<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, 2002

                                       OR

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

         For the transition period from _______________ to _________________

             Commission File No. 0-1607

                             MID-STATE RACEWAY, INC.
--------------------------------------------------------------------------------
      (Exact name of Registrants as specified in their respective charters)

                  New York                                 15-0555258
---------------------------------------------  ---------------------------------
(State or Other Jurisdiction of Incorporation  (IRS Employer Identification No.)
              or Organization)

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

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

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

         Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to Form 10-K. [X]

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

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

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

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

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

<PAGE>

TABLE OF CONTENTS

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

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

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

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

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

PART II.

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

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

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

Item 7A.        Qualitative and Quantitative Disclosures about Market Risk..............................      13

Item 8.         Financial Statements and Supplementary Data.............................................      13

Item 9.         Changes and Disagreements with Accountants on Accounting and Financial Disclosure.......      13

PART III.

Item 10.        Directors and Executive Officers of the Registrant......................................      14

Item 11.        Executive Compensation..................................................................      16

Item 12.        Security Ownership of Certain Beneficial Owners and Management..........................      16

Item 13.        Certain Relationships and Related Transactions..........................................      17

Item 14.        Controls and Procedures.................................................................      18

PART IV.

Item 15.        Exhibits, Financial Statement Schedules and Reports on Form 8-K.........................      19
</TABLE>

Signatures
Certifications

                                                                               2

<PAGE>


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

PART I.

ITEM 1. BUSINESS

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

Mid-State Development Corporation ("MSD"), formerly known as Mid-Year Sales,
Inc., is a wholly owned subsidiary of 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 2002. In 2003
the Company (i) filed its application to be licensed as a video gaming agent so
as to install and operate video lottery terminals (VLTs) at its facility in
Vernon Downs, (ii) substantially constructed a 35,000 square foot "Racino" and
(iii) commenced to hire and train a staff to operate the Racino. It is
anticipated that operations at the VLT facility will commence shortly after the
first quarter of 2004.

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

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

                                                                               3

<PAGE>

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.

The Company employed a total of 392 full-time equivalent employees during the
calendar year 2002.

ITEM 2. PROPERTIES.

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

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

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

ITEM 3. LEGAL PROCEEDINGS

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

(b)      In 2001, the New York State Legislature approved 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.

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

(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.

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

                                                                               5

<PAGE>

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, 2001           6.75         6.75
June 30, 2001            2.50         2.50
September 30, 2001       5.00         5.00
December 31, 2001        3.50         3.50
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
</TABLE>

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

(c)      There were no dividends paid during the years ended December 31, 2002
and 2001.

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

ITEM 6. SELECTED FINANCIAL DATA

                                                                               6

<PAGE>

<TABLE>
<CAPTION>
                                                    YEAR ENDED       YEAR ENDED       YEAR ENDED       YEAR ENDED       YEAR ENDED
                                                   DECEMBER 31,     DECEMBER 31,     DECEMBER 31,     DECEMBER 31,     DECEMBER 31,
                                                       2002             2001             2000             1999             1998
                                                   ------------     ------------     ------------     ------------     ------------
<S>                                                <C>              <C>              <C>              <C>              <C>
OPERATING RESULTS
   Number of racing days                                     84               84               93              114              122

OPERATING REVENUES:
   Net Pari-mutuel commissions and breakage        $  5,301,079     $  5,504,645     $  4,996,851     $  5,439,471     $  5,940,500

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

   Admissions                                            48,599           47,110           69,270           68,843           70,925
   Food, beverage and concessions                       951,809          817,166          848,237          195,038          193,057
   Other revenues                                       269,984          255,846          284,494          250,195          197,434
                                                   ------------     ------------     ------------     ------------     ------------
      Total operating revenues                        8,682,225        8,507,433        7,609,185        5,953,547        6,401,916
                                                   ------------     ------------     ------------     ------------     ------------

OPERATING EXPENSES                                   11,511,312       10,531,514        8,882,553        7,453,820        7,222,285
                                                   ------------     ------------     ------------     ------------     ------------

LOSS FROM OPERATIONS                                 (2,829,087)      (2,024,081)      (1,273,368)      (1,500,273)        (820,369)
                                                   ------------     ------------     ------------     ------------     ------------

Other income (loss)                                  (2,138,937)        (235,354)        (577,592)         135,059          933,811
                                                   ------------     ------------     ------------     ------------     ------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM              (4,969,224)      (2,262,191)      (1,474,868)      (1,368,967)         113,038
                                                   ------------     ------------     ------------     ------------     ------------

EXTRAORDINARY ITEM - GAIN ON EXTINGUISHMENT
   OF DEFERRED RETIREMENT BENEFIT LIABILITY,
   NET OF DEFERRED INCOME TAXES                               -                -          593,261                -                -
                                                   ------------     ------------     ------------     ------------     ------------

 NET INCOME (LOSS)                                 $ (4,969,224)    $ (2,262,191)    $   (881,607)    $ (1,368,967)    $    113,038
                                                   ============     ============     ============     ============     ============

Per share of common stock - basic and diluted
    Net (loss) income before extraordinary item    $     (11.22)    $      (5.11)    $      (3.33)    $      (4.89)    $       0.45
    Extraordinary item                                        -                -     $       1.34                -                -
    Net (loss) income                              $     (11.22)    $      (5.11)    $      (1.99)    $      (4.89)    $       0.45
 Cash dividends per share                                     -                -                -                -                -

FINANCIAL CONDITION

 Total Assets                                      $  8,627,436     $  6,166,181     $  6,993,375     $  4,386,727     $  3,189,768

 Total Liabilities                                 $ 15,791,532     $  8,361,053     $  6,917,030     $  3,477,595     $  2,750,675

 Total Shareholders' Equity                        $ (7,164,096)    $ (2,194,872)    $     76,345     $    909,132     $    439,093
</TABLE>

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

                              RESULTS OF OPERATIONS

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

                                                                               7

<PAGE>

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 as further explained in Note 16 of the notes to the Consolidated
Financial Statements.

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.

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 7 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

                                                                               8

<PAGE>

<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>

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

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

The increased loss from operations was a result of increased operating expenses
of $8,882,553 in 2000 versus $10,531,514 in 2001. These expense increases were
mainly related to increased payroll and benefits ($647,596), utilities
($101,730), simulcast expenses ($376,052) and food and beverage costs
($159,781). These costs increased in 2001 even though racing days decreased from
93 in 2000 to 84 in 2001 because 2001 includes the expenses of operating the
hotel, acquired in June of 2000 as well as increased simulcast expenses due to
increasing the number of simulcast events.

Operating revenue did increase from $7,609,185 in 2000 to $8,507,433 in 2001.
But the increase was not sufficient to offset the increased expenses that were
incurred in 2001 as discussed above. Operating revenue increases included an
increase of $507,794 in wagering revenue even with a decrease in racing days
previously mentioned because of the $663,656 increase in simulcasting revenue in
2001. The remaining revenue increase in 2001 was a $472,333 increase in room
rental revenue due to operating the hotel for all of 2001 compared to seven
months in 2000.

Other losses in 2001 decreased by $342,238 in 2001 to $235,354 mainly as a
result of special events income of $249,062 in 2001 versus a loss of $411,008 in
2000 which was offset by an increase in interest expense in 2001 of $301,186 to
$632,224 versus $331,035 in 2000. The increase in special events income was due
to the Company acting as a venue rather than a promoter of special events in
2001 and the increase in interest expense represents increased borrowings in
2001 to fund the operating loss previously discussed.

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

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

                                                                               9

<PAGE>

STATISTICAL COMPARISON:

12 MONTHS ENDED DECEMBER 31, 2001 VS 12 MONTHS ENDED DECEMBER 31, 2000

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

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

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

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

                                                                              10

<PAGE>

$23,000,000 Loan Agreement

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

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

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

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

V.I.P. Structures, Inc. Deferment

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

                                                                              11

<PAGE>

$250,000 Sunset Management LLC Loan

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

2003 RACING AND SIMULCAST LICENSES

In December 2002, the New York State Racing and Wagering Board (the "Board")
denied MSR's application for 2003 racing and simulcast licenses. The Board's
determination with respect to MSR's 2003 licenses was stayed by court order.
2003 license negotiations between MSR and the Board continued through the first
quarter of 2003. In April 2003, MSR and the Board entered into a stipulation and
settlement (the "SS Agreement") which effectively granted MSR conditional racing
and simulcast licenses for the 2003 racing season. The SS Agreement 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 23,800 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 pursuant to the SS
Agreement and (b) the Sunset Management LLC $250,000 loan.

                         LIQUIDITY AND CAPITAL RESOURCES

Due to the loss from operations in 2002, cash of $2,409,020 was used in
operations. This deficit was financed through additional borrowings of
$2,872,005 net of repayments on capital leases of $124,993.

The Company had a deficit in working capital of $50,144 at December 31, 2002
compared with a deficit in working capital of $2,350,310 at December 31, 2001.
The decrease in the deficit was due to the refinancing in 2002 which included
$1,821,727 of prepaid interest which is classified as a current asset at
December 31, 2002.

As of September 2003, the Company had a working capital deficit of $1,351,757,
and $2,700,000 in available financing from existing loan agreements to fund the
VLT construction. Losses for the nine month period ended September 30, 2003
approximated $5,500,000 and net cash used in operating activities for the period
approximated $6,800,000. Management expects

                                                                              12

<PAGE>

to require approximately $500,000 per month to cover expected net operating
losses on average until the estimated April 1, 2004 opening date of the VLT
facility. Subsequent to September 30, 2003, the Company secured an additional
$3,000,000 through an amendment to the Vestin loan. Additionally, the Company
received $900,000 in proceeds from the issuance of stock as a result of
exercised warrants. Based on the above, which is prepared by management and
unaudited, management expects to have funds sufficient to operate the Company
through the anticipated April VLT opening date.

                    RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

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

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

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

ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

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

A significant portion of the Company's long-term debt, as refinanced throughout
2002 and in 2003, bears interest at a fixed rate of 12%. The fixed interest rate
limits the amount of exposure that the Company has to change in interest rates.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

                                                                              13

<PAGE>

ITEM 9. CHANGES 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 reason. The resignation was not requested or
prompted by the Company.

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.

PART III.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The directors and officers of the Company as of January 10, 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        .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                   -          -
     Jack D. Dallas                   64           -                   -          -
     David E. Wilson                  67           -                   -          -
     Rose H. Frawert                  39           -                   -          -
    All officers and directors
     as a group                                                  519,083      58.12%

   * Member of Executive Committee
  ** Member of Audit Committee
 *** Less than one percent
</TABLE>

                                                                              14

<PAGE>

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

JACK D. DALLAS (age 63) is Mid-State Raceway's Vice President of Hospitality and
Resort Operations. Mr. Dallas has an extensive background in hospitality and
gaming, having directed the truck stop gaming operations in Louisiana for Delta
Downs. He also has worked as the general manager or head of operations for
numerous hotels, including the Disneyland Hotel, the Royal Lahaina Resort,
Radisson Hotel at Fisherman's Wharf and several others.

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

EDWARD A. KILEY (age 61) has served as a Director since June 1999 and is
currently the Secretary of the Company. He is a 1964 graduate of Brown
University and Dean's List and Cum Laude graduate of the Syracuse University
School of Law. A member of the New York, Florida and United States Supreme court
bars before retiring from the practice of law in 1995, he is currently employed
as a financial planner. He is the eldest son of Vernon Downs founder William F.
Kiley.

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

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

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

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

                                                                              15

<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.

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

ITEM 11. EXECUTIVE COMPENSATION

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

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

January 1, 2000 to October 28, 2000       $ 50,769        -             -
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, 2000 to December 31, 2000             -        -    $   75,000
</TABLE>

                                                                              16

<PAGE>

<TABLE>
<S>                                       <C>         <C>      <C>
November 26, 2000 to December 31, 2000    $  6,000        -
January 1, 2001 to April 21, 2001           37,049        -             -

Andy Goodell
President and Chief Executive Officer

July 1, 2002 to December 28, 2002         $ 50,356        -             -
</TABLE>

No other executive officer received an annual salary and bonus in excess of
$100,000 during the fiscal years ended December 31, 2000, 2001 and 2002. Dominic
A. Giambona received consulting fees of $60,900 during 2000.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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

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

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

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

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

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

                                                                              17

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

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

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

See elsewhere herein information with respect to the following transactions:

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

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

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

(IV)     On August 28, 2002, the Company entered into a $15,000,000 Loan
Agreement with All Capital, LLC replacing the three above loans (I, II, III).

                                                                              18

<PAGE>

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

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

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

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

ITEM 14. CONTROLS AND PROCEDURES

(a) Disclosure Controls and Procedures.

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

(i) Definition of Disclosure Controls and Procedures.

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

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

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

                                                                              19

<PAGE>

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

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

(b) Changes in Internal Controls.

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

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

(a)      Financial Statements

         (1)      Reports of Independent Auditors
                  Consolidated Balance Sheets at December 31, 2002 and 2001
                  Consolidated Statements of Operations for the years ended
                     December 31, 2002, 2001 and 2000
                  Consolidated Statements of Changes in Shareholders' Equity for
                     the years ended December 31, 2002, 2001 and 2000
                  Consolidated Statements of Cash Flows for the years ended
                     December 31, 2002, 2001 and 2000
                  Notes to Consolidated Financial Statements

         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 2002

None

(c)      Exhibits:

 4.1     Loan Agreements                   4.2     Vestin Amendment
10.1     Horseman's Agreement
10.21    VIP Finance                      10.22    VIP Indemnification
                                          10.23    VIP Guarantee
16.1     Change in Accountants            16.2     Engagement Letter
21.1     Subsidiaries of the Registrant

(d)

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

                                                                              20

<PAGE>

                                   SIGNATURES

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

                                             MID-STATE RACEWAY, INC.
                                             (Registrant)

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

                                                 JANUARY 10, 2004

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

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

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

/S/ DAVE WILSON
Dave Wilson
Acting Chief Operating Officer

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

/S/ VICTORIA SCOTT
Victoria Scott
Director

/S/ JERRY MOTTERN
Jerry Mottern
Director

/S/ DEBBIE BISHOP
Debbie Bishop
Director

/S/ JOHN STONE
John Stone
Director

/S/ JOAN PARKER
Joan Parker
Director

                                                                              21

<PAGE>

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 2001, and the related
consolidated statements of operations, changes in shareholders' equity
(deficit), and cash flows for each of the three 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 19 and 20 to the financial statements, subsequent
to December 31, 2002, the Company refinanced substantially all of its debt and
was granted a temporary racing and simulcasting license for 2003. In addition,
as explained in Note 21 to the financial statements, the Company has applied for
licensure to operate a video lottery terminal project and for its 2004 racing
and simulcasting license. There can be no assurances, however, that the VLT
project will be successfully implemented, that revenue projections of such will
be met, and the 2004 racing and simulcasting license will be granted.

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 2001, and the results of their
operations and their cash flows for each of the three 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 LLP
                                                   ----------------------------

Albany, New York

March 21, 2003, except for the second paragraph of
Note 19 and Note 20 for which the dates are August 27,
2003 and the eighth paragraph of Note 19 and Note 20
for which the dates are January 9, 2004

                                                                              22

<PAGE>

                                                     CONSOLIDATED BALANCE SHEETS
                                                      DECEMBER 31, 2002 AND 2001

<TABLE>
<CAPTION>
                                                                      2002             2001
                                                                  ------------     ------------
<S>                                                               <C>              <C>
ASSETS
CURRENT ASSETS
  Cash and cash equivalents                                       $     89,907     $     41,287
  Restricted cash                                                      253,794          192,903
  Other receivables, net of allowance for doubtful accounts of
    $10,000 in 2002 and 2001                                           401,135          242,527
  Prepaid expenses (principally interest in 2002)                    1,821,727          118,937
                                                                  ------------     ------------
      Total current assets                                           2,566,563          595,654
                                                                  ------------     ------------
PROPERTY, BUILDINGS AND EQUIPMENT
  Land, buildings and equipment                                     17,778,070       17,439,753
  Other properties                                                     121,671          121,671
                                                                  ------------     ------------
                                                                    17,899,741       17,561,424
  Less accumulated depreciation                                     12,412,951       11,990,897
                                                                  ------------     ------------
                                                                     5,486,790        5,570,527
                                                                  ------------     ------------
OTHER ASSETS                                                           574,083                -
                                                                  ------------     ------------
                                                                  $  8,627,436     $  6,166,181
                                                                  ============     ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
  Lines of credit                                                 $          -     $    674,678
  Current portion of long term debt                                    113,569           96,110
  Accounts payable and accrued expenses                              1,638,161        1,767,782
  Uncashed winning tickets                                              66,333           63,736
  Purse funds payable                                                  495,000                -
  Deposits and other current liabilities                               196,110          138,391
  Retention for capital improvements                                    27,534           45,267
  Deferred grant revenue                                                80,000          160,000
                                                                  ------------     ------------
      Total current liabilities                                      2,616,707        2,945,964
                                                                  ------------     ------------
LONG-TERM DEBT, net of current portion                              13,174,825        5,415,089
                                                                  ------------     ------------
CONTINGENCIES (Notes 13, 14, 15, 17, 18 and 19)
                                                                  ------------     ------------
SHAREHOLDERS' EQUITY
  Common stock, par value $.10 per share;
    authorized 10,000,000 shares; issued and
    outstanding 442,766 shares in 2002 and 2001                         44,277           44,277
  Additional paid-in capital                                         2,084,909        2,084,909
  Accumulated deficit                                               (9,293,282)      (4,324,058)
                                                                  ------------     ------------
      Total shareholders' deficit                                   (7,164,096)      (2,194,872)
                                                                  ------------     ------------
                                                                  $  8,627,436     $  6,166,181
                                                                  ============     ============
</TABLE>

                                 See Notes to Consolidated Financial Statements.

                                                                              23

<PAGE>

                                           CONSOLIDATED STATEMENTS OF OPERATIONS
                                   YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000

<TABLE>
<CAPTION>
                                                                            FOR THE YEAR       FOR THE YEAR       FOR THE YEAR
                                                                                ENDED             ENDED               ENDED
                                                                             DECEMBER 31,       DECEMBER 31,       DECEMBER 31,
                                                                                2002               2001               2000
                                                                           (84 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                                                   $       921,853    $       837,718    $       896,222
    Off-track betting (OTB) and inter-track wagering (ITW)                       1,370,520          1,433,419          1,530,777
    Simulcasting                                                                 3,008,706          3,233,508          2,569,852
                                                                           ---------------    ---------------    ---------------
                                                                                 5,301,079          5,504,645          4,996,851
  Room rental revenue                                                            2,110,754          1,882,666          1,410,333
  Admissions                                                                        48,599             47,110             69,270
  Food, beverage, and concessions                                                  951,809            817,166            848,237
  Other revenues                                                                   269,984            255,846            284,494
                                                                           ---------------    ---------------    ---------------
      Total operating revenues                                                   8,682,225          8,507,433          7,609,185
                                                                           ---------------    ---------------    ---------------
Operating expenses:
  Purses                                                                         2,620,736          1,896,896          1,796,874
  Payroll                                                                        2,699,502          2,746,811          2,355,818
  Taxes, other than income                                                         631,961            559,410            302,807
  Outside services and rentals                                                   1,884,046          1,549,770          1,339,756
  Utilities                                                                        806,811            844,217            742,487
  Simulcasting expenses                                                          1,212,902          1,316,512            940,460
  Food and beverage costs                                                          484,735            471,765            311,984
  Depreciation                                                                     422,054            445,357            356,774
  Bad debts (recovery)                                                                 740              4,897           (101,637)
  Other expenses                                                                   747,825            695,879            837,230
                                                                           ---------------    ---------------    ---------------
      Total operating expenses                                                  11,511,312         10,531,514          8,882,553
                                                                           ---------------    ---------------    ---------------
Loss from operations                                                            (2,829,087)        (2,024,081)        (1,273,368)
                                                                           ---------------    ---------------    ---------------
Other income (loss):
  Special events income (loss), net                                                 78,455            249,062           (411,008)
  Commissions for capital improvements                                              70,853             46,668            101,960
  Aid from state and local governments                                              80,000             80,550             36,248
  Loss on sale of other assets                                                           -             (2,892)                 -
  Investment (expense) income                                                      (16,754)            23,482             26,243
  Interest expense                                                              (1,374,385)          (632,224)          (331,035)
  Financing costs                                                                 (977,106)                 -                  -
                                                                           ---------------    ---------------    ---------------
      Total other income (loss)                                                 (2,138,937)          (235,354)          (577,592)
                                                                           ---------------    ---------------    ---------------
Loss before (provision) benefit for federal and state
  income taxes and extraordinary item                                           (4,968,024)        (2,259,435)        (1,850,960)
                                                                           ---------------    ---------------    ---------------
(Provision) benefit for federal and state income taxes:
  Currently payable                                                                 (1,200)            (2,756)              (708)
  Deferred benefit                                                                       -                  -            376,800
                                                                           ---------------    ---------------    ---------------
      Total (provision) benefit for federal and state income taxes                  (1,200)            (2,756)           376,092
                                                                           ---------------    ---------------    ---------------
Loss before extraordinary item                                                  (4,969,224)        (2,262,191)        (1,474,868)
                                                                           ---------------    ---------------    ---------------
Extraordinary item - gain on extinguishment of deferred retirement
  benefit liability, net of deferred income taxes of $376,800 (Note 17)                  -                  -            593,261
                                                                           ---------------    ---------------    ---------------
Net loss                                                                   $    (4,969,224)   $    (2,262,191)   $      (881,607)
                                                                           ===============    ===============    ===============
(Loss) income per common share - based on weighted
  average shares outstanding
Loss before extraordinary item                                             $        (11.22)   $         (5.11)   $         (3.33)
Extraordinary item                                                         $             -    $             -    $          1.34
Loss after extraordinary item                                              $        (11.22)   $         (5.11)   $         (1.99)
                                                                           ===============    ===============    ===============
</TABLE>

                                 See Notes to Consolidated Financial Statements.

                                                                              24
<PAGE>

            CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
                                   YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000

<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, 2000                           438,386  $  43,839  $ 2,041,547  $ (1,180,260) $       4,006  $   909,132
                                                                                                                    -----------

Comprehensive loss

   Net loss for the year                                                                   (881,607)             -     (881,607)

   Unrealized gain on securities available for sale                                               -          5,020        5,020
                                                                                       ------------  -------------  -----------
      Total comprehensive loss                                                             (881,607)         5,020     (876,587)

Issuance of common stock for settlement of lawsuit      4,380        438       43,362             -              -       43,800
                                                     --------  ---------  -----------  ------------  -------------  -----------
Balances at December 31, 2000                         442,766     44,277    2,084,909    (2,061,867)         9,026       76,345
                                                                                                                    -----------

Comprehensive loss

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

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

      Total comprehensive loss                                                           (2,262,191)        (9,026)  (2,271,217)
                                                     --------  ---------  -----------  ------------  -------------  -----------

Balances at December 31, 2001                         442,766     44,277    2,084,909    (4,324,058)             -   (2,194,872)

Comprehensive loss

   Net loss for the year                                                                 (4,969,224)             -   (4,969,224)
                                                                                       ------------  -------------  -----------

      Total comprehensive loss                                                           (4,969,224)             -   (4,969,224)
                                                     --------  ---------  -----------  ------------  -------------  -----------

Balances at December 31, 2002                         442,766  $  44,277  $ 2,084,909  $ (9,293,282) $           -  $(7,164,096)
                                                     ========  =========  ===========  ============  =============  ===========
</TABLE>

                                 See Notes to Consolidated Financial Statements.

                                                                              25

<PAGE>

                                           CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000

<TABLE>
<CAPTION>
                                                                       For the Year      For the Year        For the Year
                                                                           Ended            Ended               Ended
                                                                       December 31,       December 31,       December 31,
                                                                            2002              2001               2000
                                                                    (84 Racing Days)   (84 Racing Days)   (93 Racing Days)
                                                                    ----------------   ----------------   ----------------
<S>                                                                 <C>                <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES
  Net loss                                                          $     (4,969,224)  $     (2,262,191)  $       (881,607)
  Adjustments to reconcile net loss to net cash used in
    operating activities:
      Gain on extinguishment of deferred benefit liability                         -                  -           (593,261)
      Deferred tax benefit                                                         -                  -           (376,800)
      Depreciation                                                           422,054            445,357            356,774
      Amortization of prepaid financing costs                              2,091,243                  -                  -
      Change in allowance for doubtful accounts                                    -                  -           (102,000)
      Realized (gain) loss on investments                                          -            (28,227)            17,917
      Imputed interest expense                                                     -            263,105            128,947
      Loss on sale/disposal of equipment                                           -              2,892                  -
      Changes in:
        Restricted cash                                                      (60,891)           (65,335)            30,341
        Accounts and grants receivable                                      (158,608)            68,845            364,243
        Prepaid interest and other                                           (61,556)            45,492             (3,165)
        Other assets                                                               -              8,904             20,361
        Accounts payable                                                    (129,621)            32,355            224,336
        Uncashed winning tickets and other current
         liabilities                                                          60,316            119,206             19,529
        Purse funds payable                                                  495,000                  -                  -
        Deferred revenue                                                     (80,000)           160,000                  -
        Retention for capital improvements                                   (17,733)             5,375            (44,380)
                                                                    ----------------   ----------------   ----------------
          Net cash used in operating activities                           (2,409,020)        (1,204,222)          (838,765)
                                                                    ----------------   ----------------   ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
  Proceeds from maturities and sales of available-for-sale
    investment securities                                                          -            520,676            168,160
  Purchase of available-for-sale investment securities                             -                  -           (487,427)
  Proceeds from sale of equipment                                                  -             12,700                  -
  Purchase of properties and equipment                                      (289,372)          (182,603)          (658,394)
                                                                    ----------------   ----------------   ----------------
          Net cash provided by (used in) investing activities               (289,372)           350,773           (977,661)
                                                                    ----------------   ----------------   ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
  Proceeds from debt, net of issuance costs                                2,872,005          1,141,000            897,333
  Principal payments on line of credit and other debt                              -           (313,655)                 -
  Principal payments on capital leases                                      (124,993)           (78,789)           (48,256)
                                                                    ----------------   ----------------   ----------------
          Net cash provided by financing activities                        2,747,012            748,556            849,077
                                                                    ----------------   ----------------   ----------------
Net increase (decrease) in cash and cash equivalents                          48,620           (104,893)          (967,349)
Cash and cash equivalents at beginning of year                                41,287            146,180          1,113,529
                                                                    ----------------   ----------------   ----------------
Cash and cash equivalents at end of year                            $         89,907   $         41,287   $        146,180
                                                                    ================   ================   ================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
     Cash paid during the year for:
       Interest                                                     $        290,148   $        351,228   $        176,656
       Income taxes                                                 $          1,200   $          2,756   $            696
                                                                    ================   ================   ================
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
 FINANCING ACTIVITIES
 Acquisition of hotel building and equipment:
   Debt incurred                                                    $              -   $              -   $      2,421,155
   Accounts payable and other liabilities assumed                   $              -   $              -   $        345,856
 Principal payments on debt through proceeds from
   refinancing the existing debt                                    $     15,816,178   $              -   $              -
 Payments on prepaid financing costs through proceeds from
   refinancing the existing debt                                    $      4,306,560   $              -   $              -
 Capital leases                                                     $         48,915   $         16,261   $        508,776
 Accounts payable incurred for property and equipment               $              -   $         99,165   $              -
                                                                    ================   ================   ================
</TABLE>

                                 See Notes to Consolidated Financial Statements.

                                                                              26

<PAGE>

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

         Mid-State Raceway, Inc. ("MSR") operates a harness racing track in
         Vernon, New York, known as Vernon Downs. MSR is licensed by the New
         York State Racing and Wagering Board to conduct live harness racing at
         its track and to simulcast racing from other tracks. Such licenses are
         subject to annual renewal. MSR was granted a conditional license for
         2003 in May 2003 (see Note 20).

         Mid-State Development Corporation ("MSD") is a wholly owned subsidiary
         of MSR. MSD operates concessions at the harness racing track owned by
         MSR, and, beginning in June of 2000, operates a hotel adjacent to the
         track owned by MSR (see Note 13).

         MSR and MSD sustained significant operating losses for each of the
         three years in the period ended December 31, 2002, resulting in a
         shareholder deficit of approximately $7.2 million as of December 31,
         2002. Management's plans with respect to this deficit financial
         position are described in Note 21.

         PRINCIPLES OF CONSOLIDATION:

         The accompanying consolidated financial statements include the accounts
         of MSR and MSD (collectively referred to as the Company). All
         significant intercompany accounts and transactions have been eliminated
         in the consolidation.

         USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS:

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

         CASH EQUIVALENTS:

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

         PROPERTY, BUILDINGS AND EQUIPMENT:

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

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

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

         LOSS (GAIN) PER COMMON SHARE:

         Loss per share of common stock has been calculated based on the
         weighted average shares outstanding during each year. The weighted
         average number of common shares outstanding was 442,766, 442,766, and
         442,382 for the years December 31, 2002, 2001 and 2000, respectively.
         Outstanding authorized stock warrants (see Note 12) totaled

                                                                              27
<PAGE>

         1,897,700 and 197,700 at December 31, 2002 and 2001, respectively. All
         such warrants were excluded from all 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 $136,106, $77,160, and $80,710,
         for the years ended December 31, 2002, 2001 and 2000, respectively.

         INCOME TAXES:

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

         REVENUE RECOGNITION:

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

         PURSE EXPENSE RECOGNITION:

         Similar to its policy of recognizing revenue for commissions from
         wagering, through 2001, MSR recognized purse expenses associated with
         live racing when the related racing event was conducted. As explained
         in Note 16, purse expense for 2002 includes amounts attributable to
         underfunded purse carryovers from prior years, based on a contractual
         arrangement.

         ASSET IMPAIRMENT ASSESSMENTS:

         The Company reviews long-lived assets for impairment whenever events or
         circumstances indicate that the carrying value of such assets may not
         be fully recoverable. An impairment is recognized to the extent that
         the sum of undiscounted estimated future cash flows expected to result
         from use of the assets is less than the carrying value. No impairment
         has been recognized through December 31, 2002.

         OTHER ASSETS:

         Other assets consist principally of finance fees paid in connection
         with the August 2002 financing arrangement. Commitment loan fees and
         closing costs on this financing (approximately $848,000) are amortized
         on the straight-line method over one year, the original term of the
         loan.

         RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:

         In June 2001, the Financial Accounting Standards Board (FASB) issued
         Statement of Financial Accounting Standards No. 141, Business
         Combinations (SFAS 141), Statement of Financial Accounting Standards
         No. 142, Goodwill and Other Intangible Assets (SFAS 142), and Statement
         of Financial Accounting Standards No. 143, Accounting for

                                                                              28
<PAGE>

         Asset Retirement Obligations (SFAS 143). In August 2001, FASB issued
         Statement of Financial Accounting Standards No. 144, Accounting for the
         Impairment or Disposal of Long-lived Assets (SFAS 144).

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

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

         RECLASSIFICATIONS:

         Certain balances in the 2000 and 2001 financial statements have been
         reclassified for comparative purposes.

NOTE 2. RESTRICTED CASH

         Cash is restricted for the following purposes at December 31:

<TABLE>
<CAPTION>
                                 2002       2001
                              ---------   ---------
<S>                           <C>         <C>
Purses                        $  60,266   $  12,217
Capital improvements             30,958      45,267
Uncashed winning tickets         66,333      63,736
Account wagering                 96,237      71,683
                              ---------   ---------
                              $ 253,794   $ 192,903
                              =========   =========
</TABLE>

NOTE 3. OTHER RECEIVABLES

         Other receivables consist of the following at December 31:

                                                                              29
<PAGE>

<TABLE>
<CAPTION>
                                          2002        2001
                                        ---------   ---------
<S>                                     <C>         <C>
Shift adjustments                       $ 108,920   $   3,545
Commissions                                78,084      75,983
Hotel related                             113,655     122,225
Other                                     110,476      50,774
     Total                                411,135     252,527
Less allowance for doubtful accounts       10,000      10,000
                                        ---------   ---------
     Other receivables, net             $ 401,135   $ 242,527
                                        =========   =========
</TABLE>

NOTE 4. PROPERTY, BUILDINGS AND EQUIPMENT

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

<TABLE>
<CAPTION>
                                           2002          2001
                                        -----------   ------------
<S>                                     <C>           <C>
Land, buildings and equipment:
   Land                                 $    77,802   $     77,802
   Land improvements                      1,932,192      1,817,481
   Buildings and improvements            10,689,479     10,632,810
   Equipment                              4,940,783      4,797,494
   Construction in progress                 137,814        114,166
                                        -----------   ------------
                                         17,778,070     17,439,753
Other properties:
   Land                                     121,671        121,671
                                        -----------   ------------
                                         17,899,741     17,561,424
Less accumulated depreciation            12,412,951     11,990,897
                                        -----------   ------------
                                        $ 5,486,790   $  5,570,527
                                        ===========   ============
</TABLE>

NOTE 5. 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 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, 2002 and 2001 are included in accounts
         payable and accrued expenses.

NOTE 6. LINES OF CREDIT

Lines of credit at December 31 are as follows:

                                                                              30
<PAGE>

<TABLE>
<CAPTION>
                                                                                    2002     2001
                                                                                    ----   --------
<S>                                                                                 <C>    <C>
$351,000 revolving line of credit with an investment company, with interest at
3.15% over the 30-day commercial paper rate (4.9% at December 31, 2001). The
outstanding balance was repaid in January 2002. The agreement was terminated
in 2001.                                                                            $  -   $ 33,678

$700,000 line of credit agreement with prospective purchasers of MSR (see Note
15), with interest at 10%, scheduled to mature on March 15, 2002. Borrowings
under this line were repaid in full by MSR in April 2002 in connection with the
2002 financing and loan agreements (see Note 7). The agreement was effectively
cancelled upon the repayment.                                                          -    641,000
                                                                                    ----   --------
                                                                                    $  -   $674,678
                                                                                    ====   ========
</TABLE>

NOTE 7. LONG-TERM DEBT

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

<TABLE>
<CAPTION>
                                                                            2002          2001
                                                                        ------------   ----------
<S>                                                                     <C>            <C>
(A)              Note payable, All Capital, LLC                         $ 12,966,500   $        -
(B) through (F)  Notes payable and other obligations repaid in 2002                -    5,113,257
(G)              Capital lease obligations                                   321,894      397,942
                                                                        ------------   ----------
                                                                          13,288,394    5,511,199
                 Current portion                                             113,569       96,110
                                                                        ------------   ----------
                 Long-term debt, net                                    $ 13,174,825   $5,415,089
                                                                        ============   ==========
</TABLE>

A description of significant long-term obligations at December 31, 2002 and 2001
is as follows:

Note Payable, All Capital, LLC

            (A)      In March 2002, MSR entered into a financing agreement with
                  Vernon, LLC (an unaffiliated company). Under the terms of the
                  financing agreement, MSR sold a $400,000 secured convertible
                  promissory note to Vernon, LLC that was scheduled to mature in
                  December 2003 with interest originally at 10% (amended to 15%
                  in April 2002). The financing agreement required MSR to create
                  an interest reserve account to hold the first year of interest
                  on the note. The agreement also required MSR to pay a
                  commitment and loan fee equal to 5% of the total note. Both
                  the fee and the first year interest reserve were funded by MSR
                  utilizing a portion of the note proceeds. The note was
                  initially convertible, at the option of Vernon, LLC, at any
                  time after August 1, 2002, into 40,000 shares of MSR common
                  stock at the rate of $10 per share and subject to certain
                  anti-dilution provisions outlined in the financing agreement.
                  The note was secured by a mortgage and security interest on
                  MSR property and was subordinate to the mortgages described in
                  (B) through (E). Additionally, the financing agreement
                  included a provision for tag along warrants. This provision
                  required MSR to distribute to note holders, who elected not to
                  convert the principal amount of the note into common stock,
                  warrants to purchase shares of common stock for a period of
                  three years. The financing agreement also granted Vernon, LLC
                  the right of first refusal with respect to any subsequent debt
                  and/or equity financings undertaken by MSR prior to December
                  31, 2003 and allowed Vernon, LLC to appoint up to two
                  Directors on MSR's Board. The financing agreement also
                  provided that if the exclusive option agreement (Note 15) was
                  approved by the shareholders that the note would be
                  immediately repaid and the number of shares issuable upon
                  conversion of the note (or the tag along warrants) would be
                  reduced to 10,000 shares.

         In late March and early April of 2002, MSR and MSD entered into a
                  $8,500,000 loan agreement with All Capital, LLC, a company
                  affiliated with Vernon, LLC. The loan agreement was funded in
                  two installments and was secured by a first mortgage on MSR
                  and MSD land, buildings and improvements. The initial funding
                  provided $3,695,000 in funds to MSR to satisfy the $2,816,000
                  obligation to the bankruptcy trustee described in (F). The
                  second funding provided $4,805,000 in funds to MSR to repay
                  the first mortgage obligation described in (B) and the second
                  mortgage obligations described in (C), (D), and (E). The loan
                  agreement was scheduled to mature in March 2003 with interest
                  payable at 15%. The loan agreement provided MSR with the
                  option to extend the loan for up to four successive quarters
                  with a final maturity of March 31, 2004.

                                                                              31
<PAGE>

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

         In the event that an exclusive option agreement (Note 15) was approved
                  by the shareholders (a) the $8,500,000 would be immediately
                  repayable (b) the warrant issued to All Capital, LLC would not
                  thereafter be exercisable, and (c) the number of shares
                  issuable upon conversion of the $400,000 secured convertible
                  note described above (or the tag along warrants) would be
                  reduced to 50,000 shares.

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

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

         On August 28, 2002, MSR and MSD entered into a $15,000,000 Loan
                  Agreement with All Capital, LLC. The loan agreement was funded
                  in multiple installments and is secured by a first mortgage on
                  MSR and MSD land, buildings and improvements. The $12,500,000
                  proceeds of the first installment of this loan were applied to
                  the extent of (a) $9,900,000 to refinance and consolidate the
                  $400,000, $8,500,000 and $1,000,000 loans described above, and
                  (b) $2,600,000 for working capital and payment of the costs
                  associated with the loan. The remaining proceeds of the loan
                  in the amount of $2,500,000 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. The interest reserve was
                  funded by a portion of the loan proceeds and a credit for the
                  unused balances of interest reserves maintained for the
                  $8,500,000 and $1,000,000 loans. The loan agreement also
                  required MSR to pay a commitment and loan fee equal to 5% of
                  the loan; which fee was paid by MSR out of a portion of the
                  loan proceeds. On August 28, 2002 in connection with the loan
                  agreement, MSR issued a warrant to All Capital, LLC to
                  purchase 900,000 shares of common stock at the rate of $2.00
                  per share. The issuance of this warrant did not trigger any of
                  the "anti-dilution" provisions of either the $400,000 Secured
                  Convertible Promissory Note or warrants to purchase 500,000
                  and 100,000 shares of common stock, respectively, previously
                  granted to All Capital, LLC described above. In the event the
                  exclusive option agreement (Note 15) was approved by the
                  shareholders the warrant to purchase 900,000 shares would not
                  thereafter be exercisable. Also, in connection with the
                  consolidation of four loans described above into one
                  $15,000,000 loan, the "tag along" warrant provisions of the
                  $400,000 Secured Convertible Promissory Note were triggered; a
                  "tag along" warrant to purchase 200,000 shares of common stock
                  at $2.00 was issued to All Capital, LLC and the conversion
                  rights to purchase a similar number of shares at a similar
                  price per share were terminated. Both prior to and after the
                  termination of such conversion rights and the issuance of the
                  "tag along warrant" All Capital, LLC had the right, upon
                  exercise of warrants and/or the conversion rights in the
                  $400,000 note to acquire 1,700,000 shares of common stock at
                  the rate of $2.00 per share. Under the terms of the loan
                  agreement, All Capital, LLC retained the right to designate
                  six members of the Board of Directors of MSR (and the right of
                  Vernon, LLC, an affiliate of All Capital, LLC to designate two
                  members

                                                                              32
<PAGE>

                  was terminated). The loan was in default at December 31, 2002
                  since the Company did not have a 2003 racing license at
                  December 31, 2002. The initial application for a 2003 racing
                  license was denied on December 23, 2002. A conditional 2003
                  racing license was subsequently granted to the Company in
                  April 2003.

         Substantially all long-term debt at December 31, 2001 was classified as
                  long-term due to the August 2002 refinancing noted above.

         As discussed in Note 19, in January and June 2003, the Company
                  refinanced substantially all of its debt (excluding capital
                  lease obligations). As a result of the refinancings, all debt
                  at December 31, 2002 is classified as long-term, excluding the
                  current portion of capital lease obligations.

Notes Payable and Other Obligations Repaid in 2002

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

            (C)      In August 1999, MSR obtained $250,000 in loans from three
                  board members, one of whom was an officer. $83,500 of this
                  $250,000 loan came from the lender referred to in (B) above.
                  The loans bore interest at 12%, and were originally secured by
                  a second mortgage on MSR's racing plant, buildings, and
                  improvements. In 2000, $83,500 of the original $250,000 was
                  added to the first mortgage described in (B) above. The
                  remaining $166,500 remained secured by a junior mortgage and
                  was due in May 2001.

            (D)      In September 2000, MSR obtained a $300,000 loan from
                  another private lender, who was also a board member. The loan
                  was secured by a junior mortgage on MSR's racing plant,
                  buildings and improvements. The loan bore interest at 13% and
                  repayment was due in September 2001. No principal payments
                  were required until the final due date. In consideration for
                  making this loan to MSR, the lender was granted a warrant to
                  purchase 2,500 shares of MSR common stock at $10 per share
                  with an expiration date in August 2004. Additionally, in March
                  2001, in consideration for certain amendments made to this
                  loan, MSR granted this lender a warrant to purchase 2,700
                  shares of MSR common stock at $10 per share with an expiration
                  date in March 2005.

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

            (F)      Liability approximating $2,750,000 at December 31, 2001
                  representing the present value of an obligation payable to a
                  third-party bankruptcy trustee in relation to a settlement
                  agreement between the trustee and MSR for the purchase of a
                  hotel located on MSR's land adjacent to its harness racing
                  track (see Note 13). The initial April 2000 settlement
                  agreement was amended in July 2001 and was formally approved
                  by the bankruptcy court in August 2001. The approved agreement
                  called for MSR to pay $2,816,000 to the bankruptcy trustee by
                  February 18, 2002 for the purchase of the hotel. For financial
                  reporting purposes, the $2,816,000 was discounted using an
                  incremental borrowing rate of 10% and the present value
                  discount is being treated as imputed interest.

         The debt obligations described in (B), (C), (D), (E), and (F) above,
                  including all accrued interest thereon, were repaid in full in
                  March and April 2002, in connection with the 2002 financing
                  and loan agreements, as described in (A).

                                                                              33
<PAGE>

            (G)      Various capital leases for equipment with monthly payments
                  ranging from $95 to $2,168 including imputed interest from
                  6.9% to 24.5%. These leases mature at various dates through
                  2006.

         At December 31, 2002, the cost of equipment acquired through capital
                  lease obligations totaled $583,197 and is included in land,
                  building, and equipment on the balance sheet. Accumulated
                  depreciation related to these assets totaled $242,233 at
                  December 31, 2002.

         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, 2002:

<TABLE>
<CAPTION>
      YEAR ENDING DECEMBER 31                          AMOUNT
      -----------------------                         ---------
<S>                                                   <C>
2003                                                  $ 137,759
2004                                                    133,202
2005                                                     68,053
2006                                                     16,026
2007                                                     11,042
                                                      ---------
        Total minimum lease payments                    366,082
Less amount representing interest                        44,188
                                                      ---------
        Present value of net minimum lease payments     321,894
        Current maturities                              113,569
                                                      ---------
Capital lease obligation, net of current maturities   $ 208,325
                                                      =========
</TABLE>

NOTE 8. SUMMARIZED QUARTERLY DATA (UNAUDITED)

         Following is a summary of the quarterly results of operations for years
                  ended December 31, 2001 and 2002:

<TABLE>
<CAPTION>
                                                 FISCAL QUARTER
                            ----------------------------------------------------
                              FIRST        SECOND         THIRD        FOURTH
                              -----        ------         -----        ------
<S>                         <C>          <C>           <C>           <C>
2001
  Net revenues              $1,650,390   $ 2,217,027   $ 2,836,607   $ 1,795,341
  Income from operations        26,052      (521,091)     (469,915)   (1,059,127)
  Net income                   (29,390)     (674,375)     (413,677)   (1,144,749)
  Net income per share      $    (0.07)  $     (1.52)  $     (0.93)  $     (2.59)
2002
  Net revenues              $1,619,960   $ 2,407,606   $ 2,763,367   $ 1,891,292
  Income from operations       125,122      (538,822)     (553,248)   (1,862,139)
  Net income                     7,047    (1,008,092)   (1,519,700)   (2,448,479)
  Net income per share      $     0.02   $     (2.28)  $     (3.43)  $     (5.53)
</TABLE>

NOTE 9.  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

                                                                              34
<PAGE>

                  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, 2002
                  and 2001.

NOTE 10. INCOME TAXES

         Net deferred tax assets are provided for the temporary differences bet
                  ween 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, 2002 and 2001 has been offset by an equivalent valuation
                  allowance because of uncertainty concerning MSR's ability to
                  utilize net operating loss carryforwards in future years.

<TABLE>
<CAPTION>
                                                         DECEMBER 31
                                             2002                          2001
                                   -------------------------    -------------------------
                                    TEMPORARY                    TEMPORARY
                                   DIFFERENCE     TAX EFFECT    DIFFERENCE     TAX EFFECT
                                   -----------   -----------    -----------   -----------
<S>                                <C>           <C>            <C>           <C>
Net operating loss carryforwards   $12,178,000   $ 4,141,000    $ 7,217,000   $ 2,454,000
Other                                    8,000         3,000         10,000         4,000
                                   -----------   -----------    -----------   -----------
                                    12,186,000     4,144,000      7,227,000     2,458,000
Less valuation allowance                     -    (4,144,000)             -    (2,458,000)
                                   -----------   -----------    -----------   -----------
                                   $12,186,000   $         -    $ 7,227,000   $         -
                                   ===========   ===========    ===========   ===========
</TABLE>

         The net operating loss carryforwards will expire at various dates from
                  December 31, 2009 through December 31, 2022. 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
                                                          2002                         2001                   2000
                                              -------------------------      --------------------     -----------------
                                                 AMOUNT            %           AMOUNT         %        AMOUNT       %
                                              -------------------------      --------------------     -----------------
<S>                                           <C>                 <C>        <C>            <C>       <C>         <C>
Statutory federal income tax (benefit)        $(1,687,000)        (34.0)     $(769,000)     (34.0)    $(629,000)  (34.0)
Variances from statutory rate:
  Add state income tax, net of federal
  income tax benefit                                1,200           0.1          2,756        0.1           708     0.1
  Increase (decrease) in valuation allowance    1,687,000          34.0        743,200       32.9       255,400    13.6
  Other                                                 -             -         25,800        1.1        (3,200)   (0.1)
                                              -----------          ----      ---------       ----     ---------   -----
Provision (benefit) for income taxes          $     1,200           0.1      $   2,756        0.1     $(376,092)  (20.4)
                                              ===========          ====      =========       ====     =========   =====
</TABLE>

NOTE 11. LEASES

         The Raceway leases equipment, including pari-mutuel totalisator
                  equipment and services, under numerous operating lease
                  agreements. Total lease rental expense for the years ended
                  December 31, 2002, 2001, and 2000 amounted to $337,545,
                  $400,227, and $432,220 of which $275,000, $265,000, and
                  $275,400 was paid on the totalisator contract for the
                  respective years.

                                                                              35

<PAGE>

         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, 2002:

<TABLE>
<CAPTION>
                                   TOTALISATOR
                                    EQUIPMENT
                                    ---------
<S>                                <C>
2003                                $ 285,000
2004                                  295,000
                                    ---------
                                    $ 580,000
                                    =========
</TABLE>

NOTE 12. INVESTMENT INCOME

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

<TABLE>
<CAPTION>
                                    2002          2001         2000
                                    ----          ----         ----
<S>                               <C>           <C>          <C>
Interest and dividends            $   6,150     $ 33,299     $ 30,772
Other                               (22,904)      (9,817)      (4,529)
                                  ---------     --------     --------
                                  $ (16,754)    $ 23,482     $ 26,243
                                  =========     ========     ========
</TABLE>

NOTE 13. PRIVATE PLACEMENT AND COMMON STOCK WARRANTS

During 1999, MSR privately placed 150,000 shares of common stock, for the
         aggregate amount of $1,500,000 computed at the rate of $10 per share.
         In connection with such private placement, MSR, in November 1999
         executed and delivered a common stock warrant ("PP Warrant") to two
         individuals who were officers and directors of MSR. The PP Warrant
         entitled the holders to purchase not less than 150,000 nor more than
         175,000 shares of common stock at the rate of $10 per share at any time
         prior to November 15, 2000. The PP Warrant was not exercised and
         expired in accordance with its terms on November 15, 2000. On November
         14, 2000, the Board of Directors authorized the issuance: (i) to each
         of the holders of the PP Warrant, a common stock warrant to purchase up
         to 87,500 shares of common stock at the rate of $10 per share at any
         time prior to November 14, 2004; and (ii) to another member of the
         Board of Directors a common stock warrant to purchase up to 7,500
         shares of common stock at the rate of $10 per share at any time prior
         to November 14, 2004. Stockholder consent with respect to these three
         common stock warrants has not been secured. As discussed in Note 7(D),
         in September 2000, MSR granted another board member a common stock
         warrant to purchase up to 2,500 shares of common stock at the rate of
         $10 per share at any time prior to August 31, 2004. Additionally,
         during March 2001, as discussed in Notes 7(B) and 7(D), 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.

                                                                              36
<PAGE>

As described in Note 7(A), 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.

A summary of common stock warrants authorized by the Board of Directors as of
         December 31, 2002 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                       500,000             $     2         March 31, 2007
July 16, 2002                       100,000             $     2          July 31, 2007
August 28, 2002                   1,100,000             $     2        August 31, 2007
                                  =========             =======      =================
</TABLE>

Substantially all of the November 14, 2000 warrants are subject to litigation as
         described in Note 19. No value has been ascribed to the warrant
         issuances.

NOTE 14. HOTEL ACQUISITION

During fiscal year 1994, MSR, as lessor, entered into a lease agreement with
         Comfort Associates, Inc. ("CAI"), a company affiliated with MSR's
         former majority shareholder. MSR, as lessor, leased, for an initial
         period of twenty years, a certain portion of their property for the
         purpose of permitting CAI, as lessee, to construct, own, and operate a
         hotel. Construction of the hotel by CAI was completed in October 1994.
         Anytime during the lease or any renewal period of the lease, MSR could
         have elected to terminate the lease and assume all of CAI's duties,
         obligations, rights, and responsibilities under the lease for a nominal
         amount. Lease payments during the initial twenty year period were
         $10,000 per year. In May 2000, the lease was terminated, and MSR
         purchased all of the issued and outstanding shares of stock of CAI for
         $5,510, plus an additional $48,000 acquisition fee.

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

Pursuant to an original April 11, 2000 settlement agreement between the trustee
         and MSR that was later amended on July 30, 2001 and formally approved
         by the bankruptcy court in August 2001, MSR turned over the issued and
         outstanding stock of CAI to the trustee and acquired the hotel from the
         trustee. The agreement called for MSR to pay the trustee $2,816,000
         (the fair market value of the hotel less $184,000 in unpaid real estate
         taxes) by February 18, 2002 (see Note 7(F)). It was also the
         responsibility of MSR to pay the $184,000 of unpaid real estate taxes
         on the hotel (see Note 5).

                                                                              37
<PAGE>

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

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

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

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

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

MSR operates pari-mutuel wagering on the hotel premises. Net pari-mutuel
         commissions and breakage from wagering on these premises approximated
         $447,000 for the year ended December 31, 2002; $497,000 for the year
         ended December 31, 2001, and $481,000 for the year ended December 31,
         2000.

NOTE 15. OTHER RELATED PARTY TRANSACTIONS

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

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

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

                                                                              38

<PAGE>

NOTE 16. PURCHASE OPTION AGREEMENT

On September 12, 2001, MSR's Board of Directors authorized its President and
         Chief Executive Officer to execute an exclusive option agreement for
         the sale of MSR to a group of private purchasers. This group of
         purchasers includes one of the private lenders described in Note 7(E).
         The exclusive option agreement was formally executed on September 15,
         2001 and granted the purchasers an exclusive irrevocable option to
         acquire MSR (or its assets) for $9,077,350 at any time prior to March
         15, 2002. If exercised, the exclusive option agreement called for the
         purchasers to pay off all MSR debt and payables and pay $1,400,000 to
         existing MSR shareholders. The $1,400,000 payment to the shareholders
         was subject to adjustment based upon the debt outstanding at the
         exercise closing date. Accordingly, the $1,400,000 could increase or
         decrease as a result of this adjustment. The option agreement was
         subject to the approval of MSR's shareholders holding at least 66 2/3%
         of the outstanding common stock and the New York State Racing and
         Wagering Board.

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

If the exclusive option agreement is not approved by MSR's shareholders, MSR may
         be required to pay the purchasers a one-time payment of $130,000.
         Additionally, if the exclusive option agreement is not approved by
         MSR's shareholders or not exercised by the purchasers, the agreement
         requires that the loan described in Note 7(E) be repaid along with all
         accrued interest thereon. As indicated in Note 7, the full amount of
         such loan, and all accrued interest, was repaid in April 2002.

Concurrent with the execution of the exclusive option agreement, the purchasers
         provided a $700,000 working capital line of credit to MSR with interest
         at 10%, secured by a second mortgage on MSR's buildings and
         improvements, due March 15, 2002 (see Note 6).

The full balance drawn by MSR under this line of credit ($700,000) was repaid in
         April 2002 in connection with the 2002 financing and loan arrangements
         described in Note 7(A). In June 2002, management notified the group of
         purchasers that the aforementioned exclusive purchase option agreement
         was terminated and of no further force and effect. As a result of the
         termination of the option agreement by MSR, the aforementioned $130,000
         termination has been recorded as a liability in the December 31, 2002
         and 2001 balance sheets (see also Note 17).

NOTE 17. 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. In November 2001, MSR and the Association
         entered into an agreement that established MSR's 2002 purse funding at
         approximately $2,650,000, including approximately $553,000 in
         underfunded purses

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         carried forward from years prior to 2002. Actual purses and fees paid
         by MSR in 2002 approximated $2,155,000.

In April 2003, MSR and the Association entered into an agreement that
         established MSR's 2003 purse funding based upon a formula defined in
         the agreement plus underfunded purses from years prior to 2003 and net
         horsemen statutory VLT revenues. As a condition of the agreement, MSR
         established a "Designated Account" to provide for the payment and
         liquidation of previously unpaid prior purses in the approximate amount
         of $495,000. Unfunded prior purses were recorded as purse expenses in
         2002.

NOTE 18. COMMITMENTS AND CONTINGENCIES

LETTER OF CREDIT

At December 31, 2002, the Company had a $100,000 letter of credit related to a
         pari-mutuel surety bond.

2002 RACING AND SIMULCAST LICENSES

On April 8, 2002, the New York State Racing and Wagering Board (the Board)
         issued MSR a 90-day limited period harness racing license for the 2002
         racing season. The license expired on July 6, 2002 and was conditional
         upon numerous factors involving the 2002 financing and loan agreements
         referred to above. Extension of the 2002 license past the July 6, 2002
         expiration date was dependent upon, among other things, the individual
         licensability, under Board laws and regulations, of the principals
         involved in the 2002 financing and loan agreements (see Note 7(A)). On
         July 2, 2002, the Board voted to extend MSR's limited period track and
         simulcast license through December 31, 2002. As a condition of the
         license extension, MSR was required to create a segregated escrow
         account to ensure the payment of purses to horsemen.

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.

OTHER

In March 1998, MSR voted to terminate its unfunded deferred compensation plan.
         At December 31, 1999, there was a $1,013,861 liability recorded in
         MSR's consolidated balance sheet related to this plan. Subsequent to
         this termination, a lawsuit was brought against MSR by beneficiaries of
         the deferred compensation plan challenging the plan's termination and
         seeking damages of

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         $1,200,000. The lawsuit was settled in 2000 with the beneficiaries
         receiving 4,380 shares of stock, valued for financial reporting
         purposes at $10 per share, in full settlement of their claim. The gain
         on this settlement, of approximately $970,000, is recognized as an
         extraordinary item in the December 31, 2000 consolidated statement of
         operations, net of applicable income taxes of $376,800.

LITIGATION

In July 2002, MSR (along with certain MSR directors, Vernon, LLC, All Capital,
         LLC, and its principal) was named as a defendant in a lawsuit filed by
         the group of private purchasers referred to in Note 15. 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 tortious 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.

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 12), the issuance of 21,600 additional shares of common stock
         (see Note 17, Anti-Dilution 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 have not been approved by the shareholders. The
         Company believes that it has valid defenses to the lawsuit, and intends
         to seek dismissal of the case. Additionally, MSR has filed
         counterclaims against these individuals.

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

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

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<PAGE>

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

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 17, 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
         authorization for the issuance of such shares. On December 17, 2001 the
         Board of Directors clarified the minutes of the January 11, 2001
         meeting to state the 24,840 shares of common stock will be issued for
         past services to MSR. However, issuance of the stock is subject to
         approval by the shareholders, by Board resolution. No amounts have been
         recognized in this connection for the years ended December 31, 2002 or
         2001.

DELINQUENT REAL ESTATE TAXES

As explained in Note 5, MSR is subject to an agreement covering delinquent real
         estate taxes with Oneida County.

NOTE 19. SUBSEQUENT EVENTS

JANUARY 2003 REFINANCING

On January 29, 2003, MSR and MSD entered into a $18,000,000 Loan Agreement with
         All Capital, LLC. The loan agreement is secured by a first mortgage on
         MSR and MSD land, buildings, and improvements and is also secured by
         the personal property of MSR and MSD. The $18,000,000 proceeds of this
         loan were applied to the extent of (a) $11,903,831 to refinance and
         consolidate the $15,000,000 loan (see Note 7(A)), and (b) $3,689,169
         for payment of loan commitment fees, a one year interest reserve, and
         payment of the costs associated with the loan. The remaining proceeds
         of the loan in the amount of $2,407,000 are to be disbursed for working
         capital and in connection with and for the partial funding of
         construction of facilities to be utilized for the installation and
         operation of video lottery terminals. The loan bears interest at the
         rate of 12% per annum and matures on July 31, 2004. The loan can be
         extended by MSR for up to four successive quarters, until July 30,
         2005, subject to the payment of applicable extension fees. The loan
         agreement required MSR to create an interest reserve account to hold
         the amount necessary to fund the payment of interest over the initial
         one year term of the loan. The interest reserve was funded by a portion
         of the loan proceeds and a credit for the unused balances 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

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         potion of the loan proceeds. Additionally, in the event of VLT
         installation at MSR, the loan agreement requires 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.

JUNE 2003 REFINANCING

On June 30, 2003, the MSR and MSD (collectively the "Borrower") entered into a
         Loan Agreement (the "Loan Agreement") with Vestin Mortgage, Inc. (a
         Nevada corporation) pursuant to which Vestin Mortgage, Inc. ("Vestin")
         agreed to lend to the Borrower up to $23,000,000 (the "Vestin Loan").
         The Vestin Loan is evidenced by a Consolidated Secured Promissory Note
         (the "note") in the original principal amount of $23,000,000 and is
         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 has 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.

The primary terms of the Vestin Loan (as set forth in the Loan Agreement and the
         note) are as follows:

                  A.       Amount of loan - $23,000,000;

                  B.       Term of loan - 24 months;

                  C.       Maturity date - June 30, 2005;

                  D.       Loan commitment fees - $1,840,000;

                  E.       Interest reserve - $1,686,667; and

                  F.       Additional Vestin rights - the right to designate
                           three members to the Board of Directors of the
                           applicant (not as of the date hereof exercised by
                           Vestin).

On June 30, 2003, Vestin advanced $20,300,000 pursuant to the terms of the Loan
         Agreement and the note. Such proceeds were applied as follows: (a)
         $15,834,485 to All Capital LLC ("All Capital") in satisfaction of the
         Borrowers obligation to All Capital pursuant to a certain $18,000,000
         Consolidated Secured Promissory Note dated January 29, 2003 (which
         promissory note was assigned to Vestin); (b) $1,686,667 to 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 subsequently drawn down by the Borrower in connection with the
         construction of a facility to house the VLTs.

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 to Vestin of interest and principal on or
         with respect to Vestin's retained senior participation (the "Senior
         Participation") in and to the Vestin Loan, the note and the loan
         documents evidencing

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         and/or securing the Vestin Loan and the note. 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.

NOTE 20. 2003 RACING AND SIMULCAST LICENSES

In December 2002, the New York State Racing and Wagering Board (the Board)
         denied MSR's application for 2003 racing and simulcast licenses. The
         Board's determination with respect to MSR's 2003 licenses was stayed by
         court order. 2003 license negotiations between MSR and the Board
         continued through the first quarter of 2003. In April 2003, MSR and the
         Board entered into a stipulation and settlement (the Agreement) which
         effectively granted MSR conditional racing and simulcast licenses for
         the 2003 racing season. The Agreement requires that MSR and an
         associate of MSR's major creditor complete new applications for
         licenses, that the Board act upon the applications in a timely period
         and that the associate be subject to a background investigation by the
         Board.

Concurrent with the Agreement, MSR and the associate entered into a separate
         agreement whereby the associate agreed to cooperate with the Board's
         investigation. MSR agreed to reimburse the associate for all reasonable
         costs associated with complying with the Board's investigation. In
         addition, 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.

NOTE 21. FINANCIAL CONDITION AND MANAGEMENT PLANS

As of September 2003, the Company had a working capital deficit of $1,351,757,
         and $2,700,000 in available financing from existing loan agreements to
         fund the VLT construction. Losses for the nine month period ended
         September 30, 2003 approximated $5,500,000 and net cash used in
         operating activities for the period approximated $6,800,000. Management
         expects to require approximately $500,000 per month to cover expected
         net operating losses on average until the estimated April 1, 2004
         opening date of the VLT facility. Subsequent to September 30, 2003, the
         Company secured an additional $3,000,000 through an amendment to the
         Vestin loan. Additionally, the Company received $900,000 in proceeds
         from the issuance of stock as a result of exercised warrants. Based on
         the above, which is prepared by management and unaudited, management
         expects to have funds sufficient to operate the Company through the
         anticipated April VLT opening date.

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 and the
         approval by the New York Racing and Wagering board for the track's
         racing license.

Although the actual amount of net revenues will ultimately depend on the number
         of visitors to the new casino and the amount bet by such visitors, a
         preliminary independent study indicates that the Company could receive
         over $4.5 million per year in additional income from the VLT project
         before the payment of interest, taxes, depreciation, or amortization.
         Subsequent to the

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         completion of the preliminary study (a) the number of VLT machines was
         increased from 650 to 1,000, (b) the daily hours of operation were
         increased from 12 to 16 hours and (c) the portion of VLT revenues to be
         retained by the Company was increased from 15% to 20 1/4%.
         Consequently, it is anticipated that the amount to be received by the
         Company will be approximately $7.1 million.

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

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