14 million,  that can be applied to the purchase price of the Big
Easy.  We have not paid the  bareboat  charter  fees on  either  the Palm  Beach
Princess or the Big Easy since  December 2005.  The  outstanding  balance due at
September 30, 2006 is  $1,689,167  which is classified as current on our balance
sheet.

     (B) Deposits and Other Assets - Related Parties:

                                                   September 30,    December 31,
                                                        2006            2005
                                                  --------------   -------------
Loans to the Ft Lauderdale
 Project (OC Realty, LLC)                         $    2,910,367   $   2,769,989

Accrued Interest on Loans to the
 Ft. Lauderdale Project (OC Realty, LLC)               1,695,008       1,577,190

Goodwill on Purchase of GMO Travel                       193,946         193,946
                                                  --------------   -------------
Total Deposits and Other Assets - Related Parties $    4,799,321   $   4,541,125
                                                  ==============   =============

                                       20

<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

(9) ACCOUNTS PAYABLE AND ACCRUED EXPENSES

     (A) The  following  table  represents  the aging of accounts  payable as of
September 30, 2006 and December 31, 2005.
<TABLE>
                      Total       Current   31-60 Days   61-90 Days   Over 91 Days
                    ----------   --------   ----------   ----------   ------------
<CAPTION>
<S>                <C>          <C>        <C>          <C>          <C>
September 30, 2006 $ 6,244,739  $ 821,495  $   742,007  $   302,249  $   4,378,988

December 31, 2005  $ 7,310,569  $ 599,387  $ 1,216,245  $ 1,244,204  $   4,250,733
</TABLE>

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

                                     September 30, 2006   December 31, 2005
                                     ------------------   -----------------
Trade Payables                      $         1,463,795  $        1,544,211

Payroll and Related Obligations               1,194,272           1,819,604

Interest                                      1,102,252             725,272

Amounts Accrued on Various
 Contingencies                                  450,368             430,421
                                     ------------------   -----------------
Total                               $         4,210,687  $        4,519,508
                                     ==================   =================

                                       21

<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

(10) NOTES AND MORTGAGES PAYABLE

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

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

PDS Gaming (A)                          20%  $    541,102  $        -0- $    541,102  $          -0-
Francis X. Murray (B)                    8%       382,864           -0-      459,164             -0-
William H. Warner (B)                   12%        37,000           -0-       37,000             -0-
MBC Global (C)                           9%       200,000           -0-      200,000             -0-
Westminister Investments (C)             9%       150,000           -0-      150,000             -0-
Ryan Moore Trust (C)                     9%        25,000           -0-       25,000             -0-
James B. Moore Trust (C)                 9%        25,000           -0-       25,000             -0-
Other                               Various        45,497           -0-       36,595             -0-

ITG Vegas, Inc.:

PDS Gaming (D)                        22.5%     3,322,677           -0-    2,733,838             -0-
Maritime Services, Corp.                 9%           -0-           -0-      166,156             -0-
International Game Technology (E)        8%       404,928           -0-      221,297          59,568
Others                              Various        14,507        23,997       35,009          33,540

Garden State Park:

Service America Corporation (F)          6%       160,000           -0-      160,000             -0-
                                               ----------    ----------  -----------    ------------
                 Totals                      $  5,308,575  $     23,997 $  4,790,161  $       93,108

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

 Related Party Notes                             (419,864)          -0-     (496,164)            -0-
                                               ----------    ----------  -----------    ------------
Totals                                       $  4,728,711  $     23,997 $  4,133,997  $       93,108
                                               ==========    ==========  ===========    ============
</TABLE>

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

     (B) On March 1,  2003,  we  issued a  promissory  note for a line of credit
bearing interest at 8% to Francis X. Murray. The outstanding balance on the line
of credit  note at December  31, 2005 was  $459,164  and  accrued  interest  was
$29,052.  On September 19, 2005 Mr.  Murray lent an  additional  $300,000 to the
Parent  Company.  At September 30, 2006 the  outstanding  balance on the line of
credit was $382,864 and accrued interest was $45,216.  In fiscal 2003 and fiscal
2005, we issued promissory notes for $24,000 and $13,000  respectively,  bearing
interest at

                                       22

<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

12% to William H. Warner,  Secretary of the Company.  The outstanding balance is
due on demand. The proceeds from both notes were used for working capital.

     (C) On November 9, 2005, we borrowed $400,000 from four (4) private parties
and agreed to issue our promissory  notes evidencing the loans. In consideration
of the loans we also agreed to issue 3-year warrants to purchase 100,000 shares,
in the aggregate of our common stock, exercisable at $2.50 per share. The loans,
bearing interest at 9% per year, and the principal were due on December 9, 2005.
The terms of the note required the Company to issue penalty warrants on December
9, 2005 to purchase  100,000  shares of our common stock at an exercise price of
$2.50 per share.  Furthermore,  if the notes are not paid by the 9th day of each
month  thereafter,  we are  required  to issue  additional  penalty  warrants to
purchase  200,000 shares of common stock at the lesser of $2.50 per share or the
then  current  market price per share for each month  beginning  January 9, 2006
until these notes are paid. As of September 30, 2006, we have reserved  warrants
for the  issuance  of 2  million  shares  of  common  stock as a result  of this
borrowing.  Proceeds  of the  loans  were used to pay  interest  then due on our
secured indebtedness for borrowed money to PDS Gaming Corporation.

     (D) On  January  5,  2005,  the  Company  and its  subsidiary,  Royal  Star
Entertainment,  LLC  ("RSE"),  executed and  delivered a promissory  note in the
original  principal  amount of $2,850,000  (the "Note").  The Note is secured by
RSE's Preferred Ship Mortgage. The lender and holder of the Note and Mortgage is
Cruise Holdings IV, LLC, an affiliate of PDS Gaming Corporation. At closing, RSE
paid a closing  fee to the lender in an amount  equal to $78,375 or 2.75% of the
principal  amount  of the  Note.  The  proceeds  of the Loan  were  used to make
improvements  to the vessel  Royal Star or to the vessel Big Easy.  The Note was
originally due on January 17, 2006, however,  the PDS re-financing  completed on
June 30, 2005 extended the terms of this note to July 1, 2009. The interest rate
is 20% until such time as the annualized EBITDA for the various vessels operated
by the Company reach $17 million at which time the interest rate will be reduced
to 15%. We are currently  paying a default  interest rate of 22.5%. At September
30, 2006, the balance  represents the unpaid principal and the interest added to
the debt totalling $3,322,377.

     (E) On December  22,  2003,  ITG Vegas,  Inc.  issued a  twenty-four  month
promissory  note  in  the  amount  of  $231,716  bearing  interest  at  8.5%  to
International Game Technology for the purchase of gaming equipment. A payment of
$30,000  was  paid on  delivery  of the  equipment  and 24  consecutive  monthly
installments  of $10,532.85  were to be paid on the balance.  In March 2005, ITG
Vegas,  Inc. issued an additional  thirty month promissory note in the amount of
$387,463  bearing  interest at 8.15% to  International  Game  Technology for the
purchase of fully  reconditioned  gaming equipment.  Thirty consecutive  monthly
installments  of  $14,319.49  were to be paid on the balance.  At September  30,
2006, the principal  balance on the two notes to  International  Game Technology
was $404,928  which was  classified  as short term.  At  September  30, 2006 the
balance on the notes includes past due payments.  The Company is negotiating new
terms under these notes and if  unsuccessful  the  creditor  may seek to enforce
payment of the notes.

     (F) In  connection  with the January 28,  1999 lease  transactions  for the
Garden State Park facility,  the Company  purchased a liquor license  located at
Garden  State  Park  owned  by an  unaffiliated  third  party,  Service  America
Corporation (the "Holder"),  for $500,000 financed by a five (5) year promissory
note at a 6% interest rate.  Yearly principal  payments of $80,000 plus interest
were due on December 28, 2002 and December 28, 2003 and have not been paid.  The
Company has been  unsuccessful  in negotiating new terms under this note and the
creditor may seek to enforce payment of the note. In additional to the principal
amount due of $160,000 the accrued but unpaid interest is approximately  $42,000
as of September 30, 2006.

                                       23

<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

(11) VESSELS AND EQUIPMENT

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

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

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

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

Equipment & Vessel Upgrades                 5-15         3,884,142    3,334,079

Leasehold Improvements                     15-40           921,899      988,625
                                                     -------------  -----------
                                                        45,135,268   45,666,124
Less Accumulated Depreciation
 and Amortization                                       (6,041,832)  (4,024,434)
                                                     -------------  -----------
                                                    $   39,624,292 $ 41,110,834
                                                     =============  ===========

(12) RELATED PARTY DEBT

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

                                  September 30, 2006         December 31, 2005
                              ------------------------   -----------------------
                               Short-Term    Long-Term    Short-Term   Long-Term
                              -----------    ---------   -----------   ---------
Related Party Notes           $   419,864  $         -   $   496,164  $        -

Accrued Wages due to and
 Advances from
 Francis W. Murray                      -      508,710        35,189  $  395,000

Advances from Palm Beach
 Maritime Corp.
 (Francis W. Murray ownership)          -            -             -     258,571
                              -----------    ---------   -----------   ---------
         Total Debt -
          Related Parties     $   419,864  $   508,710   $   531,353  $  653,571
                              ===========    =========   ===========   =========

(13) COMMITMENTS AND CONTINGENCIES

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

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

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

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

                                       24

<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

the Coast Guard has removed the vessel's  Certificate  of  Inspection  until the
installation is completed. This work has been substantially completed.

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

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

<TABLE>
                                               Twelve Month Period Ended September 30,
                                           -----------------------------------------------   There-
                                              2007         2008        2009         2010      after      Total
                                           ---------    ---------    ---------     -------  --------   -----------
<CAPTION>
<S>                                      <C>           <C>          <C>          <C>       <C>        <C>
Capital Leases:
    P.B. Princess - Principal & Interest $ 22,017,527  $         -  $         -  $       - $        - $ 22,017,527
       Bare Boat Charter - Related Party      960,000      960,000      800,000          -          -    2,720,000
    Big Easy - Principal & Interest        21,381,850            -            -          -          -   21,381,850
       Bare Boat Charter - Related Party    1,200,000    1,200,000    1,200,000          -          -    3,600,000
Notes and Mortgages:
       Bare Boat Charter - Related Party    1,200,000    1,200,000    1,200,000          -          -    3,600,000
   Principal & Interest                     6,336,539      145,227        2,421          -          -    6,484,187
    Interest Only                             216,827            -            -          -          -      216,827
Deferred Interest Payments                    600,000      600,000      300,000          -          -    1,500,000
Operating Leases:
    Casino Equipment                        5,406,200            -            -          -          -    5,406,200
    Administrative & Office                   830,560       86,068        6,950      2,366                 925,944
Purchase Obligations                          299,082       44,416        2,443          -          -      345,941
                                           ----------   ----------   ----------    -------  ---------  -----------
Total                                    $ 59,248,585  $ 3,035,711  $ 2,311,814  $   2,366 $        0 $ 64,598,476
                                           ==========   ==========   ==========    =======  =========  ===========
</TABLE>

(14) LEGAL PROCEEDINGS

     LIQUOR LICENSE

     In connection with the January 28, 1999 sale and lease transactions for the
Garden  State  Park  facility,  we  purchased  a  liquor  license  owned  by  an
unaffiliated third party, Service America Corporation,  for $500,000 financed by
a five (5) year promissory note at a 6% interest rate. At December 31, 2002, the
unpaid principal balance was $160,000. Yearly principal payments of $80,000 plus
interest  were due on December  28, 2002 and December 28, 2003 and have not been
paid. The Company  entered into a sale and lease  agreement for the lease of our
premises from Jan. 28, 1999 to May 29, 2001 and the sale of a 10 acre portion to
be used as an OTB

                                       25

<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

facility.  Under  the  terms of our sale and lease  agreement  the  lessee/buyer
purchased  the liquor  license for $100,000 and was obligated to return it to us
in exchange for a refund of the $100,000  payment if, at the  expiration  of the
lease,  June 27, 2002,  it did not have a use for the liquor  license at the OTB
facility.  During the three year  period Jan.  28, 1999 to Jan.  28, 2002 no OTB
facility  was built and we believe the  lessee/buyer  did not have a use for the
liquor  license  at that  property.  By the  terms  of the  contract  it was the
Company's  position that we had the right to re-acquire  the liquor  license for
$100,000 and exercised such right,  however the lessee/buyer refused to perform.
On January 18, 2006 the Company  filed a  Complaint  in Camden  County  Superior
Court of NJ, Chancery Division, (Civil Action No. C-7-06) against the defendants
to protect our interests in the license.  In May 2006 the judge ruled against us
in a bench ruling.  The Company is appealing this matter.  The carrying value of
the liquor  license  was  $400,000  and as of March 31,  2006 we  recognized  an
impairment of $400,000 as a result of the court's ruling.

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

(15) FAIR VALUE OF FINANCIAL INSTRUMENTS

     As of  September  30,  2006,  in  assessing  the fair  value  of  financial
instruments,  the Company has used a variety of methods and  assumptions,  which
were based on estimates  of market  conditions  and loan risks  existing at that
time. For certain instruments, including cash and cash equivalents, investments,
non-trade  accounts  receivable and loans, and short-term debt, it was estimated
that the  carrying  amount  approximated  fair value for the  majority  of these
instruments because of their short-term  maturity.  The carrying amounts of long
term debt approximate fair value since the Company's  interest rates approximate
current  interest  rates.  On our original  Cherry Hill note  receivable  in the
amount of $10  million,  we have  elected  to defer the gain on the sale and the
interest to be accrued until such time that collectability can be determined. On
our second Cherry Hill note  receivable  we recorded a $10.5 million  impairment
loss  during  the  fiscal  year  ended  June 30,  2004 and 2005 to  reflect  the
estimated current market value of this note. (See Note 6-B)

(16) OPTIONS AND WARRANTS

     ISSUANCE OF ADDITIONAL WARRANTS

     In connection  with our borrowing of $400,000 on November 9, 2005 (See Note
10) we agreed to issue additional penalty warrants,  exercisable for a period of
three  years,  if the loan was not paid by January  9, 2006;  we agreed to issue
warrants for the purchase of 200,000shares of common stock each month at a price
per share the lower of $2.50,  or the  market  value on the day of issue in each
month for each  additional  month until the loan is paid.  As of  September  30,
2006, we have reserved  warrants for the issuance of 2 million  shares of common
stock as a result of this borrowing.  The following  table  summarizes our stock
prices for each month that warrants were issued.

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


                                       26

<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

      Date of Issue        Price
      -------------        -----
      July 9, 2006         $0.70
      August 9, 2006       $0.41
      September 9, 2006    $0.23
      October 9, 2006      $0.25
      November 9, 2006     $0.10

During the quarter ended  September  30, 2006, we recognized a non-cash  expense
for the  600,000  warrants  issued in the  amount of  $437,204.  During the nine
months ended  September  30,  2006,  we  recognized  a non-cash  expense for the
1,800,000 warrants issued in the amount of $1,510,302.  As of the filing of this
Form 10-Q, the loan has not been repaid.

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

                           Three Months Ended        Nine Months Ended
                           September 30, 2006        September 30, 2006
                           ------------------        ------------------
Expected volatility           20% to 140%               20% to 445%
Risk-free interest rate              4.7%                      4.7%
Expected term                     3 Years                   3 Years

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

(17) RELATED PARTY TRANSACTIONS

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

     During the third  quarter of Fiscal  2001,  we invested in two  projects in
which our Chairman,  President and Chief Executive  Officer,  Francis W. Murray,
also has a pecuniary interest. In connection with one such project, the Board of
Directors  approved  advances,  as  loans,  of up to $1.5  million  to a limited
partnership  in which  Francis W.  Murray  owned,  at that  time,  an 80% equity
interest and owned the general partner, the proceeds of which were to be used to
pay costs and expenses for development of a golf course in Southern  California.
In  Fiscal  2003,  the  limited  partnership's  indebtedness  to  us,  including
principal  of $735,584  and  accrued  interest,  in the amount of  $193,957  was
assumed by OC Realty, LLC, a Florida limited liability company which is owned by
Francis W.  Murray and which owns the second real estate  project  (Ocean  Club)
described below.  Such  indebtedness was due December 31, 2004, but was extended
by the Board of Directors to December 31, 2007, and bears an interest rate of 6%
and is now  scheduled to be paid upon the  completion  of the Ocean Club.  These
balances are shown in the "Deposits and Other Assets - Related  Parties" section
of the Balance Sheet (See Footnote 8 (B)).

     In the second project,  Mr. Murray (through OC Realty) is  participating in
the  development of an oceanfront  parcel of land,  located in Fort  Lauderdale,
Florida, which has received all governmental  entitlements from the City of Fort
Lauderdale and the State of Florida to develop a 14-story  building to include a
5-story parking garage,  approximately 6,000 square feet of commercial space and
a residential  9-story tower. As of December 31, 2005, we had lent $2,034,405 in
total to the project and we have accrued interest in the amount of $1,429,185 on
the loan.  These  balances are shown in the "Deposits and Other Assets - Related
Parties"  section of the Balance  Sheet (see  Footnote 8 (B)).  These loans bear
interest at 12% and will be repayable out of OC

                                       27

<PAGE>

                   INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

Realty's share of proceeds,  after payment of bank debts,  generated by the sale
of  condominiums.  We will  also  have the right to  receive,  as  participation
interest, from available cash flow of OC Realty, if the project is successful, a
priority  return of our  investment  and a priority  profits  interest for up to
three  times our  investment.  Repayment  of these  loans and our  participation
interest will be subject to repayment of, first,  bank debt of approximately $14
million (at present) and, second,  construction  financing expected to amount to
$25 to $30 million and third,  any capital invested by and fees payable to joint
venture partners  including OC Realty. OC Realty's share of proceeds  thereafter
will  range  from  22.5% to 45%.  We have  assessed  the  collectability  of the
advances  made to OC  Realty  based on  comparable  sales  of like  units in the
marketplace  which  suggest  demand  for  prospective  sales  of  the  project's
condominium  units  will  be  adequate  to  meet  its  obligations  and  provide
sufficient return to OC Realty with which to pay OC Realty's debt to us.

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

(18) SUBSEQUENT EVENTS

     (A)  Acceleration  of  the  maturity  of  our  obligations  to  PDS  Gaming
Corporation. See Note 3-K.

     (B) Issuance of additional Warrants. See Note 16

                                       28

<PAGE>

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

Forward-Looking Statements

     We have made  forward-looking  statements in this Form 10-Q,  including the
information  concerning possible or assumed future results of our operations and
those  preceded  by,  followed by or that include  words such as  "anticipates,"
"believes," "expects," "intends," or similar expressions.  For those statements,
we claim  the  protection  of the safe  harbor  for  forward-looking  statements
contained in the Private  Securities  Litigation  Reform Act of 1995. You should
understand that the following  important factors, in addition to those discussed
elsewhere in this document,  particularly  under "Risk Factors" in Part II, Item
1A,  could  affect our future  results and could  cause those  results to differ
materially from those expressed in our forward-looking statements:

     o    successfully  cure the PDS  default  represented  in their  letter  of
          October  3, 2006 and if  successful,  the  Company's  ability  to; (i)
          maintain compliance with the existing debt and lease obligations; (ii)
          sell assets; or (iii) re-negotiate our debt and lease obligations to a
          level  that  we can  reasonably  service,  based  on our  current  and
          projected cash flows;

     o    general  economic  and  business  conditions   affecting  the  tourism
          business in Florida;

     o    increased competition from new and existing forms of gaming;

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

     o    changes in laws regulating the gaming industry;

     o    the timing of the  installation  of slot machines in Broward  County's
          three  race  tracks  and  one  jai-alai  facility  as  a  result  of a
          referendum  approved on March 8, 2005.  It is  anticipated  that these
          machines will be installed  beginning in November 2006. Broward County
          is contiguous to Palm Beach County where we conduct operations;

     o    fluctuations  in quarterly  operating  results as a result of seasonal
          and weather considerations; and

     o    events  directly or  indirectly  relating to our business  causing our
          stock price to be volatile.

Overview

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

     We also lease through a bareboat  charter the gaming  vessel,  Big Easy and
during the nine month period ended  September  30, 2006  operated the vessel for
one month,  through our wholly owned subsidiary,  ITG Palm Beach, LLC ("ITGBP").
After  retrofitting  and  refurbishing  the Big Easy,  this vessel was initially
placed  into  service  on  October  18,  2005,  also from the Port of Palm Beach
Florida,  although we did not commence  regular  (although  limited)  operations
until  November  12,  2005.  On  February  1,  2006  we  indefinitely  suspended
operations of the Big Easy and have placed the vessel in wet dock storage.

     During the course of retrofitting and getting the Big Easy operational,  we
were required to raise the significant  funding needed to accomplish the goal of
making this vessel  comply with U.S.  Coast Guard  regulations  and placing this
vessel into service. We entered into various debt service agreements  throughout
Fiscal 2005, primarily with PDS Gaming ("PDS"),  which at June 30, 2005 amounted
to approximately $33.8

                                       29

<PAGE>

million  which  balance  includes  accrued  but unpaid  interest.  The loans are
secured  by  mortgages  on the Palm Beach  Princess  and the Big Easy as well as
virtually all of the assets of ITGV and its  subsidiaries,  including the vessel
Royal Star in addition to pledges of our stock in ITGV and its subsidiaries, and
collateral assignments of certain promissory notes payable to us. We, along with
Palm Beach Maritime Corporation  ("PBMC") and Palm Beach Empress,  Inc. ("PBE"),
companies  affiliated with our Chairman,  Francis W. Murray, have guaranteed the
loans.

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

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

     The  United  States  Coast  Guard  issued the Big Easy her  Certificate  of
Inspection on October 11, 2005,  following an extensive and unexpected  delay in
receiving  such   certification.   The  vessel's   first   official   cruise  to
international  waters was October 18,  2005.  Due to the  approaching  Hurricane
Wilma,  the vessel was  ordered  out of the Port for safe  haven  following  her
afternoon cruise on October 19, 2005.  Hurricane Wilma struck Florida on October
24, 2005. Due to Hurricane Wilma and vessel schedule conflicts, the Big Easy was
unable to sail  commercially  until November 6, 2005.  The  unexpected  delay in
receiving the vessels'  Certificate  of Inspection,  and the subsequent  delays,
damage and  inconveniences  caused by Hurricane Wilma immediately  following the
maiden  voyage had a  compounding  adverse  effect on the  Company's  ability to
retain  personnel.  As a result,  the Company  experienced  greater  than normal
attrition  of  Big  Easy  personnel,   particularly   those  who  carried  Coast
Guard-issued  Merchant  Marine  cards (i.e.  also known as  z-cards).  These are
issued by the Coast Guard and serve as required  documentation for those working
on US flagged vessels to fill Coast Guard mandated muster station requirements).
As the number of Merchant Marine card personnel became increasingly  inadequate,
it  became  increasingly   difficult  for  management  to  meet  muster  station
requirements,  often forcing the cancellation of many sailings,  particularly in
December and January.  The Coast Guard  stopped  issuing  Merchant  Marine cards
suddenly and unexpectedly  sometime in October,  2005. Adverse sea conditions in
November and December for commercial  sailing were also contributing  factors to
several missed sailings. As a result of these numerous challenges the vessel was
able to make only  nineteen  sailings  in  November;  twenty-  four  sailings in
December  and eight  sailings  in  January.  On January 31, 2006 the Coast Guard
denied  the  Company's  request  to provide an  extension  to  complete  certain
mandated work and removed the vessels' Certificate of Inspection. On January 31,
2006,  approximately  one hundred Coast Guard Merchant Marine card  applications
relating  to the Big Easy  remained  unprocessed  by the Coast  Guard for twelve
weeks or longer.

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

     In the past we have explored  possible  locations from which to potentially
operate  the  Big  Easy,  however,  our  negative  cash  position  has  recently
restricted our efforts to re-position the vessel. During our 2004 fiscal year we
purchased a third vessel, the M/V Royal Star. The Royal Star is currently in wet
dock  storage  and we are  limited by our  negative  cash  position  to make any
further  improvements  on the  vessel.  In the  past we have  explored  possible
locations  from which to  potentially  operate  the vessel,  however  additional
financing is necessary

                                       30

<PAGE>

before we move forward with the extensive  improvements  and  outfitting  needed
before being placed in service.

Liquidity and Capital Resources

     Our cash flow from  operations is primarily  dependent  upon the cash flows
from ITG Vegas, which operates the vessel,  M/V Palm Beach Princess.  During the
nine  months  ended  September  30,  2006,  the Palm Beach  Princess  operations
generated  approximately $5.6 million of cash (which amount was only achieved by
the deferral of $2.8 million of interest  payments  due) which was  insufficient
for our  consolidated  needs,  thus we had to rely on other  adjustments  in our
operations to meet our cash requirements.

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

     During the past few fiscal  quarters,  we extended  the terms of our vendor
payables and as a result, our accounts payable and accrued expenses exceeded our
cash by  approximately  $11.3  million as of September 30, 2006. We continued to
defer payments on vessel and equipment leases, on notes payable and charter hire
fees and continue to defer the salary of our Chairman.

     Our cash flows were  negatively  impacted  by the delay in putting  the Big
Easy in full service,  caused by delays in obtaining certification for passenger
operations  pursuant to the United States Coast Guard's  Alternative  Compliance
Program.  The costs  associated with  refurbishing and retrofitting the Big Easy
for placing it in service increased substantially due to upgrades to the vessel,
expansion of our Mardi-Gras  theme build out, and  improvements  required by the
Coast Guard,  further  depleting our working capital from our original  estimate
and required us to borrow additional funds which increased our interest expense.
These borrowings will continue to adversely affect our cash flows in the future.
More than 150 crew  members and other  employees  were hired and trained  during
this period and employees  who normally  worked  exclusively  for the Palm Beach
Princess spent time completing  assignments  for the Big Easy,  putting a severe
drain on our operational efforts and our cash flow during this period.

     On November 12, 2005 we placed the Big Easy vessel into  limited  scheduled
service from the Port of Palm Beach,  Florida.  The vessel  received Coast Guard
approval to operate on October 11, 2005 but because of the continuing effects of
hurricane Wilma,  inclement weather and rough seas,  mechanical problems and our
inability to meet the minimum  employee counts per Coast Guard  regulations,  we
did not begin regular, limited operations until mid November. We removed the Big
Easy from service on February 1, 2006 in order to conserve working capital.

     During the nine months ended September 30, 2006, the operating loss for the
Big Easy for January 2006 and the carrying costs for the remaining  eight months
were $4.2 million before interest expense.  We expect that future carrying costs
for the wet dock storage and slot machine leases will be approximately  $200,000
per month before interest expense.

     During our 2004 fiscal year, we purchased a third  vessel,  the Royal Star.
We anticipate  that the vessel will need extensive  improvements  and outfitting
before being placed in service as a gaming vessel. The vessel had been placed in
wet storage and delays in  commencing  the Royal Star  operations  have and will
continue to adversely  affect our cash flows because of the continuing  costs of
carrying the vessel.  During the nine months ending September 30, 2006, carrying
costs  for  the  Royal  Star  vessel  and  the  gaming   equipment  leases  were
approximately $1.3 million before interest expense.

     We have  not  made the  required  interest  and  principal  payments  since
December 1, 2005 and the PDS loan balances are  approximately  $35 million as of
September  30,  2006 due to the  accrued  interest  accumulating  at an interest
default rate of an additional 2.5% and fees for the Forbearance  Agreements.  We
have not made the

                                       31

required equipment lease payments to PDS from January through September 2006 and
the unpaid  equipment lease payments as of September 30, 2006 are  approximately
$1.9 million.

     On October 3, 2006, we received notice from PDS that it had accelerated the
maturity of our obligations and declared all amounts  remaining unpaid under the
Loan  Agreement and the Note dated June 30, 2005,  immediately  due and payable.
PDS has demanded the payment of all unpaid  obligations  and all amounts payable
under our equipment leases with PDS. As of October 1, 2006, we owe approximately
$35.1 million under the loan agreement and note and  approximately  $4.5 million
under the equipment leases.

     The Company  does not  currently  have the means to satisfy the  creditor's
demands and is  currently  negotiating  with PDS for an amicable  solution.  The
Company is continuing to analyze and pursue  strategic  alternatives,  including
sales of assets.  No assurances can be given that the Company will be successful
in these endeavors.  If we are unsuccessful in resolving this matter, we believe
the lender will take action in an attempt to foreclose against our assets.

     We need additional funds to meet our working capital and debt service needs
and the operating losses of the vessels not in service. However we have not been
successful in obtaining the necessary funds. The failure to obtain such funds on
a timely basis may require us to curtail  operations  or sell assets such as the
Royal Star,  the Big Easy or our Note  Receivable on the Cherry Hill Property or
even our Palm Beach  Princess  business.  The sale of assets  with  insufficient
proceeds to pay related debt may lead to default in our debt  service  payments,
which could lead to foreclosures on the leased vessels.

     Our  working  capital  as of  September  30,  2006  was a  negative  ($48.6
million).  Our cash flow and negative  working  capital  circumstances  worsened
during the nine months ended September 30, 2006 due in part to:

     o    operating  losses suffered by the Big Easy from January 1st to January
          31st due to her limited sailing  schedule in which  scheduled  cruises
          were cancelled due to Coast Guard restrictions,  mechanical  problems,
          high seas, or scheduling  conflicts  with the Palm Beach  Princess and
          the costs,  including interest, to carry the Big Easy after the vessel
          was taken out of  service on  February  1,  2006,  all of which  total
          approximately $8.1 million;

     o    costs to carry the Royal Star of approximately $1.3 million;

     o    expenses paid for costs of the Holding Company of  approximately  $1.5
          million; and

     o    a  decrease  in  the  net  income  of  the  Palm  Beach   Princess  of
          approximately $2.1 million as compared to the corresponding nine month
          period ending September 30, 2005.

                                       32

<PAGE>

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

<TABLE>
                                               Twelve Month Period Ended September 30,
                                          ------------------------------------------------   There-
                                              2007        2008           2009       2010     after        Total
                                          -----------   ----------    ----------   -------  --------   -----------
<CAPTION>
<S>                                      <C>           <C>          <C>           <C>      <C>        <C>
Capital Leases:
    P.B. Princess - Principal & Interest $ 22,017,527  $         -  $          -  $      - $       -  $ 22,017,527
       Bare Boat Charter - Related Party      960,000      960,000       800,000         -         -     2,720,000
    Big Easy - Principal & Interest        21,381,850            -             -         -         -    21,381,850
       Bare Boat Charter - Related Party    1,200,000    1,200,000     1,200,000         -         -     3,600,000
Notes and Mortgages:
   Principal & Interest                     6,336,539      145,227         2,421         -         -     6,484,187
    Interest Only                             216,827            -             -         -         -       216,827
Deferred Interest Payments                    600,000      600,000       300,000         -         -     1,500,000
Operating Leases:
    Casino Equipment                        5,406,200            -             -         -         -     5,406,200
    Administrative & Office                   830,560       86,068         6,950     2,366                 925,944
Purchase Obligations                          299,082       44,416         2,443         -         -       345,941
                                          -----------   ----------    ----------   -------  --------   -----------
Total                                    $ 59,248,585  $ 3,035,711  $  2,311,814  $  2,366 $       0  $ 64,598,476
                                          ===========   ==========    ==========   =======  ========   ===========
</TABLE>

Critical Accounting Policies and Estimates

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

Notes Receivable

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

                                       33

<PAGE>

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

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

Valuation of Vessels and Vessel Deposits - Related Parties

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

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

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

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

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

     We have approximately $35.6 million of indebtedness  outstanding to PDS for
vessel  leases and loans taken to pay interest as of September 30, 2006. We have
been unable to make the required  monthly debt service  payments  required under
the PDS loans since November 2005 and in December 2005 borrowed additional funds
in order to make  interest  payments  due  under  the  debt  agreement.  We have
extended  payment  terms of our  accounts  payable in order to conserve  working
capital.  This action could jeopardize the relationships with our vendors and we
may be  forced  to  find  alternative  sources  for  some of our  suppliers  and
professional  advisors,   further  disrupting  our  operations.  We  will  incur
additional indebtedness in the future for accrued but unpaid

                                       34

<PAGE>

interest  on  the  PDS  debt.  Our  level  of  indebtedness  will  have  several
significant negative effects on our future operations, including the following:

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

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

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

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

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

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

     o    sell selected assets or our operating business.

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

     On March 8, 2005 the citizens of Broward  County  approved a referendum  to
permit slot  machines at  pari-mutuel  facilities in Broward  County.  Currently
there are three race tracks and one  jai-alai  facility  in the County.  Broward
County is contiguous to Palm Beach County in which we conduct  operations.  In a
special  session in December 2005, the Florida  legislature  passed  legislation
which  would  permit  1,500 slot  machines  at each of the four (4)  pari-mutuel
facilities in Broward  County.  Installation of these machines is expected to be
during the fall of 2006 and  through  the first  quarter of 2007.  The  negative
impact to our  Company,  can not be  predicted  at this time.  Over the past few
years,  there has been an attempt to  legalize  gaming  throughout  the State of
Florida.  It is  likely  that  the  gaming  industry  will  continue  to  pursue
legalization  of gaming in  Florida,  and we believe  that the  legalization  of
gaming in Florida could have a material adverse impact on our operations.

                                       35

<PAGE>

Consolidated

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

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

  Gaming              $  5,892,368   $         -  $          -  $  5,892,368  $ 6,232,595  $          -  $          -  $ 6,232,595
  Fare                     479,591             -             -       479,591      627,080             -             -      627,080
  On Board                 413,995             -             -       413,995      467,529             -             -      467,529
  Other                          -             -       146,596       146,596            -             -        63,863       63,863
                      ------------  ------------ ------------- -------------  ------------  ------------ ------------- ------------
              Total      6,785,954             0       146,596     6,932,550    7,327,204             0        63,863    7,391,067
                      ------------  ------------ ------------- -------------  ------------  ------------ ------------- ------------
Operating Costs and
 Expenses:

 Gaming                  2,256,747       437,476             -     2,694,223    2,142,029             -             -    2,142,029
 Fare                      557,844             -       128,074       685,918      890,592             -        85,040      975,632
 On Board                  199,772             -             -       199,772      218,295             -             -      218,295
 Maritime & Legal        1,784,273       195,632             -     1,979,905    1,846,962             -             -    1,846,962
 G & A Expenses            724,367             -       390,384     1,114,751      607,129             -       762,236    1,369,365
Development Costs:               -             -        41,956        41,956            -     2,332,773       152,131    2,484,904
         Royal Star              -             -       418,621       418,621            -             -       350,569      350,569
             Equine              -             -             -             -            -             -       179,581      179,581
Dep & Amort                583,097             -         1,138       584,235      583,106        17,220        56,872      657,198
                      ------------  ------------ ------------- -------------  ------------  ------------ ------------- ------------
              Total      6,106,100       633,108       980,173     7,719,381    6,288,113     2,349,993     1,586,429   10,224,535
                      ------------  ------------ ------------- -------------  ------------  ------------ ------------- ------------
Operating Income
(Loss)                     679,854      (633,108)     (833,577)     (786,831)   1,039,091    (2,349,993)   (1,522,566)  (2,833,468)

Other Income (Expense):

   Interest &
   Financing Expenses     (764,335)     (873,921)     (257,512)   (1,895,768)    (649,717)     (464,829)     (206,886)  (1,321,432)

   Interest & Financing
   Expenses - Related
   Parties                (233,171)     (300,000)             -     (533,171)    (147,049)            -        (4,389)    (151,438)

   Warrant Expense               -             -      (437,204)     (437,204)           -             -             -            -

   Interest Income           1,681             -             -         1,681       13,667             -             -       13,667

   Interest Income -
    Related Parties         64,540             -         7,325        71,865       57,136             -        15,752       72,888

                      ------------  ------------ ------------- -------------  ------------  ------------ ------------- ------------
              Total       (931,285)   (1,173,921)     (687,391)   (2,792,597)    (725,963)     (464,829)     (195,523)  (1,386,315)
                      ------------  ------------ ------------- -------------  ------------  ------------ ------------- ------------
Income (Loss) Before
Income Tax            $   (251,431)  $(1,807,029) $ (1,520,968) $ (3,579,428) $   313,128  $ (2,814,822) $ (1,718,089) $(4,219,783)
                      ============  ============ ============= =============  ============  ============ ============= ============
</TABLE>

                                       36

<PAGE>

     Revenues  decreased  by  $458,517  primarily  as a result  of the  revenues
generated by the Palm Beach Princess decreasing by $541,250.


     Operating  expenses  decreased  approximately  $2.5  million,  or 25%, from
$10,224,535  in the three months ended  September  30, 2005 to $7,719,381 in the
three months ended September 30, 2006 primarily the result of:

     o    a  decrease  in the  development  costs of the Big Easy of  $2,332,773
          offset by carrying costs in the amount of $633,108  incurred while the
          vessel is in wet dock;

     o    a decrease in the Parent Company administrative expense of $371,852;

     o    a  decrease  in  operating  expenses  for the Palm Beach  Princess  of
          $182,013;

     o    a decrease in equine  operating costs of $179,581  because the Company
          terminated its equine operations on December 31, 2005;

     o    a decrease in other  development  costs of $110,175  since the Company
          was forced to reduce its costs in search for new gaming opportunities;
          offset by,

     o    an  increase  in the  carrying  costs  for our  Royal  Star  vessel of
          $68,052, which vessel has been in wet dock storage since its purchase;

     The  Operating  (loss) for the three  months ended  September  30, 2006 was
($786,831) as compared to an operating loss of ($2,833,468)  for the comparative
period of last year.

     Other expenses  increased by  approximately  $1.4 million as a result of an
increase in the interest and financing expense due to: 1) the higher debt levels
on the  vessel  leases;  2) higher  interest  rates as a result  of the  penalty
interest  incurred on the $30 million  loan from PDS;  3)  forbearance  fees and
penalties of $347,996 ; and 4) an increase in the costs of warrants  granted for
financing in the amount of $437,204.

     The  Net  (Loss)  for  the  three  months  ended  September  30,  2006  was
($3,579,428)  or ($0.31) per share as compared to a net loss of  ($4,226,783) or
($.40) per share for the three months ended September 30, 2005.

     Vessel Operations

     Palm Beach Princess

     During the current period net operating  revenue from vessel operations was
$6,785,954 as compared to $7,327,204. The decrease in revenue of $541,250 during
the  comparable  quarters is due in part to a decrease in the  passenger  counts
from  61,754 in 2005 to 54,983 or an 11%  decrease  for the three  months  ended
September 30, 2006. We attributed this drop in passenger  counts  primarily to a
decrease in the amounts  spent for marketing  and  advertising  during the three
month  period due to a decrease in cash  available.  During the quarter we spent
$332,748 less or 37% on marketing and advertising then during the  corresponding
period in the  prior  three  month  period.  The drop in  passenger  counts  was
partially  offset by an increase in the revenue per  passenger  from  $118.65 to
$123.42 during the current period.

     During the three months ended September 30, 2005, a portion of the employee
costs  normally  incurred  by  the  Palm  Beach  Princess  for  operational  and
administrative  salary  expenses  were  allocated  to  the  Big  Easy  start  up
operation.  These  allocations were made to more accurately  reflect the cost of
preparing the Big Easy for use as a casino gaming vessel. Approximately $365,000
of salaries  were  allocated to the Big Easy and expensed as  development  costs
during  the three  months  ended  September  30,  2005 where as during the three
months ended  September 30, 2006,  there was no allocation of employee cost made
to the Big Easy Operation.  This allocation  should be taken into  consideration
when comparing operating results from year to year for the Palm Beach Princess.

                                       37

<PAGE>

     Casino   operating   expenses  which  also  includes  food,   beverage  and
entertainment  increased  $114,718 from  $2,142,029 or 34% of casino  revenue in
2005 to  $2,256,747  or 38% of casino  revenue in 2006  primarily  the result of
dividing costs, many of which are fixed by their nature, over reduced revenues.

     Maritime and legal expenses decreased approximately $62,689 or 3%.

     Administrative expenses increased $77,238.

     Finance expenses increased $205,322 as a result of the higher interest rate
due to default  interest being charged and a forbearance fee recorded during the
quarter.  Depreciation  and  amortization  increased  $39,991 as a result of the
increase  in the  amortization  expense  of the dry  dock  expenditures  made in
October 2005.

     The loss before income tax expense for the three months ended September 30,
2006 was  ($251,431)  as compared to income before income tax of $313,128 in the
comparable three month period of 2005.

     The following is a  comparative  summary of income and expenses of the Palm
Beach  Princess  operation for the 13 weeks ended October 1, 2006 and for the 13
weeks ended October 2, 2005:

                                           Three Months Ended
                                       October 1,       October 2,
            Description                  2006             2005        Change
-------------------------------      ------------     ------------  -----------
Passenger Count                            54,983           61,754       (6,771)
Number of Cruises                             172              159           13
Average Number of
 Passengers per Cruise                        320              388          (69)
Net Revenue per Passenger            $     123.42     $     118.65  $      4.77

Revenue:

    Gaming                           $  5,892,368     $  6,232,595  $  (340,227)
    Fare                                1,433,075        1,623,217     (190,142)
    On Board                              822,301          916,574      (94,273)
    Less: Promotional Allowances
    Fare                                 (953,484)        (996,137)      42,653
    On Board                             (408,306)        (449,045)      40,739
                                     ------------     ------------  -----------
    Net Operating Revenue               6,785,954        7,327,204     (541,250)
                                     ------------     ------------  -----------
Expenses:
    Gaming                              2,256,747        2,142,029      114,718
    Fare                                  557,844          890,592     (332,748)
    On Board                              199,772          218,295      (18,523)
    Maritime and Legal Expenses         1,784,273        1,846,962      (62,689)
    Administrative                        724,367          647,129       77,238
    Finance Expenses - Net                931,285          725,963      205,322
    Depreciation and Amortization         583,097          543,106       39,991
                                     ------------     ------------  -----------
    Total Expenses                      7,037,385        7,014,076       23,309
                                     ------------     ------------  -----------
       Income (Loss) Before Income
         Tax Expense                 $   (251,431)    $    313,128  $  (564,559)
                                     ============     ============  ===========

     Big Easy

     During  the  three  month  period  ended  September  30,  2006 the Big Easy
sustained a loss before interest expense of approximately $633,108. The majority
of these costs consist of the  continuing  expenses to keep the ship at wet dock
and the casino  equipment  leases.  Gaming expenses  consist of gaming equipment
lease  expense  in the  amount of  approximately  $437,476.  Maritime  and legal
expense  to keep the  vessel  at wet dock  were  $195,632.  Interest,  financing
expense and the bare boat  charter  fees during the quarter  were  approximately
$1.2  million  resulting  in a net (loss) of  ($1,807,029)  for the three months
ended September 30, 2006 as compared to

                                       38
<PAGE>

($2,814,822)  during the comparable  three month period when all of the Big Easy
costs were charged to development costs.

Results of Operations for the Nine Months Ended September 30, 2006 and 2005

     Consolidated

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

<TABLE>
                                        Nine Months Ended                                      Nine Months Ended
                                        September 30, 2006                                     September 30, 2005
                     ------------------------------------------------------ -------------------------------------------------------
                                                  Holding Co                                               Holding Co
                     Palm Beach      Big          &                           Palm Beach    Big            &
                     Princess        Easy         Other Subs       Total      Princess      Easy           Other Subs     Total
                     ------------  ------------ ------------ -------------- ------------- ------------- ------------- -------------
<CAPTION>
<S>                  <C>           <C>           <C>          <C>            <C>           <C>           <C>           <C>
Operating Revenues:
Gaming               $ 20,966,818  $     62,738  $         -  $  21,029,556  $ 21,935,263  $          -  $          -  $ 21,935,263
Fare                    2,085,788         6,332            -      2,092,120     2,457,928             -             -     2,457,928
On Board                1,267,717         9,418            -      1,277,135     1,580,807             -             -     1,580,807
Other                           -             -      355,290        355,290             -             -       297,001       297,001
                     ------------  ------------ ------------ -------------- ------------- ------------- ------------- -------------
              Total    24,320,323        78,488      355,290     24,754,101    25,973,998             -       297,001    26,270,999
                     ------------  ------------ ------------ -------------- ------------- ------------- ------------- -------------
Operating Costs
 and Expenses:

Gaming                  7,002,104     1,280,309            -      8,282,413     7,026,588             -             -     7,026,588
Fare                    1,743,316        97,609      316,890      2,157,815     3,050,744             -       289,398     3,340,142
On Board                  621,907        33,957            -        655,864       753,889                           -       753,889
Maritime & Legal        5,565,283     1,542,858            -      7,108,141     5,375,755             -             -     5,375,755
G & A Expenses          2,276,737       900,777    1,489,117      4,666,631     1,919,373             -     1,875,286     3,794,659
Development Costs:                                   341,502        341,502                   6,971,072       506,284     7,477,356
         Royal Star                                1,317,521      1,317,521             -             -       528,408       528,408
             Equine                                        -              -             -             -       508,596       508,596
Impairment of Assets                                 400,000        400,000             -             -             -             -
Dep & Amort             1,847,116       411,104        6,493      2,264,713     1,563,966        17,220        65,418     1,646,604
                     ------------  ------------ ------------ -------------- ------------- ------------- ------------- -------------
              Total    19,056,463     4,266,614    3,871,523     27,194,600    19,690,315     6,988,292     3,773,390    30,451,997
                     ------------  ------------ ------------ -------------- ------------- ------------- ------------- -------------
Operating Income
(Loss)                  5,263,860    (4,188,126)  (3,516,233)    (2,440,499)    6,283,683    (6,988,292)   (3,476,389)   (4,180,998)

Other Income
 (Expense):

   Interest &
   Financing Expenses  (2,794,875)   (3,047,418)    (782,305)    (6,624,598)   (1,594,461)     (248,106)     (609,189)   (2,451,756)

   Interest &
   Financing Expenses -
    Related Parties      (739,742)     (900,000)      (9,505)    (1,649,247)     (637,923)     (415,400)      (15,977)   (1,069,300)

   Warrant Expense             -             -    (1,510,302)    (1,510,302)            -             -             -             -

   Interest Income          4,478             -            -          4,478         5,626             -        31,379        37,005

   Interest Income -
    Related Parties       193,622             -       21,894        215,516        16,220             -       189,772       205,992
                      ------------  ------------ ------------ -------------- ------------- ------------- ------------- -------------
              Total    (3,336,517)   (3,947,418)  (2,280,218)    (9,564,153)   (2,210,538)     (663,506)     (404,015)   (3,278,059)
                      ------------  ------------ ------------ -------------- ------------- ------------- ------------- -------------
Income (Loss) Before
Income Tax           $  1,927,343  $ (8,135,544) $(5,796,451) $ (12,004,652) $  4,073,145  $ (7,651,798) $ (3,880,404) $ (7,459,057)
                      ============  ============ ============ ============== ============= ============= ============= =============
</TABLE>

                                       39

     Since our accounting periods consist of a 4-4-5 week quarter,  from time to
time an  additional  week is included  in the first  period to adjust our period
ends to more closely  match a calender  year end.  For example,  the three month
period ended March 31, 2005  contained 14 weeks  compared to the 13 weeks of the
three month  period  ended March 31,  2006.  As a result,  the nine months ended
September  30,  2006 had 39 weeks as compared to 40 weeks in the same nine month
period ended September 30, 2005

     Revenues  decreased  $1,516,898  primarily  as a  result  of  the  revenues
generated by the Palm Beach Princess decreasing by approximately $1.65 million.

     Operating  expenses  decreased  approximately  $3.3  million,  or 11%, from
$30,451,997  in the nine months ended  September 30, 2005 to  $26,194,600 in the
nine months ended September 30, 2006 primarily the result of:

     o    a decrease in the  operating  and  carrying  costs for the Big Easy of
          approximately  $2.7  million  for the nine  months as  compared to the
          previous  nine month  period  when we  incurred  start-up  costs of $7
          million;

     o    a  decrease  in  operating  expenses  for the Palm Beach  Princess  of
          approximately $634,000;

     o    a decrease in equine  operating costs of $508,600  because the Company
          terminated its equine operations on December 31, 2005;

     o    an  increase  in the  carrying  costs  for our  Royal  Star  vessel of
          $789,113,  which  vessel  has  been  in wet  dock  storage  since  its
          purchase.  The  increase was  primarily  caused by the payments we are
          making on the  gaming  equipment  placed  aboard the vessel in January
          2005 whereas last year the majority of payments on the equipment  were
          interest only and classified as an interest expense; and

     o    the impairment of the liquor license in the amount of $400,000  during
          the current nine month period; offset by

     o    a  decrease   in  the  Parent   Company   administrative   expense  of
          approximately   $400,000  and  a  decrease  in  development  costs  of
          $164,782.

     The  Operating  (loss) for the nine  months  ended  September  30, 2006 was
($2,440,499)  as  compared  to an  operating  (loss)  of  ($4,180,998)  for  the
comparative nine month period ended September 30, 2005.

     Other expenses  increased by  approximately  $6.3 million as a result of an
increase in the interest and financing expense due to: 1) the higher debt levels
on the  vessel  leases;  2) higher  interest  rates as a result  of the  penalty
interest  incurred on the $30 million  loan from PDS; 3)  forbearance  fees;  4)
interest  for the Big Easy being  capitalized  until  March 31,  2005 during its
reconstruction  period  which  is  reflected  in the  nine  month  period  ended
September 30, 2005; and 5) the costs of warrants  granted during the none months
ended  September  30, 2006 for  financing  in the amount of  approximately  $1.5
million.

     The  Net  (Loss)  for  the  nine  months  ended   September  30,  2006  was
($12,004,652)  or ($1.06) per share as compared to a net (loss) of  ($7,556,057)
or ($.72) per share for the nine months ended September 30, 2005.

     Vessel Operations

     Palm Beach Princess

     During the current period net operating  revenue from vessel operations was
$24,320,323 as compared to $25,973,998. The decrease in revenue of approximately
$1.7  million  during  the  comparable  quarters  is  due to a  decrease  in our
advertising and marketing  expenses of  approximately  $1.3 million as discusses
below and, in part, to comparing  the 26 weeks of  operations  during 2006 to 27
weeks of operations  during 2005.  The operating  subsidiary  which operates the
Palm Beach Princess ends its quarterly  accounting  period on the last Sunday of
each quarter.  These end of the week cut offs normally create more comparability
of the Company's  quarterly  operations  by generally  having an equal number of
weeks  (13)  and  weekend  days  in  each  quarter.  Periodically,  this  system
necessitates  a 14 week quarter.  The March 31, 2005 quarter was such a quarter,

                                       40

<PAGE>

therefore,  the number of cruises,  revenues and expenses reported for the first
Fiscal  quarter of last year  included  one  additional  week of  operations  as
compared to the first quarter of 2006.  The average  revenue per week during the
nine months ended  September 30, 2006 was $623,598  compared to $649,350 for the
comparable  nine month period ended  September 30, 2005.  This was a result of a
decrease in the average number of passenger per cruise of 8.9%, partially offset
by an increase in the revenue per passenger from $119.08 to $123.17.

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

     Casino   operating   expenses  which  also  includes  food,   beverage  and
entertainment  decreased  $24,484 from  $7,026,588  or 32% of casino  revenue to
$7,002,104 or 33.4% of casino  revenue.  The increase in the percentage of costs
to revenues was caused primarily by the result of dividing costs,  many of which
are fixed by their nature, over reduced revenues.

     Sales,  marketing and advertising expenses decreased $1,307,428 or 43%. The
amounts incurred for marketing and advertising decreased because the Company did
not have sufficient  funds to spend due to our negative cash position.  On Board
expenses  decreased by $131,982 as a result of fewer cruises  during the current
nine month period.

     Maritime,  legal  and  administrative  expenses  increased  $189,527  which
reflects  in part the  decrease  in the  allocation  of salaries to the Big Easy
since the allocation was only done for one month in the current year.

     Finance  expenses  increased  $1,115,980 as a result of the higher interest
rate due to default interest being charged and a forbearance fee recorded during
the quarter.  Depreciation  and amortization  increased  $283,150 as a result of
amortizing the dry dock expenses incurred in October of 2005.

     The income  before  income tax expense for the nine months ended  September
30, 2006 was $1,927,343 as compared to income before income tax of $4,073,145 in
the comparable nine month period ended September 30, 2005.

                                       41

<PAGE>

     The following is a  comparative  summary of income and expenses of the Palm
Beach Princess operation for the 39 weeks ended September 2, 2006 and for the 40
weeks ended September 2, 2005:

                                           Nine Months Ended
                                       September 1,   September 2,
             Description                   2006           2005        Change
------------------------------------  ------------   ------------  ------------
Passenger Count                           197,460        218,115       (20,655)
Number of Cruises                             522            526            (4)
Average Number of
 Passengers per Cruise                        378            415           (37)
Net Revenue per Passenger            $     123.17   $     119.08  $       4.08
Revenue:

    Gaming                           $ 20,966,818   $ 21,935,263  $   (968,445)
    Fare                                5,677,516      6,251,052      (573,536)
    On Board                            2,577,350      3,093,510      (516,160)
    Less: Promotional
      Allowances
    Fare                               (3,591,728)    (3,793,124)      201,396
    On Board                           (1,309,633)    (1,512,703)      203,070
                                      ------------   ------------  -----------
    Net Operating Revenue              24,320,323     25,973,998    (1,653,675)
                                      ------------   ------------  ------------
Expenses:
    Gaming                              7,002,104      7,026,588       (24,484)
    Fare                                1,743,316      3,050,744    (1,307,428)
    On Board                              621,907        753,889      (131,982)
    Maritime and Legal Expenses         5,565,283      5,375,756       189,527
    Administrative                      2,286,737      1,919,373       367,364
    Finance Expenses - Net              3,326,517      2,210,537     1,115,980

    Depreciation and Amortization       1,847,116      1,563,966       283,150
                                      ------------   ------------  ------------
    Total Expenses                     22,392,980     21,900,853       492,127
                                      ------------   ------------  ------------
                 Income Before
                  Income Tax Expense $  1,927,343   $  4,073,145  $ (2,145,802)
                                      ============   ============  ============

     Big Easy

     During  the  nine  month  period  ending  September  30,  2006 the Big Easy
sustained   operational   losses  before  interest   expense  of   approximately
$4,188,126.  This loss consist of the operational  loss for the month of January
and the continuing  expenses to keep the ship at wet dock after February 1, 2006
and the casino equipment leases.  Interest,  financing expense and the bare boat
charter fees during the nine months were approximately $3.9 million resulting in
a net (loss) of  ($8,135,544)  for the nine months ended  September  30, 2006 as
compared to a net (loss) of ($7,651,798) during the comparable nine month period
when the Big Easy costs were charged to development costs.

Inflation

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

                                       42

<PAGE>

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4. CONTROLS AND PROCEDURES

Controls and Procedures

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

     As of the  end of the  period  covered  by this  report,  we  completed  an
evaluation,  under the supervision and with the participation of our management,
including  our chief  executive  officer  and chief  financial  officer,  of the
effectiveness  of the  design  and  operation  of our  disclosure  controls  and
procedures.  Based on the  foregoing,  our  chief  executive  officer  and chief
financial  officer  concluded  that  the  Company's   disclosure   controls  and
procedures were effective.

     There have not been any significant changes that occurred during the fiscal
quarter ended September 30, 2006 in the Company's  internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation.

                                       43

<PAGE>

                    INTERNATIONAL THOROUGHBRED BREEDERS, INC.
                                AND SUBSIDIARIES

                                     Part II

                                OTHER INFORMATION

ITEM 1A. RISK FACTORS

     As disclosed in Part I, Item 1, Footnote 3, the Company has received notice
from PDS that it has  accelerated  the maturity of our  obligations and declared
all amounts  remaining  unpaid under the Loan  Agreement and the Note dated June
30,  2005,  and  all  amounts  payable  under  our  equipment  leases  with  PDS
immediately  due  and  payable.  As of  October  1,  2006,  the  borrowers  owed
approximately  $35.6 million under the loan agreement and note and approximately
$4.5 million under the equipment leases.

     We have been in default in payment of the principal and interest  under the
note,  and in default in payment of the equipment  rentals under the PDS leases,
in each case since January 2006.  During our first quarter ended March 31, 2006,
we entered into a forbearance  agreement,  subsequently amended during our third
quarter ended  September 30, 2006, with PDS which expired on August 29, 2006. As
a result  of the  acceleration,  the rate of  interest  payable  under  the note
increased by 5% per annum above the rate in effect prior to our default.

     We do not currently  have the means to satisfy the  creditor's  demands and
are currently  negotiating with PDS for an amicable solution.  We are continuing
to analyze and pursue strategic  alternatives,  including sales of assets. If we
are  unsuccessful  in  resolving  this  matter,  we believe the lender will take
action in an attempt to foreclose against our assets.

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

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

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

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

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

ITEM 6. EXHIBITS

Exhibit                               Description of Exhibit
-------                               ----------------------

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

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

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

                                       44

<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 14, 2006       /s/Francis W. Murray
                        ----------------------------------------------------
                        Francis W. Murray, President, Chief Executive
                        Officer and Chief Financial Officer


                                       45

<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 14, 2006

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


                                       46

<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 14, 2006


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


                                       47

<PAGE>

                                                                      Exhibit 32

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

     In  connection  with the  filing  of the  Quarterly  Report on Form 10-Q of
International Thoroughbred Breeders, Inc. (the "Company") for the three and nine
months  ended  September  30,  2006 as filed with the  Securities  and  Exchange
Commission  on the date hereof  (the  "Report"),  I,  Francis W.  Murray,  Chief
Financial Officer of the Company,  hereby certify pursuant to 18 U.S.C. ss.1350,
as adopted pursuant to Section 906 of the  Sarbanes-Oxley  Act of 2002, that, to
the best of my knowledge:

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

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



 /s/ Francis W. Murray
 ------------------------------
 Name: Francis W. Murray
 Title: Chief Financial Officer
 November 14, 2006


                                       48

<PAGE>