<PAGE>

                                  UNITED STATES
                       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.  0-1607

                             MID-STATE RACEWAY, INC.

--------------------------------------------------------------------------------
      (Exact name of Registrants as specified in their respective charters)

                  New York                                15-0555258

---------------------------------------------   -------------------------------
(State or Other Jurisdiction of Incorporation  (IRS Employer Identification No.)
             or Organization)

         PO Box 860, Vernon, New York                       13476
--------------------------------------------    --------------------------------
   (Address of Principal Executive Offices)               (Zip Code)

              Registrant's Telephone Number, Including Area Code: (315) 829-2201

         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 (Section 229.405 of this chapter) 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 Form 10-K. [X]

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

           The aggregate market value of the voting stock held by non-affiliates
of the Company as of January 10, 2004 is not determinable due to limited
trading.

         Indicate the number of shares outstanding of each of the Company's
classes of common stock, as of January 10, 2004:             892,766 shares

         Securities registered pursuant to Section 12(b) of the Act: none

         Securities registered pursuant to Section 12(g) of the Act: common
stock, $0.10 par value

                                                                               1
<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                       PAGE
                                                                                                       ----
<S>                                                                                                    <C>
PART I.

Item 1.      Business................................................................................    3

Item 2.      Properties..............................................................................    3

Item 3.      Legal Proceedings.......................................................................    4

Item 4.      Submission of Matters to a Vote of Security Holders.....................................    5

PART II.

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

Item 6.      Selected Consolidated Financial Data....................................................    6

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

Item 7A.     Qualitative and Quantitative Disclosures about Market Risk..............................    7

Item 8.      Financial Statements and Supplementary Data.............................................   15

Item 9.      Changes and Disagreements with Accountants on Accounting and Financial Disclosure.......   16

PART III.

Item 10.     Directors and Executive Officers of the Registrant......................................   16

Item 11.     Executive Compensation..................................................................   18

Item 12.     Security Ownership of Certain Beneficial Owners and Management..........................   18

Item 13.     Certain Relationships and Related Transactions..........................................   20

PART IV.

Item 14.     Controls and Procedures.................................................................   20

Item 15.     Exhibits, Financial Statement Schedules and Reports on Form 8-K.........................   21

Signatures
Certifications
</TABLE>

                                                                               2
<PAGE>

Mid-State Raceway, Inc. has not filed its Form 10-Q's and Form 10-K's since its
June 30, 2000 quarterly filing. With this report, we are concurrently filing the
delinquent reports for all periods through December 2002.

PART I.

ITEM 1. BUSINESS

(a)      Mid-State Raceway, Inc., ("MSR" or the "Company"), owns and operates a
harness horse race track (the "Track" or "Vernon Downs") known as Vernon Downs,
situated in Vernon, New York. MSR is licensed under and subject to the
regulations of the Pari-Mutual Revenue Law and the supervision of the New York
State Racing and Wagering Board to conduct live harness racing at its track and
to simulcast racing to and from other tracks. Such licenses are subject to
annual renewal.

Mid-State Development Corporation ("MSD"), formerly known as Mid-Year Sales,
Inc., is a wholly owned subsidiary of the Company. Prior to 1999, MSD was an
inactive corporation. Beginning in October 1999, MSD commenced operating food
and beverage concessions at the Track owned by the Company. In January 2000, MSD
began operating special events (concerts, snowmobile racing, motorcycle racing,
etc.) at Vernon Downs. In June of 2000, MSD began operating the Hotel situated
on property owned by MSR and adjacent to the harness racing track.

Vernon Hospitality, Inc. (formed in June 2000) and Vernon Productions, Inc.
(formed in July 2000) are inactive wholly owned subsidiaries of MSR.

(b)      The Company was engaged in one business segment during 2002. In 2003
the Company (i) filed its application to be licensed as a video gaming agent so
as to install and operate video lottery terminals (VLTs) at its facility in
Vernon Downs, (ii) substantially constructed a 35,000 square foot "Racino" and
(iii) commenced to hire and train a staff to operate the Racino. It is
anticipated that operations at the VLT facility will commence shortly after the
first quarter of 2004.

(c)      Generally, the Company is not in competition with other harness racing
tracks in New York State for patrons. Saratoga race track, which conducts a
day-time racing meet, is located about 110 miles from Vernon, New York, and
competes to some extent for the Vernon Downs customers primarily on weekend
dates. Saratoga race track is expected to have its VLT operations open in early
first quarter 2004. However, their VLT operations are not expected to have a
significant impact on VLT revenues of Mid-State Raceway, which due to open
shortly thereafter.

Increased off-track wagering on thoroughbred and harness racing due to a live
television signal being sent into OTB shops in Central New York, the New York
State Lottery and the Oneida Indian Nation's Turning Stone Casino, approximately
7 miles away in Verona, New York, all continue to affect Vernon's on-track daily
averages of handle and attendance.

Competition for good horses with the resultant attractive racing programs has
increased in recent years, particularly from the metropolitan New York and New
Jersey area. This has adversely affected both the number and quality of horses
racing at Vernon Downs.

                                                                               3
<PAGE>

The Company employed an average of 425 full-time equivalent employees during the
calendar year 2001.

ITEM 2. PROPERTIES.

The track is located in Vernon, Oneida County, New York. Since the opening of
the plant and related facilities in 1953, the Company has maintained a policy of
continuously improving and modernizing its facilities.

The grandstand and clubhouse at the Track can accommodate approximately 14,000
patrons, which includes seating for 2,000 in the Grandstand and 1,700 in the
Clubhouse. There are parking facilities for approximately 5,900 automobiles.

In June of 2000, the Company completed construction of an expanded 7/8-mile oval
stone dust track, which is comparable with tracks located in major metropolitan
areas. Previously the track was a 3/4-mile oval stone dust track with a 1/4-mile
chute and a passing lane running from the last turn to the finish line. The
chute and passing lane have been eliminated. The track is illuminated by a
metal-halide and quartz lighting system. Most races are for a distance of one
mile. The stables accommodate approximately 1,000 horses and are located
adjacent to three exercise tracks and the main track.

ITEM 3. LEGAL PROCEEDINGS

(a)      When MSR purchased Gwen Bennett's stock in Comfort Associates, Inc.
("CAI") on May 19, 2000, it agreed to indemnify her for any liability she may
have had with respect to the Comfort Inn franchise agreement for the hotel.
Following the purchase, MSR terminated the franchise agreement and Gwen Bennett
was sued by Choice Hotels International for damages of approximately $557,000.
She has answered the Complaint in such action claiming, among other things, that
the signature on the franchise agreement was not hers. She has notified MSR of
the claim and has requested indemnification if the suit is successful. While the
outcome is not presently determinable, MSR believes that Mrs. Bennett did not
sign the agreement and accordingly believes it is more likely than not the
lawsuit against her will not be successful.

(b)      In 2001, the New York State Legislature approved video lottery terminal
(VLT) legislation to allow for the installation and operation of VLTs at New
York State harness race tracks. MSR is currently working with the New York State
Lottery Commission on implementation of the activities allowed by the VLT
legislation. MSR has been initially authorized to install 1,087 VLTs and may
install up to 2,500 VLTs on its premises based on activity.

As a result of this legislation, MSR was named as a defendant in two separate
lawsuits challenging the legality of the legislation and the operation of VLTs
at harness race tracks. The outcome of these lawsuits is not presently
determinable.

(c)      In July 2002, MSR (along with certain MSR directors, Shawn A. Scott,
Vernon, LLC, and All Capital, LLC) was named as a defendant in a lawsuit filed
by a group of private purchasers. The lawsuit alleges bad faith and breach of
contract against MSR and seeks not less than $30 million in damages from the
Raceway plus interest. The lawsuit also alleges fraud by certain MSR directors
and seeks damages from those defendants to be determined at trial plus legal
fees. In addition, the lawsuit alleges tortuous interference with contract by
certain MSR

                                                                               4
<PAGE>

directors, Shawn A. Scott, Vernon, LLC, and All Capital, LLC and seeks $30
million in damages from those defendants plus interest. The agreement upon which
the action is based contains a provision for the payment of a $130,000 "break up
fee" which has been recorded in the financial statements. This action was
dismissed for failure of prosecution by the plaintiff but was subsequently
reinstituted and is presently pending. The Company has notified its insurance
carrier of the commencement and pendency of the subject action. The outcome of
this lawsuit is not presently determinable and, as such, no provision for any
unfavorable outcome that may arise from this litigation has been included in the
financial statements.

(c)      On December 3, 2002, MSR was served with a summons and complaint from
both its former President (John Signorelli) and a current Board member and then
member of the Board's Audit Committee (Dominic Giambona) seeking, inter alia:
(i) monetary damages in the amount of $10 million and/or the issuance of
warrants to acquire up to 175,000 shares with a strike price of $10 per share
that would enable the plaintiffs to acquire such additional common stock upon
payment of $1.75 million; such warrants allegedly to have anti-dilution and
percentage maintenance protection for their combined interests of 39.9%; (ii)
the issuance of 21,600 additional shares of common stock, and the issuance of
additional warrants with a strike price of $5 per share to enable each of them
to maintain his present 17.19% interest in the future; and (iii) other
declaratory, equitable, and monetary relief. Such shares and warrants have not
been issued and the issuance of these shares and warrants has not been approved
by the shareholders. The Company believes that it has valid defenses to the
lawsuit, has asserted counterclaims against the plaintiffs based on various
breaches of conduct and duties, and intends to seek dismissal of the case.

(d)      On November 19, 2003 John Signorelli, a former officer of the Company
and two other stockholders (one of whom owns 200 recently acquired shares of
Common Stock) commenced an action in U.S. District Court for the Southern
District of New York against the Company, certain of its directors and others
seeking damages for alleged fraud, violations of fiduciary duties and "looting".
The Company believes that it has valid defenses to this action and intends to
vigorously defend it. The Company filed a motion to dismiss on December 30,
2003. A hearing of the Company's motion, scheduled for January 22, 2004, was
adjourned to February 12, 2004 to be heard before Judge Miriam Cedarbaum in New
York City.

(e)      MSR is a defendant in several litigation matters involving its
operations. Management believes that liabilities resulting from these lawsuits,
if any, will be immaterial or covered by insurance policies.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No items to report.

PART II.

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS

(a)      Price Range of Stock

                                                                               5
<PAGE>

MSR's common stock trades on the over-the counter bulletin board market under
the symbol "MRWY.OB". The stock is not listed or reported by any stock market
exchange or by NASDAQ.

The following table shows the high and low bid prices for the quarters indicated
for the Company's common stock in the over-the-counter bulletin board market for
the calendar quarters indicated. The prices are based upon reported quotes only,
as the stock is not listed or reported by the NASDAQ. The quotations may not
necessarily represent actual transactions and do not necessarily reflect retail
mark-up, markdown or commission.

<TABLE>
<CAPTION>
Quarter Ended                       High Bid                Low Bid
                                    --------                -------
<S>                                 <C>                     <C>
March 31, 2000                       $ 7.00                  $6.00
June 30, 2000                          7.00                   7.00
September 30, 2000                    12.00                   6.75
December 31, 2000                      6.75                   6.75
March 31, 2001                         6.75                   6.75
June 30, 2001                          2.50                   2.50
September 30, 2001                     5.00                   5.00
December 31, 2001                      3.50                   3.50
</TABLE>

(b)      At November 24, 2003, there were 499 holders of record of the Company's
common stock as reported by the Registrar and Transfer Company. As of January
10, 2004, there were 500 holders of record of the Company's common stock.

(c)      There were no dividends paid during the years ended December 31, 2001
and 2000.

There are no restrictions on the payment of dividends on the Company's common
stock. Future payment of dividends will be within the discretion of the
Company's Board of Directors and will depend on earnings, capital requirements
and the operating and financial condition of the Company.

ITEM 6. SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                 YEAR ENDED      YEAR ENDED      YEAR ENDED      YEAR ENDED      YEAR ENDED
                                                DECEMBER 31,    DECEMBER 31,    DECEMBER 31,    DECEMBER 31,    DECEMBER 31,
                                                    2001           2000            1999            1998            1997
                                                -----------     -----------     -----------     -----------     -----------
<S>                                             <C>             <C>             <C>             <C>             <C>
OPERATING RESULTS
   Number of racing days                                 84              93             114             122              77
OPERATING REVENUES:
   Net Pari-mutuel commissions and breakage     $ 5,504,645     $ 4,996,851     $ 5,439,471     $ 5,940,500     $ 5,107,853
   Room rental revenue                            1,882,666       1,410,333               -               -              --
   Admissions                                        47,110          69,270          68,843          70,925          61,740
   Food, beverage and concessions                   809,098         848,237         195,038         193,057         109,236
   Other revenues                                   255,846         284,494         250,195         197,434         102,498
                                                -----------     -----------     -----------     -----------     -----------
        Total operating revenues                  8,499,365       7,609,185       5,953,547       6,401,916       5,381,327
                                                -----------     -----------     -----------     -----------     -----------

OPERATING EXPENSES                               10,523,446       8,882,553       7,453,820       7,222,285       5,992,916
                                                -----------     -----------     -----------     -----------     -----------
</TABLE>

                                                                               6
<PAGE>

<TABLE>
<S>                                             <C>             <C>             <C>             <C>             <C>
LOSS FROM OPERATIONS                            $(2,024,081)    $(1,273,368)    $(1,500,273)    $  (820,369)    $  (611,589)
                                                ===========     ===========     ===========     ===========     ===========

   Other Income (loss)                             (235,354)       (577,792)        135,059         933,811          60,482
                                                -----------     -----------     -----------     -----------     -----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM         $(2,262,191)    $(1,474,868)    $(1,368,967)    $   113,038     $  (880,865)
EXTRAORDINARY ITEM - GAIN ON
   EXTINGUISHMENT OF DEFERRED
   RETIREMENT BENEFIT LIABILITY, NET
   OF DEFERRED INCOME TAXES                               -         593,261               -               -               -
                                                -----------     -----------     -----------     -----------     -----------

NET INCOME (LOSS)                               $(2,262,191)    $ (881,607)     $(1,368,967)    $   113,038     $  (880,865)
                                                ===========     ===========     ===========     ===========     ===========
Per share of common stock-basic and diluted
   Net (loss) income before extraordinary item  $     (5.11)    $     (3.33)    $     (4.89)    $      0.45     $     (3.52)
   Extraordinary item                                     -     $      1.34               -               -               -
   Net (loss) income                            $     (5.11)    $     (1.99)    $     (4.89)    $      0.45     $     (3.52)
Cash dividends per share                                  -               -               -               -               -

FINANCIAL CONDITION
TOTAL ASSETS                                    $ 6,166,181     $ 6,993,375     $ 4,386,727     $ 3,189,768     $ 2,430,423
TOTAL LIABILITIES                               $ 5,415,089     $ 6,917,030     $ 3,477,595     $  2,750675     $ 2,104,368
STOCKHOLDERS' EQUITY                            $(2,194,872)    $    76,345     $   909,132     $   439,093     $   326,055
</TABLE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

                              RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2001 AS COMPARED TO DECEMBER 31, 2000

During the year ended December 31, 2001 the Company incurred a loss from
operations of $2,024,081 versus a loss of $1,273,368 for the year ended December
31, 2000.

The increased loss from operations was a result of increased operating expenses
of $8,882,553 in 2000 versus $10,523,446 in 2001. These expense increases were
mainly related to increased payroll and benefits ($647,596), utilities
($103,901), simulcast expenses ($347,024) and food and beverage costs
($159,781). These costs increased in 2001 even though racing days decreased from
93 in 2000 to 84 in 2001 because 2001 includes the expenses of operating the
hotel, acquired in June of 2000 as well as increased simulcast expenses due to
increasing the number of simulcast events.

Operating revenue did increase from $7,609,185 in 2000 to $8,499,365 in 2001.
But the increase was not sufficient to offset the increased expenses that were
incurred in 2001 as discussed above. Operating revenue increases included an
increase of $507,794 in wagering revenue even with a decrease in racing days
previously mentioned because of the $663,656 increase in simulcasting revenue in
2001. The remaining revenue increase in 2001 was a $472,333 increase in room
rental revenue due to operating the hotel for all of 2001 compared to seven
months in 2000.

Other losses in 2001 decreased by $342,238 in 2001 to $235,354 mainly as a
result of special events income of $249,062 in 2001 versus a loss of $411,008 in
2000 which was offset by an

                                                                               7
<PAGE>

increase in interest expense in 2001 of $301,186 to $632,224 versus $331,035 in
2000. The increase in special events income was due to the Company acting as a
venue rather than a promoter of special events in 2001 and the increase in
interest expense represents increased borrowings in 2001 to fund the operating
loss previously discussed.

Income tax expense in 2001 was minimal due to the losses incurred in 2001 and
was $376,092 in 2000 due to the extraordinary gain recognized in 2000 due to the
extinguishment of the deferred retirement benefit liability in 2000.

Net loss for 2001 was $2,262,191 versus a loss of $881,607 in 2000. The
difference results from the extraordinary gain of $593,261 recognized in 2000
and the increased loss from operations of $2,024,081 in 2001 versus $1,273,368
in 2000, or a difference of $750,713.

STATISTICAL COMPARISON:
12 MONTHS ENDED DECEMBER 31, 2001 VS. 12 MONTHS ENDED DECEMBER 31, 2000

<TABLE>
<CAPTION>
                                       TWELVE MONTHS ENDED
                                           DECEMBER 31,              INCREASE
                                      2001            2000          (DECREASE)
                                   -----------     -----------     -----------
<S>                                <C>             <C>             <C>
GROSS HANDLE:
Live Harness                       $ 4,331,615     $ 4,650,566     $  (318,951)
OTB & ITW                            9,349,900       8,952,350         397,550
Thoroughbred Simulcast               7,458,801       4,510,304       2,948,497
Harness Simulcast                    9,976,806       9,220,939         755,867
                                   -----------     -----------     -----------
                                    31,117,122      27,334,159       3,782,963

DAILY AVERAGE:
Live Harness Handle                $    51,567     $    50,006     $     1,561
OTB & ITW Handle                       111,308          96,262          15,047
Attendance (72,548 in 2001 and
 95,407 in 2000)                           864           1,026            (162)

LIVE RACING DAYS                            84              93              (9)
</TABLE>

YEAR ENDED DECEMBER 31, 2000 AS COMPARED TO DECEMBER 31, 1999

During the year ended December 31, 2000, the Company's net loss from operations
decreased by $227,000 (15%) as compared with the year ended December 31, 1999.
Following are the significant factors in this decrease in loss from operations:

         1. Mid-State Raceway, Inc. ("MSR") operates a harness racing track at
Vernon Downs. MSR generated a loss from operations of approximately $1,273,000
in 2000 versus a loss from operations of approximately $1,500,000 in 1999, a
decrease of 15%. A significant factor in this decrease was a decrease in the
number of live racing days from 114 in 1999 to 93 in 2000.

         2. Mid-State Development Corporation ("MSD"), a wholly owned subsidiary
of MSR took over effective control of the Comfort Suites Hotel in May of 2000
from Comfort Associates, Inc. Since MSD has taken over control of operations,
the hotel has generated approximately $573,500 in net operating income,
exclusive of food and beverage operations.

                                                                               8
<PAGE>

         3. MSD has also taken over the operation of concessions (food and
beverage) in 2000 at the harness racing track owned by MSR and the food and
beverage operation of the hotel. Significant start up costs incurred by MSR
resulted in a net operating loss of approximately $534,000 in 2000.

         4. Additionally, MSD has taken over the operation of special events at
Vernon Downs. Administrative costs associated with the production divisions'
operations resulted in an operating loss of approximately $40,000 in 2000.

Other losses of $577,600 in 2000 versus other income of $135,000 in 1999 were
primarily due to:

         Net losses from special events in 2000 amounted to $411,000 versus net
profit of $41,000 in 1999. The losses from special events in 2000 were caused by
MSD promoting some events that proved to be unattractive to the public which
were also hampered by inclement weather. Management has determined that in the
future, Vernon Downs through MSD will function in the capacity of a "venue"
rather than as a "promoter" for most major events such as concerts, motorcycle
and snowmobile races.

         Increase in interest expense in 2000 of $184,000 versus the year 1999
(126% increase) was due to additional borrowings, utilization of a line of
credit and capital leases. In March 1998, MSR voted to terminate its unfunded
deferred compensation plan. Subsequent to this termination, a lawsuit was
brought against MSR by beneficiaries of the deferred compensation plan
challenging the plan's termination and seeking damages of $1,200,000. The
lawsuit was settled in February 2000 with the beneficiaries receiving 4,380
shares of MSR's common stock, valued for financial reporting purposes at $10 per
share, in full settlement of their claim. The gain on this settlement of
approximately $970,000, net of applicable taxes of $376,800 is recognized as an
extraordinary item.

MSR's simulcast operations continued to offer a variety of racing from over 58
different harness and thoroughbred tracks from around the country and
internationally during the year ended December 31, 2000. While the simulcast
operations operate at a profitable margin, the revenues are not sufficient to
cover the losses experiences through live racing.

Expansion of the racing rack to 7/8ths of a mile was successfully completed in
June 2000. It is expected that wagering will increase as a result of the
expanded track and stables are now entering higher quality horses in races at
the track.

Recent legislation in New York State allows MSR to institute a point system to
reward its high roller bettors. The points system can be used to attract high
rollers in much the same way casinos attract high rollers. The point system
combined with telephone account wagering and renovations to the hotel is
expected to increase simulcast and live racing revenues.

STATISTICAL COMPARISON:
12 MONTHS ENDED DECEMBER 31, 2000 VS. 12 MONTHS ENDED DECEMBER 31, 1999

                                                                               9
<PAGE>

<TABLE>
<CAPTION>
                                       TWELVE MONTHS ENDED
                                           DECEMBER 31,             INCREASE
                                      2000            1999         (DECREASE)
                                   -----------     -----------     -----------
<S>                                <C>             <C>             <C>
GROSS HANDLE:
Live Harness                       $ 4,650,566     $ 7,036,061     $(2,385,495)
OTB & ITW                            8,976,421      10,825,173      (1,848,752)
Thoroughbred Simulcast               4,998,655       4,679,854         318,801
Harness Simulcast                    8,449,587       8,879,904        (430,317)
                                   -----------     -----------     -----------
                                    27,075,229      31,420,992      (4,345,763)

DAILY AVERAGE:
Live Harness Handle                $    50,006     $    61,720     $   (11,714)
OTB & ITW Handle                        96,521          94,958           1,563
Attendance (95,407 in 2000 and
 154,128 in 1999)                        1,026           1,352            (326)

LIVE RACING DAYS                            93             114             (21)
</TABLE>

SUBSEQUENT EVENTS

2002 FINANCING AND LOAN AGREEMENTS

In mid-March 2002, MSR entered into a Financing Agreement with Vernon, LLC (a
company controlled by a shareholder). Under the terms of the Financing
Agreement, MSR sold a $400,000 secured convertible promissory note to Vernon,
LLC. The note matures on December 31, 2003 with interest originally at 10%
(amended to 15% in April 2002). The note was initially convertible (subject to
the Exclusive Option Agreement), at the option of Vernon, LLC at any time after
August 1, 2002, into 40,000 shares of MSR common stock at the rate of $10 per
share and subject to certain anti-dilution provisions outlined in the Financing
Agreement and the note. The note is secured by a mortgage and security interest
on MSR property and was subordinate to all other mortgage debt. Additionally,
the Financing Agreement includes a provision for tag along warrants (also
subject to the Exclusive Option Agreement) to be issued if, but only if, the
note is paid prior to the exercise of the conversion privilege. These warrants
permit the recipients to purchase shares of Common Stock for a period of three
years. The Financing Agreement also granted Vernon, LLC the right of first
refusal with respect to any subsequent debt and/or equity financings undertaken
by MSR prior to December 31, 2003 and allowed Vernon, LLC to appoint up to two
Directors on MSR's Board. The Financing Agreement also provided that if the
Exclusive Option Agreement (described in the notes to the financial statements)
was approved by the shareholders that the note would be immediately repaid and
the number of shares issuable upon conversion of the note (or the tag along
warrants) would be reduced to 10,000 shares.

$8,500,000 Loan Agreement

In late March and early April of 2002, MSR and MSD entered into an $8.5 million
loan agreement with All Capital, LLC, a company affiliated with Vernon, LLC and
controlled by a shareholder. The loan agreement was funded in two installments
and is secured by a first mortgage on MSR and MSD land, buildings and
improvements. The initial funding provided $3,695,000 in funds to MSR to satisfy
the $2,816,000 obligation to the bankruptcy trustee described in the notes to
the financial statements. The second funding provided $4,805,000 in funds to MSR
to repay all of the then existing first and second mortgage obligations. The
loan agreement matures March 31, 2003 with interest payable at 15%. The loan
agreement provides MSR with the option to extend the loan for up to four
successive quarters with a final maturity of

                                                                              10
<PAGE>

March 31, 2004. Each quarterly extension requires MSR to pay an extension fee
equal to 1.25% of the unpaid portion of the loan.

The loan agreement also required MSR to pay a commitment and loan fee equal to
5% of the total loan. The commitment and loan fee was paid by MSR using a
portion of the loan proceeds. On April 1, 2002 in connection with the loan
agreement, MSR issued a warrant to purchase 500,000 shares of common stock at a
rate of $2 per share to All Capital, LLC, exercisable (subject to the Exclusive
Option agreement) subsequent to August 1, 2002. In accordance with the
anti-dilution and other provision of the $400,000 secured convertible promissory
note referred to above the number of shares which are issuable to Vernon, LLC
upon conversion of the $400,000 note was increased to 200,000 and the exercise
price upon conversion was reduced to $2 per share.

In the event that the Exclusive Option Agreement was approved by the
shareholders (a) the $8,500,000 would be immediately repayable (b) the warrant
issued to All Capital, LLC would not thereafter be exercisable, and (c) the
number of shares issuable upon conversion of the $400,000 secured convertible
note described above (or the tag along warrants) would be reduced to 50,000
shares.

All Capital, LLC was also granted the right in the loan agreement to designate
four members to the Board of Directors of MSR. Consistent with the ruling of the
New York State Racing and Wagering Board, MSR, Vernon LLC and All Capital, LLC
(and the latter's principal) executed an undertaking not to place nominees on
the Board of Directors or participate in the management of MSR until the
nominees and the principal of All Capital, LLC were licensed. On July 2, 2002,
the nominees and principal were licensed and were subsequently seated as
participating members of the Board of Directors of MSR.

HARNESS RACING LICENSE

On April 8, 2002, the New York State Racing and Wagering Board (the Board)
issued MSR a 90-day limited period harness racing license for the 2002 racing
season. The license expired on July 6, 2002 and was conditional upon numerous
factors involving the $400,000 and $8,500,000 loans referred to above. Extension
of the 2002 license past the July 6, 2002 expiration date was dependent upon,
among other things, the individual licensability, under Board laws and
regulations, of the principals involved in such loans. On July 2, 2002, the
Board voted to extend MSR's limited period track and simulcast license through
December 31, 2002. As a condition of the license extension, MSR was required to
create a segregated escrow account to ensure the payment of purses to horsemen
for sums due to them for periods prior to December 31, 2001.

$1,000,000 Loan

On July 16, 2002, MSR and MSD entered into a $1,000,000 Interim Loan Agreement
with All Capital, LLC. The loan agreement was funded in one installment and is
secured by a mortgage on MSR and MSD land, buildings and improvements. Proceeds
of this loan were applied to the extent of $350,000 to establish a purse escrow
account required by the New York State Racing and Wagering Board as a condition
to the maintenance of the live racing and simulcast licenses; and as to the
remainder, to the short-term obligations and working capital requirements of the
two companies. The loan bears interest at the rate of 15% per annum and matures
on July 15, 2003. The loan agreement also required MSR to pay a commitment and
loan fee equal to 5% of the loan; which fee was paid by MSR out of a portion of
the loan proceeds. On July 16, 2002 in connection with this $1,000,000 loan, MSR
issued a warrant to All Capital, LLC to purchase

                                                                              11
<PAGE>

100,000 shares of common stock at the rate of $2.00 per share exercisable
(subject to the Exclusive Option Agreement) subsequent to August 1, 2002. The
issuance of this warrant did not trigger any of the "anti-dilution" provisions
of either the $400,000 Secured Convertible Promissory Note or the warrant to
purchase 500,000 shares of common stock previously granted to All Capital, LLC
in connection with the $8,500,000 loan. In the event the Exclusive Option
Agreement was approved by the shareholders the warrant to purchase 100,000
shares would not thereafter be exercisable.

$15,000,000 Loan Agreement

On August 28, 2002, MSR and MSD entered into $15,000,000 Loan agreement with All
Capital, LLC. The loan agreement is to be funded in multiple installments and is
secured by a first mortgage on MSR and MSD land, buildings and improvements. The
$12,500,000 proceeds of the first installment of this loan were applied to the
extent (a) $9,900,000 to refinance and consolidate the $400,000, $8,500,000 and
$1,000,000 loans described above, and (b) $2,600,000 for working capital and
payment of the costs associated with the loan. The remaining proceeds of the
loan in the amount of $2,500,000 are to be disbursed in connection with and for
the construction of facilities to be utilized for the installation and operation
of video lottery terminals and for working capital. The loan bears interest at
the rate of 15% per annum and matures on August 28, 2003; however, the loan
agreement provides MSR with the option to extend the loan for up to four
successive quarters with a final maturity date of August 28, 2004 subject to the
payment of a quarterly extension fee of 1.25% of the unpaid portion of the loan.
The loan agreement required MSR to create an interest reserve account to hold
the amount necessary to fund the payment of interest over the initial one-year
term of the loan. The interest reserve was funded by a portion of the loan
proceeds and a credit for the unused balances of interest reserves maintained
for the $8,500,000 and $1,000,000 loans. The loan agreement also required MSR to
pay a commitment and loan fee equal to 5% of the loan; which fee was paid by MSR
out of a portion of the loan proceeds. On August 28, 2002 in connection with the
loan agreement, MSR issued a warrant to All Capital, LLC to purchase 900,000
shares of common stock at the rate of $2.00 per share. The issuance of this
warrant did not trigger any of the "anti-dilution" provision of any of the
$400,000 Secured Convertible Promissory Note or the warrants to purchase 500,000
and 100,000 shares of common stock, respectively, previously granted to All
Capital, LLC described above. In the event the Exclusive Option Agreement is
approved by the shareholders the warrant to purchase 900,000 shares would not
thereafter be exercisable. Also, in connection with the consolidation of the
four loans described above into one $15,000,000 loan, the "tag along" warrant
provisions of the $400,000 Secured Convertible Promissory Note were triggered; a
"tag along" warrant to purchase 200,000 shares of common stock at $2.00 was
issued to All Capital, LLC and the conversion rights to purchase a similar
number of shares at a similar price per share contained in the note were
terminated. Both prior to and after the termination of such conversion rights
and the issuance of the "tag along warrant" All Capital, LLC had the right, upon
exercise of the warrants and/or the conversion rights in the $400,000 note to
acquire 1,700,000 shares of common stock at the rate of $2.00 per share. Under
the terms of the loan agreement All Capital, LLC retained the right to designate
six members of the Board of Director of MSR (and the right of Vernon, LLC, an
affiliate of All Capital, LLC to designate two members was terminated).

2003 LOAN AGREEMENTS AND OTHER FINANCING

$18,000,000 Loan Agreement

                                                                              12
<PAGE>

On January 29, 2003, MSR and MSD entered into an $18,000,000 Loan Agreement with
All Capital, LLC. This loan agreement was secured by a first mortgage on MSR and
MSD land, buildings, and improvements and was also secured by the personal
property of MSR and MSD. The $18,000,000 proceeds of this loan were applied to
the extent of (a) $11,903,831 to refinance and consolidate the $15,000,000 loan,
and (b) $3,689,169 for payment of loan commitment fees, a fund of one year
interest reserve, and for payment of the costs associated with the loan. The
remaining proceeds of the loan in the amount of $2,407,000 were to be disbursed
for working capital and in connection with and for the partial funding of
construction of facilities were to be utilized for the installation and
operation of video lottery terminals. The loan boar interest at the rate of 12%
per annum and was to mature on July 31, 2004. The loan could be extended by MSR
for up to four successive quarters, until July 30, 2005, subject to the payment
of applicable extension fees. The loan agreement required MSR to create an
interest reserve account to hold the amount necessary to fund the payment of
interest over the initial one year term of the loan. The interest reserve was
funded by a portion of the loan proceeds and a credit for the unused balance of
interest reserve maintained for the $15,000,000 loan. The loan agreement also
required MSR to pay a commitment and loan fee equal to 8% of the loan; which fee
was paid by MSR out of a portion of the loan proceeds. Additionally, in the
event of VLT installation at MSR, the loan agreement required the Company to pay
All Capital, LLC the greater of 2% gross or 6% net VLT revenues earned by MSR
through the term of the loan in exchange for management services subject to the
terms of a separate management agreement between All Capital, LLC and MSR. This
management contract was never entered into between All Capital, LLC and MSR
because the loan was repaid prior to the installation of VLTs at MSR.

$23,000,000 Loan Agreement

On June 30, 2003, the MSR and MSD (collectively the "Borrower") entered into a
Loan Agreement (the "Loan Agreement") with Vestin Mortgage, Inc. (a Nevada
corporation) pursuant to which Vestin Mortgage, Inc. ("Vestin") agreed to lend
to the Borrower up to $23,000,000 (the "Vestin Loan"). The Vestin Loan was
evidenced by a Consolidated Secured Promissory Note (the "note") in the original
principal amount of $23,000,000 and was secured by (a) a first mortgage
encumbering all of the real property and improvements thereon owned by the
Borrowers and (b) a first priority security interest in all of the personal
property of the Borrower. Additionally, the owner of All Capital, LLC had agreed
to guarantee the payment of all interest (other than default interest) and
principal payments due under the note until such time as video lottery terminals
("VLTs") are installed and operating at Vernon Downs Racetrack. Neither All
Capital LLC nor its owner received any compensation in connection with the
issuance of such guaranty. The loan boar interest at the rate of 11% per annum
and was to mature on June 30, 2005. Additionally, Vestin had the right to
designate three members to the Board of Directors of the applicant (none have
been as of the date hereof exercised by Vestin).

On June 30, 2003, Vestin advanced $20,300,000 pursuant to the terms of the Loan
Agreement and the note. Such proceeds were applied as follows: (a) $15,834,485
to All Capital, LLC ("All Capital") in satisfaction of the Borrowers obligation
to All Capital pursuant to a certain $18,000,000 Consolidated Secured Promissory
Note dated January 29, 2003 (which promissory note was assigned to Vestin); (b)
$1,686,667 to fund the interest reserve; (c) $1,840,000 to the payment of loan
commitment fees; (d) $150,000 to the payment of closing costs, and (e) $788,848
to working capital of the applicant. An additional $2,700,000 of loan proceeds
were approved to be subsequently drawn down by the Borrower in connection with
the construction of a facility to house the VLTs.

                                                                              13
<PAGE>

By agreement dated June 30, 2003, Vestin sold a $3,000,000 junior participation
in the Vestin Loan and the proceeds thereof, (the "Junior Participation"), to
All Capital LLC. Payments of interest and principal on or with respect to the
Junior Participation were junior and subordinate to the payment of Vestin of
interest and principal on or with respect to Vestin's retained senior
participation (the "Senior Participation") in and to the Vestin Loan, the note
and the loan documents evidencing and/or securing the Vestin Loan and the note.
During November 2003 Vestin repurchased the Junior Participation from All
Capital LLC.

During November 2003, the Vestin Loan Agreement was modified to increase the
maximum amount thereof to $26,000,000; and in connection with such modification
the Company was required to pay loan commitment fees of $300,000 to Vestin and a
loan broker. All of the remaining terms of the loan were unchanged.

V.I.P. Structures, Inc. Deferment

V.I.P. Structures, Inc. ("VIP"), the design/builder of the Company's VLT
Facility, has agreed to defer payment of $800,000 of the construction costs
until November 2004; and in connection therewith All Capital LLC has issued a
limited guarantee of $500,000 of such obligation to VIP. The Company has agreed
to indemnify All Capital LLC for any liability under such guaranty. All Capital
LLC received no compensation in connection with the issuance of such guaranty.

$250,000 Sunset Management LLC Loan

During November 2003, Sunset Management LLC loaned to the Company, on an
unsecured basis, the sum of $250,000 at the rate of 25% per annum. This bridge
loan was promptly repaid by the Company and the interest expense with respect
thereto was less than $4,000.

2003 RACING AND SIMULCAST LICENSES

In December 2002, the New York State Racing and Wagering Board (the "Board")
denied MSR's application for 2003 racing and simulcast licenses. The Board's
determination with respect to MSR's 2003 licenses was stayed by court order.
2003 license negotiations between MSR and the Board continued through the first
quarter of 2003. In April 2003, MSR and the Board entered into a stipulation and
settlement (the "SS Agreement"), which effectively granted MSR condition racing
and simulcast licenses for the 2003 racing season. The SS Agreement requires
that MSR and an associated of MSR's then major creditor complete new
applications in a timely period and that the associated be subject to a
background investigation by the Board. The SS Agreement further provided for a
$25,000 fine (of which $15,000 was abated) for conduct committed by prior
management in violation of the Board's rules and regulations.

Concurrent with the SS Agreement, MSR and the associate entered into a separate
agreement whereby the associate (who otherwise had no obligation to do so)
agreed to file such application and cooperate with the Board's investigation.
MSR agreed to reimburse the associate for all reasonable costs associated with
complying with the Board's investigation. Further, as additional consideration,
MSR agreed to pay an incentive fee of $280,000 to the associate over a 28-month
period commencing May 2003. Also, in April 2003, in connection with the
agreement, MSR granted the associate a warrant to purchase 23,800 shares of MSR
common stock at a price of $8.58 per share. The warrant expires on April 8,
2008.

                                                                              14
<PAGE>

From the proceeds of the increase in the Vestin Loan from $23,000,000 to
$26,000,000, the Company paid in full (a) all sums due pursuant to the SS
Agreement and (b) the Sunset Management LLC $250,000 loan.

                         LIQUIDITY AND CAPITAL RESOURCES

Due to the loss from operations in 2001, cash of $1,204,222 was used in
operations. This deficit was financed through the sale of investment securities
of $520,676 and additional borrowings of $1,141,000, net of repayments of
$313,655. Increased borrowings were the result of the $700,000 line of credit
obtained in 2001, which was subsequently repaid in April 2002.

The Company was in default under a substantial portion of its long-term debt at
December 31, 2001. However, due to the refinancing discussed under subsequent
events these obligations have been repaid and the proceeds from the borrowings
were sufficient to provide funds for operations in 2002 as well.

The Company had a deficit in working capital of $2,350,310 at December 31, 2001
compared with a deficit in working capital of $2,819,006 at December 31, 2000.
The decrease in the deficit was due to the refinancing in 2002 discussed under
subsequent events, which reclassified all but $96,110 of long-term debt to a
non-current liability at December 31, 2001.

                    RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 141, Business Combinations (SFAS 141),
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets (SFAS 142), and Statement of Financial Accounting Standards
No. 143, Accounting for Asset Retirement Obligations (SFAS 143). In August 2001,
FASB issued Statement of Financial Accounting Standards No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets (SFAS 144).

SFAS 141 addresses financial accounting and reporting for business combinations
and requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. Additionally, SFAS 141 further
clarifies the criteria to recognize intangible assets separately from goodwill.
SFAS 142, effective October 1, 2001, provides that goodwill and certain
indefinite lived intangible assets will no longer be amortized but will be
reviewed at least annually for impairment and written down and charged to income
when their recorded value exceeds their estimated fair value. Separable
intangible assets that do not have an indefinite life will continue to be
amortized over their useful lives. SFAS 143, effective in 2003, requires
recording of the fair value of liabilities associated with the retirement of
long-lived assets in the period in which they are incurred. SFAS 144, effective
in 2002, provides new guidance on the recognition of impairment losses on
long-lived assets to be held and used or to be disposed of and also broadens the
definition of what constitutes a discontinued operation and how the results of a
discontinued operation are to be measured and presented.

The adoptions of SFAS 141, SFAS 142, SFAS 143 and SFAS 144 have not had a
material impact on the consolidated results of operations or financial position
of the Company.

ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

                                                                              15
<PAGE>

The Company presently does not hold any derivative financial instruments that
would subject it to market risk inherent in derivative financial instruments.

A significant portion of the Company's long-term debt, as refinanced throughout
2002 and in 2003, bears interest at a fixed rate of 11%. The fixed interest rate
limits the amount of exposure that the Company has to change in interest rates.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated financial statements of the Company and the report of the
independent accountants are submitted under item 15 of this report and should be
read in conjunction with the Companies Form 10-K filed concurrently for the year
ended December 31, 2002.

ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE

None.

PART III.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The directors and officers of the Company as of December 1, 2003 are as follows:

<TABLE>
<CAPTION>
                                                      Common Shares
                                                       Beneficially
                                          Became       Owned as of
             Name                 Age    Director    December 1, 2003    Percent
------------------------------    ---    --------    ----------------    -------
<S>                               <C>    <C>         <C>                 <C>
   *Paul V. Noyes                 73       1998                -              -
   *Dominic A. Giambona           65       1999           68,833           7.71%
  **Edward A. Kiley               62       1999              250            ***
    Deborah Bishop                53       2002                -              -
*,**Jerry D. Mottern              45       2002                -              -
   *Hoolae Paoa                   53       2002                -              -
    Joan Rae Parker               65       2002                -              -
*,**Victoria Ann Scott            61       2002          450,000          50.41%
   *John Stone                    46       2002                -              -
    Jack D. Dallas                64          -                -              -
    David E. Wilson               67          -                -              -
    Rose H. Frawert               39          -                -              -
    All officers and directors
    as a group                                           519,083          58.12%
</TABLE>

 *  Member of Executive Committee

**  Member of Audit Committee

*** Less than one percent

                                                                              16
<PAGE>

DEBORAH BISHOP (age 53) was appointed to the Board of Directors in 2002 and
serves as the Assistant Secretary. She is a proven professional in the field of
corporate administration. Ms. Bishop recently was associated with Delta Downs
thoroughbred racing in Vinton, Louisiana and subsequently Vernon Downs in an
administrative capacity.

JACK D. DALLAS (age 64) is Mid-State Raceway's Vice President of Hospitality and
Resort Operations. Mr. Dallas has an extensive background in hospitality and
gaming, having directed the truck stop gaming operations in Louisiana for Delta
Downs. He also has worked as the general manager or head of operations for
numerous hotels, including the Disneyland Hotel, the Royal Lahaina Resort,
Radisson Hotel at Fisherman's Wharf and several others.

DOMINIC A. GIAMBONA (age 65) was Chairman of the Board from September 8, 2000
through September 26, 2001 and has served as a Director since September 1999.
Mr. Giambona is a private investor and business consultant. Born and raised in
Rome, New York, Mr. Giambona now resides in Jupiter, Florida. He is a graduate
of Syracuse University and has more than 40 years experience with building
construction, facilities management, development and marketing.

EDWARD A. KILEY (age 62) has served as a Director since June 1999 and is
currently Secretary of the Company. He is a 1964 graduate of Brown University
and Dean's List and Cum Laude graduate of the Syracuse University School of Law.
A member of the New York, Florida and United States Supreme court bars before
retiring from the practice of law in 1995, he is currently employed as a
financial planner. He is the eldest son of Vernon Downs founder William F.
Kiley.

JERRY D. MOTTERN (age 45) was appointed to the Board of Directors in 2002. He is
in the practice of Public Accounting as a sole practitioner based in Twin Falls,
Idaho. Previously, Mr. Mottern was an associate of McMullen, McPhee and Company,
CPA's and Cooper Norman and Company. Mr. Mottern practices principally in the
area of taxation. He received his Bachelor of Science from the University of
Idaho in 1980 and is a member of the American Institute of Certified Public
Accountants.

PAUL V. NOYES (age 73) has served as a Director since August 1998. He is an
attorney with an office in Sherrill, New York. Mr. Noyes, a former shareholder
of Mid-State Raceway, Inc. (1968-2003), is a graduate of Hamilton College and
Cornell University Law School.

HOOLAE PAOA (age 53) is the Chairman of the Board, President and CEO of
Mid-State Raceway, Inc. His background is primarily in hospitality and facility
development, including hotels, restaurants, retail centers, golf courses,
racetracks and casinos. Mr. Paoa was recently responsible for the operations,
expansion and ultimate sale of Delta Downs Racetrack and Casino. Born and raised
in Hawaii, Mr. Paoa currently resides in Vernon, New York. The New York Racing
and Wagering Board refused to renew Mr. Paoa's individual license to participate
in New York racing on December 12, 2003. Dave Wilson is the acting president
during Mr. Paoa's appeal process.

JOAN RAE PARKER (age 65) was appointed to the Board of Directors in 2002. She
recently retired from a career in the field of corporate administration with
Bridge Capital, LLC. Ms. Parker attended the University of Idaho and currently
resides in Henderson, Nevada.

VICTORIA ANN SCOTT (age 61) has served on the Board of Directors since 2002. Her
extensive experience in the gaming industry includes the responsibility of
building, licensing and managing video poker lounges in Louisiana. She holds two
gaming device owner licenses and

                                                                              17
<PAGE>

four video poker type V licenses. Effective November 13, 2003, Ms. Scott
acquired and exercised warrants to purchase 450,000 shares of Common Stock
(previously issued to All Capital LLC); and in connection therewith paid the
Company $900,000 for such shares.

JOHN STONE (age 46) was appointed to the Board of Directors in 2002. He has an
extensive background and is currently involved in property management in the
private sector. Mr. Stone received a Bachelor of Science degree from DeVry
Institute of Technology.

DAVID E. WILSON (age 67) is the Vice President of Racing and Facilities and
acting Chief Operating Officer for Mid-State Raceway, Inc. Mr. Wilson has over
45 years of experience in the racing industry, including stints at many
prestigious tracks, as well as the Daily Racing Form. Most recently, he was the
Vice President of Racing and the General Manager of Delta Downs in Louisiana. He
also serves as Vice President for the Lea Downs Racetrack and Casino in Hobbs,
New Mexico.

ROSE FRAWERT (age 39) was appointed Treasurer and Chief Financial Officer of the
Company on November 14, 2003 replacing James R. Wise who had served in such
capacities since October 1997. Ms. Frawert joins Mid-State Raceway after most
recently serving as Casino Controller for the Reno Hilton, a Park Place
Entertainment business. Prior experience includes serving as assistant Corporate
Controller for Phoenix Leisure, a gaming development and management company, and
with Caesars World, where she advanced through the company's financial
structure. Ms. Frawert holds a bachelors degree in accounting and is a Certified
Public Accountant.

ITEM 11. EXECUTIVE COMPENSATION

The following table sets forth summary information concerning compensation paid
or accrued by the Company for services rendered during the last three fiscal
years by the named Executive Officers.

<TABLE>
<CAPTION>
                                                             Consulting
     Name and Principal Position           Salary    Bonus      Fees
--------------------------------------     -------   -----   ----------
<S>                                        <C>       <C>     <C>
Justice M. Cheney
President and Chief Executive Officer

January 1, 1999 to December 31, 1999       $60,000
January 1, 2000 to October 28, 2000         50,769      -           -
May 26, 2001 to December 31, 2001           39,118      -           -

John J. Signorelli
President and Chief Executive Officer

September 1, 1999 to December 31, 1999           -      -     $26,000
January 1, 2000 to December 31, 2000             -      -      75,000
November 26, 2000 to December 31, 2000     $ 6,000      -           -
January 1, 2001 to April 21, 2001           37,049      -           -
</TABLE>

No other executive officer received an annual salary and bonus in excess of
$100,000 during the fiscal years ended December 31, 1999, 2000 and 2001. Dominic
A. Giambona received consulting fees of $60,900 during 2000.

                                                                              18
<PAGE>

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

At the close of business on December 1, 2003, the Company had outstanding
892,776 shares of common stock. No person or group is known by the Company to
beneficially own more than 5% of the Company's common stock except as set forth
in the following table.

<TABLE>
<CAPTION>
                                      Amount of
       Name and Address               Beneficial       Percent
    Of Beneficial Officer             Ownership         Class
-------------------------------     --------------     -------
<S>                                 <C>                <C>
Richard C. Breeden, Trustee         38,000 shares       4.25%
Bennett Management &
Development Corp.
Two Clinton Square
Syracuse, NY 13202

Richard C. Breeden, Trustee         126,657 shares     14.18%
The Bennett Funding Group, Inc.
And Neil H. Ackerman, Trustee
NW Investors II
555 Fifth Ave.
New York, NY 10017

Dominic A. Giambona                 68,833 shares       7.71%
249 Barbados Drive
Jupiter, FL 33458

John J. Signorelli                  68,833 shares       7.71%
25 Mandia Lane
PO Box 386
Goldens Bridge, NY 10526

Victoria Scott                      450,000 shares     50.40%
7000 Beach Plaza, Suite 702
St, Petersburg Beach, FL 33706
</TABLE>

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

At December 31, 2001 the Company had outstanding borrowings of $1,650,000 with
interest at 12% to a lender who was also a board member. Interest expense
incurred related to this loan was $181,000 in 2001. In March 2001, to extend the
due date of these loans to May 2002, the lender was granted a warrant to
purchase 10,000 shares of stock at a price of $10 per share. This loan was
repaid in April 2002 in connection with a refinancing of substantially all of
the Company's debt with All Capital LLC.

The Company had outstanding at December 31, 2001 $166,500 of debt with two board
members, one of whom was an officer. The debt bears interest at 12%. Interest
expense related to this loan approximated $20,000 in 2001. The amount
outstanding was repaid in April 2002 with the refinancing discussed above.

                                                                              19
<PAGE>

At December 31, 2001, the Company had a $300,000 loan outstanding due to a board
member. The debt bears interest at 13%. Interest expense related to this loan
approximated $42,250 in 2001. In March 2001 in consideration for amendments to
this loan agreement, the lender was granted a warrant to purchase 2,700 shares
of stock at a price of $10 per share. This loan was repaid in April 2002 with
the refinancing discussed above.

On January 11, 2001, the Board of Directors of the Company authorized the
issuance of a total of 24,840 shares of common stock to four individual
shareholders (three of whom were board members and two of whom were officers) in
an effort to prevent the dilution of such shareholders' ownership interest in
the Company, which includes 21,600 shares that are subject to pending
litigation. These anti-dilution shares of common stock were never issued. Due to
the fact that these shares were authorized without consideration on the part of
the shareholders, legal counsel for the Company has advised that any such
issuance would not be valid. Further, since the stock certificates were not
issued to the shareholders for the shares in question, legal counsel believes
that the Company does not need to take any action to rescind the authorization
for the issuance of such shares. On December 17, 2001 the Board of Directors
clarified the minutes of the January 11, 2001 meeting to state the 24,840 shares
of common stock will be issued for past services. However, issuance of the stock
is subject to approval by the shareholders, by Board resolution.

See elsewhere herein information with respect to the following transactions:

(I)      In March 2002 the Company entered into a Financing Agreement with
Vernon, LLC, a company controlled by a shareholder.

(II)     In April 2002 the Company entered into an $8,500,000 Loan Agreement
with All Capital, LLC, a Company affiliated with Vernon, LLC.

(III)    On July 16, 2002 the Company borrowed $1,000,000 from All Capital LLC.

(IV)     On August 28, 2002, the Company entered into a $15,000,000 loan
agreement with All Capital LLC.

(V)      On January 29, 2003, the Company entered into an $18,000,000 Loan
Agreement with All Capital LLC.

In 2002, 2001, and 2000, MSR paid approximately $59,000, $131,000, and $232,000,
respectively, to related parties for consulting services, lodging, and interest,
including amounts attributable to long-term debt (Note 7).

In December 2002, in order to induce the NYS Racing and Wagering Board (the
"Board') to issue a license to its President and CEO, the Company advanced
approximately $67,000 in the form of a security deposit to a third party for the
benefit of its President and CEO. Upon the satisfaction by the President and CEO
of the provisions of a certain undertaking given to the Board, the advance will
be returned to MSR. Should the advance be applied to the benefit of the
President and CEO it will, at that time, be treated as additional compensation.

A Company owned by MSR's President and CEO has a consulting agreement with MSR
to provide VLT consulting services to MSR in exchange for monthly payments of
$6,500 through March 2004.

                                                                              20
<PAGE>

ITEM 14. CONTROLS AND PROCEDURES

(a) Disclosure Controls and Procedures.

Within the 90 days before the date of this Form 10-K, we evaluated the
effectiveness of the design and operation of our "disclosure controls and
procedures". Mid-State Raceway, Inc. and Subsidiary conducted this evaluation
under the supervision and with the participation of management, including our
Chief Executive Officer and Chief Financial Officer.

(i) Definition of Disclosure Controls and Procedures.

Disclosure controls and procedures are controls and other procedures that are
designed with the objective of ensuring that information required to be
disclosed in our periodic reports filed under the Exchange Act, such as this
report, is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms. As defined by the SEC, such disclosure
controls and procedures are also designed with the objective of ensuring that
such information is accumulated and communicated to our management, including
the Chief Executive Officer and Chief Financial Officer, in such a manner as to
allow timely disclosure decisions.

(ii) Limitations on the Effectiveness of Disclosure Controls and Procedures and
Internal Controls.

The Company recognizes that a system of disclosure controls and procedures (as
well as a system of internal controls), no matter how well conceived and
operated, cannot provide absolute assurance that the objectives of the system
are met. Further, the design of such a system must reflect the fact that there
are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty, and that breakdowns
can occur because of simple error or mistake. Additionally, controls can be
circumvented in a number of ways. Because of the inherent limitations in a
cost-effective control system, system failures may occur and not be detected.

(iii) Conclusions with Respect to Our Evaluation of Disclosure Controls and
Procedures.

Subject to the limitations described above and not withstanding the delinquency
of this report, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures going forward are
effective in timely alerting them to material information relating to Mid-State
Raceway, Inc. and subsidiary required to be included in The Company's periodic
SEC filings.

(b)   Changes in Internal Controls.

      There have been no significant changes in The Company's internal controls
      or in other factors that could significantly affect these controls
      subsequent to the date of their evaluation.

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)      Financial Statements

         (1)      Reports of Independent Auditors
                  Consolidated Balance Sheets at December 31, 2001 and 2000
                  Consolidated Statements of Operations for the years ended
                     December 31, 2001, 2000 and 1999
                  Consolidated Statements of Changes in Shareholders' Equity for
                     the years ended December 31, 2001, 2000 and 1999
                  Consolidated Statements of Cash Flows for the years ended

                                                                              21
<PAGE>

                     December 31, 2001, 2000 and 1999
                  Notes to Consolidated Financial Statements

         (2)      The following financial statement schedules are included in
                  this Form 10-K report

                  None.

         All other schedules are omitted because they are not required, are
inapplicable or the information is otherwise shown in the financial statements
or notes thereto.

(b)      Reports on Form 8-K filed during the last quarter of 2001

         Form 8-K dated October 19, 2001 reported the signing of an agreement to
give an exclusive option to a third party to purchase the Company's stock and
assets for $9,000,000 under Item 5.

         Form 8-K dated October 30, 2001 reported the retention of independent
accountants for the registrant under Item 5.

(c)      Exhibits:

Exhibit 21.1 Subsidiaries of the Registrant
Exhibit 31.1 Certification of Chief Executive Officer
Exhibit 31.2 Certification of Principal Financial and Accounting Officer
Exhibit 32.1 Sarbanes-Oxley Chief Executive Officer
Exhibit 32.2 Sarbanes-Oxley Principal Financial and Accounting Officer

                                                                              22
<PAGE>

                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the Registrant has duly caused this Report to be
signed on its behalf by the undersigned, thereunto duly authorized.

                                            MID-STATE RACEWAY, INC.
                                            (Registrant)

                                        BY: /S/ HOOLAE PAOA
                                           -------------------------------------
                                                Hoolae Paoa
                                                Chief Executive Officer

                                                JANUARY 10, 2004

         Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities indicated on the 10th day of January 2004.

/S/ HOOLAE PAOA
Hoolae Paoa
President, Chief Executive Officer, and Chairman of the Board

/S/ ROSE H. FRAWERT
Rose H. Frawert
Principal Financial and Accounting Officer

/S/ DAVE WILSON
Dave Wilson
Acting Chief Operating Officer

/S/ ANDREW EDWARD KILEY
Andrew Edward Kiley
Director and Secretary

/S/ VICTORIA SCOTT
Victoria Scott
Director

/S/ JERRY MOTTERN
Jerry Mottern
Director

/S/ DEBBIE BISHOP
Debbie Bishop
Director

/S/ JOHN STONE
John Stone
Director

/S/ JOAN PARKER
Joan Parker
Director

                                                                              23
<PAGE>

INDEPENDENT AUDITOR'S REPORT

To the Board of Directors and Shareholders
Mid-State Raceway, Inc. and Subsidiary

We have audited the accompanying consolidated balance sheets of Mid-State
Raceway, Inc. and Subsidiary as of December 31, 2001 and 2000, and the related
consolidated statements of operations, changes in shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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.

As explained further in Note 19 to the financial statements, during August 2002,
the Company entered into a $15,000,000 loan agreement that is secured by a first
mortgage on Company land, buildings and improvements. The loan bears interest at
the rate of 15% per annum and matures in August 2003; however, the loan
agreement provides the Company with the option to extend the loan for up to four
consecutive quarters to August 2004, subject to the payment of a quarterly
extension fee.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Mid-State Raceway,
Inc. and Subsidiary as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States of America.

                                                 /s/ Urbach Kahn & Werlin LLP
                                                 ---------------------------
Albany, New York

May 1, 2002, except for note 16, as to which the date is
August 28, 2002, and the last paragraphs of notes 13,
18 and 19, as to which the date is December 16, 2002.

                                                                              24
<PAGE>

                                                     CONSOLIDATED BALANCE SHEETS
                                                      DECEMBER 31, 2001 AND 2000

<TABLE>
<CAPTION>
                                                                       2001             2000
                                                                   ------------     ------------
<S>                                                                <C>              <C>
ASSETS
CURRENT ASSETS
   Cash and cash equivalents                                       $     41,287     $    146,180
   Restricted cash                                                      192,903          127,568
   Other receivables, net of allowance for doubtful accounts of
     $10,000 in 2001 and 2000                                           242,527          311,372
   Investments                                                                -          501,475
   Other current assets                                                 118,937          164,429
                                                                   ------------     ------------
          Total current assets                                          595,654        1,251,024
                                                                   ------------     ------------
PROPERTY, BUILDINGS AND EQUIPMENT
   Land, buildings and equipment                                     17,439,753       17,162,848
   Other properties                                                     121,671          121,671
                                                                   ------------     ------------
                                                                     17,561,424       17,284,519
   Less accumulated depreciation                                     11,990,897       11,551,072
                                                                   ------------     ------------
                                                                      5,570,527        5,733,447
                                                                   ------------     ------------
OTHER ASSETS
   Other assets                                                               -            8,904
                                                                   ------------     ------------
                                                                              -            8,904
                                                                   ------------     ------------
                                                                   $  6,166,181     $  6,993,375
                                                                   ============     ============

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
   Lines of credit                                                 $    674,678     $    347,333
   Current portion of long term debt                                     96,110        1,963,622
   Accounts payable and accrued expenses                              1,767,782        1,636,262
   Uncashed winning tickets                                              63,736           56,336
   Deposits and other current liabilities                               138,391           26,585
   Retention for capital improvements                                    45,267           39,892
   Deferred grant revenue                                               160,000                -
                                                                   ------------     ------------
          Total current liabilities                                   2,945,964        4,070,030
                                                                   ------------     ------------
LONG-TERM DEBT, net of current portion                                5,415,089        2,847,000
                                                                   ------------     ------------
CONTINGENCIES (Notes 14, 16, 18, 19 and 20)
SHAREHOLDERS' EQUITY
   Common stock, par value $.10 per share;
     authorized 10,000,000 shares; issued and
     outstanding 442,766 shares in 2001 and 2000                         44,277           44,277
   Additional paid-in capital                                         2,084,909        2,084,909
   Accumulated deficit                                               (4,324,058)      (2,061,867)
   Accumulated other comprehensive income                                     -            9,026
                                                                   ------------     ------------
          Total shareholders' equity                                 (2,194,872)          76,345
                                                                   ------------     ------------
                                                                   $  6,166,181     $  6,993,375
                                                                   ============     ============
</TABLE>

                                 See Notes to Consolidated Financial Statements.

                                                                              25

<PAGE>

                                             CONSOLIDATED STATEMENT OF OPERATION
                                                      DECEMBER 31, 2001 AND 2000

<TABLE>
<CAPTION>
                                                                             FOR THE YEAR        FOR THE YEAR        FOR THE YEAR
                                                                                ENDED               ENDED               ENDED
                                                                             DECEMBER 31,        DECEMBER 31,        DECEMBER 31,
                                                                                2001                2000                1999
                                                                           (84 RACING DAYS)    (93 RACING DAYS)    (114 RACING DAYS)
                                                                           ----------------    ----------------    -----------------
<S>                                                                        <C>                 <C>                 <C>
Operating revenues:
   Net pari-mutuel commissions and breakage from wagering:
     Vernon Downs Harness                                                  $       837,718     $       896,222     $      1,230,005
     Off-track betting (OTB) and inter-track wagering (ITW)                      1,433,419           1,530,777            1,613,935
     Simulcasting                                                                3,233,508           2,569,852            2,595,531
                                                                           ---------------     ---------------     ----------------
                                                                                 5,504,645           4,996,851            5,439,471
   Room rental revenue                                                           1,882,666           1,410,333                    -
   Admissions                                                                       47,110              69,270               68,843
   Food, beverage, and concessions                                                 809,098             848,237              195,038
   Other revenues                                                                  255,846             284,494              250,195
                                                                           ---------------     ---------------     ----------------
         Total operating revenues                                                8,499,365           7,609,185            5,953,547
                                                                           ---------------     ---------------     ----------------
Operating expenses:
   Purses                                                                        1,896,896           1,796,874            1,992,214
   Payroll                                                                       2,746,811           2,355,818            1,524,236
   Taxes, other than income                                                        559,410             302,807              401,921
   Outside services and rentals                                                    227,209             405,276              209,434
   Utilities                                                                       843,694             739,793              469,621
   Simulcasting expenses                                                         1,282,148             935,124              994,934
   Food and beverage costs                                                         471,765             311,984                    -
   Depreciation                                                                    445,357             356,774              191,984
   Bad debts (recovery)                                                              4,897            (101,637)              91,586
   Settlement of lawsuit (Note 18)                                                       -                   -              380,000
   Other expenses                                                                2,045,259           1,779,740            1,197,890
                                                                           ---------------     ---------------     ----------------
         Total operating expenses                                               10,523,446           8,882,553            7,453,820
                                                                           ---------------     ---------------     ----------------
Loss from operations                                                            (2,024,081)         (1,273,368)          (1,500,273)
                                                                           ---------------     ---------------     ----------------
Other income (loss):
   Special events income (loss), net                                               249,062            (411,008)              41,418
   Commissions for capital improvements                                             46,668             101,960                    -
   Aid from state and local governments                                             80,550              36,248              233,751
   Loss on sale of other assets                                                     (2,892)                  -                    -
   Investment income                                                                23,482              26,243                6,598
   Interest expense                                                               (632,224)           (331,035)            (146,708)
                                                                           ---------------     ---------------     ----------------
         Total other income (loss)                                                (235,354)           (577,592)             135,059
                                                                           ---------------     ---------------     ----------------
Loss before (provision) benefit for federal and state
   income taxes and extraordinary item                                          (2,259,435)         (1,850,960)          (1,365,214)
                                                                           ---------------     ---------------     ----------------
(Provision) benefit for federal and state income taxes:
   Currently payable                                                                (2,756)               (708)              (3,753)
   Deferred benefit                                                                      -             376,800                    -
                                                                           ---------------     ---------------     ----------------
         Total provision (benefit) for federal and state income taxes               (2,756)            376,092               (3,753)
                                                                           ---------------     ---------------     ----------------
Loss before extraordinary item                                                  (2,262,191)         (1,474,868)          (1,368,967)
                                                                           ---------------     ---------------     ----------------
Extraordinary item - gain on extinguishment of deferred retirement
   benefit liability, net of deferred income taxes of $376,800 (Note 18)                 -             593,261                    -
                                                                           ---------------     ---------------     ----------------
Net loss                                                                   $    (2,262,191)    $      (881,607)    $     (1,368,967)
                                                                           ===============     ===============     ================
Loss per common share - based on weighted
   average shares outstanding
Loss before extraordinary item                                             $         (5.11)    $         (3.33)    $          (4.89)
Extraordinary item                                                         $             -     $          1.34     $              -
Loss after extraordinary item                                              $         (5.11)    $         (1.99)    $          (4.89)
                                                                           ===============     ===============     ================
</TABLE>

                                 See Notes to Consolidated Financial Statements.

                                                                              26

<PAGE>

                      CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                                   YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999

<TABLE>
<CAPTION>
                                                                                      (ACCUMULATED   ACCUMULATED
                                                        COMMON STOCK     ADDITIONAL     DEFICIT)/       OTHER
                                                      ----------------    PAID-IN       RETAINED    COMPREHENSIVE
                                                      SHARES    AMOUNT    CAPITAL       EARNINGS       INCOME         TOTAL
                                                      -------  -------  -----------   ------------  -------------  ------------
<S>                                                   <C>      <C>      <C>           <C>           <C>            <C>
Balances at January 1, 1999                           250,386  $25,039  $   225,347   $   188,707   $          -   $   439,093
Comprehensive income (loss)
   Net loss for the year                                    -        -            -    (1,368,967)             -    (1,368,967)
   Unrealized gain on securities available for sale         -        -            -             -          4,006         4,006
                                                                                      -----------   ------------   -----------
     Total comprehensive income (loss)                                                 (1,368,967)         4,006    (1,364,961)
Issuance of common stock through private placement,
  net of issuance costs of $45,000                    150,000   15,000    1,440,000                                  1,455,000
Issuance of common stock for settlement of lawsuit
  (Note 18)                                            38,000    3,800      376,200                                    380,000
                                                      -------  -------  -----------   -----------   ------------   -----------
Balances at December 31, 1999                         438,386   43,839    2,041,547    (1,180,260)         4,006       909,132
Comprehensive income (loss)

   Net loss for the year                                    -        -            -      (881,607)             -      (881,607)
   Unrealized gain on securities available for sale         -        -            -             -          5,020         5,020
                                                                                      -----------   ------------   -----------
     Total comprehensive income (loss)                                                   (881,607)         5,020      (876,587)
Issuance of common stock for settlement of lawsuit
  (Note 18)                                             4,380      438       43,362             -              -        43,800
                                                      -------  -------  -----------   -----------   ------------   -----------
Balances at December 31, 2000                         442,766   44,277    2,084,909    (2,061,867)         9,026        76,345
   Net loss for the year                                    -        -            -    (2,262,191)             -    (2,262,191)
   Unrealized loss on securities available for sale         -        -            -             -         (9,026)       (9,026)
                                                                                      -----------   ------------   -----------
     Total comprehensive loss                               -        -            -    (2,262,191)             -    (2,262,191)
                                                      -------  -------  -----------   -----------   ------------   -----------
Balances at December 31, 2001                         442,766  $44,277  $ 2,084,909   $(4,324,058)  $          -   $(2,194,872)
                                                      =======  =======  ===========   ===========   ============   ===========
</TABLE>

                                 See Notes to Consolidated Financial Statements.

                                                                              27

<PAGE>

                                           CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   Years Ended December 31, 2001, 2000, and 1999

<TABLE>
<CAPTION>
                                                                        FOR THE YEAR      FOR THE YEAR      FOR THE YEAR
                                                                            ENDED            ENDED              ENDED
                                                                        DECEMBER 31,      DECEMBER 31,       DECEMBER 31,
                                                                            2001              2000               1999
                                                                      (84 RACING DAYS)  (93 RACING DAYS)  (114 RACING DAYS)
                                                                      ----------------  ----------------  -----------------
<S>                                                                   <C>               <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES
   Net loss                                                           $    (2,262,191)  $      (881,607)  $     (1,368,967)
   Adjustments to reconcile net loss to net cash used in
     operating activities:
       Settlement of lawsuit                                                        -                 -            380,000
       Extinguishment of deferred benefit liability                                 -          (593,261)                 -
       Deferred tax benefit                                                         -          (376,800)                 -
       Depreciation                                                           445,357           356,774            191,984
       Change in allowance for doubtful accounts                                    -          (102,000)            90,000
       Realized and unrealized (gain) loss on investments                     (28,227)           17,917             (4,006)
       Imputed interest expense                                               263,105           128,947                  -
       Loss on sale/disposal of equipment                                       2,892                 -                  -
       Changes in:
         Restricted cash                                                      (65,335)           30,341            (70,431)
         Accounts and grants receivable                                        68,845           364,243           (167,011)
         Other current assets                                                  45,492            (3,165)            91,613
         Other assets                                                           8,904            20,361             48,341
         Accounts payable                                                      32,355           224,336            409,302
         Uncashed winning tickets and other current liabilities               119,206            19,529              4,134
         Deferred revenue                                                     160,000                 -                  -
         Retention for capital improvements                                     5,375           (44,380)            63,484
                                                                      ---------------   ---------------   ----------------
           Net cash used in operating activities                           (1,204,222)         (838,765)          (331,557)
                                                                      ---------------   ---------------   ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
   Proceeds from maturities and sales of available-for-sale
     investment securities                                                    520,676           168,160                  -
   Purchase of available-for-sale investment securities                             -          (487,427)          (192,113)
   Proceeds from sale of equipment                                             12,700                 -                  -
   Purchase of properties and equipment                                      (182,603)         (658,394)          (505,042)
                                                                      ---------------   ---------------   ----------------
           Net cash provided by (used in) investing activities                350,773          (977,661)          (697,155)
                                                                      ---------------   ---------------   ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
   Proceeds from debt                                                       1,141,000           897,333            250,000
   Principal payments on line of credit                                      (313,655)                -                  -
   Principal payments on capital leases                                       (78,789)          (48,256)                 -
   Net proceeds from sale of stock                                                  -                 -          1,455,000
                                                                      ---------------   ---------------   ----------------
           Net cash provided by financing activities                          748,556           849,077          1,705,000
                                                                      ---------------   ---------------   ----------------
Net increase (decrease) in cash and cash equivalents                         (104,893)         (967,349)           676,288
Cash and cash equivalents at beginning of year                                146,180         1,113,529            437,241
                                                                      ---------------   ---------------   ----------------
Cash and cash equivalents at end of year                              $        41,287   $       146,180   $      1,113,529
                                                                      ===============   ===============   ================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
     Cash paid during the year for:
       Interest                                                       $       351,228   $       176,656   $        137,958
       Income taxes                                                   $         2,756   $           696   $              -
                                                                      ===============   ===============   ================
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
   Acquisition of hotel building and equipment:
     Debt incurred                                                    $             -   $     2,421,155   $              -
     Accounts payable and other liabilities assumed                                 -           345,856                  -
   Capital leases                                                     $        16,261   $       508,776   $              -
   Accounts payable incurred for property and equipment               $        99,165   $             -   $              -
                                                                      ===============   ===============   ================
</TABLE>

                                 See Notes to Consolidated Financial Statements.

                                                                              28

<PAGE>

NOTE 1.  NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

            NATURE OF OPERATIONS:

         Mid-State Raceway, Inc. ("MSR") operates a harness racing track in
         Vernon, New York, known as Vernon Downs. MSR is licensed by the New
         York State Racing and Wagering Board to conduct live harness racing at
         its track and to simulcast racing from other tracks. Such licenses are
         subject to annual renewal.

         Mid-State Development Corporation ("MSD"), formerly known as Mid-Year
         Sales, Inc., is a wholly owned subsidiary of MSR. Beginning in October
         1999, MSD commenced operating concessions at the harness racing track
         owned by MSR. In June of 2000, MSD began operating a hotel adjacent to
         the track owned by MSR. Operations of the hotel are included in the
         consolidated totals for the years ended December 31, 2001 and 2000 (see
         Note 14). Prior to 1999, MSD was an inactive company.

            PRINCIPLES OF CONSOLIDATION:

               The accompanying consolidated financial statements include the
               accounts of MSR and MSD (collectively referred to as the
               Company). All significant intercompany accounts and transactions
               have been eliminated in the consolidation. Prior to 1999, MSD was
               inactive and had no assets, liabilities, revenues or expenses.

            USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS:

         The preparation of financial statements in conformity with generally
         accepted accounting principles requires management to make estimates
         and assumptions that affect the reported assets and liabilities and
         disclosure of contingent assets and liabilities at the date of the
         financial statements and the reported amounts of revenues and expenses
         during the reporting period. Actual results could differ from those
         estimates.

            CASH EQUIVALENTS:

               For purposes of reporting cash flow, cash and cash equivalents
               include money market accounts and any highly liquid debt
               instruments purchased with a maturity of three months or less.

            PROPERTY, BUILDINGS AND EQUIPMENT:

         Property, buildings and equipment are carried at cost less accumulated
         depreciation computed by the straight-line and accelerated methods.

               The estimated useful life to the various classes of assets on
               which current provisions were based are as follows:

<TABLE>
<S>                                   <C>
Land improvements                          5 to 20 years
Buildings and improvements                10 to 40 years
Other structures                      15 to 31 1/2 years
Equipment                                  3 to 20 years
</TABLE>

                                                                              29

<PAGE>


            LOSS PER COMMON SHARE:

         Loss per share of common stock has been calculated based on the
         weighted average shares outstanding during each year. The weighted
         average number of common shares outstanding was 442,766, 442,382 and
         279,805 for the years December 31, 2001, 2000 and 1999, respectively.
         Outstanding authorized stock warrants totaled 197,700 and 185,000 at
         December 31, 2001 and 2000, respectively. All such warrants were
         excluded from all loss per share calculations.

            ADVERTISING:

         MSR follows the policy of charging the costs of advertising to expense
         as incurred. Advertising expense was $77,160, $80,710, and $116,750,
         for the years ended December 31, 2001, 2000, and 1999, respectively.

            INCOME TAXES:

         The Company recognizes deferred income taxes for the tax consequences
         in future years of differences between the tax bases of assets and
         liabilities and their financial reporting amounts at each year-end
         based on enacted tax laws and statutory tax rates applicable to the
         periods in which the differences are expected to affect taxable income.
         Valuation allowances are established when necessary to reduce deferred
         tax assets to the amount expected to be realized. Income tax expense is
         the tax payable for the period and the change during the period in
         deferred tax assets and liabilities.

            REVENUE RECOGNITION:

         MSR recognizes revenue for commissions from wagering, corporate
         sponsors, and admissions when the related racing event is run. Revenue
         from hotel and other services are recognized at the time the related
         service is performed. Commissions for capital improvements are
         recognized when the related qualifying expenditures are incurred.
         Investment income is recognized on the accrual basis.

            PURSE EXPENSE RECOGNITION:

         Similar to its policy of recognizing revenue for commissions from
         wagering, MSR recognizes purse expenses associated with live racing
         when the related racing event is conducted.

            ASSET IMPAIRMENT ASSESSMENTS:

         The Company reviews long-lived assets for impairment whenever events or
         circumstances indicate that the carrying value of such assets may not
         be fully recoverable. An impairment is recognized to the extent that
         the sum of undiscounted estimated future cash flows expected to result
         from use of the assets is less than the carrying value. No impairment
         has been recognized through December 31, 2001.

            RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:

         In June 2001, the Financial Accounting Standards Board (FASB) issued
         Statement of Financial Accounting Standards No. 141, Business
         Combinations (SFAS 141), Statement of Financial Accounting Standards
         No. 142, Goodwill and Other Intangible Assets (SFAS 142), and Statement
         of Financial Accounting Standards No. 143, Accounting for Asset
         Retirement Obligations (SFAS 143). In August 2001, FASB issued
         Statement of Financial Accounting Standards No. 144, Accounting for the
         Impairment or Disposal of Long-lived Assets (SFAS 144).

                                                                              30

<PAGE>

         SFAS 141 addresses financial accounting and reporting for business
         combinations and requires that the purchase method of accounting be
         used for all business combinations initiated after June 30, 2001.
         Additionally, SFAS 141 further clarifies the criteria to recognize
         intangible assets separately from goodwill. SFAS 142, effective October
         1, 2001, provides that goodwill and certain indefinite lived intangible
         assets will no longer be amortized but will be reviewed at least
         annually for impairment and written down and charged to income when
         their recorded value exceeds their estimated fair value. Separable
         intangible assets that do not have an indefinite life will continue to
         be amortized over their useful lives. SFAS 143, effective in 2003,
         requires recording of the fair value of liabilities associated with the
         retirement of long-lived assets in the period in which they are
         incurred. SFAS 144, effective in 2002, provides new guidance on the
         recognition of impairment losses on long-lived assets to be held and
         used or to be disposed of and also broadens the definition of what
         constitutes a discontinued operation and how the results of a
         discontinued operation are to be measured and presented.

         Management does not expect the adoption of SFAS 141, SFAS 142, SFAS 143
         and SFAS 144 will have a material impact on the consolidated results of
         operations or financial position of the Company.

            RECLASSIFICATIONS:

         Certain balances in prior year financial statements have been
         reclassified for comparative purposes.

NOTE 2.  RESTRICTED CASH

Cash is restricted for the following purposes at December 31:

<TABLE>
<CAPTION>
                                             2001        2000
                                           --------    --------
<S>                                        <C>         <C>
Purses                                     $ 12,217    $  9,641
Capital improvements                         45,267      39,892
Uncashed winning tickets                     63,736      56,336
Account wagering                             71,683      21,699
                                           --------    --------
                                           $192,903    $127,568
                                           ========    ========
</TABLE>

NOTE 3.  OTHER RECEIVABLES

Other receivables consist of the following at December 31:

<TABLE>
<CAPTION>
                                             2001        2000
                                           --------    --------
<S>                                        <C>         <C>
Shift adjustments                          $  3,545    $ 68,360
Commissions                                  75,983      74,800
Hotel related                               122,225     108,745
Other                                        50,774      69,467
                                           --------    --------
       Total                                252,527     321,372
Less allowance for doubtful accounts         10,000      10,000
                                           --------    --------
       Other receivables, net              $242,527    $311,372
                                           ========    ========
</TABLE>

                                                                              31

<PAGE>

NOTE 4.  INVESTMENTS

MSR had no investments at December 31, 2001. MSR's investments were classified
         as available-for-sale securities and were reported at fair value at
         December 31, 2000, with unrealized gains included in comprehensive
         income. At December 31, 2000, investments consisted principally of
         government securities and certificates of deposit. These securities had
         a fair value of $501,745, a cost of $492,719, and an unrealized gain of
         $9,026.

NOTE 5.  PROPERTY, BUILDINGS AND EQUIPMENT

Property, buildings and equipment consist of the following at December 31:

<TABLE>
<CAPTION>
                                                             CONSOLIDATED   CONSOLIDATED
                                     MSD           MSR           2001           2000
                                 -----------   -----------   ------------   ------------
<S>                              <C>           <C>           <C>            <C>
Land, buildings and equipment:
  Land                           $         -   $    77,802   $     77,802   $     77,802
  Land improvements                        -     1,817,481      1,817,481      1,805,432
  Buildings and improvements       2,747,006     7,885,804     10,632,810     10,499,476
  Equipment                          163,544     4,633,950      4,797,494      4,780,138
  Construction in progress                 -       114,166        114,166              -
                                 -----------   -----------   ------------   ------------
                                   2,910,550    14,529,203     17,439,753     17,162,848
Other properties:
  Land                               121,671             -        121,671        121,671
                                 -----------   -----------   ------------   ------------
                                   3,032,221    14,529,203     17,561,424     17,284,519
Less accumulated depreciation        291,241    11,699,656     11,990,897     11,551,072
                                 -----------   -----------   ------------   ------------
                                 $ 2,740,980   $ 2,829,547   $  5,570,527   $  5,733,447
                                 ===========   ===========   ============   ============
</TABLE>

NOTE 6.  REAL ESTATE TAXES PAYABLE

In May 1998, Oneida County and MSR entered into an agreement whereby MSR would
         make 36 monthly installments of $6,000, commencing May 29, 1998, to
         satisfy its liability to Oneida County for nonpayment of 1997 property
         taxes, totaling $216,000, levied against MSR by Oneida County in 1997.
         Although this obligation was scheduled to be satisfied in 2001, MSR's
         payments are in arrears. The balance outstanding under this obligation
         at December 31, 2001 approximated $14,000 and is included in accounts
         payable and accrued expenses in the December 31, 2001 consolidated
         balance sheet. Due to this arrearage, Oneida County recorded a deed in
         2001 transferring MSR's title to parcels to the Oneida County Board of
         Legislators.

Additionally, MSR is delinquent on approximately $168,000 of property and school
         taxes from 2000 and 2001. Further, MSD is delinquent on approximately
         $325,000 of property and school taxes from 1999 through 2001, including
         $184,000 referred to in Note 14. Real estate taxes payable are included
         in accounts payable and accrued expenses in the December 31, 2001 and
         2000 consolidated balance sheets.

NOTE 7.  LINES OF CREDIT

Lines of credit at December 31 are as follows:

                                                                              32

<PAGE>

<TABLE>
<CAPTION>
                                                                                          2001        2000
                                                                                        --------    --------
<S>                                                                                     <C>         <C>
$351,000 revolving line of credit with an investment company, with interest at
3.15% over the 30-day commercial paper rate (4.9% at December 31, 2001).
Borrowings under this line were previously collateralized by MSR investments.
The lender terminated this line of credit in October 2001, and accordingly, the
balance outstanding at December 31, 2001 was in default. The outstanding balance
was repaid in full by MSR in January 2002.                                              $ 33,678    $347,333

$700,000 line of credit agreement with prospective purchasers of MSR (see Note
16), with interest at 10%, scheduled to mature on March 15, 2002. Borrowings
under this line are collateralized by a second mortgage on MSR land, buildings
and improvements. Borrowings under this line were repaid in full by MSR in April
2002 in connection with the 2002 financing and loan agreements (see Note 19).            641,000           -
                                                                                        --------    --------
                                                                                        $674,678    $347,333
                                                                                        ========    ========
</TABLE>

NOTE 8.  LONG-TERM DEBT

Long-term debt is comprised as follows at December 31:

<TABLE>
<CAPTION>
                                       2001                                   2000
                       ------------------------------------   ------------------------------------
                        CURRENT     LONG-TERM      TOTAL       CURRENT     LONG-TERM      TOTAL
                       ----------   ----------   ----------   ----------   ----------   ----------
<S>                    <C>          <C>          <C>          <C>          <C>          <C>
Notes Payable
   (A)                 $1,650,000          $ -   $1,650,000   $1,149,950          $ -   $1,149,950
   (B)                    166,500            -      166,500      166,500            -      166,500
   (C)                    300,000            -      300,000      300,000            -      300,000
   (D)                    250,000            -      250,000      250,000            -      250,000
Other Obligations
   (E)                  2,746,757            -    2,746,757            -    2,483,652    2,483,652
   (F)                     96,110      301,832      397,942       97,172      363,348      460,520
                       ----------   ----------   ----------   ----------   ----------   ----------
                       $5,209,367   $  301,832   $5,511,199   $1,963,622   $2,847,000   $4,810,622
                       ==========   ==========   ==========   ==========   ==========   ==========
</TABLE>

                  (A)      In May 1998, MSR obtained a $1,000,000 loan from a
                           private lender, who was also a board member. The loan
                           was collateralized by a first mortgage on MSR's
                           racing plant, buildings and improvements. In March
                           2000, MSR obtained an additional loan from this
                           private lender to finance the purchase of equipment
                           and food service inventory, valued at $66,450. This
                           additional loan was added to the $1,000,000 first
                           mortgage. Additionally, $83,500 of the loan described
                           in (B) below came from this lender and was added to
                           the first mortgage agreement in 2000. The loans bore
                           interest at 12% and required monthly interest-only
                           payments. No principal payments were required until
                           the final due date. This loan was originally due May
                           15, 2001. In March 2001, the due date was extended to
                           May 15, 2002 in exchange for granting the private
                           lender a warrant to purchase 10,000 shares of MSR
                           common stock at $10 per share with an expiration date
                           in March 2005. During 2001, MSR obtained an
                           additional $500,000 loan from this private lender.
                           This amount was also added to the first mortgage.

               The loan agreement required MSR to pay the lender $47,500 in
                           financing fees at closing. Financing fees paid at
                           closing are being amortized over the original term of
                           the loan and are included in interest expense. These
                           financing fees were fully amortized at December 31,
                           2001. At December 31, 2000, the unamortized portion
                           of financing fees was included in other assets.
                           Interest expense incurred by MSR in 2001, 2000, and
                           1999 related to this loan approximated $181,000,
                           $143,700, and $135,800, respectively.

                  (B)      In August 1999, MSR obtained $250,000 in loans from
                           three board members, one of whom was an officer.
                           $83,500 of this $250,000 loan came from the lender
                           referred to in (A) above. The loans bore interest at
                           12%, and were originally secured by a second mortgage
                           on MSR's racing plant, buildings, and improvements.
                           In 2000, $83,500 of the original $250,000 was added
                           to the first mortgage described in (A) above. The
                           remaining $166,500 remains secured by a junior
                           mortgage and was due in May 2001. No interest was
                           paid on the $166,500 loan as of December 31, 2001.
                           Unpaid interest related to this loan approximating
                           $45,800 through December 31, 2001, is included in
                           accounts payable and accrued expenses. Interest
                           expense related to this loan approximated $20,000,
                           $20,000, and $5,800 in 2001, 2000, and 1999,
                           respectively. The lenders called the $166,500 loan in
                           September 2001, but MSR did not make payment. As
                           such, the loan is in default as of December 31, 2001.

                  (C)      In September 2000, MSR obtained a $300,000 loan from
                           another private lender, who was also a board member.
                           The loan was secured by a junior mortgage on MSR's
                           racing plant, buildings and improvements. The loan
                           bore interest at

                                                                              33

<PAGE>

                           13% and repayment was due in September 2001. No
                           principal payments were required until the final due
                           date. Interest expense for this loan totaled $42,250
                           and $9,750 for 2001 and 2000, respectively. In
                           consideration for making this loan to MSR, the lender
                           was granted a warrant to purchase 2,500 shares of MSR
                           common stock at $10 per share with an expiration date
                           in August 2004. Additionally, in March 2001, in
                           consideration for certain amendments made to this
                           loan, MSR granted this lender a warrant to purchase
                           2,700 shares of MSR common stock at $10 per share
                           with an expiration date in March 2005. MSR did not
                           repay the loan, as scheduled, in September 2001.
                           Accordingly, the loan is in default at December 31,
                           2001.

                  (D)      In December 2000, MSR obtained a $250,000 loan from
                           private lenders, with interest originally at 6%, to
                           be paid in the form of MSR common stock. The note was
                           secured by certain MSR and subsidiary assets,
                           including machinery, equipment, and receivables. The
                           note was originally scheduled to mature in February
                           2001. In May 2001, the note was amended due to the
                           fact that MSR was in default under note terms. The
                           amendment extended the due date until August 15, 2001
                           and required the payment of all accrued but unpaid
                           interest on the note. In September 2001, in
                           connection with an irrevocable purchase option
                           agreement whereby MSR granted the lenders of this
                           note an option to purchase MSR (see Note 16), the
                           note maturity was extended to March 15, 2002, the
                           expiration date of the purchase option agreement.
                           Additionally, the interest rate was increased to 10%
                           and the note was added to the junior mortgages
                           previously mentioned in (B) and (C), above. Interest
                           expense in 2001 and 2000 approximated $35,000 and
                           $780 for this loan, respectively.

         The debt obligations described in Note 8 (A), (B), (C), and (D) above,
                  including all accrued interest thereon, were repaid in full in
                  April 2002, in connection with the 2002 financing and loan
                  agreements (see Note 19).

                  (E)      Represents the present value of the amount payable to
                           a third-party bankruptcy trustee in relation to a
                           settlement agreement between the trustee and MSR for
                           the purchase of a hotel located on MSR's land
                           adjacent to its harness racing track (see Note 14).
                           The initial April 2000 settlement agreement was
                           amended in July 2001 and was formally approved by the
                           bankruptcy court in August 2001. The approved
                           agreement called for MSR to pay $2,816,000 to the
                           bankruptcy trustee by February 18, 2002 for the
                           purchase of the hotel. For financial reporting
                           purposes, the $2,816,000 was discounted using an
                           incremental borrowing rate of 10% and the present
                           value discount is being treated as imputed interest.
                           Imputed interest expense for 2001 and 2000 related to
                           this transaction approximated $263,000 and $129,000,
                           respectively.

The debt obligation described in Note 8 (E) above, was repaid in full in March
         and April 2002, in connection with the 2002 financing and loan
         agreements (see Note 19).

                  (F)      Various capital leases for equipment with monthly
                           payments ranging from $95 to $2,168 including imputed
                           interest from 6.9% to 24.5%. These leases mature at
                           various dates through 2006. Interest expense totaled
                           approximately $55,000 and $36,000 for these capital
                           leases in 2001 and 2000, respectively.

Because of the 2002 refinancing and loan agreements described in Note 19, all of
         this indebtedness, except currently maturing capital lease obligations,
         has been classified as long-term.

At December 31, 2001, the cost of equipment acquired through capital lease
         obligations totaled $534,253 and is included in land, building, and
         equipment on the balance sheet. Accumulated depreciation related to
         these assets totaled $187,337 at December 31, 2001.

The following is a schedule by years of the future minimum lease payments under
         capital leases, together with the present value of the net minimum
         lease payments, as of December 31, 2001:

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31                                                 AMOUNT
-----------------------                                                --------
<S>                                                                    <C>
  2002                                                                 $174,352
  2003                                                                  127,445
  2004                                                                  119,656
  2005                                                                   60,159
  2006                                                                    6,647
                                                                       --------
      Total minimum lease payments                                      488,259
  Less amount representing interest                                      90,317
                                                                       --------
      Present value of net minimum lease payments                       397,942
      Current maturities                                                 96,110
                                                                       --------
Capital lease obligation, net of current maturities                    $301,832
                                                                       ========
</TABLE>

                                                                              34

<PAGE>

NOTE 9.  DEFERRED GRANT REVENUE

During 2001, MSR received $240,000 from Oneida County to defer costs associated
         with live racing. The agreement required MSR to continue live racing
         for a period of at least three years, beginning in 2001. If at any time
         during the three year period MSR discontinues live racing, or breaches
         any other portion of the agreement, a pro-rata share of the funds will
         be payable to Oneida County. Approximately $80,000 was earned pursuant
         to this grant during 2001.

NOTE 10. INCOME TAXES

Net deferred tax assets are provided for the temporary differences between the
         tax bases of assets and liabilities and their financial reporting
         amounts. The temporary differences that give rise to a significant
         portion of the deferred tax liability and deferred tax asset and their
         approximate tax effect are as follows. The net deferred tax asset at
         December 31, 2001 and 2000 has been offset by an equivalent valuation
         allowance because of uncertainty concerning MSR's ability to utilize
         net operating loss carryforwards in future years.

<TABLE>
<CAPTION>
                                                       DECEMBER 31
                                   -----------------------------------------------------
                                             2001                        2000
                                   -------------------------   -------------------------
                                   TEMPORARY                   TEMPORARY
                                   DIFFERENCE    TAX EFFECT    DIFFERENCE   TAX EFFECT
                                   ----------   ------------   ----------   ------------
<S>                                <C>          <C>            <C>          <C>
Net operating loss carryforwards   $8,130,000   $ 2,764,000    $5,930,000   $ 2,016,000
Other                                  10,000         4,000        22,000         8,800
                                   ----------   -----------    ----------   -----------
                                    8,140,000     2,768,000     5,952,000     2,024,800
Less valuation allowance                    -    (2,768,000)            -    (2,024,800)
                                   ----------   -----------    ----------   -----------
                                   $8,140,000   $         -    $5,952,000   $         -
                                   ==========   ===========    ==========   ===========
</TABLE>

                                                                              35

<PAGE>


The net operating loss carryforwards will expire at various dates from December
31, 2009 through December 31, 2014.

A reconciliation of the provision (benefit) for income taxes to the statutory
amount is as follows:

<TABLE>
<CAPTION>
                                                          FOR THE YEAR ENDED DECEMBER 31
                                         --------------------------------------------------------------
                                                2001                  2000                  1999
                                         ------------------   --------------------   ------------------
                                           AMOUNT      %        AMOUNT        %        AMOUNT      %
                                         ----------  ------   ----------    ------   ----------  ------
<S>                                      <C>         <C>      <C>           <C>      <C>         <C>
Statutory federal income tax (benefit)   $(769,000)  (34.0)   $(629,000)    (34.0)   $(465,000)  (34.0)
Variances from statutory rate:
  Add state income tax, net of
    federal tax benefit                      2,756     0.1          708       0.1        3,753     0.3
  Increase (decrease) in valuation
    allowance                              743,200    32.9      255,400      13.6      442,000    32.3
  Other                                     25,800     1.1       (3,200)     (0.1)      23,000     1.7
                                         ---------   -----    ---------     -----    ---------   -----
Provision (benefit) for income taxes     $   2,756     0.1    $(376,092)    (20.4)   $   3,753     0.3
                                         =========   =====    =========     =====    =========   =====
</TABLE>

NOTE 11. LEASES

The Raceway leases equipment, including pari-mutuel totalisator equipment and
         services, under numerous operating lease agreements. Total lease rental
         expense for the years ended December 31, 2001, 2000, and 1999 amounted
         to $400,227, $432,220, and $512,568 of which $265,000, $275,400, and
         $280,105 was paid on the totalisator contract for the respective years.

The totalisator operating lease agreement expires in 2004. Under the agreement,
         MSR is charged a flat fee for the equipment and services plus an
         additional amount that is dependent upon wager volume. Other operating
         lease agreements expire at various dates through 2005. Future minimum
         rental charges under operating lease agreements are as follows:

<TABLE>
<CAPTION>
                   OTHER    TOTALISATOR
                 EQUIPMENT   EQUIPMENT       TOTAL
                 ---------  -----------   ----------
<S>              <C>        <C>           <C>
2002             $  84,661  $   275,000   $  359,661
2003                97,559      285,000      382,559
2004                45,318      295,000      340,318
2005                41,207            -       41,207
2006                 4,727            -        4,727
                 ---------  -----------   ----------
                 $ 273,472  $   855,000   $1,128,472
                 =========  ===========   ==========
</TABLE>

NOTE 12. INVESTMENT INCOME

Investment income (loss) consisted of the following for the years ended December
         31:

<TABLE>
<CAPTION>
                                            2001         2000        1999
                                          ---------    --------    ---------
<S>                                       <C>          <C>         <C>
Interest and dividends                    $ 33,299     $30,772     $ 27,921
Other                                       (9,817)     (4,529)     (21,323)
                                          --------     -------     --------
                                          $ 23,482     $26,243     $  6,598
                                          ========     =======     ========
</TABLE>

                                                                              36

<PAGE>


NOTE 13. PRIVATE PLACEMENT AND COMMON STOCK WARRANTS

During 1999, MSR privately placed 150,000 shares of common stock, for the
         aggregate amount of $1,500,000 computed at the rate of $10 per share.
         In connection with such private placement, MSR, in November 1999
         executed and delivered a common stock warrant ("PP Warrant") to two
         individuals who were officers and directors of MSR. The PP Warrant
         entitled the holders to purchase not less than 150,000 nor more than
         175,000 shares of common stock at the rate of $10 per share at any time
         prior to November 15, 2000. The PP Warrant was not exercised and
         expired in accordance with its terms on November 15, 2000. On November
         14, 2000, the Board of Directors authorized the issuance: (i) to each
         of the holders of the PP Warrant, a common stock warrant to purchase up
         to 87,500 shares of common stock at the rate of $10 per share at any
         time prior to November 14, 2004; and (ii) to another member of the
         Board of Directors a common stock warrant to purchase up to 7,500
         shares of common stock at the rate of $10 per share at any time prior
         to November 14, 2004. Stockholder consent with respect to these three
         common stock warrants has not been secured. As discussed in Note 8(C),
         in September 2000, MSR granted another board member a common stock
         warrant to purchase up to 2,500 shares of common stock at the rate of
         $10 per share at any time prior to August 31, 2004. Additionally,
         during March 2001, as discussed in Notes 8(A) and 8(C), the Board of
         Directors authorized the issuance to two members of the Board of
         Directors common stock warrants to purchase 10,000 and 2,700 shares of
         common stock, respectively, at the rate of $10 per share at any time
         prior to March 19, 2005. All of the resolutions with respect to the six
         warrants described above were silent as to "anti-dilution" protection,
         and MSR has neither executed nor delivered any of such common stock
         warrants.

A summary of common stock warrants authorized by the Board of Directors as of
         December 31, 2001 is as follows:

<TABLE>
<CAPTION>
                                    NUMBER OF  EXERCISE
                                      STOCK      PRICE        EXPIRATION
      ISSUE DATE                     WARRANTS  PER SHARE         DATE
      ----------                    ---------  ---------   -----------------
<S>                                 <C>        <C>         <C>
November 14, 2000                    182,500      $10      November 14, 2004
September 1, 2000                      2,500      $10       August 31, 2004
March 19, 2001                        10,000      $10       March 19, 2005
March 19, 2001                         2,700      $10       March 19, 2005
</TABLE>

Substantially all of the November 14, 2000 warrants are subject to recent
         litigation as described in Note 19.

NOTE 14. HOTEL LEASE AND ACQUISITION

During fiscal year 1994, MSR, as lessor, entered into a lease agreement with
         Comfort Associates, Inc. ("CAI"), a company affiliated with MSR's
         former majority shareholder. MSR, as lessor, leased, for an initial
         period of twenty years, a certain portion of their property for the
         purpose of permitting CAI, as lessee, to construct, own, and operate a
         hotel. Construction of the hotel by CAI was completed in October 1994.
         Anytime during the lease or any renewal period of the lease, MSR could
         have elected to terminate the lease and assume all of CAI's duties,
         obligations, rights, and responsibilities under the lease for a nominal
         amount. Lease payments during the initial twenty year period were
         $10,000 per year. In May 2000, the lease was terminated, and

                                                                              37

<PAGE>

         MSR purchased all of the issued and outstanding shares of stock of CAI
         for $5,510, plus an additional $48,000 acquisition fee.

An investigation conducted by the bankruptcy trustee of the bankrupt companies
         affiliated with MSR's former majority shareholder revealed that the
         aforementioned hotel constructed, owned, and operated by CAI was built
         by funds fraudulently transferred from the bankrupt companies
         affiliated with MSR's former majority shareholder. The trustee
         subsequently filed suit against CAI for any and all ownership interests
         in the hotel.

Pursuant to an original April 11, 2000 settlement agreement between the trustee
         and MSR that was later amended on July 30, 2001 and formally approved
         by the bankruptcy court in August 2001, MSR turned over the issued and
         outstanding stock of CAI to the trustee and acquired the hotel from the
         trustee. The agreement called for MSR to pay the trustee $2,816,000
         (the fair market value of the hotel less $184,000 in unpaid real estate
         taxes) by February 18, 2002 (see Note 8(E)). It was also the
         responsibility of MSR to pay the $184,000 of unpaid real estate taxes
         on the hotel (see Note 8, which describes various mortgages on MSR
         property).

The purchase method of accounting was used to account for the May 2000 hotel
         acquisition, and the purchase price was allocated as follows:

<TABLE>
<S>                                            <C>
Property and equipment                         $ 2,611,000
Current assets                                      89,000
Liabilities assumed                               (345,000)
Debt incurred                                   (2,355,000)
                                               -----------
                                               $         -
                                               ===========
</TABLE>

The accompanying financial statements include the operations of the hotel,
         beginning in June 2000.

When MSR purchased the issued and outstanding stock of CAI in May 2000, it
         agreed to personally indemnify CAI's former sole stockholder for any
         liability that stockholder may have had with respect to a franchise
         agreement for the hotel. Subsequent to the stock transaction in May
         2000, the stockholder was sued by the franchisor for damages
         approximating $560,000. The stockholder answered the complaint,
         notified MSR of the claim, and requested indemnification if the suit is
         successful. Although MSR believes that the lawsuit will most likely not
         be successful, the ultimate outcome is not presently determinable.
         Consequently, no provision for a possible unfavorable outcome is
         included in these financial statements.

During 2000, the aforementioned bankruptcy trustee questioned payments of
         approximately $136,000 made by CAI to MSR, while MSR was operating the
         hotel from May 20, 2000 to June 22, 2000 for rent, water, and sewer
         charges. In September 2000, MSR provided financial information to the
         trustee relating to these expenses. While MSR believes the matter to be
         resolved, the trustee has not yet indicated that the matter is closed.

MSR operates pari-mutuel wagering on the hotel premises. Net pari-mutuel
         commissions and breakage from wagering on these premises approximated
         $497,000 for the year ended December 31, 2001 ($481,000 for the year
         ended December 31, 2000, and $450,000 for the year ended December 31,
         1999).

                                                                              38
<PAGE>

NOTE 15. OTHER RELATED PARTY TRANSACTIONS

In 2001, 2000, and 1999, MSR paid approximately $388,000, $350,000, and
$210,000, respectively, to related parties for consulting services, lodging, and
interest, including amounts attributable to long-term debt (Note 8).

NOTE 16. PURCHASE OPTION AGREEMENT

On September 12, 2001, MSR's Board of Directors authorized its President and
Chief Executive Officer to execute an exclusive option agreement for the sale of
MSR to a group of private purchasers. This group of purchasers includes one of
the private lenders described in Note 8(D). The exclusive option agreement was
formally executed on September 15, 2001 and granted the purchasers an exclusive
irrevocable option to acquire MSR for $9,077,350 at any time prior to March 15,
2002. If exercised, the exclusive option agreement called for the purchasers to
pay off all MSR debt and payables and pay $1,400,000 to existing MSR
shareholders. The $1,400,000 payment to the shareholders was subject to
adjustment based upon the debt outstanding at the exercise closing date.
Accordingly, the $1,400,000 could increase or decrease as a result of this
adjustment. The option agreement was subject to the approval of MSR's
shareholders holding at least 66 2/3% of the outstanding common stock and the
New York State Racing and Wagering Board.

In 2002, MSR's Board of Director's authorized the extension of the exclusive
option agreement until MSR shareholders have voted on the agreement. A MSR
shareholder vote on this agreement was not scheduled, since as of March 15, 2002
(a) the debt and payables of MSR were in excess of $9,077,350 and consequently
the shareholders of MSR would have received no payment in connection with the
exercise of the exclusive option agreement, and (b) as the holders of more than
33 1/3% of the issued and outstanding common stock had indicated their
unwillingness to approve the exclusive option agreement, it was unlikely that
shareholder approval of the exclusive option agreement could be secured.

If the exclusive option agreement is not approved by MSR's shareholders, MSR may
be required to pay the purchasers a one-time payment of $130,000. Additionally,
if the exclusive option agreement is not approved by MSR's shareholders or not
exercised by the purchasers, the agreement requires that the loan described in
Note 8(D) be repaid along with all accrued interest thereon. As indicated in
Note 18, the full amount of such loan and all accrued interest was repaid in
April 2002.

Concurrent with the execution of the exclusive option agreement, the purchasers
provided a $700,000 working capital line of credit to MSR with interest at 10%,
secured by a second mortgage on MSR's buildings and improvements, due March 15,
2002 (see Note 7).

The full balance drawn by MSR under this line of credit ($700,000) was repaid in
April 2002 in connection with the 2002 financing and loan arrangements described
in Note 18. In June 2002, management notified the group of purchasers that the
aforementioned exclusive purchase option agreement was terminated and of no
further force and effect. As a result of the termination of the option agreement
by MSR, the aforementioned $130,000 termination has been recorded as a liability
in the December 31, 2001 balance sheet (see also Note 18).

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NOTE 17. PURSE FUND AGREEMENT

MSR annually enters into agreements with the Harness Horse Association of
Central New York to establish purse funding levels for harness meetings at MSR.
In June 2001, both parties signed an agreement that established MSR's 2001 purse
funding at approximately $2,450,000, including approximately $406,000 in
underfunded purses carried forward from years prior to 2001. Actual purses and
fees paid by MSR in 2001 approximated $1,897,000. A November 6, 2001 agreement
established MSR's 2002 purse funding at approximately $2,650,000. This amount
includes approximately $553,000 in underfunded purses carried forward from 2001
and years prior. As described in Note 1, MSR's policy is to recognize purse
expenses associated with live racing when the related racing event is conducted.
Accordingly, underfunded purse carryovers from prior years will be recognized as
purse expenses when and if such amounts are paid.

NOTE 18. CONTINGENCIES

FORMER MAJORITY SHAREHOLDER

In March 1998, MSR provided financial information to the aforementioned
bankruptcy trustee relating to approximately $1,200,000 of corporate
sponsorships it received over a period of years from bankrupt affiliates of its
former majority shareholder. Subsequently, the trustee commenced a lawsuit
against MSR to recover these payments, based on the theory of fraudulent
conveyance. On November 5, 1999, MSR issued 38,000 shares of common stock,
valued at $10 per share, to the trustee in full settlement of the claim. The
settlement of this lawsuit is classified as an operating expense in the December
31, 1999 consolidated statement of operations.

OTHER

In March 1998, MSR voted to terminate its unfunded deferred compensation plan.
At December 31, 1999, there was a $1,013,861 liability recorded in MSR's
consolidated balance sheet related to this plan. Subsequent to this termination,
a lawsuit was brought against MSR by beneficiaries of the deferred compensation
plan challenging the plan's termination and seeking damages of $1,200,000. The
lawsuit was settled in 2000 with the beneficiaries receiving 4,380 shares of
stock, valued for financial reporting purposes at $10 per share, in full
settlement of their claim. The gain on this settlement, of approximately
$970,000, is recognized as an extraordinary item in the December 31, 2000
consolidated statement of operations, net of applicable income taxes of
$376,800.

OTHER LITIGATION

MSR is a defendant in various litigation matters arising from its operations. No
estimate can yet be made of the potential liability or damages, or the likely
outcome of the litigation. Management believes that liabilities resulting from
these lawsuits, if any, will be immaterial or will be completely covered by
insurance policies. Note 19 describes additional litigation pending against MSR.

DELINQUENT SECURITIES AND EXCHANGE COMMISSION (SEC) FILINGS

MSR is delinquent in filing a number of periodic reports, including annual and
quarterly financial information, required to be filed with the SEC. The
consequences of the Company's failure to file these reports and the actions, if
any, that the SEC might initiate against the Company in this connection, are not
presently determinable.

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NEW YORK STATE RACING AND WAGERING BOARD COMPLIANCE AUDIT

During early 2001, the New York State Racing and Wagering Board (the Board)
reviewed MSR's compliance with the Board's policies and procedures. In March
2001, the Board issued a report documenting numerous instances of non-compliance
with applicable Board statutes, rules, and regulations. This report was also
critical of certain MSR business and managerial practices. The Board also fined
MSR's President and CEO $5,000 for MSR's non-compliance. On March 28, 2001, the
Board granted MSR a limited 90-day track and simulcast license. Further, the
Board required MSR to demonstrate compliance and continued financial viability
over the 90-day period in order to receive a racing license for the 2001 live
racing season.

On June 21, 2001, the Board approved MSR's track and simulcast license for the
remainder of 2001, based on the receipt of a June 2001 satisfactory report from
a Board approved compliance monitor on the status of MSR's compliance with Board
policies and regulations subsequent to March 28, 2001.

ANTI-DILUTION STOCK

On January 11, 2001, the Board of Directors of MSR authorized the issuance of a
total of 24,840 shares of common stock to four individual shareholders (three of
whom were board members and two of whom were officers of MSR) in an effort to
prevent the dilution of such shareholders' ownership interest in MSR, which
includes 21,600 shares that are subject to pending litigation (see Note 19).
These anti-dilution shares of common stock were never issued by MSR. Due to the
fact that these shares were authorized without consideration on the part of the
shareholders, legal counsel for MSR has advised that any such issuance would not
be valid. Further, since the stock certificates were not issued to the
shareholders for the shares in question, legal counsel believes that MSR does
not need to take any action to rescind the authorization for the issuance of
such shares. On December 17, 2001 the Board of Directors clarified the minutes
of the January 11, 2001 meeting to state the 24,840 shares of common stock will
be issued for past services to MSR. However, issuance of the stock is subject to
approval by the shareholders, by Board resolution. No amounts have been
recognized in this connection for the year ended December 31, 2001.

NOTE 19. SUBSEQUENT EVENTS

2002 FINANCING AND LOAN AGREEMENTS

In mid-March 2002, MSR entered into a financing agreement with Vernon, LLC (an
unaffiliated company). Under the terms of the financing agreement, MSR sold a
$400,000 secured convertible promissory note to Vernon, LLC. The note matures on
December 31, 2003 with interest originally at 10% (amended to 15% in April
2002). The financing agreement required MSR to create an interest reserve
account to hold the first year of interest on the note. The agreement also
required MSR to pay a commitment and loan fee equal to 5% of the total note.
Both the fee and the first year interest reserve were funded by MSR utilizing a
portion of the note proceeds. The note was initially convertible, at the option
of Vernon, LLC, at any time after August 1, 2002, into 40,000 shares of MSR
common stock at the rate of $10 per share and subject to certain anti-dilution
provisions outlined in the financing agreement. The note is secured by a
mortgage and security interest on MSR property and is subordinate to the
mortgages described in Note 8. Additionally, the financing agreement includes a
provision for

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tag along warrants. This provision requires MSR to distribute to note holders,
who elect not to convert the principal amount of the note into common stock,
warrants to purchase shares of common stock for a period of three years. The
financing agreement also granted Vernon, LLC the right of first refusal with
respect to any subsequent debt and/or equity financings undertaken by MSR prior
to December 31, 2003 and allowed Vernon, LLC to appoint up to two Directors on
MSR's Board. The financing agreement also provided that if the exclusive option
agreement (Note 16) was approved by the shareholders that the note would be
immediately repaid and the number of shares issuable upon conversion of the note
(or the tag along warrants) would be reduced to 10,000 shares.

In late March and early April of 2002, MSR and MSD entered into a $8.5 million
loan agreement with All Capital, LLC, a company affiliated with Vernon, LLC. The
loan agreement was funded in two installments and is secured by a first mortgage
on MSR and MSD land, buildings and improvements. The initial funding provided
$3,695,000 in funds to MSR to satisfy the $2,816,000 obligation to the
bankruptcy trustee described in Note 8 (E). The second funding provided
$4,805,000 in funds to MSR to repay the first mortgage obligation described in
Note 8 (A) and the second mortgage obligations described in Notes 8 (B), (C),
and (D). The loan agreement matures March 31, 2003 with interest payable at 15%.
The loan agreement provides MSR with the option to extend the loan for up to
four successive quarters with a final maturity of March 31, 2004. Each quarterly
extension requires MSR to pay an extension fee equal to 1.25% of the unpaid
portion of the loan.

The loan agreement required MSR to create an interest reserve account to hold
the first year of interest on the loan. The interest reserve was completely
funded by a portion of the loan proceeds. The loan agreement also required MSR
to pay a commitment and loan fee equal to 5% of the total loan. The commitment
and loan fee was paid by MSR using a portion of the loan proceeds. On April 1,
2002, in connection with the loan agreement, MSR issued a warrant to purchase
500,000 shares of common stock at a rate of $2 per share to All Capital, LLC,
exercisable subsequent to August 1, 2002. In accordance with the anti-dilution
and other provisions of the $400,000 secured convertible promissory note
referred to above, the number of shares which are issuable to Vernon, LLC upon
conversion of the $400,000 note was increased to 200,000 and the exercise price
upon conversion was reduced to $2 per share.

In the event that the exclusive option agreement (Note 16) is approved by the
shareholders (a) the $8,500,000 would be immediately repayable (b) the warrant
issued to All Capital, LLC would not thereafter be exercisable, and (c) the
number of shares issuable upon conversion of the $400,000 secured convertible
note described above (or the tag along warrants) would be reduced to 50,000
shares.

All Capital, LLC was also granted the right in the loan agreement to designate
four members to the Board of Directors of MSR. Consistent with the ruling of the
New York State Racing and Wagering Board, MSR, Vernon, LLC and All Capital, LLC
(and the latter's principal) executed an undertaking not to place nominees on
the Board of Directors or participate in the management of MSR until the
nominees and the principal of All Capital, LLC were licensed. On July 2, 2002,
the nominees and principal were licensed and were subsequently seated as
participating members of the Board of Directors of MSR.

On April 8, 2002, the New York State Racing and Wagering Board (the Board)
issued MSR a 90-day limited period harness racing license for the 2002 racing
season. The license expired on July 6, 2002 and was conditional upon numerous
factors involving the 2002 financing and loan

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agreements referred to above. Extension of the 2002 license past the July 6,
2002 expiration date was dependent upon, among other things, the individual
licensability, under Board laws and regulations, of the principals involved in
the 2002 financing and loan agreements. On July 2, 2002, the Board voted to
extend MSR's limited period track and simulcast license through December 31,
2002. As a condition of the license extension, MSR is required to create a
segregated escrow account to ensure the payment of purses to horsemen.

On July 16, 2002, MSR and MSD entered into a $1,000,000 Interim Loan Agreement
with All Capital, LLC. The loan agreement was funded in one installment and is
secured by a mortgage on MSR and MSD land, buildings and improvements. Proceeds
of this loan were applied to the extent of $350,000 to the establishment of a
purse escrow account required by the New York State Racing and Wagering Board as
a condition to the maintenance of the live racing and simulcast licenses; and as
to the remainder, to the short-term obligations and working capital requirements
of the two companies. The loan bears interest at the rate of 15% per annum and
matures on July 15, 2003. The loan agreement required MSR to create an interest
reserve account to hold the amount necessary to fund the payment of interest
over the term of the loan. The interest reserve was completely funded by a
portion of the loan proceeds. The loan agreement also required MSR to pay a
commitment and loan fee equal to 5% of the loan; which fee was paid by MSR out
of a portion of the loan proceeds. On July 16, 2002 in connection with the loan
agreement, MSR issued a warrant to All Capital, LLC to purchase 100,000 shares
of common stock at the rate of $2.00 per share exercisable subsequent to August
1, 2002. The issuance of this warrant did not trigger any of the "anti-dilution"
provisions of any of the $400,000 Secured Convertible Promissory Note or the
warrants to purchase 500,000 shares of common stock previously granted to All
Capital, LLC in connection with the $8,500,000 loan. In the event the Exclusive
Option Agreement (Note 16) is approved by the shareholders the warrant to
purchase 100,000 shares would not thereafter be exercisable.

$15,000,000 LOAN AGREEMENT

On August 28, 2002, MSR and MSD entered into a $15,000,000 Loan Agreement with
All Capital, LLC. The loan agreement is to be funded in multiple installments
and is secured by a first mortgage on MSR and MSD land, buildings and
improvements. The $12,500,000 proceeds of the first installment of this loan
were applied to the extent of (a) $9,900,000 to refinance and consolidate the
$400,000, $8,500,000 and $1,000,000 loans described above, and (b) $2,600,000
for working capital and payment of the costs associated with the loan. The
remaining proceeds of the loan in the amount of $2,500,000 are to be disbursed
in connection with and for the construction of facilities to be utilized for the
installation and operation of video lottery terminals and for working capital.
The loan bears interest at the rate of 15% per annum and matures on August 28,
2003; however, the loan agreement provides MSR with the option to extend the
loan for up to four successive quarters with a final maturity date of August 28,
2004 subject to the payment of a quarterly extension fee of 1.25% of the unpaid
portion of the loan. The loan agreement required MSR to create an interest
reserve account to hold the amount necessary to fund the payment of interest
over the initial one year term of the loan. The interest reserve was funded by a
portion of the loan proceeds and a credit for the unused balances of interest
reserves maintained for the $8,500,000 and $1,000,000 loans. The loan agreement
also required MSR to pay a commitment and loan fee equal to 5% of the loan;
which fee was paid by MSR out of a portion of the loan proceeds. On August 28,
2002 in connection with the loan agreement, MSR issued a warrant to All Capital,
LLC to purchase 900,000 shares of common stock at the rate of $2.00 per share.
The issuance of this warrant did not trigger any of the "anti-dilution"
provisions of either the $400,000 Secured Convertible Promissory Note or
warrants to purchase 500,000

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and 100,000 shares of common stock, respectively, previously granted to All
Capital, LLC described above. In the event the exclusive option agreement (Note
16) is approved by the shareholders the warrant to purchase 500,000 shares would
not thereafter be exercisable. Also, in connection with the consolidation of
four loans described above into one $15,000,000 loan, the "tag along" warrant
provisions of the $400,000 Secured Convertible Promissory Note were triggered; a
"tag along" warrant to purchase 200,000 shares of common stock at $2.00 was
issued to All Capital, LLC and the conversion rights to purchase a similar
number of shares at a similar price per share were terminated. Both prior to and
after the termination of such conversion rights and the issuance of the "tag
along warrant" All Capital, LLC had the right, upon exercise of warrants and/or
the conversion rights in the $400,000 note to acquire 1,700,000 shares of common
stock at the rate of $2.00 per share. Under the terms of the loan agreement, All
Capital retained the right to designate six members of the Board of Directors of
MSR (and the right of Vernon, LLC, an affiliate of All Capital, LLC to designate
two members was terminated).

VIDEO LOTTERY TERMINAL (VLT) LEGISLATION

In 2001, the New York State Legislature approved VLT legislation to allow for
the installation and operation of VLT's at New York State harness race tracks.
MSR is currently working with the New York State Lottery Commission on
implementation of the activities allowed by the VLT legislation. MSR has been
initially authorized to install 1,000 VLT's on its premises.

As a result of this legislation, MSR was named as a defendant in two separate
lawsuits challenging the legality of the legislation and the operation of VLT's
at harness race tracks. The outcome of these lawsuits is not presently
determinable.

LAWSUITS

In July 2002, MSR (along with certain MSR directors, Vernon, LLC, and All
Capital, LLC) was named as a defendant in a lawsuit filed by the group of
private purchasers referred to in Note 16. The lawsuit alleges bad faith and
breach of contract against MSR and seeks not less than $30 million in damages
from the Raceway plus interest. The lawsuit also alleges fraud by certain MSR
directors and seeks damages from those defendants to be determined at trial plus
legal fees. In addition, the lawsuit alleges tortious interference with contract
by certain MSR directors, Vernon, LLC, and All Capital, LLC and seeks $30
million in damages from those defendants plus interest. The outcome of this
lawsuit is not presently determinable and, as such, no provision for any
unfavorable outcome that may arise from this litigation has been included in the
financial statements.

While the plaintiff's in the action have moved for permission from the court to
discontinue the subject action, they have indicated that they intend to
thereafter refile the action in the same court.

On December 3, 2002, MSR was served with a summons and complaint from both its
former President (John Signorelli) and a current Board member and member of the
Board's Audit Committee (Dominic Giambona) seeking, inter alia, monetary damages
in the amount of $10 million and/or the issuance of warrants to acquire up to
175,000 shares with a strike price of $10 per share that would enable the
plaintiffs to acquire such additional common stock upon payment of $1.75
million, such shares allegedly to have anti-dilution protection for their
combined interests of 39.9% (see Note 13), the issuance of 21,600 additional
shares of common stock (see

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Note 18), and the issuance of additional warrants with a strike price of $5.00
per share to enable each of them to maintain his present 17.19% interest in the
future and other declaratory, equitable, and monetary relief. The issuance of
these shares and warrants have not been approved by the shareholders. The
Company believes that it has valid defenses to the lawsuit, and intends to seek
dismissal of the case.

NOTE 20. FINANCIAL CONDITION AND MANAGEMENT PLANS

The Company sustained net losses of approximately $1,369,000 in 1999, $882,000
in 2000, and $2,262,000 in 2001, resulting in a working capital deficit of
approximately $2.4 million and a shareholder equity deficit of approximately
$2.2 million as of December 31, 2001. The Company anticipates that it will
experience a significant net operating loss during 2002.

On July 6, 2002, six new members of the Board of Directors took office and
elected a new chairman of the Board and a new President and CEO. In an effort to
reverse these losses and restore profitability, the Company intends to proceed
with the following initiatives:

         -     Install video lottery terminals in cooperation with the New York
               State Lottery.

         -     Increase the number of special events for calendar year 2003,
               including special concerts, snow-cross racing, and other special
               events.

         -     Expand opportunities for patrons to bet on the Company's live
               racing product by increasing simulcast outlets at other tracks
               and off-track betting locations, enhancing its telephone wagering
               program, and seeking additional opportunities on the internet and
               elsewhere.

         -     Increase revenues from the simulcasting of races from other
               tracks by expanding its telephone wagering program.

         -     Streamline operations, reduce operating expenses, and increase
               profitability of related operations, such as food and beverage
               operations, the on-track hotel, program sales, and video and
               photo sales.

         -     Refinance its existing debt to reduce interest and other finance
               expenses.

In October 2001, the New York State Legislature authorized the New York State
Lottery to install video lottery terminals (VLTs) at designated race-tracks, and
pay the tracks a percentage of the VLT revenues as a host fee. In response, the
Company is evaluating plans to build a new casino building to house an estimated
1,000 VLTs. In addition, the Company is planning to install 100 VLTs in its
grandstand/club house area and 100 VLTs in its hotel, subject to approval by the
New York State Lottery. The Company has retained a design-build engineering firm
and is preparing preliminary construction plans.

The amount of net revenue that will be realized from the VLT project depends on
(i) a final agreement with the Harness Horse Association of Central New York
(which represents the horse owners who race at the Company's facility) that
determines the allocation of VLT and other revenues between the Company and the
purse account paid for the winning horses, (ii) approval by the New York State
Lottery of a license for the Company, the construction of a new casino,

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and the installation of the requested VLT machines, and (iii) approval of full
construction and startup financing. The Company has already negotiated $2.5
million for the VLT construction, but anticipates that additional funding might
be required. Although the actual amount of net revenues will ultimately depend
on the number of visitors to the new casino and the amount bet by such visitors,
a preliminary independent study indicates that the Company could receive over
$4.5 million per year in additional income from the VLT project before the
payment of interest, taxes, depreciation, or amortization.

There are no assurances that the VLT project will be successfully implemented or
that revenue projections will be met. Furthermore, the future success of the
Company is dependent on the successful resolution of various lawsuits,
contingencies and contingent liabilities discussed in Notes 18 and 19.

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