EQUUS GAMING CO LP - 10-K Annual Report

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(PAGE) SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

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

FOR THE YEAR ENDED DECEMBER 31, 1997 COMMISSION FILE NUMBER 000-25306

EQUUS GAMING COMPANY L.P.
(Exact name of registrant as specified in its charter)

Virginia 54-1719877
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

650 Munoz Rivera Avenue
Doral Building, 7th Floor
Hato Rey, Puerto Rico 00918
(Address of Principal Executive Offices and Zip Code)

Registrant's telephone number, including area code: (787) 753-0676

Securities registered pursuant to Section 12(b) of the Act: Not applicable

Securities registered pursuant to Section 12(g) of the Act:

TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED

Class A Units representing assignment Nasdaq National Market System
beneficial ownership of Class A limited ("Nasdaq/NMS")
partnership interest and evidenced by
beneficial assignment certificates ("Units")

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 report(s), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No

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

As of March 25, 1998, the aggregate market value of 2,499,167 Units held by
non-affiliates of the registrant based on the closing price reported on the
NASDAQ was $3,123,959.

Documents Incorporated By Reference: Not Applicable

(PAGE) EQUUS GAMING COMPANY L.P.

1997 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

Page

PART I

Item 1. Business 1
Item 2. Properties 6
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 8

PART II

Item 5. Market for Registrant's Class A Units and Related
Unitholder Matters 9
Item 6. Selected Financial and Operating Data 10
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Item 8. Financial Statements and Supplementary Data 23
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 65

PART III

Item 10. Directors and Executive Officers of the Company and EMC 65
Item 11. Executive Compensation 68
Item 12. Security Ownership of Certain Unitholders and Management 72
Item 13. Certain Relationships and Related Transactions 73

PART IV

Item 14. Exhibits, Financial Schedules and Reports 74

(PAGE) PART I

ITEM 1. BUSINESS

GENERAL

Equus Gaming Company L.P. (the "Company") is a Virginia limited
partnership. The Company is managed by its managing general partner, Equus
Management Company ("EMC"), which until December 31, 1996 was a wholly owned
subsidiary of the Company's other general partner, Interstate General Company
L.P. ("IGC"). Effective December 31, 1996, IGC transferred all of the
outstanding shares of EMC to IGC's general partner, Interstate Business
Corporation ("IBC"). IGC is a publicly traded limited partnership with its
units traded on the American Stock Exchange. The Company is the successor
owner of the horse racing and wagering business acquired in 1989 by an IGC
subsidiary. On February 6, 1995, IGC distributed to its unitholders Class A
Units ("Units") representing assignment of a 99% Class A limited partnership
interest in the Company (the "Distribution").

The Company is engaged in thoroughbred racing, wagering and other gaming
businesses through its 99% owned subsidiary, Housing Development Associates
S.E. ("HDA"). HDA owns El Comandante Race Track ("El Comandante"), the only
licensed thoroughbred racing facility in Puerto Rico. El Comandante was
leased to El Comandante Operating Company, Inc., a Puerto Rico non-stock
Corporation ("ECOC") until December 31, 1997 when the lease was terminated
due to certain events of default of the terms of the lease. HDA also has
interests of (i) 55% in Galapagos, S.A. ("Galapagos"), which operates since
April 1995 the V Centenario Race Track in the Dominican Republic ("V
Centenario"), (ii) 100% in Equus Gaming de Panama, S.A. ("EGP"), which
operates since January 1, 1998 the Presidente Remon Race Track in the
Republic of Panama ("Presidente Remon"), and (iii) 100% in El Comandante
Management Company, LLC ("ECMC"), which operates El Comandante since January
1, 1998. In 1997 the Company formed Equus Entertainment Corporation ("EEC"),
as a wholly-owned Puerto Rico corporate subsidiary, for the purpose of
replacing the Company once certain approvals are obtained.

The Company also owns Virginia Jockey Club, Inc. ("VJC"), an unsuccessful
applicant for licenses to own and operate Virginia's first thoroughbred
racing and pari-mutuel wagering facility. VJC is now inactive.

HDA was the previous owner of S & E Network Inc. ("S&E"), which owned and
operated three UHF television stations in Puerto Rico (the "Television
Stations"), until sold to Paxson Communications of San Juan, Inc. ("Paxson")
in transactions closed in August 1996 (50% interest) and January 1997 (50%
interest).

A. Puerto Rico Operations

Live thoroughbred horse racing has been conducted continuously at El
Comandante since 1976 and at a predecessor facility since 1957. ECOC
generates commissions from bets placed on El Comandante's thoroughbred horse
races through computerized wagering facilities located at El Comandante and
V Centenario, and as of December 31, 1997 at 672 independently-owned
(PAGE)
off-track betting ("OTB") agencies throughout Puerto Rico, and from bets
placed on races simulcasted outside Puerto Rico. ECOC offers bettors win and
place wagers and exotic wagers that include daily double, exacta, quiniela,
trifecta, and Pick 3 and Pick 6 pool wagers. Races are run 52 weeks per
year, generally five days per week (Monday, Wednesday, Thursday, Friday and
Sunday). From 1993 through February 1996 races were generally run four days
per week and prior to 1993 three days per week.

The total amounts wagered are distributed principally as commissions to
the operating company and the OTB agents, winning bettors and the Puerto Rico
Government.

Operating License. On December 15, 1989, the Puerto Rico Racing Board
(the"PR Racing Board"), at the request of HDA, granted an operating license
(the "Operating License") to ECOC, which has been assigned to ECMC. The
Operating License provides ECMC with the exclusive right through December 14,
2004, to operate a race track in the San Juan Region (the largest of three
regions in Puerto Rico) which includes the San Juan metropolitan area and
over three-fourths of the northern half of the Island; the exclusive right to
conduct all types of authorized betting, both at El Comandante and off-track,
anywhere in Puerto Rico, based on races held at El Comandante; and the right
to hold a minimum of 180 day- or night-race days per year. The racing program
for El Comandante is approved annually by the PR Racing Board.

The continued validity of the Operating License during its term requires
payment of an annual license fee, currently $250,000. Pursuant to the
Operating License, HDA has an obligation to ensure that the operator complies
with all terms and provisions of the Operating License and applicable laws
and regulations. Upon its expiration in December 2004, there can be no
assurance that a new operating license will be issued to ECMC, HDA, or any
other entity operating El Comandante or that a new operating license will be
exclusive. However, since 1957 ECOC and its predecessor have operated the
only thoroughbred racing facility in Puerto Rico.

El Comandante Lease. Until December 31, 1997 HDA leased El Comandante
to ECOC under a lease agreement, as amended, (the "El Comandante Lease") that
required payments of rent by ECOC to HDA consisting principally of 25%
("Basic Rent") of the annual commissions earned by ECOC. These commissions
consist of all payments received by ECOC on all monies wagered with respect
to horse racing occurring at El Comandante, whether wagered at El Comandante
or at other betting facilities in Puerto Rico or any other country. The El
Comandante Lease provided for ECOC to pay all El Comandante expenses except
that, pursuant to (i) an amendment effective January 1, 1996, HDA assumed the
obligation to pay real property taxes on El Comandante and (ii) an amendment
effective January 1, 1997, HDA assumed the obligation to pay the annual
racing license fee.

Due to ECOC's default for unpaid Basic Rent and for certain other reasons
permitted under the El Comandante Lease, HDA terminated the El Comandante
Lease on December 31, 1997. In connection therewith, on January 1, 1998 at
HDA's direction (i) ECOC transferred to ECMC, at book value, all assets
employed in the racing business, (ii) ECMC assumed all agreements and
(PAGE)
liabilities of ECOC and (iii) ECOC assigned to ECMC the Operating License.
Among the agreements assumed by ECMC are the horseowners' agreement and
wagering service agreement.
The termination of the El Comandante Lease and the assignment of the
Operating License to ECMC are subject to the approval of the PR Racing Board,
which has not make a final determination on this matter but is permitting
ECMC to operate El Comandante until the review process is concluded.

Racing Operations. Commencing in January 1998, HDA's revenues, through
its wholly owned subsidiary ECMC, will be derived principally from
commissions on wagering. ECMC will also generate revenues from fees paid by
bettors on all OTB wagers except win-place, clubhouse admissions,
concessions, the sale of programs, and other non-wagering activities.

The largest single item of expense in operating El Comandante consists
of payments to individual horse owners and to a horse owners association (the
"Owners Association") pursuant to a contract that expired April 1, 1998. The
contract requires the Owners' Association to field sufficient horses to
conduct racing operations at El Comandante in accordance with the racing
program approved by the PR Racing Board. Management is in the process of
renegotiating the contract but does not expect significant economic changes.
The prior owner of El Comandante maintained similar agreements with the
Owners' Association since 1957. The contract obligates ECMC to provide horse
stables and related facilities, to make annual lump sum payments to the
Owners' Association of $55,000 and to pay 50% of El Comandante's commissions
as purse monies.

As a means to improve the quality and quantity of horses of racing, ECMC
provides limited financing to horse owners to purchase horses. Total credit
available to all members of the Owners' Association as a group is not to
exceed $500,000 and not more than $50,000 to any single owner, nor more than
80% of the purchase price for any horse.

ECOC had an equipment lease and services agreement with Autotote Systems
Inc. ("Autotote") for the computerized tote system installed at El Comandante
and related computerized wagering equipment provided to the OTB agencies.
Autotote personnel operate and maintain the tote system at El Comandante and
maintain the wagering equipment provided to the OTB agencies. Pursuant to
the lease and services agreement which expires March 2004, ECOC was required
to reimburse Autotote's personal property taxes and to pay a fee equal to the
greater of $800,800 annually or .65% (.0065) of the pari-mutuel handle. When
the on-line wagering system was implemented, the Owners' Association agreed
to reimburse ECOC for one-half of the rental fee paid to Autotote by ECOC up
to a maximum of $3,461 per race day. This agreement was also assumed by
ECMC.

Since commencing the on-line wagering system, all of El Comandante's
races have been broadcasted via commercial television in Puerto Rico. The
telecast permits OTB patrons to monitor odds and handicapping information
while placing bets until post time and then to view the live racing action.
The races are currently broadcasted through an agreement with S&E.

Competition. El Comandante is the only licensed thoroughbred race track
(PAGE)
operating in Puerto Rico. Until the expiration of the Operating License, no
other thoroughbred race track license for the San Juan Region may be issued
to any person. Neither the Racing Act nor ECMC's Operating License precludes
the Puerto Rico Government from granting a license to a competitor to
construct or operate a race track outside of the San Juan Region (either in
the Ponce Region or the Mayaguez Region). Management is not aware of any
pending applications for such a license, even though it has been published in
the press that the legislature is conducting an investigation on the
viability of establishing another race track in the southern part of the
island. Management believes there are significant practical obstacles to
establishing a competing race track in Puerto Rico including the availability
of financing, the need to establish an OTB network and insufficiency of
horses in Puerto Rico to conduct racing operations at two tracks. In
addition, pursuant to the Interstate Racing Act of 1978, no entity may
simulcast its racing program to Puerto Rico without consent of ECMC.

ECMC faces competition from other forms of legalized gambling in Puerto
Rico. There are 19 licensed casinos in Puerto Rico offering card and dice
games, slot machines and other games of chance. The Puerto Rico Government
has operated a ticket lottery for more than 50 years and in 1991 commenced an
electronic jackpot lottery. In addition, there are numerous cock fighting
venues on the Island. ECMC also faces competition from illegal gambling.
The Puerto Rico Government may, through legislation, legalize other forms of
gambling or grant additional gaming licenses for those forms of gambling
already authorized by law.

Employees. ECOC had approximately 316 employees as of December 31, 1997.
There were 90 employees working in the mutuel, admissions, and closed circuit
television departments covered by a collective bargaining agreement between
ECOC and the El Comandante Race Track Employees Union which expires August
23, 1998, 106 employees performing building and premises maintenance services
covered by a collective bargaining agreement between ECOC and the General
Workers Union which expires May 31, 1999, and 43 employees performing
security guard services covered by a collective bargaining agreement between
ECOC and the Security Guards Union which expires January 23, 1999. ECOC has
not experienced any work stoppage or material labor difficulty since it began
operating El Comandante in December 1989. Effective January 1, 1998, all of
ECOC's employees were transferred to ECMC and the three collective
bargaining agreements have been assumed by ECMC.

B. Dominican Republic Operations

Galapagos was selected by the Dominican Republic Racing Commission to
operate the government-owned V Centenario race track pursuant to a ten year
lease which commenced April 1995 (the "V Centenario Lease"). The V
Centenario Lease also provides Galapagos with the right to develop OTB in the
Dominican Republic and the exclusive right to simulcast all horse races,
including El Comandante races, into the Dominican Republic. Simulcasting of
El Comandante races to the Dominican Republic commenced February 27, 1995 and
V Centenario racing operations commenced April 29, 1995.

At December 31, 1997 there were 302 agencies in the Dominican Republic
(PAGE)
taking wagers on El Comandante and V Centenario races. Galapagos' business
plan anticipates that approximately 400 agencies will be installed by the end
of 1998 with continuing growth to approximately 450 agencies in 1999.

Galapagos has a five year contract with a private operator to provide the
wagering distribution system for a government-sponsored electronic lottery,
which commenced in November 1, 1997. Galapagos has an agreement with
Autotote which provides wagering equipment, software and related services.
Lottery games are sold at OTB agencies of Galapagos and at lottery agencies
selected by the operator. Galapagos' commissions (net of fees to Autotote)
are 1% of gross lottery sales at lottery agencies and 2% of gross lottery
sales at OTB agencies. In addition, the lottery operator pays Galapagos a
monthly fee for each OTB agency that sells lottery games as reimbursement for
a 50% share of telephone line costs. Galapagos is also permitted to identify
the lottery agencies to take Pick 6 pool wagers on Galapagos' live and
simulcasted races.

Competition. Galapagos faces competition from other forms of gambling
in the Dominican Republic. The Dominican Republic Government operates a
ticket lottery and instant lottery throughout the country, and an electronic
lottery commenced operations in November 1997. There are approximately 600
independent sports betting agencies and wagering on baseball is particularly
popular. Approximately 200 of the sports betting agencies were being
utilized by Galapagos as OTB agencies at December 31, 1997. Wagering on cock
fighting is both legal and popular in the Dominican Republic. Casino gaming
is permitted at hotels with a minimum of 100 rooms and there are 25 licensed
casinos in operation. Galapagos also faces competition from illegal
gambling.

Employees. Galapagos had 167 employees at December 31, 1997. Galapagos
has no agreements with unions and has not experienced any work stoppage or
material labor difficulties.

C. Panama Operations

EGP has a contract with the Panama Government for the operation of
Presidente Remon in Panama City and for the development of off-track betting
in Panama for a period of 20 years that commenced on January 1, 1998. The
contract grants EGP exclusive rights to simulcast horse races from and to the
country and the right to operate up to 500 slot machines at the race track.
EGP began simulcasting races from United States race tracks on January 2,
1998 and live racing commenced on February 14, 1998, after major improvements
to the racing strip were made. Simulcasting of El Comandante races is
expected to commence in April 1998.

EGP has entered into certain contracts and commitments in connection with
the Panama operation. An agreement with horseowners provides for minimum
guaranteed payments to horseowners as purses in 1998 and 1999 of $3.6 million
and $3.9 million, respectively. An agreement with Autotote for wagering
services, software and equipment requires minimum monthly payments of $25,000
in 1998. Service fees will be based on 1% (.01) of total wagering.

(PAGE)
Management expects that 49% of the capital stock of EGP will be sold in
1998 to Panamanian investors.

Competition. EGP faces competition from other forms of legalized
gambling in Panama. There are 8 licensed casinos in Panama offering card and
dice games and slot machines. Also, there are 15 slot machines parlors
currently operating and EGP is authorized to install up to 500 slot machines
at Presidente Remon. In addition, the Panama Government has operated a
lottery for more than 50 years.
Employees. EGP currently has 280 employees, including the general
manager who is also an employee of EMC.

D. Television Stations

To ensure the availability of television time for El Comandante racing,
HDA formed S&E as a wholly-owned subsidiary and on November 17, 1994 S&E
acquired the assets and broadcast licenses of the Television Stations for
approximately $2 million. S&E commenced broadcasting on a test basis six
hours a day and had the official inauguration of its network, TELENET, in
June 1995.

Paxson provided programming and certain other services to S&E under a
Time Brokerage Agreement from February to August 1996 when Paxson purchased
a 50% interest in S&E for $4 million. Paxson then assumed responsibility for
managing the television operations. In January 1997 Paxson purchased the
other 50% interest in S&E for $7 million.

E. HDA Financing

On December 15, 1993, HDA and El Comandante Capital Corp. ("ECCC"), a
special purpose finance wholly-owned subsidiary of HDA, together with HDA
Management Corporation ("HDAMC"), completed the sale of 68,000 units each
consisting of $1,000 principal amount of ECCC's 11.75% First Mortgage Notes
due 2003 (the "First Mortgage Notes") and a warrant to purchase one share of
Class A Common Stock of HDAMC (the "Warrants"). ECCC loaned the proceeds of
the sale of the First Mortgage Notes to HDA and HDAMC contributed the
proceeds from the sale of the Warrants to HDA in exchange for a 15% interest
in HDA. Following the 1995 Distribution of Units by IGC, HDAMC transferred
its 15% interest in HDA to the Company in exchange for 1,205,245 Units. As
a result, the Warrants became exercisable to purchase a ratable portion of
the Units held by HDAMC, net of Units to be sold by HDAMC to fund payment of
HDAMC's income taxes associated with the disposition of Units upon exercise
of Warrants.

ITEM 2. PROPERTIES

El Comandante. HDA is the owner of El Comandante, the only licensed
thoroughbred racing facility in Puerto Rico. El Comandante and related
assets consist of the following:

(PAGE)
a. A 257-acre improved parcel of land located approximately 12 miles
east of downtown San Juan in Canovanas, Puerto Rico;

b. A six-level grandstand and clubhouse with seating for over 10,000,
including private boxes for the PR Racing Board, Racing
Administrator, and other officials and horse owners, and a total
capacity in excess of 25,000;

c. Racing facilities, including a one-mile oval racing strip with a
seven-furlong chute and a 65-foot wide exercise track;

d. Food concession services and two glass-enclosed air conditioned
dining rooms with a total seating capacity of over 1,400;

e. Barn area and related facilities, including 1,595 horse stalls;

f. Paved parking area which can accommodate 7,250 vehicles;

g. Landscaped infield containing three lakes and a waterfall.

El Comandante is encumbered by a mortgage securing the First Mortgage Notes.

V Centenario. Galapagos leases V Centenario from the Dominican Republic
Government. V Centenario and related assets consist of the following:

a. An improved parcel of land located approximately 12 kilometers east
of Santo Domingo, Dominican Republic;

b. Grandstand and clubhouse with seating for over 4,200 and a total
capacity in excess of 10,000;

c. Racing facilities, including a one-mile oval strip with a
seven-furlong chute and a 1400 meter exercise track and all
necessary racing and groundskeeping equipment;

d. Food concession services and an air conditioned dining room with a
total seating capacity of 400;

e. Barn area and related facilities and equipment, including 950 horse
stalls;

d. Paved parking area which can accommodate 1,100 vehicles.

Galapagos also owns certain race track and telecommunication equipment
used in the operation of V Centenario and the off-track betting system.

Presidente Remon. EGP operates Presidente Remon under an exclusive
contract granted by the Panama Government. Presidente Remon and related
assets consist of the following:

a. A 175-acres improved parcel of land located approximately 5 miles
east of downtown Panama in Juan Diaz, Panama;

(PAGE)
b. Grandstand and clubhouse with seating for over 2,000 and a total
capacity in excess of 10,000;

c. Racing facilities, including a one-mile oval strip with a seven-
furlong chute, a ten-furlong chute and a 1,400 meter exercise
track and all necessary racing and groundskeeping equipment;

d. Food concession services and an air conditioned dining room with a
total seating capacity of 200;

e. Barn area and related facilities and equipment, including 1,200
horse stalls;

f. Paved parking area which can accommodate 600 vehicles.

ITEM 3. LEGAL PROCEEDINGS

None

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

Not applicable.

(PAGE) PART II

ITEM 5. MARKET FOR REGISTRANT'S CLASS A UNITS AND RELATED UNITHOLDER
MATTERS

The Units, which represent the assignment of beneficial ownership of the
Company's Class A limited partnership interests, have been listed and traded
on Nasdaq/NMS since February 7, 1995. The following table sets forth, for
the periods indicated, the high and low sales prices per Unit as reported by
the Nasdaq Stock Market and cash distributions paid to Unitholders during
these periods.

Cash Distributions Price Range of Units
Total Per Unit High Low

1997 Quarter:
First - - $3.375 $1.75
Second - - 3.00 1.75
Third - - 2.75 1.75
Fourth - - 2.25 0.75

1996 Quarter:
First - - 4.00 3.00
Second - - 4.125 3.125
Third - - 3.50 2.50
Fourth - - 3.00 2.25

On March 25, 1998, the closing sale price of Units was $1.25 as
reported on Nasdaq/NMS.

As of March 26, 1998, there were 6,333,617 Units outstanding and
approximately 279 Unitholders of record.

The Company intends to distribute quarterly to its Unitholders the
maximum possible amount of cash from operations, consistent with the
operational needs of the Company, including debt service. The Company's
principal source of cash has been distributions related to its interest in
HDA. The trust indenture related to the First Mortgage Notes (the
"Indenture") limits distributions by HDA to its partners, including the
Company, to approximately 48% of HDA's consolidated net income. It allows
additional cash distributions, if a certain debt coverage ratio is met.

Nasdaq has notified the Company that it does not qualify for continued
listing under the new maintenance criteria that became effective on February
23, 1998 which requires a minimum of $4 million in net tangible assets and
market public float of at least $5 million . The Company submitted on March
27, 1998 a written hearing to support its arguments in favor of an exception.
The Units of the Company will continue listed pending final determination of
the Nasdaq Listing Review Committee.

(PAGE)
ITEM 6. SELECTED FINANCIAL AND OPERATING DATA

The Company was organized in 1993 and effective March 8, 1995 it
consolidates the accounts of HDA and its subsidiaries in its financial
statements. Since the Company's historical results of operations for years
1997, 1996, and 1995 are not readily comparable, Management has presented
herein certain data on a proforma basis as if the consolidation of HDA's
account into the Company's financial statements and the issuance of 1,205,245
Units to HDAMC had all occurred on January 1, 1995. The historical financial
information was derived from the consolidated financial statements of the
Company which for the years ended December 31, 1993 through 1997 have been
audited by Arthur Andersen LLP, independent public accountants. The proforma
financial information is unaudited. This information should be read in
conjunction with, and is qualified in its entirety by, the consolidated
financial statements of the Company and "Management's Discussion and Analysis
of Financial Condition and Results of Operations".

(PAGE) For the years ended December 31,
Historical (1)
Proforma(1)
1997 1996 1995 1994 1993 1995
(In thousands, except per Unit amounts)
Income Statement Data:
Revenues:
Rental income (2) $13,720 $14,322 $11,429 $ - $ - $14,333
Commissions on wagering 4,619 4,513 2,719 - - 2,724
Other revenues:
Cash distributions - - 134 300 - -
Net lotto revenues 88 - - - - -
Other racing revenues 782 523 368 - - 374
Television Stations - 1,725 1,344 - - 1,511
Gain from sale of
Television Stations 4,669 581 - - - -
Interest income 420 232 92 55 - 114
------- ------- ------- ------- ------- -------
24,298 21,896 16,086 355 - 19,056

Financial expenses 8,735 9,048 7,398 - - 9,002
Depreciation 2,323 2,508 1,829 - - 2,163
Other expenses 8,529 9,240 7,940 1,762 - 8,600
------- ------- ------- ------- ------- -------
4,711 1,100 (1,081) (1,407) - (709)
Provision for income taxes 895 400 231 87 - 511
Minority interest (3) 878 (127) (721) - - (770)
Extraordinary item (4) 459 - - - - -
------- ------- ------- ------- ------- -------
Net income (loss) $ 2,479 $ 827 $ (591) $(1,494)$ - $ (450)
======= ======= ======= ======= ======= =======
Net income (loss) per
Unit (5) $ 0.39 $ .13 $ (.08) - - $ (.07)

December 31,
1997 1996 1995 1994 1993

Balance Sheet Data:

Cash and cash equivalents $ 508 $ 4,268 $ 814 $ - $ -
Race Tracks property and
equipment (6) 45,056 45,956 47,891 - -
Receivables from ECOC 3,106 2,780 1,816 - -
Investment in S&E (7) - 2,223 4,862 - -
Total assets 56,187 60,586 60,823 - 800
First Mortgage Notes and
accrued interest 63,681 66,737 66,573 - -
Unsecured partner's loans - 415 212 131 654
Notes payable 1,876 1,073 2,457 - -
Total liabilities 68,280 71,775 72,611 524 800
Partner's deficit (12,093) (11,189) (11,788) (524) -
- ---------------------------------------------------------------------------

(PAGE)
(1) The accounts of HDA and its subsidiaries have been consolidated in the
historical statements of income (loss) as of and for the periods after March
8, 1995. The proforma statement of loss was prepared as if the accounts of
HDA and its subsidiaries had been included commencing on January 1, 1995.

(2) Represents rent paid by ECOC pursuant to the El Comandante Lease, which
was terminated by HDA effective December 31, 1997. Commencing in 1998 a
wholly owned subsidiary of HDA is operating El Comandante.

(3) Includes HDA's minority interest in losses of Galapagos and the
Company's minority interest in HDA's net income, except that generally
accepted accounting principles limited the amount recognized in 1995, as the
Company's minority interest in HDA and in 1997, as HDA's minority interest in
Galapagos (see Note 1 to the Company's consolidated financial statements).

(4) Represents premium on early redemption of First Mortgage Notes and
write-off of related deferred financing costs and note discount.

(5) Net income (loss) allocable to the units is based on approximately 99%
interest. The per Unit amount in the historical statements of income (loss)
is calculated based on weighted average of Units outstanding since the
Distribution on February 6, 1995 amounting to 6,333,617 in 1997 and 1996 and
6,223,381 in 1995. The per Unit amount in the proforma statement of income
(loss) is calculated as if all the outstanding Units of the Company had been
issued as of January 1, 1995 amounting to 6,333,617. Outstanding options and
Warrants to purchase Units do not have a material dilutive effect on the
calculation of per Unit amounts.

(6) Includes a step-up of $5,650,000, resulting from the issuance of Units
by the Company for a 15% interest in HDA on March 8, 1995, net of related
accumulated depreciation in 1997, 1996 and 1995 of $583,190, $376,140 and
$169,000, respectively.

(7) In 1995 this amount consisted of licenses, property and equipment and
other assets of the Television Stations owned by S&E. The accounts of S&E
were not consolidated at December 31, 1996.

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

The table below summarizes the results of operations of the Company and
its consolidated subsidiaries for each of the three years in the period ended
December 31, 1997. Because the Company did not consolidate the accounts of
HDA until March 8, 1995 (see Note 1 to the Company's financial statements)
the Company's historical results of operations for 1997 and 1996 are not
readily comparable with results of operations for 1995. Accordingly, the
unaudited proforma results for 1995 have been presented as if the accounts of
HDA had been included in the Company's financial statements since January 1,
1995.

The Company's results of operations are principally attributed to its
indirect interests in two race tracks: El Comandante in Puerto Rico and V
Centenario in Dominican Republic. The Company also had an interest in
certain Television Stations in Puerto Rico which were sold in transactions
closed in August 1996 and January 1997.

For the years ended December 31,
1997 1996 1995 1995
Proforma
Revenues:
Puerto Rico $14,137 $14,551 $11,519 $14,446
Dominican Republic 5,488 5,036 3,087 3,098
Television Stations 4,669 2,306 1,344 1,511
Other 4 3 136 1
-------- -------- -------- --------
24,298 21,896 16,086 19,056
Expenses:
Financial 8,735 9,048 7,398 9,002
Depreciation 2,323 2,508 1,829 2,163
Operations
Puerto Rico 1,356 1,091 381 472
Dominican Republic 6,010 6,011 4,357 4,438
Television Stations - 1,477 2,399 2,756
Other 1,163 661 803 934
-------- -------- -------- --------
4,711 1,100 (1,081) (709)
Provision for income taxes 895 400 231 511
Minority interest 878 (127) (721) (770)
Extraordinary item 459 - - -
-------- -------- -------- --------
Net income (loss) $ 2,479 $ 827 $ (591) $ (450)
======== ======== ======== ========

THE COMPANY'S RESULTS OF OPERATIONS

1997 COMPARED TO 1996

Puerto Rico Operations

(PAGE)
Overview. El Comandante had significant growth in revenues from 1991
through 1994 which resulted largely from (i) the conversion (commencing in
November 1991 and completed in 1993) of over 570 OTB agencies to an on-line
computerized wagering system, (ii) the increase in OTB agencies to 636 at
December 31, 1994, (ii) the expansion of betting program to offer additional
wagers, (iv) the broadcasting of all of its races throughout Puerto Rico via
commercial television (until November 1991, ECOC televised only Sunday races)
and, (v) the introduction in August 1990 of a jackpot pool ("Pool Pote"),
which is paid out only in the event a single bettor wins the regular pick-six
pool.

These actions resulted in substantial increases in wagering from $128
million in 1992 to $288 million in 1994 as betting opportunities became more
attractive and more convenient to wagering patrons. However, due to
regulatory changes in OTB agents' commissions and other uncontrollable
factors, wagering decreased to $274 million in 1995, remained at the same
level in 1996 and decreased to $266 million in 1997.

In February 1996 the number of race days at El Comandante was increased
from four to five days a week and, at the same time, the number of races per
day was reduced, resulting in an increase to approximately 36 races per week
from approximately 32 races per week. The average daily wagering handle
decreased, as expected, but the extra day has compensated for the decrease.
The extra race day per week provides an extra Pick-6 pool wager each week;
this wager is favored by bettors and provides a higher commission to ECOC
than other wagers. The mix of wagers usually affects ECOC's percentage of
the total wagers it received as commissions.

Revenues. Decreased in 1997 by $414,000 (2.8%) from 1996. Revenues
from the Puerto Rico operations include (i) rental income earned from the
lease of El Comandante to ECOC and (ii) interest income from short term
investments and a note receivable from ECOC.

The El Comandante Lease, which was terminated effective December 31,
1997, required payment of rent consisting of 25% of ECOC's commissions on
wagering. In 1997, rental income decreased by $601,000 (4.2%), when there
was commissions on wagering of $54,882,000 (20.6% average take) on 258 race
days, compared to 1996, when there was commissions on wagering of $57,286,000
(20.8% average take) on 256 race days. The decrease is attributable, at
least in part, to additional gaming opportunities that are available to the
public, particularly slot machines in new casino hotels and up-graded slot
machines in existing casino hotels. In August 1997 ECOC implemented two new
wagers, a Pick 3 and Trifecta, which helped to slow the decline in wagering.
Due to ECOC's default for unpaid rent and for certain other defaults under
the El Comandante Lease, HDA terminated the El Comandante Lease. Effective
January 1, 1998 El Comandante is operated by ECMC, a wholly owned subsidiary
of HDA (see Note 2 to the Company's consolidated financial statements).

Expenses. Increased in 1997 by $265,000 from 1996. The increase was
caused primarily by HDA's assumption, effective January 1997, of the
obligation to pay the annual fee of $250,000 for the El Comandante racing
license, which was paid by ECOC through 1996.

(PAGE)
Dominican Republic Operations

The accounting records of Galapagos are maintained in Dominican Republic
pesos and converted to U.S. dollars based on the average exchange rate during
the reporting period. Consequently, fluctuations in exchange rates have an
effect in the results of operations of Galapagos, when reported in U.S.
dollars. The average exchange rate for 1997 was 14.44 pesos to one U.S.
dollar, compared to 13.75 pesos to one U.S. dollar in 1996.

Revenues. Increased in 1997 by $452,000 (9%) from 1996. Revenues from
the Dominican Republic operations include commissions on wagering of
Galapagos of $4,619,000 in 1997, when there were 363 race days and an average
of 233 agencies on line, and $4,513,000 in 1996, when there were 361 race
days and an average of 198 agencies on line. The $106,000 (2.3%) increase in
commissions on wagering was attributable primarily to the introduction in
August 1997 of new wagers with local pool bets on simulcasted races from El
Comandante and to more agencies on line during 1997.

The increase in revenues from other sources was attributed to $88,000 in
net fees earned under a contract for providing the distribution system of an
electronic lottery that commenced in November 1997, and $438,000 of economic
assistance in 1997 received from the Dominican Republic Government to improve
racing, offset in part by a reduction in restaurant revenues at V Centenario
when Galapagos discontinued operating the restaurant in August 1997 and sub-
leased it to a third party. The Government provided economic assistance from
July 1997 thru January 1998 from taxes it received on wagering on simulcasted
races from El Comandante. Management requested an extension beyond January
31, 1998 but no response has been received from the Government. However, a
portion of the Government's taxes are being set aside in a restricted account
pending the Government's final decision. If the economic assistance is not
extended, it could have an adverse effect in Galapagos' financial conditions
and its future results of operations.

Expenses. Expenses from the Dominican Republic operations in 1997
remained at the same level as in 1996. An intensified effort by the
management of Galapagos reduced controllable costs in 1997 in a broad range
of expense categories. These reductions were offset by (i) increased
expenditures for advertising and television, primarily related to the
expansion of OTB agencies outside the Santo Domingo metropolitan area where
television coverage of the races commenced July 1997 and (ii) reduced funds
available for reimbursement of expenses arising from an account funded from
a portion of wagers on pool bets. The decrease in these funds resulted from
an agreement with horseowners effective July 1997 whereby they are entitled
to 25% of these funds as purses, whereas Galapagos previously received the
entire amount. Galapagos' share will further be reduced to 65% in July 1998
and to 50% in July 1999.

Television Stations

The Television Stations were sold in transactions closed in August 1996
(50%) and January 1997 (50%), resulting in gains of $581,000 and $4,669,000,
respectively. During 1996 the revenues and expenses of the Television
Stations were $1,725,000 and $1,477,000, respectively, while in 1997 there
were no operations.
(PAGE)
Financial Expenses

Financial expenses decreased in 1997 by $313,000 (3.5%) as compared with
1996. Excluding financial expenses in 1996 related to the Television
Stations, the decrease was $175,000 and was primarily caused by interest
savings attributable to (i) final payments of the Company's loan during 1997
(outstanding balance at December 31, 1996 was $500,000) and (ii) redemption
of $3,237,000 of First Mortgage Notes in 1997.

Depreciation

Depreciation decreased in 1997 by $185,000 (7.3%) as compared with 1996.
Excluding depreciation in 1996 related to the Television Stations, the change
was not significant.

Other expenses

Other expenses increased in 1997 by $502,000 as compared with 1996,
principally due to $320,000 in non recurring costs incurred by HDA for the
cancellation of certain ECOC obligations to Supra aggregating $2,290,000; the
cancellation was done in connection with HDA's redemption in August 1997 of
Supra's 17% interest in HDA. The cancellation relieved HDA of its guarantee
of approximately $1.6 million of the $2,290,000 obligation which would have
become due upon termination of the El Comandante Lease. There was also an
increase in costs and expenses reimbursed by the Company to EMC, its managing
general partner, for services rendered by EMC's executives to the Company.
Effective January 1, 1998, the only significant services rendered by EMC to
the Company will be services of Directors since employees of EMC were
transferred to a new wholly-owned subsidiary of the Company.

Provision for Income Taxes

The provision for income tax is primarily related to Puerto Rico income
taxes on the Company's distributive share of HDA's income from Puerto Rico
sources, without taking into account Galapagos losses or expenses of the
Company. The deferred income taxes are related to the difference between the
tax basis of the Company's investment in HDA and the amount reported in the
financial statements. In 1997, approximately $463,000 of the deferred income
tax provision is related to the reversal of the tax benefit recorded by the
Company in prior years for the accumulated operating losses of the Television
Stations, as a result of the sale of S&E in January 1997. See Note 9 to the
Company's consolidated financial statements for composition of the provision
for income taxes.

Minority Interest

The minority interest in 1996 was based on 18% of HDA's net income
reduced by 45% of Galapagos' net losses. For 1997, the bases for
recognition of minority interest changed as follows: (i) following
redemption of Supra's 17% interest in HDA in August 1997, minority interest
in HDA was based on 1% of HDA's net income and (ii) because accumulated
losses of Galapagos allocable to minority stockholders exceeded their
(PAGE)
investment, minority interest in Galapagos' net losses was reduced by
$308,971. Commencing in 1998, (i) if and while Galapagos continues
generating losses, no minority interest in Galapagos' net losses will be
recognized by the Company, and (ii) if Galapagos generates profits, no
minority interest in Galapagos' net income will be recognized by the Company,
up to $308,971.

Extraordinary Item

On September 29, 1997 HDA redeemed First Mortgage Notes in the principal
amount of $2.5 million at 110% of par. This redemption was made in
connection with the approval obtained from the holders of First Mortgage
Notes to redeem the 17% interest in HDA owned by Supra. The $250,000 premium
and related bond discount and deferred financing costs were written-off in
1997 as an extraordinary item. There were no similar charges in the
comparable period of 1996. However, the Company is required to make an offer
by December 1, 1998 to redeem $3 million in First Mortgage Notes, at 110% of
par. If redeemed, the Company will also recognize an extraordinary item in
1998 for the premium and related write-offs.

1996 (HISTORICAL) COMPARED TO 1995 (PROFORMA)

The following discussion of results of operations for 1996 as compared to
1995 is made based on unaudited proforma balances for 1995 as if the accounts
of HDA had been included in the Company's financial statements at December
31, 1995.

Puerto Rico Operations

Revenues. Increased in 1996 by $105,000 (1%) from 1995, principally due
to an increase in interest income on short term investments. Rental income
from El Comandante did not change significantly: $14,322,000 in 1996 and
$14,333,000 in 1995. Rental income in 1996 was based on 25% of ECOC's
commissions of $57,286,000 from El Comandante wagering on 256 racing days,
whereas 1995 rental income was based on 25% of ECOC's commissions of
$55,731,000 from wagering on 207 racing days, plus fixed rent of $400,000
(eliminated effective January 1, 1996). In February 1996, ECOC commenced
racing five days a week by adding Thursday to its previous four-day race
week. Although the average daily commissions earned by ECOC declined in the
1996 period, the commissions earned on Thursday race days more than offset
the decline in average daily commissions.

The effect of the additional race day is shown by (1) the comparison of
January 1996 and 1995 commissions earned by ECOC before introduction of
Thursday racing, and (2) the comparison of February - December, 1995
commissions earned before Thursday racing commenced with commissions earned
February - December 1996 after Thursday racing commenced. Whereas the
January 1996 commissions were $501,000 less than the January 1995
commissions, the average monthly commissions for the balance of 1996 exceeded
by $187,000 the average monthly commissions in the comparable months of 1995.

(PAGE)
Expenses. Increased in 1996 by $619,000 from 1995. The increase was
caused primarily by HDA's assumption, effective January 1996, of the
obligation to pay real property taxes on El Comandante, which were paid by
ECOC through 1995.

Dominican Republic Operations

Revenues. Revenues in 1996 increased by $1,938,000 from 1995 due to
increased commissions on wagering. Galapagos began simulcasting El
Comandante races on February 27, 1995 to several sports betting agencies in
the Dominican Republic and commenced live racing operations at V Centenario
in April 1995. The increase in commissions is attributable to (i) full
year of racing in 1996 versus partial year in 1995 and (ii) growth in the
number OTB agencies -- 53 agencies when V Centenario opened in April 1995,
163 at December 31, 1995 and 230 at December 31, 1996.

Galapagos also had revenues of $523,000 in 1996 and $373,000 in 1995
from Jockey Club and restaurant operations and other miscellaneous sources.

Expenses. Increased in 1996 by $1,573,000 from 1995. Costs incurred in
connection with the Dominican Republic operations prior to the opening of V
Centenario in April 1995, where deferred as start up costs, whereas under
full operation during 1996 all operating costs were expensed. Certain costs,
such as horseowners' 50% share of commissions, ECOC's management fee and fees
paid to Autotote for providing the wagering system, are directly related to
the amount of wagering or to commissions earned by Galapagos and,
accordingly, accounted for a portion of the increase. The other increases in
1996 costs are largely attributable to the additional months that V
Centenario operated in 1996, offset in part by credits of $545,000 for funds
released for Galapagos' marketing costs from a restricted account upon
authorization of the Government.

Television Stations

Overview. On August 30, 1996, HDA closed the sale of a 50% interest in
Television Stations to Paxson, and consequently, the accounts of S&E were
included in the Company's consolidated financial statements only through
August 1996. The sales price was $4 million, and a gain of $581,000 was
recorded in 1996 for this sale. The costs of this sale included
approximately $1.5 million for employee severance payments, costs to cancel
certain contracts, write-off of deferred costs not recoverable under the
revised broadcasting and programming format, legal, accounting and investment
bankers' fees, and fees to holders of First Mortgage Notes for consenting to
the transaction. Commencing September 1996 Paxson assumed responsibility for
managing the Television Stations.

Revenues. S&E commenced television broadcasting in January 1995 on a
test basis until June 26, 1995, and therefore, did not have a full year of
operations in 1995. Also pursuant to the terms of a brokerage agreement
effective February 1996, Paxson provided S&E programming, including
infomercials, and changed the programming format. For the period from
September to December 1996 the revenues only included the Company's 50% share
(PAGE)
of S&E's net income. Consequently, the revenues between years are not
readily comparable.

Expenses. Decreased in 1996 by $1,279,000 from 1995. Operating costs
incurred during the 1995 test period were deferred as start-up costs while
operating costs in the period from January to August, 1996 were expensed.
The 1996 costs include fees of $272,000 to Paxson pursuant to the time
brokerage agreement for the seven months from February through August 1996.
Costs between periods are not readily comparable because (i) certain costs
were deferred during the 1995 test period, (ii) the change in the
broadcasting and programming format which commenced February 1996 resulted in
significant reductions in production and programming costs in 1996 and (iii)
fees to Paxson of $272,000 in 1996.

Financial Expenses

Financial expenses in 1996 increased by $46,000 from 1995. The increase
was primarily caused by interest in 1996 on a debt to the Dominican Republic
Government and on advances to the Company by its general partner, net of a
$86,000 reversal of interest on loans to minority stockholders.

Galapagos pays taxes to the Government of the Dominican Republic based
on a percentage of wagering. The Government agreed to a deferred payment
plan for taxes of approximately $519,000 and interest of $91,000 was accrued
in 1996 on this deferred liability. The balance of the indebtedness was
$473,000 at December 31, 1996.

Depreciation

Depreciation increased in 1996 by $345,000 from 1995. The increase is
primarily caused by capital additions to El Comandante during the year.
Property and equipment of V Centenario was not depreciated until the
commencement of its live racing operations on April 29, 1995, while there was
a full year of depreciation in 1996. Depreciation of $207,000 in 1996 and
$169,000 in 1995 was related to a step-up of $5,650,000 in El Comandante
assets. The step-up is the value assigned HDAMC's interest in HDA which was
transferred to the Company in March 1995 in exchange for Units of the
Company.

Other Expenses

Other expenses decreased in 1996 by $273,000 from 1995. The decrease
results from 1995 costs of (i) $134,000 in 1995, related to the application
by VJC, a subsidiary of the Company (currently inactive), for a license to
operate a race track in Virginia and VJC's appeal of the grant of the license
to another applicant and (ii) $131,000 for legal, accounting and other costs
incurred in connection with the distribution in February 1995 by IGC to its
unitholders of a 99% interest in the Company. No similar costs were incurred
in 1996.

There were also reductions in 1996 in IGC and EMC support services of
$82,000 and costs of $37,000 related to investigating new business
opportunities, and increases in 1996 in legal, accounting and consulting fees
(PAGE)
of $86,000 and Directors' fees and expenses of $30,000.

Provision for Income Taxes

The Company is subject to Puerto Rico income tax at a 29% rate on its
allocable share of HDA's taxable income and ECCC, an HDA subsidiary, is
subject to Federal income taxes. HDA had previously provided for deferred
Dominican Republic income taxes on interest accrued on Stockholders' loans to
Galapagos. The accrued interest was forgiven in 1996 and a tax credit was
recorded for reversal of the deferred tax provision applicable to the
forgiven interest.

1996 COMPARED TO 1995 (HISTORICAL)

The Company did not consolidate the accounts of HDA until March 8, 1995.
Accordingly, the Company's historical results of operations for 1996 and 1995
are not readily comparable and the discussion below is limited to a
comparison of revenues and expenses of the Company and VJC for these years.

Other Revenues. The Company received a cash distribution of $134,000
from HDA in February 1995 and insignificant amounts of interest income in
both years. Because the Company had a zero investment in HDA when the cash
distribution of $134,000 was received in February 1995 and since the
distribution was received prior to the consolidation of HDA's accounts as of
March 8, 1995, the distribution represented revenue to the Company that was
not eliminated in the consolidated financial statements.

Other Expenses. The changes in expenses were primarily reductions in
1996 in IGC and EMC support services of $82,000 and costs of $37,000 related
to investigating new business opportunities, and increases in 1996 in legal,
accounting and consulting fees and Directors' fees and expenses. In 1995
there were also costs of $134,000 related to VJC's application for licenses
to own and operate Virginia's first thoroughbred racing and pari-mutuel
wagering facility and to VJC's appeal of the grant of the license to another
applicant. No similar costs were incurred in 1996.

Financial Expenses. Related to interest and amortization of financing
costs on a bank loan and interest on loans from IGC.

Provision for Income Taxes. The Company is subject to Puerto Rico
income tax at a 29% rate on its allocable share of HDA's taxable income and
ECCC, an HDA subsidiary, is subject to federal income taxes. HDA had
previously provided for deferred Dominican Republic income taxes on interest
accrued on Stockholders' loans to Galapagos. The accrued interest was
forgiven in 1996 and a tax credit was recorded for reversal of the deferred
tax provision applicable to the forgiven interest.

(PAGE)

LIQUIDITY AND CAPITAL RESOURCES

The Company's principal source of cash during the year was distributions
from HDA, which are eliminated in the Company's consolidated financial
statements. Pursuant to the Indenture for the issuance of its First Mortgage
Notes, HDA's ability to make distributions to its partners is restricted to
approximately 48% of HDA's consolidated book income. In connection with the
redemption in August 1997 of a 17% interest owned by a minority partner (a
transaction that required the approval of holders of First Mortgage Notes), HDA
agreed to reduce its distributions by 17%. Because cash held by HDA and its
subsidiaries is not readily available to the Company, capital resources and
liquidity of the Company and HDA are discussed separately.

Liquidity and Capital Resources of the Company. Cash of the Company at
December 31, 1997 was approximately at the same level as December 31, 1996.

The Company's sources of cash for 1997 were $2,480,000 in cash
distributions from HDA and $320,000 in commissions related to the sale of the
Television Stations. These sources were sufficient to cover the operating
activities of the Company and its financial obligations with respect to a bank
loan and advances received in prior years from a general partner. At December
31, 1997, the Company had paid all of its loans.

Effective January 1, 1998, EMC transferred to the Company (i) its
agreements to provide certain management services to HDA and each of its
subsidiaries and (ii) the executives rendering these services. Management
estimates 1998 cash requirements in approximately $1.9 million and cash
receipts
of approximately $2.3 million from the following sources (arising from
transactions that will be eliminated in the Company's consolidated financial
statements): (i) cash distributions from HDA, estimated at $500,000 (see
"Liquidity and Capital Resources of HDA") (ii) estimated fees of $1.4 million
earned by the Company under these management agreements and (iii) collection of
approximately $400,000 of its receivables from subsidiaries. The Company's
liquidity greatly depends on the ability of its subsidiaries to pay the 1998
fees for services and their 1997 payables to the Company and HDA's ability to
make cash distributions to the Company. Because Galapagos has generated
losses
in prior years and EGP is a start-up operation, there is no assurance that the
entire amount of these fees will be collected.

Liquidity and Capital Resources of HDA. Cash and cash equivalents of HDA,
excluding its consolidated subsidiaries, decreased by $3,674,000 during 1997 to
$363,000 at December 31, 1997. HDA's 1997 uses of cash for financing and
investing activities were (i) redemption of $3,487,000 in First Mortgage Notes,
(ii) redemption of a minority 17% interest in HDA for $4 million, (iii) cash
distributions to partners of $3,024,000, (iv) capital improvements to El
Comandante of $619,000, (v) investment in Galapagos of $1,491,500, and (vi)
investment in EGP of $2,875,000 (of which $2.2 million was paid to the Panama
Government for the right to operate Presidente Remon). The $7 million proceeds
of sale in January 1997 of a 50% interest in the Television Stations and
proceeds of a $1 million loan in December 1997, together with HDA's beginning
(PAGE)
cash balance and cash flows from operations (primarily from its rental
activities related to El Comandante) were sufficient to cover HDA's 1997
capital
requirements and financial obligations. The $1 million loan from a financial
institution is payable in four quarterly installments of $250,000, commencing
April 1, 1998.

Due to an ECOC default for unpaid rent and certain other reasons permitted
under the El Comandante Lease, HDA terminated the El Comandante Lease on
December 31, 1997. On January 1, 1998, ECOC transferred to ECMC, a wholly
owned subsidiary of HDA, all assets employed in the racing business and the
Operating License, and ECMC assumed all agreements of ECOC and its liabilities,
including certain capital leases. At December 31, 1997 ECOC's liabilities
exceeded assets by $3 million including certain payables to HDA amounting to
$3.1 million.

The termination of the El Comandante Lease and the assignment of the
Operating License to ECMC are subject to the approval of the PR Racing Board.
The Racing Board has not given final approval but has permitted ECMC to operate
El Comandante until the review process is concluded. Management expects that
approval of these transactions to be subject to making the Company and HDA (i)
primarily responsible to ensure that ECMC complies with all terms and
provisions
of the Operating License and applicable regulations and orders of the Racing
Board, and (ii) jointly liable with ECMC with respect to all financial
commitments with horseowners.

As a result of the termination of the El Comandante Lease, commencing in
1998 HDA's principal source of revenues will be commissions on wagering on El
Comandante's races and on simulcasted races, principally to the Dominican
Republic and Panama. Management has projected commissions on wagering for
1998
at the same level as in 1997, approximately $55 million. During 1997 wagering
in Puerto Rico on El Comandante races declined, in part due to additional
gaming
opportunities, particularly additional and up-graded slot machines. However,
Management expects to partially offset this negative effect by expanding
simulcasting of El Comandante races in the Caribbean and Central America
countries and installing local telephone betting in the Dominican Republic,
Panama and, subject to the approval of the PR Racing Board, in Puerto Rico.

Capital requirements and financial obligations of HDA in 1998 and
anticipated cash distributions to partners are expected to be covered by cash
flows from operations and net cash flows from its investment in EGP (see
discussion below). HDA has budgeted $1.4 million in capital improvements to El
Comandante. The 1998 financial requirements of HDA and ECMC consist of (i)
principal payments on capital leases, (ii) principal payments on the December
1997 loan of $1 million discussed above and (iii) $3.3 million for redemption
of First Mortgage Notes. HDA is required to make an offer not later than
December 1, 1998 to redeem First Mortgage Notes in the principal amount of $3
million at 110% of par or it will have to pay a penalty of $971,000, equal to
1.5% of the principal amount of outstanding First Mortgage Notes. HDA's
ability to redeem the $3.3 million of First Mortgage Notes and make
(PAGE)
distributions to partners will partly depend on recovering from EGP $1,375,000
of the funds invested in Panama in 1997 and any additional funds invested in
1998. The recovery requires the closing of an underwriting of EGP's equity and
debt securities.

In January 1998, EGP received a $1.5 million bridge loan from an
investment banker in Panama and an underwriting proposal to raise, in a private
placement of registered securities, approximately $1.5 million from the sale of
49% of EGP's capital stock and $3.5 million of EGP's unsecured debt. The
unsecured debt is proposed to contain the following terms: (i) 11% interest
rate, (ii) interest payments during the first two years, monthly payments of
principal and interest for next four years, and a balloon principal payment at
maturity in six years and (iii) requirement for HDA to maintain a capital
investment in EGP of $1.5 million, the maximum amount permitted under HDA's
Indenture once EGP ceases to be a wholly owned subsidiary of HDA. Upon closing
of the underwriting, the bridge loan and accrued interest will be repaid, HDA
will recover all funds invested in EGP in excess of the $1.5 million permitted
amount, and the balance of the proceeds after offering costs will be available
for EGP's capital improvements to Presidente Remon, acquisition of equipment
and working capital. Under the contract for the operation of Presidente Remon,
EGP is required to invest $4 million during the first four years in capital
improvements and acquisition of wagering and race track equipment.

Management expects the EGP underwriting to close in June 1998 but there
can be no assurance that this deadline will be met. If the Offering is not
closed before June 15, 1998 and as a consequence HDA does not recover
$1,375,000 of its investment at December 31, 1997 and any additional funds
invested in 1998 by that date, HDA may temporarily need another source of
funds to make the $3.8 million interest payment on its First Mortgage Notes due
on June 15, 1998.

In addition to capital leases assumed from ECOC, HDA's long-term cash
commitments are charitable contributions of $550,000 and repayment commencing
in 2000 of First Mortgage Notes.

In connection with the termination of the El Comandante Lease, ECMC
assumed commitments to make contributions of $550,000 to certain charitable and
educational institutions as follows: $100,000 in 1998, $100,000 in 1999,
$150,000 in 2000 and $200,000 in 2001. Management expects to satisfy these
obligations.

HDA's First Mortgage Notes bear interest at 11.75%, payable semiannually
on June 15 and December 15, and are secured by El Comandante assets. The First
Mortgage Notes are redeemable, at the option of HDA, at redemption prices
decreasing from 104.125% to 101.5% of par, depending upon the redemption date
(see Note 6 to the Company's consolidated financial statements). The stated
maturity dates are as follows: $3,563,000 in 2000 (decreased by any amount of
First Mortgage Notes redeemed in 1998), $10,200,000 in 2001, $10,200,000 in
2002 and $40,800,000 in 2003 at maturity. Management expects to refinance this
obligation in 2001.

Year 2000 Computer Issue. Many computer systems in use today were
designed and developed using two digits, rather than four, to specify the year.
(PAGE)
As a result, such systems will recognize the year 2000 as "00". This could
cause many computer applications to fail completely or to create erroneous
results unless corrective measures are taken. The Company and its subsidiaries
utilize software and related computer technologies essential to its operations
that will be affected by the year 2000 issue. The Company is studying what
actions will be necessary to make its computer systems Year 2000 compliant.
The expense associated with these actions cannot presently be determined, but
could be significant.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

(PAGE)
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the partners of
Equus Gaming Company L.P.:

We have audited the accompanying consolidated balance sheets of Equus Gaming
Company L.P. (a Virginia limited partnership) (the Company) and subsidiaries as
of December 31, 1997 and 1996, and the related consolidated statements of
income (loss), changes in partners' deficit and cash flows for each of the
three years in the period ended December 31, 1997. 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 did
not audit the 1997 and 1996 balance sheets of Galapagos S.A. which reflect
total assets of 4% each year nor the statement of net income (loss) for the
years ended December 31, 1997, 1996 and 1995 which reflect total revenues of
23%, 23% and 19%, respectively, of the consolidated totals. Those statements
were audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for this entity, is
based solely on the report of the other auditors.

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

In our opinion, based on our audits and the report of the other auditors, the
financial statements referred to above present fairly, in all material
respects, the financial position of Equus Gaming Company L.P. and subsidiaries
as of December 31, 1997 and 1996, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1997,
in conformity with generally accepted accounting principles.

Arthur Andersen LLP
March 31, 1998
San Juan, Puerto Rico

(PAGE) EQUUS GAMING COMPANY L.P.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31,

1997 1996 1995
----------- ----------- -----------
REVENUES:
Rental income from El Comandante
Race Track $13,720,424 $14,321,401 $11,428,711
Cash distribution from Housing
Development Associates S.E.("HDA") - - 134,000
Dominican Republic operations-
Commissions on wagering from racing 4,618,720 4,513,252 2,718,646
Net revenues on lotto sales 87,659 - -
Other revenues 781,641 523,348 368,186
Television Stations - 1,724,991 1,344,338
Gain from sale of
Television Stations 4,669,400 581,120 -
Interest income 419,823 232,048 91,775
----------- ----------- -----------
24,297,667 21,896,160 16,085,656
----------- ----------- -----------
EXPENSES:
Financial 8,734,827 9,048,141 7,397,759
Depreciation 2,322,732 2,508,116 1,828,841
General and administrative 2,233,488 1,807,104 1,114,807
Operating costs of Dominican
Republic racing 5,976,140 5,971,818 4,341,046
Operating costs of Television Stations - 1,461,312 2,350,412
Other costs 319,550 - 133,713
----------- ----------- -----------
19,586,737 20,796,491 17,166,578
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES,
MINORITY INTEREST AND EXTRAORDINARY
ITEM 4,710,930 1,099,669 (1,080,922)

PROVISION FOR INCOME TAXES:
Current 1,582 263,163 222,164
Deferred 893,403 136,860 8,991
----------- ----------- -----------
INCOME (LOSS) BEFORE MINORITY
INTEREST AND EXTRAORDINARY ITEM 3,815,945 699,646 (1,312,077)

MINORITY INTEREST IN INCOME (LOSS) 878,033 (127,577) (720,792)
----------- ----------- -----------
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM 2,937,912 827,223 (591,285)

EXTRAORDINARY ITEM - Premium on early
redemption of First Mortgage Notes
and write-off of related deferred
financing costs and note discount 459,173 - -
------------ ----------- -----------
NET INCOME (LOSS) $ 2,478,739 $ 827,223 $ (591,285)
=========== =========== ===========

(continues)

(PAGE) EQUUS GAMING COMPANY L.P.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31,

(continued)

1997 1996 1995
----------- ----------- ----------

ALLOCATION OF NET INCOME (LOSS):
General Partners $ 24,787 $ 8,272 $ (77,247)
Limited Partners 2,453,952 818,951 (514,038)
----------- ----------- -----------
$ 2,478,739 $ 827,223 $ (591,285)
=========== =========== ===========
BASIC AND DILUTED PER UNIT AMOUNTS:
Net income (loss) before
extraordinary item $ 0.46 $ 0.13 $ (0.08)

Extraordinary item (0.07) - -
----------- ----------- -----------
Net income (loss) per unit $ 0.39 $ 0.13 $ (0.08)
=========== =========== ===========

WEIGHTED AVERAGE UNITS OUTSTANDING 6,333,617 6,333,617 6,223,381
=========== =========== ===========

The accompanying notes are an integral part
of these consolidated statements.

(PAGE) EQUUS GAMING COMPANY L.P.
CONSOLIDATED BALANCE SHEETS

ASSETS

December 31,
---------------------------
1997 1996
----------- ------------

CASH AND CASH EQUIVALENTS $ 507,656 $ 4,268,029
----------- ------------
ASSETS RELATED TO RACE TRACKS:
Property and equipment-
Land 7,128,858 7,128,858
Buildings and improvements 48,855,905 48,138,946
Equipment 3,346,834 2,669,639
----------- ------------
59,331,597 57,937,443
Less accumulated depreciation (14,275,812) (11,981,552)
----------- ------------
45,055,785 45,955,891
Receivables from El Comandante
Operating Company, Inc. ("ECOC") 3,106,497 2,780,416
Deferred costs-
Financing 3,565,586 4,055,866
Costs of Panama contract 2,356,292 -
Organizational and other 393,704 370,120
Other 1,201,839 932,566
----------- ------------
55,679,703 54,094,859
----------- ------------

ASSETS RELATED TO TELEVISION STATIONS:
Investment in S & E Network Inc. ("S&E") - 1,825,243
Other - 398,199
----------- ------------
- 2,223,442
----------- ------------
$56,187,359 $60,586,330
=========== ============

(continues)

(PAGE) EQUUS GAMING COMPANY L.P.
CONSOLIDATED BALANCE SHEETS

(continued)

LIABILITIES AND PARTNERS' DEFICIT

December 31,
---------------------------
1997 1996
----------- ------------
LIABILITIES RELATED TO RACE TRACKS:
First Mortgage Notes-
Principal, net of note discount of
$1,398,887 and $1,596,261, respectively $63,364,113 $66,403,739
Accrued interest 317,069 332,918
Minority interest in Galapagos - 111,427
Notes payable 615,697 572,550
Accounts payable and accrued liabilities 1,355,592 2,162,519
Accrued income taxes 1,069,902 437,692
----------- ------------
66,722,373 70,020,845
----------- ------------

OTHER LIABILITIES:
Unsecured partner's loans - 415,883
Notes payable 1,260,000 500,000
Accounts payable and accrued liabilities 215,531 287,976
Minority interest in HDA 82,631 550,605
----------- ------------
1,558,162 1,754,464
----------- ------------

PARTNERS' DEFICIT:
General Partners (728,644) (752,867)
Limited Partners - 6,383,617 units
authorized; 6,333,617 units issued
and outstanding in 1997 and 1996 (11,364,532) (10,436,112)
----------- ------------
(12,093,176) (11,188,979)
----------- ------------
$56,187,359 $60,586,330
=========== ============

The accompanying notes are an integral part
of these consolidated balance sheets.

(PAGE) EQUUS GAMING COMPANY L.P.
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' DEFICIT
FOR EACH OF THE THREE YEARS IN THE PERIOD
ENDED DECEMBER 31, 1997

General Limited
Partners Partners Total
----------- ------------ ------------

BALANCES, December 31, 1994 $ (524,217) $ - $ (524,217)

Net loss for the year (77,247) (514,038) (591,285)

Issuance of partnership's units - 5,650,000 5,650,000

Effect of consolidation of HDA (158,406) (15,682,238) (15,840,644)

Currency translation adjustments (933) (92,388) (93,321)

Cash distributions to minority
partners of HDA - (388,345) (388,345)
----------- ------------- ------------
BALANCES, December 31, 1995 (760,803) (11,027,009) (11,787,812)

Net income for the year 8,272 818,951 827,223

Currency translation adjustments (336) (33,294) (33,630)

Cash distributions to minority
partners of HDA - (194,760) (194,760)
----------- ------------ ------------
BALANCES, December 31, 1996 (752,867) (10,436,112) (11,188,979)

Net income for the year 24,787 2,453,952 2,478,739

Currency translation adjustments (564) (55,883) (56,447)

Cash distributions to minority
partners of HDA - (544,139) (544,139)

Redemption of 17% minority
interest in HDA - (2,782,350) (2,782,350)
----------- ------------ ------------
BALANCES, December 31, 1997 $ (728,644) $(11,364,532) $(12,093,176)
=========== ============ ============

The accompanying notes are an integral part
of this consolidated statement.

(PAGE) EQUUS GAMING COMPANY L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,

1997 1996 1995
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 2,478,739 $ 827,223 $(591,285)
----------- ----------- -----------
Adjustments to reconcile net income
(loss) to net cash (used in)
provided by operating activities-
Extraordinary item 459,173 - -
Gain from sale of Television
Stations (4,669,400) (581,120) -
Equity in earnings - (55,533) -
Depreciation 2,322,732 2,508,116 1,828,841
Amortization 762,423 853,035 798,773
Deferred income tax provision 893,403 136,860 8,991
Currency translation adjustments (56,447) (33,630) (93,321)
Forgiveness of interest - (173,754) -
(Increase) decrease in assets-
Rent receivable from ECOC (654,307) (1,188,067) (796,146)
Deferred costs (2,356,292) (97,598) (36,971)
Other 263,128 (435,306) (756,985)
Increase (decrease) in liabilities-
Accrued interest (2,805) 66,703 (1,359,409)
Accounts payable and accrued
liabilities (984,030) 1,040,160 (60,293)
Accrued income taxes (261,192) 68,852 134,315
Minority interest 878,033 (127,577) (720,792)
----------- ----------- -----------
Total adjustments (3,405,581) 1,981,141 (1,052,997)
----------- ----------- -----------
Net cash (used in) provided by
operating activities (926,842) 2,808,364 (1,644,282)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,422,626) (554,214) (1,790,109)
Loan to ECOC - - (1,000,000)
Collections of note from ECOC 326,661 207,594 -
Effect of the consolidation of S&E - (129,948) -
Sales of Television Stations -
Proceeds 7,000,000 4,000,000 -
Costs (505,357) (418,950) -
Effect of consolidation of HDA
cash accounts - - 3,429,221
----------- ----------- -----------
Net cash provided by investing
activities 5,398,678 3,104,482 639,112
----------- ----------- -----------

(continues)

(PAGE) EQUUS GAMING COMPANY L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,

(continued)

1997 1996 1995
----------- ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemption of First Mortgage Notes (3,237,000) - -
Premium on redemption of First
Mortgage Notes (250,000) - -
Loans and contributions from minority
stockholders 32,758 - 1,057,750
(Payments to) loans from general
partner, net (415,883) 204,254 80,762
Loans from financial institutions 1,258,079 448,418 2,799,525
Issuance of notes payable to Supra 260,000 - -
Payments on notes payable (714,213) (2,417,517) (747,191)
Increase in deferred costs (307,527) (499,504) (983,039)
Redemption of 17% minority interest
in HDA (4,314,284) - -
Cash distributions to minority
partners of HDA (544,139) (194,760) (388,345)
----------- ----------- -----------
Net cash (used in) provided by
financing activities (8,232,209) (2,459,109) 1,819,462
----------- ----------- -----------

NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (3,760,373) 3,453,737 814,292

CASH AND CASH EQUIVALENTS,
beginning of year 4,268,029 814,292 -
----------- ----------- -----------
CASH AND CASH EQUIVALENTS,
end of year $ 507,656 $ 4,268,029 $ 814,292
=========== =========== ===========

SUPPLEMENTAL INFORMATION:
Interest paid $ 7,992,439 $ 8,269,562 $ 8,165,847
Income taxes paid 262,500 194,310 94,844

NONCASH TRANSACTIONS:
Effect of consolidation of HDA's
non cash accounts - - (19,269,865)
Step-up in value of assets related to
race tracks - - 5,650,000
Units appreciation rights 106,534 - -

The accompanying notes are an integral part
of these consolidated statements.

(PAGE) EQUUS GAMING COMPANY L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES:

Equus Gaming Company L.P. (the "Company"), a Virginia limited
partnership, is engaged in thoroughbred racing, wagering and other gaming
businesses through its 99% indirectly owned subsidiary, Housing Development
Associates S.E. ("HDA"). HDA owns El Comandante Race Track ("El
Comandante"), the only licensed thoroughbred racing facility in Puerto Rico,
located in 257 acres of land. El Comandante was leased to El Comandante
Operating Company, Inc., a Puerto Rico non-stock corporation ("ECOC") until
December 31, 1997 (see Note 2). HDA also has interests of: (i) 55% in
Galapagos, S.A. ("Galapagos"),a company that operates since April 1995 the V
Centenario Race Track in the Dominican Republic ("V Centenario"), (ii) 100%
in Equus Gaming de Panama, S.A. ("EGP"), a company that operates since
January 1, 1998 the Presidente Remon Race Track in the Republic of Panama
("Presidente Remon"), and (iii) 100% in El Comandante Management Company, LLC
("ECMC"), the company that operates El Comandante since January 1, 1998,
following termination by HDA of its lease agreement with ECOC. HDA was also
the owner of S & E Network Inc. ("S&E"), which owned and operated three UHF
television stations in Puerto Rico (the "Television Stations"), until sold to
Paxson Communications of San Juan, Inc. ("Paxson") in transactions closed in
August 1996 (50% interest) and January 1997 (50% interest). In 1997 the
Company formed Equus Entertainment Corporation ("EEC"), as a wholly-owned
Puerto Rico corporate subsidiary, for the purpose of replacing the Company
once certain approvals are obtained.

Consolidation and Presentation

The Company consolidates in its financial statements the accounts of
entities in which it has a controlling interest in excess of 50%. The
accompanying consolidated financial statements include the accounts of the
Company and its subsidiaries after eliminating all significant inter-company
transactions. All of the entities included in the consolidated financial
statements are hereinafter referred to collectively, when practicable, as the
"Company". The accounts of HDA and its subsidiaries have been consolidated
since March 8, 1995 and the accounts of S&E have been excluded from the
consolidation since September 1, 1996 due to the reductions in ownership
interests.

Prior to March 8, 1995 the Company had an interest in HDA in excess of
50%. However, generally accepted accounting principles ("GAAP") did not
permit the Company to consolidate the accounts of HDA in its financial
statements because HDA Management Corporation ("HDAMC"), a partner in HDA
(see Note 6), had the right to approve any sale or disposition of HDA's
assets in excess of $500,000 and the incurrence of any debt in excess of $1
million. On March 8, 1995, HDA's partnership agreement was amended to
eliminate these approval rights of HDAMC, and effective such date the
accounts of HDA have been consolidated with the Company's accounts. The
Company recognized in 1995 revenues of $134,000 from cash distributions that
were received from HDA prior to consolidation of HDA's accounts in the
Company's financial statements.

(PAGE)
During the years ended December 31, 1997, 1996 and 1995 the Company
recorded minority interest in the income and (losses) of consolidated
subsidiaries, as follows:

For the Year Ended December 31,
--------------------------------------------
Subsidiary 1997 1996 1995
- ----------------- ------------ ------------ -------------
HDA $1,063,960 $ 487,046 $ 63,559
Galapagos (185,927) (614,623) (784,351)
------------ ------------ -------------
$ 878,033 $ (127,577) $ (720,792)
============ ============ =============

Minority interest in HDA represents the minority partners' share in
HDA's net income based on approximately 1% since August 20, 1997, when HDA
redeemed a 17% interest owned by Supra & Company S.E. ("Supra") (see Note
10), and 18% from January 1, 1996 until the date of redemption. For 1995 the
recorded minority interest represents an 18% interest in HDA's net income in
excess of the December 31, 1994 accumulated deficit of $818,750. Because HDA
is a limited liability partnership and the partners do not have any legal
obligation to fund any portion of such deficit, GAAP did not permit the
Company to record the minority partners' share of HDA's net income until the
accumulated deficit of HDA was eliminated by earnings. Minority interest in
Galapagos represents the minority stockholders' 45% share in Galapagos net
losses. In 1997 the Company recognized $308,971 of losses attributable to
the minority interest because they have no legal obligation to fund such
losses in excess of their investment.

Outstanding Units, Warrants and Options

On February 6, 1995, Interstate General Company L.P. ("IGC"), a publicly
traded limited partnership, distributed to its unitholders 5,128,372 Class A
Units ("Units") representing in the aggregate beneficial assignment of a 99%
Class A limited partnership interest in the Company (the "Distribution"). On
March 8, 1995 an additional 1,205,245 Units were issued by the Company to
HDAMC. The Units are listed for trading on the Nasdaq National Market System
("Nasdaq") under the symbol "EQUUS".

In connection with the Distribution and pursuant to the Control Transfer
Agreement (see Note 10) the Company agreed to make available to IGC for no
consideration 50,000 Units of the Company for Oppenheimer & Co., Inc. upon
the exercise of certain warrants. IGC was a general partner of the Company
until December 31, 1997.

Net income (loss) per Unit is calculated based on the weighted average
of Units outstanding since the Distribution on February 6, 1995. Outstanding
options and warrants to purchase Units do not have a material dilutive effect
on the calculation of earnings per Unit.

Pervasiveness of Estimates

The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
(PAGE)
liabilities, if any, 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.

New Pronouncements

In June 1997, the Financial Accounting Standards Board issued SFAS No.
130 "Reporting Comprehensive Income", which is effective for fiscal years
beginning after December 15, 1997. The statement establishes standards for
reporting of comprehensive income and its components. The Company plans to
adopt SFAS No. 130 in 1998 and the impact on the Company's financial
statements is not expected to be significant.

In June 1997, the Financial Accounting Standards Board issued SFAS No.
131 "Disclosures about Segments of an Enterprise and Related Information",
which is effective for fiscal years beginning after December 15, 1997. The
Company plans to adopt SFAS No. 131 in 1998.

Rental Income from El Comandante Race Track

Rental income represents rent earned under the El Comandante Lease,
recognized when wagering commissions are earned by ECOC. In 1995 a portion
of rental income, the fixed rent, was recognized in equal monthly
installments.

Revenues from Dominican Republic Operations

Commissions on wagering represent income earned by Galapagos on bets
placed on El Comandante's races simulcasted into the Dominican Republic and
on live races held at V Centenario Race Track principally through wagering
facilities located at independently owned off track betting ("OTB") agencies
throughout the Republic. Revenues on lotto sales are fees earned under a
contract for the distribution system of an electronic lottery, net of fees
paid to the company providing the equipment, software and related services
for the distribution system. In 1997, other revenues include $438,169
arising from Government tax receipts on El Comandante's simulcasted races, a
portion of which have been released to Galapagos as reimbursement of certain
costs (see Note 3).

Revenues from Television Stations

Revenues from Television Stations were primarily: (i) from contracts for
the production and broadcasting of television programs, recognized when the
programs had been completed and delivered and (ii) advertising income from
sale of air time, recognized at the time of broadcast. In 1996 it also
included HDA's $55,533 share of S&E's net income from August 31, 1996 to
December 31, 1996, recognized under the equity method of accounting for
investments.

Cash Equivalents

The Company considers as cash equivalents certificates of deposit with
an issuance to maturity term of three months or less. Management intends to
hold these certificates until maturity.

(PAGE)
Property and Equipment and Depreciation

Land, buildings and improvements, and equipment are stated at cost plus
a step-up of $5,650,000 of El Comandante assets on March 8, 1995 resulting
from the issuance of Units of the Company to HDAMC for a 15% profits interest
in HDA. Depreciation is calculated using the straight-line method over the
estimated useful lives of the property: five to ten years for equipment, 35
years for buildings, and 10 to 15 years for land improvements. For the
property related to El Comandante and the Television Stations, the composite
depreciation method was used, where any gain or loss of property retired or
sold is charged against accumulated depreciation, unless the amount involved
is material. Costs paid by S&E for the licenses to operate the Television
Stations were amortized, until sold, using the straight-line method over a
period of 20 years.

Deferred Costs

Deferred financing costs are being amortized since December 15, 1993
over the 10 year life of the first mortgage notes using the interest method.
Costs of Panama contract (see Note 4) will be amortized commencing January 1,
1998 over the 20-year period of the Panama license, using the straight line
method. Organizational and other costs are being amortized using the
straight-line method over the period of estimated benefit, ranging from 5 to
15 years.

Upon the closing of the sale to Paxson on August 30, 1996, S&E wrote-off
approximately $1 million of deferred costs and broadcast contract rights
which did not have any future benefit to S&E under Paxson's management of the
Television Stations. The write-off has been included in the accompanying
consolidated financial statements as a reduction of the gain from the sale of
Television Stations.

Currencies

The Company consolidates its accounts with Galapagos whose functional
currency is the Dominican Republic peso ("RD$"), although United States
dollars ("US$") are also a recording currency. US$ are exchanged into RD$
and vice versa through commercial banks and/or the Central Bank of the
Dominican Republic. Galapagos remeasures its monetary assets and liabilities
recorded in US$ into RD$ using the exchange rate in effect at the balance
sheet date (the "current rate") and all other assets and liabilities and
capital accounts, at the historical rates. Galapagos then translates its
financial statements from RD$ into US$ using the current rate, for all assets
and liabilities, and the average exchange rate prevailing during the year for
the revenues and expenses.

For the years ended December 31, 1997, 1996 and 1995, net exchange gains
and (losses) resulting from remeasurement of accounts, together with gains
and (losses) from foreign currency transactions, amounted to $(36,000) and
$(82,000) (included in operating costs) and $37,000 (included in other
revenues). Accumulated net losses from changes in exchange rates due to the
translation of assets and liabilities of Galapagos are included in partners'
deficit and at December 31, 1997 and 1996 amounted to $183,400, including
$52,200 from unsettled intercompany transactions, and $126,950, respectively.
The exchange rates as of December 31, 1997 and 1996 were US$1.00 to RD$14.50
(PAGE)
and US$1.00 to RD$13.97, respectively, and the average exchange rates
prevailing during the years ended December 31, 1997, 1996, and 1995, were
US$1.00 to RD$14.44, US$1.00 to RD$13.75, and US$1.00 to RD$13.00,
respectively.

The Company also consolidates its accounts with EGP whose functional
currencies are the Panama colones and the US$. Because these currencies are
of equivalent value, there is no effect attributed to foreign currency
transactions of EGP.

Reclassifications

Certain amounts presented for 1996 and 1995 in the accompanying
consolidated financial statements have been reclassified to conform with the
1997 presentation.

2. EL COMANDANTE LEASE AND PUERTO RICO RACING OPERATIONS:

Operating License

On December 15, 1989, the Puerto Rico Racing Board (the "PR Racing
Board") granted ECOC a license to operate El Comandante, which expires on
December 14, 2004 (the "Operating License"). The Operating License, which
requires payment of an annual license fee (currently $250,000), provides ECOC
with: (i) the exclusive right to operate a race track in the area of Puerto
Rico known as the San Juan Region, which approximates the northern half of
Puerto Rico, as delineated in maps produced by the Puerto Rico Planning Board
and Government Development Administration; (ii) the exclusive right to
conduct all types of authorized betting, both at El Comandante and off-track,
anywhere in Puerto Rico, based on races held at El Comandante; and (iii) the
right to hold a minimum 180 day or night race days per year.

Upon its expiration in December 2004, there can be no assurance that a
new Operating License will be issued. However, ECOC and the prior owner of
El Comandante have continuously operated the only thoroughbred racing
facility in Puerto Rico since 1957.

El Comandante's horse racing and pari-mutuel wagering operations are
subject to substantial government regulation. Pursuant to the Puerto Rico
Horse Racing Industry and Sport Act (the "Racing Act"), the PR Racing Board
and the Puerto Rico Racing Administrator (the "Racing Administrator")
exercise significant regulatory control over El Comandante's racing and
wagering operations. For example, the Racing Administrator determines the
monthly racing program and approves the number of annual race days in excess
of the statutory minimum of 180. The Racing Act also apportions payments of
the wagering handle and thus the Racing Act could be amended through
legislation to reduce the share of monies wagered that would be available as
commissions. The PR Racing Board consists of three persons appointed to
four-year terms by the Governor of Puerto Rico. The Racing Administrator is
also appointed by the Governor for a four-year term.

(PAGE)
El Comandante Lease

Until December 31, 1997 HDA leased El Comandante to ECOC under a lease
agreement, as amended, (the "El Comandante Lease") that required payments by
ECOC to HDA of rent consisting of 25% ("Basic Rent") of the annual
commissions earned by ECOC. These commissions consist of all payments
received by ECOC on all monies wagered with respect to horse racing occurring
at El Comandante, whether wagered at El Comandante or at other betting
facilities in Puerto Rico or any other country. In 1995, the El Comandante
Lease also provided for payment of certain fixed rent of $400,000. The El
Comandante Lease provided for ECOC to pay all El Comandante expenses except
that, pursuant to (i) an amendment effective January 1, 1996, HDA assumed the
obligation to pay real property taxes on El Comandante and (ii) an amendment
effective January 1, 1997, HDA assumed the obligation to pay the annual
racing license fee.

Termination of El Comandante Lease and Agreements Assumed

On October 31, 1997, HDA notified ECOC the termination of the El
Comandante Lease effective December 31, 1997 due to the existing default for
unpaid Basic Rent (see Note 5) and for certain other reasons permitted under
the El Comandante Lease. On January 1, 1998 at HDA's direction, ECOC
transferred to ECMC, at book value, all assets employed in the racing
business and ECMC assumed all agreements of ECOC and its liabilities,
including the $3.1 million due to HDA and $550,000 in commitments made by
ECOC's Board of Directors to make contributions to several charitable and
educational institutions during a four year period commencing in 1998. At
December 31, 1997, ECOC's liabilities exceeded its assets by approximately $3
million (see unaudited proforma financial statements in Note 13). Effective
January 1, 1998, ECMC commenced operating El Comandante pursuant to the
Operating License.

Among the agreements assumed by ECMC upon termination by HDA of El
Comandante Lease are the horse owners' agreement and wagering service
agreement. The agreement with the Confederacion Hipica de Puerto Rico (the
"Confederacion"), which expires on April 1, 1998, provides for payment to
horseowners of (i) 50% of wagering commissions received by the operating
company on races held at El Comandante, (ii) an annual fixed amount of
$55,000 from 1993 to 1998, and (iii) a minimum of $500 per race day for
wagering commissions on El Comandante races simulcasted outside Puerto Rico
("Simulcasting Commissions"). When Simulcasting Commissions exceed
simulcasting expenses plus $500, the Confederacion receives $500 plus 50% of
Simulcasting Commissions.

The agreement with Autotote Systems, Inc. ("Autotote") for wagering
services, software and equipment, which expires on March 15, 2005, requires
minimum annual payments which consist of the greater of $800,800 annually or
.65% (.0065) of total wagering. The Confederacion agreed to reimburse the
operating company an amount equal to .325% (.00325) of wagering for each race
day up to a maximum of $3,461 per race day until April 1998.

Management is in the process of renegotiating the agreement with the
Confederacion and does not expect any significant changes in the economic
terms of the contract that might materially affect the financial position of
ECMC or the Company.
(PAGE)
ECMC also assumed an agreement with S&E for the broadcast of El
Comandante's races effective February 1, 1997 (the "S&E Broadcast Agreement")
which requires the purchase of television time for a minimum of 910 hours at
the rate of $725 per hour (minimum annual amount of $659,750), adjusted
annually by CPI, or at the rate of $900 per hour, also subject to CPI
adjustments, if television time after 7:00 PM is needed. The S&E Broadcast
Agreement is non-cancelable by either party for ten years and thereafter can
be cancelled by HDA, at five year intervals, or by S&E, upon payment of
liquidated damages of $2 million plus CPI after January 1997. ECOC was, and
ECMC will be, responsible for producing the racing show and directing the
broadcast and is entitled to the revenues from the sales of advertising time
during the broadcasts of the racing program.

The termination of the El Comandante Lease and the assignment of the
Operating License to ECMC are subject to the approval of the PR Racing Board.
The Puerto Rico Racing Board has not made a final determination on this
matter but has temporarily permitted ECMC to operate El Comandante until
their review process is concluded. Management expects that approval of these
transactions will be subject to making the Company and HDA (i) primarily
responsible to ensure that ECMC complies with all terms and provisions of the
Operating License and applicable regulations and orders of the PR Racing
Board, and (ii) jointly liable with ECMC with respect to all financial
commitments with the Confederacion.

3. DOMINICAN REPUBLIC OPERATIONS:

V Centenario Lease

The V Centenario is leased from the Dominican Republic Government and
operated by Galapagos pursuant to a 10 year agreement ending in April 2005
(the "V Centenario Lease"). The V Centenario Lease may be renewed for
additional ten year periods by mutual agreement of the parties. The V
Centenario Lease also provides Galapagos with the right to develop off-track
betting in the Dominican Republic and the exclusive right to simulcast horse
races, into the Dominican Republic. The V Centenario Lease provides for
payments of rent based on a percentage of the annual wagering on races run at
V Centenario ("V Centenario Wagering"), as follows: .25% of the first RD$240
million (approximately US$16.5 million), .5% of the next RD$240 million, .75%
of the next RD$240 million and 1% over RD$720 million (approximately US$49.6
million).

The Dominican Republic Government agreed to invest tax receipts on
simulcasted races from July 1997 through January 1998 to improve horse
racing. Galapagos was entitled to 75% of the tax receipts, as reimbursement
for repairs and maintenance at V Centenario, marketing and television costs
and certain other items. Horseowners are entitled to the balance of the tax
receipts as additional purses. Galapagos requested an extension beyond
January 1998, which is expected to be approved, but no formal response has
been received from the Government. If extended, pursuant to an agreement
with horse owners, Galapagos's share in these tax receipts will be reduced to
65% in July 1998 and to 50% in July 1999 and years thereafter.

(PAGE)
Horse Owners' Agreement and Wagering Services Agreement

Galapagos has an agreement with Dominican Republic horseowners whereby
they receive 50% of Galapagos' commissions on V Centenario Wagering and 50%
of commissions earned by Galapagos on El Comandante's simulcasted races,
after deducting payments to ECOC for its commissions.

Galapagos receives wagering services, software and equipment under a
service agreement with Autotote for a ten year period ending March 15, 2005.
Service fees during 1995 were .65% (.0065) of total wagering and thereafter
are the greater of (a) .65% of total wagering or (b) $150,000 in 1996,
$175,000 in 1997 and thereafter $200,000 annually.

Consulting Agreement

Galapagos receives executive management services pursuant to an
agreement for the term of the V Centenario Lease. Services under this
agreement were rendered by ECOC until June 30, 1997 when it was assigned to
Equus Management Company ("EMC"), the managing general partner of the
Company. Fees consist of 1% of wagering on simulcasted races and on V
Centenario Wagering, with a maximum amount of $250,000 annually, adjusted by
CPI commencing in January 1996. Galapagos also reimburses the out-of-pocket
expenses in connection with these services. During the years ended December
31, 1997, 1996 and 1995, Galapagos incurred fees of $224,000, $236,000 and
$141,000, respectively.

Lottery

Galapagos has a five year contract with a private operator to provide
the wagering distribution system for a government-sponsored electronic
lottery, which commenced in November 1, 1997. Galapagos has an agreement
with Autotote to obtain wagering equipment, software and related services.
Lottery games are sold at OTB agencies of Galapagos and at lottery agencies
selected by the operator. Galapagos' commissions (net of fees to Autotote)
are 1% of gross lottery sales at lottery agencies and 2% of gross lottery
sales at OTB agencies. In addition, the lottery operator pays Galapagos a
monthly fee for each OTB agency that sells lottery games as reimbursement for
a 50% share of telephone line costs. Galapagos is also permitted to identify
the lottery agencies to take Pick 6 pool wagers on Galapagos' live and
simulcasted races.

Assets and liabilities related to Dominican Republic operations amounted
to $2,288,000 and $1,692,000, respectively, as of December 31, 1997 and to
$2,649,000 and $2,529,000, respectively, as of December 31, 1996.

4. REPUBLIC OF PANAMA OPERATIONS:

EGP has a contract with the Panama Government for the operation of
Presidente Remon in Panama City and for the development of off-track betting
in Panama for a period of 20 years that commenced on January 1, 1998. The
contract grants EGP exclusive rights to simulcast horse races from and to the
country and the right to operate up to 500 slot machines at the race track.
Upon execution of the contract, $2.2 million was paid to the Panama
Government. EGP is required to invest up to $4 million in improvements to
(PAGE)
Presidente Remon and for the acquisition of wagering and related equipment in
a period of four years. EGP began simulcasting races from United States race
tracks on January 2, 1998 and live racing commenced on February 14, 1998,
after major improvements to the racing strip were made.

EGP has entered into certain contracts and commitments in connection
with this operation, which should be in effect during 1998. An agreement
with horseowners provides for minimum guaranteed payments to horseowners as
purses in 1998 and 1999 of $3.6 million and $3.9 million, respectively. An
agreement with Autotote for wagering services, software and equipment
requires minimum monthly payments of $25,000 in 1998. Service fees will be
based on 1% (.01) of total wagering.

Management expects that 49% of the capital stock of EGP will be sold to
Panamanian investors for approximately $1.5 million and that EGP will raise
an additional $3.5 million in unsecured debt by June 30, 1998. The Company
has received an underwriting proposal from an investment banker in Panama
with the following terms: (i) 11% interest rate, (ii) maturity in six years,
(iii) no principal amortization during first two years, a balloon payment on
maturity and (iv) requirement for HDA to maintain an investment in the
capital of EGP of $1.5 million. In connection with this proposal, in January
1998 EGP received a $1.5 million bridge loan, which will be repaid together
with accrued interest at 11%, from proceeds of the issuance of debt
securities described above.

As of December 31, 1997, assets related to Panama operations amounted to
$3,033,000.

5. RECEIVABLES FROM EL COMANDANTE OPERATING COMPANY, INC.:

Receivables from ECOC as of December 31, 1997 and 1996 consisted of (i)
a note receivable and accrued interest of $467,977 and $796,203,
respectively, and (ii) unpaid rent under the El Comandante Lease of
$2,638,520 and $1,984,213, respectively. The note accrued interest at 5.75%
and is due in monthly installments of $30,309, including interest, over a
three year period that commenced on May 1, 1996. HDA assumed ECOC's
liabilities in connection with the termination of El Comandante Lease
effective January 1, 1998 and, consequently, these receivables will be
eliminated from the Company's consolidated financial statements.

Under the El Comandante Lease, ECOC was required to pay HDA its Basic
Rent for each race day on the 29th day following such racing day when it
became due and payable. Thereafter, unpaid Basic Rent constituted an
extension of credit and an event of default under the El Comandante Lease.
During 1997 ECOC was in default with respect to this provision.

Under the Indenture (as defined in Note 6), the maximum outstanding
amount of credit that HDA could extend to ECOC was $2 million, excluding the
portion of the rent that has not become due and payable (but which has been
accrued and included in rent receivable). During 1997 ECOC's payable to HDA
increased to an amount that approached the limit established in the El
Comandante Lease and the Indenture. The Indenture also required HDA to
commence appropriate proceedings to enforce ECOC's obligation to pay rent if
unpaid rent exceeded the monthly average for 30 days.
(PAGE)
As a result of the event of default related to payment of Basic Rent and
for certain other reasons permitted under the El Comandante Lease, on October
31, 1997, HDA issued to ECOC a 60-day notice for the termination of the El
Comandante Lease (see Note 2).

6. FIRST MORTGAGE NOTES:

Pursuant to a private offering, El Comandante Capital Corp. ("ECCC"), a
single-purpose wholly owned subsidiary of HDA, issued first mortgage notes in
the aggregate principal amount of $68 million (the "First Mortgage Notes")
under an indenture dated December 15, 1993 (the "Indenture") between ECCC,
HDA and Banco Popular de Puerto Rico, as trustee (the "Trustee"), and
HDAMC issued Warrants to purchase 68,000 shares of Class A Common Stock of
HDAMC. Upon issuance of the Warrants, HDAMC and HDA recorded additional
equity of $1,912,800, equal to the fair value of the Warrants of $2,040,000,
less offering costs of $127,200, and recorded debt discount of $2,040,000.
Such debt discount is being amortized using the interest method over the term
of the First Mortgage Notes. The First Mortgage Notes mature on December 15,
2003 and bear interest at 11.75% payable semiannually. In March 1995 the
Warrants automatically became exercisable to purchase Units of the Company
from HDAMC.

Payment of the First Mortgage Notes is guaranteed by HDA and the First
Mortgage Notes are secured by a first mortgage on El Comandante and by
certain other collateral which together encompass a lien on (i) the fee
interests of HDA in the land and fixtures comprising El Comandante, (ii) all
property rights of HDA in and to all related equipment, structures, machinery
and other property, including intangible property, ancillary to the
operations of El Comandante, (iii) substantially all of the other assets and
property of HDA, including the capital stock of ECCC owned by HDA.

ECCC is required to offer to purchase First Mortgage Notes, at face
value, to the extent that HDA has accumulated excess cash flow, asset sales
with net proceeds in excess of $5 million (to the extent these proceeds are
not invested in HDA's racing business within a year), or a total taking or
casualty, or in the event of a change of control of HDA.

As a result of the sale of the Television Stations, HDA redeemed on
March 28, 1997, $737,000 in First Mortgage Notes, at par. In connection with
the Noteholders Approval (as described in Note 10), HDA redeemed on September
29, 1997 First Mortgage Notes in the principal amount of $2.5 million, at
110% of par. The $250,000 premium paid and corresponding write-off of note
discount and deferred financing costs are included in the accompanying
consolidated statement of income (loss) for the year ended December 31, 1997
as an extraordinary item. HDA has to make an offer not later than December
1, 1998 to redeem First Mortgage Notes in the principal amount of $3 million
at 110% of par or it will have to pay a penalty equal to 1.5% of the
principal amount of outstanding First Mortgage Notes.

ECCC is required to redeem First Mortgage Notes in the principal amount
of $6,800,000 on December 15, 2000, $10,200,000 on December 15, 2001 and
2002, and the balance at maturity. However, the 1997 redemptions have
reduced the amount due on December 15, 2000. The stated maturities of the
First Mortgage Notes at December 31, 1997, reduced by early redemptions are
(PAGE)
as follows (in thousands):

Year Amount
---- -------
1998 $ -
1999 -
2000 3,563
2001 10,200
2002 10,200
2003 40,800
--------
64,763
Less note discount (1,399)
--------
$63,364
========

The amount due in 2000 will be reduced by any redemptions of First
Mortgage Notes in 1998 pursuant to the $3 million offer.

As discussed in Note 4, Management expects the EGP underwriting to close
in June 1998 but there can be no assurance that this deadline will be met.
If the Offering is not closed before June 15, 1998 and as a consequence HDA
does not recover $1,375,000 of its investment at December 31, 1997 and any
additional funds invested in 1998 by that date, HDA may temporarily need
another source of funds to make the $3.8 million interest payment on its
First Mortgage Notes due on June 15, 1998.

ECCC and HDA may also redeem First Mortgage Notes on or after
December 15, 1998 at the following redemption prices (expressed as
percentages of principal amount): if redeemed during the 12-month period
beginning December 15 of years 1998 at 104.125%, 1999 at 102.75%, 2000 at
101.5%, and 2001 and thereafter at 100% of principal amount, in each case
together with accrued and unpaid interest.

The Indenture contains certain covenants, one of which restricts the
amount of distributions to HDA's partners, including the Company. These
distributions are equal to approximately 48% of HDA's consolidated net
income. In connection with the Noteholders Approval (see Note 10), HDA
agreed to temporarily reduce these distributions by 17%. HDA is permitted to
make additional cash distributions to partners and other Restricted Payments,
as defined under the Indenture, equal to 44.25% of the excess of HDA's
cumulative consolidated net income after December 31, 1993 over the
cumulative amount of the 48% Distributions, provided that HDA meets a certain
minimum debt coverage ratio. HDA has not meet this debt coverage ratio.

7. NOTES PAYABLE:

The Company's outstanding notes payable consist of the following:

(i) Capital leases of Galapagos for the acquisition of wagering
equipment for OTB agencies in the Dominican Republic. The loans are
guaranteed by HDA and collateralized by wagering equipment. The notes are
payable in monthly installments, including interest at 10.75%. As of December
31, 1997 and 1996, loan balance was $615,697 and $572,550, respectively.
(PAGE)
(ii) A loan of the Company paid in November 1997. As of December 31,
1996 the loan balance was $500,000 and interest rate was based on the
Citibank prime rate plus 2%, equivalent to 10.25%.

(iii) A $1 million loan borrowed by HDA in December 1997 for working
capital purposes and temporary investments in Panama. The loan is payable in
four quarterly installments of $250,000 commencing April 1, 1998. The
Company has assigned up to $250,000 of quarterly distributions from HDA to
the bank and has also guaranteed the loan. The note bears interest, payable
monthly, based on Citibank prime rate plus 1/2%. At December 31, 1997 the
interest rate was 9%.

(iv) Notes payable to Supra related to a transaction described in Note
10. The $260,000, plus accrued interest at 8.5%, is payable in three
installments during 1998.

In connection with the termination of the El Comandante Lease, effective
January 1, 1998 ECMC assumed certain obligations under capital leases,
originated mainly for the acquisition of wagering related equipment. These
obligations were not reflected in the Company's consolidated financial
statements until the transfer.

The following table summarizes future minimum principal payments on notes
payable and capital leases of the Company and its subsidiaries:

Galapagos HDA ECMC
---------- ---------- ----------
Due during year
ending December 31,
1998 $ 260,706 $1,010,000 $ 513,417
1999 190,232 250,000 510,131
2000 92,137 - 445,225
2001 72,622 - 35,936
2002 - - 10,443
---------- ---------- ----------
$ 615,697 $1,260,000 $1,515,152
========== ========== ==========

8. UNIT INCENTIVE AWARDS

Various employees of the Company's managing general partner, EMC, who
were previously employed by a subsidiary of IGC, participated in IGC's Unit
Incentive Plan and Unit Option Plan ("IGC's Employee Plans"). Effective
December 31, 1996 the Company agreed to the terms of a Control Transfer
Agreement (see Note 10) to provide these employees with unit incentive awards
("Replacement Awards") that provide benefits substantially equivalent to the
awards in IGC's Employee Plans.

When the Company assumed the obligations for the Replacement Awards, IGC
transferred to the Company 75,000 of its unregistered Class A limited
Partnership Units ("IGC Units"), which are included as part of other assets.
Also, there are 20,000 IGC Units that are allocated to unit options held by
one ex-employee. These unit options are fully vested and exercisable at
December 31, 1997 and will expire on March 31, 1998. The Company is required
(PAGE)
to return to IGC the portion of the 20,000 IGC Units that is not exercised.
The Company will use the IGC Units to partially satisfy its obligations under
these plans, which at December 31, 1997 amounted to $91,709 (included in
accrued liabilities).

Under the Replacement Awards, the Unit Appreciation Rights entitle the
holders to receive upon exercise, an amount payable in cash, Units of the
Company, IGC Units or some combination thereof, as determined by EMC's
Directors. The amount received upon exercise is based on the excess of the
fair market value of the IGC's Units, plus 50% of the fair market value of
the Company's Units, over the $4 base price of the Unit Appreciation Rights
("UAR"). The fair market values of the units are determined based on the
average for a 20 day period commencing 10 days before the exercise date.
These plans are summarized on the following tables:

UAR Options
------------ -----------
Outstanding at December 31, 1996 76,500 20,000
Cancelled (18,600) -
------------ -----------
Outstanding at December 31, 1997 57,900 20,000
============ ===========

At December 31, 1997, the dates that the outstanding UAR become
exercisable and their expiration dates are as follows:

UAR Expiring
------------------------------------------------
March 31, 1998 May 15, 2004 October 18, 2004
-------------- ------------ ----------------
UAR exercisable at
December 31, 1997 27,900 6,000 16,000
May 15, 1998 - 2,000 -
October 18, 1998 - - 4,000
May 15, 1999 - 2,000 -
------------ ------------ ------------
27,900 10,000 20,000
============ ============ ============

9. INCOME TAXES:

The Company is organized as a partnership, which is not a taxable entity
for United States tax purposes and incurs no federal income tax liability.
Instead, each partner is required to take into account in computing its
income tax liability such partner's allocable share of the Company's net
taxable income.

The reconciliation between the Company's consolidated net income (loss)
per books and its net taxable income (loss), per United States partnership
return, allocable to holders of Units is as follows:

(PAGE) December 31,
-----------------------------------------------------
1997 1996 1995
--------------- ----------------- -----------------
(In thousands except per Unit amounts)
Total Per unit Total Per Unit Total Per Unit
------- ------- ------- -------- -------- --------
Net income (loss) per
books $2,478 $ 0.39 $ 827 $ 0.13 $ (591) $ (0.10)
Taxable (income) loss
not allocable to
Unitholders (1,216) (0.19) (1,226) (0.20) (1,168) (0.19)
Book income from HDA
before consolidation
and unrecorded
minority interest - - - - 345 0.06
Difference in gain from
sale of Television
Stations (1,083) (0.17) (1,286) (0.21) - -
Additional tax
depreciation (257) (0.04) (169) (0.03) (576) (0.09)
Losses from corporate
subsidiaries not
deductible by the
Company 806 0.13 1,617 0.26 2,315 0.37
Write-off of receivables - - (30) - (387) (0.06)
Disallowed costs related
to partnership interest
redemption 260 0.04 - - - -
Deferred taxes 893 0.14 172 0.03 (10) -
Other, none of which is
individually
significant 167 0.02 (75) (0.01) (143) (0.02)
------- ------- -------- -------- -------- --------
Net taxable income
(loss) $2,048 $ 0.32 $ (172) $ (0.03) $ (216) $ (0.03)
======= ======= ======== ======== ======== ========

The Company is subject to Puerto Rico income taxes at a 29% tax rate on
its Puerto Rico source income. The provision for income taxes included in the
accompanying consolidated financial statements is attributed to (i) Puerto Rico
income taxes on the Company's distributive share of HDA's income from Puerto
Rico sources and (ii) ECCC's United States income taxes on its taxable income,
as follows:

(PAGE) For the years ended December 31,
-------------------------------------------
1997 1996 1995
----------- ----------- -----------
Puerto Rico income taxes -
Deferred $ 893,403 $ 156,021 $ (10,170)
Current - 257,300 217,200
Federal income tax- current 1,582 5,863 4,964
Dominican Republic-deferred - (19,161) 19,161
----------- ----------- -----------
$ 894,985 $ 400,023 $ 231,155
=========== =========== ===========

The deferred income taxes are related to the difference between the Puerto
Rico tax basis of the Company's investment in HDA and the amount reported in
the financial statements. The 1996 credit for Dominican Republic income tax is
due to the reversal of a provision previously recorded on interest earned by
HDA on certain loans to Galapagos, which interest was forgiven in September
1996 before any interest had been collected.

Galapagos has deferred income tax benefits for losses carryforwards, which
have been fully reserved by a valuation allowance.

10. RELATED PARTY TRANSACTIONS:

Unsecured Partner's Loans

During 1996 and 1995 the Company received advances from IGC, which until
December 31, 1997 was a general partner. The advances accrued interest based
on the Citibank prime rate plus 1%, which at December 31, 1996 was 9.25%. The
loans and accrued interest were paid in 1997.

Transactions With Supra

On August 19, 1997, HDA redeemed for $4,075,000 the 17% interest held by
Supra, thereby increasing the Company's interest in HDA to approximately 99%.
The redemption price plus transaction costs of $238,724 were recorded in
partners' deficit, net of the book value of Supra's minority interest in HDA of
$1,531,934. The transaction required the approval from the majority of holders
of outstanding First Mortgage Notes (the "Noteholders Approval").

In connection with the redemption, HDA agreed to pay $260,000 to Supra and
Ruben Velez Lebron and his wife ("Velez"), the principal owners of Supra, in
exchange for Supra's and Velez's cancellation of certain promissory notes and
other obligations of ECOC aggregating $2,290,000 . The cancellation relieved
HDA of its guarantee of approximately $1.6 million of these obligations which
would become due upon termination of the El Comandante Lease. The $260,000 and
transaction costs of $59,550 are included in the 1997 consolidated statement of
income (loss) as other costs. Upon closing of these transactions, there were
certain mutual releases granted among the parties, including the filing by
Supra of a motion to dismiss the Supra complaint against the Company and other
related parties.

(PAGE)
Management Agreements

IGC and IGP provided substantially all of the administrative support
services to EMC and the Company through June, 1996 pursuant to a three year
support service agreement effective as of February 6, 1995, and continue to
provide limited administrative support and office space. The Company
reimburses IGC and IGP for expenses incurred in providing such services. In
December 1997, EMC prepaid IGP $80,000, in these type of expenses to be applied
against actual charges made by IGP.

Since August 1996 Interstate Business Corporation ("IBC"), the sole
stockholder of EMC and a general partner in IGC, has been providing certain
accounting services to the Company for a monthly fee of $1,000.

IGP provided management services to HDA pursuant to a management agreement
until August 16, 1996 when the agreement was assigned to EMC. The Agreement
has a term of 15 years ending in December 2004. Pursuant to this agreement,
HDA pays an annual management fee of $250,000, adjusted annually after 1993 by
the percentage increase in CPI over the prior year.

Pursuant to terms of its partnership agreement, the Company reimburses EMC
for its costs and expenses, including compensation of EMC's officers and
directors, in excess of amounts of EMC's cash receipts. Effective January 1,
1998, all officers of EMC were transferred to EEC, a wholly owned subsidiary of
the Company and, consequently, substantially all services rendered by EMC will
primarily be services of its Directors. EEC will also assume EMC's rights to
all management agreements with the Company's consolidated subsidiaries.

The following represents a summary of amounts accrued with respect to
services rendered by certain related parties during the years ended December
31, 1997, 1996 and 1995 (in the case of HDA, for the periods after March 8,
1995):

Services Rendered For the years ended December 31,
- ----------------------- --------------------------------
To By Concept 1997 1996 1995
- ----------- -------- --------------------- --------- --------- ----------
HDA IGP Management agreement $ - $ 169,278 $ 215,400
HDA EMC Management agreement 278,673 101,414 -
The Company IBC Accounting services 12,000 8,000 -
The Company IGC/IGP Support agreement 28,607 117,198 254,364
The Company EMC Expenses in excess of
receipts 420,958 54,783 -
The Company EMC Directors fees and
expenses 88,200 71,500 36,069

Control Transfer Agreement

Pursuant to the terms of a Control Transfer Agreement effective as of
December 31, 1996, as amended, the following agreements were made:

1. IGC sold its interest in EMC to IBC.

2. IGC guaranteed EMC up to $20 million (the "IGC Guarantee") for payment
of EMC's liabilities in excess of assets, arising from EMC status as general
(PAGE)
partner of the Company, should EMC or the Company become insolvent. IGC
withdrew as general partner of the Company following execution of the IGC
Guarantee, which is effective until December 31, 2001.

3. IBC irrevocably assigned to IGC all rights to any distributions
received by EMC from the Company in respect of EMC's general partnership
interest in the Company to the extent that such distributions and other cash
receipts of EMC exceed EMC's expenses incurred in the ordinary course of
business in its capacity as managing general partner of the Company.

4. IBC contributed to the capital of EMC 50,000 units of IGC and agreed to
maintain in EMC at all times prior to termination of the IGC Guaranty
sufficient capital to provide EMC with tangible net worth of at least $200,000.

5. EMC shall use its best efforts to obtain the approval of Nasdaq to
continue listing the Units of the Company without relying on the IGC Guarantee.

6. The Company granted Replacement Awards to various executives of EMC,
previously employed by IGP. The number of Units that the Company had agreed to
make available to IGC in connection with the Distribution was reduced from
100,000 to 50,000 Units. IGC transferred 75,000 IGC Units to the Company to
fund the Company's obligations under the Replacement Awards and the Company is
required to return to IGC the portion of 20,000 IGC Units that are not
exercised under option units, expiring on March 31, 1998, held by one
ex-employee of EMC (see Note 8).

Transaction with IGP

On December 16, 1997, the Company purchased from IGP a .19790099% interest
in HDA for a purchase price of $30,000, thereby increasing the Company's
ownership in HDA to exactly 99%.

11. LEGAL PROCEEDINGS:

Certain of the Company's subsidiaries are presently named as defendants in
various lawsuits and might be subject to certain other claims arising out of
its normal business operations. Management, based in part upon advice from
legal counsel, believes that the results of such actions will not have an
adverse impact on the Company's financial position or results of operations.

12. FAIR VALUE OF FINANCIAL INSTRUMENTS:

The balance sheet carrying amounts of cash and cash equivalents,
receivables and other current assets approximate fair value due to the liquid
and short term nature of these items. As of December 31, 1997 and 1996 the
fair value of the First Mortgage Notes were $64,763,000 and $64,600,000,
respectively, based on the market price as quoted by a brokerage firm that
trades the First Mortgage Notes. The carrying value of notes payable
approximates fair value because these obligations bear interest at variable
rates.

(PAGE)
13. UNAUDITED PROFORMA FINANCIAL STATEMENTS:

In August 1997, HDA redeemed a 17% interest owned by a minority partner,
thereby increasing the Company's interest in HDA to approximately 99% and
effective January 1, 1998, it terminated the El Comandante Lease and commenced
operating El Comandante through its wholly owned subsidiary, ECMC (the
"Proforma Transactions"). The following unaudited proforma consolidated
statement of loss for the year ended December 31, 1997 is based upon the
historical consolidated statement of the Company and its subsidiaries, and were
prepared as if the above described transactions had all occurred on January 1,
1997 and excluding the following non recurring transactions: (i) extraordinary
items, (ii) gain from sale of Television Stations and (iii) provision for
$550,000 in charitable and educational contributions committed by ECOC's Board
of Directors in connection with the termination of the El Comandante Lease.
Proforma adjustments also includes results of operations of ECOC for the year
ended December 31, 1997. The unaudited proforma consolidated statement is not
necessarily indicative of what the actual results of operations of the Company
would have been assuming such transactions had been completed as of January 1,
1997, and does not purport to represent the results of operations for future
periods. In Management's opinion, all adjustments necessary to reflect the
effects of these transactions have been made.

PROFORMA CONSOLIDATED STATEMENT OF LOSS
FOR THE YEAR ENDED DECEMBER 31, 1997
(In thousands except per unit amounts)

(Unaudited)
REVENUES:
Commissions on wagering $ 59,512
Lottery services 88
Other revenues 3,244
Interest income 420
----------
63,264
EXPENSES:
Financial 8,735
Depreciation 2,323
General and administrative 2,333
Operating costs of racing 50,997
-----------
(1,124)
PROVISION FOR INCOME TAXES 372
MINORITY INTEREST (129)
-----------
NET LOSS $ (1,367)
===========
ALLOCATION OF NET LOSS:
General partners $ (14)
Limited partners (1,353)
-----------
$ (1,367)
===========
NET LOSS PER UNIT $ (0.21)
===========
WEIGHTED AVERAGE UNITS OUTSTANDING 6,334
===========
(PAGE)
The following unaudited proforma consolidated balance sheet was presented
as if the Proforma Transactions had taken place on December 31, 1997 (amounts
in thousands):

AT DECEMBER 31, 1997

(Unaudited)
ASSETS:
Cash and cash equivalents $ 1,569
Property and equipment, net 48,829
Deferred costs, net 6,316
Other 2,572
-----------
$ 59,286
===========
LIABILITIES:
First mortgage notes and accrued interest $ 63,681
Notes payable 3,391
Accounts payable and accrued liabilities 7,783
Minority interest in HDA 82
-----------
74,937
PARTNERS' DEFICIT: (15,651)
-----------
$ 59,286
===========

(PAGE) REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors of
El Comandante Operating Company, Inc.:

We have audited the accompanying statements of net liabilities El Comandante
Operating Company, Inc. (a Puerto Rico nonstock corporation in process of
liquidation) (ECOC) as of December 31, 1996, and the related statements of
operations for each of the two years in the period ended December 31, 1996 and
cash flows for each of the three years in the period ended December 31, 1997.
In addition, we have audited the statements of net liabilities in liquidation
as of December 31, 1997 and the related statements of operations and
transactions in liquidation for the year ended December 31, 1997. These
financial statements are the responsibility of ECOC's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

As discussed in Note 1, effective January 1, 1998, ECOC discontinued its
operations upon termination of its lease of El Comandante Race Track. As a
result, ECOC has changed its basis of accounting as of December 31, 1997 from
the going concern basis to a liquidation basis. Accordingly, the carrying
values of assets are presented at estimated realizable values and liabilities
are presented at estimated settlement amounts.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the net liabilities of El Comandante Operating Company,
Inc. as of December 31, 1996, and the results of its operations for each of the
two years in the period ended December 31, 1996 and its cash flows for each of
the three years in the period ended December 31, 1997, its net assets in
liquidation as of December 31, 1997 and results of operations and transactions
in liquidation for the year ended December 31, 1997 in conformity with
generally accepted accounting principles on the bases described in the
preceding paragraph.

Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The Schedule II - Allowance for
Doubtful Accounts Receivable is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
Arthur Andersen LLP
March 17, 1998
San Juan, Puerto Rico
(PAGE) EL COMANDANTE OPERATING COMPANY, INC.
(In Process of Liquidation)

STATEMENTS OF OPERATIONS AND TRANSACTIONS IN LIQUIDATION FOR THE YEAR
ENDED DECEMBER 31, 1997 AND OPERATIONS FOR EACH OF THE TWO YEARS
IN THE PERIOD ENDED DECEMBER 31, 1996

1997 1996 1995
----------- ----------- -----------
REVENUES:
Commissions on wagering $54,881,688 $57,285,607 $55,731,364
Other 2,474,084 2,728,516 2,329,179
----------- ----------- -----------
Total revenues 57,355,772 60,014,123 58,060,543
----------- ----------- -----------
EXPENSES:
Payments to horse owners and
horse owners' association 27,359,694 28,561,893 27,851,823
Track rent 13,720,424 14,321,401 14,332,841
Salaries, wages and employee
benefits 7,565,816 7,314,034 6,866,856
Operating expenses 5,294,508 5,721,396 5,853,875
General and administrative 2,982,159 2,804,546 2,783,343
Marketing and satellite
transmission costs 2,469,002 2,607,337 2,178,155
----------- ----------- -----------
Total expenses 59,391,603 61,330,607 59,866,893
----------- ----------- -----------
LOSS BEFORE DEFERRED TAX BENEFIT
AND EXTRAORDINARY ITEMS (2,035,831) (1,316,484) (1,806,350)

DEFERRED TAX BENEFIT (522,819) (94,200) (53,007)
----------- ----------- -----------
LOSS BEFORE EXTRAORDINARY ITEMS (1,513,012) (1,222,284) (1,753,343)

EXTRAORDINARY ITEMS:
Forgiveness of indebtedness, net of
deferred income taxes of $487,500 1,884,222 - -
---------- ----------- -----------
NET INCOME (LOSS) $ 371,210 $(1,222,284) $(1,753,343)
========== =========== ===========

The accompanying notes are an integral
part of these statements.
(PAGE) EL COMANDANTE OPERATING COMPANY, INC.
(In Process of Liquidation)

STATEMENTS OF NET LIABILITIES IN LIQUIDATION AS OF DECEMBER 31, 1997
AND NET LIABILITIES AS OF DECEMBER 31, 1996

1997 1996
----------- -----------
ASSETS:
CURRENT ASSETS:
Cash, including restricted cash of
$424,994 and $494,653, respectively $1,061,239 $ 1,116,330
Accounts receivable, net 538,009 1,379,932
Prepayments and supplies inventory 277,658 242,468
Notes receivable 436,245 335,248
----------- -----------
Total current assets 2,313,151 3,073,978
----------- -----------
DEFERRED COSTS, net:
Organizational costs - 28,015
Deferred tax asset 687,656 652,337
Telecommunication installation costs 118,724 185,905
Noncompetition agreement - 145,833
----------- -----------
Total deferred costs 806,380 1,012,090
----------- -----------
FURNITURE AND EQUIPMENT, net 3,773,324 3,964,066
----------- -----------
Total assets 6,892,855 8,050,134
----------- -----------

(continues)

(PAGE) EL COMANDANTE OPERATING COMPANY, INC.
(In Process of Liquidation)

STATEMENTS OF NET LIABILITIES IN LIQUIDATION AS OF DECEMBER 31, 1997
AND NET LIABILITIES AS OF DECEMBER 31, 1996

(continued)

1997 1996
----------- -----------

LIABILITIES:
CURRENT LIABILITIES:
Current portion of capital lease
obligations 513,417 707,917
Rent payable to Housing Development
Associates S.E. ("HDA") 2,638,520 1,984,213
Accounts payable and accrued liabilities 4,245,126 3,299,930
Outstanding winning tickets and refunds 996,756 784,897
----------- -----------
Total current liabilities 8,393,819 6,776,957
----------- -----------
CAPITAL LEASE OBLIGATIONS 1,001,735 1,223,557
----------- -----------

NOTE PAYABLE TO HDA, and accrued interest 467,977 796,203
----------- -----------

OTHER LIABILITIES:
Notes - 2,450,000
Accrued interest - 145,303
----------- -----------
- 2,595,303
----------- -----------
Total liabilities 9,863,531 11,392,020
----------- -----------
NET LIABILITIES IN LIQUIDATION (1997) AND
NET LIABILITIES (1996) $(2,970,676) $(3,341,886)
=========== ===========

The accompanying notes are an integral part
of these statements.

(PAGE) EL COMANDANTE OPERATING COMPANY, INC.
(In Process of Liquidation)
STATEMENTS OF CASH FLOWS
FOR THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
1997 1996 1995
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 371,210 $(1,222,284)$(1,753,343)
----------- ----------- -----------
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities-
Forgiveness of indebtedness (2,371,722) - -
Depreciation and amortization 809,165 698,102 590,244
Deferred tax benefit (35,319) (94,200) (53,007)
Provision for bad debts 50,008 100,008 100,000
Amortization of noncompetition
agreement 145,833 250,000 250,000
(Increase) decrease in assets-
Accounts receivable 791,915 (503,621) (361,232)
Prepayments supplies inventory
and organization costs (26,850) 49,249 306,905
Increase (decrease) in liabilities-
Accounts payable and accrued
liabilities 945,196 387,982 100,302
Outstanding winning tickets
and refunds 211,859 (1,310,897) 501,042
Accrued interest (143,071) 20,401 42,244
Rent payable 654,307 1,188,069 796,146
----------- ----------- -----------
Total adjustments 931,321 785,093 2,272,644
----------- ----------- -----------
Net cash provided by (used
in) operating activities 1,402,531 (437,191) 519,301
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase (decrease) in notes
receivable (100,997) (24,304) 72,995
Capital expenditures (292,788) (484,196) (411,167)
Payments of telecommunication
installation costs - (9,586) (17,738)
----------- ----------- -----------
Net cash used in investing
activities (393,785) (518,086) (355,910)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note payable - - 1,000,000
Payments on note payable (408,736) (207,594) -
Payments of capital lease
obligations (655,101) (604,246) (488,275)
Payments of organizational costs - - (6,470)
----------- ----------- -----------
Net cash (used in) provided by
financing activities (1,063,837) (811,840) 505,255
----------- ----------- -----------
(continues)
(PAGE) EL COMANDANTE OPERATING COMPANY, INC.
(In Process of Liquidation)

STATEMENTS OF CASH FLOWS
FOR THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997

(continued)

1997 1996 1995
----------- ----------- -----------

NET (DECREASE) INCREASE IN CASH (55,091) (1,767,117) 668,646

CASH, beginning of year 1,116,330 2,883,447 2,214,801
----------- ----------- -----------
CASH, end of year $1,061,239 $ 1,116,330 $ 2,883,447
=========== =========== ===========

SUPPLEMENTAL INFORMATION:
Interest paid $ 235,466 $ 168,849 $ 246,495
=========== =========== ===========
NONCASH TRANSACTIONS:
Equipment acquired through
capital leases $ 238,779 $ 656,630 $ 429,211
=========== =========== ===========
Forgiveness of indebtedness $2,371,722 $ - $ -
=========== =========== ===========

The accompanying notes are an integral part
of these statements.
(PAGE) EL COMANDANTE OPERATING COMPANY, INC.
(In Process of Liquidation)

NOTES TO FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION:

El Comandante Operating Company, Inc. ("ECOC") is a Puerto Rico non-
stock corporation which leased from Housing Development Associates S.E.
("HDA") the El Comandante Race Track ("El Comandante"), the only thoroughbred
race track and off-track betting operation in Puerto Rico. Due to an
existing default for unpaid rent (see Note 4) and for certain other reasons
permitted under the lease agreement (the "El Comandante Lease"), HDA
terminated the El Comandante Lease effective December 31, 1997. On January
1, 1998, ECOC transferred to HDA, at book value, all assets employed in the
racing business and HDA assumed all agreements and liabilities of ECOC.

As a result of the termination of El Comandante Lease and the cease of
its racing operations, ECOC changed its basis of accounting for 1997 from a
going concern basis to a liquidation basis. Accordingly, the carrying values
of assets as of December 31, 1997 are presented at estimated realizable
values and liabilities are presented at estimated amounts. The carrying
amount assigned to all assets and liabilities did not change from historical
cost amounts, as they represent a fair estimate of liquidating values. No
significant transactions in liquidation were recorded as part of changing
ECOC's basis of accounting from a liquidation to a going concern basis.

On December 31, 1997, the Board of Directors of ECOC made commitments
with several educational and charitable institutions to make contributions
totalling $550,000 in a period of four years commencing in 1998, which was
recorded in the accompanying financial statements. In connection with the
termination of the El Comandante Lease, HDA assumed this contingent
liability.

2. SUMMARY OF ACCOUNTING POLICIES:

Pervasiveness of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities, if any, 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.

Commissions on Wagering

ECOC earned commissions ("ECOC Commissions") on bets placed on El
Comandante's thoroughbred horse races through wagering facilities at El
Comandante and at wagering facilities located at independently owned off-
track betting ("OTB") agencies throughout Puerto Rico, and from wagering on
races simulcasted outside Puerto Rico, principally to Dominican Republic. El
Comandante offers bettors win and place, daily double, exacta, trifecta,
quiniela and pool wagering. Commissions are based on percentages of wagers
(PAGE)
established by law and vary for the different types of wagers in Puerto Rico,
as follows: 26% of daily double and pool wagers; 20% of exacta, trifecta and
quiniela wagers; and 25% of losing wagers on win and place wagers. ECOC
Commissions on wagers in Puerto Rico during the years ended December 31,
1997, 1996 and 1995 averaged 21.08%, 21.27% and 20.56%, respectively.
Commissions on simulcasted races are negotiated with wagering facilities
outside Puerto Rico. ECOC Commissions on wagers on simulcasted races during
the years ended December 31, 1997 and 1996 and 1995 averaged 6.34%, 6.20% and
6.36%, respectively.

Restricted Cash

Restricted cash represents (i) accumulated cash in the "Pool Pote" which
is funded by 4% of the amounts payable to winners of the daily Pick 6 pool
and (ii) a bonus amount which is added to the Pick 6 pool payout of
predetermined race days. The Pool Pote is paid out when there is a sole pool
winner or when it reaches $2 million, $1 million is paid out as part of the
regular Pick-6 pool on the following Sunday or Holiday. The corresponding
payables are recorded as part of the liability for outstanding winning
tickets and refunds.

Accounts Receivable

Accounts receivable include balances from pool agents, simulcasting
commissions, fees earned under a management agreement described in Note 4 and
other miscellaneous amounts. As of December 31, 1997 and 1996, reserves for
doubtful accounts amounted to $290,067 and $292,087, respectively.

Notes Receivable

Notes receivable consist of unsecured short term loans to horse owners,
with interest at 2% over prime rate and with various maturity dates. These
loans provide financing to horse owners to purchase horses as a means to
improve the quality of racing. ECOC has advised the Confederacion Hipica de
Puerto Rico (the "Confederacion"), a horse owners' association, that its
credit line to all members of the Confederacion, as a group, will not exceed
$500,000 and it will not extend credit in excess of $50,000 to any single
owner, nor lend more than 80% of the purchase price of any horse.

Telecommunication Installation Costs

These costs are related to the installation of telephone lines by the
Puerto Rico Telephone Company ("PRTC") and to excise taxes on the off-track
telecommunication equipment. The costs are amortized on a straight-line
basis over the remaining life of an agreement with PRTC expiring on April 1,
1999. Amortization expense for the years ended December 31, 1997, 1996 and
1995 was approximately $60,000 in each year.

Noncompetition Agreement

These costs are related to a Noncompetition Agreement entered into with
the majority owner of Supra & Company S.E. ("Supra") and former President of
ECOC which prohibited him from investing or participating in horse racing
operations anywhere in the Caribbean for a period of three years from August
1, 1994. The amount of $750,000 payable under the agreement was recorded as
(PAGE)
a deferred cost and was amortized on a straight-line basis over the
noncompete period. Amortization expense for the years ended December 31,
1997, 1996 and 1995 was $145,833, $250,000 and $250,000, respectively.

Furniture and Equipment

Furniture and equipment is stated at cost and depreciated on a
straight-line basis over their estimated useful lives, which range from 5 to
10 years. Major replacements and improvements are capitalized and
depreciated over their estimated useful lives. Repairs and maintenance are
charged to expense when incurred. As of December 31, 1997 and 1996,
furniture and equipment was as follows:
December 31,
Useful --------------------------
Lives 1997 1996
-------- ---------- -----------
Furniture 10 $ 429,467 $ 399,088
Equipment 4-14 5,299,105 4,948,516
Motor vehicles 6 937,537 799,145
---------- -----------
6,666,109 6,146,749
Less - Accumulated depreciation (2,892,785) (2,182,683)
---------- -----------
$3,773,324 $3,964,066
========== ===========

For information with respect to pledged assets, see Note 4.

3. PENSION PLAN:

ECOC has a non-contributory defined benefit pension plan covering
substantially all of its nonunion employees. As a result of the transfer of
the company's assets, liabilities and commitments, HDA is now the sponsor of
the nonunion employees pension plan. Benefits are based on the employee's
years of service and highest average earnings over five consecutive years
during the last 15 years of employment. ECOC's policy is to fund an amount
not less than the ERISA minimum funding requirement or more than the maximum
deductible under the Puerto Rico tax law.

The net periodic pension expense for the years ended December 31, 1997,
1996 and 1995, respectively, included the following components:

1997 1996 1995
---------- ---------- ----------
Service cost $ 81,851 $ 80,475 $ 88,613
Interest cost 62,012 54,471 44,982
Actual return on plan assets (31,478) (29,061) (13,768)
Amortization of transitional asset 22,964 16,690 (1,701)
---------- ---------- ----------
Net pension expense $ 135,349 $122,575 $ 118,126
========== ========== ==========

(PAGE)
Reconciliation of the funded status and the amounts recognized in the
accompanying statements of net liabilities follows:

1997 1996 1995
---------- ---------- ----------
Accumulated benefit obligations -
Vested $ 564,891 $ 383,675 $ 350,061
Non-vested 35,211 23,828 15,400
---------- ---------- ----------
$ 600,102 $ 407,503 $ 365,461
========== ========== ==========

Actuarial present value of projected
benefit obligations $(926,531) $(723,857) $(661,354)
Plan assets at fair value 465,855 352,889 333,167
---------- ---------- ----------
Under funded status (460,676) (370,968) (328,187)
Item not yet recognized in earnings -
Unrecognized transitional obligation 286,893 234,975 198,008
---------- ---------- ----------
Accrued pension expense $(173,783) $(135,993) $(130,179)
========== ========== ==========

Assumptions used for the above computations included:

1997 1996 1995
---------- ---------- ----------
Discount rate 7.5% 8% 8%
Expected rate of increase in future
compensation levels 4.5% 5% 5%
Expected long-term rate of return on
assets 7.5% 8% 8%

4. THE OPERATING LICENSE AND EL COMANDANTE LEASE:

Operating License

On December 15, 1989, the Puerto Rico Racing Board (the "Racing Board")
granted ECOC a license to operate El Comandante, which expires on
December 14, 2004 (the "Operating License"). The Operating License, which
requires payment of an annual license fee (currently $250,000), provides ECOC
with: (i) the exclusive right to operate a race track in the area of Puerto
Rico known as the San Juan Region, which approximates the northern half of
Puerto Rico, as delineated in maps produced by the Puerto Rico Planning Board
and Government Development Administration; (ii) the exclusive right to
conduct all types of authorized betting, both at El Comandante and off-track,
anywhere in Puerto Rico, based on races held at El Comandante; and (iii) the
right to hold a minimum 180 day or night race days per year.

El Comandante's horse racing and pari-mutuel wagering operations are
subject to substantial government regulation. Pursuant to the Puerto Rico
Horse Racing Industry and Sport Act (the "Racing Act"), the Racing Board and
the Puerto Rico Racing Administrator (the "Racing Administrator") exercises
significant regulatory control over ECOC's racing and wagering operations.
(PAGE)
For example, the Racing Administrator determined the monthly racing program
for El Comandante and approved the number of annual race days in excess of
the statutory minimum of 180. The Racing Act also apportions payments of
monies wagered that would be available as ECOC Commissions. The Racing Board
consists of three persons appointed to four-year terms by the Governor of
Puerto Rico. The Racing Administrator is also appointed by the Governor for
a four-year term.

El Comandante Lease

Until December 31, 1997 HDA leased El Comandante to ECOC under a lease
agreement, as amended, (the "El Comandante Lease") that required payments by
ECOC to HDA of rent consisting of 25% ("Basic Rent") of the annual
commissions earned by ECOC. These commissions consist of all payments
received by ECOC on all monies wagered with respect to horse racing occurring
at El Comandante, whether wagered at El Comandante or at other betting
facilities in Puerto Rico or any other country. In 1995 the El Comandante
Lease also provided for payment of certain fixed rent of $400,000. The El
Comandante Lease provided for ECOC to pay all El Comandante expenses except
that, pursuant to (i) an amendment effective January 1, 1996, HDA assumed the
obligation to pay real property taxes on El Comandante and (ii) an amendment
effective January 1, 1997, HDA assumed the obligation to pay the annual
racing license fee.

Termination of El Comandante Lease and Assignment of Operating License

Due to the existing default for unpaid Basic Rent and for certain other
reasons permitted under the El Comandante Lease, HDA terminated the El
Comandante Lease. In connection therewith on January 1, 1998 at HDA's
direction (i) ECOC transferred, at book value, to El Comandante Management
Company, LLC ("ECMC"), a wholly owned subsidiary of HDA, all assets employed
in the racing business, (ii) ECMC assumed all agreements and liabilities of
ECOC, including the $3.1 million payable to HDA, and (iii) ECOC assigned to
ECMC the Operating License.

The termination of the El Comandante Lease and the assignment of the
Operating License to ECMC are subject to the approval of the Racing Board,
which has not make a final determination on this matter but has temporarily
permitted ECMC to operate El Comandante until their review process is
concluded.

Consulting Agreement

Pursuant to a consulting agreement between ECOC and Interstate General
Properties Limited Partnership S.E. ("IGP") (the "Consulting Agreement"), and
as required under the El Comandante Lease, ECOC retained as executive
management three racing consultants then employed by IGP. In April 1996, IGP
assigned its interest in the Consulting Agreement to Equus Management Company
("EMC") and the three racing consultants became employees of EMC. Except for
$25,000 of the annual salary and related payroll costs of one consultant,
ECOC reimbursed all of payroll and fringe benefit costs with respect to the
employment of the consultants. The Consulting Agreement was cancelled
effective July 1, 1997. Fees incurred by ECOC pursuant to the Consulting
Agreement during the years ended December 31, 1997, 1996 and 1995 were
$560,700, $894,000 and $871,000, respectively.
(PAGE)
Horse Owners' Agreement and Wagering Service Agreement

ECOC had an agreement with the Confederacion whereby 50% of wagering
commissions received by ECOC on races held at El Comandante are to be paid to
the Confederacion through April 1, 1998, plus an annual fixed amount of
$55,000 from 1993 to 1998. The Confederacion also receives a minimum of $500
per race day for ECOC's wagering commissions on El Comandante races
simulcasted outside Puerto Rico ("Simulcasting Commissions") and when
Simulcasting Commissions exceed simulcasting expenses plus $500, the
Confederacion receives $500 plus 50% of Simulcasting Commissions.

ECOC received wagering services, software and equipment under a service
agreement with Autotote Systems, Inc, effective through March 15, 2005. The
service agreement required minimum annual payments which consist of the
greater of $800,800 annually or .65% (.0065) of total wagering. The
Confederacion had agreed to reimburse ECOC an amount equal to .325% (.00325)
of wagering for each race day up to a maximum of $3,461 per race day until
April 1998.

5. PAYABLES TO HOUSING DEVELOPMENT ASSOCIATES S.E.:

Under the El Comandante Lease, ECOC was required to pay HDA its Basic
Rent for each race day on the 29th day following such racing day. ECOC's
failure to pay Basic Rent, in the aggregate, in an amount equal to one
month's average Basic Rent (based on the preceding 12 months) for a period of
30 days was an event of default under the El Comandante Lease. During 1997
ECOC was in default of this provision.

As a result of the event of default related to payment of Basic Rent and
for certain other reasons permitted under the El Comandante Lease, on October
31, 1997, HDA notified ECOC of the termination of the El Comandante Lease
effective December 31, 1997. Effective January 1, 1998 ECMC assumed all
ECOC's liabilities, including this payable to HDA.

6. OTHER LIABILITIES AND EXTRAORDINARY ITEM:

Other liabilities at December 31, 1996 consisted of (i) unsecured notes
of $160,000 to IGP and $40,000 to Supra, including accrued interest, (ii)
$500,000 of accrued past service costs payable to Supra and Supra's majority
owner, Ruben Velez Lebron and his wife ("Velez"), under a series of
agreements executed on December 13, 1993 incident to the reorganization of
ECOC as a nonstock corporation (the "Supra Agreements") and (iii) $1,750,000
payable to Supra and Velez for the purchase of ECOC's stock and for the
amount payable under the Noncompetition Agreement. The unsecured notes of
$200,000 bore interest at 2.5% over the prime rate, without a stated maturity
date, which at December 31, 1996 was 10.75%.

In connection with the purchase by HDA of Supra's 17% interest in HDA
the obligations to Supra and Velez were canceled on August 19, 1997 in
exchange for a payment by HDA of $260,000 to Supra and Velez. In December
1997 ECOC paid IGP $210,000 in cancellation of the note and accrued interest
which totalled $291,722. The cancellation of the obligations to Supra and
Velez and the amount of discount in cancellation of the IGP note have been
(PAGE)
recorded in the accompanying statement of operations and transactions in
liquidation for the year ended December 31, 1997 as extraordinary items.

7. INCOME TAXES:

Deferred tax assets of $687,656 and $652,337, net of valuation
allowances of $1,272,848 and $1,729,926, were recorded as of December 31,
1997 and 1996, respectively. These assets arose from the difference between
the tax basis of certain liabilities and their reported amounts in the
financial statements (which will result in deductible amounts in future years
when such liabilities are finally settled) and from the benefits of net
operating loss carryforwards ("NOL") which are available to offset future
taxable income in 1998, mainly from the gain on the transfer of assets and
liabilities on January 1, 1998 to HDA upon termination of the El Comandante
Lease. Any tax deficiency of ECOC will be assumed by ECMC.

The deferred credit for income taxes for the years ended December 31,
1997, 1996 and 1995 is net of an increase (decrease) in the valuation
allowance of ($457,078), $310,493 and $572,943, respectively.

8. LEGAL PROCEEDINGS:

ECOC has been named as a defendant in various lawsuits and might be
subject to certain other claims arising from its normal business operations,
including employment-related claims. Based upon facts available to date,
management and legal counsel believe that none of such actions will have a
material adverse effect on ECOC's financial position or results of
operations.

9. FAIR VALUE OF FINANCIAL INSTRUMENTS:

The balance sheet carrying value of cash and receivables approximates
fair value because of the liquid nature of these assets. The carrying value
of the notes receivable approximates fair value because these notes bear
interest at a rate higher than prime rate. The carrying value of the capital
lease obligations approximates fair value because these obligations bear
interest at market.

(PAGE) EL COMANDANTE OPERATING COMPANY, INC.

SCHEDULE -II- ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE

For Year Balance Provision Balance
ended Beginning Charged to End of
December 31, of Year Expense Write-Offs Recoveries Year
------------ ---------- ----------- ---------- ---------- ---------
1995 248,887 100,000 (192,025) 14,873 171,735

1996 171,735 100,008 0 20,344 292,087

1997 292,087 50,008 ( 91,416) 39,388 290,067

Under the on-line off-track betting system, ECOC has daily receivables
from agents for the difference between amounts wagered at the agencies, less
(1) payouts made by agents to winnings bettors and (2) agents' commissions.
The uncollectible receivables are the result of significant volume in
wagering resulting from the on-line system, which increases the amount of
daily receivables.

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

Not applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY AND EMC

Managing Partner of the Company

Equus Management Company ("EMC") is the managing general partner of the
Company and, as such, has full and exclusive responsibility and authority to
manage the Company, including declaring and authorizing cash distributions,
making employment decisions, determining executive compensation and making
investment decisions and other decisions normally made by executive officers
and directors of a corporation.

EMC does not engage in any significant activities other than managing the
business of the Company. EMC is governed by its Board of Directors, which
currently consists of seven persons. Directors will be elected in the future
either by Interstate Business Corporation ("IBC"), as the parent company of
EMC, or by the directors then holding office subject to certain limitations,
including that at least two of the directors be independent of the Company,
IBC and Interstate General Company L.P. ("IGC"). Thus, Unitholders do not
have the power to elect EMC's directors. The officers of EMC are elected by
its Board of Directors. At present, two of EMC's directors are directors of
IGC's managing general partner and two are officers and directors of IBC.

Approximately 99.4% of IBC is owned by the adult children of James J. and
Barbara A. Wilson. IGC is managed by its managing general partner,
Interstate General Management Corporation ("IGMC"). The Wilson family and
companies controlled by them, including IBC and Wilson Family Limited
Partnership ("WFLP"), hold approximately a 54.1% interest in IGC and a 42.6%
interest in the Company.

Directors and Executive Officers of the Company and EMC

The table below sets forth the name, age and positions with the Company and
EMC of each director and executive officer of EMC and each executive officer
of the Company.

(PAGE)
Name Age Positions with the Company and EMC
- ------------------------ ------- -----------------------------------

Thomas B. Wilson 35 President and Chief Executive
Officer of EMC and the Company;
Director of EMC

Juan M. Rivera-Gonzalez 50 Executive Vice President and
Chief Operating Officer of EMC
and the Company; Director of EMC

Gretchen Gronau 33 Vice President, Chief Financial
Officer and Treasurer of EMC
and the Company

Rafael Otero 42 Senior Vice President of EMC
and the Company

Carlos R. Rodriguez 52 Senior Vice President of EMC
and the Company

Angel Blanco-Bottey 58 Senior Vice President of EMC
and the Company

Donald G. Blakeman 65 Director of EMC

Donald J. Kevane 66 Director of EMC

Alberto M. Paracchini 65 Director of EMC

Barbara A. Wilson 61 Director and Secretary of EMC

Kevin Wilson 39 Director of EMC

Relationships Barbara A. Wilson is the mother of Thomas B. Wilson and Kevin
Wilson.

Certain additional information concerning the above persons is set forth
below.

Thomas B. Wilson has been President and Chief Executive Officer of EMC and
the Company since January 1998 and Director of EMC since February 1998. He
has been a Director of IGMC since December 1995 a Director of IBC since 1994
and a Vice President of IBC since September 1994. From 1994 to December 1997
he was President of El Comandante Operating Company, Inc.("ECOC").

Juan M. Rivera-Gonzalez has been Executive Vice President and Chief
Operating Officer of EMC and the Company since January 1998 and Director of
EMC since February 1998. From January 1996 to December 1997 he was
Executive Vice President of the Company. From September 1995 to December
1995 he served as Vice President of the Company and was also Vice President
of IGC from 1994 to April 1996. From April 1991 to December 1993 he was
President and General Manager of ECOC.

(PAGE)
Gretchen Gronau is a Certified Public Accountant and has been Vice President
and Chief Financial Officer of the Company and EMC since August 1996. From
May 1990 to August 1996 she served in various tax and financial management
positions with IGC, including Vice President from August 1994 to August 1996.
She has served as Assistant Treasurer of IBC since October 1996.

Rafael Otero has been Senior Vice President of EMC and the Company since
January 1998 and Vice President of EMC since April 1996. From 1987 to April
1996 he was an employee of IGC or ECOC and served in the following positions:
Vice President of IGC from February 1992 to April 1993; Treasurer and Senior
Vice President of ECOC from April 1993 to December 1993; Vice President of
IGC from December 1993 to April 1996. He is currently serving as General
Manager of EGP.

Carlos R. Rodriguez has been Senior Vice President of EMC and the Company
since January 1998. Prior to January 1998 he was Vice President of IGC since
1989.

Angel Blanco-Bottey has been Senior Vice President of EMC and the Company
since January 1998. He joined ECOC in 1997 as Executive Vice President and
Chief Financial Officer. From 1993 to 1997 he engaged in selective
consulting work and served in several boards of directors. Prior to 1993 he
served as Executive Vice President of Banco-Central Hispano- P.R., a
commercial bank, from which he retired. He is currently serving as Executive
Vice President of ECMC.

Donald G. Blakeman, until retired effective December 31, 1997, served as the
President of EMC and the Company since January 1996 and a Director of EMC
since its formation in 1994. Since 1994, he was Executive Vice President of
EMC until January, 1996 and Chief Financial Officer of EMC until August 1996.
He has been a Director of IGMC since its formation in 1986. He was Executive
Vice President of IGC and IGMC from 1986 until August 1996 and Secretary
from December 1990 to 1995. He was a Director of IGC's predecessor companies
from 1970 to 1986 and served in various executive positions in those
companies.

Donald J. Kevane has been a Director of EMC since its formation in 1994. He
is a certified public accountant and senior partner in the Puerto Rico
accounting firm of Kevane Peterson Soto & Pasarell, which he founded in 1975.
He is also a director since 1990 of Venture Capital Fund, Inc., a Puerto
Rico-based venture capital firm and a director since 1985 of Universal
Insurance Co., a subsidiary of Kirby Industries.

Alberto M. Paracchini has been a Director of EMC since its formation in
1994. He has been a director of BanPonce Corporation since January 1991, and
was Chairman of the Board from January 1991 to April 1993. He is Vice
Chairman of the Board of Puerto Rican Cement Company, Inc. and a director of
Venture Capital Fund, Inc., a Puerto Rico-based venture capital firm.

Barbara A. Wilson has been a Director of EMC since January 1996 and
Secretary of EMC since August 1996. She served as Director of IGMC from
December 1995 to 1996. She has been a Director of IBC since 1987, Chairman
of the Board since March 1996, Secretary since 1990 and Treasurer since
1993.

(PAGE)
Kevin Wilson has been a Director of EMC since September 1996. He has been
the President, Director and majority owner since 1989 of Community Homes,
Inc., a homebuilding company of which he was a co-founder.

Section 16(a) Beneficial Ownership Reporting Requirements

WFLP filed late on March 31, 1998 a Form 5 to report changes in its
beneficial ownership of Units during 1997 and a Form 4 with respect to its
acquisition of Units in January 1998.

ITEM 11. EXECUTIVE COMPENSATION

Until December 31, 1997 the Company did not have any employees. EMC had
five employees who were officers of EMC and/or the Company, and were
previously employees of Interstate General Properties Limited Partnership
S.E. ("IGP"), a subsidiary of IGC. Three of these employees rendered
services to ECOC pursuant to a consulting agreement that was cancelled
effective June 30, 1997. ECOC reimbursed to EMC all of their compensation
and related costs, except for $25,000 of one employee's annual salary which
was paid by the Company.

The Company reimbursed EMC for its costs and expenses, including
compensation of officers and directors, in excess of amounts EMC received
from other sources, which sources were primarily cash distributions from the
Company and reimbursements and fees for (i) services pursuant to the
consulting agreement with ECOC, (ii) services pursuant to the management
agreement with HDA, and (iii) limited services rendered to IGP and IGC by Mr.
Blakeman and Ms. Gronau.

All employees and management contracts of EMC were transferred to a wholly-
owned subsidiary of the Company on January 1, 1998. Consequently, EMC's only
significant costs will be Directors' fees and expenses. The Company will
reimburse all costs of EMC in excess of any cash it receives, which will
primarily be distributions from the Company.

Summary Compensation Table. The following table sets forth the aggregate
compensation with respect to the Chief Executive Officer and each of the
other four most highly compensated executive officers of EMC.

(PAGE) Long-Term
Compensation
Annual Compensation(1) Awards
--------------------------- ------------
Securities
Underlying
Other Annual Options/ All Other
Name & Principal Salary Bonus Compensation SAR's Compensation
Position Year ($) ($) ($) # (2) ($)(1)(3)
- ------------------ ----- ------- ----- ------------ ---------- ----------
Donald G. Blakeman(4) 27,900
President 1997 315,200 - - SAR 9,420
1996 315,200 - - 9,492

Donald Drew(5) 20,000 9,420
Senior Vice Options
President 1997 385,800 161,620 - -
1996 - - -

Juan M. Rivera 10,000 9,420
Executive Vice SAR
President 1997 180,200 50,000 -
1996 - - -

Rafael Otero 10,000 8,200
Vice President 1997 135,200 47,500 - SAR -
1996 - - -

Gretchen Gronau 10,000
Vice President SAR
and CFO 1997 100,200 - - 5,400
1996 90,200 - - 4,692

(1) The annual and other compensation paid to Messrs. Drew, Rivera and
Otero for 1996 was omitted since all but $25,000 of such annual compensation
was reimbursed to EMC by ECOC. For 1997 the entire amount of compensation has
been included. However, the consulting agreement with ECOC was cancelled
effective June 30, 1997.

(2) Represents Replacement Awards granted by the Company for unit
Appreciation Rights and Unit Options.

(3) Reflects EMC's contributions to Retirement Plan discussed below.

(4) Retired effective December 31, 1997.

(5) His employment terminated on September 30, 1997 but continued
receiving compensation until end of year while on vacations. His salary for
1997 includes a payment of $45,600 for accrued vacations and unpaid at
December 31, 1997. His bonus include $71,620 payable on April 1998 pursuant
to his employment agreement.

(PAGE)
Employment Agreements. Messrs. Drew and Rivera entered into employment
agreements with IGP which were assigned to EMC as of April 22, 1996. Mr.
Drew's agreement, which expired December 31, 1997, provided for a base salary
of $340,000 annually, plus an annual bonus payable no later than April 30 of
each year, equal to (a) 3% of Basic Rent (as defined in the El Comandante
Lease) payable by ECOC for the prior calendar year, (b) less $340,000.
Effective January 1, 1998 Mr. Drew is no longer an employee of EMC but will be
entitled to a bonus of $71,620 in 1998 based on Basic Rent of El Comandante
for 1997.

Mr. Rivera's agreement, which was cancelled effective December 31, 1997,
provided for a base salary of $180,000 annually, plus an annual bonus payable
by April 30 of each year equal to .33% of the Basic Rent payable by ECOC to
HDA for the previous year. Mr. Rivera remains as an employee without any
formal bonus arrangement.

Retirement Plan. The EMC employees were all members of IGC's retirement
plan (the "Retirement Plan") as employees of IGP and continue under the same
plan as employees of EMC. Contributions to the Retirement Plan in 1996 and
1997 were in amounts equal to 4% of base salaries and wages not in excess of
the U.S. Social Security taxable wage base, and 8% of salaries (limited to
$150,000) that exceeded that wage base.

Directors. Directors of EMC who are not employees of the Company, EMC
or any of their affiliates, receive directors' fees established by the Board
of Directors of EMC. These Directors are compensated at a rate of $3,750 per
quarter, $1,000 per meeting and out-of-pocket expenses for meetings. In 1997,
the directors' fees totaled $88,200.

Unit Options and Unit Appreciation Rights. The five employees of EMC who
were previously employed by IGP (the "Transferred Employees") participated in
IGC's Unit Incentive Plan and Unit Option Plan ("Employee Plans"). Effective
December 31, 1996 the Company agreed, pursuant to the terms of a Control
Transfer Agreement, to grant the Transferred Employees unit incentive awards
("Replacement Awards") that provide benefits substantially equivalent to the
awards in the Employee Plans of IGC.

When the Company assumed the obligations for the Replacement Awards, IGC
transferred to the Company 75,000 of its unregistered Class A limited
Partnership Units ("IGC Units"), which are to be used to satisfy the Company's
obligations under the Replacement Awards. The Replacement Awards include (i)
Unit Appreciation Rights to four EMC employees and (ii) an option granted to
Donald Drew to purchase 20,000 IGC Units and 10,000 Units of the Company
("Drew Options"). The Drew Options were fully vested and exercisable at
December 31, 1997 but expired on March 31, 1998 without being exercised.
The Company is required to return to IGC the 20,000 IGC Units.

The Unit Appreciation Rights entitle the holders to receive upon
exercise, an amount payable in cash, Units of the Company, IGC Units or some
combination thereof, as determined by EMC's Directors. The amount received
upon exercise is based on the excess of the fair market value of the IGC's
Units, plus 50% of the fair market value of the Company's Units, over the $4
base price of the Unit Appreciation Rights ("UAR"). The fair market values of
the units are determined based on the average for a 20 day period commencing
10 days before the exercise date.
(PAGE)
The 1996 activity under these plans is summarized on the following
tables:

AGGREGATED OPTION / UAR EXERCISES IN 1997 AND
DECEMBER 31, 1997 OPTION / UAR VALUES

Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-money
Options Options
and UAR at and UAR at
December 31, December 31,
1997 1997
Units ------------ ------------
Acquired Value Exercisable/ Exercisable/
Exercise Realized Unexercisable Unexercisble
(#) ($) (#) ($)
-------- -------- ------------- ------------
Unit Appreciation Rights-
Donald G. Blakeman - - 27,900/ - 36,300/ -
Juan M. Rivera - - 8,000/ 2,000 10,495/2,625
Rafael Otero - - 6,000/ 4,000 7,870/5,250
Gretchen Gronau - - 8,000/ 2,000 10,495/2,625
Options-
Donald Drew - - 20,000/ - 26,240/ -

(PAGE)
ITEM 12. SECURITY OWNERSHIP OF CERTAIN UNITHOLDERS AND MANAGEMENT

The following table sets forth certain information regarding the Units
that are beneficially owned as of March 25, 1998 (i) by each director of EMC
or executive officer of EMC or the Company, (ii) by all directors of EMC and
executive officers of EMC or the Company, as a group, and (iii) by each
person who is known by EMC or the Company to beneficially own more than 5% of
the outstanding Units of the Company. Except where noted, the address for
the beneficial owner is Doral Building, 7th Floor, 650 Munoz Rivera Avenue,
Hato Rey, PR 00918.

Beneficial Ownership (1)
Name of Beneficial Owner Number
- -------------------------- of Units Percent
----------- --------
Management and Directors
Barbara A. Wilson (2) 50 -
Kevin Wilson (2) 86,397 1.36%
Thomas B. Wilson (2) 86,397 1.36%
Donald J. Kevane 1,000 .02%
Donald G. Blakeman 186,894 2.95%
Gretchen Gronau 900 0.01%

All executive officers of EMC and
the Company and directors of EMC,
as a group (6 persons) 361,438 5.71%

Other Unitholders
HDA Management Corporation 1,205,245 19.03%

Wilson Family Limited Partnership(2)
222 Smallwood Village Center
St. Charles, Maryland 20602 2,267,721 35.80%

- --------------------------------------------------------------------------
(1) The beneficial ownership of Units is determined on the basis of
Units directly and indirectly owned by executive officers and
directors of EMC and units to be issued under options which are
exercisable within the next 60 days.

(2) WFLP is owned by the adult children of Barbara Wilson, including
Kevin Wilson and Thomas Wilson. However, because none of them is
a general partner in WFLP, the units of the Company owned by WFLP
are not considered beneficially owned by them.

(PAGE)
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Except for the matter discussed below concerning Thomas B. Wilson, the
information responding to this item appears in Note 10 to the Company's
consolidated financial statements included in Item 8 of this report.

Thomas B. Wilson has been serving as Vice President of Caribe Waste
Technologies, Inc. ("CWT") a subsidiary of IGC engaged in the development of
municipal solid waste treatment facilities and has been, and will continue to
be, devoting time to this operation. CWT will reimburse the Company for
actual payroll costs attributed to time spent by Mr. Wilson on waste
technology matters.

(PAGE)
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8K

Index to Financial Statements.

(i) Financial Statements (included in Item 8)

Equus Gaming Company L.P.
Report of Independent Public Accountants
Consolidated Statements of Income (Loss) for the years
ended December 31, 1997, 1996 and 1995
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Changes in Partners' Deficit for
each of the three years in the period ended December 31, 1997
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements

El Comandante Operating Company, Inc.
Report of Independent Public Accountants
Statements of operations and Transactions in Liquidation for the
year ended December 31, 1997 and Operations for each of the
two years in the period ended December 31, 1996
Statements of Net Liabilities in Liquidation as of December 31,
1997 and Net Liabilities as of December 31, 1996
Statements of Cash Flows for the three years in the period ended
December 31, 1997
Notes to Financial Statements

(ii) Financial Statements Schedules (included in Item 8)

El Comandante Operating Company, Inc.
Schedule II - Allowance for Doubtful Accounts Receivable

(PAGE)
Exhibits.

Exhibit
Number Exhibit Description Reference
- ---------------------------------------------------------------------------
3.1 First Amended and Restated Limited Exhibit 3.1 to Registration
Partnership Agreement of Equus Statement on Form S-11
Gaming Company L.P. (the "Company") No. 33-90982 of the Company
("Second Form S-11")

3.2 Certificate of Limited Partnership Exhibit 3.1 to Registration
of the Company Statement on Form S-11
No. 33-82750 of the Company
("Form S-11")

3.3 First Amendment to Certificate of Exhibit 3.2 to Form S-11
Limited Partnership of the Company

3.4 Second Amendment to Certificate of Exhibit 3.3 to Form S-11
Limited Partnership of the Company

3.5 Third Amendment to Certificate of Exhibit 3.5 to Form S-11
Limited Partnership of the Company

3.6 Fourth Amendment to Certificate of Filed herewith
Limited Partnership of the Company

5.1 Form of Unit Certificate Exhibit 5.1 to Form S-11

10.1 Sixth Amended and Restated Exhibit 2.2. to Current
Partnership Agreement of Housing Report on Form 8-K of
Development Associates S.E. ("HDA") March 23, 1995
("Form 8-K")

10.2 Indenture dated December 15, 1993, Exhibit 5.1 to Registration
among El Comandante Capital Corp. Statement on Form S-5
("ECCC"), as Issuer, Banco Popular No. 33-75285 of HDA,
de Puerto Rico as Trustee ("Banco ECCC and El Comandante
Popular") and HDA as Guarantor Operating Company, Inc.
(the "Indenture") ("ECOC") ("Form S-5")

10.3 First Supplemental Indenture dated Exhibit 10.27 to Form S-11
December 22, 1994 to the Indenture

10.4 Second Supplemental Indenture dated Exhibit 10.28 to Form S-11
December 22, 1994 to the Indenture

10.5 Warrant Agreement dated December 15, Exhibit 10.3 to Form S-4
1993, among HDA Management
Corporation ("HDAMC"), HDA and
Banco Popular as Warrant Agent

(PAGE)
10.6 HDA Guaranty of certain obligations Exhibit 10.5 to Form S-4
Ruben Velez Lebron and Supra &
Company, S.E. ("Supra")dated
December 14, 1993

10.7 Amended and Restated Management Exhibit 10.6 to Form S-4
Agreement dated December 15, 1993,
between Interstate General Properties
Limited Partnership S.E. ("IGP")
and HDA

10.8 Amended and Restated Lease Agreement Exhibit 10.8 to Form S-4
dated December 15, 1993, between
HDA and ECOC

10.9 Rent Escrow Agreement dated December Exhibit 10.10 to Form S-4
15, 1993, between HDA as Landlord,
ECOC as Tenant and Banco Popular as
Escrow Agent

10.10 Collateral Assignment of HDA's Exhibit 10.11 to Form S-4
Interests under the Lease dated
December 15, 1993, between HDA and
Banco Popular

10.11 Stock Pledge Agreement dated Exhibit 10.12 to Form S-4
December 15, 1993, between HDA and
Banco Popular

10.12 Pledge Agreement (Mortgage Notes) Exhibit 10.13 to Form S-4
dated December 15, 1993 between HDA
and Banco Popular

10.13 Chattel Mortgage dated December Exhibit 10.15 to Form S-4
15, 1993, between ECOC and HDA

10.14 Assignment Agreement (General Exhibit 10.15 to Form S-4
Intangibles) dated December 15,
1993, between ECOC and HDA

10.15 Assignment Agreement (General Exhibit 10.16 to Form S-4
Intangibles) dated December 15, 1993,
between HDA and Banco Popular

10.16 Pledge Agreement between ECCC and Exhibit 10.17 to Form S-4
Banco Popular

10.17 Mortgage Note of $52,000,000 of HDA Exhibit 10.18 to Form S-4

10.18 Mortgage Note of $26,000,000 of HDA Exhibit 10.19 to Form S-4

10.19 Deed of Modification and Extension Exhibit 10.20 to Form S-4
of First Mortgage to Secure
Additional Mortgage Note, No. 43,
dated December 15, 1993
(PAGE)
10.20 HDA Note in the amount of Exhibit 10.21 to Form S-4
$68,000,000 to ECCC dated December
15, 1993

10.21 Master Support and Services Exhibit 10.20 to Form S-11
Agreement dated December 9, 1994,
between Interstate General Company
L.P. ("IGC") and the Company

10.22 Consulting Agreement dated December Exhibit 10.21 to Form S-11
15, 1993 between ECOC and IGP

10.23 Closing Agreement dated November 16, Exhibit 10.26 to Form S-11
1994, among Multi-Media Television,
Inc., JEM Communications, Inc. Tele
38, Inc., S & E Network, Inc. and HDA

10.25 Conversion Agreement dated February Exhibit 2.3 to Form 8-K
3, 1995, between the Company and
IGP (the "Conversion Agreement")

10.25 First Amendment to the Conversion Exhibit 2.3 to Form 8-K
Agreement dated March 6, 1995

10.26 Lease Agreement dated September 28, Exhibit 10.21 of the Annual
1994 between the Dominican Republic Report on Form 10-K of
and Galapagos, S.A.("Galapagos") HDA for the year ended
December 31, 1994 ("1994
HDA 10-K")

10.27 Founders' Agreement among Exhibit 10.22 to 1994
Galapagos, HDA and Minority HDA 10-K
Stockholders

10.28 Management Agreement dated September Exhibit 10.23 to 1994
28, 1994, between Galapagos and HDA 10-K
ECOC

10.29 Broadcasting, Marketing and Exhibit 10.25 to 1994
Production Agreement dated March 30, HDA 10-K
1995 between ECOC and S&E

10.30 Amended and Restated Distribution Exhibit 2.1 to Form S-11
Agreement dated November 22, 1994
between the Company and IGC (the
"Distribution Agreement")

10.31 First Amendment to the Distribution Exhibit 10.31 to Second
Agreement dated February 3, 1995 Form S-11

10.32 Registration Rights Agreement dated Exhibit 10.32 to Second
February 6, 1995 between the Company Form S-11
and IGC

(PAGE)
10.33 Amended and Restated Registration Exhibit 10.29 to Form S-11
Rights Agreement with respect to the
Warrants dated December 12, 1994 by
and among HDA, HDAMC, the Company
and Oppenheimer & Co., Inc. and The
Argosy Securities Group L.P.

10.34 Third Supplemental Indenture dated Exhibit 10.34 to Annual
February 27, 1996 to the Indenture Report on Form 10-K of the
Company for the year ended
December 31, 1995 ("1995
10-K")

10.35 Fourth Supplemental Indenture dated Exhibit 10.35 to 1995 10-K
February 27, 1996 to the Indenture

10.36 First Amendment to Amended and Exhibit 10.36 to 1995 10-K
Restated Lease Agreement dated
March 28, 1996

10.37 Seventh Amended and Restated Exhibit 10.37 to 1995 10-K
Partnership Agreement of HDA dated
February 7, 1996

10.38 Stock Purchase Agreement by and Exhibit 10.38 to 1995 10-K
among S&E Network Inc. ("S&E"), HDA
and Paxson Communications of San
Juan, Inc. ("Paxson") dated January
31, 1996

10.39 Time Brokerage Agreement by and Exhibit 10.39 to 1995 10-K
between Paxson and S&E dated January
31, 1996

10.40 Escrow Agreement dated January 31, Exhibit 10.40 to 1995 10-K
1996 by and among Paxson, S&E and
First Union National Bank of Florida

10.41 Guaranty by Paxson in favor of S&E Exhibit 10.41 to 1995 10-K
and HDA dated January 31, 1996

10.42 Broadcast Agreement between ECOC and Exhibit 10.42 to 1995 10-K
S&E dated February 1, 1996

10.43 First Amendment to the Amended and Exhibit 10.43 to Annual
Restated Registration Rights Report on Form 10-K/A of
Agreement dated August 15, 1995 the Company for the year
ended December 31, 1995
("1995 10-K/A")

10.44 Assignment and Assumption of Exhibit 10.44 to 1995
Consulting Agreement dated April 10-K/A
22, 1996

(PAGE)
10.45 Assignment and Assumption of Exhibit 10.1 to Quarterly
Employment Agreements dated Report on Form 10-Q of the
April 22, 1996 Company for the quarter
ended June 30, 1996

10.46 Stock Purchase Agreement by and Exhibit 10.1 to Quarterly
between HDA and Paxson dated Report on Form 10-Q of the
November 12, 1996 Company for the quarter
ended September 30, 1996

10.47 Employment Agreement between IGP Exhibit 10.47 to Annual
and Donald Drew dated Report on Form 10-K of the
December 14, 1993 Company for the year ended
December 31, 1996
("1996 10-K")

10.48 Employment Agreement between IGP Exhibit 10.48 to 1996 10-K
and Juan Manuel Rivera dated
June 1, 1995

10.49 Closing Agreement by and among S&E, Exhibit 10.49 to 1996 10-K
Paxson, Equus and HDA dated January
21, 1997

10.50 Control Transfer Agreement by and Exhibit 10.50 to 1996 10-K
among IBC, IGC, IGP, HDA, EMC and
the Company dated December 31, 1996

10.51 Amendment to Control Transfer Exhibit 10.51 to 1996 10-K
Agreement by and among IBC, IGC,
IGP, HDA, EMC and the Company
dated March 25, 1997

10.52 Broadcast Agreement among S&E, Exhibit 10.52 to 1996 10-K
HDA and Paxson dated January
21, 1997

10.53 Second Amendment to Amended and Exhibit 10.53 to 1996 10-K
Restated Lease Agreement dated
March 31, 1997

10.54 Letter Agreement dated May 13, Exhibit 10.1 on Quarterly
1997 by and between Equus Gaming Report on Form 10-Q of the
Company L.P., HDA, Supra & Company for the Quarter
Company S.E. and Ruben Velez and ended March 31, 1997
his wife

10.55 Letter Agreement dated July 18, Exhibit 10.1 on Quarterly
1997 by and between Equus Gaming Report on Form 10-Q of the
Company L.P., HDA, Supra & Company for the Quarter
Company S.E. and Ruben Velez and ended June 30, 1997
his wife

(PAGE)
10.56 Eight Amended and Restated Exhibit 10.1 on Quarterly
Partnership Agreement of HDA dated Report on Form 10-Q of the
August 19, 1997 Company for the Quarter
ended September 30, 1997

10.57 Fifth Supplemental Indenture dated Exhibit 10.2 on Quarterly
November 14, 1997 to the Indenture Report on Form 10-Q of the
Company for the Quarter
ended September 30, 1997

10.58 Asset Purchase and Sale Agreement Filed herewith
by and between El Comandante
Management Company LLC ("ECMC") and
ECOC dated December 19, 1997

10.59 Second Amendment to Control Filed herewith
Transfer Agreement by and among
IBC, IGC, IGP, HDA, EMC and the
Company dated December 19, 1997

10.60 Guaranty Agreement by and between Filed herewith
EMC and IGC dated December 30, 1997

10.61 Agreement to Retire Partnership Filed herewith
Interest of Interstate General
Company, L.P. in Equus Gaming
Company, L.P. by and among the
Company, IGC, EMC, EMTC and HDA
dated December 30, 1997

10.62 Ninth Amended and Restated Filed herewith
Partnership Agreement of HDA
dated December 31, 1997

21 Subsidiaries of the Company Filed herewith

Reports on Form 8-K. None

(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.

Equus Gaming Company L.P.
-----------------------------------
(Registrant)

By: Equus Management Company
Managing General Partner

April 8, 1998 /s/ Thomas B. Wilson
- ----------------- ------------------------------
Date Thomas B. Wilson
President & Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

Date Title Signature
- ----------------- ----------------------- ------------------------

April 8, 1998 President, Chief /s/ Thomas B. Wilson
- ----------------- Executive Officer and ------------------------
Director Thomas B. Wilson

April 8, 1998 /s/ Juan M. Rivera
- ----------------- Executive Vice President, ------------------------
Chief Operating Officer Juan M. Rivera
and Director

April 8, 1998 Vice President and /s/ Gretchen Gronau
- ----------------- Chief Financial Officer ------------------------
Gretchen Gronau

April 8, 1998 Director /s/ Donald J. Kevane
- ----------------- ------------------------
Donald J. Kevane

April 8, 1998 Director /s/ Alberto M. Paracchini
- ----------------- -------------------------
Alberto M. Paracchini

April 8, 1998 Director /s/ Barbara A. Wilson
- ----------------- -------------------------
Barbara A. Wilson

April 8, 1998 Director /s/ Kevin Wilson
- ----------------- -------------------------
Kevin Wilson

April 8, 1998 Director /s/ Donald G. Blakeman
- ----------------- -------------------------
Donald G. Blakeman