MAGNA ENTERTAINMENT CORP - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002.

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________.

Commission File No. 000-30578

MAGNA ENTERTAINMENT CORP.
(Exact name of registrant as specified in its charter)

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

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

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

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

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

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes /X/ No / /

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As of June 28, 2002, the aggregate market value of the Class A Subordinate
Voting Stock held by non-affiliates of the registrant was approximately
$268,434,272 (based on the closing sale price of $6.99 per share of Class A
Subordinate Voting Stock reported on The Nasdaq National Market on June 28,
2002). As of June 28, 2002, the aggregate market value of the exchangeable
shares of MEC Holdings (Canada) Inc., each of which was exchangeable into one
share of Class A Subordinate Voting Stock of the registrant, held by
non-affiliates of the registrant was approximately $11,783,658 (based on the
closing sale price of $6.99 per share of Class A Subordinate Voting Stock
reported on The Nasdaq National Market on June 28, 2002). As of June 28, 2002,
non-affiliates held no shares of Class B Stock. There is no active market for
such stock.

The number of shares of Class A Subordinate Voting Stock of the registrant
outstanding as of March 17, 2003 was 48,674,796.

The number of shares of Class B Stock of the registrant outstanding as of March
17, 2003 was 58,466,056.

DOCUMENTS INCORPORATED BY REFERENCE

The registrant's proxy statement is being simultaneously filed with
the Securities and Exchange Commission ("SEC") pursuant to Regulation 14A, with
respect to the annual meeting of stockholders scheduled to be held on April 30,
2003, is incorporated by reference in Part III of this Annual Report to the
extent stated herein. The section entitled "Description of the Notes" in the
prospectus included in the registrant's registration statement on Form S-3 (File
number 333-102889), filed with the SEC on January 31, 2003, is incorporated by
reference into Part II, Item 5 of this Annual Report. Except with respect to
information specifically incorporated by reference in this Annual Report, the
documents incorporated by reference are not deemed to be filed as part hereof.

AVAILABLE INFORMATION

The Company maintains a website that contains information about the
Company, none of which is incorporated by reference in, or shall be deemed
included in, this Annual Report. It is accessible at www.magnaentertainment.com.
Through the Company's website, stockholders and the general public may access
free of charge (other than any connection charges from internet service
providers) filings the Company makes with the SEC as soon as reasonably
practicable after filing. Filing accessibility in this manner includes this
Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current
Reports on Form 8-K and amendments to these reports filed with or furnished
to the SEC.

In this Annual Report, when we use the terms "we", "us", "our" and the
"Company", we are referring to Magna Entertainment Corp. and its subsidiaries,
unless the context otherwise requires. In this Annual Report, unless stated
otherwise, all references to "$" are to U.S. dollars and all references to "Cdn.
$" are to Canadian dollars.

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INDEX TO ITEMS

PART I............................................................................................................4

Item 1. Business.................................................................................................4

Item 2. Properties..............................................................................................47

Item 3. Legal Proceedings.......................................................................................47

Item 4. Submission of Matters to a Vote of Security Holders.....................................................48

PART II..........................................................................................................48

Item 5. Market for Registrant's Common Equity and Other Stockholder Matters.....................................48

Item 6. Selected Financial Data.................................................................................49

Item 7. Management's Discussion and Analysis of Results of Operations and Financial Position....................53

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.............................................70

Item 8. Financial Statements and Supplementary Data.............................................................71

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...................114

PART III........................................................................................................114

Item 10. Directors and Executive Officers of the Registrant....................................................114

Item 11. Executive Compensation................................................................................114

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters........114

Item 13. Certain Relationships and Related Transactions........................................................114

Item 14. Disclosure Controls and Procedures....................................................................114

PART IV.........................................................................................................115

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.......................................115

SIGNATURES......................................................................................................117

EXHIBIT INDEX...................................................................................................123

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Part I
ITEM 1. BUSINESS

SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION

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

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

Important factors that could cause such differences include, but are
not limited to, the factors discussed below under "Our Business - Risk Factors"
and our subsequent public filings.

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

INCORPORATION AND CORPORATE STRUCTURE

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

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

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The following chart shows our organizational structure and that of our
material subsidiaries, together with the jurisdiction of incorporation of each
of the entities shown thereon as of March 17, 2003.

MAGNA ENTERTAINMENT CORP. ORGANIZATIONAL CHART

OUR BUSINESS

We are North America's number one owner and operator of thoroughbred
racetracks and one of the world's leading suppliers, via simulcasting, of live
racing content to the growing inter-track, off-track and account wagering
markets. We currently operate or manage eleven thoroughbred racetracks, one
standardbred racetrack, one racetrack which runs both thoroughbred and
standardbred meets and one greyhound racetrack, as well as the simulcast
wagering venues at these tracks. In addition, we operate off-track betting
("OTB") facilities and a national account wagering business known as
XpressBet(TM), which permits customers to place wagers by telephone and over the
Internet on horse races at up to 70 racetracks in North America. We also own and
operate HorseRacing TV(TM), a new television network focused exclusively on
horse racing that we launched on the Racetrack Television Network ("RTN") in
July 2002. HorseRacing TV(TM) is currently available to cable customers in the
Western Pennsylvania and San Diego areas and we are pursuing broader cable and
satellite distribution. RTN, in which we have a one-third ownership interest,
telecasts races from our racetracks and other racetracks, via private
direct-to-home satellite, to paying subscribers. For the year ended December 31,
2002, our operations generated consolidated revenues of $549.2 million.

Since December 1998, we have acquired seven large racetrack
operations in North America: Santa Anita Park near Los Angeles, Gulfstream
Park near Miami, Golden Gate Fields and Bay Meadows near San Francisco, Lone
Star Park at Grand Prairie near Dallas and The Maryland Jockey Club, which
operates Laurel Park in Maryland and Pimlico Race Course in Baltimore, home
of the Preakness Stakes(R), the middle jewel in thoroughbred racing's Triple
Crown. We have also acquired the racetrack operations of The Meadows near
Pittsburgh, Thistledown near Cleveland, Remington Park in Oklahoma City,
Great Lakes Downs in Muskegon, Michigan, Portland Meadows near Portland,
Oregon, and Multnomah Greyhound Park also near Portland, Oregon. We own all
the land on which these racetracks are located, with the exception of Bay
Meadows, Lone Star Park at Grand Prairie, Remington Park, Portland Meadows
and Multnomah Greyhound Park where we lease the land from third parties.
During the spring of 2003, we also expect to complete our acquisition of
Flamboro Downs, a standardbred racetrack located in Hamilton, Ontario, which
is currently controlled by one of our employees. Subject to our receipt of
final regulatory approvals, our employee has agreed to transfer all his
interest in Flamboro Downs to us. These acquisitions have enabled us to
secure the ownership rights to what we believe is some of the highest quality
and most popular live horse racing content in North America, based on
standard industry measures, such as total handle, average daily attendance
and average daily wagering, both on and off-track. We believe that the
aggregation of this high-quality content, combined with a strong branding
strategy and the introduction of new media distribution technologies, will
enhance the distribution of our content and help us develop new sources of
revenues. We intend to continue to acquire strategic racetracks and other
related assets on a selective basis.

We distribute our live racing content to approximately 1,000 off-track
and inter-track venues, including other racetracks, OTB facilities and casinos
in the United States, Canada, Mexico, the Caribbean and the United Kingdom. We
intend to expand the distribution of this content in these markets

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and, to the extent permitted by various regulatory regimes, in additional
markets, particularly emerging electronic media-based markets, such as wagering
via interactive television and the Internet.

In conjunction with our racetrack operations, we own and operate
thoroughbred training centers situated near San Diego, California, in Palm Beach
County, Florida and in the Baltimore, Maryland area. We believe that facilities
such as these will provide us with a competitive advantage by helping us to
attract additional high-quality horses to our racetracks and to expand our field
sizes. We believe that this will allow us to increase both our number of live
races and the total amount wagered on our races.

Legislators in a number of the states in which our racetracks
operate are considering the legalization of alternative gaming at racetracks.
Upon the completion of the Flamboro Downs acquisition, we will develop a
relationship with the Ontario Lottery and Gaming Corporation, which operates
the gaming facility at Flamboro Downs. We expect that the ownership of
Flamboro Downs and this relationship will enable us to develop additional
expertise in the issues surrounding the operation and management of
alternative gaming facilities at racetracks.

In addition to our racetracks, we also have significant real estate
holdings in the United States, Canada and Austria. As of December 31, 2002, the
aggregate net book value of all our real estate was $717.4 million. While we are
exploring the development of some of our real estate, we are actively marketing
our non-core real estate in order to generate additional capital to grow and
enhance our racing business. During the past three fiscal years, we sold
non-core real estate with an aggregate net book value of $91.0 million for gross
proceeds of $147.7 million. As of December 31, 2002, the aggregate net book
value of our remaining non-core real estate was approximately $10.8 million. We
currently have substantial real estate holdings in excess of that needed to
support our racetrack operations. This real estate consists of vacant industrial
lands, golf courses, residential housing developments, excess land around
several of our racetracks and other real estate. We are continually
re-evaluating each of these holdings in relation to our core business
activities. We will, from time to time, sell or otherwise monetize some or all
of these real estate holdings in order to fund the growth of our core racetrack
operations and related businesses. The aggregate net book value of these excess
real estate assets, including our remaining non-core real estate was
approximately $179.6 million, as of December 31, 2002.

Please see our financial statements beginning on page 71 for financial
information concerning our business and segments.

OUR STRATEGY

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

CONTINUING TO INTEGRATE OUR ACQUISITIONS BY EMPLOYING "BEST PRACTICE"
IMPROVEMENTS AT OUR RACETRACKS

Through our acquisitions, we own some of the largest and what we
believe to be some of the highest-quality thoroughbred racetracks in North
America, as measured in terms of total handle, average daily attendance and
average daily wagering both on and off-track. We believe that the increased
scale and integration of our racetrack operations and related wagering
operations will afford us the opportunity to both grow our revenues and achieve
significant operational synergies through the implementation of best practices,
cost reductions realized from economies of scale and increased efficiencies. We
intend to

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improve the quality of the live racing experience by upgrading and expanding the
infrastructure of our properties in order to attract the best available horses,
trainers and jockeys.

EXPANDING THE DISTRIBUTION OF OUR LIVE RACING

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

FURTHER DEVELOPING AN INTEGRATED BRANDING AND MARKETING STRATEGY

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

IMPROVING THE QUALITY OF THE ENTERTAINMENT EXPERIENCE AT OUR RACETRACKS AND OTB
FACILITIES

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

OBTAINING BROADER DISTRIBUTION OF HORSERACING TV(TM)

We believe that broad television distribution will help increase
future interest in horse racing and attract additional wagering customers. At
present, HorseRacing TV(TM) is carried on cable in the Western Pennsylvania
and San Diego, California areas, as well as on RTN. In the effort to broaden
the audience, reach and appeal of horse racing and wagering thereon, we are
pursuing carriage agreements with other cable and satellite operators who
could package the network with other digital sports programming sold to their
subscribers.

SELECTIVELY ACQUIRING AND DEVELOPING ADDITIONAL STRATEGIC RACETRACKS AND RELATED
ASSETS

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

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OUR HISTORY

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

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

In December 1999, Magna International redeemed approximately 14.8
million shares of our Class B Stock for proceeds of $110.0 million. On that same
date, Magna International invested $110.0 million in our Canadian subsidiary,
MEC Holdings (Canada) Inc., in return for approximately 14.8 million
exchangeable shares of MEC Holdings (Canada) Inc. Each exchangeable share was
exchangeable by the holder for one share of our Class A Subordinate Voting Stock
at any time. The purpose of these shares was to permit certain Canadian
shareholders of Magna International that were subject to limitations on their
holdings of shares of non-Canadian issuers to receive shares of a Canadian
issuer in the special dividend by Magna International described below. On
December 30, 2002, all remaining exchangeable shares of MEC Holdings (Canada),
Inc., other than those already owned by us, were purchased by us in exchange for
shares of our Class A Subordinate Voting Stock on a one-for-one basis.

On March 10, 2000, Magna International distributed to holders of its
Class A subordinate voting shares and Class B shares, by way of a special
dividend, approximately 15.7 million shares comprised of our Class A Subordinate
Voting Stock and the exchangeable shares of MEC Holdings (Canada) Inc. As of
March 17, 2003, Magna International owns, directly or indirectly, all our
outstanding Class B Stock and 4,362,328 shares of our outstanding Class A
Subordinate Voting Stock. As a result, Magna International is able to exercise
approximately 96% of the total voting power attached to all our outstanding
stock, and therefore is able to elect all our directors and to control us. Two
members of our board of directors are also members of Magna International's
board of directors and we have the same chairman.

OVERVIEW OF THE HORSE RACING INDUSTRY

PARI-MUTUEL WAGERING

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

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wagering on horse racing is the largest form of pari-mutuel wagering, and it is
currently authorized in over 40 states of the United States, all provinces of
Canada and approximately 100 other countries around the world.

RECENT HISTORY

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

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

THE GROWTH IN OFF-TRACK AND INTER-TRACK WAGERING

Pari-mutuel wagering on thoroughbred horse racing in the United States
increased from approximately $9.4 billion in 1990 to approximately $15.1 billion
in 2002, according to The Jockey Club. This increase resulted primarily from the
growth of off-track and inter-track wagering, which has grown by approximately
50.1% from approximately $8.7 billion in 1996 to approximately $13.0 billion in
2002. Simulcasting live racing events to off-track and inter-track venues has
been facilitated by technological advances and the introduction of legislative
changes.

U.S. THOROUGHBRED PARI-MUTUEL WAGERING HANDLE (IN BILLIONS)

Source: Equibase Company LLC; The Jockey Club.

Simulcasting is the process of transmitting the audio and video
signal of a live racing performance (ie, "content") from one facility to
other locations or venues where

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wagering on such content is permitted. Simulcasting provides racetracks with the
opportunity to increase revenues by exporting their live racing content to as
many wagering locations as possible, such as other racetracks, OTB facilities
and casinos, and by importing racing content from other racetracks.

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

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

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

OUR CONTENT

Our racetracks are geographically diversified. Santa Anita Park is
near Los Angeles, Gulfstream Park is near Miami, Golden Gate Fields and Bay
Meadows are near San Francisco, Lone Star Park at Grand Prairie is near
Dallas, Pimlico Race Course is in Baltimore, Laurel Park is between
Washington, D.C. and Baltimore, The Meadows is near Pittsburgh, Thistledown
is near Cleveland, Remington Park is in Oklahoma City, Great Lakes Downs is
in Muskegon, Michigan, and Portland Meadows and Multnomah Greyhound Park are
in or near Portland, Oregon. Colonial Downs, whose racing operations we
manage, is in New Kent, Virginia.

2003 RACING SCHEDULE

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

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OUR PROPERTIES

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

SANTA ANITA PARK

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

Santa Anita Park opened for thoroughbred horse racing in 1934 and hosts
The Santa Anita Meet. The Santa Anita Meet generally commences on December 26
and runs until April each year. In addition, we lease Santa Anita Park to The
Oak Tree Racing Association, which is an unaffiliated not-for-profit California
association that holds a license to host The Oak Tree Meet for approximately six
weeks each fall. Pursuant to this lease, we receive rent that consists primarily
of a percentage of the on-track handle wagered on races run at Santa Anita Park
and a percentage of The Oak Tree Racing Association net commissions from fees
earned on racing content, exported from or imported to Santa Anita Park. Santa
Anita Park will be the site of the Breeders' Cup World Thoroughbred
Championships in 2003 during The Oak Tree Meet. Santa Anita Park has one of the
longest racing schedules of the top North American racetracks, totaling
approximately 110 to 115 racing days each year (including The Oak Tree Meet).
Average daily attendance in 2002 was approximately 10,000 customers per live
racing day, representing one of the highest average daily attendance figures of
all North American racetracks.

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Santa Anita Park had one of the highest total handles, or total
amounts wagered, of all North American racetracks in 2002, approximately
$1.410 billion, including wagers made at Santa Anita Park on its races
(including The Oak Tree Meet), wagers made at other wagering venues and
through various account wagering operations on Santa Anita Park's races,
and wagers made at Santa Anita Park on races imported to its inter-track
facilities. Wagers on Santa Anita Park's races (including The Oak Tree
Meet and all venues at which wagers were placed) totaled approximately
$947.0 million in 2002. Of this amount, approximately $771.6 million in wagers
were placed at other wagering venues to which we exported Santa Anita Park's
races via simulcast and through various account wagering operations. Santa
Anita Park exports its simulcast signal to approximately 1,000 off-track and
inter-track wagering facilities in 23 countries. Throughout the year, Santa
Anita Park operates as an inter-track wagering facility where customers can
wager on races that are imported to Santa Anita Park from other racetracks.

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

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

We are considering a variety of retail-based development proposals
for approximately 81 acres of excess real estate at Santa Anita Park. This
development would be intended to further enhance the entertainment experience
at Santa Anita Park, broaden the demographic composition of our customer base
and strengthen the loyalty of existing customers. These proposals are
preliminary. If, after a detailed review, any of these proposals turn out to
be commercially viable, additional time would be required to obtain the
necessary regulatory approvals and negotiate with potential business partners
who could be expected to provide marketing and development expertise and the
necessary financing.

GOLDEN GATE FIELDS

Golden Gate Fields is located on approximately 181 acres of land in the
cities of Albany and Berkeley, California, approximately eight miles from
Oakland and approximately 11 miles from San Francisco. There are approximately
5.2 million people within a 40-mile radius of Golden Gate Fields. In November
2002, we entered into an agreement to sell approximately 16 acres of excess real
estate located at Golden Gate Fields (see "Our Real Estate Portfolio").

Golden Gate Fields' racing season of approximately 103 racing days
complements the Bay Meadows racing schedule. The season runs after the close of
Bay Meadows' racing season in the fall through to the end of March, when Bay
Meadows opens again. From the end of December through to the close of the
season, Golden Gate Fields operates simultaneously with Santa Anita Park.
Average daily attendance in 2002 was approximately 2,500 customers per live
racing day.

Golden Gate Fields had one of the highest total handles of all North
American racetracks in 2002, approximately $559.9 million, including wagers made
at Golden Gate Fields on its races, wagers made at other wagering venues and
through various account wagering operations on Golden Gate Fields' races,

12

and wagers made at Golden Gate Fields on races imported to its inter-track
facilities. Wagers on Golden Gate Fields' races (including all venues at which
wagers were placed) totaled approximately $340.6 million in 2002. Of this
amount, approximately $308.0 million in wagers were placed at other wagering
venues to which we exported Golden Gate Fields' races via simulcast and through
various account wagering operations. Golden Gate Fields exports its simulcast
signal to approximately 900 off-track and inter-track wagering facilities in the
United States, Canada, Mexico and the Caribbean. Throughout the year, Golden
Gate Fields operates as an inter-track wagering facility where customers can
wager on races that are imported to Golden Gate Fields from other racetracks.

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

We are considering retail-based development proposals at Golden Gate
Fields. This development would be intended to further enhance the
entertainment experience at Golden Gate Fields, broaden the demographic
composition of our customer base and strengthen the loyalty of existing
customers. These proposals are preliminary, although plans have been
submitted to the appropriate municipalities for approval. If, after a
detailed review, we decide to proceed with such proposals or alternative
proposals, additional time would be required to obtain or finalize the
necessary regulatory approvals and negotiate with potential business partners
who could be expected to provide marketing and development expertise and the
necessary financing.

BAY MEADOWS

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

The racing season at Bay Meadows is divided into a spring meet, which
runs approximately 55 days between early April and mid-June, and a fall meet,
which runs approximately 50 days between late August and early November. This
schedule complements the racing schedule of Golden Gate Fields, which is located
approximately 30 miles from Bay Meadows. Average daily attendance in 2002 was
approximately 3,400 customers per live racing day. In addition, we sub-lease Bay
Meadows to the San Mateo County Exposition and Fair Association, which hosts The
San Mateo County Fair Meet for two weeks during the summer.

Bay Meadows had one of the highest total handles of all North American
racetracks in 2002, approximately $516.5 million, including wagers made at Bay
Meadows on its races, wagers made at other wagering venues and through various
account wagering operations on Bay Meadows' races, and wagers made at Bay
Meadows on races imported to its inter-track facilities. Wagers on Bay Meadows'
races (including all venues at which wagers were placed) totaled approximately
$267.3 million in 2002. Of this amount, approximately $232.8 million in wagers
were placed at other wagering venues to which we exported Bay Meadows' races via
simulcast and through various account wagering operations. Bay Meadows exports
its simulcast signal to approximately 900 off-track and inter-track wagering
facilities in the United States, Canada, Mexico and the Caribbean. Throughout
the year, Bay Meadows operates as an

13

inter-track wagering facility where customers can wager on races that are
imported to Bay Meadows from other racetracks.

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

The Bay Meadows property is operated under a lease that expires on
December 31, 2003, subject to a further one-year extension at the landlord's
option. We are exploring various alternative venues, including vacant land which
we purchased in Dixon, California, to conduct the racing dates currently held at
Bay Meadows after the expiry of the lease term (including any extensions).

GULFSTREAM PARK

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

Gulfstream Park opened in 1939 and for many years, ending in 2001, the
annual meet at Gulfstream Park lasted for approximately 63 days between January
and March. Beginning in 2002, Gulfstream Park was granted approval to run its
meet for 90 days between January and April. The Breeders' Cup, one of the
preeminent series of races in the United States, was held at Gulfstream Park
three times: in 1989, 1992 and 1999. Average daily attendance in 2002 was
approximately 9,300 customers per live racing day.

Gulfstream Park had one of the highest total handles of all North
American racetracks in 2002, approximately $789.5 million, including wagers made
at Gulfstream Park on its races, wagers made at other wagering venues and
through various account wagering operations on Gulfstream Park's races, and
wagers made at Gulfstream Park on races imported to its inter-track facilities.
Wagers on Gulfstream Park's races (including all venues at which wagers were
placed) totaled approximately $660.5 million in 2002. Of this amount,
approximately $571.5 million in wagers were placed at other wagering venues to
which we exported Gulfstream Park's races via simulcast and through various
account wagering operations. Gulfstream Park exports its simulcast signal to
approximately 1,000 off-track and inter-track wagering facilities in the United
States, Canada, the Caribbean and Mexico. For the 90-day meet in 2002, average
daily on-track handle was approximately $1.7 million per day, compared to
approximately $2.0 million per day in 2001, and average field size was
approximately 8.1 horses per race, compared to 8.9 horses per race in 2001.

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

Although we are considering a major redevelopment of Gulfstream Park,
we have deferred a decision on the project. Should we proceed as contemplated,
the redevelopment would include a simulcast pavilion, a sports and entertainment
arena, and a new turf club and grandstand. In addition, there would be
significant modifications and enhancements to the racetracks and stable areas.
If completed, the Gulfstream Park redevelopment would require the demolition of
a substantial portion of the current buildings and related structures, which
include the grandstand and turf club. The aggregate carrying

14

value at December 31, 2002 of the assets that would be demolished if the
Gulfstream Park redevelopment were completed is approximately $22.2 million. We
have deferred this project for now, but if we decide to proceed with the
Gulfstream Park redevelopment as originally intended and obtain board approval,
a reduction in the expected life of the existing assets would occur and a
write-down would be necessary.

LAUREL PARK

On November 27, 2002, we acquired a controlling interest in The
Maryland Jockey Club, which owns and operates Laurel Park and Pimlico Race
Course ("Pimlico"), and manages Colonial Downs. Laurel Park, which first
appeared on the racing scene in 1911, is located on approximately 236 acres
of land in Laurel, Maryland, between Washington, D.C. and Baltimore. There
are approximately 6.6 million people living within a 40-mile radius of Laurel
Park.

Laurel Park's racing season of approximately 107 racing days,
excluding 36 racing days conducted by Pimlico at Laurel Park, complements the
Pimlico racing schedule. Live thoroughbred racing is conducted at Laurel Park
from the end of Pimlico's summer/fall meet in early October to the end of
March, when Pimlico opens for its spring meet. Racing then resumes at Laurel
Park in late July for a four-week summer meet. Average daily attendance in
2002 was approximately 4,100 customers per live racing day.

Laurel Park's handle was approximately $379.9 million in 2002,
including wagers made at Laurel Park on its races, wagers made at other wagering
venues and through various account wagering operations on Laurel Park's races,
and wagers made at Laurel Park on imported races. Wagers on Laurel Park's races
totaled approximately $202.6 million in 2002. Of this amount, approximately
$180.9 million in wagers were placed at other wagering venues to which we
exported Laurel Park's signal via simulcast and through various account wagering
operations.

Laurel Park's facilities include a grandstand with seating for
approximately 5,200 customers, a 1 1/8-mile dirt track with a seven-furlong
chute, a one-mile turf course, stalls for approximately 1,100 horses and
parking facilities sufficient to accommodate approximately 8,000 cars.

PIMLICO RACE COURSE

Historic Pimlico Race Course, home of the Preakness Stakes(R), first
opened its doors in 1870, making it the second oldest racetrack in the United
States. Pimlico is situated on approximately 116 acres of land in Baltimore,
approximately 30 miles from Laurel Park. There are approximately 5.2 million
people living within a 40-mile radius of Pimlico.

The Preakness Stakes(R) dates back to 1873, two years before the first
Kentucky Derby was run. Since 1909, the Preakness Stakes(R) has been run
annually without interruption at Pimlico and this year's race, on May 17, 2003,
will mark the 128th edition of this sporting classic. Past winners of the
Preakness Stakes(R) include legendary race horses such as Man o' War, Citation,
Secretariat, Seattle Slew and Affirmed.

The racing season at Pimlico consists of approximately 110 racing
days, including 36 racing days conducted by Pimlico at Laurel Park, and is
divided into a 10 week spring meet between early April and mid-June and a
month-long summer/fall meet in September. The spring meet features 10 graded
stakes races, including the middle jewel of thoroughbred racing's Triple
Crown, the Preakness Stakes(R), which is run annually on the third Saturday
of May. Average daily attendance in 2002 was approximately 3,900 customers
per live racing day.

15

Pimlico's handle was approximately $466.9 million in 2002, including
wagers made at Pimlico on its races, wagers made at other wagering venues and
through various account wagering operations on Pimlico's races, and wagers made
at Pimlico on imported races. Wagers on Pimlico's races totaled approximately
$285.6 million in 2002. Of this amount, approximately $258.5 million in wagers
were placed at other wagering venues to which its signal was exported via
simulcast and through various account wagering operations.

Pimlico's facilities include a grandstand with seating for
approximately 13,000 customers, a one-mile dirt track with 1 1/4-mile and
3/4-mile chutes, a 7/8-mile turf course, stalls for approximately 800 horses and
parking facilities sufficient to accommodate approximately 3,500 cars.

LONE STAR PARK AT GRAND PRAIRIE

On October 23, 2002, we acquired Lone Star Park at Grand Prairie ("Lone
Star Park"), which operates thoroughbred and American quarter horse meets and is
located on approximately 285 acres of land in the City of Grand Prairie, Texas,
approximately 12 miles west of Dallas. There are approximately 5.1 million
people living within a 40-mile radius of Lone Star Park.

Lone Star Park is one of the newest horse racing facilities in the
United States, having opened for live thoroughbred and quarter horse racing in
1997. Lone Star Park's thoroughbred meet generally commences each year in early
April and continues through mid-July. Its quarter horse meet generally commences
each year in early October and continues through November. Average daily
attendance during the 2002 thoroughbred and quarter horse meets were
approximately 9,000 and 4,400 customers per live racing day, respectively. In
addition to its live racing facilities, Lone Star Park contains a
state-of-the-art 36,000 square foot simulcast pavilion, which operates
year-round.

Lone Star Park had total handle during 2002 of approximately $400.1
million, which includes wagers made at Lone Star Park on its races, wagers made
on Lone Star Park races at other wagering venues and through various account
wagering operations, and wagers made at Lone Star Park on races imported to its
inter-track facility. Wagers on Lone Star Park's races (both thoroughbred and
quarter horse) totaled approximately $213.7 million in 2002. Of this amount,
approximately $163.1 million in wagers were placed at other wagering venues to
which we exported Lone Star Park's signal and through various account wagering
operations.

Lone Star Park's facilities include a grandstand with seating for
approximately 14,300 customers, a one-mile dirt track, a 7/8-mile turf track,
stalls for approximately 1,400 horses and parking facilities sufficient to
accommodate approximately 11,300 cars. In addition to its grandstand, clubhouse
and turf club seating, Lone Star Park has two floors of luxury suites. Lone Star
Park's simulcast pavilion contains seating for approximately 675 customers.

Lone Star Park has been selected as the site of the 2004 Breeders'
Cup World Thoroughbred Championships. We have commenced an improvement
program of approximately $5.8 million designed to upgrade and expand certain
of Lone Star Park's facilities in anticipation of hosting this event. Under
existing State of Texas legislation and an agreement with the City of Grand
Prairie, we expect that approximately $2.9 million of these improvement
costs, along with a substantial portion of the chair and equipment rental and
other costs of hosting the event, will be reimbursed by governmental
authorities.

Lone Star Park is operated pursuant to a lease with a governmental
entity associated with the City of Grand Prairie. The lease expires in 2027, at
which time we will have an option to purchase the Lone Star Park property at a
purchase price equal to one-half of its then fair market value. Pursuant to the
lease

16

terms, if we exercise the option, we will receive credit against the purchase
price in an amount equal to the sum of all rent payments made during the life of
the lease discounted back to 1997 at a rate of 8% per annum.

THE MEADOWS

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

The Meadows first opened in 1963 and has a year-round racing schedule
encompassing approximately 210 live racing days. As part of this acquisition, we
also acquired four OTB facilities in the greater Pittsburgh area, located in New
Castle, Harmar Township, Moon Township and West Mifflin.

17

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

The Meadows and its associated OTB facilities generated approximately
$245.2 million in handle in 2002, including wagers made at The Meadows on its
races, wagers made at other wagering venues and through various account wagering
operations on The Meadows' races, wagers made at The Meadows on races imported
to its inter-track facilities and wagers made at The Meadows' associated OTB
facilities. Wagers on The Meadows' races (including all venues at which the
wagers were placed) totaled approximately $99.4 million in 2002. Of this amount,
approximately $90.0 million in wagers were placed at other wagering venues to
which we exported The Meadows' races via simulcast and through various account
wagering operations. The Meadows exports its simulcast signal to approximately
240 off-track and inter-track wagering facilities in the United States, Canada
and the Caribbean. By packaging the simulcast signal from The Meadows with the
simulcast signals from our other racetracks, we expect to further increase the
number of sites to which The Meadows' simulcast program is exported. Throughout
the year, The Meadows operates as an inter-track wagering facility where
customers can wager on races that are imported to The Meadows from other
racetracks.

THISTLEDOWN

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

Thistledown has one of the longest racing seasons of all North American
thoroughbred racetracks, consisting of approximately 187 racing days between
March and December. Thistledown hosts the Summit, Thistledown, Randall and
Cranwood meets. Annually, Thistledown hosts the Ohio Derby, which is the premier
graded stakes race in Ohio.

Thistledown's handle was approximately $221.0 million in 2002,
including wagers made at Thistledown on its races, wagers made at other wagering
venues and through various account wagering operations on Thistledown's races,
and wagers made at Thistledown on races imported to its inter-track facilities.
Wagers on Thistledown's races (including all venues at which wagers were placed)
totaled approximately $116.9 million in 2002. Of this amount, approximately
$88.0 million in wagers were placed at other wagering venues to which we
exported Thistledown's races via simulcast and through various account wagering
operations. Thistledown exports its simulcast signal to as many as 500 off-track
and inter-track wagering facilities in the United States. By packaging the
simulcast signal from Thistledown with the simulcast signals from our other
racetracks, we expect to further increase the number of sites to which
Thistledown's simulcast program is exported. Throughout the year, Thistledown
operates as an inter-track wagering facility where customers can wager on races
that are imported to Thistledown from other racetracks.

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

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REMINGTON PARK

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

Remington Park's racing schedule has been significantly rationalized,
at our request, over the past two years. In 2002, the racing schedule consisted
of two meets totaling 105 live racing days: a quarter horse meet that ran from
April to June and a thoroughbred meet that ran from mid-August to mid-December.
For 2003, Remington Park has been approved for 82 total racing days, consisting
of a 13-day mixed meet for June and July, a 12-day mixed meet (including
thoroughbreds) for July and August and a 57-day thoroughbred meet from August
until the end of November.

Remington Park's handle was approximately $110.3 million in 2002,
including wagers made at Remington Park on its races, wagers made at other
wagering venues and through various account wagering operations on Remington
Park's races, and wagers made at Remington Park on races imported to its
inter-track and associated OTB facilities. Wagers on Remington Park's races
(including all venues at which wagers were placed) totaled approximately $38.3
million in 2002. Of this amount, approximately $28.6 million in wagers were
placed at other wagering venues to which we exported Remington Park's races via
simulcast and through various account wagering operations. Remington Park
exports its simulcast signal to approximately 275 off-track and inter-track
wagering facilities in the United States. By packaging the simulcast signal from
Remington Park with the simulcast signals from our other racetracks, we expect
to further increase the number of sites to which Remington Park's simulcast
program is exported. Throughout the year, Remington Park operates as an
inter-track wagering facility where customers can wager on races that are
imported to Remington Park from other racetracks.

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

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

GREAT LAKES DOWNS

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

Great Lakes Downs, which commenced operations in January 1999, offers
approximately 118 live racing days beginning in April or May and ending in
October or November of each year.

Great Lakes Downs' handle was approximately $60.0 million in 2002,
including wagers made at Great Lakes Downs on its races, wagers made at other
wagering venues and through various account wagering operations on Great Lakes
Downs' races, and wagers made at Great Lakes Downs on imported races. Wagers on
Great Lakes Downs' races (including all venues at which wagers were placed)
totaled approximately $44.6 million in 2002. Of this amount, approximately $41.1
million in wages were placed at other wagering venues to which we exported Great
Lakes Downs' races via simulcast and through various account wagering
operations. Great Lakes Downs exports its simulcast signal to approximately 600
off-track and inter-track wagering facilities in the United States. By packaging
the simulcast signal from Great Lakes Downs with the simulcast signals from our
other racetracks, we expect to further increase the number of sites to which
Great Lakes Downs' simulcast program is exported. Throughout the year, Great
Lakes Downs operates as an inter-track wagering facility where customers can
wager on races that are imported to Great Lakes Downs from other racetracks.

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

PORTLAND MEADOWS

Portland Meadows is a thoroughbred racetrack located on approximately
100 acres in the Delta Park area of Portland, Oregon. There are approximately
2.0 million people living within a 40-mile radius of Portland Meadows.

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

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

Portland Meadows generated approximately $42.5 million in handle during
its abbreviated 2002 race meet, including wagers made at Portland Meadows on its
races, wagers made at other wagering venues and through various account wagering
operations on Portland Meadows' races and wagers on imported races at Portland
Meadows and OTB facilities within the State of Oregon during Portland Meadows'
live meet. Wagers on Portland Meadows' races (including all venues at which the
wagers were placed) totaled approximately $7.0 million in 2002. Of this amount,
approximately $5.0 million in wagers were placed at other wagering venues to
which we exported Portland Meadows' races via simulcast and through various
account wagering operations. Portland Meadows exports its simulcast signal to
approximately 55 off-track and inter-track wagering facilities in the United
States and Canada. By packaging the simulcast signal from Portland Meadows with
the simulcast signals from our other

19

racetracks, we expect to further increase the number of sites to which Portland
Meadows' simulcast program is exported. Throughout the year, Portland Meadows
operates as an inter-track wagering facility where customers can wager on races
that are imported to Portland Meadows from other racetracks.

Due to a dispute with the United States Environmental Protection Agency
("EPA") concerning the amount of stormwater the Portland Meadows facility must
capture and send to the municipal sewers during heavy rain, the 2001-2002 live
meet commenced after its planned September 1, 2001 opening date and concluded
early, on February 10, 2002. A stormwater retention system for the facility,
acceptable to the EPA, was completed in May 2002 and live racing resumed in
October 2002. See "Our Business Environmental Matters".

The property on which Portland Meadows is located is leased pursuant
to a lease agreement which expires on May 15, 2005.

MULTNOMAH GREYHOUND PARK

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

Multnomah Greyhound Park first opened in 1933 and offers approximately
127 live racing days beginning in April or May and ending in mid-October of each
year.

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

Multnomah Greyhound Park generated approximately $43.4 million in
handle in 2002, including wagers made at Multnomah Greyhound Park on its races,
wagers made at other wagering venues and through various account wagering
operations on Multnomah Greyhound Park's races, and wagers made on imported
races at Multnomah Greyhound Park and OTB facilities within the State of Oregon
during Multnomah Greyhound Park's live meet. Wagers on Multnomah Greyhound
Park's races (including all venues at which the wagers were placed) totaled
approximately $12.8 million in 2002. Of this amount, approximately $5.1 million
in wagers were placed at other wagering venues to which we exported Multnomah
Greyhound Park's races via simulcast and through various account wagering
operations. Multnomah Greyhound Park exports its simulcast signal to
approximately 110 off-track and inter-track wagering facilities in the United
States, Canada and the Virgin Islands. Throughout the year, Multnomah Greyhound
Park operates as an inter-track wagering facility where customers can wager on
races that are imported to Multnomah Greyhound Park from other racetracks.

COLONIAL DOWNS

The Maryland Jockey Club manages the racing operations of Colonial
Downs and its network of four OTB facilities in Virginia. Colonial Downs is a
racetrack in New Kent, Virginia which hosted 26 days of thoroughbred racing
and 24 days of standardbred racing in 2002. The thoroughbred meet at Colonial
Downs runs from mid-June to mid-July, between the meets at Pimlico Race
Course and Laurel Park. The standardbred meet runs from early October to
mid-November. The track's signature race is the Virgina Derby, which is a 1
1/4-mile turf race for three-year-old horses that features a $500,000 purse.

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PALM MEADOWS

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

The first phase of our Palm Meadows training center opened in November
2002. The facility currently includes a 1 1/8-mile dirt track, a European style
one-mile jogging path and stalls for approximately 800 thoroughbreds. A one-mile
turf track will be completed following the 2003 Gulfstream Park meet. The
development has also been designed to accommodate up to 600 additional stalls,
six dormitory buildings, a canteen, an administration office and a stand from
which owners and trainers may observe their horses' training performance, all of
which we presently expect to construct in phases at later dates. We have also
applied to Palm Beach County for subdivision approval to construct an equestrian
estate residential development on a portion of our property adjacent to the
training facility. As of December 31, 2002, we have spent approximately $46.7
million on the development of the training center, in addition to the initial
purchase price of the land.

SAN LUIS REY DOWNS

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

BOWIE TRAINING CENTER

The Bowie Training Center is located in Prince George's County,
Maryland on approximately 162 acres. The site is located eight miles from
Laurel Park and 30 miles from Pimlico Race Course. The facility includes
approximately 1,000 stalls, a one-mile oval dirt main track, a 1/4-mile
covered dirt track, 17 barns and dormitories capable of accommodating up to
224 grooms. Originally opened in 1914 as a racetrack, the property has been
utilized since 1985 as a year-round training center to support thoroughbred
racing at Pimlico Race Course and Laurel Park.

AUSTRIAN RACETRACK DEVELOPMENT

In 2001, we commenced a 200 acre development on our land in
Ebreichsdorf, Austria, consisting of a horse racetrack combined with a gaming
and entertainment center. The racing surfaces were substantially completed in
2002, as were eight barns containing approximately 600 stalls. As of December
31, 2002, we have spent or committed a total of approximately $36.0 million on
improvements to this property. We are continuing joint venture negotiations with
an Austrian third party in order to capitalize on alternative gaming
possibilities within the development. At the same time, we are developing the
final plans for the design, engineering and financing of the grandstand and
entertainment facilities. See also "Risk Factors -- Risks Relating to Our Gaming
Operations".

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MICHIGAN RACETRACK DEVELOPMENT

On August 29, 2002, we filed an application with the Michigan Racing
Commissioner's Office for a license to construct a racetrack in the Greater
Detroit area. The proposed site for the new racetrack is in the City of Romulus,
Michigan, on a property which is situated less than two miles from the Detroit
Metropolitan Airport. The proposed site, which we have contracted to purchase,
subject to satisfactory completion of due diligence, consists of approximately
212 acres in a location less than 25 miles from the center of the business
districts of both Detroit and Ann Arbor. The proposed new track would be a dual
purpose facility which could host both thoroughbred and standardbred racing. The
issuance of a racetrack license is subject to the review and approval of the
application by the Michigan Racing Commissioner's Office. The construction of
the racetrack is also subject to certain regulatory approvals, including site
plan application review by the City of Romulus.

In December 2002, a competing application for a license to construct
and operate a horse racetrack with pari-mutuel wagering was filed with the
Michigan Office of Racing Commissioner by Triple Creek Associates, LLC. The site
for this competing application is located in Van Buren Township, Michigan, which
is adjacent to the City of Romulus, where our proposed racetrack is located.

ACCOUNT WAGERING OPERATIONS

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

TELEPHONE ACCOUNT WAGERING AND INTERNET ACCOUNT WAGERING

Operators of telephone account wagering may establish a hub in one of
the states where telephone account wagering is permitted, establish accounts
into which customers deposit funds through debit or credit cards or by check to
fund their wagering, and receive wagering instructions from these customers.
Wagers placed by customers are not allowed to exceed the amounts on deposit in
their accounts. States permitting telephone account wagering allow telephone
account wagering facilities to accept wagering instructions from customers
residing in those states as well as in states where the placing of such wagering
instructions by telephone is not expressly prohibited.

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

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

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On January 25, 2002, we announced that our wholly-owned subsidiary that
operates XpressBet(TM)'s California wagering hub had been granted a license to
conduct account wagering in the State of California by the California Horse
Racing Board.

Since 1997, XpressBet(TM) has been party to a Telecommunications
Facilitation System Agreement with YouBet.com, Inc. ("YouBet") whereby YouBet
operates an interactive system over the Internet from its website that
facilitates the transmission of wagering information from customers to
XpressBet(TM)'s Pennsylvania hub account wagering operation. Users of YouBet's
interactive system are customers of XpressBet(TM), but net revenue is shared by
XpressBet(TM) and YouBet. Until August 2001, YouBet offered only the XpressBet
system, but now also offers its own interactive wagering system at its website.
For the year ended December 31, 2002, total handle wagered through our
California and Pennsylvania hubs was $118.4 million, of which $31.5 million was
wagered through the California hub and $86.9 million was wagered through the
Pennsylvania hub. Of the amount wagered through the Pennsylvania hub, $39.4
million was wagered through the YouBet interactive system and approximately
$47.5 million came from telephone and on-line wagering instructions received by
XpressBet(TM)'s Pennsylvania hub. Our agreement with YouBet expires on December
25, 2003, subject to our right to terminate it after March 31, 2003 by giving 60
days written notice of termination.

We expect that account wagering through XpressBet(TM) will make
wagering on horse racing more convenient for our customers and expand the market
for our simulcast product by enabling us to fully utilize an important
distribution channel for our horse racing product. In the future, we will seek
to expand the operations of XpressBet(TM) through a focused marketing effort.

INTERACTIVE TELEVISION-BASED WAGERING

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

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

TELEVISION DISTRIBUTION

The first step in our television distribution plans was realized
through our participation in RTN, which is owned equally by Roberts
Communications Network, Inc., Greenwood Racing, Inc. and us. RTN is a private
direct-to-home satellite service that offers eight channels dedicated to horse
racing on a monthly subscription basis.

The RTN service is being managed independently by Roberts
Communications Network, Inc. on behalf of RTN and we are primarily a content
provider to the service. We believe that offering core and

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loyal wagering customers and owners, trainers and breeders this dedicated racing
on television is important.

In July 2002, we launched HorseRacing TV(TM), a new television
network focused exclusively on horse racing, which is presently carried on
cable in the Western Pennsylvania and San Diego, California areas, as well as
on RTN. We are seeking to achieve broader distribution of HorseRacing TV(TM)
through U.S. cable and satellite systems. HorseRacing TV(TM) is produced by
Santa Anita Park's award-winning television department.

We believe that broad television distribution will help increase future
interest in the sport and attract additional wagering customers. In the effort
to broaden the audience, reach and appeal of horse racing and wagering across
North America, we are pursuing carriage agreements with multiple system digital
cable operators (MSO) and direct broadcast satellite operators (DBS) for
HorseRacing TV(TM). The carriage agreements that we are seeking for HorseRacing
TV(TM) would package the network with other digital sports programming sold to
DBS and MSO subscribers.

COMPETITION

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

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

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

GOVERNMENT REGULATION

Horse racing is a highly regulated industry. Individual states control
the operations of racetracks located within their respective jurisdictions with
the intent of, among other things, protecting the public from unfair and illegal
gambling practices, generating tax revenue, licensing racetracks and operators
and preventing organized crime from involvement in the industry. Although the
specific form may vary,

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states that regulate horse racing generally do so through a horse racing
commission or other gambling regulatory authority. Regulatory authorities
perform background checks on all racetrack owners prior to granting them the
necessary operating licenses. Horse owners, trainers, jockeys, drivers,
stewards, judges and backstretch personnel are also subject to licensing by
governmental authorities. State regulation of horse races extends to virtually
every aspect of racing and usually extends to details such as the presence and
placement of specific race officials, including timers, placing judges, starters
and patrol judges.

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

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

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

In Maryland, the Maryland Racing Commission approves annual licenses
for racetracks to conduct thoroughbred and standardbred horse races. However,
Maryland's racing law effectively provides that except for Pimlico Race Course
and Laurel Park, the Maryland Racing Commission may not issue thoroughbred
racetrack licenses or thoroughbred race dates to any racetracks that have a

25

circumference of at least one mile and are located within the Baltimore and
Washington, D.C. markets. Other than a track located in Timonium, Maryland (a
northern suburb of Baltimore), which has a racetrack circumference of less than
one mile and which typically conducts an eight-day race meeting in connection
with the Maryland State Fair, the Maryland Racing Commission has not approved a
thoroughbred track license or thoroughbred race dates for any racetrack in
either the Baltimore or Washington, D.C. markets. We are currently subject to an
agreement with the Maryland Racing Commission that obligates us, as a condition
of our racing license in Maryland, to expend at least $15 million on capital
expenditures for renovations at the Laurel Park and Pimlico racetracks and the
thoroughbred training facility in Bowie, Maryland, together with their related
facilities and operations, between January 1, 2003 and June 30, 2004.

In Virginia, the Virginia Racing Commission regulates all aspects of
the conduct of horse racing and pari-mutuel wagering. Virginia law requires both
an owner's license, for those persons who own or lease the property and
facilities at which live horse racing is conducted, and an operator's license,
for those persons responsible for conducting live horse racing or pari-mutuel
wagering at a licensed racetrack facility or off-track wagering facility. Each
type of license has a duration of twenty years, subject to ongoing compliance
with its terms and with applicable laws and regulations. Unlike most other
states in which we operate, annual renewals are not required, other than an
annual application for race dates. MEC, through its indirect subsidiary,
Maryland-Virginia Racing Circuit, Inc. ("MVRC"), possesses a 20-year operator's
license that was issued in 1996, and pursuant to which MVRC manages the live
horse racing and pari-mutuel operations on behalf of the owners of Colonial
Downs racetrack. Currently, Colonial Downs holds the only unlimited owner's
license issued by the Virginia Racing Commission, and Colonial Downs and MVRC
each hold the only unlimited operator's licenses issued by the Virginia Racing
Commission. Unlimited licenses entail 15 or more race days.

In Florida, the Division of Pari-Mutuel Wagering considers applications
for annual licenses for thoroughbred, standardbred and quarter horse meetings.
Tax laws in Florida have historically discouraged the three Miami-area
racetracks, Gulfstream Park, Hialeah Park (which no longer hosts live racing)
and Calder Race Course, from applying for race days outside of their traditional
racing season, so the race days for these Miami-area racetracks did not overlap.
Effective July 1, 2001, a new tax structure has eliminated this deterrent. As a
result, Gulfstream Park applied for and received an additional 27 race days for
2002 and 2003, for a total of 90 race days per year. This deregulation and
accompanying increase in race days may, in the future, cause an overlap in
racing seasons which could result in Gulfstream Park facing direct competition
from other Miami-area racetracks.

In Texas, the Texas Racing Commission issues licenses to conduct
pari-mutuel wagering. Once issued, a license can be suspended or revoked for a
variety of reasons. Even with a license, a racetrack operator can conduct live
racing only during the time periods authorized by the Texas Racing Commission.
The Texas Racing Commission has not licensed any operator of a horse or
greyhound racetrack, other than Lone Star Park at Grand Prairie, in the Dallas
area.

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

26

In Oklahoma, the Oklahoma Horse Racing Commission regulates all
aspects of live horse racing with pari-mutuel wagering. The Commission
considers and approves annual licenses for thoroughbred and mixed breed
(quarter horse, paint horse and Appaloosa) race meetings. Currently, there
are three racetracks in Oklahoma that are licensed to offer a live race meet
with pari-mutuel wagering. Since it opened in 1988, Remington Park has been
the only racetrack in the Oklahoma City metropolitan area licensed to conduct
live horse racing and pari-mutuel wagering.

In Michigan, the Office of Racing Commissioner approves annual licenses
for thoroughbred, standardbred and mixed breed (quarter horse, paint horse,
Appaloosa and Arabian) race meetings. There are currently no
thoroughbred-exclusive racetracks in Michigan other than Great Lakes Downs.
However, the Office of Racing Commissioner has licensed standardbred race
meetings of five existing racetracks in Michigan. See "Our Business - Business
Developments" in connection with our application for a license to construct a
dual purpose racetrack in the Greater Detroit area and a competing application
filed by a third party.

In Pennsylvania, the Pennsylvania Harness Racing Commission approves
annual licenses for standardbred racetracks, while the Pennsylvania Horse Racing
Commission approves annual licenses for thoroughbred racetracks. Neither the
Pennsylvania Harness Racing Commission nor the Pennsylvania Horse Racing
Commission has licensed any other operators of horse racetracks, other than The
Meadows, in the Pittsburgh area. However, five applications for racetracks in
the Pittsburgh marketplace have been filed in the past year, consisting of two
standardbred applications and three thoroughbred applications. In addition, on
January 28, 2003, we filed an application with the Pennsylvania Horse Racing
Commission for a proposed thoroughbred horse racing and pari-mutuel wagering
operation to be constructed in Findlay Township, less than three miles from the
Pittsburgh International Airport. See "Our Business - Business Developments." On
September 26, 2002, the Pennsylvania Horse Racing Commission approved an
application for a thoroughbred racing license for an operation to be located
near Erie, Pennsylvania, which is approximately 100 miles from The Meadows.

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

OUR REAL ESTATE PORTFOLIO

As of December 31, 2002, the aggregate net book values of our real
estate are as follows:

Included in our income before income taxes for the year ended December
31, 2002 are gains on the sale of our non-core real estate of $2.2 million
(these gains amounted to $20.4 million in 2001 and $7

27

million in 2000). We expect the gains from sales of our non-core real estate to
be reduced to zero over the next year as the balance of our non-core real estate
is sold. We are actively marketing and intend to continue to sell the balance of
our non-core real estate in order to provide capital to grow and enhance our
racing business; accordingly, we are currently servicing, improving and seeking
zoning and other approvals for some of this real estate in order to enhance its
value on sale. See "Risk Factors -- Risks Regarding Our Company -- Our recent
operating income includes substantial gains from the sale of non-core real
estate, which sales may soon be completed, causing our future operating income
and cash flow to decrease".

We currently have substantial holdings of excess racing real estate,
revenue-producing non-racing real estate and non-core real estate in excess of
that needed to support our racetrack operations. We are continually
re-evaluating each of these holdings in relation to our core business
activities. We will, from time to time, sell or otherwise monetize some or all
of these real estate holdings in order to fund the growth of our core racing
operations and related businesses. The aggregate net book value of these excess
real estate assets as of December 31, 2002 was approximately $179.6 million.

Included in our excess racing real estate is land adjacent to several
of our racetracks, Santa Anita Park, Gulfstream Park, Golden Gate Fields, Lone
Star Park, Laurel Park and Pimlico Race Course, totaling approximately 314
acres. We are considering a variety of options with respect to this excess land,
including entertainment and retail-based developments that could be undertaken
in conjunction with business partners who could be expected to provide the
necessary marketing and development expertise, as well as the necessary
financing. In November 2002, we entered into an agreement with the East Bay
Regional Park District, a California Special District, to sell approximately 16
acres of excess real estate located at Golden Gate Fields in Berkeley,
California. The value of the consideration to be received by us for the real
estate, excluding certain tax benefits of $1.4 million, is $8.5 million. The
carrying value of the property, prior to entering into the agreement, was $14.3
million, which was based on an allocation of the purchase price for the Golden
Gate Fields acquisition in 1999. The transaction is expected to close in the
third quarter of 2003, subject to certain conditions, including the purchaser
completing its due diligence procedures. In 2002, we recorded a write-down of
this real estate which resulted in a loss before and after income taxes of $5.8
million and $2.4 million, respectively.

Our development real estate includes: approximately 562 acres of land
in Ebreichsdorf, Austria, located approximately 15 miles south of Vienna, on
which we have commenced development of a horse racetrack and gaming facility;
approximately 110 acres of undeveloped land in Oberwaltersdorf, Austria, also
located approximately 15 miles south of Vienna; approximately 800 acres of
undeveloped land in upstate New York; approximately 260 acres of undeveloped
land in Dixon, California located approximately 20 miles west of Sacramento and
approximately 435 acres of undeveloped land in Ocala, Florida.

Our revenue-producing non-racing real estate consists of two golf
courses that we own and operate, Fontana Sports and Magna Golf Club, related
recreational facilities and gated residential communities under development in
Austria and in Canada in close proximity to the golf courses. Fontana Sports,
which opened in 1997, is a semi-private sports facility located in
Oberwaltersdorf, Austria that includes an 18-hole golf course, a clubhouse which
contains dining facilities, a pro shop, a tennis club and a fitness facility.
The Magna Golf Club, which is in Aurora, Ontario, adjacent to our and Magna
International's headquarters approximately 30 miles north of Toronto, opened in
May 2001. The clubhouse was completed in the spring of 2002 and contains dining
facilities, a members' lounge, a pro shop and a fitness facility.

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Pursuant to an access arrangement effective as of March 1, 1999, Magna
International is paying us an annual fee of 2.5 million Euros (approximately
$2.6 million) to access the Fontana Sports golf course and related recreational
facilities for Magna International-sponsored corporate and charitable events, as
well as for business development purposes. The access fee relating to Fontana
Sports is payable only until March 1, 2004, unless renewed by mutual agreement
of the parties. Pursuant to an access agreement effective as of January 1, 2001,
Magna International is paying us an annual fee of Cdn. $5.0 million
(approximately $3.2 million) to access the Magna Golf Club. The access fee
relating to the Magna Golf Club is payable only until December 31, 2003, unless
renewed by mutual agreement of the parties. The Fontana Sports and Magna Golf
Club properties are both subject to rights of first refusal in favor of Magna
International if we decide to sell either of them.

ENVIRONMENTAL MATTERS

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

A dispute with the EPA (which has since been resolved) involving the
Portland Meadows racetrack caused us to postpone the planned opening of that
facility's 2001-2002 meet on September 1, 2001. The dispute with the EPA
concerned the amount of stormwater the facility must capture and send to the
municipal sewers during heavy rain. The Portland Meadows facility ultimately
opened in October 2001 for an abbreviated race meet which concluded on February
10, 2002. Pursuant to a consent decree that we entered into with the EPA, we
completed the construction of a stormwater retention system acceptable to the
EPA in May 2002. Live racing resumed at Portland Meadows in October 2002.

Our receipt of the necessary regulatory permits and other approvals to
operate the Palm Meadows facility is conditional on our agreement to haul horse
manure off-site on an interim basis, to post a performance bond to service such
obligation, and to either have an approved treatment facility in place by
November 15, 2003, or to have received all required permits and other approvals
for such facility, commenced construction and posted a performance bond by
November 15, 2003, to ensure the completion of the treatment facility by at
latest November 15, 2004. In the event of a breach of any of those timelines, we
will be forced to cease operations at Palm Meadows.

Additionally, our Gulfstream Park facility has recently received a
Notice of Violation ("NOV") from Broward County indicating violations of the
facility's wastewater discharge permit. We are presently negotiating a
compliance plan with Broward County to address the NOV. However, we do not
believe that the resulting compliance plan or any penalties that may be assessed
will have a material adverse effect on our financial condition and operating
results.

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While we have environmental permits for many of our racetracks and are
taking steps to comply with them and other applicable environmental legal
requirements, we cannot assure you that we have all required environmental
permits or are otherwise in compliance with all applicable environmental
requirements. Where we determine that an environmental permit or other
remediation or compliance programs are required of existing or acquired
racetracks, we intend to seek the necessary approvals, which may require us to
make significant capital expenditures. Also, changes in governmental laws and
regulations are ongoing, as evidenced by proposed changes to the CAFO
regulations that would significantly increase the burden of CAFO regulations,
and may make environmental compliance increasingly expensive. In addition to
environmental requirements that regulate our operations, various environmental
laws and regulations in the United States, Canada and Europe impose liability on
us as a current or previous owner and manager of real property, for the cost of
maintenance, removal and remediation of hazardous materials released or
deposited on or in properties now or previously managed by us or disposed of in
other locations. We have adopted a health and safety and environmental policy,
pursuant to which we are committed to ensuring that a systematic review program
is implemented and measured for each of our operations with a goal of continued
improvement in health and safety and environmental matters. We believe that
environmental legal requirements will not have a material adverse impact on our
business, although there can be no assurance of that.

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

EMPLOYEES

As of December 31, 2002, we employed approximately 5,100 full-time
employees, approximately 3,000 of whom were represented by unions. Due to the
seasonal nature of the live horse racing industry, the number of our seasonal
and part-time employees will vary considerably throughout the year.

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

BUSINESS DEVELOPMENTS

Set forth below is a summary of certain transactions effected in 2002,
but not yet completed, and other business developments that have occurred since
January 1, 2003.

FLAMBORO DOWNS

On June 4, 2002, we entered into an agreement to acquire all the shares
of Flamboro Downs Holdings Limited, the owner and operator of Flamboro Downs, a
standardbred racetrack located in Hamilton, Ontario, 45 miles west of Toronto,
Ontario. Flamboro Downs conducts a live harness racing meet year-round with
approximately 260 live race days. Flamboro Downs also houses a gaming facility
with 750 slot machines operated by the Ontario Lottery and Gaming Corporation.
Pursuant to an agreement with the Ontario Lottery and Gaming Corporation,
Flamboro Downs receives 20% of the "net win" (slot machine revenues minus payout
to slot players), with one-half of that amount distributed to horsemen and the
other half being retained by Flamboro Downs. Flamboro Downs also operates nine

30

OTB facilities in its Home Market Area, as designated by the Canadian
Pari-Mutuel Agency, and in 2002 began conducting telephone account wagering in
that area through an agreement with Woodbine Entertainment Group.

On October 18, 2002, Ontario Racing Inc., our former subsidiary that is
presently owned by one of our employees, acquired Flamboro Downs Holdings
Limited. Our employee had received the requisite regulatory clearances and
approvals to own and operate Flamboro Downs. The purchase price, net of cash,
was $55.9 million, consisting of a payment of $23.1 million in cash on closing,
with the remainder satisfied by ongoing payments under secured notes of
approximately $32.8 million. One of our wholly-owned subsidiaries has provided
the funding for the acquisition cost by way of a revolving secured loan facility
to Ontario Racing Inc., and we have guaranteed the secured notes.

Our employee has agreed to transfer all the shares of Ontario Racing
Inc. back to us, at his original cost, five business days after we, including
our officers and directors, have received all regulatory approvals required to
own and operate Flamboro Downs. We are using the equity method of accounting for
the results of operations of Ontario Racing Inc. pending receipt of these
approvals, which are expected to be received during the spring of 2003.

SUNSHINE MILLIONS(TM)

On January 25, 2003, Santa Anita Park and Gulfstream Park jointly
hosted the inaugural running of the Sunshine Millions(TM), a thoroughbred horse
racing event which featured California-breds and Florida-breds in head-to-head
competition. The event consisted of eight races - four races at Santa Anita Park
and four races at Gulfstream Park- with purses ranging from $250,000 to $1
million per race, for a total of $3.6 million in guaranteed purses. The event,
which generated significant increases in attendance and handle relative to
appropriate comparables from the previous year, was covered on a national NBC
broadcast.

PITTSBURGH RACETRACK DEVELOPMENT

On January 28, 2003, we filed an application with the Pennsylvania
Horse Racing Commission for a license to conduct thoroughbred horse racing and
pari-mutuel wagering at a new racetrack in the Pittsburgh area. The proposed
site for the new racetrack is in Allegheny County, Pennsylvania, on a property
which is located less than three miles from the Pittsburgh International
Airport. The proposed site, which we have contracted to purchase, subject to
satisfactory completion of due diligence, consists of approximately 174 acres
located less than 18 miles from the center of Pittsburgh's business district.
The issuance of a racetrack license is subject to the review and approval of our
application by the Pennsylvania Horse Racing Commission. The construction of the
proposed racetrack is also subject to certain regulatory approvals.

DIXON DOWNS DEVELOPMENT

On March 3, 2003, we filed an application for various local approvals
with the City of Dixon, California relating to the phased development of a
destination entertainment and retail complex. The centerpiece of the development
would be a thoroughbred horse racing track ("Dixon Downs") to be constructed on
a 260-acre site in Dixon's Northeast Quadrant, approximately 20 miles from
Sacramento. The proposed site was purchased in 2001 and 2002. The environmental
impact analysis and the rest of the land-use approval process normally takes
from 12 to 18 months for a project of this nature. See "Our Business - Our Real
Estate Portfolio."

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RISK FACTORS

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

If any of the following risks, or any of the risks described in the
other documents we file with the SEC, actually occur, our business, financial
condition, operating results and prospects could be materially adversely
affected. In that case, our ability to make payments of principal and interest
on our debt securities may be limited and the trading price of the shares of our
Class A Subordinate Voting Stock or other securities could decline substantially
and investors may lose all or part of the value of the shares of our Class A
Subordinate Voting Stock or other securities held by them.

RISKS REGARDING OUR COMPANY

WE ARE A RELATIVELY NEW COMPANY WITH A SHORT HISTORY OF RACETRACK
OPERATIONS. WE MUST SUCCESSFULLY INTEGRATE RECENT RACETRACK ACQUISITIONS OR OUR
OPERATING RESULTS MAY BE ADVERSELY AFFECTED.

We were incorporated four years ago and acquired our first racetrack in
December 1998. Accordingly, although all our racetracks have been in operation
for some time, we have a relatively short history of owning and operating
racetracks. The acquisition of Santa Anita Park was completed in December 1998,
the acquisition of Gulfstream Park was completed in September 1999, the
acquisition of Remington Park and Thistledown was completed in November 1999,
the acquisition of Golden Gate Fields was completed in December 1999, the
acquisition of Great Lakes Downs was completed in February 2000, the acquisition
of Bay Meadows was completed in November 2000, the acquisition of The Meadows
was completed in April 2001, the acquisition of Multnomah Greyhound Park was
completed in October 2001, the acquisition of Lone Star Park at Grand Prairie
was completed in October 2002 and the acquisition of Pimlico Race Course and
Laurel Park was completed in November 2002. The Portland Meadows facility
commenced operations under our management in July 2001 and we assumed the
management of Colonial Downs in November 2002. As of the date of this Annual
Report, our acquisition of Flamboro Downs is pending. Prior to their respective
acquisitions, most of these racetracks had been operated separately under
different ownership. Completing the integration of these businesses into our
operations will require a significant dedication of management resources and
further expansion of our information and other operating systems.

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

WE MAY NOT BE ABLE TO OBTAIN FINANCING OR MAY BE ABLE TO OBTAIN IT ONLY
ON UNFAVORABLE TERMS, WHICH MAY AFFECT THE VIABILITY OF OUR EXPANSION AND
IMPROVEMENT PROJECTS OR MAKE EXPANSION AND IMPROVEMENT MORE COSTLY.

We may require substantial additional financing in order to expand and
improve our operations, including financing related to alternative gaming
facilities, if any such opportunities are available to us. It is possible that
this financing will not be available or, if available, will not be available on
terms that are

32

favorable to us. Our $100 million unsecured revolving credit facility with a
Canadian chartered bank is required to be reduced to $50 million no later than
April 30, 2003, and matures on October 10, 2003. As of December 31, 2002,
indebtedness aggregating $49.5 million and letters of credit totaling $20
million were outstanding under this facility. There can be no assurance that the
amounts, terms and conditions involved in a renewal of the facility will be
favorable, or that the facility will be able to be renewed at all. Our
controlling stockholder, Magna International, has made a commitment to its
shareholders that it will not, before June 1, 2006, make any further debt or
equity investments in, or otherwise provide financial assistance to, us or any
of our subsidiaries without the prior consent of the holders of a majority of
Magna International's subordinate voting shares. If we are unable to obtain
financing on favorable terms, or at all, we may not be able to expand and
improve our operations, which could have a material adverse effect on our future
profitability.

OUR REVOLVING CREDIT FACILITY WITH A CANADIAN CHARTERED BANK IMPOSES
IMPORTANT RESTRICTIONS ON US.

Our revolving credit facility with a Canadian chartered bank requires
us to maintain a debt to earnings before interest, taxes, depreciation and
amortization ratio not greater than 3.5 to 1, and an interest coverage ratio not
lower than 1.7 to 1, each as calculated under the facility. The credit agreement
also contains customary covenants relating to our ability to incur additional
indebtedness, make future acquisitions, enter into certain related party
transactions, consummate asset dispositions, incur capital expenditures and make
restricted payments. In addition, the credit agreement requires us to use the
first $75 million of net cash proceeds of any public debt or equity offering to
repay the loans outstanding under the facility. These restrictions may limit our
ability to expand, pursue our business strategies and obtain additional funds.
Our ability to meet these financial ratios and comply with these covenants may
be affected by changes in business conditions or results of operations, adverse
regulatory developments and other events beyond our control. We cannot assure
you that we will meet these financial ratios or continue to comply with these
covenants. Failure to comply with these restrictions may result in the
occurrence of an event of default under the credit facility. Upon the occurrence
of an event of default, the lender may terminate the credit facility and demand
immediate payment of all amounts borrowed by us under that facility, which could
adversely affect our ability to repay our debt securities and would adversely
affect the trading price of our Class A Subordinate Voting Stock.

WE HAVE RECRUITED MOST OF OUR SENIOR EXECUTIVE OFFICERS FROM OUTSIDE
THE RACETRACK INDUSTRY.

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

OUR RECENT OPERATING INCOME INCLUDES GAINS FROM THE SALE OF NON-CORE
REAL ESTATE, WHICH SALES MAY SOON BE COMPLETED, CAUSING OUR FUTURE OPERATING
INCOME AND CASH FLOW TO DECREASE.

Approximately 9% of our earnings before interest, taxes, depreciation
and amortization, before write-downs, for the year ended December 31, 2002
resulted from gains from non-core real estate sales. These gains will likely be
reduced to zero over the next year as we endeavor to sell the balance of our
non-core real estate portfolio. Additionally, our short-term and annual
operating income and cash flow may decline from the prior year due to decreases
in non-core real estate sales. If we do not replace these

33

gains or offset these decreases with additional operating income and cash flow
from our racetrack operations and other sources, our future operating income and
cash flow will decline.

OUR BUSINESS IS HEAVILY CONCENTRATED AT CERTAIN OF OUR RACETRACKS.

Four of our racetracks, Santa Anita Park, Gulfstream Park, Golden Gate
Fields and Bay Meadows, accounted for approximately 64% of our revenue and 197%
of our earnings before interest, taxes, depreciation and amortization, before
write-downs, for the year ended December 31, 2002. If a business interruption
were to occur and continue for a significant length of time at any of these
racetracks, it could adversely affect our operating results. Additionally,
certain of our other racetrack properties have experienced operating losses
before interest, income taxes, depreciation and amortization over the past three
years. The operating performance of these racetracks may not improve in the
future.

WE ARE CONTROLLED BY MAGNA INTERNATIONAL AND THEREFORE MAGNA
INTERNATIONAL IS ABLE TO PREVENT ANY TAKEOVER OF US BY A THIRD PARTY.

Magna International owns all our Class B Stock, which is generally
entitled to 20 votes per share, and therefore is able to exercise approximately
96% of the total voting power of our outstanding stock. It is therefore able to
elect all our directors and to control us. As a result, Magna International is
able to cause or prevent a change in our control.

OUR RELATIONSHIP WITH MAGNA INTERNATIONAL IS NOT AT "ARM'S LENGTH", AND
THEREFORE MAGNA INTERNATIONAL MAY INFLUENCE US TO MAKE DECISIONS THAT ARE NOT IN
THE BEST INTERESTS OF OUR OTHER STOCKHOLDERS.

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

IF WE DO NOT IDENTIFY, NEGOTIATE AND COMPLETE A SUFFICIENT NUMBER OF
STRATEGIC ACQUISITIONS, WE MAY NOT ACHIEVE OUR BUSINESS PLAN AND OUR GROWTH
PROSPECTS MAY SUFFER.

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

WE ARE EXPOSED TO CURRENCY EXCHANGE RATE FLUCTUATIONS.

Our business outside the United States is generally transacted in
currencies other than U.S. dollars. Fluctuations in currencies relative to the
U.S. dollar may make it more difficult to perform

34

period-to-period comparisons of our operating results. Moreover, fluctuations in
the U.S. dollar relative to currencies in which earnings are generated outside
the United States could result in a reduction in our profitability as reported
in U.S. dollars.

RISKS RELATING TO OUR GAMING OPERATIONS

A DECLINE IN THE POPULARITY OF HORSE RACING COULD ADVERSELY IMPACT OUR
BUSINESS.

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

DECLINING ON-TRACK ATTENDANCE AND INCREASING COMPETITION IN
SIMULCASTING MAY MATERIALLY ADVERSELY AFFECT OUR OPERATING RESULTS.

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

OUR GAMING ACTIVITIES ARE DEPENDENT ON GOVERNMENTAL REGULATION AND
APPROVALS. AMENDMENTS TO SUCH REGULATION OR THE FAILURE TO OBTAIN SUCH APPROVALS
COULD ADVERSELY AFFECT OUR BUSINESS.

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

We may be unable to obtain, maintain or renew all governmental
licenses, registrations, permits and approvals necessary for the operation of
our pari-mutuel wagering and other gaming facilities. Licenses to conduct live
horse racing and simulcast wagering must be obtained from each state's
regulatory authority, in many cases annually. The denial, loss or non-renewal of
any of our licenses, registrations, permits or approvals may materially limit
the number of races we conduct or the form or types of pari-mutuel wagering we
offer, and could have a material adverse effect on our business. In addition, we
currently devote significant financial and management resources to complying
with the

35

various governmental regulations to which our operations are subject. Any
significant increase in governmental regulation would increase the amount of our
resources devoted to governmental compliance, could substantially restrict our
business, and could materially adversely affect our operating results.

THE PASSAGE OF LEGISLATION PERMITTING ALTERNATIVE GAMING AT RACETRACKS,
SUCH AS SLOT MACHINES, VIDEO LOTTERY TERMINALS AND OTHER FORMS OF
NON-PARI-MUTUEL GAMING, CAN BE A LONG AND UNCERTAIN PROCESS. A DECISION TO
PROHIBIT, DELAY OR REMOVE ALTERNATIVE GAMING RIGHTS AT RACETRACKS BY THE
GOVERNMENT OR THE CITIZENS OF A STATE, OR OTHER JURISDICTION, IN WHICH WE OWN OR
OPERATE A RACETRACK, COULD ADVERSELY AFFECT OUR BUSINESS OR PROSPECTS.

There has been speculation, by members of the media, investment
analysts and our employees and other representatives, as to the probability and
potential impact of the passage of legislation permitting alternative gaming at
racetracks in various states in the United States. This has been especially
prevalent in recent months with the conclusion of the mid-term elections in
November 2002, and as alternative gaming at racetracks has become an issue for
consideration in some states.

While certain candidates who publicly advocated alternative gaming at
racetracks were recently elected, there can be no assurance that alternative
gaming at racetracks will become permitted in those states, or if it does, what
the timetable, conditions, terms of income or revenue sharing, or other
feasibility factors will be. It is possible that public reaction or other
factors may cause these persons to change their stance on this issue or call for
a public referendum to determine whether and how to proceed. It is also
difficult to predict accurately which issues will become priority agenda items
during a legislative session.

In the event that alternative gaming legislation is enacted in a given
state or other jurisdiction, there can be no certainty as to the terms of such
legislation or regulations, including the timetable for commencement, the
conditions and feasibility of operation and whether alternative gaming rights
are to be limited to racetracks. If we were to proceed to conduct alternative
gaming in such a situation, there may be significant costs and other resources
to be expended, and there will be significant risks involved, including the risk
of changes in the enabling legislation, that may have a material adverse effect
on the relevant racetrack's operations and profitability.

The regulatory risks and uncertainties that are inherent in the conduct
of alternative gaming also apply in other jurisdictions outside the United
States. In the province of Ontario, the location of our pending acquisition of
Flamboro Downs, racetracks are permitted to serve as landlord to slot operations
conducted by a government corporation. Under that arrangement, the racetrack
retains 20% of the "net win" (slot machine revenues minus payout to slot
players), with one-half of that amount distributed to the horsemen and the other
half being retained by the racetrack owner. There can be no assurance as to how
long this arrangement will continue, or if it does, whether the terms will
remain the same. Similarly, we commenced development of a horse racetrack
combined with a gaming and entertainment center on property located
approximately 15 miles south of Vienna, Austria, in anticipation of concluding
joint venture negotiations with an Austrian third party and receiving the
requisite racing and gaming licenses. Ultimately, those negotiations may not be
successful or we may not obtain the necessary licenses. If we are unable to
complete this development as planned, we may record a substantial write-down of
the carrying value of this property.

ANY FUTURE EXPANSION OF OUR GAMING OPERATIONS WILL LIKELY REQUIRE US TO
OBTAIN ADDITIONAL GOVERNMENTAL APPROVALS OR, IN SOME CASES, AMENDMENTS TO
CURRENT LAWS GOVERNING SUCH ACTIVITIES.

36

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

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

From time to time, the United States Congress has considered
legislation that would either inhibit or restrict Internet gambling in general
or inhibit or restrict the use of certain financial instruments, including
credit cards, to provide funds for account wagering. For example, in May 2001,
the United States Senate Commerce Committee approved a bill, in the form of the
Unlawful Internet Gambling Funding Prohibition Act, which, if enacted, would
have prohibited financial institutions from enforcing credit card debts if they
knew the debts were being incurred in order to gamble illegally through the
Internet. Further, in September 2002, the United States House of Representatives
approved a bill that, if enacted, would have prohibited any person in a gambling
business from knowingly accepting, in connection with the participation of
another person in unlawful Internet gambling, credit, a check, a draft or the
proceeds of credit or an electronic funds transfer. Similar bills have been
introduced this year in both the United States House of Representatives and the
United States Senate. Although it is difficult to predict the ultimate chances
for passage of any given legislation, it is anticipated that legislation will
continue to be introduced in the United States Congress or elsewhere that will
seek to restrict, regulate or potentially ban altogether Internet gambling.
Furthermore, even in the absence of legislation, certain financial institutions
have begun to block the use of credit cards issued by them for Internet
gambling, either voluntarily or as part of a settlement with the office of the
Attorney General for New York. Legislation or actions of this nature, if enacted
or implemented without providing for a meaningful exception to allow account
wagering to be conducted as it is currently being conducted by the U.S. horse
racing industry, could inhibit account wagering by restricting or prohibiting
its use altogether or, at a minimum, by restricting or prohibiting the use of
credit cards and other commonly used financial instruments to fund wagering
accounts. If enacted or implemented, these, or any other forms of legislation or
practices restricting account wagering, could cause our business and its growth
to suffer.

IMPLEMENTATION OF SOME OF THE RECOMMENDATIONS OF THE NATIONAL GAMBLING
IMPACT STUDY COMMISSION MAY HARM OUR GROWTH PROSPECTS.

In August 1996, the United States Congress established the National
Gambling Impact Study Commission to conduct a comprehensive study of the social
and economic effects of the gambling industry in the United States. This
commission reviewed existing federal, state and local policy and practices with
respect to the legalization or prohibition of gambling activities with the aim
of formulating and proposing changes in these policies and practices and
recommending legislation and administrative

37

actions for these proposed changes. On April 28, 1999, the Commission voted to
recommend that there be a pause in the expansion of gaming. On June 18, 1999,
the Commission issued a report setting out its findings and conclusions,
together with recommendations for legislation and administrative actions. Some
of the recommendations were:

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

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

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

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

WE FACE SIGNIFICANT COMPETITION FROM OTHER RACETRACK OPERATORS,
INCLUDING THOSE IN STATES WHERE MORE EXTENSIVE GAMING OPTIONS ARE AUTHORIZED,
WHICH COULD HURT OUR OPERATING RESULTS.

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

In addition, Florida tax laws have historically discouraged the three
Miami-area horse racetracks, Gulfstream Park, Hialeah Park (which no longer
hosts live racing) and Calder Race Course, from scheduling concurrent races. A
change in the tax structure, effective as of July 1, 2001, has eliminated this
deterrent. As a result, our Gulfstream Park racetrack may face direct
competition from other Miami-area horse racetracks in the future. This
competition could significantly affect the operating results of Gulfstream Park
which could reduce our overall profitability.

COMPETITION FROM NON-RACETRACK GAMING OPERATORS MAY REDUCE THE AMOUNT
WAGERED AT OUR FACILITIES AND MATERIALLY ADVERSELY AFFECT OUR OPERATING RESULTS.

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

38

WE CURRENTLY FACE SIGNIFICANT COMPETITION FROM INTERNET AND OTHER FORMS
OF ACCOUNT WAGERING, WHICH MAY REDUCE OUR PROFITABILITY.

Internet and other account wagering gaming services allow their
customers to wager on a wide variety of sporting events and casino games from
home. The National Gambling Impact Study Commission's June 1999 report estimated
that there were over 250 on-line casinos, 64 lotteries, 20 bingo games and 139
sports wagering services offering gambling over the Internet. Total
industry-wide Internet gaming revenues are estimated to have grown from
approximately $1.1 billion in 1999 to approximately $2.5 billion in 2001,
according to Bear, Stearns & Co. Inc. in its 2002-2003 North American Gaming
Almanac. That report also estimates 2002 total industry-wide Internet gaming
revenues at $3.5 billion and projects a 2003 level of $4.2 billion. Although
many on-line wagering services are operating from offshore locations in
violation of U.S. law by accepting wagers from U.S. residents, they may divert
wagering dollars from legitimate wagering venues such as our racetracks and
account wagering operations. Moreover, our racetrack operations may require
greater ongoing capital expenditures in order to expand our business than the
capital expenditures required by Internet and other account wagering gaming
operators. Currently, we cannot offer the diverse gaming options provided by
many Internet and other account wagering gaming operators and may face
significantly greater costs in operating our business. Our inability to compete
successfully with these operators could hurt our business.

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

EXPANSION OF GAMING CONDUCTED BY NATIVE AMERICAN GROUPS MAY LEAD TO
INCREASED COMPETITION IN OUR INDUSTRY, WHICH MAY NEGATIVELY IMPACT OUR GROWTH
AND PROFITABILITY.

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

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

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

SOME JURISDICTIONS VIEW OUR OPERATIONS PRIMARILY AS A MEANS OF RAISING
TAXES, AND THEREFORE WE ARE PARTICULARLY VULNERABLE TO ADDITIONAL OR INCREASED
TAXES AND FEES.

We believe that the prospect of raising significant additional revenue
through taxes and fees is one of the primary reasons that certain jurisdictions
permit legalized gaming. As a result, gaming companies are typically subject to
significant taxes and fees in addition to the normal federal, state, provincial
and local income taxes, and such taxes and fees may be increased at any time.
From time to time, legislators and officials have proposed changes in tax laws,
or in the administration of such laws, affecting the gaming industry. For
instance, U.S. legislators have proposed the imposition of a U.S.

39

federal tax on gross gaming revenues. It is not possible to determine with
certainty the likelihood of any such changes in tax laws or their
administration; however, if enacted, such changes could have a material adverse
effect on our business.

THE 2002 BREEDERS' CUP PICK 6 CONTROVERSY COULD CAUSE A DECLINE IN
BETTOR CONFIDENCE AND RESULT IN CHANGES TO LEGISLATION, REGULATION, OR INDUSTRY
PRACTICES OF THE HORSE RACING INDUSTRY, WHICH COULD MATERIALLY REDUCE THE AMOUNT
WAGERED ON HORSE RACING AND INCREASE OUR COSTS, AND THEREFORE ADVERSELY AFFECT
OUR REVENUE AND OPERATING RESULTS.

On October 26, 2002, in connection with the Breeders' Cup World
Thoroughbred Championships held at Arlington Park in Chicago, Illinois, only one
person placed winning bets on the Pick 6, a bet to pick the winning horse in six
consecutive races. The bettor purchased all six winning tickets, valued at more
than $2.5 million, through an OTB telephone system. Payment of the winnings was
withheld when an examination of the winning bets revealed an unusual betting
pattern. Scientific Games Corporation ("Scientific Games"), the parent company
of Autotote Systems, Inc. ("Autotote Systems"), later announced that it had
fired an employee who had allegedly accessed the totalisator system operated by
Autotote Systems, altered the winning Pick 6 tickets, and erased the record of
his access. The Federal Bureau of Investigation conducted an investigation, and
on November 12, 2002, three individuals were charged in a complaint by the
United States Attorney's office of White Plains, New York, with conspiracy to
commit wire fraud. The three individuals pleaded guilty in federal court to
conspiring to commit fraud and money laundering. On December 4, 2002, a
class-action lawsuit against Autotote Systems and Scientific Games was filed in
Los Angeles Superior Court seeking unspecified monetary damages suffered by
Jimmy Allard and other bettors. In the suit, the plaintiffs allege that Autotote
Systems and Scientific Games were negligent and engaged in deceptive and unfair
practices. In addition, the pari-mutuel pool for the Breeders' Cup Pick 6
remained frozen for almost five months in an interest-bearing escrow account,
despite legal attempts by certain entities to have the appropriate payout
distributed to ticketholders with five of six winners. The United States
Attorney for the Southern District of New York authorized the release of the
funds on March 20, 2003, following the sentencing of the three perpetrators.

The National Thoroughbred Racing Association, an industry association,
has formed a task force to examine the Pick 6 controversy and make
recommendations. This task force has retained Ernst & Young LLP to perform an
examination of the internal controls and system security of the totalisator
systems of the three companies that collectively provide substantially all the
totalisator service to the North American horse racing industry. The mandate of
the Ernst & Young LLP examination is to recommend best practices to be
implemented by the totalisator companies concerning the internal controls and
system security of their totalisator systems.

The impact of the Pick 6 controversy is uncertain. A perceived lack of
integrity or security could result in a decline in bettor confidence, and would
likely lead to a decline in the amount wagered on horse racing. Further negative
publicity concerning the Pick 6 controversy, further negative information being
discovered as a result of the FBI or any other investigation, and any negative
information concerning the internal controls and security of the totalisator
systems may materially reduce the amount wagered on horse racing and the revenue
and earnings of companies engaged in the horse racing industry, including us.
The Pick 6 controversy has also caused the horse racing industry to focus on
another area of bettor concern, late odds changes, which sometimes occur as odds
updates in the totalisator system cause significant changes in the odds after a
race has commenced. The Pick 6 controversy and this industry focus on late odds
changes may lead to changes in legislation, regulation, or industry practices,
which

40

could result in a material reduction in the amount wagered on horse racing
and in the revenue and earnings of companies engaged in the horse racing
industry, including us.

IF WE PAY PERSONS WHO PLACE FRAUDULENT "WINNING" WAGERS, WE WOULD
REMAIN LIABLE TO PAY THE HOLDERS OF THE PROPER WINNING WAGERS THE FULL AMOUNT
DUE TO THEM.

As indicated by the Pick 6 controversy described in the preceding risk
factor, we may be subject to fraudulent claims for millions of dollars. If we
paid those claims, we would remain liable to the holders of the proper winning
wagers for the full amount due to them and would have the responsibility to
attempt to recover the money that we paid on the fraudulent claims. We may not
be able to recover that money, which would adversely affect our operating
results.

OUR OPERATING RESULTS FLUCTUATE SEASONALLY AND MAY BE IMPACTED BY A
REDUCTION IN LIVE RACING DATES DUE TO REGULATORY FACTORS.

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

UNFAVORABLE WEATHER CONDITIONS MAY RESULT IN A REDUCTION IN THE NUMBER
OF RACES WE HOLD.

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

THE CURRENT LEASE OF THE BAY MEADOWS PROPERTY EXPIRES ON DECEMBER 31,
2003 AND MAY NOT BE RENEWED.

The Bay Meadows site lease has been extended at market rates and
expires on December 31, 2003, subject to a further one-year extension at the
landlord's option. We are exploring various alternative venues, including vacant
land that we purchased in Dixon, California for future development, to conduct
the racing dates currently held at Bay Meadows after the expiry of the lease
term (including any extensions). There can be no assurance that we will be
successful in obtaining the necessary regulatory approvals to run these racing
dates at another racetrack operated by us in northern California if the lease is
not extended. If we conduct the Bay Meadows racing dates at another of our
racetracks, we may suffer a reduction in our revenues, which could materially
adversely affect our operating results. See "Our Business - Business
Developments".

IN THE STATE OF MARYLAND, OUR REVENUE SHARING AND OPERATIONS
AGREEMENT WITH THE OWNER OF ROSECROFT RACEWAY MAY NOT BE ASSUMED BY THE
INTENDED PURCHASER OF THE ASSETS OF ROSECROFT RACEWAY, AND IN ANY EVENT, SUCH
AGREEMENT TERMINATES ON MARCH 31, 2004.

The Maryland Jockey Club, the trade name for the entities that own
and operate Pimlico and Laurel Park, is a party to a Cross-Breed Horseracing
Revenue Sharing and Operations Agreement (the "Maryland Revenue Sharing
Agreement") with Cloverleaf Enterprises, Inc. ("Cloverleaf"), the owner of
Rosecroft Raceway ("Rosecroft"), a standardbred track located in Prince
George's County in Maryland. The Maryland Revenue Sharing Agreement was
effective as of January 1, 2000 and terminates March 31, 2004.

The Maryland Revenue Sharing Agreement provides for wagering to be
conducted, both day and night, on live and simulcast thoroughbred and harness
races at Pimlico, Laurel Park and Rosecroft and the three Maryland OTBs
operated by them. Under the agreement, wagering revenue from these sources is
pooled and certain expenses and obligations are pooled and paid from those
revenues to generate net wagering revenue. This net wagering revenue is then
distributed 80% to The Maryland Jockey Club and 20% to Rosecroft. This
agreement was entered into to resolve all issues relating to Maryland law
which prevents thoroughbred tracks in Maryland from offering live racing or
accepting simulcast wagering after 6:15 p.m. without Rosecroft's consent and
the federal Interstate Horseracing Act which provides that, without the
consent of The Maryland Jockey Club, Rosecroft cannot accept simulcast
wagering on horse racing during the times that Pimlico or Laurel are running
live races.

It has been announced that Centaur, Inc. has contracted with
Cloverleaf to acquire the assets of Rosecroft, subject to certain conditions
(including the approval of the Maryland Racing Commission). Centaur, Inc. may
or may not be assuming the obligations of the Maryland Revenue Sharing
Agreement as part of that sale, which failure to assume may result in
litigation. Either the successful non-assumption of the agreement by Centaur,
Inc. or the termination on March 31, 2004 of the agreement will require a
renegotiation of the agreement. Such renegotiation, or the failure to reach a
new agreement, may result in a decline in the revenues of The Maryland Jockey
Club that materially adversely affects our operating results.

WE MANAGE THE OPERATIONS AT COLONIAL DOWNS PURSUANT TO AN INHERITED
MANAGEMENT CONTRACT WHICH IS DEPENDENT ON THIRD PARTY ACTIONS AND EVENTS OVER
WHICH WE HAVE LIMITED CONTROL.

41

The revenues that we receive from our operations in Virginia through
the management of the Colonial Downs race meets and pari-mutuel wagering system
are highly dependent on the business strategy of Colonial Downs, over which we
have limited control. Moreover, our Virginia operations are highly dependent on
Colonial Downs' ability to maintain the owner's and operator's licenses issued
to it by the Virginia Racing Commission, over which we have limited control. In
addition, our management contract with Colonial Downs provides for a one-half
reduction in the management fee we receive if and to the extent that
non-pari-mutuel gaming activities become authorized and are conducted by us in
Maryland but are not authorized and conducted in Virginia.

THE PROFITABILITY OF OUR RACETRACKS IS PARTIALLY DEPENDENT UPON THE
SIZE OF THE LOCAL HORSE POPULATION IN THE AREAS IN WHICH OUR RACETRACKS ARE
LOCATED.

Horse population is a factor in a racetrack's profitability because it
generally affects the average number of horses (i.e., the average "field size")
that run in races. Larger field sizes generally mean increased wagering and
higher wagering revenues due to a number of factors, including the availability
of exotic bets (such as "exacta" and "trifecta" wagers). Various factors have
led to declines in the horse population in certain areas of the country,
including competition from racetracks in other areas, increased costs and
changing economic returns for owners and breeders, and Mare Reproductive Loss
Syndrome, which caused a large number of mares in Kentucky to sustain late term
abortions or early embryonic loss in 2001. If we are unable to attract horse
owners to stable and race their horses at our tracks by offering a competitive
environment, including improved facilities, well-maintained racetracks, better
living conditions for backstretch personnel involved in the care and training of
horses stabled at our tracks, and a competitive purse structure, our
profitability could decrease.

WE DEPEND ON AGREEMENTS WITH OUR HORSEMEN'S INDUSTRY ASSOCIATIONS TO
OPERATE OUR BUSINESS.

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

IF WE ARE UNABLE TO CONTINUE TO NEGOTIATE SATISFACTORY UNION CONTRACTS,
SOME OF OUR EMPLOYEES MAY COMMENCE A STRIKE. A STRIKE BY OUR EMPLOYEES OR A WORK
STOPPAGE BY BACKSTRETCH PERSONNEL, WHO ARE EMPLOYED BY HORSE OWNERS AND
TRAINERS, MAY LEAD TO LOST REVENUES AND COULD HAVE A MATERIAL ADVERSE EFFECT ON
OUR BUSINESS.

As of December 31, 2002, we employed approximately 5,100 full-time
employees, approximately 3,000 of whom were represented by unions. A strike or
other work stoppage by our employees could lead to lost revenues and have a
material adverse effect on our business, financial condition, operating results
and prospects.

42

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

AN EARTHQUAKE IN CALIFORNIA COULD INTERRUPT OUR OPERATIONS AT SANTA
ANITA PARK, GOLDEN GATE FIELDS AND BAY MEADOWS, WHICH WOULD ADVERSELY IMPACT OUR
CASH FLOW FROM THESE RACETRACKS.

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

OUR BUSINESS DEPENDS ON PROVIDERS OF TOTALISATOR SERVICES.

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

A DECLINE IN GENERAL ECONOMIC CONDITIONS COULD ADVERSELY AFFECT OUR
BUSINESS.

Our operations are affected by general economic conditions, and
therefore our future success is unpredictable. The demand for entertainment and
leisure activities tends to be highly sensitive to consumers' disposable
incomes, and thus a decline in general economic conditions may lead to our
customers having less discretionary income to wager on horse racing. In 2002,
the weak U.S. economy had a negative impact on our operating results and if the
economy deteriorates further, the consequent reduction in our revenues could
have a material adverse effect on our operating results.

REAL ESTATE OWNERSHIP AND DEVELOPMENT RISKS

OUR OWNERSHIP AND DEVELOPMENT OF REAL ESTATE IS SUBJECT TO RISKS AND
MAY INVOLVE SIGNIFICANT ONGOING EXPENDITURES OR LOSSES THAT COULD ADVERSELY
AFFECT OUR OPERATING RESULTS.

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

43

insurance costs and related charges, must be made throughout the period of
ownership of real property, which expenditures may negatively impact our
operating results.

WE MAY NOT BE ABLE TO SELL OR OTHERWISE MONETIZE SOME OF OUR NON-CORE
REAL ESTATE, EXCESS RACING REAL ESTATE AND REVENUE-PRODUCING NON-RACING REAL
ESTATE WHEN WE NEED TO OR AT THE PRICE WE WANT, WHICH MAY MATERIALLY ADVERSELY
AFFECT OUR FINANCIAL CONDITION.

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

WE REQUIRE GOVERNMENTAL APPROVALS FOR SOME OF OUR PROPERTIES WHICH MAY
TAKE A LONG TIME TO OBTAIN OR WHICH MAY NOT BE GRANTED, EITHER OF WHICH COULD
MATERIALLY ADVERSELY AFFECT OUR EXISTING BUSINESS OR OUR GROWTH.

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

WE MAY NOT BE ABLE TO COMPLETE EXPANSION PROJECTS SUCCESSFULLY AND ON
TIME, WHICH WOULD MATERIALLY ADVERSELY AFFECT OUR GROWTH AND OUR OPERATING
RESULTS.

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

We have deferred a decision on the proposed redevelopment of Gulfstream
Park in Florida. If we proceed with such redevelopment, we will schedule the
project to minimize any interference with Gulfstream Park's racing season, but
there is a risk that the redevelopment will not be completed

44

according to schedule, in which case it could cause us to disrupt a racing
season and result in a reduction in the revenues and earnings generated at
Gulfstream Park during that season. See "Our Business - Our Properties -
Gulfstream Park".

We are currently subject to an agreement with the Maryland Racing
Commission that requires us to expend at least $15 million on capital
improvements to the Laurel Park and Pimlico racetracks and the thoroughbred
training facility in Bowie, Maryland, together with their related facilities and
operations, between January 1, 2003 and June 30, 2004. We will endeavor to
schedule the work for these expenditures to minimize interference with the
respective racing seasons, but given the short timeline, that cannot be assured.
If there is interference with either of Pimlico's or Laurel Park's racing
seasons, or the project plans are not completed according to schedule, it could
result in a reduction in the revenues and earnings generated at those
racetracks. See "Government Regulation".

WE FACE STRICT ENVIRONMENTAL REGULATION AND MAY BE SUBJECT TO LIABILITY
FOR ENVIRONMENTAL DAMAGE, WHICH COULD MATERIALLY ADVERSELY AFFECT OUR FINANCIAL
RESULTS.

We are subject to a wide range of requirements under environmental laws
and regulations relating to waste water discharge, waste management and storage
of hazardous substances. Compliance with environmental laws and regulations can,
in some circumstances, require significant capital expenditures. Moreover,
violations can result in significant penalties and, in some cases, interruption
or cessation of operations. We were involved in a dispute with the United States
Environmental Protection Agency involving the Portland Meadows racetrack, which
we currently lease and operate, which dispute caused us to postpone the planned
opening of the 2001-2002 meet at that facility on September 1, 2001 and also to
conclude the 2001-2002 meet early, on February 10, 2002. See "Our Business -
Environmental Matters".

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

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

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

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

RISKS RELATING TO OUR SECURITIES

OUR STOCK PRICE MAY BE VOLATILE, AND FUTURE ISSUANCES OR SALES OF OUR
STOCK MAY DECREASE OUR STOCK PRICE.

45

The trading price of our Class A Subordinate Voting Stock has
experienced, and may continue to experience, substantial volatility. The
following factors have had, and may continue to have, a significant effect on
the market price of our Class A Subordinate Voting Stock:

- - our historical and anticipated operating results;

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

- - the passage or anticipated passage of legislation affecting horse
racing or gaming;

- - developments affecting the horse racing or gaming industries generally;

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

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

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

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

THE TRADING PRICE OF OUR CLASS A SUBORDINATE VOTING STOCK COULD
DECREASE AS A RESULT OF OUR ISSUING ADDITIONAL SHARES AS CONSIDERATION FOR
FUTURE ACQUISITIONS.

We may issue our Class A Subordinate Voting Stock as full or partial
consideration in connection with future acquisitions. To the extent that we do
so, the percentage of our common equity and voting stock that our existing
stockholders own will decrease and, particularly if such acquisitions do not
contribute proportionately to our profitability, the trading price of our shares
may also decrease.

SALES OF OUR CLASS A SUBORDINATE VOTING STOCK BY MAGNA INTERNATIONAL OR
BY CERTAIN OTHER OF OUR SIGNIFICANT STOCKHOLDERS UNDER OUR SHELF REGISTRATION
STATEMENT COULD DEPRESS OUR STOCK PRICE.

As of March 17, 2003, Magna International owns 4,362,328 shares of our
Class A Subordinate Voting Stock and 58,466,056 shares of our Class B Stock
(which are convertible into shares of our Class A Subordinate Voting Stock on a
one-for-one basis). Magna International has announced its intention at an
undetermined time in the future to convert some shares of our Class B Stock to
shares of our Class A Subordinate Voting Stock and dispose of these shares of
our Class A Subordinate Voting Stock when market conditions for doing so are
favorable, with the ultimate intention of retaining only a minority equity
position but continuing to retain control of us. In addition, we have an
effective shelf registration statement that permits the secondary sale of shares
of our Class A Subordinate Voting Stock by some of our stockholders who received
those shares in connection with our past acquisitions. A total of 857,401
shares covered by that shelf registration statement remain unsold. We also have
agreed to use our commercially reasonable efforts to cause a shelf registration
statement covering up to 8,823,529 shares of our Class A Subordinate Voting
Stock issuable upon the conversion of $75,000,000 aggregate outstanding
principal amount of our 7 1/4% Convertible Subordinated Notes due December 15,
2009 to be

46

declared effective by April 1, 2003. Sales of a substantial number of shares of
our Class A Subordinate Voting Stock, either by Magna International or under our
shelf registration statements, could depress the prevailing market price of our
Class A Subordinate Voting Stock.

WE DO NOT PLAN TO PAY DIVIDENDS UNTIL 2004, IF AT ALL.

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

OUR DEBT SECURITIES ARE SUBJECT TO RISKS ASSOCIATED WITH DEBT
FINANCING.

Our debt securities are subject to the following risks associated with
debt financing:

- - the risk that cash flow from operations will be insufficient to meet
required payments of principal and interest;

- - the risk that, to the extent that we maintain floating rate
indebtedness, interest rates will fluctuate; and

- - risks resulting from the fact that the indentures or other agreements
governing our debt securities and credit facilities may contain
covenants imposing certain limitations on our ability to acquire and
dispose of assets and otherwise conduct and finance our business.

In addition, although we anticipate that we will be able to repay or
refinance any indebtedness that we incur when it matures, we may not be able to
do so, and the terms of any refinancings of our indebtedness may not be
favorable to us. Our leverage may have important consequences including the
following:

- - our ability to obtain additional financing for acquisitions, working
capital, capital expenditures or other purposes may be impaired, or such
financing may not be available on terms favorable to us;

- - a substantial decrease in our operating cash flow or an increase in our
expenses could make it difficult for us to meet our debt service
requirements and force us to modify our operations; and

- - our higher level of debt and resulting interest expense may place us at a
competitive disadvantage with respect to a competitor with lower amounts of
indebtedness and/or higher credit ratings.

ITEM 2. PROPERTIES

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

ITEM 3. LEGAL PROCEEDINGS

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

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

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

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND OTHER STOCKHOLDER MATTERS

TRADING HISTORY

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

On March 17, 2003, the last sale price of the Class A Subordinate
Voting Stock as reported by the Nasdaq National Market was $4.70 and by the
Toronto Stock Exchange was Cdn. $6.90.

On February 26, 2003, the trading symbol for our Class A Subordinate
Voting Stock was changed from "MIEC" to "MECA" on the Nasdaq National Market and
from "MIE.A" to "MEC.A" on the Toronto Stock Exchange.

The Class B Stock is unlisted and not actively traded.

The number of securityholders of record as of March 17, 2003 was as
follows: Class A Subordinate Voting Stock: 602; Class B Stock: three.

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DIVIDENDS AND DIVIDEND POLICY

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

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

RECENT SALES OF UNREGISTERED SECURITIES

On December 2, 2002, we completed the sale of $75 million aggregate
principal amount of our 7 1/4% Convertible Subordinated Notes due December 15,
2009 (the "Convertible Notes"). The initial purchasers of the Convertible Notes
were BMO Nesbitt Burns Corp. and CIBC World Markets Corp. For a description of
the Notes, please read the section entitled "Description of the Convertible
Notes" in the prospectus included in our registration statement on Form S-3
(File number 333-102889), filed with the SEC on January 31, 2003, which is
incorporated by reference herein.

ITEM 6. SELECTED FINANCIAL DATA

The following tables set forth our selected consolidated financial and
operating data for the periods indicated. The selected consolidated financial
and operating data as at and for the year ended July 31, 1998, as at and for the
five months ended December 31, 1998, and as at and for the years ended December
31, 1999, 2000, 2001 and 2002 have been derived from and should be read in
conjunction with our audited Consolidated Financial Statements as at and for the
years ended December 31, 1999 (as filed with our Annual Report for the fiscal
year ended December 31, 1999), December 31, 2000 (as filed with our Annual
Report for the year ended December 31, 2000), December 31, 2001 (as filed with
our Annual Report for the year ended December 31, 2001) and December 31, 2002
(included in this Report). The selected financial and operating information
should also be read in conjunction with the section entitled "Management's
Discussion and Analysis of Results of Operations and Financial Position"
included in this Annual Report.

49

- -------------
(1) We prepare our financial statements in accordance with U.S. generally
accepted accounting principles, or U.S. GAAP, which, as applied to us, do
not materially differ from accounting principles generally accepted in
Canada, or Canadian GAAP, except as disclosed in note 20 to the
Consolidated Financial Statements.

(2) "EBITDA" is not intended to represent cash flows or results of operations
in accordance with U.S. GAAP, nor is it a measure under Canadian GAAP.
EBITDA may not be comparable to similarly titled amounts reported by other
companies. See "GAAP and Non-GAAP Financial Measures" below for a
cautionary disclosure and the reconciliation of EBITDA to our consolidated
financial statements.

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

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

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

GAAP AND NON-GAAP FINANCIAL MEASURES

We evaluate the operating and financial performance of our business
using several measures, including revenue, EBITDA (defined as income (loss)
before interest, taxes, depreciation and amortization), net income (loss) and
diluted earnings (loss) per share. We have also reported these measures
excluding the sale of non-core real estate as management believes these sales
will not continue beyond 2003 as all of our non-core real estate is expected
to be sold. In addition, we have also excluded asset write-downs from these
earnings measures as management believes these are unusual expenses and not
expected to recur year after year. Furthermore, management believes that the
use of these measures, excluding gains from the sale of non-core real estate
and asset write-downs, enables management and investors to evaluate and
compare from period to period, our operating performance in a meaningful and
consistent manner. However, these measures should be considered in addition
to, but not as a substitute for or superior to, other measures of financial
performance prepared in accordance with generally accepted accounting
principles such as income (loss) before income taxes and net income (loss).

51

The following table reconciles our non-GAAP financial measures to the
accompanying financial statements:

RECONCILIATION OF NON-GAAP TO GAAP FINANCIAL MEASURES
(U.S. DOLLARS IN THOUSANDS, EXCEPT PER SHARE FIGURES)
(UNAUDITED)

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

The following discussion of our results of operations and financial
position should be read in conjunction with our consolidated financial
statements for the year ended December 31, 2002.

OVERVIEW

MEC is North America's number one owner and operator of thoroughbred
racetracks and one of the world's leading suppliers, via simulcasting, of live
racing content to the growing inter-track, off-track and account wagering
markets. We have had an active year and made significant progress in achieving
our strategic plan. In October 2002, we completed the acquisition of Lone Star
Park at Grand Prairie, a thoroughbred and American quarter horse racetrack
located near Dallas, Texas. In November 2002, we acquired a controlling interest
in Pimlico Race Course and Laurel Park, which are operated under the trade name
"The Maryland Jockey Club". Pimlico Race Course, the home of the Preakness
Stakes(R), the middle jewel of thoroughbred racing's Triple Crown, and Laurel
Park both are located in the Baltimore, Maryland area. In addition, in October
2002, Ontario Racing Inc. acquired Flamboro Downs, a Harness racetrack located
in Hamilton, Ontario, 45 miles west of Toronto, Ontario. Five business days
after MEC receives all necessary regulatory approvals for the acquisition of
Flamboro Downs, the shares of ORI will be transferred to the Company. We expect
this acquisition will be completed in the spring of 2003. We currently operate
or manage eleven thoroughbred racetracks, one standardbred racetrack, one
racetrack that runs both thoroughbred and standardbred meets and one greyhound
track, as well as the simulcast wagering venues at these tracks. In addition, we
operate off-track betting facilities and a national account wagering business
known as XpressBet(TM), which permits customers to place wagers by telephone and
over the Internet on horse races run at up to 70 racetracks in North America.
MEC also owns and operates HorseRacing TV(TM), a new television channel focused
exclusively on horse racing that we launched on the Racetrack Television Network
("RTN") in July 2002. HorseRacing TV(TM) is currently shown on cable only in the
western Pennsylvania and San Diego, California areas and on RTN, but we are in
discussions with cable and satellite operators with the goal of achieving
broader distribution. RTN, in which we have a one-third interest, was formed to
telecast races from our racetracks and other racetracks, via private direct to
home satellite, to paying subscribers. To support certain of our thoroughbred
racetracks, we own thoroughbred training centers situated near San Diego,
California, in Palm Beach

53

County, Florida and in the Baltimore, Maryland area. We have also commenced
development of a horse racetrack and gaming facility near Vienna, Austria.

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

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

- - Expanding the distribution of our live racing;

- - Further developing an integrated branding and marketing strategy;

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

- - Obtaining broader distribution of HorseRacing TV(TM); and

- - Selectively acquiring and developing additional strategic racetracks and
related assets.

A number of the states in which our racetracks operate are considering
the legalization of alternative gaming at racetracks. Through the pending
acquisition of Flamboro Downs, we will develop a relationship with the Ontario
Lottery and Gaming Corporation, which operates the gaming facility at Flamboro.
We expect that the ownership of Flamboro and this relationship will enable us to
develop some expertise in the issues surrounding the operation and management of
alternative gaming facilities at racetracks.

Based on our current export simulcast sales to the UK and market
research, we believe that the European marketplace offers significant potential
growth for the export of MEC's horse racing. Our afternoon time zone horse
racing is available for simulcast delivery during the evening in Europe, while
currently there is limited domestic European racing conducted in the evenings.
We believe that MEC's horse racing is ideally suited to meet this product need
in many European markets that have a strong affinity for horse racing and
wagering.

At December 31, 2002, we had spent or committed approximately $36.0
million on the development of a racetrack, combined with a gaming and
entertainment center, on property that we own in Ebreichsdorf, Austria. One
function of this development will be to serve as the central totalisator and
satellite hub for our European business, by receiving race signals from North
America and in turn delivering those signals to European simulcast recipients
via European satellite delivery system. In addition, this development will
afford MEC a unique opportunity to market, promote and sell our North American
product to the European marketplace. This project has been commenced in
anticipation of concluding joint venture negotiations with an Austrian third
party and receiving the requisite racing and gaming licenses. Although we have
made significant progress to date, ultimately those negotiations may not be
successful or we may not obtain the necessary licenses. If we are unable to
complete this development as planned, we may need to take a substantial
write-down of the carrying value of this property.

In addition to our racetracks, we own a significant real estate
portfolio which includes two golf courses, related recreational facilities and
gated residential communities under development in Austria

54

and in Canada, as well as other real estate in the United States, Canada and
Austria. We are exploring the development of real estate on the land surrounding
certain of our racetracks. These real estate projects could be pursued in
conjunction with developers who could be expected to provide marketing and
development expertise and the necessary financing. While we are exploring the
development of some of our real estate, we intend to continue to sell our
non-core real estate in order to generate additional capital to grow and enhance
our racing business.

The amounts described below are based on our consolidated financial
statements, which we prepare in accordance with U.S. generally accepted
accounting principles ("GAAP"). U.S. GAAP, as applied to us, does not materially
differ from accounting principles generally accepted in Canada, or Canadian
GAAP, except as disclosed in Note 20 to our consolidated financial statements.

RACING OPERATIONS

Information about our racing operations is set forth below.

(1) Population residing within 40 miles of each of our racetracks, except for
Santa Anita Park (30 miles), The Meadows (50 miles) and Great Lakes Downs
(50 miles). Data from Urban Systems Inc.

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

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

(4) The Bay Meadows lease expires on December 31, 2003, subject to a further
one year extension at the landlord's option.

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

(6) The Maryland Jockey Club manages Colonial Downs in New Kent, Virginia and
Colonial Downs' network of Virginia OTB facilities. Colonial Downs had 26
days of live thoroughbred racing and 24 days of live standardbred racing
during 2002. Management fees earned from the management of Colonial Downs
are included in Pimlico Race Course and Laurel Park's revenue.

(7) In 2002, Pimlico Race Course conducted 36 racing days at Laurel Park.

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

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

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

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

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

- - Wagers placed by telephone or over the Internet by customers enrolled in
our national account wagering program, XpressBet(TM).

56

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

In response to the recent controversy regarding the alleged
manipulation of certain multi-leg wagers, such as "Pick 6" bets, we are
currently reviewing our practices and certain of our suppliers' practices in
cooperation with other racetrack operators, industry associations, regulators
and others. The results of the current investigations concerning these wagers
and the growing concern over late posting of odds changes may cause a decline in
bettor confidence and could result in changes to legislation, regulation, or
industry practices, which could materially adversely impact the amount wagered
on horse racing.

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

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

Set forth below is a list of the total live race days by racetrack for
the years ended December 31, 2002, 2001 and 2000 as well as of those live race
days during our ownership of the racetracks.

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----------- -------------- ---------- --------------- ---------- --------------
1,369 1,082 1,416 986 1,454 711
=========== ============== ========== =============== ========== ==============

(1) Excludes The Oak Tree Meet which consisted of 26 days in 2002, 32 days in
2001 and 27 days in 2000.

(2) The live race meet at Portland Meadows concluded early on February 10,
2002, to enable the necessary steps to be taken in order to bring the
facility into compliance with the requirements of the United States
Environmental Protection Agency ("EPA"). This resulted in 34 fewer live
race days than were awarded for 2002. Construction of a storm water
retention system acceptable to the EPA was completed and live racing
resumed in October 2002.

(3) Pimlico Race Course conducts a portion of its race meet at Laurel Park.

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

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

In 2002, we reached an agreement with the property owner on an
extension of the site lease for Bay Meadows Racecourse. The extension runs
through December 31, 2003, subject to a further one-year extension at the
landlord's option. The rental rate for the facility has increased approximately
$3.0 million for 2003, compared to the prior year. Although we expect that the
lease will be extended beyond the end of 2003, we are continuing to explore
alternative venues, including vacant land that we purchased in Dixon,
California, at which to conduct the racing dates currently held at Bay Meadows.
Should we wish to run these racing dates at another racetrack operated by MEC in
northern California, we would require regulatory approval.

Although we are considering a major redevelopment of our Gulfstream
Park racetrack in Florida (the "Gulfstream Park Redevelopment"), we have
deferred a decision on the project. Should we proceed as currently contemplated,
the Gulfstream Park Redevelopment would include a simulcast pavilion, a sports
and entertainment arena and a new turf club and grandstand. In addition, there
would be significant modifications and enhancements to the racetracks and stable
areas. If completed, the Gulfstream Park Redevelopment would require the
demolition of a substantial portion of the current buildings and related
structures, which include the grandstand and turf club. The aggregate carrying
value at December 31, 2002 of the assets that would be demolished if the
Gulfstream Park Redevelopment is completed is approximately $22.2 million. If we
decide to proceed with the Gulfstream Park Redevelopment and obtain the approval
of our Board of Directors, a reduction in the expected life of the existing
assets would occur and a write-down would be necessary.

SEASONALITY

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

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REAL ESTATE OPERATIONS

We characterize our real estate as follows:

Revenue-Producing Racing Real Estate

- - real estate at our racetracks used in our racing operations;

Excess Racing Real Estate

- - excess real estate at our racetracks that we are considering developing
with strategic partners;

Development Real Estate

- - real estate not at our racetracks that is either under development or that
we are holding for development;

Revenue-Producing Non-Racing Real Estate

- - developed real estate not at our racetracks that is currently generating
revenue for us; and

Non-Core Real Estate

- - non-core real estate that we hold for sale.

As of December 31, 2002, the aggregate net book values of our real
estate are as follows:

Included in our income before income taxes for the year ended December
31, 2002 are gains on the sale of Non-Core Real Estate of $2.2 million. We
expect these gains to be eliminated after the next year as the balance of our
Non-Core Real Estate is sold. We intend to continue to sell the balance of our
Non-Core Real Estate in order to provide capital to grow and enhance our core
racing operations and related businesses.

Included in our Excess Racing Real Estate is land adjacent to several
of our racetracks, Santa Anita Park, Gulfstream Park, Golden Gate Fields, Lone
Star Park, Laurel Park and Pimlico Race Course, totaling approximately 314
acres. We are considering a variety of options with respect to this excess land,
including entertainment and retail-based developments that could be undertaken
in conjunction with business partners who could be expected to provide the
necessary financing. In November 2002, we entered into an agreement with the
East Bay Regional Park District, a California Special District, to sell
approximately 16 acres of excess real estate located at Golden Gate Fields in
Berkeley, California. The

59

value of the consideration to be received by the Company for the real estate,
excluding certain tax benefits of $1.4 million, is $8.5 million. The carrying
value of the property, prior to entering into the agreement, was $14.3 million,
which was based on an allocation of the purchase price for the Golden Gate
Fields acquisition in 1999. The transaction is expected to close in the third
quarter of 2003, subject to certain conditions, including the purchaser
completing certain due diligence procedures. In 2002, we recorded a write-down
of this real estate which resulted in a loss before income taxes and a loss
after income taxes of $5.8 million and $2.4 million, respectively.

Our Development Real Estate is largely undeveloped, and includes:
approximately 562 acres of land in Ebreichsdorf, Austria, located approximately
15 miles south of Vienna, on which we have commenced development of a horse
racetrack and gaming facility; approximately 110 acres of undeveloped land in
Oberwaltersdorf, Austria, also located approximately 15 miles south of Vienna;
approximately 800 acres of undeveloped land in upstate New York; approximately
260 acres of undeveloped land in Dixon, California, located approximately 20
miles west of Sacramento; and approximately 435 acres of undeveloped land in
Ocala, Florida.

Our Revenue-Producing Non-Racing Real Estate consists of two golf
courses that we own and operate, Fontana Sports and Magna Golf Club. Fontana
Sports, which opened in 1997, is a semi-private sports facility located in
Oberwaltersdorf, Austria that includes an 18-hole golf course, a clubhouse which
contains a dining facility, a fitness facility, a pro shop and a tennis club.
The Magna Golf Club, which is in Aurora, Ontario, adjacent to our and Magna
International Inc.'s ("Magna") headquarters approximately 30 miles north of
Toronto, opened in May 2001. The clubhouse was completed in the spring of 2002
and contains a dining facility, a members' lounge, a pro shop and a fitness
facility.

Pursuant to an access arrangement effective as of March 1, 1999, Magna
is paying us an annual fee of 2.5 million Euros ($2.6 million) to access the
Fontana Sports golf course and related recreational facilities for
Magna-sponsored corporate and charitable events, as well as for business
development purposes. The access fee relating to Fontana Sports is payable until
March 1, 2004, unless renewed by mutual agreement of the parties. Pursuant to an
access agreement effective as of January 1, 2001, Magna is paying us an annual
fee of $5.0 million Canadian ($3.2 million) to access the Magna Golf Club. The
access fee relating to the Magna Golf Club is payable until December 31, 2003,
unless renewed by mutual agreement of the parties. The Fontana Sports and Magna
Golf Club properties are both subject to rights of first refusal in favor of
Magna if we decide to sell either of them.

RELATED PARTY TRANSACTIONS

Refer to Note 17 to the consolidated financial statements, which
describes all material related party transactions.

RESULTS OF OPERATIONS

The following is a discussion and comparison of our results of
operations and financial position for the years ended December 31, 2002, 2001
and 2000.

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

RACING OPERATIONS

Revenues from our racing operations were $522.6 million in 2002,
compared to $459.4 million in 2001, an increase of $63.2 million or 13.8%. The
increase resulted primarily from additional live race days at Gulfstream, the
acquisition of MEC Pennsylvania, which includes the operations of The Meadows,
four OTB facilities and the Pennsylvania hub for XpressBet(TM), in April 2001
and Multnomah in October 2001, the lease of Portland Meadows in July 2001, the
acquisition of Lone Star Park in October 2002 and The Maryland Jockey Club in
November 2002, the launch of XpressBet(TM) in California in January 2002 and
improved results at Santa Anita Park.

In 2002, gross wagering revenues for our racing operations increased
14.4% to $450.7 million, compared to $394.0 million in 2001, primarily as a
result of the additional live race days at Gulfstream, increased average daily
handle at Santa Anita Park and the completion of our acquisitions, partially
offset by decreased revenues at certain of our racetracks as a result of lower
average daily attendance, fewer live race days and a generally weak U.S.
economy. Non-wagering revenues in 2002 increased 9.9% to $71.9 million compared
to $65.4 million in 2001. Contributing to the increase in non-wagering revenues
were increases in revenues from parking, racing and concert admissions, program
sales and food and beverage operations related to the increase in live race days
and due to our acquisitions.

Purses, awards and other increased by 13.4% to $276.0 million in 2002
from $243.4 million in 2001 primarily due to the increase in gross wagering
revenues for the year. As a percentage of gross wagering revenue, purses, awards
and other decreased from 61.8% in 2001 to 61.2% in 2002. Operating costs
increased to $183.4 million in 2002 from $152.6 million in 2001. The increased
operating costs included $24.4 million related to acquisitions or new business
units not included in the prior year. As a percentage of total racing revenues,
operating costs increased from 33.2% in 2001 to 35.1% in 2002. The increase in
operating costs as a percentage of revenue was primarily the result of an
increase in insurance costs of $3.6 million, start-up costs of $1.3 million
related to XpressBet(TM) and the launch of HorseRacing TV(TM) and an increase in
utility costs of approximately $0.8 million.

Racing general and administrative expenses were $41.5 million in 2002,
compared to $31.1 million in 2001. As a percentage of total racing revenues,
general and administrative expenses increased from 6.8% in 2001 to 7.9% in 2002.
The increased costs included $4.9 million of costs related to acquisitions or
new business units not included in the prior year and higher costs of the
corporate head office, as several members of corporate and group management
teams joined late in the second quarter of 2001 and during 2002.

REAL ESTATE OPERATIONS

Revenues from real estate operations were $26.6 million in 2002,
compared to $59.7 million in 2001. Income before income taxes from real estate
activities decreased to a loss of $0.1 million in 2002 from income of $21.5
million in 2001. These decreases are primarily attributable to the lower level
of sales of Non-Core Real Estate in 2002. In 2002, we had gains on the sale of
Non-Core Real Estate of $2.2 million, compared to gains of $20.4 million during
2001.

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PREDEVELOPMENT AND OTHER COSTS

Predevelopment and other costs were $2.3 million in 2002 compared to
$3.2 million in 2001. The decrease in predevelopment and other costs was a
result of lower activity on certain development projects in the current year.

WRITE-DOWN OF LONG-LIVED AND INTANGIBLE ASSETS

Pursuant to SFAS 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", and SFAS 142, "Goodwill and Other Intangible Assets", our
long-lived assets and racing licenses were tested for impairment after
completion of our annual business planning process. As a result of declining
attendance and related revenues at Remington Park and Great Lakes Downs,
operating profits and cash flows were lower than expected in 2002. Based on
these results, the earnings forecasts for these two racetracks were revised and
we recognized an impairment in value of $14.7 million related to our long-lived
assets and an impairment in value of racing licenses of $2.8 million in 2002.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization decreased $3.4 million from $26.2 million
in 2001 to $22.8 million in 2002, primarily as a result of the implementation of
Statement of Financial Accounting Standards Board Statement No. 142, Goodwill
and Other Intangible Assets ("SFAS 142"). The implementation of SFAS 142
resulted in the cessation of amortization of goodwill and intangible assets that
meet the criteria for indefinite life, effective January 1, 2002. The impact of
SFAS 142 was to reduce depreciation and amortization expense by $8.0 million
from the prior year, which has been partially offset by increased depreciation
and amortization of fixed assets for our acquisitions and increased depreciation
on recent fixed asset additions.

INTEREST INCOME AND EXPENSE

Our net interest expense for the year ended December 31, 2002 decreased
$2.0 million to $0.7 million from $2.7 million in 2001. The lower net interest
expense is attributable to the capitalization of interest on certain properties
under development in the current year, interest earned on increased cash
balances on hand and a reduction of debt for the majority of the year.

INCOME TAX PROVISION

We recorded an income tax benefit of $8.6 million on a loss before
income taxes of $23.0 million in 2002, compared to an income tax provision of
$9.3 million on income before income taxes of $22.8 million in 2001. Our
effective income tax rate in 2002 was 37.4%, compared to 41.0% in 2001,
primarily as a result of the income tax recovery recorded on our write-down of
long-lived and intangible assets, which did not reflect any state tax recovery.

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

RACING OPERATIONS

Revenues from our racing operations were $459.4 million in 2001,
compared to $355.2 million in 2000, an increase of $104.2 million or 29.3%. This
increase resulted primarily from having nine racetracks open for live racing for
some part of the year, compared with only six open in 2000. We

62

acquired the operations of Bay Meadows on November 17, 2000, the operations of
MEC Pennsylvania, formerly Ladbroke Pennsylvania, which include the operations
of The Meadows, four OTB facilities and the Pennsylvania hub for XpressBet(TM),
on April 5, 2001, and Multnomah Greyhound Park on October 26, 2001. In addition,
in the second quarter of 2001, we leased a racetrack facility in Portland,
Oregon operating as Portland Meadows.

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

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

REAL ESTATE OPERATIONS

Revenues from real estate operations were $59.7 million in 2001,
compared to $58.3 million in 2000. Income before income taxes from real estate
activities increased to $21.5 million in 2001 from $5.4 million in 2000. These
increases are primarily attributable to the sale of Non-Core Real Estate in
2001. In 2001 we had gains on the sale of Non-Core Real Estate of $20.4 million,
compared to gains of $7.0 million during the same period in 2000.

PREDEVELOPMENT AND OTHER COSTS

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

DEPRECIATION AND AMORTIZATION

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

63

INTEREST INCOME AND EXPENSE

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

INCOME TAX PROVISION

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

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

RACING OPERATIONS

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

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

Purses, awards and other increased 122.2%, from $85.5 million in 1999
to $190.0 million in 2000. As a percentage of gross wagering revenue, purses,
awards and other decreased from 63.9% in 1999 to 63.1% in 2000. Operating costs
increased from $63.3 million in 1999 to $128.6 million in 2000. As a percentage
of total racing revenues, operating costs decreased from 38.4% in 1999 to 36.2%
in 2000, purses, awards and other increased from 51.9% to 53.5%, and general and
administrative expenses increased from 3.6% to 5.1%. The reduction in operating
costs as a percentage of revenues is primarily the result of cost savings and
other synergies realized in connection with the consolidation of racing
operations in 2000. Racing general and administrative expenses increased to
$18.1 million in 2000, compared to $6.0 million in 1999. The increase was
primarily due to the additional racetracks acquired in late 1999 and 2000, the
significant costs incurred to restructure our corporate office and other
one-time

64

costs, primarily related to severance payments and the closing of our Santa
Monica office, of approximately $7.5 million in 2000.

REAL ESTATE OPERATIONS

Revenues from our real estate operations were $58.3 million in 2000,
compared to $21.9 million in 1999. Income before income taxes from real estate
operations increased to $5.4 million in 2000 from a loss of $2.6 million in
1999. This increase was primarily attributable to an increase in the amount of
Non-Core Real Estate sold in 2000 compared to 1999. For the year ended December
31, 2000, we had gains of $7.0 million on the sale of real estate, compared to
gains of $0.6 million in 1999.

PREDEVELOPMENT AND OTHER COSTS

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

DEPRECIATION AND AMORTIZATION

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

INTEREST INCOME AND EXPENSE

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

INCOME TAX PROVISION

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

LIQUIDITY AND CAPITAL RESOURCES

YEAR ENDED DECEMBER 31, 2002

OPERATING ACTIVITIES

Cash provided by operations before changes in non-cash working capital
decreased $6.6 million in 2002 compared to 2001. The decrease was attributable
to decreases in net income, depreciation and amortization, future income taxes
and gains on disposal of real estate properties, partially offset by write-

65

downs of real estate and intangible assets and equity earnings. In 2002, cash
provided from non-cash working capital balances was $0.4 million.

INVESTING ACTIVITIES

Cash used in investing activities in 2002 was $226.2 million, including
$146.3 million spent on acquisitions, primarily for Lone Star Park and The
Maryland Jockey Club, expenditures of $107.2 million on real estate property and
fixed asset additions and $26.6 million in other asset additions, partially
offset by $53.9 million of proceeds received on the sale of Non-Core Real
Estate. Expenditures relating to real estate property and fixed assets for 2002
included $42.0 million for the construction of our Palm Meadows training center,
$23.3 million for our Austrian racetrack under development, $8.1 million for the
completion of our Magna Golf Club clubhouse, $7.6 million for the purchase of
435 acres of land in Ocala, Florida and maintenance capital improvements of $9.9
million. The remaining $16.3 million of expenditures related to other racetrack
property enhancements, infrastructure and predevelopment costs on certain of our
properties and account wagering and television related activities. Other asset
additions included our cash advance of $23.1 million to Ontario Racing Inc.
related to the purchase of Flamboro Downs.

FINANCING ACTIVITIES

Cash provided by financing activities was $249.2 million in 2002
arising from the issuance of share capital for $142.4 million, net of issue
expenses, and convertible subordinated notes for $72.2 million, net of issue
expenses, and utilization of the Company's revolving credit facility for $49.5
million, partially offset by the net repayment of long-term debt of $14.9
million.

YEAR ENDED DECEMBER 31, 2001

OPERATING ACTIVITIES

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

INVESTING ACTIVITIES

Cash used in investing activities in 2001 was $7.5 million, including
investments of $40.0 million in real estate property and fixed asset and other
asset additions and $24.0 million on the acquisitions of MEC Pennsylvania and
Multnomah Greyhound Park, partially offset by $56.5 million of proceeds received
on the sale of Non-Core Real Estate. In 2001, we invested $38.9 million in real
estate and fixed asset additions, which included $6.4 million for the purchase
of real estate, $14.8 million related to maintenance capital improvements to the
racetracks and $10.7 million on the Magna Golf Club in Aurora, Ontario. The
remaining $7.0 million of expenditures related to racetrack property
enhancements, infrastructure and predevelopment costs on certain of our
properties and on account wagering activities, including the telephone and
Internet and television distribution.

66

FINANCING ACTIVITIES

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

YEAR ENDED DECEMBER 31, 2000

OPERATING ACTIVITIES

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

INVESTING ACTIVITIES

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

FINANCING ACTIVITIES

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

WORKING CAPITAL, CASH AND OTHER RESOURCES

Our net working capital, excluding cash and cash equivalents and bank
indebtedness, was ($37.6) million at December 31, 2002, compared to ($22.6)
million at December 31, 2001. The decreased investment in net working capital,
excluding cash and cash equivalents and bank indebtedness, was primarily related
to an increase in accounts payable and other accruals of $34.4 million,
partially offset by an increase in accounts receivable of $13.0 million and
prepaid expenses and other of $2.9 million and a

67

reduction of income taxes payable of $3.6 million, primarily as a result of the
increased number of tracks owned and operating at year end.

On May 1, 2002, we entered into an agreement with respect to a $75.0
million senior, unsecured revolving credit facility. On October 11, 2002, we
entered into an amending agreement to increase this facility from $75.0 million
to $100.0 million. The credit facility has a term of one year, which expires on
October 10, 2003, and may be extended, with the consent of both parties. Under
the terms of the agreement, as amended and restated on December 2, 2002, the
amount available under the credit facility will be reduced to $50.0 million on
April 30, 2003. At December 31, 2002, we had borrowed $49.5 million and issued
letters of credit totaling $20.0 million under this facility.

One of our subsidiaries, The Santa Anita Companies, Inc., is party to a
secured term loan facility, which bears interest at LIBOR plus 2.2% per annum.
We have entered into an interest rate swap contract and fixed the rate of
interest at 6.0% per annum to November 30, 2004, the maturity date of the term
loan facility. At December 31, 2002, $55.7 million was outstanding under this
fully drawn term loan facility.

Also, two of our subsidiaries, which are part of The Maryland Jockey
Club, are party to secured term loan facilities which bear interest at 6.5% and
7.0% per annum, respectively. Both term loans have interest rate adjustment
clauses which reset to the market rate for a U.S. Treasury security of an
equivalent term plus 2.6% at set dates prescribed in the agreements. At December
31, 2002, $19.6 million and $4.9 million, respectively, were outstanding under
these fully drawn term loan facilities which mature on December 1, 2013 and June
7, 2017, respectively.

On December 2, 2002, we issued $75.0 million of 7.25% convertible
subordinated notes, which are convertible at any time at the option of the
holders into shares of Class A Subordinate Voting Stock at a conversion price of
$8.50 per share, subject to adjustments under certain circumstances, and mature
on December 15, 2009. The notes are redeemable at the principal amount together
with accrued and unpaid interest, at the Company's option, under certain
conditions on or after December 21, 2005. At December 31, 2002, all the notes
remained outstanding.

On November 27, 2002, contemporaneous with our acquisition of The
Maryland Jockey Club, the Company granted the remaining minority interest
shareholders of The Maryland Jockey Club the option to sell such interest to us,
at any time during the first five years after closing of the acquisition. A cash
payment of $18.3 million plus interest will be required on exercise of the
option.

At December 31, 2002, we had cash and cash equivalents of $87.7 million
and total shareholders' equity of $720.9 million. At December 31, 2002, we also
had unused and available credit facilities of approximately $50.5 million.

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

68

QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

Our future earnings, cash flows and fair values relating to financial
instruments are primarily dependent upon prevalent market rates of interest,
such as LIBOR and EURIBOR. Based on interest rates at December 31, 2002 and our
current credit facilities, a 1% per annum increase or decrease in interest rates
on our line of credit and other variable rate borrowings would not materially
affect our annual future earnings and cash flows. Based on borrowing rates
currently available to us, the carrying amount of our debt approximates its fair
value.

In order to mitigate a portion of the interest rate risk associated
with our variable rate debt, we have entered into an interest rate swap
contract. Under the terms of this contract, the Company receives a LIBOR based
variable interest rate and pays a fixed rate of 6.0% on a notional amount of
$55.7 million as at December 31, 2002. The maturity date of this contract is
November 30, 2004.

ACCOUNTING DEVELOPMENTS

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

During 2001, the Financial Account Standards Board ("FASB") issued
Statement No. 143 ("SFAS 143") Accounting For Asset Retirement Obligations. SFAS
143 requires that legal obligations arising from the retirement of tangible
long-lived assets, including obligations identified by a company upon
acquisition and construction and during the operating life of a long-lived
asset, be recorded and amortized over the asset's useful life using a systematic
and rational allocation method. SFAS 143 is effective for fiscal years starting
after June 15, 2002.

During 2002, FASB issued Statement No. 146 ("SFAS 146"), Accounting for
Costs Associated with Exit or Disposal Activities. SFAS 146 requires that costs
associated with an exit or disposal activity be recognized and measured at fair
value in the period, which the liability is incurred. SFAS 146 is effective for
exit or disposal activities that are initiated after December 31, 2002.

In 2002, FASB issued Interpretation No. 45 ("FIN 45"), Guarantor's
Accounting and Disclosure Requirements for Guarantees, including Indirect
Guarantees of Indebtedness of Others. FIN 45 requires guarantees to be recorded
at fair value; previously a liability was only recorded when a loss under a
guarantee was probable and reasonably estimable. The initial recognition and
measurement provisions of FIN 45 are applicable on a prospective basis to
guarantees issued or modified after December 21, 2002.

69

Although we are currently reviewing SFAS 143, SFAS 146 and the
recognition and measurement requirements of FIN 45, we have not determined the
impact, if any, of these pronouncements on our consolidated financial
statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

70

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF THE INDEPENDENT AUDITORS

To the Shareholders of Magna Entertainment Corp.

We have audited the accompanying consolidated balance sheets of Magna
Entertainment Corp. as of December 31, 2002 and 2001, and the related
consolidated statements of operations and comprehensive income (loss), changes
in shareholders' equity and cash flows for each of the years in the three year
period ended December 31, 2002. Our audit also included the financial schedule
listed in the Index at Item 15(a). These financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Magna
Entertainment Corp. at December 31, 2002 and 2001, and the consolidated results
of its operations and its cash flows for each of the years in the three year
period ended December 31, 2002, in conformity with United States generally
accepted accounting principles. Also, in our opinion, the related financial
schedule, when considered in relation to the basic financial statements taken as
a whole, present fairly in all material respects the information set forth
therein.

As described in note 2 to these consolidated financial statements, the Company
changed its accounting policies for goodwill and other intangible assets.

Toronto, Canada ERNST & YOUNG LLP
February 7, 2003 /s/ Ernst & Young LLP

71

MAGNA ENTERTAINMENT CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS)

[U.S. DOLLARS IN THOUSANDS, EXCEPT PER SHARE FIGURES]

SEE ACCOMPANYING NOTES

72

MAGNA ENTERTAINMENT CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

[U.S. DOLLARS IN THOUSANDS]

SEE ACCOMPANYING NOTES

73

MAGNA ENTERTAINMENT CORP.

CONSOLIDATED BALANCE SHEETS

[U.S. DOLLARS AND SHARE AMOUNTS IN THOUSANDS]

SEE ACCOMPANYING NOTES

74

MAGNA ENTERTAINMENT CORP.

CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY

[U.S. DOLLARS IN THOUSANDS]

SEE ACCOMPANYING NOTES

75

MAGNA ENTERTAINMENT CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

1. SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

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

PRINCIPLES OF CONSOLIDATION

These consolidated financial statements include the accounts of Magna
Entertainment Corp. and its subsidiaries (collectively the "Company"). All
significant intercompany balances and transactions have been eliminated.

CASH AND CASH EQUIVALENTS

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

IMPAIRMENT OF LONG-LIVED ASSETS

Financial Accounting Standards Board Statement No. 144 ("SFAS 144")
"Accounting for the Impairment or Disposal of Long-Lived Assets" establishes
accounting standards for the impairment of long-lived assets, including real
estate properties, fixed and other assets. The Company evaluates impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable.

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

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

76

MAGNA ENTERTAINMENT CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

REAL ESTATE PROPERTIES

REVENUE-PRODUCING RACING REAL ESTATE

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

EXCESS RACING REAL ESTATE

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

DEVELOPMENT REAL ESTATE

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

REVENUE-PRODUCING NON-RACING REAL ESTATE

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

NON-CORE REAL ESTATE

Non-core real estate includes properties available for sale. Properties
available for sale are valued at the lower of cost, which includes acquisition
and development costs, and fair value less costs of disposal. The Company
evaluates the lower of cost and fair value less costs of disposal whenever
events or changes in circumstance indicate possible impairment.

FIXED ASSETS

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

77

MAGNA ENTERTAINMENT CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

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

RACING LICENSES AND GOODWILL

Racing licenses represent the value attributed to licenses to conduct
race meets acquired through the Company's acquisition of racetracks. Goodwill
represents the excess of the purchase price of a subsidiary company over the
fair value of the underlying net identifiable assets arising on acquisition. In
accordance with Financial Accounting Standards Board Statement No. 142 ("SFAS
142"), "Goodwill and Other Intangible Assets", the Company has applied the
non-amortization and impairment rules for existing goodwill and other intangible
assets that meet the criteria for indefinite life, effective January 1, 2002.
Racing licenses and goodwill are evaluated for impairment on an annual basis or
when impairment indicators are present. An impairment write-down to fair value
would occur if discounted cash flows from operations net of the fair value of
the long-lived assets was less than the carrying amount of the racing license or
goodwill.

REVENUE RECOGNITION

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

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

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

DEFERRED REVENUES

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

78

MAGNA ENTERTAINMENT CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

SEASONALITY OF REVENUES

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

ADVERTISING

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

FOREIGN EXCHANGE

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

INCOME TAXES

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

STOCK-BASED COMPENSATION

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

79

MAGNA ENTERTAINMENT CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

The pro-forma impact on net income (loss) and earnings (loss) per share
if the Company had applied the fair value recognition provisions of SFAS 123 to
stock-based compensation, is as follows:

EARNINGS PER SHARE

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

Under the treasury stock method:

- - The convertible subordinated notes are assumed to be converted at the
beginning of the period (or at the issuance, if later) and net income is
increased by related interest;

- - The exercise of options is assumed to be at the beginning of the period (or
at the time of issuance, if later);

- - The proceeds from the exercise of options are assumed to be used to
purchase Class A Subordinate Voting Stock at the average market price
during the period; and

- - The incremental number of shares of Class A Subordinate Voting Stock (the
difference between the number of shares assumed issued and the number of
shares assumed purchased) is included in the denominator of the diluted
earnings per share calculation.

80

MAGNA ENTERTAINMENT CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

INTEREST RATE SWAPS

The Company utilizes, on occasion, interest rate swap contracts to
hedge exposure to interest rate fluctuations on its variable rate debt. The fair
value of the swaps is recorded on the balance sheet as an asset or liability
with the offset recorded in other comprehensive income net of income taxes. Any
changes in the market value of the swaps are adjusted to the asset or liability
account and recorded net of income taxes in other comprehensive income.

USE OF ESTIMATES

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

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

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

During 2001, the Financial Accounting Standards Board ("FASB"), issued
Statement No. 143 ("SFAS 143"), "Accounting for Asset Retirement Obligations".
SFAS 143 requires that legal obligations arising from the retirement of tangible
long-lived assets, including obligations identified by a company upon
acquisition and construction and during the operating life of a long-lived
asset, be recorded and amortized over the asset's useful life using a systematic
and rational allocation method. SFAS 143 is effective for fiscal years beginning
after June 15, 2002.

During 2002, FASB issued Statement of Financial Accounting Standards
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities"
("SFAS 146"). SFAS 146 requires that costs associated with an exit or disposal
activity be recognized and measured at fair value in the period in which the
liability is incurred. SFAS 146 is effective for exit or disposal activities
that are initiated after December 31, 2002.

During 2002, FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"). FIN 45 requires certain guarantees to be
recorded at fair value; previously a liability was recorded only when a loss
under a guarantee was probable and reasonably estimable. The initial recognition
and measurement provisions of FIN 45 are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002.

Although the Company is currently reviewing SFAS 143 and SFAS 146, and
the recognition and measurement requirements of FIN 45, the impact, if any, of
these pronouncements on its consolidated financial statements has not been
determined.

81

MAGNA ENTERTAINMENT CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

RECLASSIFICATION

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

2. ACCOUNTING CHANGE

Effective January 1, 2002, the Company implemented SFAS 142, "Goodwill
and Other Intangible Assets". SFAS 142 requires the application of the
non-amortization and impairment rules for existing goodwill and other intangible
assets that meet the criteria for indefinite life beginning January 1, 2002.

The following is the pro-forma impact of the implementation of SFAS
142:

3. BUSINESS ACQUISITIONS

The following acquisitions were accounted for using the purchase
method:

[a] Acquisitions in the year ended December 31, 2002

LONE STAR PARK AT GRAND PRAIRIE

On October 23, 2002, the Company completed the acquisition of
substantially all the operations and related assets of Lone Star Park at Grand
Prairie, for a total cash purchase price, including transaction costs, of $79.1
million, net of cash acquired of $1.8 million. Lone Star Park at Grand Prairie
operates thoroughbred and American quarter horse race meets at its racetrack
located near Dallas, Texas.

THE MARYLAND JOCKEY CLUB

On November 27, 2002, the Company completed the acquisition of a
controlling interest in the Pimlico Race Course and Laurel Park, which are
operated under the trade name "The Maryland Jockey

82

MAGNA ENTERTAINMENT CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

Club ("MJC")", for a total purchase price, including transaction costs, of $84.9
million, net of cash acquired of $5.3 million. The total purchase price was
satisfied by cash payments of $66.6 million and the obligation to pay $18.3
million, which bears interest at the six month London Inter-bank Offered Rate
("LIBOR"), upon the exercise of either the put or call option described below.
Under the terms of the agreements, the Company acquired a 51% equity and voting
interest in The Maryland Jockey Club of Baltimore City, Inc., the owner of
Pimlico Race Course, a 51% voting interest and a 58% equity interest on a fully
diluted basis in Laurel Racing Assoc., Inc., the general partner and manager of
Laurel Racing Association Limited Partnership ("LRALP"), the owner of Laurel
Park, and the entire limited partnership interest in LRALP. The Company also
purchased options from the De Francis family, the sellers of the business, to
buy their remaining voting and equity interests in MJC, which represent all the
minority interests, at any time during the period starting 48 months and ending
60 months after the closing of the transaction. The Company has also granted the
De Francis family the option to sell such interests to the Company at any time
during the first five years after the closing. In consideration for these
options, the Company paid $18.4 million on closing and an additional $18.3
million, plus interest at the six month LIBOR, will be paid on exercise of the
options. The put and call options are viewed, for accounting purposes, on a
combined basis with the minority interest and accounted for as a financing of
the Company's purchase of such minority interest. Accordingly, the Company has
consolidated 100% of the operations of MJC from the date of acquisition. Pimlico
Race Course, the home of the Preakness Stakes(R), the middle jewel in
thoroughbred racing's Triple Crown, and Laurel Park, are located in the
Baltimore, Maryland area.

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

The purchase price and related allocations for these acquisitions are
preliminary. Adjustments to the purchase price and related preliminary
allocations may occur as a result of obtaining more information

83

MAGNA ENTERTAINMENT CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

regarding asset valuations, liabilities assumed, purchase price adjustments
pursuant to the purchase agreements, and revisions of preliminary estimates of
fair values made at the date of purchase.

FLAMBORO DOWNS

On October 18, 2002, the shares of Flamboro Downs Holdings Limited, the
owner and operator of Flamboro Downs, a harness racetrack located in Hamilton,
Ontario, 45 miles west of Toronto, were acquired by Ontario Racing Inc. ("ORI").
Flamboro Downs also houses a gaming facility with 750 slot machines operated by
the Ontario Lottery and Gaming Corporation ("OLGC"). ORI is a former subsidiary
of the Company that is presently owned by an employee of the Company. Five
business days after the Company receives all necessary regulatory approvals for
the acquisition of Flamboro Downs, the shares of ORI will be transferred to the
Company. The results of operations of ORI, which owns Flamboro Downs, have been
accounted for under the equity method pending receipt of the approvals, which
are expected to be received in the spring of 2003.

The purchase price, net of cash, was approximately $55.9 million,
consisting of a cash payment of $23.1 million on closing, with the remainder
satisfied by ongoing payments under secured notes of approximately $32.8
million. In addition, the purchase and sale agreement stipulates that the
purchase price may be increased by a maximum of $3.5 million (Cdn. $5.5
million), plus accrued interest, in the event that Flamboro Downs' agreement
with the OLGC, with respect to the slot facility, is extended. The Company has
provided the funding for the acquisition cost by way of a revolving secured loan
facility to ORI and has guaranteed the secured notes.

As of December 31, 2002, the Company has advanced $23.1 million to ORI,
representing acquisition costs, which is recorded in other assets.

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

MEC PENNSYLVANIA

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

MULTNOMAH GREYHOUND PARK

84

MAGNA ENTERTAINMENT CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

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

GREAT LAKES DOWNS

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

BAY MEADOWS

On November 17, 2000, the Company completed the acquisition of Bay
Meadows Operating Co., LLC and Bay Meadows Catering (collectively "Bay Meadows")
for a total cash purchase price, including transaction costs, of $24.1 million,
net of cash acquired of $0.09 million. Bay Meadows Operating Co., LLC operates
the Bay Meadows racetrack, which is located in the city of San Mateo,
California.

85

MAGNA ENTERTAINMENT CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

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

[d] Pro-forma Impact

If the acquisitions completed during the years ended December 31, 2002
and 2001 had occurred on January 1, 2001, the Company's unaudited pro-forma
revenue would have been $708.3 million and $726.3 million for the years ended
December 31, 2002 and 2001, respectively, unaudited pro-forma net income (loss)
would have been $(12.9) million and $13.9 million for the years ended December
31, 2002 and 2001, respectively, and unaudited pro-forma basic and diluted
earnings (loss) per share would have been $(0.12) and $0.16 for the years ended
December 31, 2002 and 2001, respectively.

4. WRITE-DOWN OF LONG-LIVED AND INTANGIBLE ASSETS

Pursuant to SFAS 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", and SFAS 142, "Goodwill and Other Intangible Assets", the
Company's long-lived assets and racing licenses were tested for impairment after
completion of the Company's annual business planning process. As a result of
declining attendance and related revenues at Remington Park and Great Lakes
Downs, operating profits and cash flows were lower than expected in 2002. Based
on these results, the earnings forecasts for these two racetracks were revised.

The fair value of the racetracks was determined using the discounted
cash flow method, including a probability-weighted approach in considering the
likelihood of possible outcomes. It also includes the estimated future cash
flows associated with the racing licenses and long-lived assets directly
associated with, and expected to arise as a direct result of, the use and
disposition of those assets. The fair value determined was then compared to the
carrying value of the racing licenses and long-lived assets in order to
determine the amount of the impairment. The long-lived assets consist of fixed
assets and real estate properties.

86

MAGNA ENTERTAINMENT CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

As a result of the assets' carrying value exceeding their fair value at
Remington Park and Great Lakes Downs, the Company recognized an impairment in
value of $14.7 million related to its long-lived assets, which has been
allocated to the fixed assets and real estate properties on a pro-rata basis
using the relative carrying values of the assets, and an impairment in value of
racing licenses of $2.8 million in 2002.

5. WRITE-DOWN OF EXCESS REAL ESTATE

In November 2002, the Company entered into an agreement with the East
Bay Regional Park District, a California Special District, to sell approximately
16 acres of excess real estate located at Golden Gate Fields in Berkeley,
California. The value of the consideration to be received by the Company for the
real estate, excluding certain tax benefits of $1.4 million, is $8.5 million.
The carrying value of the property, prior to entering into the agreement, was
$14.3 million, which was based on an allocation of the purchase price for the
Golden Gate Fields acquisition in 1999. The transaction is expected to close in
the third quarter of 2003, subject to certain conditions, including the
purchaser completing certain due diligence procedures. In 2002, the Company
recorded a write-down of this real estate which has resulted in a loss before
income taxes and a loss after income taxes of $5.8 million and $2.4 million,
respectively.

87

MAGNA ENTERTAINMENT CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

6. REAL ESTATE PROPERTIES

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

88

MAGNA ENTERTAINMENT CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

7. FIXED ASSETS

Fixed assets consist of:

8. OTHER ASSETS

Other assets consist of:

89

MAGNA ENTERTAINMENT CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

9. INCOME TAXES

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

At December 31, 2002, the Company had United States federal and
Austrian income tax loss carry-forwards totaling approximately $17.8 million. Of
the $17.8 million in loss carry-forwards at December 31, 2002, $5.8 million have
no expiration date and the remainder expire as follows:

Years:
2008 to 2010 $ 3,100
2012 to 2018 4,800
2020 to 2022 4,100
- ----------------------------------------------------------------------------------------------------------------------
$12,000
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------

There are annual limitations on the utilization of the loss
carry-forwards subject to expiration.

The company also has U.S. state income tax loss carry-forwards
available.

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

90

MAGNA ENTERTAINMENT CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

91

MAGNA ENTERTAINMENT CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

[e] Future tax assets and liabilities at December 31, 2002 consist of the
following temporary differences:

[f] Income taxes paid in cash were $5.0 million for the year ended December
31, 2002 (for the year ended December 31, 2001 - $6.7 million; for the
year ended December 31, 2000 - $3.2 million).

10. BANK INDEBTEDNESS

During the year, the Company entered into a credit agreement with
respect to a senior, unsecured revolving credit facility for $100.0 million. The
credit facility is available by way of U.S. dollar loans and letters of credit
for general corporate purposes. The facility has been guaranteed by certain
subsidiaries of the Company which own and operate Golden Gate Fields, Gulfstream
Park, MEC Pennsylvania and The Maryland Jockey Club and operate Bay Meadows. As
of December 31, 2002, the Company had borrowed $49.5 million and issued letters
of credit totaling $20.0 million under the credit facility, such that $30.5
million was unused and available. Under the terms of the agreement, the amount
available under the credit facility will be reduced to $50.0 million on April
30, 2003. The credit facility expires on October 10, 2003, unless extended with
the consent of both parties.

92

MAGNA ENTERTAINMENT CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

The loans under the facility bear interest at either the U.S. Base rate
or LIBOR plus a margin based on the ratio of debt to earnings before interest,
taxes, depreciation and amortization. The weighted average interest rate on the
loans outstanding under the credit facility as at December 31, 2002 was 4.0%.

11. DEBT AND COMMITMENTS

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

93

MAGNA ENTERTAINMENT CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

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

The overall weighted average interest rate on long-term debt at
December 31, 2002 was 5.7% (for the year ended December 31, 2001 - 5.9%; for the
year ended December 31, 2000 - 8.1%).

[b] Future principal repayments on long-term debt at December 31, 2002 are
as follows:

2003 $ 15,049
2004 55,788
2005 6,896
2006 19,787
2007 1,636
Thereafter 33,694
- -----------------------------------------------------------------------------------------------------------------------
$132,850
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------

[c] Included within the above schedule of future principal repayments of
long-term debt (note 11(b)) is an obligation under a capital lease.
Future minimum lease payments under the capital lease in effect at
December 31, 2002 are as follows:

2003 $ 1,320
2004 1,320

94

MAGNA ENTERTAINMENT CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

2005 1,320
2006 1,320
2007 1,452
Thereafter 32,868
- -----------------------------------------------------------------------------------------------------------------------
Total payments 39,600
- -----------------------------------------------------------------------------------------------------------------------
Less: capital lease minimum payments representing interest 24,078
- -----------------------------------------------------------------------------------------------------------------------
Present value of lease payments $15,522
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------

[d] At December 31, 2002, the Company has additional unused and available
operating lines of credit totaling $20.0 million, which are secured by
a guarantee, a pledge of stock of a subsidiary, and by assets of
certain subsidiaries.

[e] Interest expense and interest income include:

Interest capitalized relates to real estate properties under
development.

Interest paid in cash for the year ended December 31, 2002 was $6.7
million (for the year ended December 31, 2001 - $7.4 million; for the year ended
December 31, 2000 - $2.5 million).

12. CONVERTIBLE SUBORDINATED NOTES

On December 2, 2002, the Company issued $75.0 million of 7.25%
convertible subordinated notes which mature on December 15, 2009. The unsecured
notes are convertible at any time at the option of the holders into shares of
Class A Subordinate Voting Stock at a conversion price of $8.50 per share. The
conversion price may be adjusted under certain circumstances. The notes are
redeemable in whole or in part, at the Company's option, on or after December
21, 2005, at the principal amount plus accrued and unpaid interest, provided
that, in connection with any redemption occurring on or after December 21, 2005
and before December 15, 2007, the closing price of the Class A Subordinate
Voting Stock has exceeded 125% of the conversion price for at least 20 trading
days in the 30 consecutive trading day period ending on the trading day prior to
mailing of the notice of redemption. At December 31, 2002, all the notes
remained outstanding.

The Company incurred issue expenses of $2.8 million, which have been
recorded as a reduction of the outstanding notes balance. The notes balance will
be accreted to its face value over the term to maturity.

95

MAGNA ENTERTAINMENT CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

13. CAPITAL STOCK

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

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

[i] Each share is entitled to one vote per share at all meetings of
stockholders.

[ii] Each share shall participate equally as to dividends with each share of
Class B Stock and each Exchangeable Share.

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

[i] Each share is entitled to 20 votes per share at all meetings of
stockholders.

[ii] Each share shall participate equally as to dividends with each share of
Class A Subordinate Voting Stock and each Exchangeable Share.

[iii] Each share may be converted at any time into a fully-paid share of
Class A Subordinate Voting Stock.

Exchangeable Shares, which were called for redemption on December 30, 2002, had
the following attributes:

[i] Each share was entitled, by the holder thereof instructing Magna
International Inc. ("Magna") to exercise one vote attached to a share
of the Company's Class A Subordinate Voting Stock or Class B Stock held
by Magna, to one vote per share at all meetings of stockholders of the
Company, but were non-voting with respect to MEC Holdings (Canada) Inc.

[ii] Each share would have participated equally as to dividends with each
share of Class A Subordinate Voting Stock and Class B Stock.

[iii] Each share was convertible at any time into a fully-paid share of Class
A Subordinate Voting Stock.

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

[b] Changes in the Class A Subordinate Voting Stock, Class B Stock and
Exchangeable Shares for the years ended December 31, 2002, 2001 and 2000 are
shown in the following table (number of shares in the following table are
expressed in whole numbers and have not been rounded to the nearest thousand):

96

MAGNA ENTERTAINMENT CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

97

MAGNA ENTERTAINMENT CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

(i) On April 10, 2002, the Company completed a public offering of 23
million shares of its Class A Subordinate Voting Stock, at a price to
the public of $6.65 per share, or Cdn. $10.60 per share in Canada.
Expenses of the issue of approximately $10.9 million have been netted
against the cash proceeds.

(ii) On December 30, 2002, MEC Holdings (Canada) Inc. called for redemption
all remaining outstanding Exchangeable Shares not held by the Company.
The redemption call purchase price was satisfied in full upon delivery
by the Company to each holder of outstanding Exchangeable Shares of one
share of the Company's Class A Subordinate Voting Stock for each
Exchangeable Share held.

[c] Basic earnings per share of Class A Subordinate Voting Stock,
Exchangeable Shares or Class B Stock for the year ended December 31, 2002 has
been calculated using 100,674,267 shares. The amount has been calculated using
the weighted average number of shares outstanding during the year. As a result
of the net loss for the year ended December 31, 2002, there is no dilutive
effect of the stock options and convertible subordinated notes.

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

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

98

MAGNA ENTERTAINMENT CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

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

14. CURRENCY TRANSLATION ADJUSTMENT

Unrealized translation adjustments arise on the translation to U.S.
dollars of assets and liabilities of the Company's self-sustaining foreign
operations. During the year ended December 31, 2002, the Company incurred
unrealized currency translation gains of $16.3 million, primarily from the
strengthening of the Euro against the U.S. dollar (an unrealized loss of $9.1
million for the year ended December 31, 2001; an unrealized loss of $8.9 million
for the year ended December 31, 2000).

15. FINANCIAL INSTRUMENTS

[a] Fair Value

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

CASH AND CASH EQUIVALENTS, ACCOUNTS RECEIVABLE, BANK INDEBTEDNESS, ACCOUNTS
PAYABLE, CUSTOMER DEPOSITS AND ACCRUED LIABILITIES.

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

LONG-TERM DEBT AND CONVERTIBLE SUBORDINATED NOTES

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

99

MAGNA ENTERTAINMENT CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

[b] Credit Risk

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

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

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

[c] Interest Rate Risk

The Company utilizes, on occasion, interest rate swap contracts to hedge
exposure to interest rate fluctuations on variable rate debt.

During the year ended December 31, 2002, the Company entered into an interest
rate swap contract with a major financial institution. Under the terms of the
contract, the Company receives a LIBOR based variable interest rate and pays a
fixed rate of 6.0% on a notional amount of $55.7 million as at December 31,
2002, reduced by monthly amounts of $350 thousand until maturity. The maturity
date of the contract is November 30, 2004.

Financial Accounting Standards Board Statement No. 133 ("SFAS 133"), "Accounting
for Derivative Instruments and Hedging Activities", requires companies to
recognize all their derivative instruments at fair value. Gains or losses
related to changes in fair value of derivative instruments designated as cash
flow hedges are recorded in accumulated comprehensive income if certain hedge
criteria are met, and recognized in the statement of operations along with the
related results of the hedged item. The statement requires that the Company
formally document, designate and assess the effectiveness of such transactions
in order to qualify for such hedge accounting treatment.

The Company has designated its interest rate swap contract as a cash flow hedge
of anticipated interest payments under its variable rate debt agreement.
Accordingly, gains and losses on the swap that are recorded in accumulated
comprehensive income will be recorded in net income as net interest expense in
the periods in which the related variable interest is paid.

The Company's interest rate swap is a payable of approximately $2.2 million at
December 31, 2002, using current interest rates.

The Company expects to reclassify approximately $1.3 million before income
taxes, or $0.8 million after income taxes, of the amount included in accumulated
comprehensive income as of December 31, 2002, into net interest expense over the
next twelve months.

100

MAGNA ENTERTAINMENT CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

Otherwise, the Company is not exposed to significant interest rate risk due to
the short-term maturity of its monetary current assets and current liabilities.

16. SEGMENT INFORMATION

OPERATING SEGMENTS

The Company's reportable segments reflect how the Company is organized
and managed by senior management. The Company has two operating segments: racing
and real estate and other operations. The racing segment includes the operation
or management of twelve thoroughbred racetracks, one standardbred racetrack, one
greyhound track and three thoroughbred training centers. In addition, the racing
segment includes off-track betting ("OTB") facilities and a national account
wagering business. The real estate segment includes the operation of two golf
courses and related recreational facilities, residential housing developments
adjacent to our golf courses and other real estate holdings.

101

MAGNA ENTERTAINMENT CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

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

102

MAGNA ENTERTAINMENT CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

GEOGRAPHIC SEGMENTS

Revenues by geographic segment of the Company are as follows:

17. TRANSACTIONS WITH RELATED PARTIES

[a] During the year ended December 31, 2002, the Company sold certain non-core
real estate properties located in Canada, the United States and Europe to
affiliates of Magna, an entity holding a controlling interest in the Company,
for total proceeds of $42.4 million, for use in their automotive business. The
gain on the sale of the properties of approximately $10.0 million, net of tax,
is reported as a contribution to equity.

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

During the year ended December 31, 2000, the Company sold approximately 24.5
acres of land located in Vaughan, Ontario to Magna, for use in their automotive
business, for total proceeds of approximately $5.8 million. The gain on the sale
of the property of approximately $1.4 million, net of tax, is reported as a
contribution to equity.

[b] During the year ended December 31, 2001, the Company entered into an
access agreement with Magna for its use of the golf course and the clubhouse
meeting, dining and other facilities in Aurora, Ontario. The agreement, which
expires on December 31, 2003, unless renewed by mutual agreement of

103

MAGNA ENTERTAINMENT CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

the parties, stipulates an annual fee of $3.2 million (Cdn $5.0 million). During
the years ended December 31, 2002 and 2001, $2.6 million and $2.7 million,
respectively, have been recognized in real estate revenue related to this
agreement.

[c] Properties under and held for development includes $5.8 million which
represents the book value of the remaining Aurora lands transferred to the
Company by Magna under a conditional sale agreement. The conditional sale
agreement is subject to the successful severance of the affected properties. If
severance is not obtained within a specified period such that Magna retains
ownership of the Aurora lands, Magna must return $5.8 million to the Company
with interest. Prior to completion of the conditional sale, the property is
being leased by the Company from Magna for a nominal amount.

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

During the year ended December 31, 2000, the Company sold to a company
associated with members of the family of Mr. F. Stronach, including one family
member who was an officer and director of the Company at the time, approximately
three acres of land in Aurora, Ontario for a sale price of approximately $0.2
million.

[e] The Company had granted a limited term option to Magna to reacquire a
real estate property for a fixed price equal to its book value of 50 million
Austrian Schillings ($2.3 million). This option was exercised during 2000.

[f] Effective March 1, 1999, the Company began charging Magna an access fee
for its use of the golf course and related facilities in Oberwaltersdorf,
Austria. The agreement, which expires on March 1, 2004, unless renewed by mutual
agreement of the parties, stipulates a yearly fee amounting to $2.6 million
(Euros 2.5 million). During the years ended December 31, 2002, 2001 and 2000,
$2.4 million, $2.2 million and $2.3 million, respectively, have been recognized
in real estate revenue related to this fee.

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

104

MAGNA ENTERTAINMENT CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

18. COMMITMENTS AND CONTINGENCIES

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

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

[c] The Company also has letters of credit issued with a financial
institution of $3.6 million to guarantee various construction projects related
to activity of the Company. These letters of credit are secured by cash deposits
of the Company.

[d] The Company has provided indemnities related to surety bonds and letters
of credit issued in the process of obtaining licenses and permits at certain
racetracks and to guarantee various construction projects related to activity of
its subsidiaries. As of December 31, 2002, these indemnities amounted to $7.4
million with expiration dates through 2003.

[e] At December 31, 2002, the Company had commitments under operating leases
requiring minimum annual rental payments for the years ending December 31 as
follows:

105

MAGNA ENTERTAINMENT CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

2005 2,192
2006 1,256
2007 438
- --------------------------------------------------------------------------------------------------------------------
$10,799
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------

For the year ended December 31, 2002, payments under these operating leases
amounted to approximately $3.8 million (for the year ended December 31, 2001 -
$3.6 million; for the year ended December 31, 2000 - $3.0 million). The Company
also rents or leases certain totalisator equipment and services, for which the
annual payments are contingent upon handle, live race days and other factors.
The Company's rent expense relating to the totalisator equipment and services
was $4.7 million for the year ended December 31, 2002 (for the year ended
December 31, 2001 - $4.1 million; for the year ended December 31, 2000 - $2.5
million).

The Company occupies land for the Remington Park racing facility under an
operating lease that extends through 2013. The lease also contains options to
renew for five 10-year periods after the initial term. Under the lease
agreement, the Company made an initial payment of $4.0 million that is being
amortized over the initial lease term. In addition to the initial payment, the
Company is obligated to pay additional rent based on minimum annual rental
payments ranging from $111 thousand to $133 thousand and one-half of one percent
of the wagers made at the track in excess of $187 million during the racing
season. The percentage rent was not applicable for the year ended December 31,
2002.

The Bay Meadows lease expires on December 31, 2003, subject to a further one
year extension at the landlord's option.

[f] In connection with its acquisition of a controlling interest in The
Maryland Jockey Club, Maryland Racing, Inc. ("MRI"), a wholly-owned
subsidiary of the Company, has agreed with the Maryland Racing Commission to
spend a minimum of $5.0 million by August 31, 2003, $5.0 million by December
31, 2003, and $5.0 million by June 30, 2004 on capital expenditures and
renovations at Pimlico Race Course, Laurel Park, Bowie Training Center and
related facilities and operations.

[g] Contractual commitments outstanding at December 31, 2002, which related
to construction and development projects, amounted to approximately $17.5
million.

[h] Completion of the acquisition of Flamboro Downs is subject to the receipt
of regulatory approvals. The secured notes of $32.8 million, assumed by ORI on
its acquisition of Flamboro Downs, have been guaranteed by the Company. In
addition, the purchase and sale agreement stipulates that the purchase price may
be increased by a maximum of $3.5 million (Cdn. $5.5 million), plus accrued
interest, in the event that Flamboro Downs' agreement with the OLGC, with
respect to the slot facility, is extended.

[i] Although the Company is considering a major redevelopment of its
Gulfstream Park racetrack in Florida (the "Gulfstream Park Redevelopment"), it
has deferred a decision on the project. Should it

106

MAGNA ENTERTAINMENT CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

proceed as currently contemplated, the Gulfstream Park Redevelopment would
include a simulcast pavilion, a sports and entertainment arena and a new turf
club and grandstand. In addition, there would be significant modifications and
enhancements to the racetracks and stable areas. If completed, the Gulfstream
Park Redevelopment would require the demolition of a substantial portion of the
current buildings and related structures, which include the grandstand and turf
club. The aggregate carrying value at December 31, 2002 of the assets that would
be demolished if the Gulfstream Park Redevelopment is completed is approximately
$22.2 million. If the Company decides to proceed with the Gulfstream Park
Redevelopment and obtains the approval of its Board of Directors, a reduction in
the expected life of the existing assets would occur and a write-down would be
necessary.

19. OTHER LONG-TERM LIABILITIES

Other long-term liabilities is comprised as follows:

EMPLOYEE DEFINED BENEFIT PLANS

The Company's Santa Anita Park racetrack has a pension plan that
consists of a non-contributory defined benefit retirement plan for year-round
employees who are at least 21 years of age, have one or more years of service,
and are not covered by collective bargaining agreements. Plan assets consist of
a group of annuity contracts with a life insurance company. Plan benefits are
based primarily on years of service and qualifying compensation during the final
years of employment. Funding requirements comply with federal requirements that
are imposed by law.

107

MAGNA ENTERTAINMENT CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

The net periodic pension cost of the Company for the years ended
December 31, 2002, 2001 and 2000 included the following components:

The following provides a reconciliation of benefit obligations, plan
assets and funded status of the plan:

108

MAGNA ENTERTAINMENT CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

The Company also participates in several multi-employer benefit plans
on behalf of its employees who are union members. Company contributions to these
plans were $3.9 million, $3.9 million and $3.8 million, respectively, for the
years ended December 31, 2002, 2001 and 2000. The data available from
administrators of the multi-employer pension plans is not sufficient to
determine the accumulated benefit obligations, nor the net assets attributable
to the multi-employer plans in which Company employees participate.

The Company offers various 401(k) plans (the "Plans") to provide
retirement benefits for employees. All employees who meet certain eligibility
requirements are able to participate in the Plans. Discretionary matching
contributions are determined each year by the Company. The Company contributed
to the Plans $0.4 million in the year ended December 31, 2002, $0.4 million in
the year ended December 31, 2001 and approximately $0.3 million in the year
ended December 31, 2000.

LONG-TERM INCENTIVE PLAN

The Company has a Long-term Incentive Plan (the "Plan") (adopted in
2000) which allows for the grant of nonqualified stock options, incentive stock
options, stock appreciation rights, restricted stock, bonus stock and
performance shares to directors, officers, employees, consultants, independent
contractors and agents. A maximum of 7.9 million shares are available to be
issued under the Plan, of which approximately 6.5 million are available for
issuance pursuant to stock options and tandem stock appreciation rights and
approximately 1.4 million are available for issuance pursuant to any other type
of award under the Plan.

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

109

MAGNA ENTERTAINMENT CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

Information with respect to shares under option is as follows:

Information regarding stock options outstanding is as follows:

Pro-forma information regarding net income and earnings per share is
required by SFAS 123, "Accounting and Disclosure of Stock-Based Compensation",
and has been determined as if the Company had accounted for its stock options
under the fair value method under SFAS 123. The average fair values of the stock
option grants in 2002 were $3.41 (for the year ended December 31, 2001 - $2.90;
for the year ended December 31, 2000 - $1.07). The fair value of stock option
grants in 2002 was estimated at the date of grant using the following
assumptions:

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

110

MAGNA ENTERTAINMENT CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

20. CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

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

a) Under Canadian GAAP, the Company's convertible subordinated notes would be
recorded in part as debt and in part as shareholders' equity, rather than
entirely as debt as considered under U.S. GAAP.

Under Canadian GAAP, the convertible subordinated notes liability would decrease
by $4.8 million, and other paid in capital, included in shareholders' equity,
would increase by $7.6 million. In addition, the issue costs related to the
notes of $2.8 million would be recorded in other assets and not netted within
the liability amount.

b) Under Canadian GAAP, sale of land to a related party that owns less than 80%
of the vendor's share capital, where the exchange amount is supported by
independent evidence, is considered an income item rather than a contribution to
equity as considered under U.S. GAAP.

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

111

MAGNA ENTERTAINMENT CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

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

112

MAGNA ENTERTAINMENT CORP.
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2002
[AMOUNTS IN THOUSANDS, U.S. DOLLARS]

COSTS
CAPITALIZED GROSS AMOUNT AT WHICH
INITIAL COSTS TO SUBSEQUENT TO FOREIGN EXCHANGE CARRIED AT CLOSE
COMPANY ACQUISITION IMPACT OF PERIOD
----------------- -------------- ---------------- ---------------------
BUILDING BUILDING BUILDING BUILDING
AND AND AND AND
ENCUM- IMPROVE- IMPROVE- IMPROVE- IMPROVE-
DESCRIPTION BRANCE LAND MENTS LAND MENTS LAND MENTS LAND MENTS
- ----------- ------ ---- ----- ---- ----- ---- ----- ---- -----

EXCESS REAL ESTATE
Racing Operations
Santa Anita Park (Arcadia, California,
U.S.A.) - 52,500 - - 281 - - 52,500 281
Gulfstream Park (Hallandale, Florida,
U.S.A.) - 14,201 - - - - - 14,201 -
Golden Gate Fields (Albany, California,
U.S.A.) - 14,323 - (5,823) - - - 8,500 -
Lone Star Park ( Grand Prairie, Texas,
U.S.A.) - 4,245 - - - - - 4,245 -
Maryland Jockey Club ( Baltimore, Maryland,
U.S.A.) - 10,900 - - - - - 10,900 -
MEC Grundstucksentwicklungs GmbH
(Niederoesterreich, Austria) - 9,974 - 1,050 - (1,366) - 9,658 -

REAL ESTATE HELD FOR DEVELOPMENT
Racing Operations
Dixon Downs (Dixon, California, U.S.A.) - 6,584 - 2,210 742 - - 8,794 742
Ocala (Ocala, Florida, U.S.A.) - 7,227 - 390 - - - 7,617 -
MEC Grundstucksentwicklungs GmbH
(Niederoesterreich, Austria) - 11,475 - 1,207 29,634 (1,571) - 11,111 29,634

Real Estate Operations
New York, U.S.A. - 725 - 1,961 - - - 2,686 -
Ontario, Canada - 2,334 - 3,977 - (511) - 5,800 -
Niederoesterreich, Austria - 6,804 - - - (1,804) - 5,000 -

NON-CORE REAL ESTATE
Land
Ontario, Canada - 2,559 - 216 - (341) - 2,434 -
Kentucky, U.S.A. - 2,847 - (236) - - - 2,611 -
Michigan, U.S.A. - 1,161 - 204 - - - 1,365 -
Florida, U.S.A. - 1,918 - 410 - - - 2,328 -
Commercial/Industrial Properties
Oberoesterreich, Austria - 3,376 8,193 (3,516) (8,563) 162 370 22 -
Oberoesterreich, Austria - 2,024 - - - (92) - 1,932 -
Residential Properties
Niederoesterreich, Austria - 18 1,553 - 54 (1) (65) 17 1,542
Other - 41 - - - (4) - 37 -
----- ------- ----- ----- ------ ------- --- ------- ------
- 155,236 9,746 2,050 22,148 (5,528) 305 151,758 32,199
----- ------- ----- ----- ------ ------- --- ------- ------
----- ------- ----- ----- ------ ------- --- ------- ------

GROSS
AMOUNT
AT WHICH
CARRIED
AT CLOSE LIFE ON WHICH
OF PERIOD DEPRECIATION IN
--------- LATEST INCOME
ACCUMULATED DATE OF DATE STATEMENT IS
DESCRIPTION TOTAL DEPRECIATION CONSTRUCTION ACQUIRED COMPUTED
- ----------- ----- ------------ ------------ -------- --------

EXCESS REAL ESTATE
Racing Operations
Santa Anita Park (Arcadia, California,
U.S.A.) 52,781 - n/a 1998 n/a
Gulfstream Park (Hallandale, Florida,
U.S.A.) 14,201 - n/a 1999 n/a
Golden Gate Fields (Albany, California,
U.S.A.) 8,500 - n/a 1999 n/a
Lone Star Park (Grand Prairie, Texas,
U.S.A.) 4,245 - n/a 2002 n/a
Maryland Jockey Club (Baltimore, Maryland,
U.S.A.) 10,900 - n/a 2002 n/a
MEC Grundstucksentwicklungs GmbH
(Niederoesterreich, Austria) 9,658 - n/a 1996 n/a

REAL ESTATE HELD FOR DEVELOPMENT
Racing Operations
Dixon Downs (Dixon, California, U.S.A.) 9,536 - n/a 2001 n/a
Ocala (Ocala, Florida, U.S.A.) 7,617 - n/a 2002 n/a
MEC Grundstucksentwicklungs GmbH
(Niederoesterreich, Austria) 40,745 - Ongoing 1996 n/a

Real Estate Operations
New York, U.S.A. 2,686 - n/a 1998 n/a
Ontario, Canada 5,800 - n/a 1997 n/a
Niederoesterreich, Austria 5,000 - n/a 1994 n/a

NON-CORE REAL ESTATE
Land
Ontario, Canada 2,434 - n/a 1997 n/a
Kentucky, U.S.A. 2,611 - n/a 1997 n/a
Michigan, U.S.A. 1,365 - n/a 1996 n/a
Florida, U.S.A. 2,328 - n/a 1994 n/a
Commercial/Industrial Properties
Oberoesterreich, Austria 22 - n/a 1998 n/a
Oberoesterreich, Austria 1,932 - n/a 1998 n/a
Residential Properties
Niederoesterreich, Austria 1,559 1,461 n/a 1998 23 years
Other 37 - n/a 1998 n/a
------- -----
183,957 1,461
------- -----
------- -----

113

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

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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

ITEM 11. EXECUTIVE COMPENSATION

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

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

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

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

ITEM 14. DISCLOSURE CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures. Within 90 days
prior to the filing date of this Annual Report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the Company's disclosure controls and procedures as
defined in Rule 13a-14 under the U.S. Securities Exchange Act of 1934. Based
upon that evaluation, the Chief Executive Officer and Chief Financial Officer
have concluded that the Company's current disclosure controls and procedures are
adequate and effective.

114

(b) Changes in internal controls. There have been no significant
changes in the Company's internal controls or in other factors that could
significantly affect internal controls subsequent to the date of the evaluation
by the Chief Executive Officer and Chief Financial Officer.

The design of any system of controls and procedures is based in part
upon certain assumptions about the likelihood of future events. There can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions, regardless of how remote.

PART IV

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

(a) Financial Statements and Schedule

The following Consolidated Financial Statements of Magna Entertainment
Corp. as at or for the year ended December 31, 2002 are included in Part II,
Item 8 of this Report:

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

(b) Reports on Form 8-K

We filed the following reports with the SEC on Form 8-K during the
quarter ended December 31, 2002:

On November 4, 2002, we filed a current report on Form 8-K reporting
the issuance of a press release on October 31, 2002 that announced our unaudited
financial results for the nine-month period ended September 30, 2002.

On November 6, 2002, we filed a current report on Form 8-K reporting
the issuance of a press release on October 23, 2002 announcing we had completed
the acquisition of substantially all the assets and operations of Lone Star Park
at Grand Prairie. The acquired assets include the rights under a long-term lease
of Lone Star Park at Grand Prairie pursuant to a lease agreement with Grand
Prairie Sports Development Corporation and a related purchase option exercisable
at expiry in 2027. The purchase price, after adjustments, of approximately $100
million was satisfied by payment of approximately $81 million in cash and the
assumption of certain liabilities, including the Lone Star capital lease
obligation of approximately $19 million. The Company paid the purchase price
primarily from cash on hand and partly through a draw on its credit facility
with Bank of Montreal.

On November 22, 2002, we filed a current report on Form 8-K reporting
that, on November 13, 2002, the Maryland Racing Commission unanimously approved
the acquisition by the Company of the controlling interest in Pimlico Race
Course and Laurel Park, which operate under the trade name The Maryland Jockey
Club. The proposed acquisition and its terms were first announced on July 15,
2002.

115

On November 22, 2002, we filed a current report on Form 8-K reporting
the issuance of a press release on November 19, 2002 announcing that we had
entered into an agreement to sell $50 million aggregate principal amount of our
7 1/4% Convertible Subordinated Notes due December 15, 2009. The initial
purchasers of the Convertible Notes were granted a 30-day option to purchase an
additional $25 million in aggregate principal amount of additional Convertible
Notes.

On December 9, 2002, we filed a current report on Form 8-K reporting
the issuance of a press release on December 2, 2002 announcing that we completed
the previously announced sale of our Convertible Notes. The initial purchasers
of the Convertible Notes, BMO Nesbitt Burns Corp. and CIBC World Markets Corp.,
exercised their option, in full, to purchase additional Convertible Notes,
bringing the aggregate principal amount of the issue to $75 million.

On December 12, 2002, we filed a current report on Form 8-K reporting
that, on November 27, 2002, we completed the acquisition of a majority interest
in Pimlico Race Course and Laurel Park, which operate under the trade name "The
Maryland Jockey Club". We purchased an indirect 51% equity and voting interest
in The Maryland Jockey Club of Baltimore City, Inc., the owner of Pimlico Race
Course, a 51% voting interest and a 58% equity interest on a fully diluted basis
in Laurel Racing Assoc., Inc., the general partner and manager of Laurel Racing
Association Limited Partnership, the owner of Laurel Park, and the entire
limited partnership interest in Laurel Racing Association Limited Partnership.
The aggregate purchase price for all these interests was approximately $50.6
million in cash, subject to closing adjustments. In addition, we agreed to
purchase options from the De Francis family to buy their voting and equity
interests in The Maryland Jockey Club, which represent all of the minority
interests, at any time during the period commencing 48 months and ending 60
months after the closing of the transaction. We also granted the De Francis
family the right to sell such interests to us at any time during the first five
years after the closing. In consideration for these options, we agreed to pay
$18.4 million on the closing date and an additional $18.3 million upon exercise
of the options, subject to an interest adjustment.

(c) Exhibits

Please refer to the exhibit index below.

116

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on this 27th day of
March, 2003.

MAGNA ENTERTAINMENT CORP.

By: /s/ JIM MCALPINE
-------------------------
Jim McAlpine
President and Chief
Executive Officer

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

117

118

CERTIFICATION OF CHIEF EXECUTIVE OFFICER REGARDING MAGNA
ENTERTAINMENT CORP.'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR
ENDED DECEMBER 31, 2002

I, Jim McAlpine, certify that:

1. I have reviewed this annual report on Form 10-K of Magna Entertainment
Corp.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.

Date: March 27, 2003

/s/ JIM MCALPINE
- ----------------
Jim McAlpine
President and Chief Executive Officer

119

CERTIFICATION OF CHIEF FINANCIAL OFFICER REGARDING MAGNA ENTERTAINMENT
CORP.'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR
ENDED DECEMBER 31, 2002

I, Graham J. Orr, certify that:

1. I have reviewed this annual report on Form 10-K of Magna Entertainment
Corp.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.

Date: March 27, 2003

/s/ GRAHAM J. ORR
- -----------------
Graham J. Orr
Executive Vice-President and Chief
Financial Officer

120

EXHIBIT INDEX

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

121

122

123

EXHIBIT NO. DESCRIPTION OF DOCUMENT

99.2 Certification by the Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as added by Section 906 of the
Sarbanes-Oxley Act of 2002.

124