<PAGE>

                      SECURITIES AND EXCHANGE COMMISSION

                            Washington, D.C. 20549
                                   FORM 10-K
               [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                    OF THE SECURITIES EXCHANGE ACT OF 1934

                  For the Fiscal Year Ended December 31, 2001

                                      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 No. 000-30578
                           MAGNA ENTERTAINMENT CORP.
            (Exact Name of Registrant as Specified in Its Charter)

               Delaware                              98-0208374
     (State or Other Jurisdiction          (I.R.S. Employer Identification
   of Incorporation or Organization)                   Number)

            337 Magna Drive                            L4G 7K1
        Aurora, Ontario, Canada                      (Zip Code)
    (Address of Principal Executive
               Offices)

Registrant's telephone number, including area code: (905) 726-2462
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Class A
Subordinate Voting Stock
(Title of Class)

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 past 90 days. Yes X No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.

As of March 15, 2002, the aggregate market value of the Class A Subordinate
Voting Stock held by non-affiliates of the registrant was approximately
$173,702,028 (based on the closing sale price of $9.07 per share of Class A
Subordinate Voting Stock reported on The Nasdaq National Market on March 15,
2002). As of March 15, 2002, the aggregate market value of the exchangeable
shares of MEC Holdings (Canada) Inc., each of which is exchangeable into one
share of Class A Subordinate Voting Stock of the registrant, held by non-
affiliates of the registrant was approximately $19,194,224 (based on the
closing sale price of $9.07 per share of Class A Subordinate Voting Stock
reported on The Nasdaq National Market on March 15, 2002).

The number of shares of Class A Subordinate Voting Stock of the registrant
outstanding as of March 15, 2002 was 23,513,599.

The number of shares of Class B Stock of the registrant outstanding as of
March 15, 2002 was 58,466,056.

                      Documents Incorporated by Reference

The registrant's proxy statement filed with the Securities and Exchange
Commission pursuant to Regulation 14A, with respect to the annual meeting of
stockholders scheduled to be held on April 18, 2002, is incorporated by
reference in Part III of this Form 10-K to the extent stated herein. Except
with respect to information specifically incorporated by reference in this
Form 10-K, the document incorporated by reference is not deemed to be filed as
a part hereof.
<PAGE>

   In this Annual Report, when we use the terms "we", "us", "our" and the
"Company", we are referring to Magna Entertainment Corp. and its subsidiaries,
unless the context otherwise requires. In this Annual Report, unless stated
otherwise, all references to "$" are to U.S. dollars and all references to
"Cdn. $" are to Canadian dollars. All pro forma financial or operating
information in this Annual Report is derived from our unaudited Pro Forma
Consolidated Statements of Operations and Comprehensive Income (Loss) (as filed
with Amendment No. 3 to our Registration Statement on Form S-1, dated March 8,
2002 (File no. 333-70520)), which give effect to acquisitions that we made
after January 1, 2000 as though they were completed on that date.

                                    Part I

Item 1. Business

Special Note Regarding Forward-Looking Information

   This Annual Report contains forward-looking statements as defined by the
U.S. Securities Act of 1933 and the U.S. Securities Exchange Act of 1934.
These forward-looking statements may include, among others, statements
regarding: expectations as to operational improvements; expectations as to
cost savings, revenue growth and earnings; the time by which certain
objectives will be achieved; estimates of costs relating to environmental
remediation and restoration; proposed new products and services; expectations
that claims, lawsuits, environmental costs, commitments, contingent
liabilities, labor negotiations or agreements, or other matters will not have
a material adverse effect on our consolidated financial position, operating
results, prospects or liquidity; projections, predictions, expectations,
estimates or forecasts as to our financial and operating results and future
economic performance; and other matters that are not historical facts.

   Forward-looking statements should not be read as guarantees of future
performance or results, and will not necessarily be accurate indications of
whether or the times at or by which such future performance or results will be
achieved. Forward-looking statements are based on information available at the
time and/or management's good faith belief with respect to future events, and
are subject to risks and uncertainties that could cause actual performance or
results to differ materially from those expressed in the statements.

   Important factors that could cause such differences include, but are not
limited to, the factors discussed below under "Risk Factors".

   Forward-looking statements speak only as of the date the statement was
made. We assume no obligation to update forward-looking information to reflect
actual results, changes in assumptions or changes in other factors affecting
forward-looking information. If we update one or more forward-looking
statements, no inference should be drawn that we will make additional updates
with respect thereto or with respect to other forward-looking statements.

Incorporation and Corporate Structure

   We were incorporated on March 4, 1999 under the laws of the State of
Delaware as MI Venture Inc. Our certificate of incorporation was amended by a
certificate of amendment on August 30, 1999 to reclassify our Common Stock
into Class A Common Stock and to add a new class of stock designated as Class
C Common Stock. Our certificate of incorporation was further amended on
November 4, 1999 to change our name to MI Entertainment Corp., add share
provisions for our Class A Subordinate Voting Stock and Class B Stock, and
reclassify and subdivide our issued and outstanding Class C Common Stock into
Class B Stock. Our certificate of incorporation was further amended on January
26, 2000 to change our name to Magna Entertainment Corp. Our certificate of
incorporation was further amended on February 29, 2000 to broaden our
corporate purpose, clarify the attributes of our Class A Subordinate Voting
Stock and Class B Stock, and implement our Corporate Constitution.
Subsequently, our certificate of incorporation was restated on March 1, 2000
to consolidate all prior amendments.

   Our registered office is located at 1209 Orange Street, Wilmington, Delaware,
19801 and our principal executive office is located at 337 Magna Drive,
Aurora, Ontario, Canada L4G 7K1.

   The following chart shows our organizational structure and that of our
material subsidiaries, each of which is directly or indirectly wholly owned by
us, together with the jurisdiction of incorporation of each of the entities
shown thereon as of March 18, 2002.

               [MAGNA ENTERTAINMENT CORP. ORGANIZATIONAL CHART]

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                                 OUR BUSINESS

   We are the leading owner and operator of thoroughbred racetracks in the
United States, based on revenue, and a leading supplier, via simulcasting, of
live racing content to the growing inter-track, off-track and account wagering
markets. We currently operate eight thoroughbred racetracks, one standardbred
racetrack and one greyhound racetrack, as well as the simulcast wagering
venues at these tracks. In addition, we operate off-track betting ("OTB")
facilities and a national account wagering business known as XpressBetTM,
which permits customers to place wagers by telephone and over the Internet on
horse races at up to 65 racetracks in North America. We also have a one-third
ownership interest in Racetrack Television Network, LLC, a new venture formed
to telecast races from our racetracks and other racetracks, via satellite, to
paying subscribers. For the year ended December 31, 2001, our operations
generated consolidated revenue of approximately $519.1 million, or $548.0
million on a pro forma basis.

   Since December 1998, we have acquired four of the most prestigious
racetrack operations in North America: Santa Anita Park near Los Angeles,
Gulfstream Park near Miami, and Golden Gate Fields and Bay Meadows near San
Francisco. We have also acquired the racetrack operations of The Meadows near
Pittsburgh, Thistledown near Cleveland, Remington Park in Oklahoma City and
Great Lakes Downs in Muskegon, Michigan. We own all the land on which the
above-mentioned racetracks are located, with the exception of Bay Meadows and
Remington Park, where we lease the land from third parties. In addition, we
recently began to lease and operate Portland Meadows and we recently acquired
the operations of and leased Multnomah Greyhound Park, both of which are
located in or near Portland, Oregon. These acquisitions have enabled us to
secure the ownership rights to what we believe is some of the highest quality
and most popular live horse racing content in North America, based on standard
industry measures, such as total handle, average daily attendance and average
daily wagering, both on and off-track. We believe that the aggregation of this
high-quality content, coupled with a strong branding strategy and the
introduction of new media distribution technologies, will enhance distribution
of our content and help us develop new sources of revenues. We intend to
continue to acquire strategic racetracks and other related assets on a
selective basis.

   We distribute our live racing content to approximately 1,000 off-track and
inter-track venues, including other racetracks, OTB facilities and casinos in
the United States, Canada, Mexico, the Caribbean and Australia. We intend to
expand the distribution of this content in these markets and, to the extent
permitted by various regulatory regimes, in additional markets, particularly
emerging electronic media-based markets, such as wagering via interactive
television and the Internet.

   In conjunction with our racetrack operations, we own and operate a horse
boarding and training center located approximately 45 miles north of San Diego
and approximately 90 miles southeast of Santa Anita Park, and we are
developing another such facility in Palm Beach County, Florida approximately
40 miles north of Gulfstream Park. We believe that these facilities will
provide us with a competitive advantage by helping us to attract additional
high-quality horses to our racetracks and to expand our field sizes. We
believe that this will allow us to increase both our number of live races and
the total amount wagered on our races.

   In addition to our racetracks, we also have significant real estate
holdings in the United States, Canada and Austria. We characterize our real
estate as follows:

  .  real estate at our racetracks to be used in our racing operations
     ("Revenue-Producing Racetrack Real Estate");

  .  excess real estate at our racetracks that we are considering developing
     with strategic partners ("Excess Racetrack Real Estate");

  .  real estate not at our racetracks that is either under development or
     that we are holding for development ("Development Real Estate");

  .  developed real estate not at our racetracks that is currently generating
     revenue for us ("Revenue-Producing Non-Racetrack Real Estate"); and

  .  non-core real estate that we hold for sale ("Non-Core Real Estate").

   As of December 31, 2001, the aggregate net book value of all our real
estate (including fixed assets at racetracks and at Revenue-Producing Non-
Racetrack Real Estate) was $574.7 million. While we are exploring the
development of some of our real estate, we intend to continue to sell our Non-
Core Real Estate in order to generate additional capital to grow and enhance
our racing business. During the past three years, we sold Non-Core Real Estate
with an aggregate

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net book value of $58.8 million for gross proceeds of $99.4 million. As of
December 31, 2001, the aggregate net book value of our remaining Non-Core Real
Estate was approximately $38.5 million.

   Please see our financial statements beginning on page 46 for financial
information concerning our business and its segments.

Our Strategy

   Since our inception in 1998, we have experienced significant growth in
scale and profitability through a disciplined acquisition program. We intend
to grow and develop our business further by:

Selectively Acquiring Additional Strategic Racetracks and Related Assets

   We will selectively pursue the acquisition of strategically important,
geographically diverse racetracks and related operations in order to increase
our ownership of live racing content. We intend to simulcast this content to
other pari-mutuel wagering venues and to increase both the number of days in
the year and hours in the day that we offer wagering on live and simulcast
races.

Continuing to Integrate our Acquisitions by Employing "Best Practice"
Improvements at our Racetracks

   Through our acquisitions, we own what we believe are some of the highest-
quality thoroughbred racetracks in North America, as measured in terms of
total handle, average daily attendance and average daily wagering both on and
off-track. We believe that the increased scale and integration of our
racetrack operations will afford us the opportunity to both grow our revenues
and achieve significant operational synergies through the implementation of
best practices, cost reductions realized from economies of scale and increased
efficiencies. We intend to improve the quality of the live racing experience
by upgrading and expanding the infrastructure of our properties in order to
attract the best available horses, trainers and jockeys.

Expanding the Distribution of our Live Racing

   We currently distribute our live racing content to inter-track and off-
track venues in the United States, Canada, Mexico, the Caribbean and
Australia. We believe that, subject to applicable regulation, significant
opportunities exist to expand the distribution of our content through the
further development of our simulcasting operations and our XpressBet Internet
and telephone account wagering business, as well as the development of new
forms of account wagering, including interactive television.

Further Developing an Integrated Branding and Marketing Strategy

   We intend to combine our racing content, and possibly the racing content
from racetracks not owned by us, and market this content under our brand name.
We believe that aggregating this content would offer pari-mutuel wagering
venues that import our content greater convenience and lower operating costs,
while offering customers at their facilities access to more racing content,
including signals that the venue operators may not have purchased as stand-
alone products. We believe that packaging our product this way will increase
the exposure of our smaller racetracks.

Improving the Quality of the Entertainment Experience at our Racetracks and
OTB Facilities

   We believe that the horse racing industry does not currently reach a large
portion of its potential customer base. We are attempting to increase
attendance at our racetracks and broaden the appeal of horse racing by
developing higher-quality racetrack facilities with a wider variety of
amenities. We will seek to enter into joint venture arrangements with
strategic partners to develop leisure and entertainment-based real estate
projects on land surrounding, or adjacent to, certain of our premier
racetracks. Such developments could include retail shopping facilities,
restaurants, hotels and entertainment projects. Subject to regulatory
approval, these developments may also involve the integration of other gaming
operations, such as video lottery terminals or similar gaming devices.

Our History

   Our parent company, Magna International Inc. ("Magna International"), is
one of the most diversified automotive parts suppliers in the world. In 1999,
Magna International entered into a series of transactions in order to separate
its non-automotive businesses from its automotive businesses.

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<PAGE>

   We were incorporated in Delaware on March 4, 1999. In November 1999, Magna
International completed a reorganization of its corporate structure (the
"Reorganization"), under which Magna International's non-automotive businesses
and certain real estate assets were transferred to us. As part of the
Reorganization, our capital structure was amended to establish two classes of
stock: Class A Subordinate Voting Stock, with one vote per share, and Class B
Stock, generally with 20 votes per share.

   In December 1999, Magna International redeemed approximately 14.8 million
shares of our Class B Stock for proceeds of $110.0 million. On that same date,
Magna International invested $110.0 million in our Canadian subsidiary, MEC
Holdings (Canada) Inc. ("Exchangeco"), in return for approximately 14.8
million exchangeable shares of Exchangeco. Each exchangeable share may be
exchanged by the holder for one share of our Class A Subordinate Voting Stock
at any time. The purpose of these shares was to permit certain Canadian
shareholders of Magna International that were subject to limitations on their
holdings of shares of non-Canadian issuers to receive shares of a Canadian
issuer in the special dividend by Magna International described below. Because
the exchangeable shares (together with certain ancillary rights) are
economically equivalent to our Class A Subordinate Voting Stock, those
exchangeable shares that are still outstanding are included for purposes of
calculating our earnings per share and shareholders' equity on a consolidated
basis.

   On March 10, 2000, Magna International distributed to holders of its Class
A subordinate voting shares and Class B shares, by way of a special dividend,
approximately 15.7 million shares comprised of our Class A Subordinate Voting
Stock and the exchangeable shares of Exchangeco. As of March 18, 2002, Magna
International owns, directly or indirectly, all our outstanding Class B Stock
and 4,362,328 shares of our outstanding Class A Subordinate Voting Stock. As a
result, Magna International is able to exercise approximately 98% of the total
voting power attached to all our outstanding stock, and therefore is able to
elect all our directors and to control us. Three members of our board of
directors are also members of Magna International's board of directors and we
have the same chairman.

Overview of the Horse Racing Industry

Pari-Mutuel Wagering

   Pari-mutuel wagering on horse racing is a form of wagering in which wagers
on horse races are aggregated in a commingled pool of wagers (the "mutuel
pool") and the payoff to winning customers is determined by both the total
dollar amount of wagers in the mutuel pool and the allocation of those dollars
among the various kinds of bets. Unlike casino gaming, the customers bet
against each other, and not against the operator, and therefore the operator
bears no risk of loss with respect to any wagering conducted. The pari-mutuel
operator retains a pre-determined percentage of the total amount wagered (the
"take-out") on each event, regardless of the outcome of the wagering event,
and the remaining balance of the mutuel pool is distributed to the winning
customers. Of the percentage retained by the pari-mutuel operator, a portion
is paid to the horse owners in the form of purses or winnings, which encourage
the horse owners and their trainers to enter their horses in a track's races.
Pari-mutuel wagering on horse racing is the largest form of pari-mutuel
wagering, and it is currently authorized in over 40 states of the United
States, all provinces of Canada and approximately 100 other countries around
the world.

Recent History

   The horse racing industry is a highly fragmented industry with relatively
few high-quality racetracks and relatively few operators owning more than two
facilities. Over the past 20 years, live attendance at horse racetracks in the
United States has declined substantially due to a number of factors, including
the growth in off-track wagering; increased competition from other forms of
gaming and leisure entertainment; the attrition of the racing industry's
traditional customer base; the lack of, or deterioration in, the quality of
live racing events at many racetracks; and the inability of racetrack
operators to broaden the appeal of wagering on horse racing. Declines in live
attendance have resulted in an overall decline in the amount of money wagered
on live horse racing, which has exacerbated the problem of producing high-
quality live wagering events and in developing entertaining racetrack
facilities.

   In the early 1990s, the introduction of off-track and inter-track wagering
became more prevalent and reversed the decline in the total amount of dollars
wagered on horse racing. The rise of off-track and inter-track wagering has
resulted in a significant increase in total industry revenues, and the
creation of larger pools of wagers on horse races at certain racetracks. This
has more than offset the decline in live on-track wagering due to declining
live attendance. The larger pools of wagers have produced larger purses, which
have resulted in higher-quality racing events and an

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increased interest in horse racing and pari-mutuel wagering. Subsequently, the
financial performance of many of the premier racetracks in the United States
has improved.

The Growth in Off-track and Inter-track Wagering

   Pari-mutuel wagering on thoroughbred horse racing in the United States
increased from approximately $9.4 billion in 1990 to approximately $14.6
billion in 2001, according to The Jockey Club. This increase resulted
primarily from the growth of off-track and inter-track wagering, which has
grown by approximately 43.3% from approximately $8.7 billion in 1996 to
approximately $12.4 billion in 2001. Simulcasting live racing events to off-
track and inter-track venues has been facilitated by technological advances
and the introduction of legislative changes.

       [BAR CHART - Total U.S. Thoroughbred Pari-Mutuel Wagering Handle]

                Source: Equibase Company LLC; The Jockey Club.

      [BAR CHART - U.S. Thoroughbred Racing Pari-Mutuel Handle Breakdown]

                Source: Equibase Company LLC; The Jockey Club.

   Simulcasting is the process of transmitting the audio and video signal of a
live racing performance from one facility to a satellite for retransmission to
other locations or venues where pari-mutuel wagering is permitted.
Simulcasting provides racetracks with the opportunity to increase revenues by
exporting their live racing content to as many wagering locations as possible,
such as other racetracks, OTB facilities and casinos, and by importing racing
content from other racetracks.

   Revenues are increased because simulcasting provides racetracks that export
their live content with additional customers in multiple locations who would
not have otherwise been able to place wagers on the live racing event.
Similarly, simulcasting provides operators of pari-mutuel wagering venues who
import content from other racetracks with more product upon which their
customers can place wagers. Providers of live racing content who export their
content to other venues generally charge these venues a percentage of all
monies wagered on their content, while operators of pari-mutuel wagering
venues that import racing content retain a pre-determined percentage of all
amounts wagered at their facility on the imported content. Because the
competition for content time slots is relatively intense, the growth of
simulcasting has been particularly beneficial to the operators of premier
racetracks, which tend to offer higher quality racing, with larger fields and
higher purses. Conversely, operators of smaller or lesser quality racetracks
have historically benefited less from simulcasting, due to a lack of demand
for their content. Part of our strategy involves efforts to broaden the
distribution of, and demand for, the racing content from our smaller tracks.

   We expect that off-track and inter-track wagering will experience continued
growth as additional venues able to import simulcast content are established
and new distribution channels for pari-mutuel wagering, such as the telephone,
Internet and interactive television, are further developed.

   Because of the high quality of our thoroughbred racing content and
racetrack properties, we believe we are well positioned to participate in the
future growth of off-track, inter-track and account wagering as both a leading
exporter and importer of live racing content.

Our Content

   Our racetracks are geographically diversified. Santa Anita Park is near Los
Angeles, Gulfstream Park is near Miami, Golden Gate Fields and Bay Meadows are
near San Francisco, The Meadows is near Pittsburgh, Thistledown is near
Cleveland, Remington Park is in Oklahoma City, Great Lakes Downs is in
Muskegon, Michigan, and Portland Meadows and Multnomah Greyhound Park are in
or near Portland, Oregon.

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2002 Racing Schedule

   As illustrated in the chart below, live racing is offered throughout the
year at our racetracks. The racing dates for Santa Anita Park indicated below
include The Oak Tree Meet.

<TABLE>
<CAPTION>
                   RACETRACK                  RACING DATES
       ------------------------  ---------------------------------------
       <S>                       <C>
             Bay Meadows              April 3, 2002--June 16, 2002
                                  and August 30, 2002--November 3, 2002
          Golden Gate Fields        December 26, 2001--March 31, 2002
                                 and November 6, 2002--December 22, 2002
          Great Lakes Downs         April 29, 2002--October 29, 2002
           Gulfstream Park           January 3, 2002--April 24, 2002
             The Meadows           January 3, 2002--December 29, 2002
       Multnomah Greyhound Park       May 3, 2002--October 12, 2002
            Remington Park             April 5, 2002--June 8, 2002
                                 and August 10, 2002--December 21, 2002
           Portland Meadows        October 27, 2001--February 10, 2002
                                 and October 19, 2002--December 29, 2002
           Santa Anita Park         December 26, 2001--April 21, 2002
                                  and October 2, 2002--November 3, 2002
             Thistledown            March 29, 2002--December 23, 2002
</TABLE>

Our Properties

   Set forth below is a description of certain of our properties.

Santa Anita Park

   Santa Anita Park is situated on approximately 305 acres of land in the City
of Arcadia, California, approximately 14 miles northeast of Los Angeles.
Approximately 10.9 million people are located within a 30-mile radius of Santa
Anita Park.

   Santa Anita Park opened for thoroughbred horse racing in 1934 and hosts The
Santa Anita Meet. The Santa Anita Meet generally commences on December 26 and
runs until April each year. In addition, we lease Santa Anita Park to The Oak
Tree Racing Association, which is an unaffiliated not-for-profit California
association that holds a license to host The Oak Tree Meet for approximately
six weeks each fall. Pursuant to this lease, we receive rent that consists
primarily of a percentage of the on-track handle wagered on races run at Santa
Anita Park and a percentage of The Oak Tree Racing Association net commissions
from fees earned on racing content, exported from or imported to Santa Anita
Park. Santa Anita Park has one of the longest racing schedules of the top
North American racetracks, totaling approximately 115 racing days each year
(including The Oak Tree Meet). Average daily attendance in 2001 was
approximately 10,500 customers per live racing day, representing one of the
highest average daily attendance figures of all North American racetracks.

   Santa Anita Park had one of the highest total handles, or total amounts
wagered, of all North American racetracks in 2001, approximately $1,425.0
million, including wagers made at Santa Anita Park on its races (including The
Oak Tree Meet), wagers made at other wagering venues and through various
account wagering operations on Santa Anita Park's races, and wagers made at
Santa Anita Park on races imported to its inter-track facilities. Wagers on
Santa Anita Park's races (including The Oak Tree Meet and all venues at which
wagers were placed) totaled approximately $984.0 million in 2001. Of this
amount, approximately $798.7 million in wagers were placed at other wagering
venues to which we exported Santa Anita Park's races via simulcast and through
various account wagering operations. Santa Anita Park exports its simulcast
signal to approximately 1,000 off-track and inter-track wagering facilities in
23 countries. Throughout the year, Santa Anita Park operates as an inter-track
wagering facility where customers can wager on races that are imported to
Santa Anita Park from other racetracks.

   Santa Anita Park's facilities include a large art deco-style grandstand
structure with seating for approximately 19,000 customers, as well as standing
room for additional customers, a one-mile oval dirt track as well as a 7/8-
mile turf course, stalls for approximately 2,000 horses and parking facilities
sufficient to accommodate approximately 20,000 cars.

   In December 1999, we completed a $45.0 million capital renovation program
at Santa Anita Park, which included the development of a new 750-seat high-end
restaurant, the installation of a 2,120 square foot LED screen in the infield
track area for racing customers and other upgrades to the grandstand, the
track and other areas of the facility.

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   We are considering a variety of retail-based development proposals for
approximately 81 acres of Excess Racetrack Real Estate at Santa Anita Park
that are not currently in use. This development would be intended to further
enhance the entertainment experience at Santa Anita Park, broaden the
demographic composition of our customer base and strengthen the loyalty of
existing customers. These proposals are preliminary. If, after a detailed
review, any of these proposals turn out to be commercially viable, additional
time would be required to obtain the necessary regulatory approvals and
negotiate with potential business partners who would be expected to provide
the necessary financing. We do not intend to devote our capital to the
development of Excess Racetrack Real Estate at Santa Anita Park.

Gulfstream Park

   Gulfstream Park is located on approximately 255 acres of land in the cities
of Hallandale and Aventura, between Miami and Ft. Lauderdale in Florida. There
are approximately 4.3 million people living within a 40-mile radius of
Gulfstream Park.

   Gulfstream Park opened in 1939 and for the last several years, the annual
meet at Gulfstream Park has lasted for approximately 63 days between January
and March. Beginning in 2002, Gulfstream Park has been granted approval to run
its meet for 90 days between January and April. The Breeders' Cup, one of the
preeminent series of races in the United States, was held at Gulfstream Park
three times--in 1989, 1992 and 1999. Average daily attendance in 2001 was
approximately 10,300 customers per live racing day.

   Gulfstream Park had one of the highest total handles of all North American
racetracks in 2001, approximately $704.0 million, including wagers made at
Gulfstream Park on its races, wagers made at other wagering venues and through
various account wagering operations on Gulfstream Park's races, and wagers
made at Gulfstream Park on races imported to its inter-track facilities.
Wagers on Gulfstream Park's races (including all venues at which wagers were
placed) totaled approximately $662.4 million in 2001. Of this amount,
approximately $575.0 million in wagers were placed at other wagering venues to
which we exported Gulfstream Park's races via simulcast and through various
account wagering operations. Gulfstream Park exports its simulcast signal to
approximately 800 off-track and inter-track wagering facilities in the United
States, Canada, the Caribbean and Mexico.

   Gulfstream Park's facilities include a grandstand with permanent seating
for approximately 8,700 customers, a clubhouse with seating for an additional
5,800 customers, a one-mile main track, a 7/8-mile turf track, stalls for
approximately 1,390 horses and parking for approximately 14,000 cars.

   We are currently considering a major redevelopment of Gulfstream Park.
Should it proceed as currently contemplated, the Gulfstream Park redevelopment
would include a simulcast pavilion, a sports and entertainment arena, and a
new turf club and grandstand. In addition, there would be significant
modifications and enhancements to the racetracks and stable areas. If
completed, the Gulfstream Park redevelopment would require the demolition of a
substantial portion of the current buildings and related structures, which
include the grandstand, turf club and annex. The aggregate carrying value at
December 31, 2001 of the assets that would be demolished if the Gulfstream
Park redevelopment is completed is approximately $23.0 million. If we decide
to proceed with the Gulfstream Park redevelopment and obtain the approval of
our board of directors, a reduction in the expected life of the existing
assets would occur and a write-down would be necessary.

Golden Gate Fields

   Golden Gate Fields is located on approximately 181 acres of land in the
cities of Albany and Berkeley, California, approximately eight miles from
Oakland and approximately 11 miles from San Francisco. There are approximately
5.2 million people living within a 40-mile radius of Golden Gate Fields.

   Golden Gate Fields' racing season of approximately 103 racing days
complements the Bay Meadows racing schedule, which runs after the close of Bay
Meadows' racing season in the fall through to the end of March, when Bay
Meadows opens again. From the end of December through to the close of the
season, Golden Gate Fields operates simultaneously with Santa Anita Park.
Average daily attendance in 2001 was approximately 2,700 customers per live
racing day.

   Golden Gate Fields had one of the highest total handles of all North
American racetracks in 2001, approximately $534.9 million, including wagers
made at Golden Gate Fields on its races, wagers made at other wagering venues
and

                                       8
<PAGE>

through various account wagering operations on Golden Gate Fields' races, and
wagers made at Golden Gate Fields on races imported to its inter-track
facilities. Wagers on Golden Gate Fields' races (including all venues at which
wagers were placed) totaled approximately $318.7 million in 2001. Of this
amount, approximately $283.9 million in wagers were placed at other wagering
venues to which we exported Golden Gate Fields' races via simulcast and
through various account wagering operations. Golden Gate Fields exports its
simulcast signal to approximately 500 off-track and inter-track wagering
facilities in the United States, Canada, Mexico and the Caribbean. Throughout
the year, Golden Gate Fields operates as an inter-track wagering facility
where customers can wager on races that are imported to Golden Gate Fields
from other racetracks.

   Golden Gate Fields' facilities include a one-mile main track and a 9/10-
mile turf course, stalls for over 1,400 horses, a main grandstand with seating
for approximately 8,000 customers, a clubhouse with seating for approximately
5,250 customers, a turf club with seating for approximately 1,150 customers
and parking for over 8,500 cars.

Bay Meadows

   Bay Meadows is situated on approximately 100 acres of land in San Mateo,
California, between San Francisco and San Jose. There are approximately 5.7
million people living within a 40-mile radius of Bay Meadows.

   The racing season at Bay Meadows is divided into a spring meet, which runs
approximately 56 days between early April and mid-June, and a fall meet, which
runs approximately 51 days between late August and early November. This
schedule complements the racing schedule of Golden Gate Fields, which is
located approximately 30 miles from Bay Meadows. In addition, we sub-lease Bay
Meadows to the San Mateo County Exposition and Fair Association, which hosts
The San Mateo County Fair Meet for two weeks during the summer. Average daily
attendance in 2001 was approximately 3,600 customers per live racing day.

   Bay Meadows had one of the highest total handles of all North American
racetracks in 2001, approximately $495.3 million, including wagers made at Bay
Meadows on its races, wagers made at other wagering venues and through various
account wagering operations on Bay Meadows' races, and wagers made at Bay
Meadows on races imported to its inter-track facilities. Wagers on Bay
Meadows' races (including all venues at which wagers were placed) totaled
approximately $253.5 million in 2001. Of this amount, approximately $214.3
million in wagers were placed at other wagering venues to which we exported
Bay Meadows' races via simulcast and through various account wagering
operations. Bay Meadows exports its simulcast signal to approximately 500 off-
track and inter-track wagering facilities in the United States, Canada, Mexico
and the Caribbean. Throughout the year, Bay Meadows operates as an inter-track
wagering facility where customers can wager on races that are imported to Bay
Meadows from other racetracks.

   The facilities at Bay Meadows include a grandstand with seating for
approximately 8,000 customers (including the clubhouse and turf club), a one-
mile oval track with 1-mile and 3/4-mile chutes, a 7/8-mile turf course and
stalls for approximately 900 horses with auxiliary stabling available at
Golden Gate Fields for 900 more horses.

   The Bay Meadows property is operated under a lease that expires on the
later of (1) December 31, 2002, and (2) the final date of any horse racing
meet in progress on December 31, 2002, but in no event later than March 31,
2003. We are exploring various alternatives for the conduct of the Bay Meadows
racing days after the expiration of the lease, which include (1) the renewal
or extension of the lease, (2) the purchase of the Bay Meadows property, (3)
the use of land in the vicinity that we have acquired recently, subject to
regulatory approval, and (4) the transfer of the Bay Meadows racing days to
Golden Gate Fields, subject to regulatory approval.

Thistledown

   Thistledown is located on 128 acres in North Randall, Ohio, approximately
10 miles southeast of downtown Cleveland. There are approximately 3.0 million
people living within a 40-mile radius of Thistledown.

   Thistledown has one of the longest racing seasons of all North American
thoroughbred racetracks, consisting of approximately 187 racing days between
April and December. Thistledown hosts the Summit, Thistledown, Randall and
Cranwood meets. Annually, Thistledown hosts the Ohio Derby, which is the
premier graded stakes race in Ohio and is one of the top races of three-year
old horses in the United States.


                                       9
<PAGE>

   Thistledown's handle was approximately $237.4 million in 2001, including
wagers made at Thistledown on its races, wagers made at other wagering venues
and through various account wagering operations on Thistledown's races, and
wagers made at Thistledown on races imported to its inter-track facilities.
Thistledown exports its simulcast signal to as many as 45 off-track and inter-
track wagering facilities in the United States. By packaging the simulcast
signal from Thistledown with the simulcast signals from our other racetracks,
we expect to further increase the number of sites to which Thistledown's
simulcast program is exported. Throughout the year, Thistledown operates as an
inter-track wagering facility where customers can wager on races that are
imported to Thistledown from other racetracks.

   Thistledown's facilities include a grandstand with seating for
approximately 8,000 customers, a luxury suite for corporate and group events,
a one-mile oval track, stalls for approximately 1,500 horses and parking for
approximately 6,000 cars.

Remington Park

   Remington Park racetrack is situated on approximately 370 acres in Oklahoma
City, Oklahoma. There are approximately 1.1 million people living within a 40-
mile radius of Remington Park.

   Remington Park offers a total of approximately 118 live racing days during
each year. In 2001, the racing schedule consisted of three meets: a quarter
horse meet from April to June and two separate thoroughbred meets that ran
three to five days per week, from mid-January to late February and mid-August
to late November. In 2002, Remington Park will run two meets: a quarter horse
meet from April to June, and a thoroughbred meet from August to December.

   Remington Park's handle was approximately $133.9 million in 2001, including
wagers made at Remington Park on its races, wagers made at other wagering
venues and through various account wagering operations on Remington Park's
races, and wagers made at Remington Park on races imported to its inter-track
and associated OTB facilities. Wagers on Remington Park's races (including all
venues at which wagers were placed) totaled approximately $54.0 million in
2001. Of this amount, approximately $39.3 million in wagers were placed at
other wagering venues to which we exported Remington Park's races via
simulcast and through various account wagering operations. Remington Park
exports its simulcast signal to approximately 35 off-track and inter-track
wagering facilities in the United States. By packaging the simulcast signal
from Remington Park with the simulcast signals from our other racetracks, we
expect to further increase the number of sites to which Remington Park's
simulcast program is exported. Throughout the year, Remington Park operates as
an inter-track wagering facility where customers can wager on races that are
imported to Remington Park from other racetracks.

   Remington Park's facilities include a grandstand with seating for
approximately 20,000 customers, 21 luxury suites for corporate and group
events, a one-mile dirt track, a 7/8-mile turf course, stalls for
approximately 1,300 horses, recently installed lighting to permit night racing
and parking facilities sufficient to accommodate approximately 8,000 cars.

   The property on which Remington Park is located is leased from the Oklahoma
Zoological Trust pursuant to a lease which extends through 2013, with options
to renew until 2063 in ten-year increments.

Great Lakes Downs

   Great Lakes Downs is situated on approximately 85 acres in Muskegon,
Michigan, approximately 35 miles from Grand Rapids. There are approximately
1.2 million people living within a 50-mile radius of Great Lakes Downs.

   Great Lakes Downs, which commenced operations in January 1999, offers
approximately 120 live racing days beginning in April or May and ending in
October or November of each year.

   Great Lakes Downs' handle was approximately $59.3 million in 2001,
including wagers made at Great Lakes Downs on its races, wagers made at other
wagering venues and through various account wagering operations on Great Lakes
Downs' races, and wagers made at Great Lakes Downs on races imported to its
inter-track facilities. Wagers on Great Lakes Downs' races (including all
venues at which wagers were placed) totaled approximately $45.7 million in
2001. Great Lakes Downs exports its simulcast signal to approximately 60 off-
track and inter-track wagering facilities in the United States. By packaging
the simulcast signal from Great Lakes Downs with the simulcast signals from
our other racetracks, we expect to further increase the number of sites to
which Great Lakes Downs' simulcast program is

                                      10
<PAGE>

exported. Throughout the year, Great Lakes Downs operates as an inter-track
wagering facility where customers can wager on races that are imported to
Great Lakes Downs from other racetracks.

   Great Lakes Downs' facilities include a grandstand with seating for
approximately 10,000 customers, a 5/8-mile dirt track, stalls for
approximately 800 horses and parking facilities sufficient to accommodate
approximately 3,200 cars.

The Meadows

   We acquired The Meadows racetrack, which is our first standardbred (harness
racing) track, through the acquisition of Ladbroke Racing Pennsylvania, Inc.
(renamed MEC Pennsylvania Racing, Inc.) in April 2001. It is located in Meadow
Lands, Pennsylvania, in the greater Pittsburgh area, on approximately 155
acres of land. There are approximately 2.8 million people living within a 50-
mile radius of The Meadows.

   The Meadows first opened in 1963 and has a year-round racing schedule
encompassing approximately 222 live racing days. As part of this acquisition,
we also acquired four OTB facilities in the greater Pittsburgh area, located
in New Castle, Harmar Township, Moon Township and West Mifflin.

   The Meadows' facilities include a grandstand with seating for approximately
5,000 customers, a 5/8-mile harness track, stalls for approximately 990 horses
and parking facilities to accommodate approximately 3,000 cars. The four OTB
facilities acquired with The Meadows each contain a restaurant and bar and
offer wagering on simulcast races from racetracks across the country.

   The Meadows and its associated OTB facilities generated approximately
$248.3 million in handle in 2001, including wagers made at The Meadows on its
races, wagers made at other wagering venues and through various account
wagering operations on The Meadows' races, wagers made at The Meadows on races
imported to its inter-track facilities and wagers made at The Meadows'
associated OTB facilities. Wagers on The Meadows' races (including all venues
at which the wagers were placed) totaled approximately $105.1 million in 2001.
Of this amount, approximately $87.2 million in wagers were placed at other
wagering venues to which we exported The Meadows' races via simulcast and
through various account wagering operations. The Meadows exports its simulcast
signal to approximately 125 off-track and inter-track wagering facilities in
the United States, Canada and the Caribbean. By packaging the simulcast signal
from The Meadows with the simulcast signals from our other racetracks, we
expect to further increase the number of sites to which The Meadows' simulcast
program is exported. Throughout the year, The Meadows operates as an inter-
track wagering facility where customers can wager on races that are imported
to The Meadows from other racetracks.

Portland Meadows

   In the second quarter of 2001, we entered into a definitive agreement to
lease and operate, for up to four years, Portland Meadows thoroughbred
racetrack. It is located on approximately 100 acres in the Delta Park area of
Portland, Oregon. There are approximately 2.0 million people living within a
40-mile radius of Portland Meadows.

   Portland Meadows first opened in 1946 and generally offers approximately 80
live racing days between October and April.

   Portland Meadows' facilities include a grandstand with seating for
approximately 10,000 customers, a one-mile thoroughbred track, stalls for
approximately 850 horses and parking facilities to accommodate approximately
2,500 cars.

   Portland Meadows generated approximately $47.0 million in handle in 2001,
including wagers made at Portland Meadows on its races, wagers made at other
wagering venues and through various account wagering operations on Portland
Meadows' races, and wagers on imported races at Portland Meadows and its
associated OTB facilities within the State of Oregon during Portland Meadows'
live meet. Wagers on Portland Meadows' races (including all venues at which
the wagers were placed) totaled approximately $10.0 million in 2001. Of this
amount, approximately $7.4 million in wagers were placed at other wagering
venues to which we exported Portland Meadows' races via simulcast and through
various account wagering operations. By packaging the simulcast signal from
Portland Meadows with the simulcast signals from our other racetracks, we
expect to increase the number of sites to which Portland Meadows'

                                      11
<PAGE>

simulcast program is exported. Throughout the year, Portland Meadows operates
as an inter-track wagering facility where customers can wager on races that
are imported to Portland Meadows from other racetracks.

   Due to a dispute with the United States Environmental Protection Agency, we
are not currently running live races at Portland Meadows. The dispute with the
EPA concerns the amount of stormwater the facility must capture and send to
the municipal sewers during heavy rain. We anticipate commencing, in the near
future, construction of a stormwater retention system acceptable to the EPA.
We will recommence live racing at Portland Meadows after this construction is
completed. See "Item 1. Business--Our Business--Environmental Matters".

Multnomah Greyhound Park

   We acquired the business operations of Multnomah Greyhound Park in October
2001 and entered into a lease for the underlying real estate for a period of
up to five years. The leased real estate consists of approximately 32 acres
and is located in Wood Village, Oregon, which is near Portland. There are
approximately 2.0 million people living within a 40-mile radius of Multnomah
Greyhound Park.

   Multnomah Greyhound Park first opened in 1933 and offers approximately 119
live racing days between May and mid-October.

   Multnomah Greyhound Park's facilities include a grandstand with seating for
approximately 6,000 customers, a 1/4-mile greyhound track and parking facilities
to accommodate approximately 1,200 cars.

   Multnomah Greyhound Park generated approximately $47.1 million in handle in
2001, including wagers made at Multnomah Greyhound Park on its races, wagers
made at other wagering venues and through various account wagering operations
on Multnomah Greyhound Park's races, and wagers made on imported races at
Multnomah Greyhound Park and its associated OTB facilities within the State of
Oregon during Multnomah Greyhound Park's live meet. Wagers on Multnomah
Greyhound Park's races (including all venues at which the wagers were placed)
totaled approximately $17.4 million in 2001. Of this amount, approximately
$8.7 million in wagers were placed at other wagering venues to which we
exported Multnomah Greyhound Park's races via simulcast and through various
account wagering operations. Throughout the year, Multnomah Greyhound Park
operates as an inter-track wagering facility where customers can wager on
races that are imported to Multnomah Greyhound Park from other racetracks.

San Luis Rey Downs

   San Luis Rey Downs is a horse boarding and training center situated
approximately 45 miles north of downtown San Diego. It is located on
approximately 200 acres of land and includes over 500 horse stalls, a one-mile
oval dirt main track, a 3/8-mile dirt training track, an equine exercise pool,
and related facilities and equipment. Due to its proximity to Santa Anita
Park, San Luis Rey Downs supplements Santa Anita Park's stabling facilities,
which we believe enables us to continue to attract some of the top horses in
North America.

Palm Meadows

   On October 18, 2000, we acquired 481 acres of land in Palm Beach County,
Florida for a total purchase price of $22.9 million. The property is located
approximately 40 miles north of Gulfstream Park. We are currently developing a
horse boarding and training center on this land to be operated in conjunction
with Gulfstream Park. We believe that this facility will help us to continue
to attract high-quality horses to Gulfstream Park and to expand our field
sizes.


Account Wagering Operations

   Account wagering involves the placing of wagers on live horse racing events
through various forms of electronic media, which could include telephone, the
Internet and interactive television. Currently, fourteen states expressly
permit the licensing of an operator to conduct telephone account wagering:
California, Connecticut, Kentucky, Louisiana, Maryland, Massachusetts, Nevada,
New Hampshire, New Jersey, New York, North Dakota, Ohio, Oregon and
Pennsylvania. Currently, the states that expressly permit telephone account
wagering also permit Internet account wagering and interactive television-
based wagering.


                                      12
<PAGE>

Telephone Account Wagering and Internet Account Wagering

   Operators of telephone account wagering may establish a hub in one of the
states where telephone account wagering is permitted, establish accounts into
which customers deposit funds through debit or credit cards or by check to
fund their wagering, and receive wagering instructions from these customers.
Wagers placed by customers are not allowed to exceed the amounts on deposit in
their accounts. States permitting telephone account wagering allow telephone
account wagering facilities to accept wagering instructions from customers
residing in those states as well as in states where the placing of such
wagering instructions by telephone is not expressly prohibited. According to
the National Gambling Impact Study Commission's June 1999 report, the amount
wagered through telephone account wagering systems in the United States in
1998 was approximately $550.0 million.

   In 2001, we acquired the Call-A-Bet (renamed XpressBetTM) telephone account
wagering operation as part of our acquisition of Ladbroke Racing Pennsylvania,
Inc. Customers of XpressBetTM may give wagering instructions on horse races
offered at our racetracks and at various racetracks that have entered into
agreements with us.

   Since 1997, XpressBetTM has been party to a Telecommunications Facilitation
System Agreement with YouBet.com, Inc. ("YouBet") whereby YouBet operates an
interactive system over the Internet from its website that facilitates the
transmission of wagering information from customers to XpressBetTM's
Pennsylvania hub account wagering operation. Customers of YouBet's interactive
system are customers of XpressBetTM, but net revenue is shared equally by
XpressBetTM and YouBet. In 2001, total handle for amounts wagered through
XpressBetTM's Pennsylvania hub was approximately $132.8 million, of which
approximately $72.1 million came through the YouBet interactive system and
approximately $60.7 million came from telephone wagering instructions received
by XpressBetTM's Pennsylvania hub. Until August 2001, YouBet offered only the
XpressBetTM system, but now also offers its own interactive wagering system at
its website.

   We expect that telephone account wagering through XpressBetTM will make
wagering on horse racing more convenient for our customers and expand the
market for our simulcast product by enabling us to fully utilize an important
distribution channel for our horse racing product.

   On January 18, 2002, we introduced a new online wagering platform,
www.xpressbet.com. Due to the growth of the Internet and its increased
recognition as a medium of both communication and commerce facilitation, we
are exploring further opportunities to enhance our Internet-based account
wagering services. We believe that this would enable us to increase the market
for our simulcast product by maximizing the opportunities offered by the
Internet as a distribution channel for our live horse racing content.

   On January 25, 2002, we announced that our wholly-owned subsidiary that
operates XpressBetTM's California wagering hub had been granted a license to
conduct account wagering in the State of California by the California Horse
Racing Board. In the future, we will seek to expand the operations of
XpressBetTM through a focused marketing effort.

Interactive Television-based Wagering

   Interactive television-based wagering involves the transmission of horse
racing-related television content through cable or satellite delivery into the
homes of subscribers. Subscribers would then be able to use interactive,
"real-time" technology, generally through a remote-controlled device connected
to a television, to wager on televised broadcasts of live horse races. In
order to place wagers, customers must deposit money with the relevant wagering
operators through the use of debit or credit cards. The horse racetrack
exporting its live signal would be entitled to a simulcast fee based on in-
home wagers placed on its races.

   Interactive television-based wagering would allow us to increase the market
for our simulcast product by using an important distribution channel for this
product. We currently control the rights to broadcast races from our tracks.
Interactive television-based wagering would enhance our ability to promote our
live horse racing, and we expect that it would enable us to attract new
customers to horse racing. We are currently exploring the potential of
interactive television-based wagering on horse racing, possibly in conjunction
with business partners.

Television Distribution

   We have commenced the first step in our television distribution plans
through our participation in the Racing Television Network, LLC ("RTN"). RTN
is jointly owned by Roberts Communications Network, Inc., Greenwood

                                      13
<PAGE>

Racing, Inc. and us. It is a direct-to-home satellite service that offers
eight channels dedicated to horse racing on a monthly subscription basis.

   The RTN service is being managed independently by Roberts Communications
Network, Inc. on behalf of RTN and we are primarily a content provider to the
service. We believe that offering core and loyal wagering customers and
owners, trainers and breeders this dedicated racing on television is
important.

   We also believe that broad television distribution will help increase
future interest in the sport and attract additional wagering customers. In the
effort to broaden the audience, reach and appeal of horse racing and wagering
across North America, we are pursuing carriage agreements with multiple system
digital cable operators (MSO's) and direct broadcast satellite operators
(DBS), for our horse racing TV network concept outlined below.

   Our horse racing TV network will broadcast continuous live horse racing on
two channels and will display odds, results and other related wagering
information on a third channel. One of our live horse racing channels will
showcase our premier live horse racing year-round. Our horse racing TV network
will be produced by Santa Anita's award-winning television department and the
network is scheduled to launch in June 2002.

   Once our horse racing TV network is operating, the carriage agreements that
we are seeking for at least one of the live horse racing channels would
package the channel with other digital sports programming sold to DBS and MSO
subscribers.

Competition

   We face numerous sources of competition. We compete with other racetracks
for customers both with respect to attendance at our racetracks and in the
simulcast markets. We also compete with other racetracks for horses, jockeys
and backstretch personnel. One of our competitors, Churchill Downs Inc., has
been in operation for a much longer period of time than we have and may have
greater name recognition. We expect this competition from other racetracks to
intensify as new gaming operators enter our markets and existing competitors
expand their operations and consolidate management of multiple racetracks.

   We also compete for customers with other sports, entertainment and gaming
operators, including casinos and government-sponsored lotteries. We also
compete with Internet and other account wagering gaming services that allow
their customers to wager on a wide variety of sporting events and Las Vegas-
style casino games from home, many of which are currently operating from off-
shore locations in violation of U.S. law by accepting wagers from U.S.
residents.

   As we develop our account wagering operations, including telephone,
Internet and interactive television wagering, we expect our competition with
other account wagering operators to increase substantially. In addition, our
ability to conduct account wagering on racetracks that we do not own is
dependent on our ability to enter into agreements with those racetracks
whereby we obtain account wagering rights. Certain racetracks, including those
currently owned by Churchill Downs Inc. and those currently operated by the
New York Racing Association, have entered into contracts with other account
wagering operators, granting such operators exclusive rights to accept account
wagering on their races. We may not be able to obtain access to racing content
from racetracks not owned by us for our account wagering operations as a
result of these exclusive arrangements or otherwise on terms that are
acceptable to us.

Government Regulation

   Horse racing is a highly regulated industry. Individual states control the
operations of racetracks located within their state with the intent of, among
other things, protecting the public from unfair and illegal gambling
practices, generating tax revenue, licensing racetracks and operators and
preventing organized crime from involvement in the industry. Although the
specific form may vary, states that regulate horse racing generally do so
through a horse racing commission or other state gambling regulatory
authority. Regulatory authorities perform background checks on all racetrack
owners prior to granting them the necessary operating licenses. Horse owners,
trainers, jockeys, drivers, stewards, judges and backstretch personnel are
also subject to licensing by state authorities. State regulation of horse
races extends to virtually every aspect of racing and usually extends to
details such as the presence and placement of specific race officials,
including timers, placing judges, starters and patrol judges.


                                      14
<PAGE>

   In addition to state regulation of horse racing, the United States
government regulates horse racing through the Interstate Horseracing Act of
1978 and the Interstate Wire Act of 1961. As a result of these two statutes,
racetracks can commingle wagers from differing racetracks and wagering
facilities and broadcast horse racing events to other licensed establishments.
Currently, fourteen states expressly permit the licensing of an operator to
conduct telephone account wagering: California, Connecticut, Kentucky,
Louisiana, Maryland, Massachusetts, Nevada, New Hampshire, New Jersey, New
York, North Dakota, Ohio, Oregon and Pennsylvania.

   We currently satisfy the applicable licensing requirements of the racing
and gambling regulatory authorities in each state where we maintain racetracks
and/or carry on business, including the California Horse Racing Board, the
Florida Department of Business and Professional Regulation Division of Pari-
Mutuel Wagering, the Oklahoma Horse Racing Commission, the Ohio State Racing
Commission, the Office of the Racing Commissioner of the Michigan Department
of Agriculture, the Pennsylvania Harness Racing Commission, the Nevada Gaming
Commission, the New Jersey Casino Control Commission and the Oregon Racing
Commission. As part of this regulation, licenses to conduct live horse racing
and to participate in simulcast wagering must be obtained annually, and there
is no assurance that these licenses will be granted.

   In California, the California Horse Racing Board is responsible for
regulating the form of wagering, the length and conduct of meets and the
distribution of the pari-mutuel wagers within the limits set by the California
legislature. The California Horse Racing Board has annually licensed one of
our subsidiaries, Los Angeles Turf Club, Inc., and The Oak Tree Racing
Association to conduct racing meets at Santa Anita Park. At present, the
California Horse Racing Board has not licensed other thoroughbred racetracks
in Southern California to conduct racing during these meets. However, night
quarter horse meets are conducted at other racetracks in Southern California
during portions of these meets. The California Horse Racing Board also
annually licenses the operations of Golden Gate Fields and Bay Meadows.
Furthermore, pursuant to legislation effective January 1, 2002, the California
Horse Racing Board granted us, on January 24, 2002, a license to conduct
account wagering in California that runs until December 31, 2003. Currently,
there are two other licensees in California that are licensed to conduct
account wagering in that state. Our financial condition and operating results
could be materially adversely affected by legislative changes or action by the
California Horse Racing Board that would increase the number of competitive
racing days, reduce the number of racing days available to us and The Oak Tree
Racing Association, authorize other forms of wagering, grant additional
licenses authorizing competitors to conduct account wagering, or remove or
limit our authority to conduct account wagering in California.

   In Florida, the Division of Pari-Mutuel Wagering considers applications for
annual licenses for thoroughbred, standardbred and quarter horse races. Tax
laws in Florida have historically discouraged the three Miami-area racetracks,
Gulfstream Park, Hialeah Park and Calder Race Course, from applying for race
days outside of their traditional racing season, so the race days for these
Miami-area racetracks did not overlap. Effective July 1, 2001, a new tax
structure has eliminated this deterrent. As a result, Gulfstream Park applied
for and received an additional 27 race days for 2002. This increase in race
days may cause an overlap in racing seasons which could result in Gulfstream
Park facing direct competition from other Miami-area racetracks in 2002.

   In Ohio, the Ohio State Racing Commission approves annual licenses for
thoroughbred, standardbred and quarter horse races. The Ohio State Racing
Commission has not licensed any other operators of thoroughbred racetracks in
the Cleveland area to conduct racing during Thistledown's meets. However, the
Ohio State Racing Commission has licensed an operator of a night harness
racing track in the Cleveland area.

   In Oklahoma, the Oklahoma Horse Racing Commission approves annual licenses
for thoroughbred, standardbred and quarter horse races.

   In Michigan, the Office of the Racing Commissioner approves annual licenses
for thoroughbred, standardbred and quarter horse races. There are currently no
other thoroughbred racetracks in Michigan other than Great Lakes Downs.
However, the Office of the Racing Commissioner has licensed standardbred
racetracks in Michigan.

   In Pennsylvania, the Pennsylvania Harness Racing Commission approves annual
licenses for standardbred racetracks. Neither the Pennsylvania Harness Racing
Commission nor the Pennsylvania Horse Commission (which approves annual
licenses for thoroughbred racetracks) has licensed any other operators of
horse racetracks in the Pittsburgh area. However, the Pennsylvania Horse
Commission has recently received an application for a thoroughbred

                                      15
<PAGE>

racing license for an operation to be located near Erie, Pennsylvania, which
is approximately 100 miles from The Meadows.

   In Oregon, the Oregon Racing Commission approves annual licenses for horse
and greyhound racetracks. The Oregon Racing Commission has not licensed any
other operators of horse or greyhound racetracks in the Portland area.

Our Real Estate Portfolio

   As of December 31, 2001, the aggregate net book values of our real estate
and certain fixed assets were as follows:

<TABLE>
<CAPTION>
                                                                   (in millions)
                                                                   -------------
<S>                                                                <C>
Revenue-Producing Racetrack Real Estate...........................    $320.4(1)
Excess Racetrack Real Estate......................................      80.8
Development Real Estate...........................................      78.3
Revenue-Producing Non-Racetrack Real Estate.......................      56.7(1)
Non-Core Real Estate..............................................      38.5
                                                                      ------
Total.............................................................    $574.7
                                                                      ======
</TABLE>
-------
(1) Includes fixed assets.

   Approximately 39.5% of our earnings before interest, taxes, depreciation
and amortization for the year ended December 31, 2001 resulted from gains from
sales of our Non-Core Real Estate. We expect these gains to be reduced to zero
over the next two years as the balance of our Non-Core Real Estate is sold. We
intend to continue to sell the balance of our Non-Core Real Estate in order to
provide capital to grow and enhance our racing business; accordingly, we are
currently servicing, improving and seeking zoning and other approvals for some
of this real estate in order to enhance its value on sale. See "Item 1.
Business--Risk Factors--Risks Regarding Our Company--Our recent operating
income includes substantial gains from the sale of non-core real estate, which
sales will soon decrease and may cause our future operating income and cash
flow to decrease."

   Included in our Excess Racetrack Real Estate is land adjacent to three of
our largest racetracks, Santa Anita Park, Gulfstream Park and Golden Gate
Fields, totaling approximately 150 acres. We are considering a variety of
options with respect to this excess land, including entertainment and retail-
based developments that could be undertaken in conjunction with business
partners who would be expected to provide the necessary financing, as we do
not intend to devote our capital to the development of our Excess Racetrack
Real Estate.

   Our Development Real Estate is largely undeveloped, and includes: 481 acres
in Palm Beach County, Florida that are being used to develop a horse training
and boarding facility; approximately 1,050 acres of land in Ebreichsdorf,
Austria, located approximately 15 miles south of Vienna, on which we have
commenced development of a horse racetrack; approximately 110 acres of
undeveloped land in Oberwaltersdorf, Austria, also located approximately 15
miles south of Vienna; approximately 800 acres of undeveloped land in upstate
New York; and approximately 225 acres of land in northern California between
San Francisco and Sacramento.

   Our Revenue-Producing Non-Racetrack Real Estate consists of two golf
courses that we operate, Fontana Sports and Magna Golf Club. Fontana Sports,
which opened in 1997, is a semi-private sports facility located in
Oberwaltersdorf, Austria that includes an 18-hole golf course, a clubhouse
which contains a restaurant, a pro shop, a tennis club and a fitness facility.
The Magna Golf Club, which is in Aurora, Ontario, adjacent to our and Magna
International's headquarters approximately 30 miles north of Toronto, opened
in May 2001. We are currently marketing and accepting memberships in the Magna
Golf Club. The clubhouse is expected to be completed in the spring of 2002.
When completed, the clubhouse will contain a restaurant, a members' lounge and
a pro shop.

   Pursuant to an access arrangement effective as of March 1, 1999, Magna
International is paying us an annual fee of 2.5 million Euros to access the
Fontana Sports golf course and related recreational facilities for Magna
International-sponsored corporate and charitable events, as well as for
business development purposes. The access fee relating to Fontana Sports is
payable until March 1, 2004. Pursuant to an access agreement effective as of
January 1, 2001, Magna International is paying us an annual fee of Cdn. $5.0
million to access the Magna Golf Club. The access fee relating to the Magna
Golf Club is payable until December 31, 2003. The Fontana Sports and Magna
Golf Club properties are both subject to rights of first refusal in favor of
Magna International if we decide to sell either of them.

                                      16
<PAGE>

Environmental Matters

   We are subject to a wide range of requirements under environmental laws and
regulations relating to wastewater discharge, waste management and storage of
hazardous substances. Those requirements include United States Environmental
Protection Agency and state regulations that address the impacts of manure and
wastewater generated by concentrated animal feeding operations ("CAFOs") on
water quality, including, but not limited to, stormwater discharges. CAFO
regulations include permit requirements and water quality discharge standards.
Enforcement of CAFO regulations has been receiving increased governmental
attention. Compliance with these and other environmental laws and regulations
can, in some circumstances, require significant capital expenditures.
Moreover, violations can result in significant penalties and, in some cases,
interruption or cessation of operations. Historically, environmental laws and
regulations have not had a material adverse effect on our financial condition
and operating results.

   A dispute with the EPA involving the Portland Meadows racetrack caused us
to postpone the planned September 1, 2001 opening of that facility. The
dispute with the EPA concerns the amount of stormwater the facility must
capture and send to the municipal sewers during heavy rain. The Portland
Meadows facility ultimately opened on October 27, 2001 for an abbreviated race
meet which concluded on February 10, 2002. We anticipate commencing, in the
near future, construction of a stormwater retention system acceptable to the
EPA. We will recommence live racing at Portland Meadows after this
construction is completed.

   While we have environmental permits for many of our racetracks and are
taking steps to comply with them and other applicable environmental legal
requirements, we may not have all required environmental permits or otherwise
be in compliance with all applicable environmental requirements. Where we do
not have an environmental permit, but one may be required, we will determine
whether a permit is in fact required and, if so, will seek to obtain one and
address any related compliance issues, which may require us to make
significant capital expenditures. Also, changes in governmental laws and
regulations are ongoing, as evidenced by proposed changes to the CAFO
regulations that would significantly increase the burden of CAFO regulations
and may make environmental compliance increasingly expensive. In addition to
environmental requirements that regulate our operations, various environmental
laws and regulations in the United States, Canada and Europe impose liability
on us as a current or previous owner and manager of real property, for the
cost of maintenance, removal and remediation of hazardous materials released
or deposited on or in properties now or previously managed by us or disposed
of in other locations. We believe that environmental legal requirements will
not have a material adverse impact on our business, although it is possible
that they will.

   A subsidiary of Magna International has agreed to indemnify us in respect
of environmental remediation costs and expenses relating to existing
conditions at some of our Austrian real estate properties.

Employees

   As of December 31, 2001, we employed approximately 4,300 full-time
employees, approximately 2,500 of whom were represented by unions. Due to the
seasonal nature of the live horse racing industry, the number of our seasonal
and part-time employees will vary considerably throughout the year.

   Since our inception, we have not had a work stoppage. We consider our
relations with our employees to be good. We also believe that our future
success will depend in part on our continued ability to attract, integrate,
retain and motivate highly-qualified technical and managerial personnel, and
upon the continued service of our senior management.


Legal Proceedings

   From time to time, various routine claims incidental to our business are
made against us. None of these claims has had, and we believe that none of the
current claims, if successful, will have, a material adverse effect upon our
business.

Business Developments

   Set forth below is a summary of material business developments that have
occurred since January 1, 2001.


                                      17
<PAGE>

   On April 5, 2001, we completed the acquisition of Ladbroke Racing
Pennsylvania, Inc. and Sport Broadcasting, Inc. (collectively the "Ladbroke
Companies") for a total purchase price, including transaction costs, of $46.6
million, net of cash acquired of $7.0 million. The total purchase price was
satisfied by cash payments of $20.1 million, the issuance of two promissory
notes totaling $13.25 million which bear interest at 6% with the first note in
the amount of $6,625,000 maturing on the first anniversary of the closing date
and the second note in the amount of $6,625,000 maturing on the second
anniversary of the closing date and by the issuance of 3,178,297 shares of
Class A Subordinate Voting Stock. The Ladbroke Companies include account
wagering operations, The Meadows harness racetrack and four OTB facilities
located around the Pittsburgh, Pennsylvania area.

   On July 5, 2001, we announced that we had entered into definitive
agreements to lease and operate, for up to four years, Portland Meadows
thoroughbred racetrack and to acquire the operations and lease of Multnomah
Greyhound Park, both of which are located in Portland, Oregon. A dispute with
the United States Environmental Protection Agency concerning our backside
stormwater retention plan for Portland Meadows caused us to postpone the
planned September 1, 2001 opening of that facility. The Portland Meadows
facility ultimately opened on October 27, 2001 for an abbreviated race meet
which concluded on February 10, 2002. We anticipate commencing, in the near
future, construction of a stormwater retention system acceptable to the EPA.
We will recommence live racing at Portland Meadows after this construction is
completed. See "Item 1. Business--Our Business--Environmental Matters". In
addition, on October 26, 2001, we completed the acquisition of Multnomah
Greyhound Park for a total purchase price, including transaction costs, of
approximately $5.9 million, net of cash acquired of $0.3 million.
Approximately one-third of the purchase price was satisfied by the issuance of
330,962 shares of our Class A Subordinate Voting Stock and the balance was
paid in cash.

   On August 2, 2001, we were notified that a joint venture in which we have a
one-third ownership interest, GMR-NY LLC, was selected by the City of New York
as the successful bidder in an auction to acquire the operations of New York
City Off-Track Betting Corporation, or NYCOTB, from the City. The acquisition
was subject to substantial conditions, including the passage, by December 31,
2001, of enabling legislation by both the New York State Assembly and Senate.
As a result of the events of September 11, 2001 and other factors, the
enabling legislation was not passed by this deadline and the prospective
transaction was not completed.

   In January 2002, we entered into a joint venture with Roberts
Communications Network, Inc. and Greenwood Racing, Inc. to establish an
equally-owned company that will telecast horse races from racetracks owned by
us, Greenwood Racing and others. These telecasts will be carried on the
Racetrack Television Network, a private direct-to-home satellite horse racing
service. The network will provide up to eight channels of horse racing that
can be accessed by paying subscribers through digital set-top boxes in
conjunction with small dish satellite receiver technology.

   On January 18, 2002, we announced the rebranding of our national account
wagering service as XpressBetTM and the introduction of a new online wagering
platform, www.xpressbet.com. On January 25, 2002, we announced that our
wholly-owned subsidiary that operates XpressBetTM had been granted a license,
valid until December 31, 2003, to conduct account wagering in the State of
California by the California Horse Racing Board.

   On February 8, 2002, we signed a commitment letter with the Canadian
chartered bank affiliate of BMO Nesbitt Burns Inc. and BMO Nesbitt Burns
Corp., with respect to a proposed $75.0 million senior unsecured revolving
credit facility. If completed, this proposed credit facility will have a term
of approximately one year that may be extended with the consent of both
parties.

   On March 6, 2002, we entered into a definitive agreement to acquire
substantially all the operations and related assets of Lone Star Park at Grand
Prairie, a thoroughbred and American quarter horse racetrack located near
Dallas, Texas. The acquired assets include the rights under a long-term lease
of the Lone Star Park facility and a related purchase option exercisable at
the termination of the lease in 2027. The purchase price of the acquisition
will be satisfied by the payment of $80.0 million in cash and the assumption
of certain liabilities, which includes the Lone Star Park facility capital
lease obligation of approximately $19.0 million, subject to usual adjustments
at closing. The transaction is expected to close in the second quarter of
2002, subject to certain conditions, including the receipt of regulatory
approvals. Lone Star Park's racing season complements our current racing
season by adding live racing dates at a premier racetrack in the last three
quarters of our fiscal year.

   For the year ended December 31, 2001, Lone Star Park had revenues of
approximately $66.0 million and earnings before interest, taxes, depreciation
and amortization, adjusted for estimated non-recurring costs, of approximately
$7.0

                                      18
<PAGE>

million. Lone Star Park's total handle was approximately $398 million in 2001.
In 2001, wagers on Lone Star Park's races placed at Lone Star Park totaled
approximately $52 million; wagers placed at other wagering venues to which
Lone Star Park's races are exported via simulcast totaled approximately $168
million; and wagers placed at Lone Star Park on races imported to its inter-
track facilities totaled approximately $178 million.

   On March 8, 2002, we announced that we intended to proceed with the
offering which was first announced on October 26, 2001, but was deferred in
view of market conditions. An amendment to our registration statement on Form
S-1 was filed with the Securities and Exchange Commission, and a preliminary
short form prospectus was filed with the securities commissions of each
province of Canada, on March 8, 2002, for a public offering of 20 million
shares of our Class A Subordinate Voting Stock in the United States and
Canada. The offering also contemplates an over-allotment option allowing the
underwriters to purchase up to an additional 3 million shares of our Class A
Subordinate Voting Stock. The issue is being underwritten by a syndicate for
which the representatives are Bear, Stearns & Co. Inc., BMO Nesbitt Burns Inc.
and CIBC World Markets Corp.

                                 RISK FACTORS

   The most significant risks and uncertainties we face are described below,
but other risks and uncertainties that are not known to us or that we
currently believe are not material or are similar to those faced by other
companies in our industry may also have a material adverse effect on our
business, financial condition, operating results or prospects.

   If any of the following risks, or any of the risks described in the other
documents we file with the Securities and Exchange Commission, actually occur,
our business, financial condition, operating results and prospects could be
materially adversely affected. In that case, the trading price of shares of
our Class A Subordinate Voting Stock and the exchangeable shares of our
Canadian subsidiary, MEC Holdings (Canada) Inc., could decline substantially,
and investors may lose all or part of the value of the shares of our Class A
Subordinate Voting Stock or the exchangeable shares held by them.

Risks Regarding Our Company

   We are a relatively new company with a short history of racetrack
operations. We must successfully integrate recent racetrack acquisitions or
our operating results may be adversely affected.

   We were incorporated approximately three years ago and acquired our first
racetrack in December 1998. Accordingly, although all our racetracks have been
in operation for some time, we have a relatively short history of owning and
operating racetracks. The acquisition of Santa Anita Park was completed in
December 1998, the acquisition of Gulfstream Park was completed in September
1999, the acquisition of Remington Park and Thistledown was completed in
November 1999, the acquisition of Golden Gate Fields was completed in December
1999, the acquisition of Great Lakes Downs was completed in February 2000, the
acquisition of Bay Meadows was completed in November 2000, the acquisition of
The Meadows was completed in April 2001 and the acquisition of Multnomah
Greyhound Park was completed in October 2001. The Portland Meadows facility
commenced operations under our management in July 2001. Prior to their
respective acquisitions, most of these racetracks had been operated separately
under different ownership. Completing the integration of these businesses into
our operations will require a significant dedication of management resources
and further expansion of our information and other operating systems.

   If we do not successfully integrate our recent acquisitions and any future
acquisitions, or if this integration consumes a significant amount of our
management's time, then these acquisitions may materially adversely affect our
efficiency and, therefore, significantly harm our business.

   If we do not identify, negotiate and complete a sufficient number of
strategic acquisitions, we may not achieve our business plan and our growth
prospects may suffer.

   Our current business plan calls for us to continue to actively pursue
strategic acquisitions. Our future profitability will depend to some degree
upon the ability of our management to identify, complete and successfully
integrate commercially viable acquisitions. If we do not do so for any reason,
we may not be able to implement our business plan successfully, or grow as
quickly as we anticipate, and this could have a material adverse effect on our
future profitability.


                                      19
<PAGE>

   We have recruited most of our senior executive officers from outside the
racetrack industry.

Although our management personnel at our racetracks generally have extensive
experience in the racetrack industry, we have recruited most of our senior
executive officers from outside the industry. Our chief executive officer,
chief operating officer and chief financial officer each joined us during the
last two years. This lack of racetrack industry experience may impede the
implementation of our strategy and slow our growth.

   We may not be able to obtain financing or may be able to obtain it only on
unfavorable terms, which may affect the viability of our expansion projects or
make expansion more costly.

   We may require additional financing in order to expand our operations. It
is possible that this financing will not be available or, if available, will
not be available on terms that are favorable to us. Our controlling
stockholder, Magna International, has made a commitment to its shareholders
that it will not, before June 1, 2006, make any further debt or equity
investments in, or otherwise provide financial assistance to, us or any of our
subsidiaries without the prior consent of the holders of a majority of Magna
International's subordinate voting shares. If we are unable to obtain
financing on favorable terms, or at all, we may not be able to expand our
operations, which could have a material adverse effect on our future
profitability.

   Our recent operating income includes substantial gains from the sale of
non-core real estate, which sales will soon decrease and may cause our future
operating income and cash flow to decrease.

   Approximately 37% of our pro forma earnings before interest, taxes,
depreciation and amortization for the year ended December 31, 2001 resulted
from gains from real estate sales. These gains will likely be reduced to zero
over the next two years as the balance of our non-core real estate portfolio
is sold. Additionally, our short-term and annual operating income and cash
flow may decline from the prior year due to decreases in non-core real estate
sales. If we do not replace these gains or offset these decreases with
additional operating income and cash flow from our racetrack operations, our
future operating income and cash flow will decline.

   Our business is heavily concentrated at certain of our racetracks.

   Four of our racetracks, Santa Anita, Gulfstream, Golden Gate Fields and Bay
Meadows, accounted for approximately 61% of our pro forma revenue and 83% of
our pro forma earnings before interest, taxes, depreciation and amortization
for the year ended December 31, 2001. If a business interruption were to occur
and continue for a significant length of time at any of these racetracks, it
could harm our operating results. Additionally, certain of our other racetrack
properties have experienced negative earnings before interest, income taxes,
depreciation and amortization over the past two years. These racetrack
properties may not improve their operating performance in the future.

   We are controlled by Magna International and therefore Magna International
is able to prevent any takeover of us by a third party.

   Magna International owns all our Class B Stock, which is generally entitled
to 20 votes per share, and therefore is able to exercise approximately 98% of
the total voting power of our outstanding stock. It is therefore able to elect
all our directors and to control us. As a result, Magna International is able
to cause or prevent a change in our control.

   Our relationship with Magna International is not at "arm's length", and
therefore Magna International may influence us to make decisions that are not
in the best interests of our other stockholders.

   Our relationship with Magna International is not at "arm's length". In
addition to the ownership of our stock as described in the preceding risk
factor, three members of our board of directors are also members of Magna
International's board of directors and we have the same chairman. In some
cases, the interests of Magna International may not be the same as those of
our other stockholders, and conflicts of interest may arise from time to time
that may be resolved in a manner detrimental to us or our minority
stockholders. Magna International is able to cause us to effect certain
corporate transactions without the consent of the holders of our Class A
Subordinate Voting Stock, subject to applicable law and the fiduciary duties
of our directors and officers. Consequently, transactions effected between us
and Magna International may not be on the same terms as could be obtained from
independent parties, resulting in the possibility of our minority
stockholders' interests being compromised.


                                      20
<PAGE>

   A decline in general economic conditions could adversely affect our
business.

   Our operations are affected by general economic conditions, and therefore
our future success is unpredictable. The demand for entertainment and leisure
activities tends to be highly sensitive to consumers' disposable incomes, and
thus a decline in general economic conditions may lead to our customers having
less discretionary income to wager on horse racing. This would cause a
reduction in our revenues and could therefore have a material adverse effect
on our operating results.

   We are exposed to currency exchange rate fluctuations.

   Our business outside the United States is generally transacted in
currencies other than U.S. dollars. Fluctuations in currencies relative to the
U.S. dollar may make it more difficult to perform period-to-period comparisons
of our operating results. Moreover, fluctuations in the U.S. dollar relative
to currencies in which earnings are generated outside the United States could
result in a reduction in our profitability.

Risks Relating to Our Gaming Operations

   A decline in the popularity of horse racing could adversely impact our
business.

   The continued popularity of horse racing is important to our growth plans
and our operating results. Our business plan anticipates our attracting new
customers to our racetracks, off-track betting facilities and account wagering
operations. Even if we are successful in making acquisitions and expanding and
improving our current operations, we may not be able to attract a sufficient
number of new customers to achieve our business plan. Public tastes are
unpredictable and subject to change. Any decline in interest in horse racing
or any change in public tastes may adversely affect our revenues and,
therefore, our operating results.

   Declining on-track attendance and increasing competition in simulcasting
may materially adversely affect our operating results.

   There has been a general decline in the number of people attending and
wagering at live horse races at North American racetracks due to a number of
factors, including increased competition from other forms of gaming,
unwillingness of customers to travel a significant distance to racetracks and
the increasing availability of off-track wagering. The declining attendance at
live horse racing events has prompted racetracks to rely increasingly on
revenues from inter-track, off-track and account wagering markets. The
industry-wide focus on inter-track, off-track and account wagering markets has
increased competition among racetracks for outlets to simulcast their live
races. A continued decrease in attendance at live events and in on-track
wagering, as well as increased competition in the inter-track, off-track and
account wagering markets, could lead to a decrease in the amount wagered at
our facilities and on races conducted at our racetracks and may materially
adversely affect our business, financial condition, operating results and
prospects.

   Our gaming activities are dependent on governmental regulation and
approvals. Amendments to such regulation or the failure to obtain such
approvals could adversely affect our business.

   All our pari-mutuel wagering operations are contingent upon the continued
governmental approval of these operations as forms of legalized gaming. All
our current gaming operations are subject to extensive governmental regulation
and could be subjected at any time to additional or more restrictive
regulation, or banned entirely. See "Item 1. Business--Our Business--
Government Regulation" and "--Environmental Matters".

   We may be unable to obtain, maintain or renew all governmental licenses,
registrations, permits and approvals necessary for the operation of our pari-
mutuel wagering facilities. Licenses to conduct live horse racing and
simulcast wagering must be obtained annually from each state's regulatory
authority. The loss or non-renewal of any of our licenses, registrations,
permits or approvals may materially limit the number of races we conduct or
the form or types of pari-mutuel wagering we offer, and could have a material
adverse effect on our business. In addition, we currently devote significant
financial and management resources to complying with the various governmental
regulations to which our operations are subject. Any significant increase in
governmental regulation would increase the amount of our resources devoted to
governmental compliance, could substantially restrict our business, and could
materially adversely affect our operating results.


                                      21
<PAGE>

   Any future expansion of our gaming operations will likely require us to
obtain additional governmental approvals or, in some cases, amendments to
current laws governing such activities.

   The high degree of regulation in the gaming industry is a significant
obstacle to our growth strategy, especially with respect to account wagering,
including telephone, interactive television and Internet-based wagering.
Account wagering may currently be conducted only through hubs or bases located
in certain states. Our expansion opportunities in this area will be limited
unless more states amend their laws to permit account wagering. The necessary
amendments to those laws may not be enacted. In addition, the licensing and
legislative amendment processes can be both lengthy and costly, and we may not
be successful in obtaining required licenses, registrations, permits and
approvals.

   In the past, certain state attorneys general, district attorneys and other
law enforcement officials have expressed concern over the legality of
interstate account wagering. In December 2000, legislation was enacted in the
United States that amends the Interstate Horseracing Act of 1978. We believe
that this amendment clarifies that inter-track simulcasting, off-track betting
and account wagering, as currently conducted by the U.S. horse racing
industry, are authorized under U.S. federal law. The amendment may not be
interpreted in this manner by all concerned, however, and there may be
challenges to these activities by both state and federal law enforcement
authorities, which could have a material adverse impact on our business,
financial condition, operating results and prospects.

   From time to time, the United States Congress has considered legislation
that would inhibit or restrict the use of certain financial instruments,
including credit cards, to provide funds for account wagering. For example, in
May 2001, the United States Senate Commerce Committee proposed legislation, in
the form of the Unlawful Internet Gambling Funding Bill, that would prohibit
financial institutions from enforcing credit card debts if they knew the debts
were being incurred in order to gamble illegally through the Internet.
Further, in July 2001, a bill was reintroduced into the United States House of
Representatives that would prohibit any person in a gambling business from
knowingly accepting, in connection with the participation of another person in
Internet gambling, credit, an electronic funds transfer, a check, a draft or
the proceeds of credit or an electronic funds transfer. Legislation of this
nature, if enacted, could inhibit account wagering by restricting the use of
credit cards and other commonly used financial instruments to fund wagering
accounts. This, or any other legislation restricting account wagering, could
cause our business and its growth to suffer.

   Implementation of some of the recommendations of the National Gambling
Impact Study Commission may harm our growth prospects.

   In August 1996, the United States Congress established the National
Gambling Impact Study Commission to conduct a comprehensive study of the
social and economic effects of the gambling industry in the United States.
This commission reviewed existing federal, state and local policy and
practices with respect to the legalization or prohibition of gambling
activities with the aim of formulating and proposing changes in these policies
and practices and recommending legislation and administrative actions for
these proposed changes. On April 28, 1999, the Commission voted to recommend
that there be a pause in the expansion of gaming. On June 18, 1999, the
Commission issued a report setting out its findings and conclusions, together
with recommendations for legislation and administrative actions. Some of the
recommendations were:

  .  prohibiting Internet gambling that was not already authorized within the
     United States or among parties in the United States and any foreign
     jurisdiction;

  .  limiting the expansion of gambling into homes through such mediums as
     account wagering; and

  .  banning the introduction of casino-style gambling into pari-mutuel
     facilities for the primary purpose of saving a pari-mutuel facility that
     the market has determined no longer serves the community or for the
     purpose of competing with other forms of gaming.

   The recommendations made by the National Gambling Impact Study Commission
could result in the enactment of new laws and/or the adoption of new
regulations in the United States, which would materially adversely impact the
gambling industry in the United States in general or our segment in particular
and consequently may threaten our growth prospects.

   We face significant competition from other racetrack operators which could
hurt our operating results.


                                      22
<PAGE>

   We face significant competition in each of the jurisdictions in which we
operate racetracks and we expect this competition to intensify as new
racetrack operators enter our markets and existing competitors expand their
operations and consolidate management of multiple racetracks. In addition, the
introduction of legislation enabling slot machines or video lottery terminals
to be installed at racetracks in certain states allows those racetracks to
increase their purses and compete more effectively with us for horse owners
and trainers. One of our competitors, Churchill Downs Inc., has been in
operation for a much longer period of time than we have and may have greater
name recognition. Competition from existing racetrack operators, as well as
the addition of new competitors, may hurt our future performance and operating
results.

   In addition, Florida tax laws have historically discouraged the three
Miami-area horse racetracks, Gulfstream Park, Hialeah Park and Calder Race
Course, from scheduling concurrent races. A recent tax structure, effective as
of July 1, 2001, has eliminated this deterrent. As a result, our Gulfstream
Park racetrack may face direct competition from the other Miami-area horse
racetracks in the future. This competition could significantly affect the
operating results of Gulfstream Park which could reduce our overall
profitability.

   Competition from non-racetrack gaming operators may reduce the amount
wagered at our facilities and materially adversely affect our operating
results.

   We compete for customers with casinos, sports wagering services and other
non-racetrack gaming operators, including government-sponsored lotteries,
which benefit from numerous distribution channels, including supermarkets and
convenience stores, as well as from frequent and extensive advertising
campaigns. We do not enjoy the same access to the gaming public or possess the
advertising resources that are available to government-sponsored lotteries as
well as some of our other non-racetrack competitors, which may adversely
affect our ability to effectively compete with them.

   We depend on agreements with our horsemen's industry associations to
operate our business.

   The U.S. Interstate Horseracing Act of 1978, as well as various state
racing laws, require that, in order to simulcast races, we have written
agreements with the horsemen at our racetracks, who are represented by
industry associations. In some states, if we fail to maintain operative
agreements with the industry associations, we may not be permitted to conduct
live racing or simulcasting at tracks within those states. In addition, our
simulcasting agreements are generally subject to the approval of the industry
associations. Should we fail to renew existing agreements with the industry
associations on satisfactory terms or fail to obtain approval for new
simulcast agreements, we would lose revenues and our operating results would
suffer.

   If we are unable to continue to negotiate satisfactory union contracts,
some of our employees may commence a strike. A strike by our employees or a
work stoppage by backstretch personnel, who are employed by horse owners and
trainers, may lead to lost revenues and could have a material adverse effect
on our business.

   As of December 31, 2001, we employed approximately 4,300 full-time
employees, approximately 2,500 of whom were represented by unions. A strike or
other work stoppage by our employees could lead to lost revenues and have a
material adverse effect on our business, financial condition, operating
results and prospects.

   Recently enacted legislation in California will facilitate the organization
of backstretch personnel in that state. A strike by backstretch personnel
could, even though they are not our employees, lead to lost revenues and
therefore hurt our operating results.

   We currently face significant competition from Internet and other forms of
account wagering, which may reduce our profitability.

   Internet and other account wagering gaming services allow their customers
to wager on a wide variety of sporting events and casino games from home. The
National Gambling Impact Study Commission's June 1999 report estimates that
there are over 250 on-line casinos, 64 lotteries, 20 bingo games and 139
sports wagering services offering gambling over the Internet. Amounts wagered
in the Internet gaming market are estimated to have doubled from approximately
$445 million in 1997 to over $900 million in 1998, according to Interactive
Gaming News, an Internet gaming publication. Although many on-line wagering
services are operating from offshore locations in violation of U.S. law by
accepting wagers from U.S. residents, they may divert wagering dollars from
legitimate wagering venues

                                      23
<PAGE>

such as our racetracks and account wagering operations. Moreover, our
racetrack operations may require greater ongoing capital expenditures in order
to expand our business than the capital expenditures required by Internet and
other account wagering gaming operators. Currently, we cannot offer the
diverse gaming options offered by many Internet and other account wagering
gaming operators and may face significantly greater costs in operating our
business. Our inability to compete successfully with these operators could
hurt our business.

   In addition, the market for account wagering is affected by changing
technology. Our ability to anticipate such changes and to develop and
introduce new and enhanced services on a timely basis will be a significant
factor in our ability to expand, remain competitive and attract new customers.

   Expansion of gaming conducted by Native American groups may lead to
increased competition in our industry, which may negatively impact our growth
and profitability.

   In March 2000, the California state constitution was amended, resulting in
the expansion of gaming activities permitted to be conducted by Native
American groups in California. This may lead to increased competition and may
have an adverse effect on the profitability of Santa Anita Park, Golden Gate
Fields, Bay Meadows and our future growth in California. It may also affect
the purses that those tracks are able to offer and therefore adversely affect
our ability to attract top horses.

   Several Native American groups in Florida have recently expressed interest
in opening or expanding existing casinos in southern Florida, which could
compete with Gulfstream Park and reduce its profitability.

   Moreover, other Native American groups may open or expand casinos in other
regions of the country where we currently operate, or plan to operate,
racetracks or other gaming operations. Any such competition from Native
American groups could adversely affect our growth and profitability.

   Some jurisdictions view our operations primarily as a means of raising
taxes, and therefore we are particularly vulnerable to additional or increased
taxes and fees.

   We believe that the prospect of raising significant additional revenue
through taxes and fees is one of the primary reasons that certain
jurisdictions permit legalized gaming. As a result, gaming companies are
typically subject to significant taxes and fees in addition to the normal
federal, state, provincial and local income taxes, and such taxes and fees may
be increased at any time. From time to time, legislators and officials have
proposed changes in tax laws, or in the administration of such laws, affecting
the gaming industry. For instance, U.S. legislators have proposed the
imposition of a U.S. federal tax on gross gaming revenues. It is not possible
to determine with certainty the likelihood of any such changes in tax laws or
their administration; however, if enacted, such changes could have a material
adverse effect on our business.

   Our operating results fluctuate seasonally and may be impacted by a
reduction in live racing dates due to regulatory factors.

   We experience significant fluctuations in quarterly operating results due
to the seasonality associated with the racing schedules at our racetracks.
Generally, our revenues from racetrack operations are greater in the first
quarter of the calendar year than in any other quarter. We have a limited
number of live racing dates at each of our racetracks and the number of live
racing dates varies somewhat from year to year. The allocation of live racing
dates in most of the states in which we operate is subject to regulatory
approval from year to year and, in any given year, we may not receive the same
or more racing dates than we have had in prior years. Recently, the regulatory
agencies in California have announced their intention to reduce live racing
dates. We are also faced with the prospect that competing racetracks may seek
to have some of our historical dates allocated to them. A significant decrease
in the number of our live racing dates would reduce our revenues and cause our
business to suffer.

   Unfavorable weather conditions may result in a reduction in the number of
races we hold.

   Since horse racing is conducted outdoors, unfavorable weather conditions,
including extremely high or low temperatures, excessive precipitation, storms
or hurricanes, may cause races to be cancelled or may reduce attendance and
wagering. Since a substantial portion of our operating expenses is fixed, a
reduction in the number of races held or the number of horses racing due to
unfavorable weather would reduce our revenues and cause our business to
suffer.


                                      24
<PAGE>

   The current lease of the Bay Meadows property expires in less than one year
and may not be renewed.

   The Bay Meadows site lease expires on December 31, 2002 (subject to
extension through March 31, 2003 if we are holding a race meet). Although we
are exploring various alternative venues for the conduct of the racing dates
currently held at Bay Meadows, there is a risk that we will be unable to
obtain the necessary regulatory approvals to transfer these racing dates to
another racetrack operated by us in northern California, which could cause a
reduction in our revenues and, therefore, materially adversely affect our
operating results.

   The profitability of our racetracks is partially dependent upon the size of
the local horse population in the areas in which our racetracks are located.

   Horse population is a factor in a racetrack's profitability because it
generally affects the average number of horses (i.e., the average "field
size") that run in races. Larger field sizes generally mean increased wagering
and higher wagering revenues due to a number of factors, including the
availability of exotic bets (such as "exacta" and "trifecta" wagers). Various
factors have led to declines in the horse population in certain areas of the
country, including competition from racetracks in other areas, increased costs
and changing economic returns for owners and breeders, and Mare Reproductive
Loss Syndrome, which last year caused a large number of mares in Kentucky to
sustain late term abortions or early embryonic loss. If we are unable to
attract horse owners to stable and race their horses at our tracks by offering
a competitive environment, including improved facilities, well-maintained
racetracks, better living conditions for backstretch personnel involved in the
care and training of horses stabled at our tracks, and a competitive purse
structure, our profitability could decrease.

   An earthquake in California could interrupt our operations at Santa Anita
Park, Golden Gate Fields and Bay Meadows, which would adversely impact our
cash flow from these racetracks.

   Three of our largest racetracks, Santa Anita Park, Golden Gate Fields and
Bay Meadows, are located in California and are therefore subject to earthquake
risks. We do not maintain significant earthquake insurance on the structures
at our California racetracks. We maintain fire insurance for fire risks,
including those resulting from earthquakes, subject to policy limits and
deductibles. There can be no assurance that earthquakes or the fires often
caused by earthquakes will not seriously damage our California racetracks and
related properties or that the recoverable amount of insurance proceeds will
be sufficient to fully cover reconstruction costs and other losses. If an
uninsured or underinsured loss occurs, we could lose anticipated revenue and
cash flow from our California racetracks.

   Our business depends on providers of totalisator services.

   In purchasing and selling our pari-mutuel wagering products, our customers
depend on information provided by two of the three main totalisator companies
operating in North America. These totalisator companies provide the computer
systems that accumulate wagers, record sales, calculate payoffs and display
wagering data. The loss of any of the totalisator companies as a provider of
these critical services would decrease competition in the market for those
services and could result in an increase in the cost to obtain them.
Additionally, the failure of the totalisator companies to keep their
technology current could limit our ability to serve customers effectively or
develop new forms of wagering. Because of the highly specialized nature of
these services, replicating these totalisator services would be expensive.


Real Estate Ownership and Development Risks

   Our ownership and development of real estate is subject to risks and may
involve significant ongoing expenditures or losses that could adversely affect
our operating results.

   All real estate investments are subject to risks including: general
economic conditions, such as the availability and cost of financing; local
real estate conditions, such as an oversupply of residential, office, retail
or warehousing space, or a reduction in demand for real estate in the area;
governmental regulation, including taxation of property and environmental
legislation; and the attractiveness of properties to potential purchasers or
tenants. The real estate industry is also capital intensive and sensitive to
interest rates. Further, significant expenditures, including property taxes,
mortgage payments, maintenance costs, insurance costs and related charges,
must be made throughout the period of ownership of real property, which
expenditures may negatively impact our operating results.


                                      25
<PAGE>

   We may not be able to sell some of our non-core real estate when we need to
or at the price we want, which may materially adversely affect our financial
condition.

   At times, it may be difficult for us to dispose of some of our non-core
real estate. The costs of holding real estate may be high and, during a
recession, we may be faced with ongoing expenditures with little prospect of
earning revenue on our non-core real estate properties. If we have inadequate
cash reserves, we may have to dispose of properties at prices that are
substantially below the prices we desire, and in some cases, below the prices
we originally paid for the properties, which may materially adversely affect
our financial condition and our growth plans.

   We require governmental approvals for some of our properties which may take
a long time to obtain or which may not be granted, either of which could
materially adversely affect our existing business or our growth.

   Some of our properties will require zoning and other approvals from local
government agencies. The process of obtaining these approvals may take many
months and we might not obtain the necessary approvals. Furthermore, in the
case of certain land to be held by us in Aurora, Ontario, the transfer of this
land to us from Magna International is conditional on our obtaining permission
to sever the land from adjoining properties and other approvals. If we do not
obtain these approvals, we may not ultimately acquire this land. Holding
costs, while regulatory approvals are being sought, and delays may render a
project economically unfeasible. If we do not obtain all of our necessary
approvals, our plans, growth and profitability could be materially adversely
affected.

   We may not be able to complete expansion projects successfully and on time,
which would materially adversely affect our growth and our operating results.

   We intend to further develop our racetracks and expand our gaming
activities. Numerous factors, including regulatory and financial constraints,
could cause us to alter, delay or abandon our existing plans. If we proceed to
develop new facilities or enhance our existing facilities, we face numerous
risks that could require substantial changes to our plans. These risks include
the inability to secure all required permits and the failure to resolve
potential land use issues, as well as risks typically associated with any
construction project, including possible shortages of materials or skilled
labor, unforeseen engineering or environmental problems, delays and work
stoppages, weather interference and unanticipated cost overruns. For example,
Santa Anita Park completed certain upgrades to its facilities in 1999. The
disruption caused by these upgrades was greater than anticipated and reduced
the total amount wagered at Santa Anita Park's simulcast wagering facilities
and attendance at The Oak Tree Meet in 1999. Even if completed in a timely
manner, our expansion projects may not be successful, which would affect our
growth and could have a material adverse effect on our future profitability.

   We are currently considering a major redevelopment of Gulfstream Park.
Although we would schedule the redevelopment so as to minimize any
interference with Gulfstream Park's racing season, there is a risk that the
redevelopment would not be completed according to schedule, in which case it
could cause us to disrupt a racing season and result in a reduction in the
revenues and earnings generated at Gulfstream Park during that season. See
"Item 1. Business--Our Business--Description of Properties--Gulfstream Park".

   We face strict environmental regulation and may be subject to liability for
environmental damage, which could materially adversely affect our financial
results.

   We are subject to a wide range of requirements under environmental laws and
regulations relating to waste water discharge, waste management and storage of
hazardous substances. Compliance with environmental laws and regulations can,
in some circumstances, require significant capital expenditures. Moreover,
violations can result in significant penalties and, in some cases,
interruption or cessation of operations. We have been involved in a dispute
with the United States Environmental Protection Agency involving the Portland
Meadows racetrack, which we currently lease and operate, which dispute caused
us to postpone the planned September 1, 2001 opening of that facility. See
"Item 1. Business--Our Business--Environmental Matters."

   Furthermore, we may not have all required environmental permits and we may
not otherwise be in compliance with all applicable environmental requirements.
Where we do not have an environmental permit but one may be required, we will
determine if one is in fact required and, if so, will seek to obtain one and
address any related compliance issues, which may require significant capital
expenditures.


                                      26
<PAGE>

   Various environmental laws and regulations in the United States, Canada and
Europe impose liability on us as a current or previous owner and manager of
real property, for the cost of maintenance, removal and remediation of
hazardous substances released or deposited on or in properties now or
previously owned or managed by us or disposed of in other locations. Our
ability to sell properties with hazardous substance contamination or to borrow
money using that property as collateral may also be uncertain.

   Changes to environmental laws and regulations, resulting in more stringent
terms of compliance, or the enactment of new environmental legislation, could
expose us to additional liabilities and ongoing expenses.

   Any of these environmental issues could have a material adverse effect on
our business.

Risks Relating to Our Class A Subordinate Voting Stock and the Exchangeable
Shares

   Our stock price may be volatile, and future issuances or sales of our stock
may decrease our stock price.

   The trading prices of our Class A Subordinate Voting Stock and the
exchangeable shares of MEC Holdings (Canada) Inc. have experienced, and may
continue to experience, substantial volatility. The following factors have
had, and may continue to have, a significant effect on the market price of our
Class A Subordinate Voting Stock and the exchangeable shares:


  .  our historical and anticipated operating results;

  .  the announcement of new wagering and gaming opportunities by us or our
     competitors;

  .  the passage of legislation affecting horse racing or gaming;

  .  developments affecting the horse racing or gaming industries generally;

  .  sales or other issuances or the perception of potential sales or
     issuances, including in connection with our past and future
     acquisitions, of substantial amounts of our shares;

  .  sales or the expectation of sales by Magna International of a portion of
     our shares held by it, as a result of its previously stated intention to
     reduce its majority equity position in us over time, or by our other
     significant stockholders; and

  .  a shift in investor interest away from the gaming industry, in general.

   These factors could have a material adverse effect on the market price of
our Class A Subordinate Voting Stock and the exchangeable shares, regardless
of our financial condition and operating results.

   Certain Canadian shareholders of Magna International, who received
exchangeable shares as a distribution from Magna International, may sell the
shares of our Class A Subordinate Stock that they receive upon the exchange of
exchangeable shares, which sales may reduce the trading price of our Class A
Subordinate Voting Stock.

   Certain Canadian shareholders of Magna International received exchangeable
shares of our Canadian subsidiary that are exchangeable on a one-for-one basis
for shares of our Class A Subordinate Voting Stock as a distribution from
Magna International. As of December 31, 2001, 2,263,372 exchangeable shares
were outstanding, excluding those held by us. As certain Canadian shareholders
are subject to restrictions on the amount of stock of a non-Canadian company
that they may own, after these exchangeable shares are exchanged for shares of
our Class A Subordinate Voting Stock, these shareholders may sell the shares
of Class A Subordinate Voting Stock that they receive in exchange for the
exchangeable shares. This may have a material adverse effect on the market
price of our Class A Subordinate Voting Stock, regardless of our financial
condition and operating results.

   The trading price of our Class A Subordinate Voting Stock and the
exchangeable shares could decrease as a result of our issuing additional
shares as consideration for future acquisitions.

   We may issue our Class A Subordinate Voting Stock as full or partial
consideration in connection with future acquisitions. To the extent that we do
so, the percentage of our common equity and voting stock that our existing

                                      27
<PAGE>

stockholders own will decrease and, particularly if such acquisitions do not
contribute proportionately to our profitability, the trading price of our
shares and the exchangeable shares may also decrease.

   Sales of our Class A Subordinate Voting Stock by Magna International or by
certain other of our significant stockholders under our shelf registration
statement could depress our stock price.

   As of the date of this Annual Report, Magna International owns 4,362,328
shares of our Class A Subordinate Voting Stock and 58,466,056 shares of our
Class B Stock (which are convertible into shares of our Class A Subordinate
Voting Stock on a one-for-one basis). Magna International has announced its
intention at an undetermined point in the future to convert some shares of our
Class B Stock to shares of our Class A Subordinate Voting Stock and dispose of
these shares of our Class A Subordinate Voting Stock when market conditions
for doing so are favorable, with the ultimate intention of retaining only a
minority equity position but continuing to retain control of us. In addition,
we have an effective shelf registration statement that permits the secondary
sale of shares of our Class A Subordinate Voting Stock by some of our
stockholders who received those shares in connection with our past
acquisitions. Up to 881,126 shares covered by that shelf registration
statement remain unsold. Sales of a substantial number of shares of our Class
A Subordinate Voting Stock, either by Magna International or under our shelf
registration statement, could depress the prevailing market prices of our
Class A Subordinate Voting Stock and the exchangeable shares.

   We do not plan to pay dividends until 2004, if at all.

   We have not paid any dividends to date on our Class A Subordinate Voting
Stock, we do not plan to pay any dividends until 2004 and we may not pay
dividends then, or ever.

Item 2.  Properties

   Information concerning properties required by this item is incorporated by
reference to the information contained in "Item 1. Business" of this Report.

Item 3.  Legal Proceedings

   Information concerning legal proceedings required by this item is
incorporated by reference to the information contained in "Item 1. Business"
of this Report.

Item 4.  Submission of Matters to a Vote of Security Holders

   No matter was submitted to a vote of our stockholders during the fourth
quarter of the fiscal year covered by this Report.

                                      28
<PAGE>

                                    Part II

Item 5.  Market for Registrant's Common Equity and Other Stockholder Matters

Trading History

   The Class A Subordinate Voting Stock is listed and traded on the Nasdaq
National Market under the symbol "MIEC" and on The Toronto Stock Exchange
under the symbol "MIE.A". The Class A Subordinate Voting Stock commenced
trading on the Nasdaq National Market on February 23, 2000 and closed at a
price of $3.06 per share, and on The Toronto Stock Exchange on February 23,
2000 where it closed at a price of Cdn. $4.60 per share. The following table
sets forth for the calendar periods indicated the high and low sale prices per
share of the Class A Subordinate Voting Stock as reported by the Nasdaq
National Market and The Toronto Stock Exchange ("TSE").

<TABLE>
<CAPTION>
                                               Nasdaq              TSE
                                             ----------- -----------------------
                                             High   Low     High         Low
                                             ----- ----- ----------- -----------
<S>                                          <C>   <C>   <C>         <C>
2000:
  First Quarter............................. $5.69 $3.06 Cdn. $ 8.10 Cdn. $ 4.60
  Second Quarter............................ $7.75 $2.94 Cdn. $11.40 Cdn. $ 4.15
  Third Quarter............................. $7.50 $5.81 Cdn. $10.90 Cdn. $ 8.55
  Fourth Quarter............................ $6.56 $4.38 Cdn. $10.00 Cdn. $ 6.55
2001:
  First Quarter............................. $6.13 $3.88 Cdn. $ 8.90 Cdn. $ 6.00
  Second Quarter............................ $7.30 $4.00 Cdn. $11.00 Cdn. $ 6.21
  Third Quarter............................. $8.19 $5.45 Cdn. $12.55 Cdn. $ 8.60
  Fourth Quarter............................ $7.20 $5.50 Cdn. $11.35 Cdn. $ 9.00
2002:
  First Quarter (through March 15, 2002).... $9.95 $6.50 Cdn. $15.80 Cdn. $10.41
</TABLE>

   On March 15, 2002, the last sale price of the Class A Subordinate Voting
Stock as reported by the Nasdaq National Market was $9.07 and by The Toronto
Stock Exchange was Cdn. $14.15.

   The exchangeable shares of our Canadian subsidiary, MEC Holdings (Canada)
Inc., which are exchangeable on a one-for-one basis for shares of our Class A
Subordinate Voting Stock, are listed and traded on The Toronto Stock Exchange
under the symbol "MEH". The exchangeable shares commenced trading on February
23, 2000 and closed at a price of Cdn. $4.60 per share on that day. The
following table sets forth for the calendar periods indicated the high and low
sale prices per exchangeable share as reported by The Toronto Stock Exchange.

<TABLE>
<CAPTION>
                                                                  TSE
                                                        -----------------------
                                                           High         Low
                                                        ----------- -----------
<S>                                                     <C>         <C>
2000:
  First Quarter........................................ Cdn. $ 8.10 Cdn. $ 4.60
  Second Quarter....................................... Cdn. $11.20 Cdn. $ 4.20
  Third Quarter........................................ Cdn. $10.90 Cdn. $ 8.30
  Fourth Quarter....................................... Cdn. $ 9.75 Cdn. $ 6.40
2001:
  First Quarter........................................ Cdn. $ 9.00 Cdn. $ 6.00
  Second Quarter....................................... Cdn. $10.90 Cdn. $ 6.30
  Third Quarter........................................ Cdn. $12.77 Cdn. $ 8.40
  Fourth Quarter....................................... Cdn. $11.30 Cdn. $ 8.90
2002:
  First Quarter (through March 15, 2002)............... Cdn. $15.70 Cdn. $10.50
</TABLE>

   On March 18, 2002, the last sale price of the exchangeable shares as
reported by The Toronto Stock Exchange was Cdn. $14.11.


                                      29
<PAGE>

Dividends and Dividend Policy

   The holders of our Class A Subordinate Voting Stock, our Class B Stock and
the exchangeable shares of our Canadian subsidiary, MEC Holdings (Canada)
Inc., are entitled to receive their proportionate share of dividends declared
by our board of directors, except in the case of certain stock dividends.
Subject to applicable law, we intend to pay quarterly dividends starting in
2004. Any dividends will be declared on our Class A Subordinate Voting Stock
and Class B Stock in accordance with our restated certificate of
incorporation, including our corporate constitution, which sets forth certain
dividend entitlements for our stockholders, subject to applicable law.

   We have not declared any dividends since our Class A Subordinate Voting
Stock has been publicly trading.



                                      30
<PAGE>

Item 6.  Selected Financial Data

   The following tables set forth our selected consolidated financial and
operating data for the periods indicated. The selected consolidated financial
and operating data as at and for the years ended July 31, 1997 and 1998, as at
and for the five months ended December 31, 1998, and as at and for the years
ended December 31, 1999, 2000 and 2001 have been derived from and should be
read in conjunction with our audited Consolidated Financial Statements as at and
for the years ended December 31, 1999 (as filed with our Annual Report for the
fiscal year ended December 31, 1999), December 31, 2000 (as filed with our
Annual Report for the year ended December 31, 2000) and December 31, 2001
(included in this Report). The selected financial and operating information
should also be read in conjunction with the section entitled "Management's
Discussion and Analysis of Results of Operations and Financial
Position" included in this Annual Report.

<TABLE>
<CAPTION>
                            Year Ended
                             July 31,       Five Months   Year Ended December 31,
                          ----------------     Ended     ---------------------------
Income Statement                            December 31,
Data(1):                   1997     1998        1998       1999      2000     2001
----------------          -------  -------  ------------ --------  -------- --------
                              (U.S. dollars in thousands, except share data)
<S>                       <C>      <C>      <C>          <C>       <C>      <C>
Revenue
Racetrack...............  $    --  $  ----    $ 8,745    $164,946  $355,249 $459,411
Real Estate.............   15,276   20,486      6,597      21,914    58,314   59,650
                          -------  -------    -------    --------  -------- --------
Total Revenue...........  $15,276  $20,486    $15,342    $186,860  $413,563 $519,061
                          =======  =======    =======    ========  ======== ========
Costs and Expenses
Racetrack costs and
 expenses...............  $    --  $    --    $ 8,418    $155,263  $341,017 $430,282
Real estate costs and
 expenses...............   13,879   25,864      8,462      21,820    50,717   37,090
Depreciation and
 amortization...........    1,824    1,852      1,649       7,924    20,061   26,194
                          -------  -------    -------    --------  -------- --------
                           15,703   27,716     18,529     185,007   411,795  493,566
Interest expense
 (income), net..........      955    1,380      1,221        (920)      215    2,682
                          -------  -------    -------    --------  -------- --------
Income (loss) before
 income taxes...........  $(1,382) $(8,610)   $(4,408)   $  2,773  $  1,553 $ 22,813
                          =======  =======    =======    ========  ======== ========
Net income (loss).......  $(1,382) $(8,610)   $(4,231)   $    (62) $    441 $ 13,464
                          =======  =======    =======    ========  ======== ========
Earnings (loss) per
 share of Class A
 Subordinate Voting
 Stock, Class B Stock
 and Exchangeable Share
Basic...................  $    --  $ (0.11)   $ (0.05)   $   0.00  $   0.01 $   0.16
                          =======  =======    =======    ========  ======== ========
Diluted.................  $    --  $ (0.11)   $ (0.05)   $   0.00  $   0.01 $   0.16
                          =======  =======    =======    ========  ======== ========
Average number of shares
 of Class A Subordinate
 Voting Stock, Class B
 Stock and Exchangeable
 Shares outstanding
 during the period (in
 thousands)
Basic...................       --   78,535     78,535      78,686    80,422   82,930
Diluted.................       --   78,535     78,535      78,686    80,424   83,242
</TABLE>

<TABLE>
<CAPTION>
                            Year Ended      Five Months
                             July 31,          Ended     Year Ended December 31,
                          ----------------  December 31, --------------------------
Other Data:                1997     1998        1998       1999     2000     2001
-----------               -------  -------  ------------ --------  -------  -------
                                       (U.S. dollars in thousands)
<S>                       <C>      <C>      <C>          <C>       <C>      <C>
EBITDA(2)...............  $ 1,397  $(5,378)   $ (1,538)  $  9,777  $21,829  $51,689
Capital expenditures(3).       --       --          --     54,762   30,418  32,278
Cash provided from (used
 for)
  Operating activities..   (3,894)  (7,868)     (6,349)    15,226  (16,109)  25,629
  Investment activities.  (43,579) (72,643)   (136,685)  (215,398) (35,255)  (7,546)
  Financing activities..   47,576  (80,584)    155,170    238,458   32,906  (10,159)
<CAPTION>
                            At July 31,                      At December 31,
                          ----------------               --------------------------
Balance Sheet Data(1):     1997     1998        1998       1999     2000     2001
----------------------    -------  -------  ------------ --------  -------  -------
                                       (U.S. dollars in thousands)
<S>                       <C>      <C>      <C>          <C>       <C>      <C>
Cash and cash
 equivalents............  $   220  $   295    $ 17,503   $ 50,660  $31,976  $39,212
Real estate properties
 and fixed assets, net..  111,659  182,889     334,911    564,789  568,265  574,677
Total assets............  113,175  184,802     364,142    760,353  781,039  854,256
Total debt(4)...........   18,938   19,495      32,335     45,884   83,706   85,901
Shareholders' equity(5).   87,917  158,275     302,502    547,087  541,788  567,854
</TABLE>
-------
(1) We prepare our financial statements in accordance with U.S. generally
    accepted accounting principles, or U.S. GAAP, which, as applied to us, do
    not materially differ from accounting principles generally accepted in
    Canada, or Canadian GAAP, except as disclosed in note 15 to the
    Consolidated Financial Statements.

(2) "EBITDA" consists of earnings before interest, income taxes, depreciation
    and amortization. EBITDA is a financial metric used by many investors to
    compare companies on the basis of operating results, asset value and

                                      31
<PAGE>

   the ability to incur and service debt. It is not intended to represent cash
   flow or results of operations in accordance with U.S. GAAP, nor is it a
   measure under Canadian GAAP. EBITDA may not be comparable to similarly
   titled amounts reported by other companies.

(3) Capital expenditures include both maintenance and strategic capital
    expenditures less the cost of real estate property additions.

(4) Total debt includes bank indebtedness and long-term debt (including long-
    term debt due within one year).

(5) As at July 31, 1997 and 1998 and December 31, 1998, represents Magna
    International's net investment in us.

Item 7.  Management's Discussion and Analysis of Results of Operations and
Financial Position

  Overview

   We are the leading owner and operator of thoroughbred racetracks in the
United States, based on revenue, and a leading supplier, via simulcasting, of
live racing content to the growing inter-track, off-track and account wagering
markets. We currently operate eight thoroughbred racetracks, one standardbred
racetrack and one greyhound track, as well as the simulcast wagering venues at
these tracks. In addition, we operate OTB facilities and a national account
wagering business known as XpressBetTM, previously known as "Call-A-Bet",
which permits customers to place wagers by telephone and over the Internet on
horse races at up to 65 racetracks in North America. We also have a one-third
ownership interest in Racetrack Television Network, LLC, a new venture formed
to telecast races from our racetracks and other racetracks, via satellite, to
paying subscribers. For the year ended December 31, 2001, our operations
generated consolidated revenue of approximately $519.1 million, or $548.0
million on a pro forma basis.

   Since our inception in 1998, we have experienced significant growth in
scale and profitability through a disciplined acquisition program and the
realization of operating efficiencies. We intend to grow and develop our
business further by:

  .  Selectively acquiring additional strategic racetracks and related
     assets;

  .  Continuing to integrate our acquisitions by employing "best practice"
     improvements at our racetracks;

  .  Expanding the distribution of our live racing;

  .  Further developing an integrated branding and marketing strategy; and

  .  Improving the quality of the entertainment experience at our racetracks
     and OTB facilities.

   In addition to our racetracks, we also have significant real estate
holdings in the United States, Canada and Austria. While we are exploring the
development of some of our real estate, we intend to continue to sell our Non-
Core Real Estate in order to generate additional capital to grow and enhance
our racing business.

   The amounts described below are based on our consolidated financial
statements, which we prepare in accordance with U.S. generally accepted
accounting principles ("GAAP"). U.S. GAAP, as applied to us, does not
materially differ from accounting principles generally accepted in Canada, or
Canadian GAAP, except as disclosed in Note 15 to our consolidated financial
statements.

   The following management's discussion and analysis should be read in
conjunction with our consolidated financial statements included in this Annual
Report.

                                      32
<PAGE>

Racing operations

  Information about certain of our racing operations is set forth below.

<TABLE>
<CAPTION>
                                                                            Year ended December 31, 2001
                                                                         ----------------------------------
                                                                          Live
                            Date    Local Market                         Racing     Total
Track and Location        Acquired  Population(1)     Racing Season       Days    Handle(2)      Revenue
------------------------ ---------- ------------- ---------------------- ------ ------------- -------------
                                    (in millions)                               (in millions) (in millions)
                                                                                 (unaudited)   (unaudited)
<S>                      <C>        <C>           <C>                    <C>    <C>           <C>
Santa Anita Park........  Dec. 1998     10.9        Jan. 1 to Apr. 16      83     $1,101.4       $143.0(3)
 Los Angeles                                        and Dec. 26 to 31
                                                    The Oak Tree Meet      32        323.6
                                                   --Sept. 26 to Nov. 5

Gulfstream Park......... Sept. 1999      4.3        Jan. 3 to Mar. 16      63        704.0         65.1
 Miami

Golden Gate Fields......  Dec. 1999      5.2         Jan. 1 to Apr. 1     103        534.9         61.4
 San Francisco                                    and Nov. 7 to Dec. 17

Bay Meadows.............  Nov. 2000      5.7        Apr. 4 to Jun. 17     107        495.3         64.6
 San Francisco                                    and Aug. 31 to Nov. 5

The Meadows(4)(5).......  Apr. 2001      2.8             All Year         222        381.1         70.9
 Pittsburgh

Thistledown.............  Nov. 1999      3.0        Apr. 6 to Dec. 31     187        237.4         36.3
 Cleveland

Remington Park..........  Nov. 1999      1.1       Jan. 13 to Feb. 25,    118        133.9         26.6
 Oklahoma City                                       Apr. 7 to June 9
                                                  and Aug. 11 to Nov. 24

Great Lakes Downs.......  Feb. 2000      1.2        Apr. 30 to Oct. 30    127         59.3          6.0
 Muskegon, Michigan

Portland Meadows(4).....  July 2001      2.0        Jan. 1 to Apr. 30      80         47.0         13.8
 Portland                                         and Oct. 27 to Dec. 31

Multnomah Greyhound
 Park(4)................  Oct. 2001      2.0         May 1 to Oct. 16     119         47.1          9.3
 Portland                                                                                        ------
                                                                                    TOTAL:       $497.0
                                                                                                 ======
</TABLE>
-------
(1) Population residing within 40 miles of each of our racetracks, except for
    Santa Anita Park (30 miles), The Meadows (50 miles) and Great Lakes Downs
    (50 miles). Data from Urban Systems Inc.

(2) Amounts comprising Total Handle include inter-company transactions for our
    ten racetracks and our separate OTB facilities, for both our importing and
    our exporting facilities.

(3) Rental and other revenues earned from The Oak Tree Meet are included in
    Santa Anita Park's revenue.

(4) Includes unaudited data for periods prior to our ownership.

(5) Includes total revenue and handle of our four OTB facilities and our
    XpressBetTM (then known as "Call-A-Bet") account wagering operations through
    our Pennsylvania hub.

   Our primary source of racetrack revenues is commissions earned from pari-
mutuel wagering. Pari-mutuel wagering on horse racing is a form of wagering in
which wagers on a horse race are aggregated in a commingled pool of wagers
(the "mutuel pool") and the payoff to winning customers is determined by both
the total dollar amount of wagers in the mutuel pool and the allocation of
those dollars among the various kinds of bets. Unlike casino gambling, the
customers bet against each other, and not against us, and therefore we bear no
risk of loss with respect to any wagering conducted. We retain a pre-
determined percentage of the total amount wagered (the "take-out") on each
event, regardless of the outcome of the wagering event, and the remaining
balance of the mutuel pool is distributed to the winning customers. Of the
percentage we retain, a portion is paid to the horse owners in the form of
purses or winnings, which encourage the horse owners and their trainers to
enter their horses in our races. Our share of pari-mutuel wagering revenues is
based on pre-determined percentages of various categories of the pooled wagers
at our racetracks. The maximum pre-determined percentages are approved by
state regulators. Pari-mutuel wagering on horse racing occurs on the live
races being conducted at racetracks, as well as on televised racing signals,
or simulcasts, received or imported by the simulcast wagering facilities
located at such racetracks or OTB facilities, and through various forms of
account wagering. Our racetracks have simulcast wagering facilities to
complement our live horse racing, enabling our customers to wager on horse
races being held at other racetracks.


                                      33
<PAGE>

   We derive our gross wagering revenues from the following primary sources:

  .   Wagers placed at our racetracks or our OTB facilities on live racing
      conducted at our racetracks;

  .   Wagers placed at our racetracks' simulcast wagering venues or our OTB
      facilities on races imported from other racetracks;

  .   Wagers placed at other locations (e.g., other racetracks, OTB facilities
      or casinos) on live racing signals exported by our racetracks; and

  .   Wagers placed by telephone or over the Internet by customers enrolled in
      our national account wagering program, XpressBetTM.

   Wagers placed at our racetracks or our OTB facilities on live racing
conducted at one of our racetracks produce more revenue for us than wagers
placed on imported racing content, because we must pay the racetrack sending
us its signal a fee generally equal to 3% to 4% of the amount wagered on its
race. Wagers placed on imported signals, in turn, produce more revenue for us
than wagers placed on our signals exported to off-track venues (i.e., other
racetracks, OTB facilities or casinos), where we are paid a commission
generally equal to only 3% to 4% of the amount wagered at the off-track venue
on the signal we export to those venues. Revenues from our telephone and
Internet account wagering operations vary depending upon the source of the
signal upon which the wager is placed; wagers placed on our signals produce
more revenue for us than wagers placed on races imported by us from other
racetracks.

   We also generate non-wagering revenues consisting primarily of food and
beverage sales, program sales, admissions income, parking revenues and income
from the rental of our facilities to other racing operators.

   Live race days are a significant factor in the operating and financial
performance of our racing business. Another significant factor is the level of
wagering per customer on our racing content on-track, at inter-track simulcast
locations and at OTB facilities. There are also many other factors that have a
significant impact on our racetrack revenues, which factors include, but are
not limited to: attendance at our racetracks; inter-track simulcast locations
and OTB facilities; activity through our XpressBetTM system; the number of races
and the average field size per race; our ability to attract the industry's top
horses and trainers; inclement weather; and changes in the economy.

   Set forth below is a list of the total live race days by racetrack for the
years ended December 31, 2001, 2000 and 1999, as well as of those live race
days during our ownership of the racetracks.

<TABLE>
<CAPTION>
                                           Year Ended December 31,
                              --------------------------------------------------
                                    2001             2000             1999
                              ---------------- ---------------- ----------------
                                    During Our       During Our       During Our
                              Total Ownership  Total Ownership  Total Ownership
                              ----- ---------- ----- ---------- ----- ----------
<S>                           <C>   <C>        <C>   <C>        <C>   <C>
Santa Anita Park(1)..........   83      83       87      87       84      84
Golden Gate Fields...........  103     103      106     106      105      13
Bay Meadows..................  107     107      106      --      104      --
Gulfstream Park..............   63      63       63      63       63      --
Thistledown..................  187     187      187     187      187      18
Remington Park...............  118     118      136     136      123      16
Great Lakes Downs............  127     127      132     132      139      --
The Meadows..................  222     170      231      --      231      --
Portland Meadows.............   80      28       80      --       80      --
</TABLE>
-------
(1) Excludes The Oak Tree Meet which consisted of 32 days in 2001, 27 days in
    2000 and 31 days in 1999.

   We recognize revenue prior to our payment of purses, stakes, awards and
pari-mutuel wagering taxes. The costs relating to these amounts are shown as
"purses, awards and other" in our consolidated financial statements.

   Our operating costs include principally salaries and benefits, utilities,
the cost of food and beverages sold, racetrack repairs and maintenance expenses,
sales and marketing expenses, rent, printing costs, property taxes, licenses
and insurance.

   We are currently considering a major redevelopment of our Gulfstream Park
racetrack in Florida. See "Item 1. Business--Our Business--Our Properties--
Gulfstream Park".

                                      34
<PAGE>

Seasonality

   As a result of the seasonal nature of our racetrack business, our racetrack
revenues and operating results for any quarter will not be indicative of the
revenues and operating results for the year. Because four of our largest
racetracks, Santa Anita Park, Gulfstream Park, Bay Meadows and Golden Gate
Fields, run live race meets principally during the first half of the year, our
racing operations have historically operated at a loss in the second half of
each year, with our third quarter generating the largest loss. This
seasonality has resulted in large quarterly fluctuations in revenue and
operating results. We expect the seasonality of our business to gradually
diminish as our acquisition and account wagering initiatives evolve.

Real estate operations

   We characterize our real estate as follows:

  .  real estate at our racetracks to be used in our racing operations
     ("Revenue-Producing Racetrack Real Estate");

  .  excess real estate at our racetracks that we are considering developing
     with strategic partners ("Excess Racetrack Real Estate");

  .  real estate not at our racetracks that is either under development or
     that we are holding for development ("Development Real Estate");

  .  developed real estate not at our racetracks that is currently generating
     revenue for us ("Revenue-Producing Non-Racetrack Real Estate"); and

  .  non-core real estate that we hold for sale ("Non-Core Real Estate").

   As of December 31, 2001, the aggregate net book values of our real estate
and certain fixed assets were as follows:

<TABLE>
<CAPTION>
                                                                   (in millions)
                                                                   -------------
<S>                                                                <C>
Revenue-Producing Racetrack Real Estate...........................    $320.4(1)
Excess Racetrack Real Estate......................................      80.8
Development Real Estate...........................................      78.3
Revenue-Producing Non-Racetrack Real Estate.......................      56.7(1)
Non-Core Real Estate..............................................      38.5
                                                                      ------
  Total...........................................................    $574.7
                                                                      ======
</TABLE>
-------
(1) Includes fixed assets.

   Approximately 39.5% of our earnings before interest, taxes, depreciation
and amortization for the year ended December 31, 2001 resulted from gains from
sales of our Non-Core Real Estate. We expect these gains to be reduced to zero
over the next two years as the balance of our Non-Core Real Estate is sold. We
intend to continue to sell the balance of our Non-Core Real Estate in order to
provide capital to grow and enhance our racing business; accordingly, we are
currently servicing, improving and seeking zoning and other approvals for some
of this real estate in order to enhance its value on sale. See "Item 1.
Business--Risk Factors -- Risks Regarding Our Company. Our recent operating
income includes substantial gains from the sale of non-core real estate, which
sales will soon decrease and may cause our future operating income and cash
flow to decrease."

   Included in our Excess Racetrack Real Estate is land adjacent to three of
our largest racetracks, Santa Anita Park, Gulfstream Park and Golden Gate
Fields, totaling approximately 150 acres. We are considering a variety of
options with respect to this excess land, including entertainment and retail-
based developments that could be undertaken in conjunction with business
partners who would be expected to provide the necessary financing, as we do
not intend to devote our capital to the development of our Excess Racetrack
Real Estate.

   Our Development Real Estate is largely undeveloped, and includes: 481 acres
in Palm Beach County, Florida that are being used to develop a horse training
and boarding facility; approximately 1,050 acres of land in Ebreichsdorf,
Austria, located approximately 15 miles south of Vienna, on which we have
commenced development of a horse racetrack; approximately 110 acres of
undeveloped land in Oberwaltersdorf, Austria, also located approximately 15

                                      35
<PAGE>

miles south of Vienna; approximately 800 acres of undeveloped land in upstate
New York; and approximately 225 acres of land in northern California between
San Francisco and Sacramento.

   Our Revenue-Producing Non-Racetrack Real Estate consists of two golf
courses that we operate, Fontana Sports and Magna Golf Club. Fontana Sports,
which opened in 1997, is a semi-private sports facility located in
Oberwaltersdorf, Austria that includes an 18-hole golf course, a clubhouse
which contains a restaurant, pro shop, tennis club and a fitness facility. The
Magna Golf Club, which is in Aurora, Ontario, adjacent to our and Magna
International's headquarters approximately 30 miles north of Toronto, opened
in May 2001. We are currently marketing and accepting memberships in the Magna
Golf Club. The clubhouse is expected to be completed in the spring of 2002.
When completed, the clubhouse will contain a restaurant, a members' lounge and
a pro shop.

   Pursuant to an access arrangement effective as of March 1, 1999, Magna
International is paying us an annual fee of 2.5 million Euros to access the
Fontana Sports golf course and related recreational facilities for Magna
International-sponsored corporate and charitable events, as well as for
business development purposes. The access fee relating to Fontana Sports is
payable until March 1, 2004. Pursuant to an access agreement effective as of
January 1, 2001, Magna International is paying us an annual fee of Cdn. $5.0
million to access the Magna Golf Club. The access fee relating to the Magna
Golf Club is payable until December 31, 2003. The Fontana Sports and the Magna
Golf Club properties are both subject to rights of first refusal in favor of
Magna International if we decide to sell either of them.


Results of Operations

   The following is a discussion and comparison of our results of operations
and financial position for the years ended December 31, 2001, 2000 and 1999.

Year Ended December 31, 2001 Compared to December 31, 2000

Racetrack operations

   Revenues from our racetrack operations were $459.4 million in 2001,
compared to $355.2 million in 2000, an increase of $104.2 million or 29.3%.
This increase resulted primarily from having nine racetracks open for live
racing for some part of the year, compared with having only six open in 2000.
We acquired the operations of Bay Meadows on November 17, 2000, the operations
of MEC Pennsylvania, formerly Ladbroke Pennsylvania, which include the
operations of The Meadows, four OTB facilities and the Pennsylvania hub for
XpressBetTM, on April 5, 2001 and Multnomah Greyhound Park on October 26, 2001.
In addition, in July 2001, we leased a racetrack facility in Portland, Oregon
operating as Portland Meadows.

   In 2001, gross wagering revenues for our racetracks increased 30.8% to
$394.0 million, compared to $301.3 million in 2000, primarily relating to the
increase in live race days due to our acquisitions. Non-wagering revenues in
2001 increased 21.3% to $65.4 million, compared to $54.0 million in 2000.
Contributing to the increase in non-wagering revenues were increases in
revenues from parking, admissions and program sales related to the increase in
live race days due to our acquisitions and the addition of food and beverage
revenues from our Gulfstream Park facility, previously contracted out to
concession operators.

   Purses, awards and other increased by 28.1% to $243.4 million in 2001 from
$190.0 million in 2000, primarily due to the increase in gross wagering
revenues for the year. As a percentage of gross wagering revenue, purses,
awards and other decreased from 63.1% in 2000 to 61.8% in 2001. Operating
costs increased to $152.6 million in 2001 from $128.6 million in 2000. As a
percentage of total racetrack revenues, operating costs decreased from 36.2%
in 2000 to 33.2% in 2001. The reduction in operating costs as a percentage of
revenues was primarily the result of cost savings and other synergies realized
on the consolidation of racetrack operations during the year. Racetrack
general and administrative expenses were $31.1 million in 2001, compared to
$18.1 million in 2000. As a percentage of total racetrack revenue, general and
administrative expenses increased from 5.1% in 2000 to 6.8% in 2001. The
increase in general and administrative expenses as a percentage of total
racetrack revenue in 2001 was primarily related to the higher costs of the
corporate head office, where we have continued to add management expertise.
These costs were significantly lower during the formative stage of the Company
in 2000.


                                      36
<PAGE>

Real estate operations

   Revenues from real estate operations were $59.6 million in 2001, compared
to $58.3 million in 2000. Earnings before interest, taxes, depreciation and
amortization from real estate activities increased to $22.6 million in 2001
from $7.6 million in 2000. These increases are primarily attributable to the
sale of Non-Core Real Estate in 2001. In 2001, we had gains on the sale of
Non-Core Real Estate of $20.4 million, compared to gains of $7.0 million
during the same period in 2000. The increase in sales is consistent with
management's stated intention to provide capital for future growth by selling
our Non-Core Real Estate.

Predevelopment and other costs

   Predevelopment and other costs were $3.2 million in 2001, compared to $4.2
million in 2000. These costs include consultants' fees associated with
technology development, feasibility studies, construction designs, market
analyses, site models and alternative site investigations.

Depreciation and amortization

   Depreciation and amortization increased by $6.1 million to $26.2 million in
2001, compared to $20.1 million in 2000. The increase in depreciation and
amortization is primarily attributable to our Bay Meadows and MEC Pennsylvania
acquisitions and increased depreciation recorded on recent fixed asset
additions.

Interest income and expense

   Our net interest expense for the year ended December 31, 2001 increased
$2.5 million to $2.7 million from $0.2 million in 2000. The higher net
interest expense is attributable to the increase in long-term debt in the
fourth quarter of 2000 and the second quarter of 2001, related to the
financings of our Bay Meadows and MEC Pennsylvania acquisitions and the
purchase of 481 acres of land in Palm Beach County, Florida, offset by
interest capitalized on properties under development.


Income tax provision

   We recorded an income tax provision of $9.3 million on income before income
taxes of $22.8 million in 2001, compared to an income tax provision of $1.1
million on income before income taxes of $1.6 million in 2000. Our effective
income tax rate in 2001 was 41.0%, compared to 71.6% in 2000, primarily as a
result of the higher level of operating losses in certain subsidiaries in 2000
for which we did not recognize the tax benefit in that period.

Year Ended December 31, 2000 Compared to December 31, 1999

Racetrack operations

   Revenues from our racetrack operations were $355.2 million in 2000,
compared to $164.9 million in 1999, an increase of $190.3 million, or 115.4%.
The increase in revenues is primarily the result of the additional racetracks
acquired in 2000 and in late 1999. Revenues for 2000 reflect the full year of
live racing and simulcast operations for all the racetracks we owned during
the period except for Great Lakes Downs and Bay Meadows, revenues for which
are included from their dates of acquisition on February 29, 2000 and November
17, 2000, respectively. Revenues for 1999 reflect the full year operations of
Santa Anita Park and the operations of Gulfstream Park from September 1, 1999,
the date of acquisition, Thistledown and Remington Park from November 12,
1999, their date of acquisition, and Golden Gate Fields from December 10,
1999, the date of acquisition.

   Gross wagering revenues for our racetracks increased 125.0% to $301.3
million in 2000, compared to $133.9 million in 1999, primarily as a result of
our racetrack acquisitions. Non-wagering revenues in 2000 were $54.0 million,
compared to $31.0 million in 1999, an increase of 74.0%. The increase in non-
wagering revenues is lower than the increase in gross wagering revenues
because a portion of the gross wagering revenues is earned from simulcast
export activities, which do not provide our racetracks with customers that
would generate non-wagering revenues.

   Purses, awards and other increased 122.2%, from $85.5 million in 1999 to
$190.0 million in 2000. As a percentage of gross wagering revenue, purses,
awards and other decreased from 63.9% in 1999 to 63.1% in 2000. Operating
costs increased from $63.3 million in 1999 to $128.6 million in 2000. As a
percentage of total racetrack revenues, operating

                                      37
<PAGE>

costs decreased from 38.4% in 1999 to 36.2% in 2000, purses, awards and other
increased from 51.9% to 53.5%, and general and administrative expenses
increased from 3.6% to 5.1%. The reduction in operating costs as a percentage
of revenues is primarily the result of cost savings and other synergies
realized in connection with the consolidation of racetrack operations in 2000.
Racetrack general and administrative expenses increased to $18.1 million in
2000, compared to $6.0 million in 1999. The increase was primarily due to the
additional racetracks acquired in late 1999 and 2000, the significant costs
incurred to restructure our corporate office and other one-time costs,
primarily related to severance payments and the closing of our Santa Monica
office, of approximately $7.5 million in 2000.

Real estate operations

   Revenues from our real estate operations were $58.3 million in 2000,
compared to $21.9 million in 1999. Earnings before interest, taxes,
depreciation and amortization from real estate operations increased to $7.6
million in 2000 from $0.1 million in 1999. This increase was primarily
attributable to an increase in the amount of Non-Core Real Estate sold in 2000
compared to 1999. For the year ended December 31, 2000, we had gains of $7.0
million on the sale of real estate, compared to gains of $0.6 million in 1999.

Predevelopment and other costs

   Predevelopment and other costs related to both our racing operations and
our real estate operations were $4.2 million in 2000, compared to $0.5 million
in 1999, resulting from our increasing our predevelopment activities in 2000.

Depreciation and amortization

   Depreciation and amortization increased by $12.2 million to $20.1 million
for 2000, compared to $7.9 million in 1999. This increase reflects full year
depreciation and amortization charges related to Gulfstream Park, Thistledown,
Remington Park and Golden Gate Fields, all acquired in the second half of
1999, and partial year depreciation and amortization charges related to Great
Lakes Downs and Bay Meadows, both acquired in 2000.

Interest income and expense

   Our net interest expense for 2000 was $0.2 million, compared to net
interest income of $0.9 million for 1999. The higher net interest expense is
attributable to the increase in long-term debt in 2000 primarily related to
the financing of the Bay Meadows acquisition and the purchase of land in Palm
Beach County, Florida.

Income tax provision

   We recorded an income tax provision of $1.1 million on income before income
taxes of $1.6 million for 2000, compared to an income tax provision of $2.8
million on income before income taxes of $2.8 million for 1999. The decrease
in our income tax provision resulted primarily from the higher level of
operating losses in 1999 of some of our subsidiaries, for which we did not
recognize the tax benefit in that period.

Liquidity and Capital Resources

Year Ended December 31, 2001

Operating activities

   Cash provided by operations before changes in non-cash working capital
increased by $18.6 million from $7.7 million in 2000 to $26.3 million in 2001.
The increase was attributable to increases in net income, depreciation and
amortization and future income taxes, partially offset by additional gains
recorded on the disposal of Non-Core Real Estate. In 2001, cash invested in
non-cash working capital balances was $0.7 million.

Investing activities

   Cash used in investing activities in 2001 was $7.5 million, including
investments of $40.0 million in real estate property and fixed asset and other
asset additions and $24.0 million on the acquisitions of MEC Pennsylvania and
Multnomah Greyhound Park, partially offset by $56.5 million of proceeds
received on the sale of Non-Core Real Estate. In 2001, we invested $38.9
million in real estate and fixed asset additions, which included $6.4 million
for the

                                      38
<PAGE>

purchase of real estate, $14.8 million in upgrades to racetrack facilities,
normal ongoing maintenance items and other fixed assets, and $10.7 million in
the Magna Golf Club in Aurora, Ontario. The remaining $7.0 million of
expenditures related to racetrack property enhancements, infrastructure and
predevelopment costs on certain of our properties, and account wagering
activities, including the telephone and Internet and television distribution.

Financing activities

   Cash used for financing activities was $10.2 million in 2001. During 2001,
there were repayments of bank indebtedness of $7.6 million and of long-term
debt of $18.0 million, partially offset by the issuance of long-term debt of
$15.0 million related to our term loan facility and the issuance of share
capital of $0.5 million.

Year Ended December 31, 2000

Operating activities

   In 2000, we generated $7.7 million of cash flow from operations and
invested $23.8 million in working capital, resulting in a net use of cash of
$16.1 million for operating activities. During the comparable period in 1999,
we generated $5.9 million of cash flow from operations and our investment in
working capital decreased by $9.3 million, resulting in net cash from
operating activities of $15.2 million. The decrease in cash flow from
operations of $31.3 million from $15.2 million in 1999 to a use of cash of
$16.1 million in 2000 is primarily due to the need to fund working capital
deficiencies in that period related to acquisitions completed in the latter
part of 1999 and early 2000. Those funding requirements had been taken into
consideration in the negotiation of the purchase price of those acquisitions.

Investing activities

   Cash used in investing activities was $35.3 million for the year ended
December 31, 2000. During 2000, $24.1 million was used to acquire Bay Meadows
and $54.0 million was spent on real estate property and other fixed asset
additions. Expenditures on real estate included the purchase of 481 acres of
property in Palm Beach County, Florida, which we are currently developing into
a second horse boarding and training center, for $22.9 million, $22.5 million
on continued spending in connection with the Magna Golf Club in Aurora,
Ontario and $8.6 million on upgrades to racetrack facilities, normal ongoing
maintenance items and other fixed assets. Cash used in investing activities in
2000 was partially offset by proceeds of $33.4 million from the sale of Non-
Core Real Estate.

Financing activities

   Cash provided by financing activities for the year ended December 31, 2000
was $32.9 million. The cash provided by financing activities for 2000 relates
substantially to the issuance of long-term debt of $48.0 million primarily
related to the financing of the Bay Meadows acquisition and other real estate
additions, partially offset by the repayment of other long-term debt of $15.9
million. Included in these repayments was $6.8 million of debt assumed in
connection with the acquisition of Gulfstream Park and the repayment of a
portion of the promissory note issued in connection with the acquisition of
Golden Gate Fields.


Year Ended December 31, 1999

Operating activities

   Cash provided by operating activities in 1999 of $15.2 million is primarily
a result of cash generated by our Santa Anita Park operations of $13.3 million
and some of our other racetracks, offset by cash usages at some of our
racetracks and other operations.

Investing activities

   Cash used in investing activities in 1999 totaled $215.4 million and
included primarily $81.2 million to acquire Gulfstream Park, $14.2 million to
acquire Thistledown and Remington Park, $59.0 million to acquire Golden Gate
Fields and $6.4 million to acquire the operations and real estate assets of
San Luis Rey Downs. Also during 1999, $56.5 million was spent on real estate
property and other fixed asset additions, which included $45.0 million of

                                      39
<PAGE>

spending on a capital renovation program at Santa Anita Park, $8.0 million on
upgrades to our racetrack facilities, normal ongoing maintenance items and
other fixed assets, and $3.5 million on the development of the Magna Golf Club
in Aurora, Ontario.

Financing activities

   Throughout 1999, cash provided by financing activities was primarily
through contributions by Magna International. On September 1, 1999, Magna
International invested $250.0 million in cash by way of an equity
contribution.

Working Capital, Cash and Other Resources

   Our working capital (other than cash and cash equivalents) was ($22.6)
million at December 31, 2001, compared to ($11.1) million at December 31,
2000. The decreased investment in working capital (other than cash and cash
equivalents) was primarily a result of an increase in accounts payable and
other accruals of $11.6 million as a result of increased track level activity
and the increased number of tracks operating at December 31, 2001.

   At December 31, 2001, we had cash and cash equivalents of $39.2 million and
total shareholders' equity of $567.9 million.

   One of our subsidiaries, The Santa Anita Companies, Inc., is a party to a
secured term loan facility, which bears interest at rates ranging between the
U.S. prime rate and LIBOR plus 2.2% per annum. At December 31, 2001, $59.9
million was outstanding under this fully drawn term loan facility. The
maturity date of this facility has been extended to November 30, 2004. In
addition to this facility, as at December 31, 2001, we had approximately $26.0
million of other long-term debt with various terms and an unused and available
operating line of credit of $10.0 million.

   We believe that our current cash resources, cash flow from our racetrack
and real estate operations and cash available under our Santa Anita credit
facility described above will be sufficient to finance our operations and our
maintenance capital expenditure program during the next year. However, in
order to complete our acquisition and strategic capital programs, we will be
required to seek additional debt and/or equity financing through public or
private sources. If such additional financing is not available to us as needed
or on terms acceptable to us, we may not be able to complete our acquisition
or strategic capital programs.

Quantitative and Qualitative Disclosures About Market Risk

   Our primary exposure to market risk (or the risk of loss arising from
adverse changes in market rates and prices, including interest rates, foreign
currency exchange rates and commodity prices) is with respect to our
investments in companies with a functional currency other than the U.S.
dollar. Fluctuations in the U.S. dollar exchange rate relative to the Canadian
dollar and the Euro will result in fluctuations in shareholders' equity and
comprehensive income. We have generally not entered into derivative financial
arrangements for hedging purposes, and have not and will not enter into such
arrangements for speculative purposes.

   Additionally, we are exposed to interest rate risk. Interest rates are
sensitive to many factors, including governmental monetary and tax policies,
domestic and international economic and political considerations and other
factors that are beyond our control.

   Our future earnings, cash flows and fair values relating to financial
instruments are primarily dependent upon prevalent market rates of interest,
such as LIBOR and EURIBOR. Based on interest rates at December 31, 2001 and
our current credit facilities, a 1% increase or decrease in interest rates on
our line of credit and other variable rate borrowings would not materially
affect our annual future earnings and cash flows. Based on borrowing rates
currently available to us, the carrying amount of our debt approximates its
fair value.

Accounting Developments

   Under Staff Accounting Bulletin 74, we are required to disclose certain
information related to new accounting standards, which have not yet been
adopted due to delayed effective dates.


                                      40
<PAGE>

   In 2001, the Financial Accounting Standards Board issued Statements No. 141
("SFAS 141"), Business Combinations and No. 142 ("SFAS 142"), Goodwill and
Other Intangible Assets. SFAS 141 requires that all business combinations
initiated after June 30, 2001 be accounted for using the purchase method of
accounting. In addition, SFAS 141 provides new criteria to determine when an
acquired intangible asset should be recognized separately from goodwill.

   SFAS 142 requires the application of the non-amortization and impairment
rules for existing goodwill and other intangible assets that meet the criteria
for indefinite life beginning with fiscal years starting after December 15,
2001. In all cases, SFAS 142 must be adopted at the beginning of a fiscal
year.

   We will apply the new standards on accounting for goodwill and other
intangible assets beginning in our first quarter of 2002. Application of the
non-amortization provisions of SFAS 142 is expected to result in an increase
in income before taxes of approximately $8.0 million per year. Although we
will perform the required impairment tests on our intangible assets that meet
the criteria for indefinite life, as of January 1, 2002, we have not yet
determined the impact, if any, of this test on our consolidated financial
statements.

   During 2001, the Financial Accounting Standards Board issued Statement No.
143 ("SFAS 143") Accounting for Asset Retirement Obligations. SFAS 143
requires that legal obligations arising from the retirement of tangible long-
lived assets, including obligations identified by a company upon acquisition
and construction and during the operating life of a long-lived asset, be
recorded and amortized over the asset's useful life using a systematic and
rational allocation method. SFAS 143 is effective for fiscal years starting
after June 15, 2001.

   Also during 2001, the Financial Accounting Standards Board issued Statement
No. 144 ("SFAS 144"), Accounting for the Impairment or Disposal of Long-Lived
Assets. SFAS 144, which supercedes Statement No. 121 ("SFAS 121"), is
effective for fiscal years beginning after December 15, 2001. SFAS 144
provides guidance on differentiating between assets held for sale, and assets
held for disposal other than by sale. Consistent with SFAS 121, SFAS 144
continues to require the same approach for recognizing and measuring the
impairment of assets to be held and used.

   Although we are currently reviewing SFAS 143 and SFAS 144, we have not yet
determined the impact, if any, of these pronouncements on our consolidated
financial statements.

Environmental Regulation

   For a discussion of certain uncertainties that we face with respect to
environmental regulations, see "Item 1. Business--Our Business--Environmental
Matters".

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk

   Information required by this item is incorporated by reference to the
information contained in "Item 7. Management's Discussion and Analysis of
Results of Operations and Financial Position" of this Annual Report.

Item 8.  Financial Statements and Supplementary Data

   [To be inserted].


                                      41
<PAGE>

Item 8. Financial Statements and Supplementary Data

                       CONSOLIDATED FINANCIAL STATEMENTS

                               December 31, 2001

                           Magna Entertainment Corp.

                                      F-1
<PAGE>

                        REPORT OF INDEPENDENT AUDITORS

To the Shareholders of Magna Entertainment Corp.

We have audited the accompanying consolidated balance sheets of Magna
Entertainment Corp. as of December 31, 2001 and 2000, and the related
consolidated statements of operations and comprehensive income (loss), changes
in shareholders' equity and cash flows for the years ended December 31, 2001,
2000 and 1999. Our audits also included the financial statement schedule listed
in the Index at Item 14(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with United States generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Magna
Entertainment Corp. at December 31, 2001 and 2000, and the consolidated
results of its operations and its cash flows for the years ended December 31,
2001, 2000 and 1999, in conformity with United States generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken
as a whole, present fairly in all material respects the information set forth
therein.

Toronto, Canada                        /s/ Ernst & Young LLP
February 1, 2002

                                      F-2
<PAGE>

     CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

[U.S. dollars in thousands, except per share figures]
<TABLE>
------------------------------------------------------------------------------
<CAPTION>
                                                  Years ended December 31,
                                                 ----------------------------
                                           Note    2001      2000      1999
------------------------------------------------------------------------------
<S>                                       <C>    <C>       <C>       <C>

Revenues                                  11, 12
Racetrack
 Gross wagering                                  $393,981  $301,288  $133,924
 Non-wagering                                      65,430    53,961    31,022
Real estate
 Sale of real estate                               40,600    37,630     2,544
 Rental and other                                  19,050    20,684    19,370
------------------------------------------------------------------------------
                                                  519,061   413,563   186,860
------------------------------------------------------------------------------
Costs and expenses
Racetrack
 Purses, awards and other                         243,389   190,043    85,520
 Operating costs                                  152,561   128,612    63,302
 General and administrative                        31,092    18,117     5,987
Real estate
 Cost of real estate sold                          20,171    30,656     1,916
 Operating costs                                   15,789    18,928    18,071
 General and administrative                         1,130     1,133     1,833
Predevelopment and other costs                      3,240     4,245       454
Depreciation and amortization                      26,194    20,061     7,924
Interest expense (income), net                 7    2,682       215      (920)
------------------------------------------------------------------------------
                                                  496,248   412,010   184,087
------------------------------------------------------------------------------
Income before income taxes                    11   22,813     1,553     2,773
Income taxes                                   6    9,349     1,112     2,835
------------------------------------------------------------------------------
Net income (loss)                                  13,464       441       (62)
Other comprehensive loss
 Foreign currency translation adjustment           (9,062)   (8,938)   (7,493)
------------------------------------------------------------------------------
Comprehensive income (loss)                      $  4,402  $ (8,497) $ (7,555)
------------------------------------------------------------------------------
Earnings per share for Class A
 Subordinate Voting Stock,
 Class B Stock or Exchangeable Share:
  Basic                                        8 $   0.16  $   0.01  $   0.00
  Diluted                                      8 $   0.16  $   0.01  $   0.00
------------------------------------------------------------------------------
Average number of shares of Class A
 Subordinate Voting Stock,
 Class B Stock and Exchangeable Shares
 outstanding during the period [in
  thousands]:
  Basic                                        8   82,930    80,422    78,686
  Diluted                                      8   83,242    80,424    78,686
------------------------------------------------------------------------------
</TABLE>

                             See accompanying notes

                                      F-3
<PAGE>

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

[U.S. dollars in thousands]
<TABLE>
------------------------------------------------------------------------------
<CAPTION>
                                                   Years ended December 31,
                                                   --------------------------
                                              Note  2001     2000      1999
------------------------------------------------------------------------------
<S>                                           <C>  <C>      <C>      <C>
Cash provided from (used for)
OPERATING ACTIVITIES:
Net income (loss)                                  $13,464  $   441  $    (62)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities
 Depreciation and amortization                      26,194   20,061     7,924
 Future income taxes                            6    7,082   (5,802)   (1,295)
 Gain on disposal of real estate properties        (20,429)  (6,974)     (628)
------------------------------------------------------------------------------
                                                    26,311    7,726     5,939
------------------------------------------------------------------------------
Changes in non-cash working capital
 Restricted cash                                    (5,053)  (5,709)   (2,691)
 Accounts receivable                                (1,587)  (4,139)   (8,607)
 Prepaid expenses and other                          3,325    1,563    (2,952)
 Accounts payable                                      769   (5,114)    4,688
 Accrued salaries and wages                           (443)   3,172     1,653
 Customer deposits                                   2,181       --        --
 Other accrued liabilities                           3,278   (6,840)   11,931
 Income taxes payable                               (5,023)  (6,146)    6,042
 Deferred revenue                                    1,871     (622)     (777)
------------------------------------------------------------------------------
                                                      (682) (23,835)    9,287
------------------------------------------------------------------------------
                                                    25,629  (16,109)   15,226
------------------------------------------------------------------------------
INVESTMENT ACTIVITIES:
Acquisition of businesses, net of cash          2  (23,951) (24,117) (160,812)
Real estate property additions                     (31,009) (46,493)  (47,430)
Fixed asset additions                               (7,853)  (7,535)   (9,017)
Other assets (additions) disposals                  (1,208)   9,493      (683)
Proceeds on real estate sold to Magna          12   12,436    6,147        --
Proceeds on disposal of real estate                 44,039   27,250     2,544
------------------------------------------------------------------------------
                                                    (7,546) (35,255) (215,398)
------------------------------------------------------------------------------
FINANCING ACTIVITIES:
(Decrease) increase in bank indebtedness            (7,609)     759    (2,722)
Issuance of long-term debt                          15,000   48,000        --
Repayment of long-term debt                        (18,026) (15,853)   (3,278)
Issuance of share capital                              476       --        --
Net contribution by Magna                               --       --   244,458
------------------------------------------------------------------------------
                                                   (10,159)  32,906   238,458
------------------------------------------------------------------------------
Effect of exchange rate changes on cash and
 cash equivalents                                     (688)    (226)      (68)
------------------------------------------------------------------------------
Net increase (decrease) in cash and cash
 equivalents during the year                         7,236  (18,684)   38,218
Cash and cash equivalents, beginning of year        31,976   50,660    12,442
------------------------------------------------------------------------------
Cash and cash equivalents, end of year             $39,212  $31,976  $ 50,660
------------------------------------------------------------------------------
</TABLE>

                             See accompanying notes

                                      F-4
<PAGE>

                          CONSOLIDATED BALANCE SHEETS

[U.S. dollars in thousands]
<TABLE>
-----------------------------------------------------------------
<CAPTION>
                                                December 31,
                                             -------------------
                                       Note    2001       2000
-----------------------------------------------------------------
<S>                                   <C>    <C>        <C>
                             ASSETS
-----------------------------------------------------------------
Current assets:
 Cash and cash equivalents                   $  39,212  $ 31,976
 Restricted cash                                18,782    13,461
 Accounts receivable                            33,101    33,399
 Prepaid expenses and other                      5,162     7,984
-----------------------------------------------------------------
                                                96,257    86,820
-----------------------------------------------------------------
Real estate properties, net                3   542,006   536,181
-----------------------------------------------------------------
Fixed assets, net                          4    32,671    32,084
-----------------------------------------------------------------
Other assets, net                          5   179,665   117,561
-----------------------------------------------------------------
Future tax assets                          6     3,657     8,393
-----------------------------------------------------------------
                                             $ 854,256  $781,039
-----------------------------------------------------------------
             LIABILITIES AND SHAREHOLDERS' EQUITY
-----------------------------------------------------------------
Current liabilities:
 Bank indebtedness                           $      --  $  7,609
 Accounts payable                               46,036    39,433
 Accrued salaries and wages                      7,171     7,614
 Customer deposits                               2,181        --
 Other accrued liabilities                      17,418    14,140
 Income taxes payable                      6     1,312     1,111
 Long-term debt due within one year        7    18,133    12,754
 Deferred revenue                                5,531     3,660
-----------------------------------------------------------------
                                                97,782    86,321
-----------------------------------------------------------------
Long-term debt                             7    67,768    63,343
-----------------------------------------------------------------
Other long-term liabilities               14     2,576       234
-----------------------------------------------------------------
Future tax liabilities                     6   118,276    89,353
-----------------------------------------------------------------

Commitments and contingencies         12, 13

Shareholders' equity:
Class A Subordinate Voting Stock           8   157,633   100,770
Exchangeable Shares                        8    16,800    57,937
Class B Stock                              8   394,094   394,094
Contributed surplus                       12     7,290     1,352
Retained earnings (deficit)                     11,474    (1,990)
Accumulated comprehensive loss             9   (19,437)  (10,375)
-----------------------------------------------------------------
                                               567,854   541,788
-----------------------------------------------------------------
                                              $854,256  $781,039
-----------------------------------------------------------------
</TABLE>

                             See accompanying notes

On behalf of the Board:

         /s/ J. Terrence Lanni                     /s/ Jim McAlpine
                Director                                Director


                                      F-5
<PAGE>

           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
[U.S. dollars in thousands]
------------------------------------------------------------------------------------------------------------
                                        Class A
                                      Subordinate                                    Retained   Accumulated
                          Magna's Net   Voting    Exchangeable Class B   Contributed Earnings  Comprehensive
                          Investment     Stock       Shares     Stock      Surplus   (Deficit)     Loss
------------------------------------------------------------------------------------------------------------
<S>                       <C>         <C>         <C>          <C>       <C>         <C>       <C>
Magna's net investment
 at December 31, 1998      $302,502    $     --     $    --    $     --    $   --     $    --    $     --
Activity for the three-
 months ended March 31,
 1999:
Net income                    9,325
Net distribution to
 Magna                       (5,542)
Other comprehensive loss     (5,045)
------------------------------------------------------------------------------------------------------------
Magna's net investment
 at March 31, 1999, the
 date at which the net
 investment was fixed       301,240
Activity for the seven-
 month period ended on
 the date of the
 Reorganization,
 November 5, 1999:
Net loss                     (6,956)
Cash contribution by
 Magna                      250,000
Other comprehensive loss     (1,011)
------------------------------------------------------------------------------------------------------------
Magna's net investment
 at November 5, 1999,
 prior to the
 Reorganization             543,273
Completion of the
 Reorganization as
 described in the
 principles of
 consolidation and
 resulting allocation to
 capital stock and net
 future tax liabilities
 of $3,818                 (543,273)                            539,455
------------------------------------------------------------------------------------------------------------
Magna's net investment
 at November 5, 1999,
 after completion of the
 Reorganization                  --                             539,455
Activity for the two-
 months ended December
 31, 1999:
Net loss                                                                               (2,431)
Other comprehensive loss                                                                           (1,437)
Conversion of Class B
 Stock to Exchangeable
 Shares                                             110,000    (110,000)
Issue of shares of Class
 A Subordinate Voting
 Stock for acquisitions                  11,500
------------------------------------------------------------------------------------------------------------
Balances at December 31,
 1999                            --      11,500     110,000     429,455                (2,431)     (1,437)
Activity for the year
 ended December 31,
 2000:
Net income                                                                                441
Net contribution by
 Magna                                                                      1,352
Other comprehensive loss                                                                           (8,938)
Conversion of Class B
 Stock to Class A
 Subordinate Voting
 Stock                                   35,361                 (35,361)
Issue of Class A
 Subordinate Voting
 Stock for an
 acquisition                              1,846
Conversion of
 Exchangeable Shares to
 Class A Subordinate
 Voting Stock                            52,063     (52,063)
------------------------------------------------------------------------------------------------------------
Balances at December 31,
 2000                            --     100,770      57,937     394,094     1,352      (1,990)    (10,375)
Activity for the year
 ended December 31,
 2001:
Net income                                                                             13,464
Net contribution by
 Magna                                                                      5,938
Other comprehensive loss                                                                           (9,062)
Issue of Class A
 Subordinate Voting
 Stock for acquisitions                  15,250
Issue of Class A
 Subordinate Voting
 Stock under the Long-
 term Incentive Plan                        476
Conversion of
 Exchangeable Shares to
 Class A Subordinate
 Voting Stock                            41,137     (41,137)
------------------------------------------------------------------------------------------------------------
Balances at December 31,
 2001                      $     --    $157,633     $16,800    $394,094    $7,290     $11,474    $(19,437)
------------------------------------------------------------------------------------------------------------
</TABLE>

                             See accompanying notes

                                      F-6
<PAGE>

                             Magna Entertainment Corp.
                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

        (all amounts in U.S. dollars unless otherwise noted and all
          tabular amounts in thousands, except per share figures)

1.SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

   These consolidated financial statements have been prepared in U.S. dollars
following United States generally accepted accounting principles ("U.S.
GAAP"). These policies are also in conformity, in all material respects, with
Canadian generally accepted accounting principles, except as described in Note
15 to these consolidated financial statements.

Principles of Consolidation

   Magna Entertainment Corp. (the "Company") was formed to hold and operate
all of the non-automotive related assets (including non-automotive real
estate) owned by Magna International Inc. and its subsidiaries ("Magna"). Such
assets were reorganized under the Company in various stages, and the capital
structure was established (see Note 8), over the period from March 31, 1999,
Magna's announcement date of the planned formation of the Company, to November
5, 1999, the completion date of the reorganization (the "Reorganization").

   The consolidated financial statements prior to November 5, 1999 present the
historic financial position and operating results of the assets and
liabilities reorganized under the Company on a carve out basis from Magna. To
give effect to the continuity of Magna's interest in the assets and
liabilities of the Company, all assets and liabilities have been recorded in
the consolidated balance sheets at Magna's book values and have been included
from the date they were acquired by Magna. All significant intercompany
balances and transactions have been eliminated.

   The assets and liabilities reorganized under the Company include the
following:

Racetrack Operations

..  All the outstanding capital stock of The Santa Anita Companies, Inc.
   ("SAC"). On December 10, 1998, SAC (formerly 234567 Development Inc., a
   wholly owned inactive subsidiary of Magna) acquired all of the outstanding
   capital stock of the Los Angeles Turf Club, Inc. ("LATC") which operates
   the Santa Anita Park racetrack in California. SAC also acquired 305 acres
   of related real estate.

..  All the outstanding capital stock of Gulfstream Park Racing Association,
   Inc. ("Gulfstream") from the date of acquisition, September 1, 1999.
   Gulfstream operates the Gulfstream Park racetrack, which is located on
   approximately 255 acres of land in the cities of Hallandale and Aventura,
   Florida.

..  All the outstanding capital stock of the Pacific Racing Association and
   Ladbroke Landholdings, Inc. ("Golden Gate") from the date of acquisition,
   December 10, 1999. Golden Gate operates the Golden Gate Fields racetrack,
   which is located on approximately 181 acres of land in the cities of Albany
   and Berkeley, California.

..  All the outstanding capital stock of Thistledown, Inc. ("Thistledown") and
   Remington Park, Inc. ("Remington") from the date of acquisition, November
   12, 1999. These companies operate the Thistledown and Remington Park
   racetracks, which are located on approximately 120 acres of land in the
   city of North Randall, Ohio and 370 acres of land in the city of Oklahoma
   City, Oklahoma, respectively. The Remington Park property is leased under
   an agreement that extends through 2013, with options to renew for five 10-
   year periods.

..  The real estate assets of SLRD Thoroughbred Training Center, Inc. ("SLRD").
   SLRD, which operates a horse boarding and training center located near San
   Diego, California, owns approximately 202 acres of real estate.

Real Estate Operations

..  All the outstanding capital stock of Fontana Beteiligungs AG (formerly
   Magna Vierte Beteiligungs AG) ("FVB"). Effective January 1, 1999, the
   assets and liabilities of Magna Liegenschaftsverwaltungs GmbH ("MLV") were
   split into two companies. Under the split, all of the assets, liabilities,
   operations and employees of MLV were transferred to FVB except for two real
   estate properties and an equivalent amount of debt financing

                                      F-7
<PAGE>

                           Magna Entertainment Corp.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

          (all amounts in U.S. dollars unless otherwise noted and all
            tabular amounts in thousands, except per share amounts)

   due to Magna. The two real estate properties not transferred to FVB were,
   from their original acquisition date by MLV, leased back to Magna on a
   triple net lease basis such that Magna was responsible for the operating
   costs related to the properties. The assets and operations of MLV
   transferred to FVB include a golf course and adjacent residential
   development in Oberwaltersdorf, Austria.

..  All the outstanding capital stock of MEC Projektentwicklungs AG (formerly
   Magna Projektentwicklungs AG) which owns all of the outstanding capital
   stock of MEC Grundstucksentwicklungs GmbH (formerly Magna
   Grundstucksentwicklungs GmbH) (collectively "MGE"). MGE's primary asset is
   a parcel of land held for development in Ebreichsdorf, Austria.

..  Land and improvements in Aurora, Ontario (the "Aurora lands") which are
   subject to a conditional sale agreement by Magna to the Company. The
   conditional sale agreement is subject to the successful severance of the
   affected properties.

..  Various other parcels of land and improvements (the "vacant land
   portfolio") and other non-automotive properties, including any incidental
   operations associated with such properties. One of these properties is
   subject to a conditional sale agreement.

..  Rights to acquire, from an affiliated company (see Note 12), approximately
   200 acres of land and improvements in Aurora, Ontario. An 18-hole golf
   course was subsequently constructed and a clubhouse is currently under
   construction on the property known as the Magna Golf Club.

   The consolidated statements of operations and comprehensive income (loss)
include the following: (a) the historic revenues and expenses of MLV adjusted
to exclude the rental revenues earned, depreciation expense and interest on
debt due to Magna all related to the two MLV properties not transferred to
FVB; (b) the historic revenues and expenses of MGE; (c) the historic revenues
and expenses (which are limited to incidental costs of ownership the most
significant of which is property taxes), net of amounts capitalized, related
to the Magna Golf Club, the Aurora lands and the vacant land portfolio and
other non-automotive properties transferred to the Company; and (d) the
historic revenues and expenses of all acquisitions from their date of purchase
(see Note 2).

   Prior to the Reorganization, the administrative costs associated with
managing the Aurora lands, the vacant land portfolio and other non-automotive
properties were borne by Magna's real estate management division (the
"Division"). The Division was also responsible for administering Magna's
automotive related real estate portfolio, none of which has been transferred
to the Company. The administrative costs of the Division include personnel
costs (salary, benefits, travel), administration office costs and other
overheads. Further, the Company has paid no fees to Magna for services
provided (including accounting, tax, legal, treasury services and other
incidental costs associated with establishing the Company and its operations).
An allocation of the Division and Magna's historic administrative costs has
been included in these consolidated financial statements based on management's
best estimate of the cost of the services provided.

   Prior to the Reorganization, interest expense as presented in the
consolidated statements of operations and comprehensive income (loss) includes
interest on external debt and amounts due to Magna (included in Magna's net
investment) held by SAC, LATC, Gulfstream, Golden Gate, Thistledown,
Remington, SLRD, FVB, and MGE. No interest has been charged on Magna's net
investment in the Magna Golf Club, the Aurora lands and the vacant land
portfolio and the other non-automotive properties transferred to the Company.
Under the Reorganization, the transfer of these assets by Magna to the Company
is by way of an equity investment.

   Income taxes for U.S. legal entities have been recorded based on a
consolidated tax sharing agreement using the liability method of tax
allocation. Income taxes with respect to the other components of the
consolidated statements of operations and comprehensive income (loss) have
been recorded at statutory rates based on income before income taxes as
included in the consolidated statements of operations and comprehensive income
(loss) as though such components were separate tax paying entities. Given that
the revenues and expenses of this latter component of the consolidated
statements of operations and comprehensive income (loss) have been prepared on
a carve out basis from Magna, the

                                      F-8
<PAGE>

                           Magna Entertainment Corp.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

          (all amounts in U.S. dollars unless otherwise noted and all
            tabular amounts in thousands, except per share amounts)

resulting income taxes payable and deferred income tax assets and liabilities
have been included in Magna's net investment, prior to November 5, 1999.

   Over the period prior to the completion of the Reorganization on November
5, 1999, Magna's net investment also included Magna's net long-term debt
investments (subsequently converted into equity investments as part of the
Reorganization) and equity investments in the Company created as part of the
Reorganization, the accumulated net income (loss) of the Company,
contributions by, less distributions to Magna and the currency translation
adjustment.

   As a result of the basis of presentation described above, the consolidated
statements of operations and comprehensive income (loss) prior to the
Reorganization may not necessarily be indicative of the revenues and expenses
that would have resulted had the Company historically operated as a stand-
alone entity.

Cash and Cash Equivalents

   Cash and cash equivalents include cash on account, demand deposits and
short-term investments with original maturities of less than three months at
acquisition and excludes restricted cash which represents segregated cash
accounts held by the Company on behalf of others, primarily horse owners.

Impairment of Long-Lived Assets

   The Financial Accounting Standards Board Statement No. 121 ("SFAS 121")
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of" establishes accounting standards for the impairment of
long-lived assets, including real estate properties, fixed and other assets.
The Company evaluates impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.

   For long-lived assets not available for sale, the Company assesses
periodically whether there are indicators of impairment. If such indicators
are present, the Company assesses the recoverability of the long-lived assets
by determining whether the carrying value of such assets can be recovered
through projected undiscounted cash flows. If the sum of expected future cash
flows, undiscounted and without interest charges, is less than net book value,
the excess of the net book value over the estimated fair value, based upon
using discounted future cash flows, is charged to operations in the period in
which such impairment is determined by management.

   When long-lived assets are identified by the Company as available for sale,
if necessary, the carrying value is reduced to the estimated fair value less
costs of disposal. Fair value is determined based upon discounted cash flows
of the assets at rates deemed reasonable for the type of property and
prevailing market conditions, appraisals and, if appropriate, current
estimated net sales proceeds from pending offers.

Real Estate Properties

Revenue-Producing Racetrack Real Estate

   Revenue-producing racetrack real estate is valued at cost which includes
acquisition and development costs. Development costs include all direct
construction costs, capitalized interest and indirect costs wholly
attributable to development. Buildings are depreciated on a straight-line
basis over 40 years.

Excess Racetrack Real Estate

   Excess racetrack real estate is valued at cost which includes acquisition
and development costs. Development costs include all direct construction
costs, capitalized interest and indirect costs wholly attributable to
development.


                                      F-9
<PAGE>

                           Magna Entertainment Corp.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

          (all amounts in U.S. dollars unless otherwise noted and all
            tabular amounts in thousands, except per share amounts)

Development Real Estate

   Development real estate is valued at cost which includes acquisition and
development costs. Development costs include all direct construction costs,
capitalized interest and indirect costs wholly attributable to development.

Revenue-Producing Non-Racetrack Real Estate

   Revenue-producing non-racetrack real estate is valued at cost which
includes acquisition and development costs. Development costs include all
direct construction costs, capitalized interest and indirect costs wholly
attributable to development. Buildings are depreciated on a straight-line
basis over 40 years.

Non-Core Real Estate

   Non-core real estate includes properties available for sale and residential
development real estate. Properties available for sale are valued at the lower
of cost, which includes acquisition and development costs, and fair value less
costs of disposal. The Company evaluates the lower of cost and fair value less
costs of disposal whenever events or changes in circumstance indicate possible
impairment. Residential development real estate is valued at cost which
includes acquisition and construction costs. Construction costs include all
direct construction costs, capitalized interest and indirect costs wholly
attributable to construction.

Fixed Assets

   Fixed assets are recorded at cost, less accumulated depreciation.
Depreciation is provided on a straight-line basis over the estimated useful
lives of the fixed assets as follows: machinery and equipment over 3 to 15
years and furniture and fixtures over 5 to 7 years.

   Government grants and tax credits received for capital expenditures are
reflected as a reduction of the cost of the related asset.

Racing Licenses and Goodwill

   Racing licenses represent the value attributed to licenses to conduct race
meets acquired through the Company's acquisition of racetracks. Goodwill
represents the excess of the purchase price of a subsidiary company over the
fair value of the underlying net identifiable assets arising on acquisition.
Racing licenses and goodwill are amortized on a straight-line basis over 20
years.

Revenue Recognition

   The Company records operating revenues associated with horse racing on a
daily basis, except for season admissions which are recorded ratably over the
racing season. Wagering revenues are recognized gross of purses, stakes and
awards and pari-mutuel wagering taxes. The costs relating to these amounts are
shown as "Purses, awards and other" in the accompanying statement of
operations and comprehensive income (loss).

   Revenues from the sale of residential development inventory are recognized
in two phases. First, revenue related to sale of land is recognized when the
title to the land passes to the purchaser. The remaining revenue is recognized
when the unit is constructed by the independent contractor and the collection
of the sale proceeds is reasonably assured and all other significant
conditions are met. Properties which have been sold, but for which these
criteria have not been satisfied, are included in residential development real
estate.

   Golf course annual membership fee revenues are recognized into revenue
ratably over the applicable season. Non-refundable golf membership initiation
fees are deferred and amortized over the expected membership life.


                                     F-10
<PAGE>

                           Magna Entertainment Corp.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

          (all amounts in U.S. dollars unless otherwise noted and all
            tabular amounts in thousands, except per share amounts)

Deferred Revenues

   Deferred revenues associated with racetrack operations consist primarily of
prepaid box seats, admission tickets and parking, which are recognized into
revenue ratably over the period of the related race meet.

Seasonality of Revenues

   The Company's racetrack business is seasonal in nature. The Company's
racetrack revenues and operating results for any quarter will not be
indicative of the revenues and operating results for the year. A
disproportionate share of annual revenues and net earnings are earned in the
first quarter of each year.

Advertising

   Costs incurred for producing advertising associated with horse racing are
generally expensed when the advertising program commences. Costs incurred with
respect to promotions for specific live race days are expensed on the
applicable race day.

Foreign Exchange

   Assets and liabilities of self-sustaining foreign operations are translated
using the exchange rate in effect at the year-end and revenues and expenses
are translated at the average rate during the year. Exchange gains or losses
on translation of the Company's net equity investment in these operations are
deferred in Magna's net investment prior to November 5, 1999. The accumulated
exchange gain or loss resulting from translating each foreign subsidiary's
financial statements from its functional currency to U.S. dollars is included
in comprehensive income (loss) in equity starting November 6, 1999. The
appropriate amounts of exchange gains or losses included in accumulated
comprehensive income (loss) are reflected in income when there is a sale or
partial sale of the Company's investment in these operations or upon a
complete or substantially complete liquidation of the investment.

Income Taxes

   The Company follows the liability method of tax allocation for accounting
for income taxes. Under the liability method of tax allocation, future tax
assets and liabilities are determined based on differences between financial
reporting and tax bases of assets and liabilities, and are measured using
enacted tax rates and laws that will be in effect when the differences are
expected to reverse.

Stock-based Compensation

   The Financial Accounting Standards Board Statement No. 123 ("SFAS 123"),
Accounting for Stock-Based Compensation provides companies an alternative to
accounting for stock-based compensation as prescribed under APB Opinion No. 25
("APB 25"). SFAS 123 encourages, but does not require companies to recognize
an expense for stock-based awards based on their fair value at the date of
grant. SFAS 123 allows companies to continue to follow existing accounting
rules (intrinsic value method under APB 25) provided that pro-forma
disclosures are made of what net income and earnings per share would have been
had the fair value method been used. The Company accounts for stock-based
compensation under APB 25 and provides pro-forma disclosure required by SFAS
123.

Earnings per Share

   Basic earnings per share is computed by dividing net income (loss) by the
weighted average number of Class A Subordinate Voting Stock, Class B Stock and
Exchangeable Shares outstanding during the year. Diluted earnings per share
reflects the assumed conversion of all dilutive securities using the treasury
stock method.


                                     F-11
<PAGE>

                           Magna Entertainment Corp.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

          (all amounts in U.S. dollars unless otherwise noted and all
            tabular amounts in thousands, except per share amounts)

Use of Estimates

   The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
that affect the amounts reported and disclosed in the consolidated financial
statements. Actual results could differ from those estimates.

Impact of Recently Issued Accounting Standards

   Under Staff Accounting Bulletin 74, the Company is required to disclose
certain information related to new accounting standards, which have not yet
been adopted due to delayed effective dates.

   In 2001, the Financial Accounting Standards Board issued Statements No. 141
("SFAS 141"), Business Combinations and No. 142 ("SFAS 142"), Goodwill and
Other Intangible Assets. SFAS 141 requires that all business combinations
initiated after June 30, 2001 be accounted for using the purchase method of
accounting. In addition, SFAS 141 provides new criteria to determine when an
acquired intangible asset should be recognized separately from goodwill.

   SFAS 142 requires the application of the non-amortization and impairment
rules for existing goodwill and other intangible assets that meet the criteria
for indefinite life beginning with fiscal years starting after December 15,
2001. In all cases, SFAS 142 must be adopted at the beginning of a fiscal
year.

   The Company will apply the new standards on accounting for goodwill and
other intangible assets beginning in its first quarter of 2002. Application of
the non-amortization provisions of SFAS 142 is expected to result in an
increase in income before income taxes of approximately $8.0 million per year.
Although the Company will perform the required impairment tests on its
intangible assets that meet the criteria for indefinite life, as of January 1,
2002, it has not yet determined the impact, if any, of this test on its
consolidated financial statements.

   During 2001, the Financial Accounting Standards Board issued Statement No.
143 ("SFAS 143"), Accounting for Asset Retirement Obligations. SFAS 143
requires that legal obligations arising from the retirement of tangible long-
lived assets, including obligations identified by a company upon acquisition
and construction and during the operating life of a long-lived asset, be
recorded and amortized over the asset's useful life using a systematic and
rational allocation method. SFAS 143 is effective for fiscal years starting
after June 15, 2001.

   Also during 2001, the Financial Accounting Standards Board issued Statement
No. 144 ("SFAS 144"), Accounting for the Impairment or Disposal of Long-Lived
Assets. SFAS 144, which supersedes Statement No. 121 ("SFAS 121"), is
effective for fiscal years beginning after December 15, 2001. SFAS 144
provides guidance on differentiating between assets held for sale, and assets
held for disposal other than by sale. Consistent with SFAS 121, SFAS 144
continues to require the same approach for recognizing and measuring the
impairment of assets to be held and used.

   Although the Company is currently reviewing SFAS 143 and SFAS 144, it has
not determined the impact, if any, of these pronouncements on its consolidated
financial statements.

Reclassification

   Certain comparative figures have been reclassified to conform to the
current year's method of presentation.

                                     F-12
<PAGE>

                           Magna Entertainment Corp.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

          (all amounts in U.S. dollars unless otherwise noted and all
            tabular amounts in thousands, except per share amounts)

2.BUSINESS ACQUISITIONS

   The following acquisitions were accounted for using the purchase method:

  [a] Acquisitions in the year ended December 31, 2001

  MEC Pennsylvania

  On April 5, 2001, the Company completed the acquisition of Ladbroke Racing
  Pennsylvania, Inc. and Sport Broadcasting, Inc. (collectively the "Ladbroke
  Companies" or "MEC Pennsylvania") for a total purchase price, including
  transaction costs, of $46.6 million, net of cash acquired of $7.0 million.
  The total purchase price was satisfied by cash payments of $20.1 million,
  the issuance of two promissory notes totaling $13.25 million which bear
  interest at 6% with the first note in the amount of $6,625,000 maturing on
  the first anniversary of the closing date and the second note in the amount
  of $6,625,000 maturing on the second anniversary of the closing date and by
  the issuance of 3,178,297 shares of Class A Subordinate Voting Stock. The
  Ladbroke Companies include account wagering operations, The Meadows harness
  racetrack and four off-track betting facilities located around the
  Pittsburgh, Pennsylvania area.

  Multnomah Greyhound Park

  On October 26, 2001, the Company acquired all the outstanding capital stock
  of MKC Acquisition Co., operating as Multnomah Greyhound Park, for a total
  purchase price, including transaction costs, of $5.9 million, net of cash
  acquired of $0.3 million. Of the total purchase price, $3.9 million was
  paid in cash and the balance of $2.0 million through the issuance of
  330,962 shares of Class A Subordinate Voting Stock. Multnomah Greyhound
  Park is located in Portland, Oregon and operates a greyhound dog racing and
  pari-mutuel horse wagering business.

   The purchase price of these 2001 acquisitions, which may be adjusted
further, has been allocated to the assets and liabilities acquired as follows:

<TABLE>
------------------------------------------------------------------------------
<CAPTION>
                                                            Multnomah
                                                   MEC      Greyhound
                                               Pennsylvania   Park     Total
------------------------------------------------------------------------------
<S>                                            <C>          <C>       <C>
Non-cash working capital deficit                 $ (6,514)   $ (292)  $(6,806)
Real estate properties and fixed assets            19,947       292    20,239
Other assets                                       60,587     9,602    70,189
Future taxes                                      (27,448)   (3,723)  (31,171)
------------------------------------------------------------------------------
Net assets acquired and total purchase price,
 net of cash acquired                            $ 46,572    $5,879   $52,451
------------------------------------------------------------------------------
The purchase consideration for these
 acquisitions is as follows:
Cash                                             $ 20,072    $3,879   $23,951
Issuance of two promissory notes                   13,250        --    13,250
Issuance of Class A Subordinate Voting Stock       13,250     2,000    15,250
------------------------------------------------------------------------------
                                                 $ 46,572    $5,879   $52,451
------------------------------------------------------------------------------
</TABLE>

    [b] Acquisitions in the year ended December 31, 2000

  Great Lakes Downs

  On February 29, 2000, the Company completed the acquisition of Great Lakes
  Downs, Inc. ("Great Lakes Downs") for a total purchase price, including
  transaction costs, of $1.8 million, net of cash acquired of $0.08 million.
  The total purchase price of $1.8 million was satisfied by the issuance of
  267,416 shares of Class A Subordinate Voting Stock. Great Lakes Downs, Inc.
  owns and operates the Great Lakes Downs racetrack, which is located on
  approximately 85 acres of land in the city of Muskegon, Michigan.

                                     F-13
<PAGE>

                           Magna Entertainment Corp.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

          (all amounts in U.S. dollars unless otherwise noted and all
            tabular amounts in thousands, except per share amounts)

  Bay Meadows

  On November 17, 2000, the Company completed the acquisition of Bay Meadows
  Operating Co., LLC and Bay Meadows Catering (collectively "Bay Meadows")
  for a total cash purchase price, including transaction costs, of $24.1
  million, net of cash acquired of $0.09 million. Bay Meadows Operating Co.,
  LLC operates the Bay Meadows racetrack, which is located in the city of San
  Mateo, California. The property on which the Bay Meadows racetrack is
  located is leased under an agreement that expires on the later of December
  31, 2002 or the final date of any horse racing meet in progress on December
  31, 2002, but in no event later than March 31, 2003.

   The purchase price of these 2000 acquisitions, has been allocated to the
assets and liabilities acquired as follows:

<TABLE>
-----------------------------------------------------------------------------
<CAPTION>
                                                    Great
                                                    Lakes     Bay
                                                    Downs   Meadows  Total
-----------------------------------------------------------------------------
<S>                                                <C>      <C>     <C>
Non-cash working capital (deficit)                 $(3,370) $   701 $ (2,669)
Real estate properties                               7,688       --    7,688
Fixed assets                                         2,399    1,587    3,986
Other assets                                         1,340   21,829   23,169
Debt due within one year                              (447)      --     (447)
Long-term debt                                      (5,840)      --   (5,840)
-----------------------------------------------------------------------------
Net assets acquired and total purchase price, net
 of cash acquired                                  $ 1,770  $24,117 $ 25,887
-----------------------------------------------------------------------------
The purchase consideration for these acquisitions
 is as follows:
Cash                                                                $ 24,117
Issuance of Class A Subordinate Voting Stock                           1,770
-----------------------------------------------------------------------------
                                                                    $ 25,887
-----------------------------------------------------------------------------
</TABLE>

    [c] Acquisitions in the year ended December 31, 1999

  Gulfstream Park

  On September 1, 1999, the Company acquired all the outstanding capital
  stock of Gulfstream for a cash purchase price, including transaction costs,
  of $81.2 million, net of cash acquired of $8.0 million. Gulfstream operates
  the Gulfstream Park racetrack, which is located on approximately 255 acres
  of land in the cities of Hallandale and Aventura, Florida.

  Golden Gate Fields

  On December 10, 1999, the Company completed the acquisition of Golden Gate
  for a total purchase price, including transaction costs, of $83.4 million,
  net of cash acquired of $1.2 million. Of the total purchase price, $59.1
  million was paid in cash, $7.0 million through the issuance of 1,012,195
  shares of Class A Subordinate Voting Stock and the balance of $17.3
  million, representing the discounted value of a promissory note payable,
  was satisfied by way of an interest-free promissory note payable, $10.0
  million of which matures on the first anniversary of the date of closing
  and $5.0 million on each of the second and third anniversaries. Golden Gate
  operates the Golden Gate Fields racetrack, which is located on
  approximately 181 acres of land in the cities of Albany and Berkeley,
  California.

                                     F-14
<PAGE>

                           Magna Entertainment Corp.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

          (all amounts in U.S. dollars unless otherwise noted and all
            tabular amounts in thousands, except per share amounts)

  Thistledown and Remington Park

  On November 12, 1999, the Company completed the acquisitions of Thistledown
  and Remington for a total purchase price, including transaction costs, of
  $18.7 million, net of cash acquired of $5.8 million. Of the total purchase
  price, $14.2 million was paid in cash and the balance of $4.5 million
  through the issuance of 650,695 shares of Class A Subordinate Voting Stock.
  These companies operate the Thistledown and Remington Park racetracks,
  which are located on approximately 120 acres of land in the city of North
  Randall, Ohio and 370 acres of leased land in the city of Oklahoma City,
  Oklahoma, respectively. The Remington Park lease extends through 2013, with
  options to renew for five 10-year periods.

  San Luis Rey Downs

  In May 1999, the Company acquired the real estate assets of SLRD for cash
  consideration of $6.4 million. SLRD which operates a horse boarding and
  training center located in San Diego, California, owns approximately 202
  acres of real estate.

   The purchase price of these 1999 acquisitions, has been allocated to the
assets and liabilities acquired as follows:

<TABLE>
-----------------------------------------------------------------------------
<CAPTION>
                                                Thistledown  San
                                       Golden       and      Luis
                            Gulfstream  Gate     Remington   Rey
                               Park    Fields      Park     Downs    Total
-----------------------------------------------------------------------------
<S>                         <C>        <C>      <C>         <C>    <C>
Non-cash working capital
 deficit                     $(3,978)  $(4,372)   $(3,739)  $   -- $ (12,089)
Real estate properties        81,700    81,971     17,683    6,375   187,729
Fixed assets                   1,643     2,046        432       --     4,121
Other assets                  62,543    31,614      7,243       --   101,400
Debt due within one year      (6,800)       --         --       --    (6,800)
Future taxes                 (53,904)  (27,888)    (2,927)      --   (84,719)
-----------------------------------------------------------------------------
Net assets acquired and
 total purchase price, net
 of cash acquired            $81,204   $83,371    $18,692   $6,375 $ 189,642
-----------------------------------------------------------------------------
The purchase consideration
 for these acquisitions is
 as follows:
Cash                                                               $ 160,812
Long-term debt                                                        17,330
Issuance of Class A
 Subordinate Voting Stock                                             11,500
-----------------------------------------------------------------------------
                                                                   $ 189,642
-----------------------------------------------------------------------------
</TABLE>

    [d] Pro-forma Impact

  If the acquisitions completed during the years ended December 31, 2001 and
  2000 had occurred on January 1, 2000, the Company's unaudited pro-forma
  revenue would have been $548.0 million and $564.2 million for the years
  ended December 31, 2001 and 2000, respectively, and unaudited pro-forma net
  income would have been $13.6 million and $6.1 million for the years ended
  December 31, 2001 and 2000, respectively.

                                     F-15
<PAGE>

                           Magna Entertainment Corp.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

          (all amounts in U.S. dollars unless otherwise noted and all
            tabular amounts in thousands, except per share amounts)

3. REAL ESTATE PROPERTIES

Real estate properties consist of:
<TABLE>
---------------------------------------------------------------------
<CAPTION>
                                                    December 31,
                                                    2001      2000
---------------------------------------------------------------------
<S>                                               <C>       <C>
Revenue-producing racetrack real estate
Cost
 Land and improvements                             143,446   136,792
 Buildings                                         155,256   131,592
 Construction in progress                            5,580    15,019
---------------------------------------------------------------------
                                                   304,282   283,403
Accumulated depreciation
 Buildings                                         (12,650)   (4,983)
---------------------------------------------------------------------
Revenue-producing racetrack real estate, net       291,632   278,420
---------------------------------------------------------------------
Excess racetrack real estate                        80,839    80,839
---------------------------------------------------------------------
Development real estate
Cost
 Land and improvements                              74,728    67,358
 Construction in progress                            3,549     1,195
---------------------------------------------------------------------
Development real estate, net                        78,277    68,553
---------------------------------------------------------------------
Revenue-producing non-racetrack real estate
Cost
 Land and improvements                              24,892    24,903
 Buildings                                          30,449    23,284
 Construction in progress                            1,444        --
---------------------------------------------------------------------
                                                    56,785    48,187
Accumulated depreciation
 Buildings                                          (3,974)   (3,402)
---------------------------------------------------------------------
Revenue-producing non-racetrack real estate, net    52,811    44,785
---------------------------------------------------------------------
Non-core real estate
 Land and improvements                              28,705    46,409
 Buildings                                          14,190    19,758
---------------------------------------------------------------------
                                                    42,895    66,167
Accumulated depreciation
 Buildings                                          (4,448)   (2,583)
---------------------------------------------------------------------
Non-core real estate, net                           38,447    63,584
---------------------------------------------------------------------
                                                  $542,006  $536,181
---------------------------------------------------------------------
</TABLE>

The classifications of properties above represent the Company's current
intentions with respect to future use (e.g. development or sale).

                                      F-16
<PAGE>

                           Magna Entertainment Corp.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

          (all amounts in U.S. dollars unless otherwise noted and all
            tabular amounts in thousands, except per share amounts)

4. FIXED ASSETS

Fixed assets consist of:
<TABLE>
---------------------------------------------------------------------
<CAPTION>
                                                     December 31,
                                                    2001      2000
---------------------------------------------------------------------
<S>                                                <C>      <C>
Revenue-producing racetrack fixed assets
Cost
 Machinery and equipment                           $37,008  $ 34,571
 Furniture and fixtures                             10,785     6,591
---------------------------------------------------------------------
                                                    47,793    41,162
Accumulated depreciation
 Machinery and equipment                           (17,489)  (12,340)
 Furniture and fixtures                             (1,510)       --
---------------------------------------------------------------------
Revenue-producing racetrack fixed assets, net       28,794    28,822
---------------------------------------------------------------------
Revenue-producing non-racetrack fixed assets
Cost
 Machinery and equipment                           $ 2,232  $  2,585
 Furniture and fixtures                              4,481     3,143
---------------------------------------------------------------------
                                                     6,713     5,728
Accumulated depreciation
 Machinery and equipment                            (1,009)   (1,182)
 Furniture and fixtures                             (1,827)   (1,284)
---------------------------------------------------------------------
Revenue-producing non-racetrack fixed assets, net    3,877     3,262
---------------------------------------------------------------------
                                                   $32,671  $ 32,084
---------------------------------------------------------------------
</TABLE>

5. OTHER ASSETS

Other assets consist of:
<TABLE>
--------------------------------------------------
<CAPTION>
                                 December 31,
                                 2001      2000
--------------------------------------------------
<S>                            <C>       <C>
Racing licenses
 Cost                          $184,550  $114,058
 Accumulated amortization       (14,195)   (6,199)
--------------------------------------------------
                                170,355   107,859
Mortgage receivable and other     8,574     8,927
Goodwill, net                       736       775
--------------------------------------------------
                               $179,665  $117,561
--------------------------------------------------
</TABLE>

                                      F-17
<PAGE>

                           Magna Entertainment Corp.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

          (all amounts in U.S. dollars unless otherwise noted and all
            tabular amounts in thousands, except per share amounts)

6.INCOME TAXES

  [a] The provision for income taxes differs from the expense that would be
      obtained by applying the United States federal statutory rate as a
      result of the following:

<TABLE>
---------------------------------------------------------------
<S>                                       <C>     <C>    <C>
                                       Years ended December 31,
                                            2001    2000   1999
---------------------------------------------------------------
Expected provision:
Federal statutory income tax rate (35%)   $7,985  $  544 $  971
State income tax, net of federal benefit     571      84    234
Losses not benefited                         262     203  1,512
Foreign rate differentials                   546     242     96
Other                                        (15)     39     22
---------------------------------------------------------------
Income tax provision                      $9,349  $1,112 $2,835
---------------------------------------------------------------
</TABLE>

   At December 31, 2001, the Company had United States federal and Austrian
income tax loss carry-forwards totaling approximately $15.0 million. Of the
$15.0 million in loss carry-forwards at December 31, 2001, $9.3 million have
no expiration date and the remainder, which are not available until 2005,
expire as follows:

<TABLE>
----------------------------------------------------------------
<CAPTION>
Year:
----------------------------------------------------------------
<S>                                                       <C>
2010                                                      $1,100
2016                                                       1,900
2017                                                         500
2018                                                       2,200
----------------------------------------------------------------
                                                          $5,700
----------------------------------------------------------------
</TABLE>

  [b] The details of income (loss) before income taxes by jurisdiction are as
      follows:

<TABLE>
----------------------------------------------------------------
<S>                                         <C>     <C>     <C>
                                        Years ended December 31,
                                            2001    2000    1999
----------------------------------------------------------------
United States                            $  (203) $ (605) $4,506
Foreign                                   23,016   2,158  (1,733)
----------------------------------------------------------------
                                         $22,813  $1,553  $2,773
----------------------------------------------------------------
</TABLE>

  [c] The details of the income tax provision (benefit) are as follows:

<TABLE>
----------------------------------------------------------------
<S>                                      <C>    <C>     <C>
                                        Years ended December 31,
                                            2001    2000    1999
----------------------------------------------------------------
Current provision
 United States                            $1,550  $   --  $2,178
 Foreign                                     717   3,160   1,952
----------------------------------------------------------------
                                           2,267   3,160   4,130
----------------------------------------------------------------
Future provision
 United States                              (531)   (323)   (345)
 Foreign                                   7,613  (1,725)   (950)
----------------------------------------------------------------
                                           7,082  (2,048) (1,295)
----------------------------------------------------------------
                                          $9,349  $1,112  $2,835
----------------------------------------------------------------
</TABLE>

                                     F-18
<PAGE>

                           Magna Entertainment Corp.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

          (all amounts in U.S. dollars unless otherwise noted and all
            tabular amounts in thousands, except per share amounts)

  [d] Future income taxes have been provided on temporary differences, which
      consist of the following:

<TABLE>
-----------------------------------------------------------------------------
<S>                                                  <C>     <C>     <C>
                                                     Years ended December 31,
                                                       2001     2000    1999
-----------------------------------------------------------------------------
Tax deferral on sale of real estate                 $10,448  $    --  $   --
Amortization of purchase accounting fair value
 increments, not allowed for tax purposes           $(2,732) $(2,174) $ (522)
Tax gain in excess of book gain on disposal of real
 estate property                                     (2,382)    (751)   (640)
Tax gain on revaluation of foreign real estate           --       --    (310)
Tax benefit of loss carry-forwards                     (205)    (557) (1,512)
Utilization of loss carry-forwards                    1,200    1,231     177
Other                                                   761       --      --
Increase in valuation allowance                          (8)     203   1,512
-----------------------------------------------------------------------------
                                                    $ 7,082  $(2,048) $(1,295)
----------------------------------------------------------------------------
</TABLE>

  [e] Future tax assets and liabilities at December 31, 2001 consist of the
      following temporary differences:

<TABLE>
-----------------------------------------------------------------------------
<S>                                                          <C>      <C>
                                                              December 31,
                                                             2001     2000
-----------------------------------------------------------------------------
Assets
Real estate properties tax value in excess of book value    $12,985  $17,800
Tax benefit of loss carryforwards
 Pre-acquisition                                              1,995    2,614
 Post-acquisition                                             3,626    2,936
-----------------------------------------------------------------------------
                                                             18,606   23,350
Valuation allowance
 Valuation allowance against tax benefit of loss
  carryforwards
  Pre-acquisition                                            (1,995)  (1,445)
  Post-acquisition                                           (2,960)  (2,582)
Valuation allowance against tax benefit of real estate
 properties in excess of book value                          (9,994) (10,930)
-----------------------------------------------------------------------------
Future tax assets                                           $ 3,657  $ 8,393
-----------------------------------------------------------------------------
Liabilities
 Real estate properties book basis in excess of tax basis  $ 52,892  $52,041
 Other assets book basis in excess of tax basis              56,497   34,690
 Other                                                        8,887    2,622
-----------------------------------------------------------------------------
 Future tax liabilities                                    $118,276  $89,353
-----------------------------------------------------------------------------
</TABLE>

  [f] Income taxes paid in cash were $6.7 million for the year ended December
      31, 2001 (for the year ended December 31, 2000--$3.2 million; for the
      year ended December 31, 1999--$2.9 million).

                                      F-19
<PAGE>

                           Magna Entertainment Corp.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

          (all amounts in U.S. dollars unless otherwise noted and all
            tabular amounts in thousands, except per share amounts)

7.DEBT AND COMMITMENTS

  [a] The Company's long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                                  December 31,
                                                                   2001    2000
--------------------------------------------------------------------------------
<S>                                                               <C>     <C>
A term loan facility, bearing interest at LIBOR [London Inter-
 bank Overnight Rate] plus 2.2% per annum (4.325% at December
 31, 2001) with a maturity date of November 30, 2004, (extended
 during the year from November 30, 2002 to November 30, 2004)
 secured by a deed of trust against Santa Anita Park racetrack
 and related real estate. At December 31, 2001, the term loan is
 fully drawn and is repayable in monthly principal amounts of
 $350 thousand until maturity.                                   $59,850 $48,000

Non-interest bearing promissory note (imputed interest of
 8.675%), final installment of $5.0 million which matures in
 December 2002.                                                    4,599   8,833

Promissory note bearing interest at 6% per annum, payable in two
 equal installments of $6.625 million which mature in each of
 April 2002 and April 2003.                                       13,250      --

Bank term line of credit denominated in Euros, bearing interest
 at EURIBOR plus 0.625% per annum (4.147% at December 31,
 2001).The term line of credit is repayable in annual
 installments of $2.6 million (Euros 2.9 million) due in July of
 2002, 2003 and 2004. The Company has provided two first
 mortgages on real estate properties as security for this
 facility.                                                         7,695   8,192

Mortgages outstanding with various Austrian banks and local
 governments repaid in the year.                                      --   5,392

Mortgages payable to a United States commercial bank repaid in
 the year.                                                            --   4,877

Other loans to various subsidiaries from various banks, and city
 governments, including mortgage loans, equipment loans and a
 term loan, with interest rates ranging from 4% to 9%.               507     803
--------------------------------------------------------------------------------
                                                                  85,901  76,097
Less due within one year                                          18,133  12,754
--------------------------------------------------------------------------------
                                                                 $67,768 $63,343
--------------------------------------------------------------------------------
</TABLE>

The Company is in compliance with all of its debt agreements and related
covenants.

  [b] Future principal repayments on long-term debt at December 31, 2001 are
      as follows:

<TABLE>
-------------------------------------------------------------------------------
<S>                                                                     <C>
2002                                                                    $18,133
2003                                                                     13,425
2004                                                                     54,054
2005                                                                         39
2006                                                                         39
Thereafter                                                                  211
-------------------------------------------------------------------------------
                                                                        $85,901
-------------------------------------------------------------------------------
</TABLE>

  [c] At December 31, 2001, the Company has an unused and available operating
      line of credit of $10.0 million secured by a guarantee from SAC
      supported by a pledge of the stock of LATC.

                                     F-20
<PAGE>

                           Magna Entertainment Corp.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

          (all amounts in U.S. dollars unless otherwise noted and all
            tabular amounts in thousands, except per share amounts)

  [d] Interest expense and interest income include:

<TABLE>
<CAPTION>
                                    December 31,
                                 2001     2000    1999
----------------------------------------------------------
<S>                             <C>      <C>     <C>
Interest cost, gross
 External debt                  $ 8,893  $ 3,263  $ 1,308
 Magna debt                          --       --      701
----------------------------------------------------------
                                  8,893    3,263    2,009
Less: Interest capitalized        1,657       --      343
----------------------------------------------------------
Interest expense                $ 7,236  $ 3,263  $ 1,666
----------------------------------------------------------
Interest income
 External                       $(4,554) $(3,048) $  (271)
 Internal                            --       --   (2,315)
----------------------------------------------------------
                                $(4,554) $(3,048) $(2,586)
----------------------------------------------------------
Interest expense (income), net  $ 2,682  $   215  $  (920)
----------------------------------------------------------
</TABLE>

Interest capitalized relates to real estate properties under development.

Interest paid in cash for the year ended December 31, 2001 was $7.4 million
(for the year ended December 31, 2000 - $2.5 million; for the year ended
December 31, 1999 - $2.5 million).

8.CAPITAL STOCK

  [a] The Company's authorized, issued and outstanding capital stock is as
      follows:

      Class A Subordinate Voting Stock with a par value of $0.01 per share
      [authorized - 310,000,000] have the following attributes:

      [i]   Each share is entitled to one vote per share at all meetings of
            stockholders.
      [ii]  Each share shall participate equally as to dividends with each
            share of Class B Stock and each Exchangeable Share.

      Class B Stock with a par value of $0.01 per share [authorized -
      90,000,000] have the following attributes:

      [i]   Each share is entitled to 20 votes per share at all meetings of
            stockholders.
      [ii]  Each share shall participate equally as to dividends with each
            share of Class A Subordinate Voting Stock and each Exchangeable
            Share.
      [iii] Each share may be converted at any time into a fully-paid share of
            Class A Subordinate Voting Stock.

      In the event that the Class A Subordinate Voting Stock, Class B Stock or
      Exchangeable Shares are subdivided or consolidated, the other classes
      shall be similarly changed to preserve the relative position of each
      class.

  [b] On November 5, 1999, Magna completed the Reorganization described in
      the Principles of Consolidation section set out under "Significant
      Accounting Policies" in Note 1 to these consolidated financial
      statements. In addition, the Company's capital structure was
      established. As of November 5, 1999, 78,535,328 shares of Class B Stock
      and nil shares of Class A Subordinate Voting Stock were issued and
      outstanding.

      On December 30, 1999, a further amendment to the Company's capital
      structure was effected. On this date, MEC Holdings (Canada) Inc., a
      wholly owned Canadian subsidiary of the Company, amended its Articles of
      Incorporation to create a new class of shares, referred to as
      Exchangeable Shares.

      Each Exchangeable Share may be exchanged by the holder for one share of
      Class A Subordinate Voting Stock of the Company. The Exchangeable Shares
      entitle holders to dividends and other rights economically

                                     F-21
<PAGE>

                           Magna Entertainment Corp.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

          (all amounts in U.S. dollars unless otherwise noted and all
            tabular amounts in thousands, except per share amounts)

    equivalent to shares of the Company's Class A Subordinate Voting Stock
    and, through a Voting and Exchange Agreement between Magna, the Company
    and MEC Holdings (Canada) Inc., to vote at meetings of stockholders of
    the Company. The Board of Directors of MEC Holdings (Canada) Inc. has
    the right to redeem all of the outstanding Exchangeable Shares provided
    that written notice of this determination is provided 60 days in
    advance. The redemption price at such time will be satisfied by the
    delivery of one share of Class A Subordinate Voting Stock of the Company
    for each Exchangeable Share. The Exchangeable Shares, which have no par
    value [authorized - unlimited], have the following attributes:

    [i]   Each share is entitled, by the holder thereof instructing Magna to
          exercise one vote attached to a share of the Company's Class A
          Subordinate Voting Stock or Class B Stock held by Magna, to one vote
          per share at all meetings of stockholders of the Company, but are
          non-voting with respect to MEC Holdings (Canada) Inc.
    [ii]  Each share shall participate equally as to dividends with each
          share of Class A Subordinate Voting Stock and Class B Stock.
    [iii] Each share may be converted at any time into a fully-paid share of
          Class A Subordinate Voting Stock.

    On December 30, 1999, 14,823,187 shares of the Company's Class B Stock
    held by Magna were redeemed for $110.0 million. On this same date,
    $110.0 million was invested by Magna in MEC Holdings (Canada) Inc. in
    return for 14,823,187 Exchangeable Shares. All of the common shares of
    MEC Holdings (Canada) Inc. continue to be held by the Company. Given
    that the Exchangeable Shares are economically equivalent to shares of
    Class A Subordinate Voting Stock of the Company, the Exchangeable Shares
    are included in shareholders' equity in the Company's consolidated
    balance sheet.

    [c] Changes in the Class A Subordinate Voting Stock, Class B Stock and
        Exchangeable Shares for the years ended December 31, 2001, 2000 and
        1999 are shown in the following table (number of shares in this
        table are expressed in whole numbers and have not been rounded to
        the nearest thousand):

<TABLE>
<CAPTION>
                               Class A
                          Subordinate Voting    Exchangeable
                                Stock              Shares            Class B Stock
                          ------------------ -------------------  ---------------------
                          Number of  Stated  Number of   Stated    Number of    Stated
                            shares    value    shares     value     shares      value
----------------------------------------------------------------------------------------
<S>                       <C>        <C>     <C>         <C>      <C>          <C>
Issued and outstanding
 at December 31, 1998             --  $    --         --  $    --           --  $     --
Issued on completion of
 the Reorganization on
 November 5, 1999                 --       --         --       --   78,535,328   539,455
Conversion of Class B
 Stock to Exchangeable
 Shares                           --       -- 14,823,187  110,000  (14,823,187) (110,000)
Issued on acquisitions
 of subsidiaries           1,662,890   11,500         --       --           --        --
----------------------------------------------------------------------------------------
Issued and outstanding
 at December 31, 1999      1,662,890   11,500 14,823,187  110,000   63,712,141   429,455
Conversion of Class B
 Stock to Class A
 Subordinate Voting
 Stock                     5,246,085   35,361                       (5,246,085)  (35,361)
Issued on acquisition of
 subsidiary                  267,416    1,846
Conversion of
 Exchangeable Shares to
 Class A Subordinate
 Voting Stock              7,015,756   52,063 (7,015,756) (52,063)
----------------------------------------------------------------------------------------
Issued and outstanding
 at December 31, 2000     14,192,147  100,770  7,807,431   57,937   58,466,056   394,094
Conversion of
 Exchangeable Shares to
 Class A Subordinate
 Voting Stock              5,544,059   41,137 (5,544,059) (41,137)
Issued on acquisition of
 subsidiaries              3,509,259   15,250
Issued under the Long-
 term Incentive Plan          78,094      476
----------------------------------------------------------------------------------------
Issued and outstanding
 at December 31, 2001     23,323,559 $157,633  2,263,372  $16,800   58,466,056  $394,094
----------------------------------------------------------------------------------------
</TABLE>

                                     F-22
<PAGE>

                           Magna Entertainment Corp.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

          (all amounts in U.S. dollars unless otherwise noted and all
            tabular amounts in thousands, except per share amounts)

  [d] Basic and diluted earnings per share of Class A Subordinate Voting
      Stock, Exchangeable Shares or Class B Stock for the year ended December
      31, 2001 have been calculated using 82,930,007 and 83,241,974 shares,
      respectively. Both amounts have been calculated using the weighted
      average number of shares outstanding during the year. Diluted earnings
      per share include the dilution effect of options to purchase 311,967
      shares.

      Basic and diluted earnings per share of Class A Subordinate Voting Stock,
      Exchangeable Shares or Class B Stock for the year ended December 31, 2000
      have been calculated using 80,421,795 and 80,424,138 shares, respectively.
      Both amounts have been calculated using the weighted average number of
      shares outstanding during the year. Diluted earnings per share include the
      dilution effect of options to purchase 2,343 shares.

      Basic and diluted loss per share of Class A Subordinate Voting Stock,
      Exchangeable Shares or Class B Stock for the year ended December 31, 1999
      have been calculated using 78,686,300 shares. The total amount is
      comprised of 63,712,141 shares of Class B Stock and 14,823,187
      Exchangeable Shares being the number of each class outstanding after the
      completion of all capital transactions under the Reorganization, plus
      150,972 shares of Class A Subordinate Voting Stock representing the
      weighted average number of shares issued on acquisitions of subsidiaries
      during the year.

      The following is a summary of the elements used in calculating basic and
      diluted earnings per share:

<TABLE>
<CAPTION>
                                            Years ended December 31,
                                              2001    2000   1999
-------------------------------------------------------------------
<S>                                          <C>     <C>    <C>
Net income (loss)                            $13,464 $  441 $  (62)
-------------------------------------------------------------------
Weighted average shares outstanding           82,930 80,422 78,686
Net effect of dilutive stock options             312      2     --
-------------------------------------------------------------------
Diluted weighted average shares outstanding   83,242 80,424 78,686
-------------------------------------------------------------------
Earnings per Share:
 Basic                                       $  0.16 $ 0.01 $ 0.00
-------------------------------------------------------------------
 Diluted                                     $  0.16 $ 0.01 $ 0.00
-------------------------------------------------------------------
</TABLE>

  [e] On November 15, 2001, the Company filed an amendment to its
      registration statement offering 20 million shares of Class A
      Subordinate Voting Stock for sale.

9. CURRENCY TRANSLATION ADJUSTMENT

   Unrealized translation adjustments arise on the translation to U.S. dollars
of assets and liabilities of the Company's self-sustaining foreign operations.
During the year ended December 31, 2001, the Company incurred unrealized
currency translation losses of $9.1 million from the weakening of the Euro and
the Canadian dollar against the U.S. dollar (an unrealized loss of $8.9
million for the year ended December 31, 2000; an unrealized loss of $7.5
million for the year ended December 31, 1999).

10.FINANCIAL INSTRUMENTS

  [a] Fair Value

    The methods and assumptions used to estimate the fair value of financial
    instruments are described below. Management has estimated the fair value
    of its financial instruments using available market information and
    appropriate valuation methodologies. Considerable judgement is required
    in interpreting market data to develop estimates of fair value.
    Accordingly, estimated fair values are not necessarily indicative of the
    amounts that could be realized in current market exchanges.

    Cash and cash equivalents, accounts receivable, bank indebtedness,
    accounts payable, income taxes payable, customer deposits and accrued
    liabilities

                                     F-23
<PAGE>

                           Magna Entertainment Corp.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

          (all amounts in U.S. dollars unless otherwise noted and all
            tabular amounts in thousands, except per share amounts)

    Due to the short period to maturity of these instruments, the carrying
    values as presented in the consolidated balance sheets are reasonable
    estimates of fair value.

    Long-term debt

    The fair value of the Company's long-term debt, based on current rates
    for debt with similar terms and maturities, is not materially different
    from its carrying value.

  [b] Credit Risk

    The Company's financial assets that are exposed to credit risk consist
    primarily of cash and cash equivalents and accounts receivable.

    Cash and cash equivalents, which consist of short-term investments,
    including commercial paper, are only invested in entities with an
    investment grade credit rating. Credit risk is further reduced by
    limiting the amount which is invested in any one government or
    corporation.

    The Company, in the normal course of business, settles wagers for other
    racetracks and is thereby exposed to credit risk. However, receivables
    are generally not a significant portion of the Company's total assets
    and are comprised of a large number of accounts.

  [c] Interest Rate Risk

    The Company is not exposed to significant interest rate risk due to the
    short-term maturity of its monetary current assets and current
    liabilities and its current levels of long-term debt balances.

11.SEGMENT INFORMATION

Operating Segments

   The Company's reportable segments reflect how the Company is organized and
managed by senior management. The Company has two operating segments:
racetrack and real estate operations. The racetrack segment includes the
operation of eight thoroughbred racetracks, a standardbred racetrack, a
greyhound track and a horse boarding and training center. In addition, the
racetrack segment includes off-track betting ("OTB") facilities and a national
account wagering business. The real estate segment includes the operation of
two golf courses and related facilities, a residential housing development
adjacent to our golf course located in Austria and other real estate holdings.

   The accounting policies of each segment are the same as those described in
Note 1 to these consolidated financial statements. The following summary
presents key information by operating segment.

<TABLE>
<CAPTION>
                                          Year ended December 31, 2001
------------------------------------------------------------------------
                                         Racetrack  Real Estate
                                         Operations Operations   Total
------------------------------------------------------------------------
<S>                                      <C>        <C>         <C>
Revenues                                  $459,411    $59,650   $519,061
------------------------------------------------------------------------
Income before income taxes                   1,308     21,505     22,813
------------------------------------------------------------------------
Real estate properties and fixed asset
 additions                                  24,343     14,519     38,862
------------------------------------------------------------------------
Real estate properties, fixed and other
 assets, net                               611,798    142,544    754,342
Current assets                                                    96,257
Future tax assets                                                  3,657
------------------------------------------------------------------------
Total assets                                                    $854,256
------------------------------------------------------------------------
</TABLE>

                                     F-24
<PAGE>

                           Magna Entertainment Corp.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

          (all amounts in U.S. dollars unless otherwise noted and all
            tabular amounts in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                          Year ended December 31, 2000
------------------------------------------------------------------------
                                         Racetrack  Real Estate
                                         Operations Operations   Total
------------------------------------------------------------------------
<S>                                      <C>        <C>         <C>
Revenues                                  $355,249    $58,314   $413,563
------------------------------------------------------------------------
Income (loss) before income taxes           (3,863)     5,416      1,553
------------------------------------------------------------------------
Real estate properties and fixed asset
 additions                                  46,128      7,900     54,028
------------------------------------------------------------------------
Real estate properties, fixed and other
 assets, net                               522,096    163,730    685,826
Current assets                                                    86,820
Future tax assets                                                  8,393
------------------------------------------------------------------------
Total assets                                                    $781,039
------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
                                          Year ended December 31, 1999
------------------------------------------------------------------------
                                         Racetrack  Real Estate
                                         Operations Operations   Total
------------------------------------------------------------------------
<S>                                      <C>        <C>         <C>
Revenues                                  $164,946    $21,914   $186,860
------------------------------------------------------------------------
Income (loss) before income taxes            5,418     (2,645)     2,773
------------------------------------------------------------------------
Real estate properties and fixed asset
 additions                                  48,199      8,248     56,447
------------------------------------------------------------------------
Real estate properties, fixed and other
 assets, net                               463,032    202,724    665,756
Current assets                                                    88,230
Future tax assets                                                  6,367
------------------------------------------------------------------------
Total assets                                                    $760,353
------------------------------------------------------------------------
</TABLE>
Geographic Segments

Revenues by geographic segment of the Company are as follows:
<TABLE>
------------------------------------------------------------------------
<CAPTION>
                                                Years ended December 31,
                                                  2001     2000     1999
------------------------------------------------------------------------
<S>                                          <C>       <C>      <C>
United States                                $ 463,958 $362,749 $167,262
Canada                                           3,393   24,545       --
Europe                                          51,710   26,269   19,598
------------------------------------------------------------------------
                                             $ 519,061 $413,563 $186,860
------------------------------------------------------------------------
</TABLE>

Real estate properties, fixed and other assets, net of accumulated depreciation
and amortization, by geographic segment are as follows:

<TABLE>
------------------------------------------------------------------------
<CAPTION>
                                                Years ended December 31,
                                                  2001     2000     1999
------------------------------------------------------------------------
<S>                                          <C>       <C>      <C>
United States                                $ 629,029 $539,047 $483,117
Canada                                          59,201   58,967   75,070
Europe                                          66,112   87,812  107,569
------------------------------------------------------------------------
                                             $ 754,342 $685,826 $665,756
------------------------------------------------------------------------
</TABLE>

12.TRANSACTIONS WITH RELATED PARTIES

  [a] During the year ended December 31, 2001, the Company sold two non-core
      real estate properties located in Milton, Ontario to Magna for total
      proceeds of approximately $12.4 million. The gain on the sale of the
      properties of approximately $6.0 million, net of tax, is reported as a
      contribution to equity.

                                      F-25
<PAGE>

                           Magna Entertainment Corp.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
          (all amounts in U.S. dollars unless otherwise noted and all
            tabular amounts in thousands, except per share amounts)

  [b] During the year ended December 31, 2001, the Company entered into an
      access agreement with Magna for its use of the golf course and the
      clubhouse meeting, dining and other facilities in Aurora, Ontario. The
      agreement, which expires on December 31, 2003, stipulates an annual fee
      of $3.1 million (Cdn $5.0 million). During the year ended December 31,
      2001, $2.7 million has been recognized in revenue related to this
      agreement.

  [c] Properties under and held for development includes $17.4 million which
      represents the book value of the Aurora lands transferred to the
      Company by Magna under a conditional sale agreement. The conditional
      sale agreement is subject to the successful severance of the affected
      properties. If severance is not obtained within a specified period such
      that Magna retains ownership of the Aurora lands, Magna must return
      $17.4 million to the Company with interest. Prior to completion of the
      conditional sale, the property is being leased by the Company from
      Magna for a nominal amount.

  [d] Properties available for sale includes $2.5 million, which represents
      the book value of vacant land, transferred to the Company by Magna
      under a conditional sale agreement. The conditional sale agreement is
      subject to the successful severance of the affected property. If
      severance is not obtained within a specified period such that Magna
      retains ownership of the property, Magna must return $2.5 million to
      the Company with interest. Prior to completion of the conditional sale,
      the property is being leased by the Company from Magna for a nominal
      amount.

  [e] During the year ended December 31, 2000, the Company completed the
      purchase from a company associated with members of the family of
      Mr. F. Stronach, the Chairman of the Board and a Director of the Company
      and the Chairman of the Board of Magna, and Mr. A. Stronach, the Vice-
      President, Corporate Development and a Director of the Company,
      approximately 200 acres of land and improvements in Aurora, Ontario for
      a purchase price of approximately $11.0 million. This land is adjacent
      to land currently owned by Magna and other land subject to a
      conditional sale agreement between Magna and the Company. The purchase
      agreement for the land was originally entered into by Magna during the
      five-month period ended December 31, 1998, following review and
      approval by the unrelated members of the Magna Board of Directors. The
      purchase was completed in October 2000 after the satisfaction of
      certain conditions, including the registration of a Plan of Subdivision
      following the approval of the relevant government authorities. The
      rights to acquire this land and improvements, as well as golf course
      construction in progress funded by Magna, were transferred to the
      Company as part of the Reorganization.

  [f] During the year ended December 31, 2000, the Company sold to a company
      associated with members of the family of Mr. F. Stronach and
      Mr. A. Stronach approximately three acres of land in Aurora, Ontario for a
      sale price of approximately $0.2 million.

  [g] During the year ended December 31, 2000, the Company sold to Magna
      approximately 24.5 acres of land in Vaughan, Ontario for a sale price
      of approximately $5.8 million. The gain on the sale of the property of
      approximately $1.4 million is reported, net of tax, as a contribution to
      equity.

  [h] The Company had granted a limited term option to Magna to reacquire a
      real estate property for a fixed price equal to its book value of 50
      million Austrian Schillings ($3.7 million). This option was exercised
      during 2000.

  [i] Effective March 1, 1999, the Company began charging Magna an access fee
      for its use of the golf course and related facilities in
      Oberwaltersdorf, Austria. The agreement, which expires on March 1,
      2004, stipulates a yearly fee amounting to $2.2 million (Euros 2.5
      million). During the years ended December 31, 2001, 2000 and 1999, $2.2
      million, $2.3 million and $2.6 million, respectively, has been
      recognized in revenue related to this fee.

                                     F-26
<PAGE>

                           Magna Entertainment Corp.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
          (all amounts in U.S. dollars unless otherwise noted and all
            tabular amounts in thousands, except per share amounts)

      The Company has granted Magna a right of first refusal to purchase the
      Company's two golf courses.

  [j] One of the Company's subsidiaries has been named as a defendant in a
      class action brought in a United States District Court by various
      plaintiffs. The plaintiffs in this action claim unspecified
      compensatory and punitive damages, for restitution and disgorgement of
      profits, all in relation to forced labor performed by the plaintiffs
      for such subsidiary and certain other Austrian and German corporate
      defendants at their facilities in Europe during World War II and
      certain property right claims. As a result of the Reorganization, the
      Company acquired the shares of such subsidiary. Under Austrian law,
      such subsidiary would be jointly and severally liable for the damages
      awarded in respect of these class action claims. An Austrian subsidiary
      of Magna has agreed to indemnify such subsidiary for any damages or
      expenses associated with this case.

  [k] A subsidiary of Magna has agreed to indemnify the Company in respect of
      environmental remediation costs and expenses relating to existing
      conditions at certain of the Company's Austrian real estate properties.

13. COMMITMENTS AND CONTINGENCIES

  [a] The Company generates a substantial amount of its revenues from
      wagering activities and, therefore, it is subject to the risks inherent
      in the ownership and operation of a racetrack. These include, among
      others, the risks normally associated with changes in the general
      economic climate, trends in the gaming industry, including competition
      from other gaming institutions and state lottery commissions and
      changes in tax laws and gaming laws.

  [b] In the ordinary course of business activities, the Company may be
      contingently liable for litigation and claims with customers, suppliers
      and former employees. Management believes that adequate provisions have
      been recorded in the accounts where required. Although it is not
      possible to accurately estimate the extent of potential costs and
      losses, if any, management believes, but can provide no assurance, that
      the ultimate resolution of such contingencies would not have a material
      adverse effect on the financial position of the Company.

  [c] The Company is currently considering a major redevelopment of its
      Gulfstream Park racetrack in Florida (the "Gulfstream Park
      Redevelopment"). Should it proceed as currently contemplated, the
      Gulfstream Park Redevelopment would include a simulcast pavilion,
      sports and entertainment arena and a new turf club and grandstand. In
      addition, there would be significant modifications and enhancements to
      the racetracks and stable areas. If completed, the Gulfstream Park
      Redevelopment would require the demolition of a substantial portion of
      the current buildings and related structures, which include the
      grandstand, turf club and annex. The aggregate carrying value at
      December 31, 2001 of the assets that would be demolished if the
      Gulfstream Park Redevelopment is completed is approximately $23.0
      million. If the Company decides to proceed with the Gulfstream Park
      Redevelopment and obtains the approval of its Board of Directors, a
      reduction in the expected life of the existing assets would occur and
      a write-down would be necessary.

  [d] The Company has issued letters of credit to guarantee various
      construction projects related to activity of its subsidiaries. These
      letters of credit amount to $4.5 million with expiration dates ranging
      from 2002 through 2003.

  [e] At December 31, 2001, the Company had commitments under operating
      leases requiring annual rental payments for the years ending December
      31 as follows:

<TABLE>
    ---------------------------------------------------------------
     <S>                                                     <C>
     2002                                                    $3,800
     2003                                                     2,799
     2004                                                     1,627
     2005                                                     1,050
     2006                                                       545
    ---------------------------------------------------------------
                                                             $9,821
    ---------------------------------------------------------------
</TABLE>

                                     F-27
<PAGE>

                           Magna Entertainment Corp.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
          (all amounts in U.S. dollars unless otherwise noted and all
            tabular amounts in thousands, except per share amounts)

      For the year ended December 31, 2001, payments under operating leases
      amounted to approximately $3.2 million (for the year ended December 31,
      2000 - $3.0 million; for the year ended December 31, 1999 - $0.8
      million).

      The Company occupies land for the Remington Park racing facility under
      an operating lease that extends through 2013. The lease also contains
      options to renew for five 10-year periods after the initial term. Under
      the lease agreement, the Company made an initial payment of $4 million
      that is being amortized over the initial lease term. In addition to the
      initial payment, the Company is obligated to pay additional rent based
      on minimum annual rental payments ranging from $111 thousand to $133
      thousand and one-half of one percent of the wagers made at the track in
      excess of $187 million during the racing season.

  [f] Contractual commitments outstanding at December 31, 2001, which related
      to a land purchase, construction and development projects, amounted to
      approximately $5.3 million.

14. OTHER LONG-TERM LIABILITIES

Other long-term liabilities is comprised as follows:

<TABLE>
----------------------------------------------------------------
<CAPTION>
<S>                                                 <C>    <C>
                                                    December 31,
                                                       2001 2000
----------------------------------------------------------------
Deferred revenue                                    $2,494  $ --
Pension liability                                       82   234
----------------------------------------------------------------
                                                      2,576  234
----------------------------------------------------------------
</TABLE>

Employee Defined Benefit Plans

   With the acquisition of the Santa Anita Park racetrack in December 1998, the
Company assumed the assets and liabilities of the Retirement Income Plan
discussed below.

   This plan consists of a non-contributory defined benefit retirement plan for
year-round employees who are at least 21 years of age, have one or more years
of service, and are not covered by collective bargaining agreements. Plan
assets consist of a group of annuity contracts with a life insurance company.
Plan benefits are based primarily on years of service and qualifying
compensation during the final years of employment. Funding requirements comply
with federal requirements that are imposed by law. In the event of a "change in
control," participants in the defined benefit retirement plan will become fully
vested in plan benefits. This occurred on December 10, 1998.

   The net periodic pension cost of the Company for the years ended December 31,
2001, 2000 and 1999 included the following components:

<TABLE>
<CAPTION>
<S>                                            <C>   <C>   <C>
                                                Years ended
                                                December 31,
                                               2001  2000  1999
----------------------------------------------------------------
Components of net periodic pension cost:
Service cost                                   $361   196   392
Interest cost on projected benefit obligation   556   588   573
Actual return on plan assets                   (262) (922) (942)
Net amortization and deferral                  (331)  348   485
----------------------------------------------------------------
Net periodic pension cost                      $324  $210  $508
----------------------------------------------------------------
</TABLE>

                                     F-28
<PAGE>

                           Magna Entertainment Corp.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
          (all amounts in U.S. dollars unless otherwise noted and all
            tabular amounts in thousands, except per share amounts)

   The following provides a reconciliation of benefit obligations, plan assets
and funded status of the plan.
<TABLE>
<CAPTION>
                                               Years ended December 31,
                                                  2001    2000    1999
-----------------------------------------------------------------------
<S>                                             <C>     <C>     <C>
Change in benefit obligation:
 Benefit obligation at beginning of year        $9,198  $8,669  $8,668
 Service cost                                      361     196     392
 Interest cost                                     556     588     573
 Benefits paid                                    (582)   (537)   (508)
 Actuarial losses (gains)                        1,257     282    (456)
-----------------------------------------------------------------------
Benefit obligation at end of year               10,790   9,198   8,669
-----------------------------------------------------------------------
Change in plan assets:
 Fair value of plan assets at beginning of year  9,142   8,287   7,351
 Actual return on plan assets                      262     922     942
 Company contributions                             476     470     502
 Benefits paid                                    (582)   (537)   (508)
-----------------------------------------------------------------------
Fair value of plan assets at end of year         9,298   9,142   8,287
-----------------------------------------------------------------------
Funded status of plan (underfunded)             (1,492)    (56)   (382)
Unrecognized net gain (loss)                     1,410    (178)   (112)
-----------------------------------------------------------------------
Net pension liability                           $  (82) $ (234) $ (494)
-----------------------------------------------------------------------
</TABLE>

Assumptions used in determining the funded status of the retirement income
plan are as follows:

<TABLE>
<CAPTION>
                                                   Years ended December 31,
                                                          2001  2000  1999
---------------------------------------------------------------------------
<S>                                                       <C>   <C>   <C>
Weighted average discount rate                            6.25%  7.0%  7.0%
Weighted average rate of increase in compensation levels   5.0%  5.0%  5.0%
Expected long-term rate of return                          7.5%  8.0%  8.0%
</TABLE>

   The measurement date and related assumptions for the funded status of the
Company's retirement income plan are as of the end of the year.

   The Company also participates in several multi-employer benefit plans on
behalf of its employees who are union members. Company contributions to these
plans were $2.5 million, $3.8 million and $4.8 million, respectively, for the
years ended December 31, 2001, 2000 and 1999. The data available from
administrators of the multi-employer pension plans is not sufficient to
determine the accumulated benefit obligations, nor the net assets attributable
to the multi-employer plans in which Company employees participate.

   The Company offers various 401(k) plans (the "Plans") to provide retirement
benefits for employees. All employees who meet certain eligibility
requirements are able to participate in the Plans. Discretionary matching
contributions are determined each year by the Company. The Company contributed
to the Plans $0.4 million in the year ended December 31, 2001, $0.3 million in
the year ended December 31, 2000 and approximately $0.2 million in 1999 from
the dates of acquisition through December 31, 1999.

Long-term Incentive Plan

   The Company has a Long-term Incentive Plan (the "Plan") (adopted in 2000)
which allows for the grant of nonqualified stock options, incentive stock
options, stock appreciation rights, restricted stock, bonus stock and
performance shares to directors, officers, employees, consultants, independent
contractors and agents. A maximum of 8.0 million shares can be issued under
the Plan, of which 6.5 million are available for issuance pursuant to stock
options and tandem stock appreciation rights and 1.5 million are available for
issuance pursuant to any other type of award under the Plan.

                                     F-29
<PAGE>

                           Magna Entertainment Corp.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
          (all amounts in U.S. dollars unless otherwise noted and all
            tabular amounts in thousands, except per share amounts)

   The Company grants stock options to certain directors, officers and key
employees to purchase shares of the Company's Class A Subordinate Voting
Stock. All of such stock options give the grantee the right to purchase Class
A Subordinate Voting Stock of the Company at a price no less than the fair
market value of such stock at the date of grant. Generally, stock options
under the Plan vest over a period of two to six years from the date of grant
at rates of 1/7th to 1/3rd per year and expire on or before the tenth
anniversary of the date of grant, subject to earlier cancellation in the
events specified in the stock option agreements entered into by the Company
with each recipient of options. Also during 2001, the Company issued 63,094
shares as bonus stock pursuant to the Plan.

lInformation with respect to shares under option is as follows:

<TABLE>
<CAPTION>
                              Shares Subject      Weighted Average
                                 to Option         Exercise Price
                             ---------------      ----------------
<S>                         <C>        <C>        <C>      <C>
                                 2001       2000      2001    2000
------------------------------------------------------------------
Balance, Beginning of Year  3,821,666         --  $   6.31 $    --
Granted                     1,250,000  4,665,000      5.17    6.39
Exercised                     (15,000)        --      4.90      --
Forfeited                    (603,333)  (843,334)     6.33    6.73
------------------------------------------------------------------
Balance, End of Year        4,453,333  3,821,666      5.99    6.31
------------------------------------------------------------------
</TABLE>
Information regarding stock options outstanding is as follows:

<TABLE>
-------------------------------------------------------------------------------
<CAPTION>
                                              Options             Options
                                            Outstanding         Exercisable
                                            -----------        ------------
                                             2001      2000      2001      2000
-------------------------------------------------------------------------------
<S>                                     <C>       <C>       <C>       <C>
Number                                  4,453,333 3,821,666 2,475,571 1,451,000
Weighted average exercise price         $    5.99 $    6.31 $    6.20 $    6.41
Weighted average remaining contractual
 life (years)                                 7.6       8.4       7.1       7.5
</TABLE>

   Pro-forma information regarding net income and earnings per share is required
by the Financial Accounting Standard Board Statement No. 123 ("SFAS 123"),
Accounting and Disclosure of Stock-Based Compensation and has been determined
as if the Company had accounted for its stock options under the fair value
method under SFAS 123. The average fair values of the stock option grants were
$2.90. The fair value of stock option grants was estimated at the date of
grant using the following assumptions:

<TABLE>
<S>                                                                 <C>
Risk free interest rates                                              4.5%
Dividend yields                                                         0%
Volatility factors of expected market price of Class A Subordinate
 Voting Stock                                                       0.542
Weighted average expected life (years)                               4.28
</TABLE>

   The Black - Scholes option valuation model was developed for use in
estimating the fair value of traded options that require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock options have characteristics significantly different from
those of traded options and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its stock options.

   The Company's SFAS 123 pro-forma net income and the related per share amounts
for 2001 are as follows:

<TABLE>
<S>                                   <C>
Net income, as reported                                            $13,464
Pro-forma stock compensation expense                                (2,815)
--------------------------------------------------------------------------
Pro-forma net income                                               $10,649
--------------------------------------------------------------------------
Pro-forma earnings per share                                       $  0.13
--------------------------------------------------------------------------
</TABLE>

                                     F-30
<PAGE>

                           Magna Entertainment Corp.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
          (all amounts in U.S. dollars unless otherwise noted and all
            tabular amounts in thousands, except per share amounts)

   For purposes of pro-forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period.

15. CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

   The Company's accounting policies as reflected in these consolidated
financial statements do not materially differ from Canadian generally accepted
accounting principles ("Canadian GAAP") except for:

  a) Under Canadian GAAP, sale of land to a related party that owns less than
     80% of the vendors share capital is considered an income item rather
     than a contribution to equity as considered under U.S. GAAP.

  b) Under Canadian GAAP there is no requirement to disclose comprehensive
     income (loss).

   The following table presents net income (loss) and earnings per share
information following Canadian GAAP:

<TABLE>
<CAPTION>
<S>                                       <C>     <C>    <C>
                                        Years ended December 31,
                                             2001   2000  1999
---------------------------------------------------------------
Net Income (loss) under U.S. GAAP         $13,464 $  441 $ (62)
Adjustments [net of related tax effects]
Gain on sale of land to Magna (a)           5,938  1,352    --
---------------------------------------------------------------
Net income (loss) under Canadian GAAP     $19,402 $1,793 $ (62)
---------------------------------------------------------------
Earnings per share:
 Basic                                    $  0.23 $ 0.02 $0.00
---------------------------------------------------------------
 Diluted                                  $  0.23 $ 0.02 $0.00
---------------------------------------------------------------
</TABLE>

Quarterly Information
(unaudited)

<TABLE>
<CAPTION>
<S>                         <C>      <C>      <C>          <C>         <C>
For the year ended
December 31, 2001           March 31 June 30  September 30 December 31  Total
-------------------------------------------------------------------------------
Revenue                     $244,526 $113,192   $65,832      $95,511   $519,061
Earnings (loss) before
 interest, income taxes,
 depreciation and
 amortization ("EBITDA")      44,622   11,019    (2,825)      (1,127)    51,689
EBITDA before gains on the
 sale of real estate          32,564    6,025    (2,862)      (4,467)    31,260
Net income (loss)             22,468    2,237    (6,227)      (5,014)    13,464
Diluted earnings (loss)
 per share                      0.28     0.03     (0.07)       (0.06)      0.16
-------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
<S>                         <C>      <C>      <C>          <C>         <C>
For the year ended
December 31, 2000           March 31 June 30  September 30 December 31  Total
-------------------------------------------------------------------------------
Revenue                     $186,468 $102,344   $50,213      $74,538   $413,563
EBITDA                        26,434    9,132    (4,063)      (9,674)    21,829
EBITDA before gains on the
 sale of real estate          26,434    6,777    (7,759)     (10,597)    14,855
Net income (loss)             11,980    2,752    (5,110)      (9,181)       441
Diluted earnings (loss)
 per share                      0.15     0.03     (0.06)       (0.11)      0.01
-------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
<S>                       <C>      <C>       <C>          <C>         <C>
For the year ended
December 31, 1999         March 31 June 30   September 30 December 31  Total
-------------------------------------------------------------------------------
Revenue                   $ 97,865 $ 34,712    $10,419      $43,864   $186,860
EBITDA                      18,096      583     (6,346)      (2,556)     9,777
EBITDA before gains on
 the sale of real estate    18,096      583     (6,346)      (3,184)     9,149
Net income (loss)            9,325   (1,235)    (5,090)      (3,062)       (62)
Diluted earnings (loss)
 per share                    0.12    (0.02)     (0.06)       (0.04)      0.00
-------------------------------------------------------------------------------
</TABLE>


                                     F-31
<PAGE>

MAGNA ENTERTAINMENT CORP.
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2001
[Amounts in thousands, U.S. dollars]

<TABLE>
<CAPTION>
                                          Initial Costs to       Costs Capitalized
                                              Company        Subsequent to Acquisition      Foreign Exchange Impact
                                        -------------------- ------------------------------ ----------------------------
                                                Building and                Building and                  Building and
 Description                Encumbrance  Land   Improvements   Land         Improvements      Land        Improvements
 -----------                ----------- ------- ------------ ------------  ---------------- -----------  ---------------
 <S>                        <C>         <C>     <C>          <C>           <C>              <C>          <C>
 RACETRACK OPERATIONS
 Racing Facilities
  Santa Anita Park
   (Arcadia, California,
   U.S.A.)                    59,850     25,072    43,277           5,114           38,700           --             --
  Gulfstream Park
   (Hallandale, Florida,
   U.S.A.)                        --     46,344    20,264             757           (2,221)          --             --
  Golden Gate Fields
   (Albany, California,
   U.S.A.)                        --     56,986    11,128             672            7,080           --             --
  Thistledown (North
   Randall, Ohio, U.S.A.)         --      1,062     8,114             180              146           --             --
  Remington Park
   (Oklahoma City,
   Oklahoma, U.S.A.)              --      1,851     5,302           2,627            1,532           --             --
  Great Lakes Downs
   (Muskegon, Michigan,
   U.S.A.)                        --      3,997     3,691              --            3,470           --             --
  Bay Meadows (San Mateo,
   California, U.S.A.)            --         --        --              --               24           --             --
  MEC Pennsylvania
   (Pittsburg,
   Pennsylvania, U.S.A.)          --      6,448    12,672              --               45           --             --
  MEC Oregon Racing Inc.
   (Portland, Oregon, U.S.A.)     --         --        --              --              448           --             --
  EquiTech Racing Systems
   Inc. (Dublin,
   California, U.S.A.)            --         --        --              --               14           --             --
  SLRD (San Diego,
   California, U.S.A.)            --      3,845     2,500             487              192           --             --
 Land held for
  development
  Santa Anita Park
   (Arcadia, California,
   U.S.A.)                        --     52,500        --              --              281           --             --
  Gulfstream Park
   (Hallandale, Florida,
   U.S.A.)                        --     14,201        --              --               --           --             --
  Golden Gate Fields
   (Albany, California,
   U.S.A.)                        --     13,857        --              --               --           --             --
  Dixon Downs (Dixon,
   California, U.S.A.)            --      6,584        --              --               --           --             --
  GPRA Training Centre
   (Boynton, Florida,
   U.S.A.)                        --     22,940        --           3,105               --           --             --
 REAL ESTASTE OPERATIONS
 Golf Course Facilities
  Niederoesterreich,
   Austria                        --      3,721        --           8,902           20,203       (1,964)        (7,940)
  Ontario, Canada                 --     11,008        --          12,870            9,593       (1,158)          (101)
 Land
  Ontario, Canada                 --     12,912        --           7,410               --       (2,895)            --
  Ontario, Canada                 --        986        --             124               --         (110)            --
  Ontario, Canada                 --        377        --               4               --          (55)            --
  Ontario, Canada                 --      2,559        --             198               --         (383)            --
  Ontario, Canada                 --      1,669        --             241               --         (276)            --
  Ontario, Canada                 --         14        --              15               --           (2)            --
  Kentucky, U.S.A.                --      2,847        --              75               --           --             --
  Michigan, U.S.A.                --      1,161        --             170               --           --             --
  Michigan, U.S.A.                --      2,782        --            (234)              --           --             --
  Florida, U.S.A.                 --      1,918        --             308               --           --             --
  New York, U.S.A.                --        725        --           1,870               --           --             --
  Niederoesterreich,
   Austria                        --      7,099        --             534               --       (2,082)            --
  Niederoesterreich,
   Austria                        --     21,449        --           6,413               --       (6,736)            --
 Commercial/Industrial
  Properties
  Colorado, U.S.A.                --         --       405              --                7           --             --
  Oberoesterreich,
   Austria                        --      3,376     8,193           1,541            4,124         (613)        (1,564)
 Residential Properies
  Ontario, Canada                 --         70       112               6               21           (8)           (13)
  Colorado, U.S.A.                --         --     3,208             127              168           --             --
  Niederoesterreich,
   Austria                        --         18        30              --               36           (4)            (5)
  Niederoesterreich,
   Austria                        --         --        --           3,222            8,716         (464)        (1,631)
 Other                            --         41         1              (7)              (4)          (2)            --
                              ------    -------   -------    ------------     ------------  -----------    -----------
                              59,850    330,419   118,897          56,731           92,575      (16,752)       (11,254)
                              ======    =======   =======    ============     ============  ===========    ===========
</TABLE>
<PAGE>

<TABLE>
<CAPTION>
                               Gross Amount at which
                             Carried at Close of Period
                            ----------------------------
                                     Buildings
                                        and              Accumulated    Date of
 Description                 Land   Improvements  Total  Depreciation Construction
 -----------                ------- ------------ ------- ------------ ------------
 <S>                        <C>     <C>          <C>     <C>          <C>
 RACETRACK OPERATIONS
 Racing Facilities
  Santa Anita Park
   (Arcadia, California,
   U.S.A.)                   30,186    81,977    112,163    11,802          n/a
  Gulfstream Park
   (Hallandale, Florida,
   U.S.A.)                   47,101    18,043     65,144       296          n/a
  Golden Gate Fields
   (Albany, California,
   U.S.A.)                   57,658    18,208     75,866     2,773          n/a
  Thistledown (North
   Randall, Ohio, U.S.A.)     1,242     8,260      9,502     2,647          n/a
  Remington Park
   (Oklahoma City,
   Oklahoma, U.S.A.)          4,478     6,834     11,312     1,165          n/a
  Great Lakes Downs
   (Muskegon, Michigan,
   U.S.A.)                    3,997     7,161     11,158       431          n/a
  Bay Meadows (San Mateo,
   California, U.S.A.)           --        24         24         4          n/a
  MEC Pennsylvania
   (Meadows,
   Pennsylvania)              6,448    12,717     19,165       748          n/a
  MEC Oregon Racing Inc.
   (Portland, Oregon)            --       448        448        55          n/a
  EquiTech Racing Systems
   Inc. (Dublin,
   California, U.S.A.)           --        14         14        --          n/a
  SLRD (San Diego,
   California, U.S.A.)        4,332     2,692      7,024       268          n/a
 Land held for
  development
  Santa Anita Park
   (Arcadia, California,
   U.S.A.)                   52,500       281     52,781        --          n/a
  Gulfstream Park
   (Hallandale, Florida,
   U.S.A.)                   14,201        --     14,201        --          n/a
  Golden Gate Fields
   (Albany, California,
   U.S.A.)                   13,857        --     13,857        --          n/a
  Dixon Downs (Dixon,
   California, U.S.A.)        6,584        --      6,584        --          n/a
  GPRA Training Centre
   (Boynton, Florida,
   U.S.A.)                   26,045        --     26,045        --          n/a
 REAL ESTASTE OPERATIONS
 Golf Course Facilities
  Niederoesterreich,
   Austria                   10,659    12,263     22,922     3,814         1996
  Ontario, Canada            22,720     9,492     32,212        11      Ongoing
 Land
  Ontario, Canada            17,427        --     17,427        --          n/a
  Ontario, Canada             1,000        --      1,000        --          n/a
  Ontario, Canada               326        --        326        --          n/a
  Ontario, Canada             2,374        --      2,374        --          n/a
  Ontario, Canada             1,634        --      1,634        --          n/a
  Ontario, Canada                27        --         27        --          n/a
  Kentucky, U.S.A.            2,922        --      2,922        --          n/a
  Michigan, U.S.A.            1,331        --      1,331        --          n/a
  Michigan, U.S.A.            2,548        --      2,548        --          n/a
  Florida, U.S.A.             2,226        --      2,226        --          n/a
  New York, U.S.A.            2,595        --      2,595        --          n/a
  Niederoesterreich,
   Austria                    5,551        --      5,551        --          n/a
  Niederoesterreich,
   Austria                   21,126        --     21,126        --          n/a
 Commercial/Industrial
  properties
  Colorado, U.S.A.               --       412        412       141          n/a
  Oberoesterreich,
   Austria                    4,304    10,753     15,057     4,413          n/a
 Residential properies
  Ontario, Canada                68       120        188        --          n/a
  Colorado, U.S.A.              127     3,376      3,503        --          n/a
  Niederoesterreich,
   Austria                       14        61         75        35          n/a
  Niederoesterreich,
   Austria                    2,758     7,085      9,843        --      Ongoing
 Other                           32        (3)        29         7
                            -------   -------    -------    ------
                            370,398   200,218    570,616    28,610
                            =======   =======    =======    ======
</TABLE>
<PAGE>

<TABLE>
<CAPTION>
                                                                 Life on which
                                                                Depreciation in
                                                                Lastest income
                                                        Date     statement is
 Description                                          Acquired     Computed
 -----------                                          --------- ---------------
 <S>                                                  <C>       <C>
 RACETRACK OPERATIONS
 Racing Facilities
  Santa Anita Park (Arcadia, California, U.S.A.)        1998       40 years
  Gulfstream Park (Hallandale, Florida, U.S.A.)         1999       40 years
  Golden Gate Fields (Albany, California, U.S.A.)       1999       40 years
  Thistledown (North Randall, Ohio, U.S.A.)             1999       40 years
  Remington Park (Oklahoma City, Oklahoma, U.S.A.)      1999       40 years
  Great Lakes Downs (Muskegon, Michigan, U.S.A.)        2000       40 years
  Bay Meadows (San Mateo, California, U.S.A.)           2000       40 years
  MEC Pennsylvania (Meadows, Pennsylvania)              2001       40 years
  MEC Oregon Racing Inc. (Portland, Oregon)             2001       40 years
  EquiTech Racing Systems Inc. (Dublin, California,
   U.S.A.)                                              2001       40 years
  SLRD (San Diego, California, U.S.A.)                  1999       40 years
 Land held for development
  Santa Anita Park (Arcadia, California, U.S.A.)        1998          n/a
  Gulfstream Park (Hallandale, Florida, U.S.A.)         1999          n/a
  Golden Gate Fields (Albany, California, U.S.A.)       1999          n/a
  Dixon Downs (Dixon, California, U.S.A.)               2001          n/a
  GPRA Training Centre (Boynton, Florida, U.S.A.)       2000          n/a
 REAL ESTASTE OPERATIONS
 Golf Course Facilities
  Niederoesterreich, Austria                            1994       25 years
  Ontario, Canada                                       1998          n/a
 Land
  Ontario, Canada                                       1997          n/a
  Ontario, Canada                                       1997          n/a
  Ontario, Canada                                       1985          n/a
  Ontario, Canada                                       1997          n/a
  Ontario, Canada                                       1987          n/a
  Ontario, Canada                                                     n/a
  Kentucky, U.S.A.                                      1997          n/a
  Michigan, U.S.A.                                      1996          n/a
  Michigan, U.S.A.                                      1996          n/a
  Florida, U.S.A.                                       1994          n/a
  New York, U.S.A.                                      1998          n/a
  Niederoesterreich, Austria                            1994          n/a
  Niederoesterreich, Austria                            1996          n/a
 Commercial/Industrial properties
  Colorado, U.S.A.                                      1992          n/a
  Oberoesterreich, Austria                              1998          n/a
 Residential properies
  Ontario, Canada                                       1998          n/a
  Colorado, U.S.A.                                      1995          n/a
  Niederoesterreich, Austria                            1998       23 years
  Niederoesterreich, Austria                            1994          n/a
 Other
</TABLE>
<PAGE>

Item 9.   Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

   None.
                                   Part III

Item 10.  Directors and Executive Officers of the Registrant

   Pursuant to instruction G(3) of the General Instructions to Form 10-K, the
information required herein is incorporated by reference from sections of our
Proxy Statement titled "Nominees", "Management--Executive Officers" and
"Section 16(a) Beneficial Ownership Reporting Compliance," which Proxy
Statement will be filed with the Securities and Exchange Commission.

Item 11.  Executive Compensation

   Pursuant to instruction G(3) of the General Instructions to Form 10-K, the
information required herein is incorporated by reference from sections of our
Proxy Statement titled "The Board of Directors and Committees of the Board --
Directors' Compensation", "The Board of Directors and Committees of the Board
-- Compensation Committee Interlocks and Insider Participation", "Executive
Compensation" and "Corporate Governance, Human Resources and Compensation
Committee Report", which Proxy Statement will be filed with the Securities and
Exchange Commission.

Item 12.  Security Ownership of Certain Beneficial Owners and Management

   Pursuant to instruction G(3) of the General Instructions to Form 10-K, the
information required herein is incorporated by reference from the section of
our Proxy Statement titled "Security Ownership", which Proxy Statement will be
filed with the Securities and Exchange Commission.


Item 13.  Certain Relationships and Related Transactions

   Pursuant to instruction G(3) of the General Instructions to Form 10-K, the
information required herein is incorporated by reference from the section of
our Proxy Statement titled "The Board of Directors and Committees of the Board
-- Certain Relationships and Related Transactions", which Proxy Statement will
be filed with the Securities and Exchange Commission.

                                    Part IV

Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a)  Financial Statements and Schedule

   The following Consolidated Financial Statements of Magna Entertainment
Corp. as at or for the year ended December 31, 2001 are included in Part II,
Item 8 of this Report:

  Report of the Independent Auditors
  Consolidated Statements of Operations and Comprehensive Income (Loss)
  Consolidated Statements of Cash Flows
  Consolidated Balance Sheets
  Consolidated Statements of Changes in Shareholders' Equity
  Notes to the Consolidated Financial Statements
  Schedule III--Real Estate and Accumulated Depreciation

(b)  Reports on Form 8-K

   We filed the following reports with the SEC on Form 8-K during the quarter
ended December 31, 2001:

   On October 31, 2001, we filed a current report on Form 8-K reporting the
issuance of a press release on October 26, 2001 in which we announced that we
had filed with the Securities and Exchange Commission an amendment to our
registration statement and that we would shortly file a preliminary short form
prospectus with the securities commissions of each province of Canada for a
public offering of 20 million shares of our Class A Subordinate Voting Stock.
The offering contemplates an over-allotment option allowing the underwriters
to purchase up to an additional 3

                                      42
<PAGE>

million shares of our Class A Subordinate Voting Stock. The preliminary short
form prospectus was filed with the provincial securities commissions on
October 30, 2001.

   On November 5, 2001, we filed a current report on Form 8-K reporting the
issuance of a press release on November 2, 2001 that announced our unaudited
financial results for the nine-month period ended September 30, 2001.

   On November 8, 2001, we filed a current report on Form 8-K reporting the
issuance of a press release on October 26, 2001 announcing that we had
completed the acquisition of Multnomah Greyhound Park in Oregon. Concurrent
with the acquisition, we entered into a lease to occupy the real estate upon
which the operations of Multnomah Greyhound Park are conducted for up to five
years. We acquired the operations of Multnomah Greyhound Park through the
purchase of all of the issued and outstanding stock of MKC Acquisition Co.,
for a purchase price of approximately $5.9 million, net of cash acquired of
$0.3 million. Approximately one-third of the purchase price was satisfied
through the issuance of 330,962 shares of our Class A Subordinate Voting Stock
and the balance was paid in cash.

(c)  Exhibits

   Please refer to the exhibit index below.

                                      43
<PAGE>

                                  SIGNATURES

   Pursuant to the requirements of Section 13 or 15(d) 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 on this 19th day
of March 2002.

                                       MAGNA ENTERTAINMENT CORP.

                                       By:   /s/  Jim McAlpine
                                                   Jim McAlpine
                                                   President and Chief
                                                   Executive Officer

   Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
Signature               Title                                 Date
---------               -----                                 ----
<S>                     <C>                                   <C>
s/Jim McAlpine          President and Chief Executive Officer March 19, 2002
Jim McAlpine            and Director
/s/ Graham J. Orr       Executive Vice-President and          March 19, 2002
Graham J. Orr           Chief Financial Officer
/s/ Douglas R. Tatters  Vice-President and Controller         March 19, 2002
Douglas R. Tatters
                        Director                              March 19, 2002
Jerry D. Campbell
 *                      Director                              March 19, 2002
William G. Davis
     *                  Director                              March 19, 2002
Peter M. George
 *                      Director                              March 19, 2002
Joseph W. Harper
 *                      Director                              March 19, 2002
J. Terrence Lanni
 *                      Director                              March 19, 2002
F. Jack Liebau
 *                      Director                              March 19, 2002
Edward C. Lumley
                        Director                              March 19, 2002
James Nicol
 *                      Director                              March 19, 2002
Gino Roncelli
                        Vice-President, Corporate             March 19, 2002
Andrew Stronach         Development and Director
 *                      Chairman and Director                 March 19, 2002
Frank Stronach
 *                      Director                              March 19, 2002
Ronald J. Volkman
 *                      Director                              March 19, 2002
John C. York II
/s/ Gary M. Cohn        As attorney-in-fact for               March 19, 2002
Gary M. Cohn            the officers and/or directors
                        marked by an asterisk.
</TABLE>

                                      44
<PAGE>

                                 EXHIBIT INDEX

The following documents are filed as part of this Registration Statement.

<TABLE>
<CAPTION>
 Exhibit No. Description of Document
 ----------- -----------------------
 <C>         <S>
             Restated Certificate of Incorporation of Magna Entertainment Corp.
     3.1     (1)
     3.2     By-Laws of Magna Entertainment Corp. (1)
      4      Form of Stock Certificate for Class A Subordinate Voting Stock (2)
    10.1     Stock Purchase Agreement dated as of June 30, 1999 between Magna
             Entertainment Corp. and Gulfstream Park Racing Association Inc.
             (2)
    10.2     Stock Purchase Agreement dated as of October 21, 1999 between
             Magna Entertainment Corp., The Edward J. DeBartolo Corporation and
             Oklahoma Racing LLC (2)
    10.3     Stock Purchase Agreement dated as of November 5, 1999 between
             Magna Entertainment Corp. and Ladbroke Racing Corporation (2)
    10.4     Exchangeable Share Support Agreement dated as of February 14, 2000
             among Magna Entertainment Corp. and MEC Holdings (Canada) Inc. (2)
    10.5     Voting and Exchange Agreement dated as of February 14, 2000 among
             Magna Entertainment Inc., Magna Entertainment Corp. and MEC
             Holdings (Canada) Inc. (2)
    10.6     Term Loan Credit Agreement dated as of November 15, 1999, as
             amended from time to time, between The Santa Anita Companies, Inc.
             and Wells Fargo Bank, National Association (2)
    10.7     Revolving Credit Agreement dated as of January 1, 2001 between Los
             Angeles Turf Club, Incorporated and Wells Fargo Bank, National
             Association (3)
    10.8     Forbearance Agreement dated as of February 8, 2000 between Magna
             International Inc. and Magna Entertainment Corp. (2)
    10.9     Access Agreement dated as of March 1, 1999 between Magna
             International Inc. and Magna Liegenschaftsverwaltungs-GmbH (2)
    10.10    Magna Entertainment Corp. Long-Term Incentive Plan (4)
    10.11    Employment Agreement with Donald Amos dated August 3, 2000 (3)
    10.12    Employment Agreement with Graham J. Orr dated October 5, 2000 (3)
    10.13    Employment Agreement with Gary M. Cohn dated November 1, 2000 (3)
    10.14    Purchase Agreement dated as of August 25, 2000 between Magna
             Entertainment Corp., BMOC Acquisitions XIV, LLC and PaineWebber
             Real Estate Securities, Inc. (incorporated by reference to exhibit
             2 to registrant's Report on Form 8-K filed February 2, 2001)
    10.15    Lease dated as of November 17, 2000 between Bay Meadows Operating
             Company LLC and PW Acquisition IV, LLC (3)
    10.16    Amendment No. 1 to the Term Loan Credit Agreement dated as of
             November 15, 1999, between The Santa Anita Companies, Inc. and
             Wells Fargo Bank, National Association (3)
    10.17    Amendment No. 2 to the Term Loan Credit Agreement dated as of
             November 15, 1999, between The Santa Anita Companies, Inc. and
             Wells Fargo Bank, National Association (3)
    10.18    Stock Purchase Agreement dated as of December 21, 2000 among
             Ladbroke Racing Wyoming, Inc., Ladbroke Racing Corporation and
             Magna Entertainment Corp. (incorporated by reference to exhibit 2
             to registrant's Report on Form 8-K filed March 16, 2001)
    10.19    Amendment No. 1, effective as of the Closing Date, to the Stock
             Purchase Agreement, dated as of December 21, 2000 (incorporated by
             reference to exhibit 2.1 to registrant's Report on Form 8-K filed
             March 16, 2001)
    10.20    Amending letter agreement dated March 28, 2001 to the Stock
             Purchase Agreement dated as of December 31, 2000 (incorporated by
             reference to exhibit 2.2 to registrant's Report on Form 8-K filed
             March 16, 2001)
    10.21    Preferred Access Agreement dated December 21, 2001 between Magna
             International Inc. and MEC Holdings (Canada) Inc. (5)
    10.22    Stock Purchase Agreement dated June 27, 2001 between Magna
             Entertainment Corp. and Arthur L. McFadden (5)
    10.23    Commercial Lease dated June 30, 2001 between Portland Meadows
             Management, LLC and MEC Oregon Racing, Inc. (5)
     21      Subsidiaries of the Registrant (5)
</TABLE>

                                       1
<PAGE>

<TABLE>
<CAPTION>
 Exhibit No. Description of Document
 ----------- -----------------------
 <C>         <S>
     23      Consent of Ernst & Young LLP.
     24      Powers of Attorney.
</TABLE>

(1) Incorporated by reference to the corresponding exhibit number of the
    registrant's Report on Form 8-K filed on March 16, 2000.

(2) Incorporated by reference to the corresponding exhibit number of the
    registrant's Registration Statement on Form S-1 originally filed on
    January 14, 2000 (File number 333-94791).

(3) (Incorporated by reference to the corresponding exhibit number of the
    registrant's Annual Report on Form 10-K for the fiscal year ended December
    31, 2000.

(4) Incorporated by reference to corresponding exhibit number of the
    registrant's Annual Report on Form 10-K for the fiscal year ended December
    31, 1999.

(5) Incorporated by reference to the corresponding exhibit number of the
    registrant's Amendment No. 3 on Form S-1 filed on March 8, 2002 (File
    number 333-70520).

                                       2