EMPLOYMENT AGREEMENT
                              --------------------

     THIS  EMPLOYMENT  AGREEMENT,  is made as of June 23,  1999,  by and between
COLONIAL DOWNS HOLDINGS,  INC., a Virginia corporation (the "Company"),  and IAN
M. STEWART ("Executive") and recites and provides as follows:

     WHEREAS, the Company is engaged in the business of seeking opportunities or
horse racing and  pari-mutuel  wagering in Virginia,  and its  subsidiaries  are
currently the holders of the only unlimited  licenses to own and operate a horse
racetrack  with  pari-mutuel  wagering in Virginia  (the  "Track")  and the only
entities  authorized to apply for licenses to own and operate satellite wagering
facilities ("SWF") in Virginia;

     WHEREAS, the Company desires to employ Executive as President and Chief
Financial Officer of the Company; and

     WHEREAS, Executive desires to be so employed by Company on the terms and
conditions hereinafter set forth;

     WHEREAS,  through his  relationship  with the Company,  the Executive  will
become  acquainted  with  certain  confidential  or  proprietary  aspects of the
Company's business,  including without limitation,  operating methods, marketing
strategy, sponsorship and advertising agreements, design and layout of the Track
facilities,  potential  new  business  opportunities,  and  potential  sites for
additional  SWFs,  and  other  confidential  and  proprietary  information  that
constitute  valuable  assets of the  Company  and which the  Company  desires to
protect.

     NOW,  THEREFORE,  for and in  consideration  of the  mutual  covenants  and
agreements  herein  contained  and other good and  valuable  consideration,  the
receipt and  sufficiency  of which are hereby  acknowledged,  the parties hereto
agree as follows:

     1.     EMPLOYMENT.  The Company hereby employs the Executive, and the
            ----------
Executive  hereby  accepts  employment  with the Company as President  and Chief
Financial Officer.

     2.     DUTIES OF THE EXECUTIVE.  As the President and Chief Financial
            -----------------------
Officer of the Company,  the Executive  shall  faithfully  serve the Company and
shall at all times devote his full time, best efforts,  skills,  attention,  and
energies to the  development,  organization,  management,  and  expansion of the
Company's  business to the utmost of the Executive's  ability,  and shall do and
perform  all  such  services,  acts,  and  things  connected  therewith  as  are
reasonably  required  and as the  Company  shall from time to time  direct.  The
Executive  shall not become  engaged or  involved in any  activities  or matters
which may adversely affect or reflect  discredit on the Company or its business,
or conflict with his services to the Company.  This Agreement shall not prohibit
the Executive from  investing  personal  assets in other  businesses or entities
that do not  compete  with  the  Company  (as  described  in  Section  9 of this
Agreement).



<PAGE>   2

     3.     TERM.  Subject to the provisions of Section 8 regarding
            ----
termination,  this Agreement  shall remain in effect for a term of two (2) years
beginning  on the date  hereof.  This  Agreement  may be renewed and extended on
terms and conditions mutually agreeable to the parties hereto.

     4.     COMPENSATION.  For all services rendered by the Executive pursuant
            ------------
to this Agreement, the Company shall pay the Executive a base salary of $150,000
per annum, payable in equal semi-monthly installments, or at such other times as
may be mutually agreed upon by the parties.

     5.     DEDUCTIONS.  The Company is authorized to deduct from the actual
            ----------
compensation  of the  Executive  such sums as may be  required to be deducted or
withheld under the provisions of any federal,  state, or local law or regulation
now in effect or hereafter  put into effect  during the term of this  Agreement,
including  without  limitation,  social  security,   unemployment,   and  income
withholding taxes.

     6.     BENEFITS.
            --------
            (a) The Executive  shall be entitled to a paid vacation each year of
three (3)  weeks,  the  timing of which  shall be  subject  to mutual  agreement
between the Company  and the  Executive.  The  Executive's  attendance  at trade
shows, training,  educational,  and professional programs and meetings shall not
be charged against Executive's  vacation allowance.  The Executive shall also be
entitled to paid sick leave of five (5) days each year.
            (b) The Executive shall be entitled to the use of an automobile, the
make  and  model of  which  shall  be  mutually  agreeable  to the  Company  and
Executive, leased by the Company at its expense.
            (c) The Company  shall  reimburse  the  Executive  for all  expenses
reasonably  and  necessarily  incurred by him in the  performance  of his duties
hereunder. To be reimbursed,  the Executive must submit written evidence of such
expenses to the Company within thirty (30) days after incurring such expense.
            (d) The Executive shall receive such other benefits,  if any, as the
Company generally provides to all other Executives involved in the operations of
the  Company,  whether  now in  effect or  hereafter  adopted,  including  group
hospital  and  accidental  insurance  benefits  and group  disability  insurance
coverage.

     7.     STOCK OPTIONS.  Subject to approval by the Board of Directors, the
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Company  shall  grant  Executive  an option for 10,000  shares of Class A Common
Stock of the Company at an exercise price equal to the reported closing price of
the stock on the  NASDAQ  Small Cap  Market  as of the date  this  Agreement  is
executed by all  parties.  Such  option  shall vest pro rata on each of June 23,
2000 and June 23, 2001,  subject to the terms of the Company's 1997 Stock Option
Plan.


<PAGE>   3

     8.     TERMINATION OF EMPLOYMENT.
            -------------------------
            (a) Upon  the  occurrence  of any of the  following  events  and the
expiration of any required notice, this Agreement and the Executive's employment
hereunder automatically shall terminate:
                 (1)  The death or bankruptcy of the Executive;
                 (2)  The Board of Director's termination of the Executive's
                      employment at any time, "for cause" or not "for cause" (as
                      defined   below).   This  Agreement  and  the  Executive's
                      employment  hereunder  shall terminate upon the expiration
                      of a period of  thirty  (30) days  after  delivery  by the
                      Company  of  written   notice  to  the  Executive  of  his
                      termination.   The  phrase  "for  cause"   shall   include
                      termination   because   of   the   Executive's    personal
                      dishonesty,  incompetence,  willful misconduct, censure or
                      reprimand by any regulatory  body  (including the Virginia
                      Racing  Commission),  breach of fiduciary  duty  involving
                      personal  profit,  intentional  failure to perform  stated
                      duties,  willful violation of any law, rule, or regulation
                      (other  than  traffic  violations  or  similar  offenses),
                      failure  to  perform   assigned  duties  in  a  reasonably
                      satisfactory  manner,  or material breach of any provision
                      of this Agreement;
                 (3)  The  expiration  of a period  of thirty  (30)  days  after
                      delivery by the Executive of written notice to the Company
                      of his resignation as an Executive of the Company; or
                 (4)  The disability of the Executive. "Disability" shall mean a
                      physical   or  mental   disability   that   prevents   the
                      substantial  performance  by the  Executive  of his duties
                      hereunder  lasting  for a  continuous  period  of six  (6)
                      months or longer.  The reasoned and good faith judgment of
                      the  Company's  Board of Directors  as to the  Executive's
                      disability  shall  be  final  and  shall  be based on such
                      competent  medical  evidence as shall be  presented to the
                      Company's  Board of Directors  by the  Executive or by any
                      physician  or  group  of  physicians  or  other  competent
                      medical experts on behalf of the Executive  engaged by the
                      Company.
            (b) In the event the Executive voluntarily terminates his employment
or has his employment  terminated "for cause" under this Agreement,  he shall be
entitled to receive  from the Company  only the base salary and  benefits as set
forth herein that have accrued to the date of termination in full  settlement of
all of the Company's obligations hereunder.
            (c) In the event the Company  terminates the employment of Executive
by reason of his disability, the Executive shall be entitled to receive from the
Company  only the base salary and benefits set forth herein that have accrued to
the date of  disability in full  settlement of all of the Company's  obligations
hereunder.
            (d) In the  event  the  Company  terminates  the  employment  of the
Executive  not "for cause",  the  Executive  shall be entitled to six (6) months
base salary as set forth  herein and the  benefits as set forth herein that have
accrued to the date of  termination  in full  settlement of all of the Company's
obligations hereunder.

<PAGE>   4

     9.     FIDUCIARY RELATIONSHIP.
            ----------------------
            (a)  The Executive as a Fiduciary.  It is understood and agreed
                 ----------------------------
that the  Executive  will serve in a fiduciary  capacity to the Company  and, as
such,  will  comply  with the  standards  applicable  to  fiduciaries  and other
Executives of the Company.
            (b)  Confidential Information and Trade Secrets.  All information
                 ------------------------------------------
relating to or used in the business and  operations  of the Company  (including,
but not  limited  to,  marketing  plans,  business  procedures,  trade  secrets,
patents,  sources  of  supplies  and  materials,   reports,   memoranda,  plans,
documents, and the like), whether conceived, prepared, originated,  developed or
compiled by the  Executive or by the Company prior to or during the term of this
Agreement  and  the  employment  of  the  Executive  (hereinafter  "Confidential
Information and Trade Secrets"),  are and shall be confidential  information and
trade  secrets which are the  exclusive  property of the Company,  provided such
information is not generally known in the horse racing industry.
            (c)  Property of the Company.  All Confidential Information and
                 -----------------------
Trade Secrets as defined in Section 8(b) are and shall be the exclusive property
of the Company.
            (d)  Nondisclosure of Confidential Information and Trade Secrets.
                 -----------------------------------------------------------
Except in the regular  course of his  employment by the Company  hereunder or as
the Company may expressly  authorize or direct in writing,  the Executive  shall
not,  during or after the  termination  or expiration of this  Agreement,  copy,
reproduce,  disclose  or  divulge  to  others,  use or permit  others to use any
Confidential Information and Trade Secrets, or any records or materials relating
to any such  Confidential  Information or Trade Secrets.  The Executive  further
covenants and agrees that during the term of this  Agreement he shall not remove
from the custody and control of the Company any records of or materials relating
to such Confidential Information and Trade Secrets and that upon the termination
or expiration of his employment he shall deliver the same to the Company.

     10.    COVENANT NOT TO COMPETE; NON-SOLICITATION.
            -----------------------------------------
            (a) In  consideration  of the fees  and  benefits  that he  receives
pursuant to this  Agreement,  during the term of this  Agreement and for one (1)
year  thereafter,  the Executive  hereby  covenants and agrees that he will not,
without the prior written consent of the Company, either alone or in partnership
with or in conjunction with any other person,  firm, or corporation,  whether as
principal,  agent, or shareholder (other than an entity in which Executive holds
less  than a  five  percent  (5%)  equity  interest),  directly  or  indirectly,
participate,  carry on, conduct, or be engaged in, or advise, any person,  firm,
corporation,  or other legal entity  carrying on or engaging in the horse racing
business in Virginia,  Maryland,  West Virginia or North  Carolina that competes
with the business conducted by the Company on the date hereof.
            (b) In addition,  for one (1) year after the Executive  ceases to be
employed  by the  Company,  the  Executive  shall not seek to induce  any of the
Company's employees to leave the Company' employment to work for any entity with
which he is affiliated. In addition, during such one (1) year period, the


<PAGE>   5

Executive  shall not solicit any sponsors or  advertisers of the Company for the
purpose of inducing,  directly or indirectly, the termination of any sponsorship
or advertising agreements.
            (c) The Executive  recognizes that the Company's remedies at law may
be  inadequate  to  protect  itself  against  a breach  of this  provision,  and
therefore  agrees  that  injunctive  or  other  equitable  relief  shall  be  an
appropriate  remedy for breach of this  covenant not to compete,  and shall be a
remedy in addition to any and all other remedies available to the Company.
            (d) The parties agree that if the restrictions of this Section 9 are
determined by any court of competent  jurisdiction,  at the time of enforcement,
to be unreasonable as to the duration,  scope or area of restriction,  then such
restrictions  should be applied only to such  activities  and territory and only
for such period of time as the court determines to be reasonable in light of all
circumstances then existing.

     11.    REMEDIES.  The Executive hereby represents that the services to be
            --------
performed by the Executive  under the terms of this  Agreement are of a special,
unique, extraordinary, and intellectual character, which gives them a particular
value,  the breach of which cannot be reasonably or  adequately  compensated  in
damages in an action at law. The  Executive  expressly  acknowledges  and agrees
that the Company shall be entitled to obtain, in addition to any other rights or
remedies  the Company  may  possess,  injunctive  or other  equitable  relief to
prevent a prospective or continuing breach of any provision of this Agreement by
the Executive.

     12.    NOTICES.  All notices or other communications required or
            -------
permitted  by and among the  parties  shall be in writing and shall be deemed to
have been given, delivered or made when delivered by hand or mailed by certified
or registered mail,  postage prepaid,  return receipt  requested,  and addressed
either as follows or in such other manner as a party may subsequently  designate
to the other party in writing:

            If to the Company, at:
            ---------------------
            Colonial Downs Holdings, Inc.
            10515 Colonial Downs Parkway
            New Kent, Virginia  23124

            If to the Executive, at:
            -----------------------
            The  Executive's  address as shown on the  personnel  records of the
Company.

     13.    SEVERABILITY.  In the event any one or more of the provisions
            ------------
contained in this Agreement  shall for any reason be held invalid,  illegal,  or
unenforceable in any respect, such invalidity,  illegality,  or unenforceability
shall not  affect  any  other  provision  hereof,  and this  Agreement  shall be
construed as if such invalid, illegal, or unenforceable provision had never been
contained herein.



<PAGE>   6

     14.    ENTIRE AGREEMENT.  This Agreement supersedes any other agreement,
            ----------------
whether  written  or oral,  that  may  have  been  made or  entered  into by the
Executive  and the Company  relating to the matters  contemplated  hereby.  This
Agreement   constitutes   the  entire   agreement   concerning  the  transaction
contemplated  herein and there are no agreements or  commitments  in relation to
the subject matter hereof except as set forth herein.

     15.    AMENDMENTS.  This Agreement may be amended or supplemented at any
            ----------
time only in writing as agreed by the parties.

     16.    APPLICABLE LAW.  This Agreement and the legal relations among the
            --------------
parties  hereto  shall be  governed  by and  construed  in  accordance  with the
substantive  laws of the  Commonwealth  of Virginia,  without  giving  effect to
conflict of law provisions and principles thereof.

     17.    INTERPRETATION.  When the context in which words are used in this
            --------------
Agreement indicates that such is the intent,  words in the singular number shall
include the plural,  and vice versa,  and words in the  masculine  gender  shall
include the feminine and neuter genders, and vice versa.

     18.    TITLES AND HEADINGS.  Titles and headings to sections and
            -------------------
paragraphs  herein are inserted for  convenience of reference  only, and are not
intended  to be a part of or to affect  the  meaning or  interpretation  of this
Agreement.

     19.    BINDING EFFECT.  This Agreement shall be binding upon and
            --------------
enforceable against the Company and its successors and assigns.

     20.    NO ATTACHMENT.  Except as required by law, no right to receive
            -------------
payments  under this  Agreement  shall be subject to  anticipation,  alienation,
sale,  assignment,   encumbrance,   charge,  pledge,  or  hypothecation,  or  to
execution,  attachment,  levy or similar  process or  assignment by operation of
law, and any attempt,  voluntary or  involuntary to affect any such action shall
be null, void and of no effect.

     21.    SURVIVAL OF CERTAIN PROVISIONS.  The obligations of the parties
            ------------------------------
pursuant  to  Sections  9,  10,  and 22 of  this  Agreement  shall  survive  the
termination of this Agreement.

     22.    CONSENT TO SERVICE AND JURISDICTION.  Executive consents and
            -----------------------------------
agrees that the Circuit  Court of the City of Richmond,  Virginia and the United
States District Court for the Eastern District of Virginia,  or at the option of
the Company, any other court located in the Commonwealth of Virginia in which it
shall  initiate  legal or  equitable  proceedings  and which shall have  subject
matter  jurisdiction  over the  matter  in  controversy,  shall  have  exclusive
jurisdiction  to hear and determine  any claims or disputes  between the Company
<PAGE> 7

and the Executive  pertaining directly or indirectly to this Agreement or to any
matter  arising  therefrom.  The  Executive  expressly  submits and  consents in
advance to such  jurisdiction in any action or proceeding  commenced in any such
court, hereby waiving personal service or process or other papers issued therein
and  agreeing  that  service  of such  process  or other  papers  may be made by
registered or certified mail to the Executive.

     23.    ACKNOWLEDGMENTS.  Executive acknowledges that he has read this
            ---------------
Agreement in its entirety and  understands  each of the provisions  contained in
this Agreement. Executive acknowledges that the provisions of this Agreement are
reasonable and represents that he will be able to engage in other activities for
the purpose of earning a livelihood  should the  provisions  of the Agreement be
enforced.

     IN WITNESS  WHEREOF the parties  hereto have executed this Agreement on the
date first above written.

     COMPANY:                       COLONIAL DOWNS HOLDINGS, INC.,
     -------
                                    a Virginia corporation



                                    By:      /s/ Jeffrey P. Jacobs
                                          ----------------------------
                                          Jeffrey P. Jacobs, CEO



     EXECUTIVE:                              /s/ Ian M. Stewart
     ---------                            ----------------------------
                                          Ian M. Stewart