<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, 2003

                                     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.

[X] YES  [ ] 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 June 30, 2003 was $1,868,415 based upon the average closing
bid and ask price of such stock on such day.

         Indicate the number of shares outstanding of each of the Company's
classes of common stock, as of April 14, 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

<PAGE>

TABLE OF CONTENTS

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

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

Item 2.        Properties...........................................................................................       4

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

Item 4.        Submission of Matters to a Vote of Security Holders..................................................       6

PART II.

Item 5.        Market for Registrant's Common Equity and Related Stockholder Matters................................       6

Item 6.        Selected Consolidated Financial Data.................................................................       7

Item 7.        Management's Discussion and Analysis of Financial Condition and Results of
                    Operations......................................................................................       8

Item 7A.       Qualitative and Quantitative Disclosures about Market Risk...........................................      14

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

Item 9.        Changes in and Disagreements with Accountants on Accounting and
                    Financial Disclosure............................................................................      15

Item 9A.       Controls and Procedures..............................................................................      15

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.......................................      19

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

Item 14.       Principal Accountant Fees and Services...............................................................      21

PART IV.

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

Signatures
Exhibits
</TABLE>

                                       2
<PAGE>

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-Mutuel Revenue Law and
         supervision of the New York State Racing and Wagering Board to conduct
         live harness racing at its track and to and 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 a hotel situated on property owned
         by MSR and adjacent to the Track (the "Hotel").

         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 2003, 2002
         and 2001. 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 in August 2004.

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

         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 a total of 117 full-time equivalent employees
         during the calendar year 2003.

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. The suit
         against Mrs. Bennett has been dismissed and MSR is in the process of
         preparing a motion of summary judgment seeking dismissal of the suit
         against MSR. However, there remains a cause of action against Mr.
         Patrick Bennett by CAI which in turn gives rise to a third party claim
         against the Company. The outcome of this action is not presently
         determinable.

         (b) In 2001, the New York State Legislature approved 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 and
         up to 2,500, based on activity performance, VLTs on its Track 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 VLTs at harness race tracks. The outcome of these lawsuits
         is not presently determinable.

                                       4
<PAGE>

         (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
         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.

         (d) 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;
         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.
         Discovery is on going.

         (e) During November 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 ("Signorelli Action")
         against the Company, certain of its directors and others alleging
         improprieties with respect to the below: "looting" and mismanagement.
         The Company believes that it has valid defenses to this action and, in
         addition, counterclaims the third party claims against one or more of
         the plaintiffs and other third parties. On March 5, 2004, this case was
         dismissed; however, plaintiffs have been given thirty (30) days to
         amend their complaint. As of April 5, 2004, the plaintiff had not
         amended the complaint.

         (f) 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.

                                       5
<PAGE>

         (g) On December 30, 2003, MSR commenced an action against Jeffrey
         Gural, Vernon Downs Acquisition, LLC, Dominic Giambona, John
         Signorelli, James Wise and Paul Noyes alleging that the defendants
         embarked on a campaign to destroy the company through the dissemination
         of false information following the failed attempt by the defendants to
         purchase the company at a reduced cost. MSR has asserted causes of
         action generally were tortuous, interfered with contractual relations,
         breached fiduciary duty to the company both generally as board members
         and specifically for breach of confidentiality agreement, and by
         defamation. The defendants have answered the complaint and served
         discovery demands.

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

         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, 2002                    9.00                   8.00
June 30, 2002                     8.00                   8.00
September 30, 2002                8.00                   8.00
December 31, 2002                 8.00                   8.00
March 31, 2003                    6.00                   5.00
June 30, 2003                     5.00                   5.00
September 30, 2003                7.50                   7.50
December 31, 2003                 7.50                   7.50
</TABLE>

         (b) As of April 14, 2004, there were 500 holders of record of the
         Company's common stock.

         (c) There were no dividends declared during the years ended December
         31, 2003 and 2002.

         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.

                                       6
<PAGE>

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,
OPERATING RESULTS                         2003             2002             2001             2000             1999
                                      ------------     ------------     ------------     ------------     ------------
<S>                                   <C>              <C>              <C>              <C>              <C>
   Number of racing days                        96               84               84               93              114
OPERATING REVENUES:
   Net Pari-mutuel commissions and
breakage                              $  4,736,522     $  5,301,079     $  5,504,645     $  4,996,851     $  5,439,471

   Room rental revenue                   2,188,198        2,110,754        1,882,666        1,410,333                -

   Admissions                                5,625           48,599           47,110           69,270           68,843
   Food, beverage and concessions        1,062,600          951,809          817,166          848,237          195,038

   Other revenues                          265,439          269,984          255,846          284,494          250,195
                                      ------------     ------------     ------------     ------------     ------------

      Total operating revenues           8,258,385        8,682,225        8,507,433        7,609,185        5,953,547
                                      ------------     ------------     ------------     ------------     ------------

OPERATING EXPENSES                      12,564,884       11,511,312       10,531,514        8,882,553        7,453,820
                                      ------------     ------------     ------------     ------------     ------------

LOSS FROM OPERATIONS                    (4,306,499)      (2,829,087)      (2,024,081)      (1,273,368)      (1,500,273)
                                      ------------     ------------     ------------     ------------     ------------

Other income (loss)                     (4,410,392)      (2,138,937)        (235,354)        (577,592)         135,059
                                      ------------     ------------     ------------     ------------     ------------

LOSS BEFORE EXTRAORDINARY ITEM          (8,716,891)      (4,969,224)      (2,262,191)      (1,474,868)      (1,368,967)
                                      ------------     ------------     ------------     ------------     ------------

EXTRAORDINARY ITEM - GAIN ON
EXTINGUISHMENT OF DEFERRED
RETIREMENT BENEFIT LIABILITY, NET
OF DEFERRED INCOME TAXES                                          -                -          593,261                -
                                      ------------     ------------     ------------     ------------     ------------
 NET LOSS                             $ (8,716,891)    $ (4,969,224)    $ (2,292,191)    $   (881,607)    $ (1,368,967)
                                      ============     ============     ============     ============     ============

Per share of common stock - basic
and diluted
    Net loss before extraordinary
item                                  $     (17.32)    $     (11.22)    $      (5.11)    $      (3.33)    $      (4.89)
    Extraordinary item                           -                -                -     $       1.34                -
    Net loss                          $     (17.32)    $     (11.22)    $      (5.11)    $      (1.99)    $      (4.89)
 Cash dividends per share                        -                -                -                -                -

FINANCIAL CONDITION

 Total Assets                         $ 12,544,655     $  8,627,436     $  6,166,181     $  6,993,375     $  4,386,727

 Total Liabilities                    $ 27,525,642     $ 15,791,532     $  8,361,053     $  6,917,030     $  3,477,595

 Total Shareholders' Equity
   (deficit)                          $(14,980,987)    $ (7,164,096)    $ (2,194,872)    $     76,345     $    909,132
</TABLE>

                                       7
<PAGE>

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

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2003 AS COMPARED TO DECEMBER 31, 2002

         During the year ended December 31, 2003 operating revenues decreased by
423,840 or 4.9% when compared to operating revenues for the year ended December
31, 2002 of $8,682,225.

         Although net wagering and simulcast revenue was down to $4,736,522 in
2003 from $5,301,079 in 2002, a decline of $564,557 or 10.6%, this was offset by
increases in room revenue of $77,445 or 3.7%, and increased food and beverage
concession revenue of $110,791 or 11.6%.

         The decline in wagering and simulcast revenue is attributed to general
economic conditions. The increase in hotel revenue and food and beverage
concession revenue is due to increased utilization of those facilities by
patrons.

         Operating expenses for the year ended December 31, 2003 were
$12,564,884 versus $11,511,312 for the year ended December 31, 2002, an increase
of $1,053,572 or 9.2%.

         The major increase in operating expenses was the increase in outside
services from $1,884,046 in 2002 to $2,849,914 in 2003. This increase of
$965,868 is due, to the costs incurred related to legal and consulting fees paid
in connection with the project to install video lottery terminals, obtain a
racing license for the 2003 and 2004 racing season and various litigation
described in Item 3.

         Other operating expenses consisted of 1) payroll costs which increased
by $514,664, to $3,214,166 in 2003 versus $2,699,502 in 2002, due to the
employment of personnel for the anticipated VLT operation, thus creating a
higher head count and payroll expense; 2) utilities which increased $162,510
from $806,811 in 2002 to $969,321 in 2003 due to harsher winter conditions in
2003; 3) simulcast expenses, which increased slightly from $1,212,902 in 2002 to
$1,246,894 in 2003.

         The loss from operations was $4,306,499 in 2003 versus a loss of
$2,829,087 in 2002 or an increase in the loss by $1,477,412 mainly due to the
increased operating expenses discussed above.

         Total interest expense and financing costs were in $4,762,583 in 2003
versus $2,351,491 in 2002. The increased costs in 2003 are a direct result of
refinancing in 2003 which resulted in higher effective interest rates and fees
associated with the refinancing as discussed in Note 4 of the Notes to the
Consolidated Financial Statements.

         Overall the net loss for 2003 was $8,716,891 versus a loss of
$4,969,224 or an increase in the loss of $3,747,667. The increase is a result of
increased operating expenses and interest and financing charges in 2003 when
compared to 2002.

                                       8
<PAGE>

         STATISTICAL COMPARISON:

         12 MONTHS ENDED DECEMBER 31, 2003 VS 12 MONTHS ENDED DECEMBER 31, 2002

<TABLE>
<CAPTION>
                                                 TWELVE MONTHS ENDED
                                                      DECEMBER 31,              INCREASE
                                                 2003            2002          (DECREASE)
                                             ------------    ------------     ------------
<S>                                          <C>             <C>              <C>
GROSS HANDLE:
Live Harness                                 $  4,711,200    $  4,682,919     $     28,281
OTB & ITW                                       4,694,628       9,312,174       (4,617,546)
Thoroughbred Simulcast                          6,429,486       6,481,972          (52,486)
Harness Simulcast                               8,148,779       9,608,447       (1,459,668)
                                             ------------    ------------     ------------
                                               23,984,093      30,085,512       (6,101,419)

DAILY AVERAGE:
Live Harness Handle                          $     49,075    $     55,749     $     (6,674)
OTB & ITW Handle                                   48,902         110,859          (61,957)
Attendance (108,859 in 2003 and 85,352 in
2002)                                               1,134           1,016              118

LIVE RACING DAYS                                       96              84               12
</TABLE>

YEAR ENDED DECEMBER 31, 2002 AS COMPARED TO DECEMBER 31, 2001

         During the year ended December 31, 2002 operating revenues increased by
$174,792 or 2.0% when compared to operating revenues for the year ended December
31, 2001 of $8,507,433.

         Although net wagering and simulcast revenue was down to $5,301,079 in
2002 from $5,504,645 in 2001, a decline of $203,566 or 3.7%, this was offset by
increases in room revenue of $228,088 or 12.0%, and increased food and beverage
concession revenue of $134,643 or 16.5%.

         The decline in wagering and simulcast revenue is attributed to general
economic conditions. The increase in hotel revenue and food and beverage
concession revenue is due to increased utilization of those facilities by
patrons.

         Operating expenses for the year ended December 31, 2002 were
$11,511,312 versus $10,531,514 for the year ended December 31, 2001, an increase
of $979,798 or 9.3%.

         The major increase in operating expenses was the increase in purses
from $1,896,896 in 2001 to $2,620,736 in 2002. This increase of $723,840 is due,
in part, to the recording of under funded prior year purses of $553,000 as an
expense in 2002.

         Other operating expenses consisted of 1) payroll costs, which were
relatively unchanged from the 2002 amount of $2,699,502 versus $2,746,811 in
2001, due to better utilization of personnel and lower head count; 2) utilities,
which declined $37,406 from $844,217 in 2001 to $806,811 in 2002 due to a milder
winter in 2002; 3) simulcast expenses, which decreased from $1,316,512 in 2001
to $1,212,902 in 2002 due to the decline in simulcast wagering noted above; and
4) increased outside services and rentals of $334,276 from $1,549,770 in 2001 to
$1,884,046 in 2002 due to increased legal and consulting fees in connection with
the project to install video lottery terminals.

                                       9
<PAGE>

         The loss from operations was $2,829,087 in 2002 versus a loss of
$2,024,081 in 2001 or an increase in the loss by $805,006 mainly due to the
increased operating expenses discussed above.

         Total interest expense and financing costs were $2,351,491 in 2002
versus $632,224 in 2001. The increased costs in 2002 are a direct result of
numerous refinancings in 2002, which resulted in higher effective interest
rates, and fees associated with the refinancing as discussed in Note 4 of the
Notes to the Consolidated Financial Statements.

         Overall the net loss for 2002 was $4,969,224 versus a loss of
$2,262,191 or an increase in the loss of $2,707,033. The increase is a result of
increased operating expenses and interest and financing charges in 2002 when
compared to 2001.

         STATISTICAL COMPARISON:

         12 MONTHS ENDED DECEMBER 31, 2002 VS. 12 MONTHS ENDED DECEMBER 31, 2001

<TABLE>
<CAPTION>
                                               TWELVE MONTHS ENDED
                                                    DECEMBER 31,               INCREASE
                                                2002           2001           (DECREASE)
                                            ------------    ------------     ------------
<S>                                         <C>             <C>              <C>
GROSS HANDLE:
Live Harness                                $  4,682,919    $  4,331,615     $    351,304
OTB & ITW                                      9,312,174       9,349,900          (37,726)
Thoroughbred Simulcast                         6,481,972       7,458,801         (976,829)
Harness Simulcast                              9,608,447       9,976,806         (368,359)
                                            ------------    ------------     ------------
                                              30,085,512      31,117,122       (1,031,610)

DAILY AVERAGE:
Live Harness Handle                         $     55,749    $     51,567     $      4,182
OTB & ITW Handle                                 110,859         111,308             (449)
Attendance (85,362 in 2002 and 72,548 in
2001)                                              1,016             864              152

LIVE RACING DAYS                                      84              84                0
</TABLE>

LIQUIDITY AND CAPITAL RESOURCES

         The Company has continued to incur operating losses and working capital
deficits. These conditions cast doubt about the Company's ability to continue as
a going concern. As of December 2003, the Company had a working capital deficit
of $1,495,649 and approximately $1,600,000 of remaining available financing from
existing loan agreements to fund the VLT construction and start up costs. Losses
for the twelve month period ended December 31, 2003 approximated $8,717,000 and
net cash used in operating activities for the period approximated $4,996,000.
Management expects to require approximately $500,000 per month to cover expected
net operating losses on average until the estimated August 1, 2004 opening date
of the VLT facility. Management is currently working to secure additional
financing to fund operations through the opening of the VLT facility through the
exercise of stock warrants or additional debt financing. There can be no
assurances that such funding will be available.

         On April 12, 2004 Raceway Ventures, LLC, an unaffiliated third party
acquired all of the outstanding stock and warrants, to purchase additional
common stock, from the majority shareholder of Mid-State Raceway, Inc.

                                       10
<PAGE>

2003 LOAN AGREEMENTS AND OTHER FINANCING

$18,000,000 Loan Agreement

         On January 29, 2003, MSR and MSD entered into an $18,000,000 Loan
Agreement with All Capital, LLC (an affiliate owned by a shareholder). 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 a $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 for the partial
funding for construction of facilities to be utilized for the installation and
operation of video lottery terminals. The loan bore 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 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.

$23,000,000 Loan Agreement

         On June 30, 2003, 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 bore 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 designated as of the date hereof 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 may be drawn down by the Borrower in connection with the
construction of a facility to house the VLT's and for working capital.

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

                                       11
<PAGE>

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.
By agreement dated June 30, 2003, Vestin sold an undivided interest in its
Senior Participation to Owens Mortgage Investment Fund, a California general
partnership ("Owens"); and thereafter, on July 9, 2003, repurchased such
undivided interest from Owens.

         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 (an affiliate of All
Capital, LLC) loaned to the Company, on an unsecured basis, the sum of $250,000
at the rate of 25% per annum. The Company promptly repaid this bridge loan and
the interest expense with respect thereto was less than $4,000.

RACING, SIMULCASTING AND VLT 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 agreement(the "SS Agreement") which effectively
granted MSR conditional racing and simulcast licenses for the 2003-racing
season. The SS Agreement required that MSR and an associate of MSR's then major
creditor (All Capital, LLC) complete new applications in a timely period and
that the associate 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 23,300
shares of MSR common stock at a price of $8.58 per share. The warrant expires on
April 8, 2008. 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 to the
associate pursuant to the SS Agreement and (b) the Sunset Management LLC
$250,000 loan.

                                       12
<PAGE>

         After first denying MSR a 2004 live racing and simulcast license on
February 24, 2004, on March 22, 2004, the New York State Racing and Wagering
Board ("NYSRWB") granted Mid State Raceway, Inc. live racing and simulcast
licenses, conditioned on the following:

         1) The formation of a Racing Division which would exercise sole and
         exclusive authority with respect to operation and control of the
         Company's real and personal property located in Vernon, New York (the
         "Track"), except for the portion used for food and beverage, lodging,
         video gaming, or corporate purposes.

         2) The creation of the position of General Manager of the Racing
         Division who shall have full operational control over the Racing
         Division and its employees. The General Manager must be acceptable to
         and licensed by the NYSRWB. On March 18, 2004, the Company engaged
         Dennis Dowd, a former New Jersey Racing Commission chairman to be its
         General Manager of the Racing Division. Investor Shawn Scott and
         Hoolae Paoa are not allowed to influence racing operations -
         directly or indirectly - while they appeal the NYSRWB's December
         decision to deny them individual track management licenses.

         3) The adoption of a budget for the operation of the Racing Division
         during 2004 subject to the approval of the General Manager and the
         NYSRWB.

         4) The successful final inspection by the state Office of Fire
         Prevention and Control, which found 78 violations last year; all of
         which have been corrected.

         As of March 31, 2004, The Company believes it is in substantial
compliance with the foregoing conditions

         The Company became bound by the conditions immediately upon the
issuance of 2004 live racing and simulcast licenses and racing dates and the
conditions will remain in effect until the first to occur of Shawn Scott
receiving a license from the NYSRWB or Shawn Scott and Victoria Scott being
divested of their shares of Common Stock of the Company and warrants to acquire
shares of Common Stock of the Company.

         On April 12, 2004 Raceway Ventures, LLC, an unaffiliated third party
acquired all of the outstanding stock and warrants, to purchase additional
common stock, from the majority shareholder of Mid-State Raceway, Inc.

         The start of the 100 day racing season is anticipated to begin on April
23, 2004.

         The Company's application to the New York Lottery for approval to
operate video lottery terminals "VLT" is still pending.

CONTRACTUAL OBLIGATIONS

         The Company's estimated future payments as of December 31, 2003 related
to its material debt and other certain contractual obligations and the timing of
those payments are set forth below. Since some of these payment amounts are not
fixed, the amounts in the table may be estimates and the actual amounts may be
different.

                                       13
<PAGE>

<TABLE>
<CAPTION>
                                                 LESS THAN        1 -3            3-5      MORE THAN
   CONTRACTUAL OBLIGATIONS          TOTAL         1 YEAR          YEARS          YEARS      5 YEARS
                                 -----------    -----------    -----------    -----------  ---------
<S>                              <C>            <C>            <C>            <C>          <C>
Long-term debt (1)               $24,234,076    $         -    $24,234,076    $         -     $  -
Capital lease obligations (2)        238,688        131,376         94,069         13,243        -
Operating leases (3)                 436,249        358,262         77,987              -        -
                                 -----------    -----------    -----------    -----------     ----
Total                            $24,909,013    $   489,638    $24,406,132    $    13,243     $  -
                                 -----------    -----------    -----------    -----------     ----
</TABLE>

         (1)      Long-term debt represents a loan payable that matures in June
                  2005.

         (2)      Capital lease obligations represent various equipment leases
                  that mature at various dates through March 2008.

         (3)      Operating leases represent equipment leased under
                  non-cancelable operating leases expiring at various dates
                  through December 2006.

CRITICAL ACCOUNTING POLICIES

         The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make assumptions and
estimates that affect the reported amounts of 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. Our most
significant estimates related to the valuation of property and equipment which
may be significantly affected by changes in the regulatory environment in which
the company operates. Our significant accounting policies are described in Note
1 to the consolidated financial statements included in Item 15 of the Form 10-K
annual report.

         Our business can be impacted positively and negatively by legislative
and regulatory changes, such as those previously described. Significant negative
changes resulting from these activities could result in a significant impairment
of our property and equipment in accordance with generally accepted accounting
standards.

IMPACT OF RECENTLY ISSUED ACCOUNTING ANNOUNCEMENTS

         In January 2003 the Financial Accounting Standards Board issued
Financial Accounting Standards Board Interpretation No. 46 "Consolidation of
Variable Interest Entities". The statement requires consolidation of certain
entities when one entity has a controlling interest in a second entity. This
would apply to certain specific purpose entities regardless of the percentage of
ownership. The interpretation was effective for the Company as of July 1, 2003
and its adoption had no impact on the consolidated financial statements.

         In May 2003 the Financial Accounting Standards Board issued Statement
No. 150 "Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity". The statement requires reclassification from
equity to a liability classification in the balance sheet of certain equity and
financial instruments, including common stock, if certain criteria are met. The
statement was effective for the quarter beginning July 1, 2003 and its adoption
had no impact on the consolidated financial statements

ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

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

                                       14
<PAGE>

         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% in 2003. The
fixed interest rate limits the amount of exposure that the Company has to
increases in interest rates. However the Company pays a higher cost of funds
when interest rates decline.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The consolidated financial statements of the Company and the reports of
the independent accountants are submitted under item 15 of this report.

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

         On December 15, 2003, Mid-State Raceway, Inc. received notice that
Urbach Kahn & Werlin LLP, Certified Public Accountants (UK&W), the firm of
independent accountants previously engaged as the principal accountants to audit
the Company's financial statements, resigned. The resignation was unilateral and
was communicated in a letter to the Company dated December 11, 2003 citing
delinquent SEC filings as the principle reason for its resignation. The
resignation was not requested or prompted by the Company. Subsequently, UK &W
was reengaged on a limited scope basis to assist MSR in satisfying, its
delinquent filing requirements under the Exchange Act of 1934.

         UK&W's reports on the Company's financial statements for the past two
years contained no adverse opinion or disclaimer of opinion, nor were they
qualified or modified as to uncertainty, audit scope, or accounting principles.
During the Company's two most recent fiscal years and the subsequent interim
period up to the date of the resignation, there were no disagreements with UK&W
of the character described in paragraph (a)(1)(iv) of Regulation S-K, Item 304,
and there were no reportable events of the character described in paragraph
(a)(1)(v) of Regulation S-K, Item 304.

         On January 15, 2004 the Audit Committee of the board of directors
appointed Dannible & McKee, LLP as the Company's independent accountant.

ITEM 9A. 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

                                       15
<PAGE>

                  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.

PART III.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The directors and officers of the Company as of March 30, 2004 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                   72           1998                   -                      -
*   Dominic A. Giambona             64           1999              68,833                   7.71%
**  Edward A. Kiley                 62           1999                 250                    ***
    Deborah Bishop                  53           2002                   -                      -
*,**Jerry D. Mottern                45           2002                   -                      -
    Joan Rae Parker                 65           2002                   -                      -
*,**Victoria Ann Scott              61           2002             450,000                  50.41%
*   John Stone                      47           2002                   -                      -
    Hoolae Paoa                     53           2002                   -                      -
</TABLE>

                                16

<PAGE>

<TABLE>
<S>                                 <C>             <C>            <C>                     <C>
David E. Wilson                     67              -                    -                     -
William B. Thornton                 43              -                    -                     -

All officers and directors as a group                              519,083                 58.12%
</TABLE>

*Member of Executive Committee

**Member of Audit Committee

***Less than one percent

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.

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 61) has served as a Director since June 1999 and is
currently secretary of the corporation. 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, 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.

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.

                                       17
<PAGE>

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 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.

WILLIAM B. THORNTON (age 43) was appointed Treasurer and Chief Financial Officer
of the Company on March 16, 2004 replacing Rose H. Frawert who had served in
such capacities since November 13, 2003. Mr. Thornton joins Mid-State Raceway
with over twenty years in the gaming industry, most recently serving as Chief
Financial Officer/Assistant General Manager for the Golden Phoenix Hotel,
Casino, & Resort. At the Golden Phoenix, Mr. Thornton was one of only two
executives with a Key Employee license. Prior experience includes the position
of Property Controller for the Flamingo Reno, a Park Place Entertainment (now
Caesar's Entertainment) business. He also serves as Corporate Chief Financial
Officer for Total Management Services LLC (an affiliate of All Capital, LLC).

         The Audit Committee has not presently designated a member as the
financial expert. Due to the size of the Company and lack of financial
complexity, the committee does not presently anticipate adding a financial
expert.

         Due to recent changes in the Board of Directors and time spent on
financing issues the registrant has not presently adopted a code of ethics but
intends to do so in 2004.

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
May 26, 2001 to December 31, 2001             39,118        -              -
January 1, 2002 to July 13, 2002              31,934        -              -
July, 14, 2002 to December 31, 2002                -        -        $19,250

John J. Signorelli
President and Chief Executive Officer
January 1, 2001 to April 21, 2001             37,049        -              -
</TABLE>

                                       18

<PAGE>

<TABLE>
<S>                                          <C>            <C>       <C>
Andy Goodell
President and Chief Executive Officer
July 1, 2002 to December 28, 2002             50,356        -              -

Hoolae Paoa
Chief Executive Officer
December 27, 2002 to Present                 120,000        -         78,000
</TABLE>

         No other executive officer received an annual salary and bonus in
excess of $100,000 during the fiscal years ended December 31, 2001, 2002 and
2003.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         At the close of business on December 31, 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>

                                       19
<PAGE>

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 borrowings at December 31, 2001 of $166,500
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.

         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)      On August 28, 2002, the Company entered into a $15,000,000
                  Loan Agreement with All Capital, LLC replacing and refinancing
                  existing financing agreements of: (1) $400,000 with Vernon,
                  LLC, (2) $8,500,000 with All Capital, LLC and (3) $1,000,000
                  with All Capital, LLC.

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

         (III)    On June 30, 2003, the Company entered into a $23,000,000 Loan
                  Agreement with Vestin Mortgage, Inc.

         (IV)     On June 30, 2003, the Company entered into a $3,000,000 Junior
                  Participation Loan Agreement with Vestin Mortgage, Inc.

         In 2003, 2002, and 2001, MSR paid approximately $108,000, $59,000, and
$131,000, respectively, to related parties for consulting services, lodging, and
interest.

                                       20
<PAGE>

         In December 2002, as a condition for 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 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.

ITEM 14. ACCOUNTING FEES

Fees billed by the Company's principal accountants, Dannible & McKee, LLP in
2003 and Urbach Kahn & Werlin LLP in 2002, in the aggregate for each of the last
two years were as follows:

<TABLE>
<CAPTION>
                          2003           2002
                        -------        -------
<S>                     <C>            <C>
Audit Fees:             $43,482        $78,150

 Tax Fees:              $11,208        $ 6,064

 All other fees:        $40,673        $ 8,361
</TABLE>

There were no other fees billed for services other than those noted above. Prior
to their appointment as independent auditors on January 15, 2004 Dannible &
McKee, LLP assisted the Company with preparing regulatory filings for 2002 and
prior years. Fees for these services are included in the caption "all other
fees" and were approved in advance by the audit committee.

The fees for tax services represent fees for compliance related to Federal and
state tax return preparation and filing.

The fees for audit and tax services for 2003 were proposed to the audit
committee and approved by that committee in engagement letters. No other
services were provided by the accountants that would require approval by the
audit committee.

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

(a)      Financial Statements

<TABLE>
<CAPTION>
                                                                          Page
                                                                          ----
<S>                                                                       <C>
(1)  Reports of Independent Auditors                                       F-1
     Consolidated Balance Sheets at December 31, 2003 and 2002             F-3
     Consolidated Statements of Operations for the years ended
          December 31, 2003, 2002 and 2001                                 F-4
     Consolidated Statements of Changes in Shareholders' Equity
          for the years ended December 31, 2003, 2002 and 2001             F-5
     Consolidated Statements of Cash Flows for the years ended
          December 31, 2003, 2002 and 2001                                 F-6
     Notes to Consolidated Financial Statements                            F-7
</TABLE>

                                       21
<PAGE>

         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 2003

         Form 8-K dated December 19, 2003 reporting change in the registrants
auditors under Item 4.

         Form 8-K dated December 31, 2003 reporting the exercise of certain
warrants to purchase 450,000 shares of stock under Item 1.

(c)      Exhibits:

21.1     Subsidiaries of the Registrant

31.1     Certification of CEO

31.2     Certification of CEO

32.1     Section 1350 Certification of CEO

32.2     Section 1350 Certification of CEO

                                   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
                                             APRIL 14, 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 14th day of April 2004.

/S/ HOOLAE PAOA
Hoolae Paoa
Chief Executive Officer

/S/ WILLIAM B. THORNTON
William B. Thornton
Treasurer and Chief Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on the 14th day of April 2004.

                                       22
<PAGE>

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

/S/WILLIAM B. THORNTON
William B. Thornton
Treasurer and Chief Financial Officer


Edward A. Kiley
Secretary and Director

/S/VICTORIA SCOTT
Victoria Scott
Director

/S/JERRY MOTTERN
Jerry Mottern
Director

/S/DEBORAH BISHOP
Deborah Bishop
Director

/S/JOHN STONE
John Stone
Director

/S/JOAN PARKER
Joan Parker
Director


Paul Noyes
Director


Dominic Giambona
Director

                                       23
<PAGE>


INDEPENDENT AUDITOR'S REPORT

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

         We have audited the accompanying consolidated balance sheet of
Mid-State Raceway, Inc. and Subsidiaries as of December 31, 2003, and the
related consolidated statements of operations, changes in shareholders' equity
(deficit), and cash flows for the year then ended. 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 audit.

         We conducted our audit 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 audit provides a
reasonable basis for our opinion.

         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 Subsidiaries as of December 31, 2003, and the consolidated
results of their operations and their cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States of
America.

         The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 13 to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency that raises substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are described in Note 13. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty,

                                                /s/ Dannible & McKee LLP
                                                ------------------------

Syracuse, New York
March 25, 2004

                                       F1
<PAGE>

Mid-State Raceway, Inc.

INDEPENDENT AUDITOR'S REPORT

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

         We have audited the accompanying consolidated balance sheets of
Mid-State Raceway, Inc. and Subsidiary as of December 31, 2002, and the related
consolidated statements of operations, changes in shareholders' equity
(deficit), and cash flows for each of the two years in the period ended December
31, 2002. 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 Notes 4(B) and 12 to the financial statements,
subsequent to December 31, 2002, the Company refinanced substantially all of its
debt and was granted a conditional racing and simulcast licenses for 2003 and
2004. In addition, as explained in Notes 12 and 13 to the financial statements,
the Company has an application pending with the New York State Lottery for
approval to operate video lottery terminals (VLT's). There can be no assurances,
however, that the VLT project will be successfully implemented, that revenue
projections of such will be met, and the VLT application will be approved.

         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, 2002, and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 2002, in conformity with accounting principles generally accepted
in the United States of America.

                                            /s/ Urbach Kahn & Werlin
                                            ------------------------

Albany, New York
March 21, 2003

                                       F2
<PAGE>

Mid-State Raceway, Inc.

                          CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 2003 AND 2002

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
                                                                                             2003             2002
----------------------------------------------------------------------------------------------------------------------
<S>                                                                                      <C>              <C>
ASSETS
CURRENT ASSETS
  Cash and cash equivalents                                                              $    195,099     $     89,907
  Restricted cash                                                                             296,412          253,794
  Accounts receivables, net of allowance for doubtful accounts of
   $20,000 in 2003 and $10,000 in 2002                                                        240,790          401,135
  Prepaid expenses (principally interest in 2003 & 2002)                                      839,022        1,821,727
----------------------------------------------------------------------------------------------------------------------
       Total current assets                                                                 1,571,323        2,566,563
----------------------------------------------------------------------------------------------------------------------
PROPERTY, BUILDINGS AND EQUIPMENT
  Land, buildings and equipment                                                            21,792,286       17,778,070
  Other properties                                                                            121,671          121,671
----------------------------------------------------------------------------------------------------------------------
                                                                                           21,913,957       17,899,741
  Less accumulated depreciation                                                            12,765,108       12,412,951
----------------------------------------------------------------------------------------------------------------------
                                                                                            9,148,849        5,486,790
----------------------------------------------------------------------------------------------------------------------
DEBT ISSUANCE COSTS                                                                         1,824,483          574,083
----------------------------------------------------------------------------------------------------------------------
                                                                                         $ 12,544,655     $  8,627,436
======================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
  Current portion of long term debt                                                      $    112,454     $    113,569
  Accounts payable and accrued expenses                                                     1,775,167        1,638,161
  Uncashed winning tickets                                                                     70,267           66,333
  Purse funds payable                                                                          78,389          495,000
  Deposits and other current liabilities                                                      207,677          196,110
  Retention for capital improvements                                                           39,711           27,534
  VIP deferred payments                                                                       783,277                -
  Deferred grant revenue                                                                            -           80,000
----------------------------------------------------------------------------------------------------------------------
       Total current liabilities                                                            3,066,942        2,616,707
----------------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT, net of current portion                                                     24,458,700       13,174,825
----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES                                                                          27,525,642       15,791,532
----------------------------------------------------------------------------------------------------------------------
CONTINGENCIES (Note 12)
----------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
  Common stock, par value $.10 per share;
   authorized 10,000,000 shares; issued and
   outstanding 892,766 shares in 2003 and 442,766 shares in 2002                               89,277           44,277
  Additional paid-in capital                                                                2,939,909        2,084,909
  Accumulated deficit                                                                     (18,010,173)      (9,293,282)
----------------------------------------------------------------------------------------------------------------------
       Total shareholders' deficit                                                        (14,980,987)      (7,164,096)
----------------------------------------------------------------------------------------------------------------------
                                                                                         $ 12,544,655     $  8,627,436
----------------------------------------------------------------------------------------------------------------------
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements

                                       F3
<PAGE>

Mid-State Raceway, Inc.

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                  YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001

<TABLE>
<CAPTION>
                                                                        FOR THE YEAR           FOR THE YEAR        FOR THE YEAR
                                                                            ENDED                 ENDED               ENDED
                                                                        DECEMBER 31,           DECEMBER 31,        DECEMBER 31,
                                                                            2003                   2002                2001
                                                                      (96 RACING DAYS)       (84 RACING DAYS)    (93 RACING DAYS)
                                                                      ----------------       ----------------    ----------------
<S>                                                                   <C>                    <C>                 <C>
Operating revenues:
   Net pari-mutuel commissions and breakage from wagering:
     Vernon Downs Harness                                               $    903,003           $    921,853        $    837,718
     Off-track betting (OTB) and inter-track wagering (ITW)                1,136,163              1,370,520           1,433,419
     Simulcasting                                                          2,697,356              3,008,706           3,233,508
-------------------------------------------------------------------------------------------------------------------------------
                                                                           4,736,522              5,301,079           5,504,645
   Room rental revenue                                                     2,188,199              2,110,754           1,882,666
   Admissions                                                                  5,625                 48,599              47,110
   Food, beverage, and concessions                                         1,062,600                951,809             817,166
   Other revenues                                                            265,439                269,984             255,846
-------------------------------------------------------------------------------------------------------------------------------
        Total operating revenues                                           8,258,385              8,682,225           8,507,433
-------------------------------------------------------------------------------------------------------------------------------
Operating expenses:
   Purses                                                                  1,750,206              2,620,736           1,896,896
   Payroll                                                                 3,214,166              2,699,502           2,746,811
   Taxes, other than income                                                  663,347                631,961             559,410
   Outside services and rentals                                            2,849,914              1,884,046           1,549,770
   Utilities                                                                 969,321                806,811             844,217
   Simulcasting expenses                                                   1,246,894              1,212,902           1,316,512
   Food and beverage costs                                                   529,268                484,735             471,765
   Depreciation                                                              385,331                422,054             445,357
   Bad debts                                                                  40,783                    740               4,897
   Other expenses                                                            915,654                747,825             695,879
-------------------------------------------------------------------------------------------------------------------------------
        Total operating expenses                                          12,564,884             11,511,312          10,531,514
-------------------------------------------------------------------------------------------------------------------------------
Loss from operations                                                      (4,306,499)            (2,829,087)         (2,024,081)
-------------------------------------------------------------------------------------------------------------------------------
Other income (loss):
   Special events income, net                                                267,896                 78,455             249,062
   Commissions for capital improvements                                       27,625                 70,853              46,668
   Aid from state and local governments                                       80,000                 80,000              80,550
   Loss on disposal of other assets                                          (24,921)                     -              (2,892)
   Investment (expense) income                                                 1,591                (16,754)             23,482
   Interest expense                                                       (2,186,598)            (1,374,385)           (632,224)
   Financing costs                                                        (2,575,985)              (977,106)                  -
-------------------------------------------------------------------------------------------------------------------------------
        Total other income (loss)                                         (4,410,392)            (2,138,937)           (235,354)
-------------------------------------------------------------------------------------------------------------------------------
Loss before (provision) benefit for federal and state
   income taxes and extraordinary item                                    (8,716,891)            (4,968,024)         (2,259,435)
-------------------------------------------------------------------------------------------------------------------------------
(Provision) benefit for federal and state income taxes:
   Currently payable                                                               -                 (1,200)             (2,756)
   Deferred benefit                                                                -                      -                   -
-------------------------------------------------------------------------------------------------------------------------------
        Total (provision) benefit for federal and state income taxes               -                 (1,200)             (2,756)
-------------------------------------------------------------------------------------------------------------------------------
Net loss                                                                  (8,716,891)            (4,969,224)         (2,262,191)
-------------------------------------------------------------------------------------------------------------------------------
Net loss per common share - basic and diluted (Note 1)                        (17.32)                (11.22)              (5.11)
===============================================================================================================================
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements

                                       F4
<PAGE>

Mid-State Raceway, Inc.

            CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
                                   YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001

<TABLE>
<CAPTION>
                                                                                                         ACCUMULATED
                                                          COMMON STOCK       ADDITIONAL                     OTHER
                                                        -----------------      PAID-IN    ACCUMULATED   COMPREHENSIVE
                                                        SHARES    AMOUNT       CAPITAL      DEFICIT        INCOME          TOTAL
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                     <C>       <C>        <C>         <C>            <C>            <C>
Balances at January 1, 2001                             442,766   $44,277    $2,084,909  $ (2,061,867)    $  9,026     $     76,345
                                                                                                                       ------------
Comprehensive loss

   Net loss for the year                                                                   (2,262,191)           -       (2,262,191)

   Unrealized gain on securities available for sale                                                 -       (9,026)          (9,026)
                                                                                         ------------------------------------------

     Total comprehensive loss                                                              (2,262,191)      (9,026)      (2,271,217)
-----------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 2001                           442,766    44,277     2,084,909    (4,324,058)           -       (2,194,872)

   Net loss for the year                                                                   (4,969,224)           -       (4,969,224)
-----------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 2002                           442,766    44,277     2,084,909    (9,293,282)           -       (7,164,096)

   Net loss for the year                                                                   (8,716,891)           -       (8,716,891)

   Exercise of common stock warrants                    450,000    45,000       855,000             -            -          900,000
-----------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 2003                           892,766   $89,277    $2,939,909  $(18,010,173)    $      -     $(14,980,987)
===================================================================================================================================
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements

                                       F5
<PAGE>


Mid-State Raceway, Inc.

                                           CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001

<TABLE>
<CAPTION>
                                                                 FOR THE YEAR       FOR THE YEAR      FOR THE YEAR
                                                                    ENDED              ENDED             ENDED
                                                                 DECEMBER 31,       DECEMBER 31,      DECEMBER 31,
                                                                     2003               2002              2001
                                                               (96 RACING DAYS)   (84 RACING DAYS)  (93 RACING DAYS)
--------------------------------------------------------------------------------------------------------------------
<S>                                                            <C>                <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES
  Net loss                                                       $ (8,716,891)     $ (4,969,224)     $ (2,262,191)
  Adjustments to reconcile net loss to net cash used in
   operating activities:
     Depreciation                                                     385,331           422,054           445,357
     Amortization of prepaid financing costs                        2,575,985         2,091,243                 -
     Change in allowance for doubtful accounts                         40,783                 -                 -
     Realized (gain) loss on investments                                    -                 -           (28,227)
     Imputed interest expense                                               -                 -           263,105
     Loss on sale/disposal of equipment                                24,921                 -             2,892
     Changes in:
       Restricted cash                                                (42,618)          (60,891)          (65,335)
       Accounts receivable                                            119,562          (158,608)           68,845
       Prepaid expenses and other                                     982,705           (61,556)           45,492
       Other assets                                                         -                 -             8,904
       Accounts payable                                               103,437          (129,621)           32,355
       Uncashed winning tickets and other current liabilities          15,501            60,316           119,206
       Purse funds payable                                           (416,611)          495,000                 -
       Deferred revenue                                               (80,000)          (80,000)          160,000
       Retention for capital improvements                              12,177           (17,733)            5,375
--------------------------------------------------------------------------------------------------------------------
         Net cash used in operating activities                     (4,995,718)       (2,409,020)       (1,204,222)
--------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
  Proceeds from maturities and sales of available-for-sale
   investment securities                                                    -                 -           520,676
  Proceeds from sale of equipment                                           -                 -            12,700
  Purchase of properties and equipment                             (3,249,703)         (289,372)         (182,603)
--------------------------------------------------------------------------------------------------------------------
         Net cash provided by (used in) investing activities       (3,249,703)         (289,372)          350,773
--------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
  Proceeds from debt, net of issuance costs                        11,644,791         2,872,005         1,141,000
  Principal payments on line of credit and other debt              (4,073,599)                -          (313,655)
  Exercise of common stock warrants                                   900,000
  Principal payments on capital leases                               (120,579)         (124,993)          (78,789)
--------------------------------------------------------------------------------------------------------------------
         Net cash provided by financing activities                  8,350,613         2,747,012           748,556
--------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents                  105,192            48,620          (104,893)
Cash and cash equivalents at beginning of year                         89,907            41,287           146,180
--------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year                         $    195,099      $     89,907      $     41,287
====================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
    Cash paid during the year for:
      Interest                                                   $  1,038,927      $    290,148      $    351,228
      Income taxes                                                                 $      1,200      $      2,756
====================================================================================================================
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
  FINANCING ACTIVITIES
  Principal payments on debt through proceeds from refinancing
   of existing debt                                              $ 13,353,969      $ 15,816,178      $          -
  Payments on prepaid interest through proceeds from
   refinancing the existing debt                                 $  2,793,222      $  4,306,560      $          -
  Capital leases                                                 $     29,449      $     48,915      $     16,261
  Accounts payable incurred for property and equipment           $    793,159      $          -      $    $99,165
====================================================================================================================
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements

                                       F6
<PAGE>

Mid-State Raceway, Inc.

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") is a wholly owned
         subsidiary of MSR. MSD operates concessions at the harness racing track
         owned by MSR, and operates a hotel adjacent to the track owned by MSR.

                  MSR and MSD sustained significant operating losses for each of
         the three years in the period ended December 31, 2003, resulting in a
         shareholder deficit of approximately $15,000,000 as of December 31,
         2003. Management's plans with respect to this deficit financial
         position are described in Note 13.

         PRINCIPLES OF CONSOLIDATION:

                  The accompanying consolidated financial statements include the
         accounts of MSR and MSD and two inactive subsidiaries; Vernon
         Productions Inc. and Vernon Hospitality Inc. (collectively referred to
         as the Company). All significant intercompany accounts and transactions
         have been eliminated in consolidation.

         USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS:

                  The preparation of financial statements in conformity with
         accounting principles generally accepted in the United States of
         America 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 AND CASH EQUIVALENTS:

                  For purposes of reporting cash flow, cash and cash equivalents
         include any highly liquid investments with a maturity of three months
         or less when purchased.

         RESTRICTED CASH:

                  Restricted cash represents refundable deposits, amounts due to
         horsemen for purses and deposits received for account wagering.

         RECEIVABLES AND CREDIT POLICIES:

                  Accounts receivable are unsecured customer obligations due
         under normal trade terms requiring payment within 30 days from the
         invoice date. Interest is not accrued on past-due invoices. Accounts
         receivable are stated at the amount billed to the customer. Payments of
         accounts receivable are allocated to specific invoices identified on
         the customer's remittance advice. Customer account balances with
         invoices dated over 90 days old are considered delinquent.

                  The carrying amount of accounts receivable is reduced by a
         valuation allowance that represents management's best estimate of the
         amounts that will not be collected. Management individually reviews all
         accounts receivable balances that exceed 90 days from invoice date and,
         based on assessment of current creditworthiness, estimates the portion,
         if any, of the balance that will not be collected.

                                       F7
<PAGE>

Mid-State Raceway, Inc.

         PROPERTY, BUILDINGS AND EQUIPMENT:

                  Property, buildings and equipment are stated at cost less
         accumulated depreciation. Expenditures for repairs and maintenance are
         charged to expense as incurred. For financial statement purposes,
         depreciation is computed using the straight line and accelerated
         methods over the estimated useful life 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>

         NET 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 503,177, 442,766, and
         442,766 for the years December 31, 2003, 2002 and 2001, respectively.
         Outstanding authorized stock warrants (see Note 12) totaled 1,471,000
         and 1,897,700 at December 31, 2003 and 2002, respectively. All such
         warrants were excluded from all net loss per share calculations because
         their effect was anti-dilutive.

         ADVERTISING:

                  MSR follows the policy of charging the costs of advertising to
         expense as incurred. Advertising expense was $265,531, $136,106, and
         $77,160, for the years ended December 31, 2003, 2002, and 2001,
         respectively.

         INCOME TAXES:

                  The Company recognizes deferred income taxes for the tax
         consequences in future years of differences between the tax basis 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.

         FINANCIAL INSTRUMENTS:

                  The Company maintains various financial instruments in the
         ordinary course of business, which consist of cash, accounts receivable
         and long-term debt. The carrying value of the Company's financial
         instruments approximates their fair value at December 31, 2003 and
         2002. The fair values of long-term debt are determined using
         incremental

<PAGE>

     Mid-State Raceway, Inc.

         borrowings rates available to the Company for similar types of
         borrowings. All other financial instruments are short-term in nature
         and their fair values are based on the amounts that they have been or
         will be settled for subsequent to the balance sheet date.

         LONG-LIVED ASSETS:

                  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. 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, 2003.

         DEBT ISSUANCE COSTS:

                  Debt issuance costs consist principally of loan commitment
         fees and closing costs and are amortized on the straight-line basis
         over the original term of the loan.

NOTE 2.  PROPERTY, BUILDINGS AND EQUIPMENT

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

<TABLE>
<CAPTION>
                                                              2003          2002
------------------------------------------------------------------------------------
<S>                                                        <C>           <C>
Land, buildings and equipment:
   Land                                                    $    77,802   $    77,802
   Land improvements                                         1,922,304     1,932,192
   Buildings and improvements                               10,856,808    10,689,479
   Equipment                                                 5,017,514     4,940,783
   Construction in progress                                  3,917,858       137,814
------------------------------------------------------------------------------------
                                                            21,792,286    17,778,070
Other properties:
   Land                                                        121,671       121,671
------------------------------------------------------------------------------------
                                                            21,913,957    17,899,741
Less accumulated depreciation                               12,765,108    12,412,951
------------------------------------------------------------------------------------
                                                           $ 9,148,849   $ 5,486,790
====================================================================================
</TABLE>

                  Depreciation expense was $385,331, $422,054, and $445,357 for
         2003, 2002, and 2001 respectively. Total interest expense capitalized
         as a component of the cost of construction in progress was
         approximately $86,000 in 2003.

NOTE 3.  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. As MSR did not make all of
         the required payments on a timely basis, Oneida County recorded a deed
         in 2001 transferring MSR's title to parcels to the Oneida County Board
         of Legislators. MSR satisfied all amounts due pursuant to the 1997
         property taxes in 2002.

                  At December 31, 2002, MSR owes approximately $545,000 relating
         to delinquent property and school taxes for 2002 and prior periods. In
         January 2003, the Company paid approximately $236,000 to Oneida County
         to satisfy 2003 property taxes and relevied

<PAGE>

    Mid-State Raceway, Inc.

         2002 school taxes. Additionally, as part of a delinquent tax payment
         agreement with Oneida County, the Company is required to pay the County
         $10,000 per month for ten months (March 2003 - December 2003) and
         $16,974 per month for 24 months (January 2004 - December 2005) to
         satisfy the delinquent tax liability.

                  Unpaid real estate taxes at December 31, 2003 and 2002 are
         included in accounts payable and accrued expenses.

NOTE 4.  LONG-TERM DEBT AND LEASE OBLIGATIONS

                  Long-term debt is comprised of the following at December 31:

<TABLE>
<CAPTION>
                                                        2003                  2002
--------------------------------------------------------------------------------------
<S>                                                  <C>                   <C>
(A)     Note payable, All Capital, LLC               $         -           $12,966,500
(B)     Note payable, Vestin Mortgage, Inc.          $24,364,077                     -
(C)     Capital lease obligations                        207,077               321,894
--------------------------------------------------------------------------------------
        Current portion                               24,571,154            13,288,394
                                                         112,454               113,569
--------------------------------------------------------------------------------------
        Long-term debt, net                          $24,458,700           $13,174,825
======================================================================================
</TABLE>

                  A description of significant long-term obligations at December
         31, 2003 and 2002 is as follows:

                  (A).     On August 28, 2002, MSR and MSD entered into a
                           $15,000,000 Loan Agreement with All Capital, LLC (a
                           Company owned by a shareholder). The loan agreement
                           was funded in multiple installments and was 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 (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 were
                           to be disbursed in connection with and for the
                           construction of facilities to be utilized for the
                           installation and operation of video lottery
                           terminals. The loan bore interest at the rate of 15%
                           per annum and was scheduled to mature on August 28,
                           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 initial one
                           year term of the loan funded through loan proceeds.
                           In connection with the loan agreement, MSR issued
                           stock warrants to All Capital, LLC. Under the terms
                           of the loan agreement, All Capital, LLC retained the
                           right to designate six members of the Board of
                           Directors of MSR. This obligation was paid in full
                           2003.

                  (B).     On June 30, 2003, 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

<PAGE>

         Mid-State Raceway, Inc.

                           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 bears
                           interest at the rate of 11% per annum and is to
                           mature on June 30, 2005. Additionally, Vestin has the
                           right (which to date has not been exercised) to
                           designate three members to the Board of Directors of
                           the Company.

                           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; (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. The
                           remaining proceeds may be drawn down by the Borrower.
                           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 additional loan
                           commitment fees of $300,000. All of the remaining
                           terms of the loan were unchanged. The note includes a
                           provision in the event the video lottery terminals
                           have not been installed by March 31, 2004 that the
                           company is required to obtain an appraisal of all
                           real and personal property. If the appraised value is
                           less than the unpaid balance at that date the company
                           must pay within 14 days of receipt of appraisal the
                           shortfall.

                  (C)      Various capital leases for equipment with monthly
                           payments ranging from $190 to $2,168 including
                           imputed interest from 6.9% to 16.3%. These leases
                           mature at various dates through 2008.

                           At December 31, 2003 and 2002, the cost of equipment
                           acquired through capital lease obligations totaled
                           $553,689 and $583,197, respectively and is included
                           in land, building, and equipment on the balance
                           sheet. Accumulated depreciation related to these
                           assets totaled $511,387 and $445,327 at December 31,
                           2003 and 2002 respectively.

                  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, 2003:

<PAGE>

Mid-State Raceway, Inc.

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31                                                  AMOUNT
--------------------------------------------------------------------------------
<S>                                                                     <C>
   2004                                                                 $131,376
   2005                                                                   73,199
   2006                                                                   20,870
   2007                                                                   12,673
   2008                                                                      570
--------------------------------------------------------------------------------
     Total minimum lease payments                                        238,688
   Less amount representing interest                                      31,611
--------------------------------------------------------------------------------
     Present value of net minimum lease payments                         207,077
     Current maturities                                                  112,454
--------------------------------------------------------------------------------
Capital lease obligation, net of current maturities                     $ 94,623
================================================================================
</TABLE>

NOTE 5.  SUMMARIZED QUARTERLY DATA (UNAUDITED)

                  Following is a summary of the quarterly results of operations
         for years ended December 31, 2002 and 2003:

<TABLE>
<CAPTION>
                                                       FISCAL QUARTER ENDED
                                    ------------------------------------------------------------
<S>                                 <C>             <C>             <C>             <C>
2002                                  3/31/2002       6/30/2002       9/30/2002      12/31/2002
   Net revenues                     $ 1,619,960     $ 2,407,606     $ 2,763,367     $ 1,891,292
   Income (loss) from operations        125,122        (538,822)       (553,248)     (1,862,139)
   Net income (loss)                      7,047      (1,008,092)     (1,519,700)     (2,448,479)
   Net income (loss) per share      $      0.02     $     (2.28)    $     (3.43)    $     (5.53)
2003                                  3/31/2003       6/30/2003       9/30/2003      12/31/2003
   Net revenues                     $ 1,485,597     $ 2,361,111     $ 2,704,891     $ 1,706,786
   Loss from operations                (250,146)       (498,239)     (1,194,294)     (2,363,820)
   Net loss                          (1,514,084)     (2,088,679)     (1,939,665)     (3,174,463)
   Net loss per share               $     (3.42)    $     (4.72)    $     (4.38)    $     (4.82)
</TABLE>

NOTE 6.  DEFERRED GRANT REVENUE

                  During 2001, MSR received $240,000 from Oneida County to
         mitigate 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 each of the years
         ending December 31, 2003, 2002 and 2001.

NOTE 7.  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, 2003 and 2002 has been offset by an

<PAGE>

Mid-State Raceway, Inc.

         equivalent valuation allowance because of uncertainty concerning the
         Company's ability to utilize net operating loss carryforwards in future
         years.

<TABLE>
<CAPTION>
                                                                       DECEMBER 31
                                                            2003                           2002
                                                ---------------------------    ---------------------------
                                                 TEMPORARY                      TEMPORARY
                                                 DIFFERENCE     TAX EFFECT      DIFFERENCE     TAX EFFECT
----------------------------------------------------------------------------------------------------------
<S>                                             <C>            <C>             <C>            <C>
Net operating loss carryforwards                $20,900,000    $  7,100,000    $12,178,000    $  4,141,000
Other                                               153,000          52,000          8,000           3,000
----------------------------------------------------------------------------------------------------------
                                                 21,053,000       7,152,000     12,186,000       4,144,000
Less valuation allowance                                  -      (7,152,000)             -      (4,144,000)
----------------------------------------------------------------------------------------------------------
                                                $21,053,000    $          -    $12,186,000    $          -
==========================================================================================================
</TABLE>

                  The net operating loss carryforwards will expire at various
         dates from December 31, 2009 through December 31, 2023. Utilization of
         the net operating loss carryforwards may be limited due to the
         ownership change provisions as enacted by the Tax Reform Act of 1986
         and subsequent legislation.

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

<TABLE>
<CAPTION>
                                                                             FOR THE YEAR ENDED DECEMBER 31
                                                                    2003                   2002                   2001
                                                           ----------------------  ---------------------  ------------------------
                                                                AMOUNT       %         AMOUNT       %          AMOUNT          %
----------------------------------------------------------------------------------------------------------------------------------
<S>                                                        <C>             <C>     <C>            <C>     <C>                <C>
Statutory federal income tax (benefit)                     $  (3,008,000)  (34.0)  $ (1,687,000)  (34.0)  $   (769,000)      (34.0)
Variances from statutory rate:
   Add state income tax, net of federal income
     tax benefit                                                       -                  1,200     0.1          2,756         0.1
   Increase (decrease) in valuation allowance                  3,008,000    34.0      1,687,000    34.0        743,200        32.9
   Other                                                               -                      -       -         25,800         1.1
----------------------------------------------------------------------------------------------------------------------------------
Provision (benefit) for income taxes                       $           -       -   $      1,200     0.1   $      2,756         0.1
==================================================================================================================================
</TABLE>

NOTE 8. 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,
         2003, 2002, and 2001 amounted to $375,880, $337,545, and $400,227 of
         which approximately $285,000, $275,000, and $265,000 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.
         Future minimum rental charges under operating lease agreements are as
         follows as of December 31, 2003:

<PAGE>

         Mid-State Raceway, Inc.

<TABLE>
<S>                    <C>
2004                     358,262
2005                      57,473
2006                      20,514
---------------------------------
                       $ 436,249
=================================
</TABLE>

NOTE 9.  PRIVATE PLACEMENT AND COMMON STOCK WARRANTS

                  On November 14, 2000, the Board of Directors authorized the
         issuance: (i) to each of two members of the Board of Directors, 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. 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.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.

                  In connection with various 2002 loan transactions, the Company
         granted warrants to purchase a total of 1,700,000 shares of MSR common
         stock at $2 per share to the creditors associated with the 2002 loan
         transactions. In November 2003, 450,000 of these warrants were
         exercised for the purchase of common stock at $2 per share.

                  In April 2003 in connection with the stipulation and
         settlement agreement with the NYS Racing and Wagering Board, the
         Company issued warrants to purchase a total of 23,300 shares of MSR
         common stock at $8.58 per share to an associate of the Company's major
         creditor All Capital, LLC.

                  A summary of common stock warrants authorized by the Board of
         Directors as of December 31, 2003 is as follows:

<TABLE>
<CAPTION>
                              NUMBER OF      EXERCISE           AUTHORIZED
                                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
April 1,2002                     50,000        $   2          March 31, 2007
July 16, 2002                   100,000        $   2          July 31, 2007
August 28, 2002               1,100,000        $   2          August 31, 2007
April 8, 2003                    23,300        $8.58          April 8, 2008
</TABLE>

<PAGE>

         Mid-State Raceway, Inc.

         Substantially all of the November 14, 2000 warrants are subject to
         litigation as described in Note 12. No value has been ascribed to the
         warrant issuances.

NOTE 10. OTHER RELATED PARTY TRANSACTIONS

                  In 2003, 2002, and 2001, MSR paid approximately $273,000,
         $59,000, and $131,000, respectively, to related parties for consulting
         services, lodging, and interest.

                  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.

NOTE 11. 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. The
         exclusive option agreement was formally executed on September 15, 2001
         and granted the purchasers an exclusive irrevocable option to acquire
         MSR. If the exclusive option agreement was not approved by MSR's
         shareholders, MSR may be required to pay the purchasers a one-time
         payment of $130,000.

                  In April 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, 2003
         and 2002 Consolidated Financial Statements.

NOTE 12. COMMITMENTS AND CONTINGENCIES

LETTER OF CREDIT

                  At December 31, 2003, the Company had a $100,000 letter of
         credit related to a pari-mutuel surety bond.

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. In April 2003, MSR and the Board entered into a stipulation
         and settlement (the "SS Agreement") which effectively granted MSR
         conditional racing and simulcast licenses for the 2003-racing season.
         The SS Agreement

<PAGE>

         Mid-State Raceway, Inc.

         requires that MSR and an associate of MSR's then major creditor
         complete new applications in a timely period and that the associate 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 23,300
         shares of MSR common stock at a price of $8.58 per share. The warrant
         expires on April 8, 2008. During 2003, the Company paid in full all
         sums due pursuant to the SS Agreement.

                  On March 22, 2004, the New York State Racing and Wagering
         Board ("NYSRWB") granted Mid State Raceway, Inc. (the "Company") 2004
         live racing and simulcasting licenses conditioned on the following:

                  1)       The formation of a Racing Division which would
                           exercise sole and exclusive authority with respect to
                           operation and control of the Company's real and
                           personal property located in Vernon, New York (the
                           "Track"), except for the portion used for food and
                           beverage, lodging, or corporate purposes.

                  2)       The creation of the position of General Manager of
                           the Racing Division who shall have full operational
                           control over the Racing Division and its employees.
                           The General Manager must be acceptable to and
                           licensed by the NYSRWB. On March 18, 2004, the
                           Company engaged Dennis Dowd, a former New Jersey
                           Racing Commission chairman to be General Manager of
                           the Racing Division. Investor Shawn Scott and track
                           President Hoolae Paoa are not allowed to influence
                           racing operations - directly or indirectly - while
                           they appeal the NYSRWB's December decision to deny
                           the licenses.

                  3)       The Company will adopt a budget for the operation of
                           the Racing Division during 2004 subject to the
                           approval of the General Manager and the NYSRWB.

                  4)       The track must pass a final inspection by the state
                           Office of Fire Prevention and Control, which found 78
                           violations last year. According to the NYSRWB, all
                           but three of those violations have been corrected.

                  The Company will be bound by the conditions immediately upon
         the issuance of 2004 live racing and simulcast licenses and racing
         dates and the conditions will remain in effect until the first to occur
         of Shawn Scott receiving a license from the NYSRWB or Shawn Scott and
         Victoria Scott being divested of their shares of Common Stock of the
         Company and warrants to acquire shares of Common Stock of the Company.

                  The start of the 100 day racing season will be April 23, 2004.

<PAGE>

         Mid-State Raceway, Inc.

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.

                  The Company's application to the New York Lottery for approval
         to operate video lottery terminals is still pending

PURSE FUND AGREEMENT

                  MSR annually enters into agreements with the Harness Horse
         Association of Central New York (the "Association") to establish purse
         funding levels for harness meetings at MSR. At December 31, 2003 and
         2002, the consolidated balance sheet includes approximately $78,000 and
         $495,000 in unpaid purse liabilities from prior years. In December
         2003, MSR and the Association entered into an agreement that
         established MSR's 2004 funding at approximately $1,900,000.

LITIGATION

                  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. The suit against Mrs. Bennett has been dismissed and MSR is
         in the process of preparing a motion of summary judgment seeking
         dismissal of the suit against MSR. However, there remains a cause of
         action against Mr. Patrick Bennett by CAI which in turn gives rise to a
         third party claim against the Company. The outcome of this action is
         not presently determinable.

                  In July 2002, MSR (along with certain MSR directors, Vernon,
         LLC (an affiliate of All Capital, LLC), All Capital, LLC, and its
         principal) was named as a defendant in a lawsuit filed by the group of
         private purchasers (see Note 11). The lawsuit alleges bad faith and
         breach of contract against MSR and seeks not less than $30 million in
         damages from MSR 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 directors, Vernon,
         LLC, All Capital, LLC, and its principal 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.

<PAGE>

         Mid-State Raceway, Inc.

                  On December 3, 2002, MSR was served with a summons and
         complaint from one former Board member and a current member of the
         Board 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 9), the issuance of 21,600
         additional shares of common stock, 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 has 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. Additionally, MSR has filed
         counterclaims against these individuals.

                  During November 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 ("Signorelli Action")
         against the Company, certain of its directors and others alleging
         improprieties with respect to "looting" and mismanagement. The Company
         believes that it has valid defenses to this action and. In addition,
         counterclaims and third party claims against one or more of the
         plaintiffs and other third parties. The time for the Company and other
         defendants to answer or otherwise move with respect to the complaint
         has been extended to January 12, 2004 by stipulation. On March 5, 2004
         this case was dismissed. Plaintiffs have been given thirty (days) to
         amend their complaint.

                  MSR is a defendant in various other 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.

DELINQUENT SECURITIES AND EXCHANGE COMMISSION (SEC) FILINGS

                  MSR has been delinquent in filing on a timely basis 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 timely and the actions, if any,
         that the SEC might initiate against the Company in this connection, are
         not presently determinable.

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 12, Litigation). 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

<PAGE>

         Mid-State Raceway, Inc.

         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.

NOTE 13. FINANCIAL CONDITION AND MANAGEMENT PLANS

                  The accompanying financial statements have been prepared in
         conformity with generally accepted accounting principles, which
         contemplate continuation of the Company as a going concern. The Company
         has incurred continued operating losses and working capital deficits
         and these conditions raise substantial doubt about the Company's
         ability to continue as a going concern. As of December 2003, the
         Company had a working capital deficit of $1,495,619 and approximately
         $1,600,000 of remaining available financing from existing loan
         agreements to fund the VLT construction and start up costs. Losses for
         the twelve month period ended December 31, 2003 approximated $8,717,000
         and net cash used in operating activities for the period approximated
         $4,996,000. In addition as discussed in Note 4 upon the completion of
         an appraisal of the property pursuant to the Vestin loan agreement the
         Company could be required to repay a portion of the debt in 2004.
         Management expects to require approximately $500,000 per month to cover
         expected net operating losses on average until the estimated August 1,
         2004 opening date of the VLT facility. Management is currently working
         to secure additional financing to fund operations through the opening
         of the VLT facility through the exercise of stock warrants. In addition
         management has reduced the number of employees and reviewed and
         implemented other cost saving measures.

                  The Company expects to be profitable when the VLT's are in
         full operation. Circumstances that could affect the opening date and
         the amount of net revenue that will be ultimately realized from the VLT
         project include (i) the timing and number of machines installed, and
         (ii) approval by the New York State Lottery of a license for the
         Company to operate the VLT facility.

                  There are no assurances the VLT application will be approved
         and that the VLT project will be successfully implemented or that
         revenue projections will be met or that the VLT project will provide
         working capital to sustain the Company's operations. Furthermore, the
         future success of the Company is dependent on the successful resolution
         of the various lawsuits, contingencies and contingent liabilities
         discussed in Note 12.

NOTE 14. SUBSEQUENT EVENT (UNAUDITED)

                  On April 12, 2004, Raceway Ventures, LLC an unaffiliated third
         party acquired all of the outstanding stock and additional stock
         purchase warrants from the majority stockholder of Mid-State Raceway
         Inc.