10-K

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

FORM 10-K

(Mark One)
ý	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2005.
OR
o	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 (State or Other Jurisdiction of Incorporation or Organization)	98-0208374 (I.R.S. Employer Identification No.)
337 Magna Drive Aurora, Ontario, Canada (Address of Principal Executive Offices)	L4G 7K1 (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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o    No ý

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o    No ý

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 ý    No o

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. Yes ý    No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one). Large accelerated filer o Accelerated Filer ý Non-accelerated Filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes o    No ý

As of June 30, 2005, the aggregate market value of the Class A Subordinate Voting Stock held by non-affiliates of the registrant was approximately $213,718,093 (based on the closing sale price of $5.64 per share of Class A Subordinate Voting Stock reported on The Nasdaq National Market on June 30, 2005, the last day of the registrant's most recently completed second quarter). As of June 30, 2005, 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 8, 2006 was 48,921,259.

The number of shares of Class B Stock of the registrant outstanding as of March 8, 2006 was 58,466,056.

Documents Incorporated by Reference

        Portions of the registrant's proxy statement (our "Proxy Statement") to be filed with the Securities and Exchange Commission ("SEC") pursuant to Regulation 14A within 120 days after the registrant's fiscal year end of December 31, 2005 are incorporated by reference in Part II, Item 5 and Part III of this Annual Report to the extent stated herein. 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.

INDEX

	Page
PART I
Item 1. Business	4
Item 1A. Risk Factors	36
Item 1B. Unresolved Staff Comments	52
Item 2. Properties	52
Item 3. Legal Proceedings	52
Item 4. Submission of Matters to a Vote of Security Holders	52
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	53
Item 6. Selected Financial Data	54
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations	56
Item 7A. Quantitative and Qualitative Disclosures about Market Risk	87
Item 8. Financial Statements and Supplementary Data	88
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	129
Item 9A. Controls and Procedures	129
Item 9B. Other Information
PART III
Item 10. Directors and Executive Officers of the Registrant	129
Item 11. Executive Compensation	129
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	130
Item 13. Certain Relationships and Related Transactions	130
Item 14. Principal Accountant Fees and Services	130
PART IV
Item 15. Exhibits and Financial Statement Schedules	130
SIGNATURES	131
EXHIBIT INDEX

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Part I
Item 1. Business

Available Information

        We file Annual Reports on Form 10-K and Current Reports on Form 8-K with the Securities and Exchange Commission. You may read and copy any materials we file with the SEC at the SEC's Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. You may obtain information on the hours of operation of the SEC's Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

        We maintain a website that contains information about us, 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 our website, stockholders and the general public may access free of charge (other than any connection charges from internet service providers) filings we make 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. Information contained in or otherwise accessed through the registrant's website does not form part of this Annual Report. Any reference to our website is an inactive textual reference only.

        In this Annual Report, when we use the terms "we", "us", "our", "MEC" and the "Company", we are referring to Magna Entertainment Corp., the Registrant, 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.

Special Note Regarding Forward-Looking Information

        This Annual Report, including "Management's Discussion and Analysis of Results of Financial Condition and Results of Operations" in Item 7, contains "forward-looking statements" within the meaning of applicable securities legislation, including the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended. These forward-looking statements may include, among others, statements regarding: our strategies and plans; expectations as to financing and liquidity requirements and arrangements; expectations as to operational improvements; expectations as to cost savings, revenue growth and earnings; the time by which certain redevelopment projects, transactions or other objectives will be achieved; estimates of costs relating to environmental remediation and restoration; proposed new racetracks or other developments, products and services; expectations as to the timing and receipt of government approvals and regulatory changes in gaming and other racing laws and regulations; 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, beliefs 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 performance or results will be achieved. Undue reliance should not be placed on such statements. Forward-looking statements are based on information available at the time and/or management's good faith assumptions and analyses made in the light of our perception of historical trends, current conditions and expected future developments, as well as other factors we believe are appropriate in the circumstances and are subject to known and unknown risks, uncertainties and other unpredictable factors, many of which are beyond the Company's control, that could cause actual events or results to differ materially from such forward-looking statements.

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

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        Forward-looking statements speak only as of the date the statements were 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.

OUR BUSINESS

        We own and operate horse racetracks in California, Florida, Maryland, Texas, Oklahoma, Pennsylvania, Ohio, Michigan, Oregon and Ebreichsdorf, Austria. Based on revenues, we are North America's number one owner and operator of horse racetracks and we are 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 (harness racing) racetrack and one racetrack that runs both thoroughbred and standardbred meets, as well as the simulcast wagering venues at these tracks. In October 2005, we completed the sale of our interest in Flamboro Downs, a standardbred racetrack in Ontario, Canada, and in September 2005, we completed the sale of our interest in the Maryland-Virginia Racing Circuit, Inc. ("MVRC"), which managed the operations of Colonial Downs, a thoroughbred and standardbred racetrack. Please see "Management's Discussion and Analysis of Financial Condition and Results of Operations — Recent Developments and Initiatives". On December 31, 2004, we ceased operations at Bay Meadows, near San Francisco, and Multnomah Greyhound Park, in Oregon, as these were operations in leased facilities and the leases were not renewed for 2005. In addition, we operate off-track betting ("OTB") facilities, a U.S. national account wagering business known as XpressBet®, which permits customers to place wagers by telephone and over the Internet on horse races at over 100 North American racetracks and internationally on races in Australia, South Africa and Dubai, and a European-based account wagering business known as MagnaBet™. We also own and operate HorseRacing TV™ ("HRTV™"), a television network focused on horse racing that we initially launched on the Racetrack Television Network ("RTN"). HRTV™ is currently distributed to more than 12 million cable and satellite TV subscribers. RTN, in which we have a minority interest, was formed to telecast races from our racetracks and other racetracks, via private direct-to-home satellite, to paying subscribers. In 2004, we launched RaceONTV™ in Europe to distribute North American racing content from our racetracks and other U.S. racetracks that have agreed to participate in our international distribution network to locations outside North America. We also own a 30% equity interest in AmTote International, Inc. ("AmTote"), a provider of totalisator services to the pari-mutuel industry. To support certain of our thoroughbred racetracks, we own and operate thoroughbred training centers situated near San Diego, California, in Palm Beach County, Florida and in the Baltimore, Maryland area. We also own and operate production facilities in Austria and in North Carolina for StreuFex™, a straw-based horse bedding product.

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        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, South America, the Caribbean, the United Kingdom, Ireland, Germany and Austria. We intend to expand the distribution of this content in these markets 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.

        Since December 1998, we have acquired six large racetrack operations in North America: Santa Anita Park near Los Angeles, Gulfstream Park near Miami, Golden Gate Fields near San Francisco, Lone Star Park at Grand Prairie near Dallas, and The Maryland Jockey Club, which operates Laurel Park, situated between Washington, D.C. and Baltimore, and Pimlico Race Course in Baltimore, home of the Preakness Stakes®, 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 our newest racetrack, Magna Racino™, which we built near Vienna, Austria. 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 own all the land on which these racetracks are located, with the exception of Great Lakes Downs, Lone Star Park at Grand Prairie, Remington Park and Portland Meadows (in which we own a minority interest in the land).

        In addition to our racetracks, we own a significant real estate portfolio, which includes two golf courses and related recreational facilities as well as three residential developments in various stages of development in Austria, the United States and Canada. In November 2005, we announced that we had entered into an agreement to sell our residential development property in the United States and the proposed sale was subject to the completion of due diligence by the purchaser by February 28, 2006 and a closing by March 30, 2006. The agreement was amended on February 27, 2006 extending the due diligence completion date to March 15, 2006. On March 15, 2006 we further amended the agreement by extending the due diligence completion date to April 3, 2006 and the closing date to April 28, 2006. We are also working with potential developers and strategic partners for the development of leisure and entertainment or retail-based real estate projects on the excess land surrounding, or adjacent to, certain of our premier racetracks. We have entered into a Limited Liability Company Agreement with Forest City Enterprises, Inc. concerning the proposed development of "The Village at Gulfstream Park™", a mixed-use retail, entertainment and residential project on a portion of the Gulfstream Park Property. Please see "Our Properties — Gulfstream Park" below. While we are exploring the development of some of our real estate, we intend to continue to sell our remaining non-core real estate (which had a book value of $2.5 million as of December 31, 2005) and may also sell our residential developments and certain other real estate in order to generate additional capital for our racing business. See "Our Real Estate Portfolio" below.

        Initiatives related to the passage of legislation permitting alternative gaming at racetracks, such as slot machines, video lottery terminals ("VLTs") and other forms of non-pari-mutuel gaming, are actively underway in a number of states in which we operate. In July 2004, legislation was enacted in Pennsylvania that entitles The Meadows to apply for a license to operate between 1,500 and 3,000 slot machines, subject to future expansion of up to 2,000 additional slot machines upon certain conditions being met. In December 2005, The Meadows filed a Conditional/Category 1 gaming license application with the Pennsylvania Gaming Control Board. In addition, alternative gaming legislation has passed in Florida and an initiative is currently underway to implement legislation governing slot machine operations at certain pari-mutuel facilities in Broward County, Florida. In Florida, Amendment 4 to the Florida State Constitution was approved, permitting the governing bodies of Broward and Miami-Dade counties to each hold a county-wide referendum on whether to authorize slot machines within existing, licensed pari-mutuel facilities that have conducted live racing during each of the last two years. A referendum was held in Broward County, where Gulfstream Park is located, on March 8, 2005 and the authorization of slot machines in the county was approved. On December 8, 2005, legislation authorizing the operation of slot machines within existing, licensed Broward County, Florida pari-mutel facilities that have conducted live racing or games during each of 2002 and 2003 was passed by the Florida Legislature. On January 4, 2006, the Governor of Florida signed the legislation into law. The Division of Pari-mutuel Wagering will oversee the conduct of slot machine operations and will be required to develop the governing rules and regulations by July 2006, failing which the facilities will be entitled to operate pursuant to temporary licenses. We are working closely with State and Division officials and with Gulfstream Park's horsemen and breeders to pursue the remaining steps to implementation of slot machine gaming at Gulfstream Park and, provided that we are able to obtain adequate funding and are able to reach agreements with the horsemen and breeders, we expect to be operational by the summer of 2006. Please see "Management's Discussion and Analysis of Financial Condition and Results of Operations — Recent Developments and Initiatives". Under new legislation which was approved by the citizens of the State of Oklahoma in a referendum held on November 2, 2004, Remington Park is permitted to operate electronic gaming machines. In November 2005, we opened a gaming facility with 650 electronic gaming machines, the current maximum permitted by the legislation at Remington Park. See "Government Regulation — Alternative Gaming — Oklahoma" below.

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        In July 2005 we announced that as part of our strategic plan, our Board of Directors approved a Recapitalization Plan which is intended to recapitalize our balance sheet over the following 12 months through the sale of certain non-strategic assets, with proceeds realized from those asset sales being applied to reduce debt. Please see "Management's Discussion and Analysis of Financial Condition and Results of Operations — Recent Developments and Initiatives".

        In November 2005, we entered into a share purchase agreement with PA Meadows, LLC, a company jointly owned by William Paulos and William Wortman, controlling shareholders of Millennium Gaming, Inc., and a fund managed by Oaktree Capital Management, LLC ("Oaktree" and together, with PA Meadows, LLC, "Millennium-Oaktree"), providing for the acquisition by Millennium-Oaktree of all of the outstanding shares of Washington Trotting Association, Inc. ("WTA"), Mountain Laurel Racing, Inc. ("MLR") and MEC Pennsylvania Racing, Inc. ("PAR"), each wholly-owned subsidiaries of ours. WTA, MLR and PAR are the entities through which we currently own and operate The Meadows (the "Meadows Entities"). The sale is scheduled to close following receipt of approval from the Pennsylvania Harness Racing Commission, receipt by WTA of a Conditional/Category 1 slot license pursuant to the Pennsylvania Race Horse Development and Gaming Act, and certain other customary closing conditions. Under the terms of the share purchase agreement, Millennium-Oaktree will pay us $225 million, subject to a $39 million holdback, and we will continue to manage racing operations at The Meadows on behalf of Millenium-Oaktree pursuant to a minimum 5-year racing services agreement.

        In February 2006, we announced the formation of PariMax, Inc. ("PariMax"), a new company to oversee the development of our various electronic distribution platforms, including XpressBet®, HRTV™, MagnaBet™, RaceONTV™ and our 30% stake in AmTote. See "PariMax" below.

        In March 2006, we announced that our Board of Directors initiated a search for a new chief executive officer. Tom Hodgson, our current President and CEO, joined us in early 2005 to develop and implement our Recapitalization Plan. Under his leadership, the Recapitalization Plan was substantially completed. A search will be conducted by our Corporate Governance and Compensation Committee, in conjunction with an executive search firm, to find a new CEO with in-depth knowledge and experience in the horseracing and gaming industry. Mr. Hodgson will leave his positions with us and step down from our Board of Directors at the end of March, at which time Frank Stronach, our Chairman, will assume the role of Interim Chief Executive Officer.

        Please see our financial statements beginning on page 88 for financial information concerning our business and segments, including a geographic breakdown of revenues and information concerning long-lived assets.

Our Strategy

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

Further Developing Our In-Home Simulcasting and Wagering Services

        In order to advance efforts to increase our overall customer base we recently formed PariMax. PariMax business units aggregate content from both MEC and non-MEC racetracks, creating economies of scale as we repackage and deliver this content in compelling formats to various customer segments. We believe this approach can enable us to cost-effectively present live horse racing action to an increasing number of locations for an increasing number of hours per week, thus growing our reach to new customers and growing frequency among existing customers. This growth would benefit PariMax, MEC-owned tracks, and non-MEC tracks, which elect to utilize PariMax services. For the domestic, in-home wagering market, these services include XpressBet®, which offers account wagering on over 100 North American racetracks via the Internet and by telephone. XpressBet® is complemented by HorseRacing TV™, our specialty television network focused on horse racing. HRTV™ is distributed to more than 12 million cable and satellite television subscribers and enables fans to watch live racing content from all over the United States, as well as Australia, Hong Kong and Great Britain. We believe that broad television distribution will help increase future interest in horse racing and attract additional wagering customers. At present, HorseRacing TV™ is carried on cable in 18 states and is available nationally on Dish Network™ as well as RTN. In an effort to broaden the audience, reach and appeal of horse racing and wagering thereon, we are pursuing carriage agreements with additional cable and satellite operators to achieve expanded distribution of HorseRacing TV™ in North America.

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        Our strategy is to focus on the development of complete wagering solutions and concentrate on serving the global wagering market by developing product lines which meet the needs of both distribution partners and end consumers worldwide. For distribution partners, RaceONTV™ will provide simulcasting and wagering solutions for betting shops internationally. AmTote will continue to provide a variety of wagering interfaces and connectivity products for racetracks, OTBs, and account wagering providers, both domestically and abroad. For consumers, XpressBet® and MagnaBet™ will be PariMax's account wagering platforms, which provide video streaming and wagering opportunities to an increasingly international customer base. Consumers will be further served by PariMax supported television channels, including HRTV™ in the United States, Racing World in the United Kingdom and Ireland (a planned joint venture between MEC, Churchill Downs Inc. ("CDI"), and Racing UK) and PremiereWin (a MEC television partner) in central Europe.

Entering New Markets

        PariMax will oversee the development of new markets for MEC around the world. We currently distribute our content to inter-track and off-track venues in the United States, Canada, Mexico, South America, the Caribbean, the United Kingdom, Ireland, Germany and Austria. Most of our international expansion in 2005 was driven by organizations now under PariMax oversight. MagnaBet™ entered a partnership in Europe with leading German-language sports broadcaster Premiere. This led to the introduction of PremiereWin, a horse racing focused television channel featuring U.S. racing content in the evening hours. In support of the PremiereWin broadcast, MagnaBet™ developed two web sites, Race Is On and Pferde Profi, which delivered MagnaBet™'s account wagering services to the target audience of PremiereWin television viewers in Germany and Austria. These platforms generated significant revenue growth for MagnaBet™ in 2005. RaceONTV™ continued to offer a North American racing-driven, simulcast distribution service to customers in Austria, Germany and Peru during 2005.

        Our international strategy in 2005 was particularly focused on the British market, and that focus led to several recent developments. For the in-home market, in January 2006, we entered into a memorandum of understanding with CDI and Racing UK, a media rights company and subscription television channel owned by thirty-one leading British racecourses, to develop a new subscription television channel called "Racing World" to broadcast our racing content and CDI racing content, as well as content from other North American and international racetracks, into the United Kingdom and Ireland. Additionally, Racing World will be the exclusive distributor of MEC and CDI wagering rights to the in-home market, and will also aggregate other U.S. tracks for distribution. To aid in its penetration of the competitive British home wagering market, our subsidiary XpressBet, Inc. has joined with The Betting Site Limited, a joint venture between Racing UK and The Racing Post, to provide its wagering services through a newly developed integrated betting interface appearing on The Betting Site (www.thebettingsite.co.uk). This new service launched in March 2006 when Racing World launched on the Sky platform in the U.K. and Ireland.

        In the more traditional, licensed betting office market, RaceONTV™ has launched a service with Ladbrokes which provides U.S. horse racing to the new Ladbrokes Xtra service in Britain and Ireland. Ladbrokes Xtra currently serves several hundred Ladbrokes shops, and we expect it to roll out to all of Ladbrokes over 2000 licensed betting offices over the course of 2006. We believe the British and Irish markets have great potential for evening distribution of U.S. product, and our strategy is to continue to explore partnerships that allow us to strategically and cost-effectively deploy in these markets. We also believe that, subject to applicable regulation, significant opportunities exist to expand the distribution of our content through the further development of our international distribution network.

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Improving the Quality of the Entertainment Experience and Facilities at Certain of Our Racetracks

        In order to increase our customer base, we intend to improve the quality of the entertainment experience at our racetracks by offering a variety of experiences with horse racing as the feature attraction. In pursuit of this strategy, we have begun and intend to continue to redevelop and modernize various of our facilities. In 2004, we commenced the redevelopment of Gulfstream Park, located just outside Miami, Florida. This redevelopment has included the construction of new wider and longer racing surfaces, which allows Gulfstream Park to run a longer live racing season and offer larger field sizes as well as a new grandstand/entertainment facility, each of which we expect to result in greater attendance and handle. In January 2006, the new Gulfstream Park opened for the 2006 winter meet. The redeveloped Gulfstream Park offers customers a number of different dining options and, when fully completed, will improve the quality of the entertainment experience.

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 improve the quality of the live racing experience for our customers and horsemen by upgrading and expanding our physical facilities, technology and business processes in order to attract more customers and the best available horses, trainers and jockeys.

Adding Alternative Gaming, if Permitted, at Certain of Our Racetracks

        In order to broaden our market appeal and thereby increase attendance and revenues, we intend to pursue alternative gaming opportunities, where available. Alternative gaming legislation that authorizes slot machines, video lottery terminals (VLTs) or electronic gaming at certain designated locations has been approved in Oklahoma, where our racetrack Remington Park is located, in Pennsylvania, where our racetrack The Meadows is located and Broward County, Florida, where our Gulfstream Park racetrack is located. Under new legislation which was approved by the citizens of the State of Oklahoma in a referendum held on November 2, 2004, Remington Park is permitted to operate electronic gaming machines. We have obtained the licenses and built the necessary facilities to operate electronic gaming at Remington Park and in November 2005, we opened a gaming facility with 650 electronic gaming machines, the current maximum permitted by the legislation at Remington Park. See "Government Regulation — Alternative Gaming — Oklahoma" below.

        The Meadows, in Pennsylvania, is subject to a share purchase agreement providing for the acquisition by PA Meadows, LLC, a company jointly owned by William Paulos and William Wortman, controlling shareholders of Millennium Gaming, Inc., and a fund managed by Oaktree Capital Management, LLC ("Oaktree" and together, with PA Meadows, LLC, "Millennium-Oaktree") of all of the outstanding shares of certain wholly-owned subsidiaries through which we currently own and operate The Meadows (see "Our Content — The Meadows"). License applications have been submitted and discussions are ongoing with the purchasers with respect to a construction program for The Meadows slot machines.

        In Florida, we intend to apply for a slot machine operator license and complete construction to allow for slot machine operations as soon as possible in anticipation of operating 1,500 slot machines at Gulfstream Park in the second half of 2006. Alternative gaming legislation is also being seriously considered in other states in which we operate pari-mutuel facilities and if such legislation is approved, we would expect to apply for the applicable licenses and build the necessary facilities as soon as practicable.

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Developing Our Significant Real Estate Assets

        We have a significant portfolio of high quality real estate located in densely populated urban markets. Included in this real estate portfolio is land adjacent to several of our racetracks, Santa Anita Park, Gulfstream Park, Golden Gate Fields, Lone Star Park at Grand Prairie, Laurel Park and Magna Racino™. We are considering a variety of options with respect to this 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 pursuit of this strategy, we have entered into a Limited Liability Company Agreement with Forest City Enterprises, Inc. concerning the proposed development of a combined retail and entertainment development called "The Village at Gulfstream Park™" featuring the Gulfstream Park race track as its cornerstone entertainment feature. We have also entered into a letter of intent with Caruso Affiliate Holdings to explore the possibility of joint ventures to develop certain undeveloped lands surrounding our Santa Anita Park and Golden Gate Fields racetracks into retail and entertainment venues.

Selectively Acquiring and Developing Additional Content

        We will selectively pursue the acquisition and development of strategically important, geographically diverse racetracks and content in order to increase our distribution 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.

Intellectual Property Management

        In order to improve the utilization of our investment in the quality racing content being generated from our premier racing facilities and our partnerships with others who are owners of premier racing facilities, we are undertaking an organized approach to intellectual property management. Our intellectual property ranges from ownership of racing content and the pari-mutuel racing event that is determined by the race outcome, to the techniques and technology used to process wagers placed on the pari-mutuel racing event. In recent years we have focused on the creation of alternative pari-mutuel wagering solutions, new wager types that use existing pari-mutuel wagering solutions and exploration in the development of wagers for non traditional pari-mutuel wagering events. Acquisition of intellectual property has and will continue to include in-house research and development and the purchasing of intellectual property developed outside of the company. Our intellectual property management includes the filing of patents, regular review of patents filed and awarded, review of the competitive landscape and review of the legislative landscape nationally and internationally.

Our History

        We were incorporated in Delaware on March 4, 1999. In November 1999, Magna International Inc., our original parent company and one of the most diversified automotive parts suppliers in the world, completed a reorganization of its corporate structure, under which Magna International Inc.'s non-automotive businesses and certain real estate assets were transferred to us. As part of this 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, with 20 votes per share.

        On March 10, 2000, Magna International Inc. 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 composed of our Class A Subordinate Voting Stock and 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 Inc. 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 Inc. described above. 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.

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        On August 19, 2003, the shareholders of Magna International Inc. approved the spin off of its wholly-owned subsidiary, MI Developments Inc. As a result of the spin-off transaction, MI Developments Inc. acquired Magna International Inc.'s controlling interest in MEC. MI Developments Inc. is a real estate operating company engaged in the ownership, development, management, leasing, acquisition and expansion of industrial and commercial real estate properties located in Canada, Europe, the United States and Mexico. Virtually all of MI Development Inc.'s income-producing properties are under long-term leases to Magna International Inc. and its subsidiaries.

        As of March 8, 2006, MI Developments Inc. owns, directly or indirectly, all of our outstanding Class B Stock and 4,362,328 shares of our Class A Subordinate Voting Stock. As a result, MI Developments Inc. is able to exercise approximately 96% of the total voting power attached to all of our outstanding stock, and therefore is able to elect all our directors and to control us. Each company has its own board of directors and management team, although we share the same Chairman and Vice-Chairman. In addition, our Board of Directors has established a committee of independent directors to whom they have delegated the responsibility of reviewing any proposed related party transactions, including any proposed transactions between us and MI Developments Inc. or between us and our original parent company, Magna International Inc. Sales or a spin-off or other distribution of our stock by MI Development Inc. or by certain of our other significant stockholders under our registration statements could depress our stock price. See "Risk Factors — Risks Relating to Our Securities".

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, called a 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, called the takeout, 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 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

        Over the past twenty 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 and account 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-track on 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 an 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.

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        The early 1990's also saw the advent of a form of pari-mutuel and non-pari-mutuel wagering termed account wagering. Account wagering allows subscribers to establish wagering accounts and utilize various interactive platforms, such as the telephone, the Internet and interactive television, to transmit their wagering information to a designated account wagering operator, which then places wagers on the subscribers' behalf. Account wagering has grown steadily as a convenient and popular wagering option, for both pari-mutuel and non-pari-mutuel bettors alike. The rising popularity of account wagering serves as both an opportunity for the pari-mutuel wagering industry to further expand revenues and a challenge to prevent this new wagering platform from further eroding on-track attendance and wagering.

The Growth in Off-track and Inter-track Wagering

        Pari-mutuel wagering on thoroughbred horse racing in the United States increased from $10.4 billion in 1995 to $15.2 billion in 2003, before receding to $14.6 billion in 2005, according to The Jockey Club. This increase from 1995 resulted primarily from the growth of off-track and inter-track wagering, which has grown by approximately 47% from $8.7 billion in 1996 to $12.8 billion in 2005. The decrease during the last two years results primarily from an increase in the number of wagering options available to the general public, including lotteries, casinos and poker. This increased competition is both from on-line options and more traditional bricks and mortar establishments. 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)

	1995		1996		1997		1998		1999		2000		2001		2002		2003		2004		2005
Total Handle	$	10.429	$	11.627	$	12.542	$	13.115	$	13.724	$	14.321	$	14.550	$	15.062	$	15.180	$	15.099	$	14.561
On-Track Handle		*	$	2.944	$	2.703	$	2.498	$	2.359	$	2.270	$	2.112	$	2.029	$	1.902	$	1.860	$	1.741
Off-Track Handle		*	$	8.683	$	9.839	$	10.617	$	11.365	$	12.051	$	12.438	$	13.033	$	13.278	$	13.239	$	12.819

*

Not available

Source: Equibase Company LLC; The Jockey Club.

        Simulcasting is the process of transmitting the audio and video signal of a live racing performance, referred to as the content, from one facility to other locations or venues where wagering on such content is permitted. Simulcast wagering 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 and wagering opportunities from other racetracks. Account wagering is a form of off-track wagering whereby the betting customer establishes a wagering account with an established account wagering provider. The account wagering subscriber uses the balance in the wagering account to fund wagers processed on the subscriber's behalf by the account wagering provider. Since its inception, account wagering has gained a growing percentage of the dollars wagered through off-track wagering operators. Account wagering is conducted both by operators based and licensed in the United States, such as our subsidiary, XpressBet, Inc. and by operators located outside the United States.

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        Revenues have increased because simulcast wagering, including account wagering, 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, simulcast wagering 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 simulcast wagering 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 are pursuing strategies, such as the formation of PariMax, to benefit from this revenue growth opportunity while at the same time exploring ways to minimize the potential negative effects often associated with non-U.S. companies placing wagers on behalf of U.S. citizens.

        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 is 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 is near Portland, Oregon. Maroñas, a racetrack to which we provide management services, is in Montevideo, Uruguay. Our newest racetrack, Magna Racino™, is located near Vienna, Austria.

2006 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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RACETRACK	SCHEDULED RACING MEETS
Santa Anita Park	December 26, 2005 - April 23, 2006 and September 27, 2006 - October 29, 2006
Gulfstream Park	January 4, 2006 - April 23, 2006
Golden Gate Fields	February 8, 2006 - May 7, 2006, August 24, 2006 - October 15, 2006
Laurel Park	December 26, 2005 - April 15, 2006, September 8, 2006 - December 31, 2006
Lone Star Park at Grand Prairie	April 13, 2006 - July 23, 2006 and October 6, 2006 - December 2, 2006
Pimlico Race Course	April 22, 2006 - June 10, 2006
The Meadows	January 3, 2006 - December 30, 2006
Thistledown	April 14, 2006 - November 27, 2006
Remington Park	March 10, 2006 - June 4, 2006 and August 4, 2006 - November 28, 2006
Portland Meadows	January 1, 2006 - May 7, 2006 and October 22, 2006 - December 31, 2006
Great Lakes Downs	May 6, 2006 - October 31, 2006
Magna Racino™	March 12, 2006 - December 3, 2006

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 the end of 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 five to 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 was 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 116 racing days each year (including The Oak Tree Meet). Average daily attendance in 2005 was approximately 8,200 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 2005, approximately $1.250 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 (excluding wagers placed in Northern California and via account wagering systems licensed to operate in California), and wagers made at Santa Anita Park and its inter-track facilities on imported races. Wagers on Santa Anita Park's races (including The Oak Tree Meet and all venues at which wagers were placed) totaled approximately $846.7 million in 2005. Of this amount, approximately $694.6 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 17,000 cars.

        In January 2004, we completed certain renovation and improvement projects that included the opening of Sirona's™, a 25,000 square foot sports bar and restaurant located across from the walking ring. Sirona's™ operates year-round from an open-air terrace overlooking a seven acre garden paddock. After-race activities feature a weekly musical concert from its garden stage. Other enhancements include two new customer convenient food service facilities in our front garden, eight high definition video projection systems in our major betting halls, two LED screens flanking our walking ring, and the extensive landscaping and lighting of our main entry and south parking lot.

        We are considering a variety of retail-based development proposals for our 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, 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.

        In April 2004, we signed a letter of intent to explore the possibility of joint ventures between Caruso Affiliate Holdings and various MEC affiliates to develop certain undeveloped lands surrounding Santa Anita Park and Golden Gate Fields. We are continuing to explore these developmental opportunities but we have not yet entered into definitive agreements regarding either of these potential developments. Please see "Management's Discussion and Analysis of Financial Condition and Results of Operations — Recent Developments and Initiatives".

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.

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        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 approximately 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 in 1989, 1992 and 1999. In 2005, Gulfstream Park's race meet was conducted out of temporary facilities and average daily attendance was approximately 5,100 customers per live racing day.

        The redevelopment of Gulfstream Park, which commenced in 2004, continued through 2005. As a result of the redevelopment, the 2005 Gulfstream meet was run from temporary facilities and therefore, 2005 attendance and on-track handle decreased compared to previous years. In the fourth quarter of 2004, significant modifications and enhancements to Gulfstream Park's racing surfaces were completed and a new dirt and turf racetrack, featuring a 1¹/8-mile main track and one-mile turf course were opened. The project also includes the construction of a modern clubhouse/grandstand offering an array of restaurants and entertainment facilities. Gulfstream Park opened for its 2006 live race meet on January 4, 2006. Racing and patron areas were sufficiently complete to open the meet. Construction is ongoing and best efforts are being made to complete the facility as soon as possible and minimize interference with the 2006 live race meet. Please see "Management's Discussion and Analysis of Financial Condition and Results of Operations — Recent Developments and Initiatives".

        Gulfstream Park had total handle during 2005 of approximately $797.4 million, which includes wagers made at Gulfstream Park on its races, wagers made on Gulfstream Park races at other wagering venues and through various account wagering operations, and wagers made at Gulfstream Park on races imported to its inter-track facility. Wagers on Gulfstream Park's races totaled approximately $670.7 million in 2005. Of this amount, approximately $615.3 million in wagers were placed at other wagering venues to which we exported Gulfstream Park's signal and through various account wagering operations.

        In May 2005, we entered into a Limited Liability Company Agreement with Forest City concerning the planned development of The Village at Gulfstream Park™. The proposed first phase of The Village at Gulfstream Park™ is an innovative integration of a state-of-the-art lifestyle shopping and entertainment environment with Gulfstream Park that is expected to incorporate approximately 400,000 square feet of lifestyle retail shops, restaurants, cinema and entertainment facilities, including some of the most unique and sought-after national and local tenants. The proposed second phase of the Village at Gulfstream Park™ is to incorporate a unique residential village overlooking the picturesque Gulfstream Park racetrack, Florida's inner-coastal waterway and the Atlantic Ocean beyond. Future phases also anticipate a hotel and commercial office space. Under the Limited Liability Company Agreement, Forest City will manage the development of The Village at Gulfstream Park™, secure financing for the project and act as the property manager. Each of Forest City and MEC will hold a 50% interest in the joint venture, which will lease the land underlying the retail project on a long-term basis from MEC. Please see "Management's Discussion and Analysis of Financial Condition and Results of Operations — Recent Developments and Initiatives".

        On December 8, 2005, legislation authorizing the operation of slot machines within existing, licensed Broward County, Florida pari-mutel facilities that have conducted live racing or games during each of 2002 and 2003 was passed by the Florida Legislature. On January 4, 2006, the Governor of Florida signed the legislation into law. The Division of Pari-mutuel Wagering will oversee the conduct of slot machine operations and will be required to develop the governing rules and regulations by July 2006, failing which the facilities will be entitled to operate pursuant to temporary licenses. We are working closely with State and Division officials and with Gulfstream Park's horsemen and breeders to pursue the remaining steps to implementation of slot machine gaming at Gulfstream Park and, provided that we are able to obtain adequate funding and are able to reach agreements with the horsemen and breeders, we expect to have slot machines operating during 2006. Please see "Management's Discussion and Analysis of Financial Condition and Results of Operations — Recent Developments and Initiatives".

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Golden Gate Fields

        Golden Gate Fields is located on approximately 154 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 December 2003, we closed the sale of approximately 16 acres of excess real estate located at Golden Gate Fields, located on the Berkeley side of the property, to the East Bay Regional Park District (see "— Our Real Estate Portfolio" below).

        Golden Gate Fields' racing season lasts for approximately 105 racing days. The season is split throughout the year and has varied for the last few years. Due to the change of dates in 2005, we only ran 96 days in 2005. Average daily attendance in 2005 was approximately 2,400 customers per live racing day.

        Golden Gate Fields had total handle during 2005 of approximately $457.6 million, including wagers made at Golden Gate Fields on its races, wagers made at other wagering venues and through various account wagering systems on Golden Gate Fields' races (excluding wagers placed in Southern California, and wagers placed via advanced deposit wagering systems licensed to operate in California) and wagers made at Golden Gate Fields and its inter-track facilities on imported races. Wagers on Golden Gate Fields' races totaled approximately $257.2 million in 2005. Of this amount, approximately $231.6 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 from other racetracks.

        Golden Gate Fields' facilities include a one-mile track and a ⁷/8-mile turf course, stalls for over 1,350 horses, a main grandstand with seating for approximately 8,000 customers, a Clubhouse with seating for approximately 4,500 customers, a Turf Club with seating for approximately 1,200 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 our existing customers. These proposals are preliminary. 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.

        In April 2004, we signed a letter of intent to explore the possibility of joint ventures between Caruso Affiliate Holdings and various MEC affiliates to develop certain undeveloped lands surrounding Santa Anita Park and Golden Gate Fields. We are continuing to explore these developmental opportunities but we have not yet entered into definitive agreements regarding either of these potential developments. Please see "Management's Discussion and Analysis of Financial Condition and Results of Operations — Recent Developments and Initiatives".

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. 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 in 2005 was 135 days compared to 58 racing days in 2004. There were less live racing dates in 2004 due to the redevelopment of Laurel Park's racing surfaces. Live thoroughbred racing is generally conducted at Laurel Park from September to mid-April, when Pimlico opens for its spring meet. Average daily attendance at Laurel Park in 2005 was approximately 3,300 customers per live racing day.

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        Laurel Park's handle was approximately $441.8 million in 2005, 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 $295.4 million in 2005. Of this amount, approximately $271.6 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 new 1¹/8-mile dirt track with a seven and one half-furlong chute which opened in January 2005, and a new ⁷/8-mile turf course which opened in September 2005. Laurel Park has stalls for approximately 1,000 horses and parking facilities sufficient to accommodate approximately 8,000 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 2005 spring thoroughbred meet was approximately 7,000 customers per live race day and 3,200 customers during the fall quarter horse meet. 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 2005 of approximately $333.5 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 totaled approximately $165.5 million in 2005. Of this amount, approximately $129.5 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 10,000 customers, a one-mile dirt track, a ⁷/8-mile turf track, stalls for approximately 1,600 horses and parking facilities sufficient to accommodate approximately 10,000 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 can also accommodate approximately 2,100 customers.

        Lone Star Park was the site of the 2004 Breeders' Cup™ World Thoroughbred Championships, making it the youngest track in history to host this prestigious event. An overwhelming response from racing fans from around the world resulted in the fastest sellout in Breeders' Cup history with a total attendance of 53,717 on race day. Four major Breeders' Cup wagering records were established: $120,863,117 for all sources on the 12-race program; $109,838,668 for all sources on the eight Breeders' Cup races; $107,536,392 for total simulcast handle; and $16,401,762 for international simulcast handle.

        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 real property at a purchase price equal to one-half of its then fair market value. Pursuant to the lease 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.

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Pimlico Race Course

        Historic Pimlico Race Course, home of the Preakness Stakes®, 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® dates back to 1873, two years before the first Kentucky Derby was run. Since 1909, the Preakness Stakes® has been run annually at Pimlico without interruption and this year's race, on May 20, 2006, will mark the 131^st edition of this sporting classic. Past winners of the Preakness Stakes® include legendary race horses such as Man o' War, Citation, Secretariat, Seattle Slew and Affirmed.

        The racing season at Pimlico generally consists of approximately 60 racing days in a Spring meet, between early April and mid-June. Historically, after its Summer meet, racing would resume at Laurel Park in September and run through December. The Spring meet features 10 graded stakes races, including the middle jewel of thoroughbred racing's Triple Crown, the Preakness Stakes®, which is run annually on the third Saturday in May. Average daily attendance in 2005 was approximately 3,500 customers per live racing day.

        Pimlico's handle was approximately $305.2 million in 2005, 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 $203.8 million in 2005. Of this amount, approximately $188.4 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 1³/16-mile and ³/4-mile chutes, a ⁷/8-mile turf course, stalls for approximately 700 horses and parking facilities sufficient to accommodate approximately 3,500 cars.

The Meadows

        We acquired The Meadows racetrack, which was our first standardbred (harness racing) track, 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 206 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. In 2004, The Meadows opened its fifth OTB in Greensburg.

        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 Meadows' OTB facilities 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 $247.9 million in handle in 2005, 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 $110.1 million in 2005. Of this amount, approximately $103.8 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. 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.

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        In July 2004, legislation was enacted in Pennsylvania that entitles The Meadows to apply for a license to operate between 1,500 and 3,000 slot machines, subject to future expansion of up to 2,000 additional slot machines upon certain conditions being met. The Meadows filed a Conditional/Category 1 gaming license application with the Pennsylvania Gaming Control Board in December 2005.

        In November 2005, we entered into a share purchase agreement with PA Meadows, LLC, a company jointly owned by William Paulos and William Wortman, controlling shareholders of Millennium Gaming, Inc., and a fund managed by Oaktree Capital Management, LLC ("Oaktree" and together, with PA Meadows, LLC, "Millennium-Oaktree"), providing for the acquisition by Millennium-Oaktree of all of the outstanding shares of Washington Trotting Association, Inc. ("WTA"), Mountain Laurel Racing, Inc. ("MLR") and MEC Pennsylvania Racing, Inc. ("PAR"), each wholly-owned subsidiaries of ours. WTA, MLR and PAR are the entities through which we currently own and operate The Meadows (the "Meadows Entities"). The sale is scheduled to close following receipt of approval from the Pennsylvania Harness Racing Commission, receipt by WTA of a Conditional/Category 1 slot license pursuant to the Pennsylvania Race Horse Development and Gaming Act, and certain other customary closing conditions. Under the terms of the share purchase agreement, Millennium-Oaktree will pay us $225 million, subject to a hold-back amount of $39 million, and we will continue to manage racing operations at The Meadows on behalf of Millennium-Oaktree pursuant to a minimum 5-year racing services agreement.

Thistledown

        Thistledown is located on approximately 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 185 racing days between April and November. 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 $234.0 million in 2005, 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 $143.2 million in 2005. Of this amount, approximately $121.4 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 700 off-track and inter-track wagering facilities in the United States. 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 600 seat tiered dining room, a 200 seat private party suite, 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.

Remington Park

        Remington Park is situated on approximately 370 acres adjacent to Interstates 35 and 44 in Oklahoma City, Oklahoma. There are approximately 1.1 million people living within a 40-mile radius of Remington Park.

        In 2005, the racing schedule consisted of two meets totaling 98 days of live racing days, which included a 32 day quarter horse meet from mid-March through early June and a 66 day thoroughbred meet from early August through the end of November 2005. In 2006, Remington Park has been approved for 118 days of live racing, consisting of 50 days of quarter horse racing from mid-March through early June and a 68 day thoroughbred meet from early August through late November.

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        Remington Park's handle was approximately $106.5 million in 2005, 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 $48.1 million in 2005. Of this amount, approximately $41.1 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 500 off-track and inter-track wagering facilities in the United States. 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 across the country.

        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.

        Under new legislation which was approved by the citizens of the State of Oklahoma in a referendum held on November 2, 2004, Remington Park is permitted to operate electronic gaming machines. In November 2005, we opened a gaming facility with 650 electronic gaming machines, the current maximum amount permitted by the legislation at Remington Park. See "Government Regulation — Alternative Gaming — Oklahoma" below. During 2005, the machines generated an average daily net win per unit of $225. Under the terms of the legislation, gaming operations at the racetrack are permitted for up to 18 hours per day, not to exceed 106 hours per week. The distribution of revenues from the racetrack's electronic gaming operations will vary based on the annual gross revenues of the racetrack from gaming less all monetary payouts ("Adjusted Gross Revenues"). The legislation allocates between 10% and 30% of the Adjusted Gross Revenues to the State, primarily for the funding of education, between 20% and 30% for the benefit of the horsemen and the remaining 50% to 60% to the racetrack, out of which the racetrack operator will pay its capital and operating costs. Remington Park may be eligible for an additional 50 machines in each of 2008 and 2010. It is anticipated that the gaming facility will significantly improve Remington Park's operating results and contribute to the horse racing industry through increased purses.

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 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 sand track, stalls for approximately 850 horses and parking facilities to accommodate approximately 2,500 cars.

        Portland Meadows generated approximately $68.9 million in handle during the 2005 calendar year, 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 $18.1 million in 2005. Of this amount, approximately $15.9 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 150 off-track and inter-track wagering facilities in the United States. Throughout the year, Portland Meadows operates as a simulcast wagering facility where customers can wager on races that are imported to Portland Meadows from other racetracks.

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        We operate racing at Portland Meadows, subject to the satisfaction of certain conditions, pursuant to a long term lease. We own an approximately 22% interest in the real property upon which the Portland Meadows facility is located.

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 100 live racing days beginning in May and ending in early November of each year.

        Great Lakes Downs' handle was approximately $62.6 million in 2005, 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 $50.8 million in 2005. Of this amount, approximately $48.2 million in wagers 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 250 off-track and inter-track wagering facilities in the United States. 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.

        On August 24, 2004, we sold the real property and associated racetrack license of Great Lakes Downs to Richmond Racing Co., LLC for approximately $4.2 million. The consideration included cash of $0.2 million and the issuance of a 20-year promissory note with a principal amount of $4.0 million, which bears interest at 5% per annum. We also entered into a lease agreement with Richmond Racing, which gives us the conditional right to continue operating Great Lakes Downs and to conduct thoroughbred race meetings at the racetrack. The lease is for an initial term of five years with an option to renew the lease for up to three additional periods of five years each. We also have an option to repurchase the property and associated racetrack license of Great Lakes Downs from Richmond Racing in the event we are unsuccessful in obtaining a racetrack license for the proposed Romulus racetrack or in the event that state law in Michigan is amended to allow an entity to hold more than one racetrack license. On May 17, 2005, the Michigan Office of Racing Commission granted us the license for the Romulus track.

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Magna Racino™

        Our newest racetrack, Magna Racino™ opened on April 4, 2004 and is situated on approximately 650 acres in Ebreichsdorf, just outside Vienna, Austria. There are approximately 2.5 million people living within a 30-mile radius of Magna Racino™. During 2005, Magna Racino™ was visited by over 130,000 guests and held a meet consisting of 45 live racing days between mid-March and late November. In 2006, Magna Racino™ has been approved for 41 days of live racing, between mid-March and early December.

        Magna Racino™ features both thoroughbred and standardbred racing on three different tracks, a ⁵/8-mile sand track, a one-mile sand track and a one-mile turf course. During 2005, Magna Racino's™ facilities included 61 paddocks, 608 stalls, parking for approximately 2,400 cars, a grandstand that also houses a 150,000 square foot entertainment center, three restaurants, a simulcast center and a sportsbook/gaming facility that opened in September 2004. In March 2006, Magna Racino™ added another 18 paddocks for a total number of 79 paddocks. Magna Racino's™ sportsbook facility is operated by Admiral Sportwetten AG under an agreement that entitles Magna Racino™ to receive a percentage of all wagers placed with Admiral at Magna Racino™. Magna Racino's™ 150 video lottery terminals are operated by the Austrian Lottery, a division of Casinos Austria AG, under an agreement that entitles Magna Racino™ to receive a percentage of the gross profit and recovery of certain costs from the video lottery terminal operations located at Magna Racino™.

        Magna Racino's™ handle was approximately $4.5 million in 2005, including wagers made at Magna Racino™ on its races, wagers made at other wagering venues and through account wagering operations on Magna Racino™ races and wagers made at Magna Racino™ on imported races. Magna Racino™ exports its simulcast signal to various off-track and inter-track wagering facilities in Germany and Austria. Throughout the year, Magna Racino™ operates as an inter-track wagering facility where customers can wager on races that are imported to Magna Racino™ from other racetracks around the world.

Training Centers

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 have developed Palm Meadows® on this land, a horse boarding and training center, which is operated in conjunction with Gulfstream Park. We believe that Palm Meadows® will help us to continue to attract high-quality horses to Gulfstream Park. 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 facility opened in November 2002 and currently includes a 1¹/8-mile dirt track, a one-mile turf course, stalls for up to 1,440 horses, administrative offices, dormitories, a viewing stand and a 60,000 square foot compost building.

        In November 2005, one of our subsidiaries that owns approximately 157 acres of excess real estate in Palm Beach County, Florida, entered into an agreement to sell the real property to Toll Bros, Inc., a Pennsylvania real estate development company for $51.0 million in cash. The proposed sale was subject to the completion of due diligence by the purchaser by February 28, 2006 and a closing by March 30, 2006. The agreement was amended on February 27, 2006 extending the due diligence completion date to March 15, 2006. On March 15, 2006 we further amended the agreement by extending the due diligence completion date to April 3, 2006 and the closing date to April 28, 2006.

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, horse trails 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.

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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 used since 1985 as a year-round training center to support thoroughbred racing at Pimlico and Laurel Park.

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.

PariMax

        In February 2006, our Board of Directors approved the formation of PariMax, Inc., a new company to oversee the development of our various electronic distribution platforms including XpressBet®, HRTV™, MagnaBet™, RaceONTV™ and our 30% stake in AmTote. PariMax will focus on the development of complete wagering solutions and will concentrate on serving the global wagering market by developing product lines which meet the needs of both distribution partners and end consumers worldwide. For distribution partners, RaceONTV™ will provide simulcasting and wagering solutions for betting shops internationally. AmTote will continue to provide a variety of wagering interfaces and connectivity products for racetracks, OTBs, and account wagering providers, both domestically and abroad. For consumers, XpressBet® and MagnaBet™ will be PariMax's account wagering platforms, which provide video streaming and wagering opportunities to an increasingly international customer base. Consumers will be further served by PariMax supported television channels, including HRTV™ in the United States, Racing World in the United Kingdom and Ireland (a planned joint venture between MEC, Churchill Downs Inc., and Racing UK) and PremiereWin (a MEC television partner) in central Europe.

XpressBet®

        We offer advance deposit account wagering by telephone and over the Internet through XpressBet®, to customers in certain jurisdictions of the United States and, in connection with Racing World, to customers in the United Kingdom and Ireland, subject to legal and governmental restrictions. See "— Government Regulation" below. Operators of advance deposit account wagering businesses may establish a hub in a state where advance deposit account wagering is expressly 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 on behalf of customers are not allowed to exceed the amounts on deposit in their accounts. Customers of XpressBet® may place wagers either over the telephone with a live teller, over the telephone with a voice-activated automated teller, over the telephone with a touch tone recognition system or through the Internet.

        XpressBet® was developed from the account wagering business operated by The Meadows harness racetrack in Pennsylvania under the trade name Call-A-Bet. Call-A-Bet launched a telephone account wagering business in 1983 for Pennsylvania account holders. In 1995, Call-A-Bet expanded its customer base throughout the United States. We purchased Ladbroke Racing Pennsylvania, Inc., which included The Meadows and Call-A-Bet, in April 2001 and upon obtaining a license to conduct advance deposit account wagering in California in January 2002, re-branded the account wagering company as XpressBet®. Our subsidiary, XpressBet, Inc. is primarily responsible for conducting our account wagering operations. XpressBet, Inc. is currently licensed as a multi-jurisdictional wagering hub in Oregon, where its totalisator hub operations are located. This license permits XpressBet, Inc., to place advance deposit account wagers on behalf of residents in Oregon and other jurisdictions that do not prohibit account wagering. In addition, XpressBet, Inc. has received state-based licenses or racing commission approval in California, Idaho, Maryland, Massachusetts, Virginia and Washington. See "— Government Regulation" below for a further discussion of the regulatory issues that affect our XpressBet® account wagering business.

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        Wagering through an XpressBet® account is permitted only after XpressBet® has verified the account holder's identity, address and age and the account has been funded. XpressBet® account holders can wager on over 100 North American racetracks and internationally on races in Australia, South Africa and Dubai. The XpressBet® service provides up-to-the-minute racing information, including live odds and results, race program information, real-time audio and video streaming and an easy-to-use betting screen.

        The primary source of revenue for XpressBet® is the takeout on the handle wagered by its customers through advance deposit wagering accounts. The takeout revenue is reduced by host track fees, purse account funds, source market fees and other operating expenses. For the year ended December 31, 2005, total handle wagered through XpressBet® was approximately $135.1 million.

MagnaBet™

        MagnaBet™ offers advance deposit account wagering over the Internet and via mobile communications devices, to customers in Austria and Germany. MagnaBet™ holds licenses issued by the provincial government of Lower Austria and the provincial government of Hanover, Germany, which allow it to accept and process pari-mutuel wagers. Customers deposit funds through credit cards, prepaid cards, bank transfers and internet-banking to fund their wagering accounts, and receive wagering instructions from these customers. Wagers placed by customers are not allowed to exceed the amounts on deposit in their accounts. Customers of MagnaBet™ may place wagers either through the Internet or mobile devices.

        We launched MagnaBet™ in Austria in September 2004, where its operations are located, and in Germany in December 2004. Wagering through a MagnaBet™ account is permitted only after MagnaBet™ has verified the account holder's identity, address and age and the account has been funded. MagnaBet™ account holders can wager on thoroughbred and harness races at Magna Racino™, on races at Krieau, an Austrian standardbred racetrack opened in 1878, and internationally on over 27 North American thoroughbred and standardbred racetracks. The MagnaBet™ service provides up-to-the-minute racing information, including live odds and results, race program and past performance information, real-time audio and video streaming and an easy-to-use betting screen.

        The primary source of revenue for MagnaBet™ is the takeout on the handle wagered by its customers through advance deposit accounts. The takeout revenue is reduced by host track fees, totalisator purse account funds, source market fees and other operating expenses. For the year ended December 31, 2005, total handle wagered through MagnaBet™ was approximately $11.5 million.

Television Distribution

        We believe that broad television distribution will help increase future interest in the sport of horse racing and attract additional wagering customers. In order to accomplish this goal, we have entered into a number of television distribution initiatives.

HorseRacing TV™

        HorseRacing TV™ is a television network focused on horse racing. HorseRacing TV™ carries horse racing from racetracks located throughout North America as well as commentary and related content, combined into a single signal produced by Santa Anita Park's award-winning television department. In January 2003, we launched HorseRacing TV™ on our first cable television system (Time Warner San Diego) and we have quickly grown the network's distribution to over 12 million cable and satellite subscribers nationally. HorseRacing TV™ has entered into a national distribution agreement with Dish Network™ (Echostar Communications Corp.) that makes HRTV™ available in all 50 U.S. states. Additionally, HorseRacing TV™ has entered into agreements with certain national/regional cable television operators, including Comcast, to make HorseRacing TV™ available via cable distribution in 18 states. HorseRacing TV™ is also available on RTN (see below).

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RTN

        In 2002, we entered into an arrangement with Roberts Communications Network, Inc. and an affiliate of Greenwood Racing, Inc. to form RTN, a private U.S. direct-to-home satellite service that currently offers twenty channels dedicated to horse racing on a monthly subscription basis. We hold a minority interest in RTN, which is independently managed by Roberts Communications Network, Inc., and we are primarily a content provider to the service.

RaceONTV™

        We provide broadcast and wagering services under the brand RaceONTV™ to OTBs and racetracks outside the United States, subject to legal and governmental restrictions. RaceONTV™ services include the supply of decoders to receive an encoded satellite channel featuring live horse racing, wagering terminals to allow pari-mutuel wagering into U.S., Austrian, and German racetrack pari-mutuel pools, an internet-based customer service center for downloading racecard information and marketing materials as well as totalisator and wagering pool settlement services.

        RaceONTV™ launched in early 2004 and currently has customers in Austria and Germany. MEC Sport und Entertainment GmbH holds a license issued by the provincial government of Lower Austria which allows it to accept and process pari-mutuel wagers and a license issued by the Austrian Regulatory Authority for Telecommunications and Broadcasting which allows it to broadcast an encoded TV channel via satellite with a European footprint. Services are offered only to OTBs and racetracks with a valid license to accept pari-mutuel wagers in the jurisdictions in which it operates.

        RaceONTV™'s primary source of revenues are the service fees it receives as a percentage of handle generated at its customers' physical locations and rent for decoders and wagering equipment and services. This is reduced by host track fees, totalisator service fees, costs for signal transmission and distribution and other operating expenses.

Racing World

        On January 5, 2006, we entered into a memorandum of understanding with CDI and Racing UK, a media rights company and subscription television channel owned by thirty-one leading British racecourses, to develop a new subscription television channel called "Racing World" to broadcast our racing content and CDI racing content, as well as content from other North American and international racetracks, into the United Kingdom and Ireland.

        In addition, the parties are currently negotiating the terms of a definitive agreement. XpressBet® has been granted the rights to provide, on a non-exclusive basis, account wagering and audio-visual streaming services enabling customers in the United Kingdom and Ireland to wager on the Racing World Content. To this end, XpressBet® has executed a letter of intent with The Betting Site Limited (http://www.thebettingsite.co.uk), a joint venture between Racing UK and The Racing Post, providing for the development of an integrated betting interface enabling UK and Irish customers to open an account with XpressBet®.

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Other Television Distribution

        From time to time, we seek exclusive and non-exclusive television distribution agreements with television networks and other distribution outlets to cover horse racing events from our tracks. In 2005 we came to an agreement with NBC to extend its live broadcast of the Preakness until 2010. NBC will also carry the Santa Anita Derby and Florida Derby on one of its networks through 2010, as well as the Sunshine Millions®, which NBC has aired since its inception in 2003. Additionally, HDNet has carried live and tape-delayed, high-definition television coverage of certain horse races from Lone Star Park at Grand Prairie and Santa Anita Park. We continue to seek new outlets for national television coverage of our horse racing content in order to promote the sport of horse racing and attract additional wagering customers to our racetracks and other wagering platforms.

Magna 5 Pick 5™

        In January 2004, we introduced a new Pick 5 wager, the Magna 5™, which offers a guaranteed $500,000 minimum pool every Saturday afternoon during selected periods each year. Sponsored by XpressBet®/HRTV™, the Magna 5™ features five races in the span of about one hour from premier tracks such as Santa Anita Park, Gulfstream Park, Golden Gate Fields and Laurel Park. While the Magna 5™ features races from our tracks, the national wager is offered at pari-mutuel outlets throughout the country. Over ten weeks in 2005, the Magna 5™ drew an average pool of $567,835. In 2004, the Magna 5™ wagering pool averaged $545,275.

Sunshine Millions®

        On January 25, 2003, we launched the Sunshine Millions®, a thoroughbred horse racing event which features California breds and Florida breds in head to head competition. The annual event, which is hosted by Santa Anita Park and Gulfstream Park, consists 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.

        California breds won five out of eight races when they competed head to head against Florida breds during the fourth edition of the Sunshine Millions® held on January 28, 2006. This event was covered on a national one and one-half hour NBC broadcast. Overnight ratings for the broadcast secured a four percent share of all televisions in use. All sources handle for Gulfstream Park and Santa Anita Park, together with on-site handle, topped $32 million for the 2006 edition of the Sunshine Millions®.

StreuFex™

        In 2002, we purchased FEX ÖKO Faserverarbeitungs-GMBH ("FOF"), an Austrian company that manufactures and sells StreuFex™, a horse bedding product made from straw that is ground and turned into pellets. With the purchase of FOF, we acquired a StreuFex™ manufacturing plant in Neusied/Zaya, Austria. In 2003, we purchased approximately 80 acres of land in Lumberton, North Carolina on which we have built a StreuFex™ manufacturing facility. The Lumberton facility commenced operations and we introduced StreuFex™ to the North American market in the first quarter of 2004 and currently supplies both Gulfstream Park and Palm Meadows Training Center with horse bedding.

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 to be constructed on a 260-acre site in Dixon's Northeast Quadrant, approximately 20 miles from Sacramento. Portions of the proposed site were purchased in 2001 and 2002. The environmental impact analysis of the project has been initiated and the related studies have been prepared. Extensive site visits by city officials to other of our racetracks occurred in 2005. Several public information sessions were conducted by the City of Dixon during 2005. We expect to complete the environmental review of the project, the negotiations with the City of Dixon regarding the terms of development and the necessary public hearings by mid-2006.

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Michigan Racetrack Development

        On August 29, 2002, we filed an application with The Office of Racing Commissioner (Michigan) 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. This site, which was purchased by a subsidiary of our parent company, MI Developments Inc. in October 2003, 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. We have entered into an option agreement with MI Developments Inc. to purchase the shares of the subsidiary that owns the site. The construction of the racetrack is still subject to certain regulatory approvals by the City of Romulus, but in August 2004 the Romulus city council and planning commission effectively approved the site plan and location for the proposed horse racetrack by granting the necessary site plan and conditional use approvals that are required for us to apply for and receive a building permit. In addition, in December 2003, the citizens of the City of Romulus held a referendum to determine whether they supported (i) a casino and (ii) a horse racetrack in the City of Romulus. A majority of the votes cast in the referendum were in favor of both a casino and a horse racetrack in the City of Romulus. Finally, in January 2004, the Romulus city council adopted a resolution supporting, in principle, our application to The Office of Racing Commissioner (Michigan) for a new horse racetrack in the City of Romulus.

        On May 17, 2005, The Office of Racing Commissioner (Michigan) issued an order awarding a racetrack license to our subsidiary, Michigan Racing, Inc., which order is subject to certain conditions regarding the performance of obligations pertaining to the construction of the facility at the Romulus site. Since the issuance of this order, two appeals have been filed. The first appeal was filed by the parties who operate Northville Downs, an existing harness racetrack located in Northville, Michigan. The second appeal was filed by Triple Creek Associates, LLC, a competing applicant for the license issued to our subsidiary, Michigan Racing, Inc. The appeal filed by Northville Downs was initially dismissed by the circuit court assigned to hear the appeal. A motion for leave to appeal this ruling is now pending before the Michigan Court of Appeals We do not know when the Michigan Court of Appeals will issue its ruling.

        The appeal filed by Triple Creek Associates, LLC is still pending before the Circuit Court for Ingham County Michigan, where it was filed originally. We have intervened as a party in this matter. We do not know when the Ingham County Circuit Court will render a decision on this appeal or, if the appeal is unsuccessful, whether Triple Creek Associates, LLC will seek further leave to appeal.

Recent Developments

        For a summary of certain transactions and other projects that were underway in 2005 in addition to the foregoing, please see "Management Discussion and Analysis of Financial Condition and Results of Operations — Recent Developments and Initiatives".

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 wagering markets. We also compete with other racetracks for horses, jockeys and backstretch personnel. Certain of our competitors operate in jurisdictions which permit alternative gaming at racetracks, which enhances their ability to compete for horsemen by offering larger purses and attracts additional potential customers to their facilities. One of our competitors, CDI, 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.

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        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 continue to develop our account wagering operations, including telephone, Internet and interactive television wagering, we expect our competition with other account wagering operators to also increase. 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 CDI, 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 certain types of account wagering on their races. We may not be able to obtain access, on terms that are acceptable to us, to racing content from racetracks not owned by us for our account wagering operations as a result of these exclusive arrangements or otherwise.

Government Regulation

Horse Racing

        Horse racing is a highly regulated industry. In the United States, 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 being involved in the industry. Although the specific form may vary, 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 the United States, interstate pari-mutuel wagering on horse racing is also subject to the federal Interstate Horseracing Act of 1978 and the federal Interstate Wire Act of 1961. As a result of these two statutes, racetracks can commingle wagers from different racetracks and wagering facilities and broadcast horse racing events to other licensed establishments.

        We currently satisfy the applicable licensing requirements of the racing and gambling regulatory authorities in each state or province 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 State Harness Racing Commission, the Nevada Gaming Commission, the New Jersey Casino Control Commission, the Oregon Racing Commission and the Government of the Province of Lower Austria. Please see our discussion of our wholly-owned subsidiary, XpressBet, Inc., for a list of the jurisdictions where it is licensed or has received regulatory approval to conduct interstate account wagering. With respect to our racetracks, 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.

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        In California, the California Horse Racing Board ("CHRB") is responsible for regulating the form of wagering, the length and conduct of meets and the allocation and distribution of pari-mutuel wagers within the limits set by the California legislature. The CHRB has annually licensed one of our subsidiaries, Los Angeles Turf Club, Inc. as well as The Oak Tree Racing Association, to conduct separate racing meets at Santa Anita Park. At present, the CHRB has not licensed other thoroughbred racetracks in Southern California to conduct racing during these meets. However, night quarter horse racing is conducted at Los Alamitos Race Course in Southern California during portions of these meets. The CHRB also annually licenses the operations of Golden Gate Fields in respect of the two racing meets that it conducts each year. As with the Southern California market, the CHRB has not licensed other thoroughbred racetracks in Northern California to conduct racing during these meets. The CHRB also has licensed XpressBet, Inc., as an out-of-state account wagering hub, to place wagers on behalf of California residents as described more fully below. 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 CHRB 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 as it is currently being conducted. In the first quarter of 2006, the CHRB passed a motion to require all California thoroughbred racetracks to install a synthetic racing surface, commonly referred to as "Polytrack", by the end of 2007 or face a loss of dates. We are currently evaluating the Polytrack surfaces and have commenced discussions with the CHRB about the timing of a resurfacing of Santa Anita and Golden Gate Fields but anticipate this regulatory requirement could have a material effect on the financial condition and operating results of our California operations.

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

        In Florida, the Division of Pari-Mutuel Wagering considers applications for annual licenses for thoroughbred, standardbred and quarter horse meetings with pari-mutuel wagering. 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 eliminated this deterrent. While a revised tax structure has enabled Gulfstream Park to apply for and receive additional race days since 2002, the deregulation of the race day allocation process may, in the future, cause an overlap in racing seasons which could result in Gulfstream Park facing direct competition from other Miami-area racetracks. Gulfstream Park is currently in a dispute with the Division of Pari-Mutual Wagering over Gulfstream Park's ability to conduct simulcast wagering while it is not running its meet. In July 2004, a court ruling was made in Gulfstream Park's favor and found that Section 550.615(6) of the Florida Statutes, which prohibited such form of simulcasting, was unconstitutional and struck the statute down. In September 2005 the ruling was appealed and the appeal court affirmed the trial court ruling in favor of Gulfstream Park. Currently an injunction is in place preventing Gulfstream Park from conducting simulcast wagering when its meet ends in April 2006 and an appeal by the Division of Pari-Mutuel Wagering is with the Florida Supreme Court and a decision is likely to be reached by the end of 2006.

        In Texas, the Texas Racing Commission issues licenses to conduct live racing with pari-mutuel wagering on thoroughbred, quarter horse and greyhound races. 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 in the Dallas area, other than Lone Star Park.

        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.

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        In Oklahoma, the Oklahoma Horse Racing Commission regulates all aspects of live thoroughbred and mixed breed (quarter horse, paint horse and appaloosa) horse racing with pari-mutuel wagering, as well as alternative gaming operations by licensed tracks, as will be discussed in more detail below. The Commission considers and approves annual licenses for thoroughbred and mixed breed race meetings. Currently, there are four 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 with pari-mutuel wagering. In 2004, the Office of Racing Commissioner issued a racetrack license to a party seeking to construct a thoroughbred racetrack east of Lansing, Michigan. To date, construction on that track has not begun. In addition, on May 17, 2005, the Office of Racing Commissioner issued a racetrack license to our wholly-owned subsidiary, Michigan Racing, Inc. for it to construct and conduct thoroughbred racing at a proposed racetrack to be located in Romulus, Michigan. See "— Recent Developments" for an update as to the status of that license and the litigation surrounding it. Other than the two recently licensed but not-yet-constructed racetracks described in the preceding sentences, 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 at five existing racetracks in Michigan and one mixed breed (thoroughbred, quarter horse, paint horse, appaloosa and Arabian) race meeting at existing racetrack in central Michigan.

        In Pennsylvania, the Pennsylvania State Harness Racing Commission approves annual licenses for standardbred racetracks, while the Pennsylvania State Horse Racing Commission approves annual licenses for thoroughbred racetracks. Neither the Pennsylvania State Harness Racing Commission nor the Pennsylvania State Horse Racing Commission has licensed any operators of horse racetracks, other than The Meadows, in the Pittsburgh area; however, on September 26, 2002, the Pennsylvania State 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. Two parties applied for the sole remaining harness racetrack license available in Pennsylvania. While the Pennsylvania State Harness Commission denied each of these parties' application in the fall of 2005, each party has sought an appeal of these rulings. It is difficult to predict when either of these two appeals will be resolved. If either party ultimately receives the license, each of these parties' proposed sites are located within approximately sixty miles of The Meadows harness racetrack.

        In Oregon, the Oregon Racing Commission approves annual licenses for horse and greyhound racetracks, and, as discussed below, multi-jurisdictional account wagering hubs. The Oregon Racing Commission has not licensed any operators of horse racetracks in the Portland area, other than Portland Meadows. The Oregon Racing Commission has, however, licensed five other account wagering operators who compete with XpressBet, Inc. for account wagering customers.

        In Austria, horse race meets are conducted at the Magna Racino™ by the Austrian Race Horse Owners Club under agreement with us. The Austrian Race Horse Owners Club conducts standardbred (harness) and thoroughbred horse race meets pursuant to licenses issued by the Direktorium des Jockeyclub für Österreich (thoroughbred) and the Zentrale für Traberzucht und Rennen in Österreich (standardbred harness). There is no limitation as to the number of racing days that can be conducted under these licenses. We offer pari-mutuel wagering on the horse races conducted at the Magna Racino™ and through our MagnaBet™ account wagering service pursuant to totalisator licenses issued by the Government of the Province of Lower Austria.

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        In addition to conducting live horse racing with pari-mutuel wagering at our various tracks in the United States, we conduct telephone and Internet account wagering through our subsidiary, XpressBet, Inc., and the entities that hold the licenses to conduct horseracing and pari-mutuel wagering at The Meadows. XpressBet, Inc. currently holds a license to serve as a multi-jurisdictional account wagering hub by the Oregon Racing Commission which expires June 30, 2006. The Oregon license enables XpressBet, Inc. to open accounts and accept wagering instructions on behalf of U.S citizens in respect of horse and dog races and to open accounts and accept wagering instructions on behalf of non-U.S. citizens in respect of horse races. XpressBet, Inc. also holds account wagering licenses issued by the California Horse Racing Board, the Idaho Racing Commission, the Virginia Racing Commission and the Washington Horse Racing Commission. XpressBet, Inc. also has received regulatory approvals from the Massachusetts Racing Commission and the Maryland Racing Commission to open accounts and place wagers on behalf of residents from those states. The two entities that conduct horseracing and pari-mutuel wagering at The Meadows are entitled to serve as a Pennsylvania-based account wagering hub by virtue of their annual licenses to conduct standardbred racing and pari-mutuel wagering. XpressBet, Inc. has an agreement with the entities that conduct horseracing and pari-mutuel wagering at The Meadows to provide account wagering services to those entities' account holders and to conduct their respective account wagering operations under the trade name XpressBet®. In accordance with its multi-jurisdictional hub license from Oregon and, to the extent applicable, state-based requirements imposed by states where it is licensed or otherwise approved, XpressBet, Inc. opens wagering accounts on behalf of residents from various states and countries and processes wagering instructions from those account holders in respect of races conducted throughout the United States and in other countries.

        Laws governing account wagering in the United States vary from state to state. Currently, approximately seventeen states have expressly authorized some form of account wagering by their residents. A smaller number of states have expressly prohibited pari-mutuel wagering and/or account wagering. The remaining states have authorized pari-mutuel wagering but have neither expressly authorized nor expressly prohibited their residents from placing wagers through account wagering hubs located in different states. We believe that the amendment to the federal Interstate Horseracing Act of 1978, described above, clarified that an account wagering operation may open accounts on behalf of and accept wagering instructions from residents of states where pari-mutuel wagering is legal and where providing wagering instructions to account wagering operators located in other states is not expressly prohibited by statute, regulation or other government restrictions. Although our account wagering operations are conducted in accordance with what we believe is a valid interpretation of applicable state and federal law, certain state attorneys general, district attorneys and other law enforcement officials have expressed concern over the legality of interstate account wagering. The amendment to the federal Interstate Horseracing Act of 1978 may not be interpreted similarly by all interested parties, and there may be challenges to our account wagering activities or those of other account wagering operations by both state and federal law enforcement authorities, which could have a material adverse effect on our business, financial conditions, operating results and prospects.

        In addition to placing account wagers on behalf of U.S. residents, we also place wagers on behalf of account holders who reside in countries other than the United States. In the case of foreign-based account wagers, we place them either through our Oregon-licensed XpressBet, Inc. subsidiary or through our Austrian- and German-licensed MagnaBet™ account wagering service. Whether a wager is placed through XpressBet® or through MagnaBet™, we comply with the regulatory requirements imposed by each of the jurisdictions that have licensed us to accept wagers from non-U.S. residents. The laws regarding account wagering by residents of countries other than the United States vary from country to country, and we seek to understand and comply with those laws to the greatest extent possible. As with any issue that turns on the interpretation of legal requirements, it is possible that law enforcement authorities from these foreign jurisdictions may disagree with our interpretation of their laws in respect of account wagering and seek to challenge our ability to place account wagers on behalf of their residents. In certain cases, such challenges could have a material adverse effect on our business, financial conditions, operating results and prospects, including the licenses we hold to conduct horse racing and pari-mutuel wagering (including account wagering) in the U.S.

Alternative Gaming

Pennsylvania

        The Pennsylvania Race Horse Development and Gaming Act was passed and signed into legislation in July 2004. This legislation authorizes the granting of slot machine licenses to up to seven Category 1 licensed facilities (i.e. racetracks) and up to five Category 2 licensed facilities (i.e. non-tracks), along with limited licenses to up to two Category 3 licensed facilities (i.e. resort hotels). Those racetracks and non-track facilities which successfully apply for slot machine licenses will be permitted to operate between 1,500 and 3,000 slot machines each, subject to future expansion of up to 2,000 additional machines per facility upon the approval of the Pennsylvania Gaming Control Board. The licensed resort facilities will be permitted to operate, on a limited basis, up to 500 machines each.

        Each racetrack slot machine licensee in Pennsylvania will be required to pay 34% of its daily gross revenues from gaming less all monetary payouts ("Gross Terminal Revenues") to the State Gaming Fund, 4% of its Gross Terminal Revenues as a local share assessment, 5% of its Gross Terminal Revenues to the Pennsylvania Gaming Economic Development and Tourism Fund and a maximum of 12% of its Gross Terminal Revenues to a pool (the "Horsemen Pool") for distribution to each racetrack's horsemen, in the form of purses and other awards. Non-track and resort facilities will be bound to make the same percentage distributions but, since they do not conduct horse racing, they will contribute to the Horsemen Pool that portion of their Gross Terminal Revenues which is equal, on a pro rata basis, to the amount contributed to the Horsemen Pool by Category 1 licensees. The Horsemen Pool will then be allocated among the horsemen at each of the Category 1 licensed facilities, with the intention of providing payments to the horsemen at each racetrack, which are equivalent to 18% of that track's Gross Terminal Revenues.

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        All racetrack licensees offering slot machines in Pennsylvania must pay an upfront fee of $50.0 million and will be required to commit a minimum of $5.0 million over a five year period, and a minimum of $0.25 million annually for five years thereafter, for improvements and maintenance of its backside. The legalization of alternative gaming at Pennsylvania racetracks is anticipated to have a significant positive impact on purses and on the Pennsylvania horse racing industry in general. See "— Recent Developments" for a further discussion regarding the share purchase agreement entered into in respect of the Meadows Entities and the application made by WTA for a Conditional/Category 1 gaming license.

Oklahoma

        Under new legislation that was approved by the citizens of the State of Oklahoma in a referendum held on November 2, 2004, Remington Park, our Oklahoma City racetrack, has been permitted to operate 650 electronic gaming machines, subject to increases of an additional 50 machines in each of the third and fifth years after the issuance of the applicable license. The Oklahoma Horse Racing Commission is empowered under the legislation to oversee licensees' licenses and operations. The Commission has promulgated temporary regulations regarding the licensure of electronic gaming operators and the operation of the electronic gaming machines, and it continues to work on the promulgation of permanent regulations in these areas. We have and will continue to closely monitor and participate in this process. On August 11, 2005 we received our license to operate 650 electronic gaming machines in 2005 and we opened for business on November 21, 2005. On November 17, 2005 we received our 2006 license.

Florida

        On November 2, 2004, Amendment 4 to the Florida State Constitution was approved, permitting the governing bodies of Broward and Miami-Dade counties to each hold a county-wide referendum on whether to authorize slot machines within existing, licensed pari-mutuel facilities that have conducted live racing during each of the last two years. On March 9, 2005, voters in Broward County, where Gulfstream Park is located, approved the referendum by a majority vote. Subsequently, on December 8, 2005, the state legislature adopted legislation to allow for and govern the slot machine operators of Gulfstream Park and the three other qualifying Broward County pari-mutuel facilities. Under the terms of this legislation, Florida Statutes Chapter 551, Gulfstream Park and the three other pari-mutuel facilities in Broward County are permitted to operate up to 1,500 slot machines at each of their gaming facilities. The slot machine nonrefundable, annual license fee is $3.0 million and there is a required $250,000 annual minimum contributor to responsible gaming. We will be permitted to offer gaming for a maximum of 16 hours per day, 365 days a year. The tax payable to the state is 50% of Gulfstream Park's gross gaming revenues. In addition, under the legislation, we are required to have written agreements with the Florida Horsemen's Benevolent and Protective Associations and the Florida Thoroughbred Breeders' Association, Inc. prior to the renewal of a gaming license. We currently have agreements with each of these parties, but the agreements were reached prior to the legislation being passed and will need to be substantially revised. We are in discussions regarding these agreements. We have entered into an agreement with Broward County, identical in principal terms to agreements entered into by the three other pari-mutuel facilities in that County, that contains, among other things, provision for payment to the County of 1.7% of gross terminal revenues up to a level of $250.0 million of gross terminal revenues and 2.0% on gross terminal revenues in excess. This agreement also provides for further payments of an additional 1.5% on the first $250 million of gross gaming revenues in excess to go into escrow or account for the relevant city, until Gulfstream Park reaches agreement with the city thereby replacing the escrow. This potential agreement is under discussion.

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        The Legislation requires the Division of Pari-Mutuel Wagering to issue us a temporary license, provided we are in good standing under our pari-mutuel license, 180 days following the effective date of the Act (this would be July 3, 2006) if the Division of Pari-Mutuel Wagering has not by then adopted rules allowing for the issuance of permanent slot machine licenses. The temporary license would then become a permanent license once the rules are adopted, provided we meet the licensing requirements.

Austria

        Austrian law permits Glucks- und Unterhaltungsspiel Ebreichsdorf Betriebsges.m.bH, a division of Casinos Austria AG, to operate video lottery terminals at the Magna Racino™ under license and pursuant to the Games of Chance Act (Austria).

Our Real Estate Portfolio

        As of December 31, 2005, the aggregate net book values of our real estate properties are as follows:

	($ millions)
Revenue-Producing Racing Real Estate	730.1
Excess Racing Real Estate	96.3
Development Real Estate	43.8
Revenue-Producing Non-Racing Real Estate	77.3
Non-Core Real Estate	2.5
Total	950.0

        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.

        Included in our excess racing real estate is land adjacent to several of our racetracks, Santa Anita Park, Gulfstream Park, Lone Star Park at Grand Prairie, Laurel Park, Pimlico Race Course and Magna Racino™, totaling approximately 786 acres. We are considering a variety of options with respect to this 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.

        Our development real estate, which is largely undeveloped, includes: approximately 27 acres of land in Oberwaltersdorf, Austria, located approximately 20 miles south of Vienna, Austria; approximately 800 acres of land in upstate New York; approximately 260 acres of land in Dixon, California, located approximately 20 miles southwest of Sacramento; approximately 491 acres of land in Ocala, Florida; and approximately 21 acres of land in Aurora, Ontario, adjacent to one of our golf courses, which is currently under development for a residential community.

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        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 tennis club and a clubhouse which contains a dining facility, a pro shop and a fitness facility. The Magna Golf Club, an 18-hole golf course in Aurora, Ontario, adjacent to our and Magna International Inc.'s 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.

        In November 2004, we entered into long-term access agreements with Magna International Inc. and one of its subsidiaries for their use of the golf courses and associated facilities at Magna Golf Club and Fontana Sports. Magna International Inc. has a right of first refusal to purchase Magna Golf Club and Fontana Sports.

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 ("CAFO") on water quality, including, but not limited to, storm water 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.

        With respect to significant capital expenditures, the Water Quality Board Permit for the discharge of surface waste water at Santa Anita Park is currently being renewed. In order to renew the permit, Santa Anita Park will be required to perform certain remedial work to its existing barns and uncovered backstretch areas. The cost of such remediation is currently estimated at $5.0 million over four years. Consideration is also being given to incorporate the need for environmental remediation with other capital improvements to the backstretch. No citations on violations are contemplated provided that Santa Anita Park proceeds with the remediation work.

        While we have environmental permits for many of our racetracks and other business operations and are taking steps to comply with them and other applicable environmental legal requirements, we cannot be certain 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 and other business operations, 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 changes to the CAFO regulations that 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.

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Employees

        As of December 31, 2005, we employed approximately 5,200 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.

Item 1A.    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 and Canadian securities regulatory authorities, actually occur or increase, 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 expect that during 2006 we will require additional financing to fund our current planned operations and the implementation of our strategic plan, but we may not be able to obtain such financing on satisfactory terms, if at all.

        We expect that during 2006, we will be required to seek additional debt and/or equity financing in order to fund our current planned operations and the implementation of our strategic plan, including capitalizing on future growth opportunities. We also intend to generate cash by selling some of our real estate holdings and other assets in order to fund our current planned operations and certain portions of our strategic plan. If additional financing or other sources of funds are not available to us as needed, or are not available on terms that are acceptable to us, our business, operations and financial condition may be materially adversely affected, including, among other things, our ability to add alternative gaming to our racetracks where permitted or improve or expand our operations as planned.

        We have already entered into numerous financing arrangements secured by significant portions of our assets, which will limit our ability to provide security for new loans. Please see "Management's Discussion and Analysis of Financial Condition and Results of Operations — Working Capital, Cash and Other Resources".

        Following their expiry, there can be no assurance that the amounts, terms and conditions involved in the renewal or extension of our existing financing arrangements will be favorable, or that we will be able to renew or extend any of these financing arrangements at all. If we are unable to renew or extend our financing arrangements when due, on favorable terms, or at all, our business, operations and financial condition may be materially adversely affected.

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Our senior secured revolving credit facility imposes important restrictions on us.

        Our senior revolving credit facility, which matures on July 31, 2006, requires us to maintain earnings before interest, taxes, depreciation and amortization of not less than $11.0 million at Santa Anita Park and $4.0 million at Golden Gate Fields, respectively, calculated on a rolling 12 month basis. This revolving credit facility is secured by a first charge on the assets of Golden Gate Fields and a second charge on the assets of Santa Anita Park and are guaranteed by certain of our subsidiaries which own and operate Golden Gate Fields and Santa Anita Park. 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. These restrictions may limit our ability to expand, pursue our business strategies and obtain additional funds. Our ability to meet these financial covenants may be adversely affected by a deterioration in business conditions or our results of operations, adverse regulatory developments and other events beyond our control. At December 31, 2005, we were not in compliance with one of the financial covenants contained in the credit agreement. A waiver was obtained from the lender for the financial covenant breach at December 31, 2005. It is possible that we may not be able to meet the financial covenants under our $50.0 million senior revolving credit facility at the quarterly reporting dates during the remaining term of the facility. Failure to comply with these restrictions may result in the occurrence of an event of default under the senior, revolving credit facility and trigger a cross-default under certain of our other credit facilities. Upon the occurrence of an event of default, the lender may terminate the senior, revolving credit facility, demand immediate payment of all amounts borrowed by us and require adequate security or collateral for all outstanding letters of credit outstanding under the 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.

Our bridge loan imposes important restrictions on us.

        Our bridge loan with a subsidiary of our parent company, MI Developments Inc., which matures on August 31, 2006, requires us to maintain earnings before interest, taxes, depreciation and amortization of not less than $11.0 million at Santa Anita Park and $4.0 million at Golden Gate Fields, respectively, calculated on a rolling 12 month basis. This bridge loan was originally secured by a second charge on the assets of Golden Gate Fields, a third charge on the assets of Santa Anita Park and a first charge over the assets of The Meadows and was guaranteed by certain of our subsidiaries, including those which own and operate Golden Gate Fields, Santa Anita Park, The Meadows, Gulfstream Park, Palm Meadows and San Luis Rey Downs. Additionally, in the first quarter of 2006, first charges on the lands owned by four MEC subsidiaries were put in place as additional security. The lands are those commonly referred to by us as Thistledown, the Dixon Land, San Luis Rey Downs and the New York Porter lands. In addition, a guarantee was provided by those subsidiaries which own and/or operate Thistledown and the New York Porter lands. Our bridge loan 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. These restrictions may limit our ability to expand, pursue our business strategies and obtain additional funds. Our ability to meet these financial covenants may be adversely affected by a deterioration in business conditions or our results of operations, adverse regulatory developments and other events beyond our control. At December 31, 2005, we were not in compliance with one of the financial covenants contained in the bridge loan agreement. A waiver was obtained from the lender for the financial covenant breach at December 31, 2005. It is possible that we may not be able to meet the financial covenants under our bridge loan at the quarterly reporting dates during the remaining term of the facility. Failure to comply with these restrictions may result in the occurrence of an event of default under the bridge loan and trigger a cross-default under certain of our other credit facilities. Upon the occurrence of an event of default, the lender may terminate the bridge loan, demand immediate payment of all amounts borrowed by us and require adequate security or collateral for all outstanding security under the bridge loan, 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.

        In addition, the bridge loan provides that, subject to certain specified exemptions, the proceeds of any debt or equity offering or asset sale must be used to reduce outstanding indebtedness under the bridge loan or other specified indebtedness. This restriction severely limits our ability to use the proceeds of any debt or equity offering or asset sale to grow our business.

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Repayments under our Gulfstream Park Construction Loan and Remington Park Construction Loan impose limitations on the amount of funds available to grow those business.

        Beginning on January 1, 2007, each of our Gulfstream Park Construction Loan, which matures in 2016, and Remington Park Construction Loan, which matures in 2015, require that repayment of interest on the amounts outstanding. These interest payments will limit the amount of funds available to invest back into the racetracks. In addition, the Remington Construction Loan further provides that certain cash from the operations of Remington Park must be used to pay deferred interest on the loan, plus a portion of the principal under the loan equal to the deferred interest on the Gulfstream Park Construction Loan. This requirement will further limit the funds available to grow our business.

Each of our senior revolving credit facility and our bridge loan matures in 2006.

        Our $50.0 million senior revolving credit facility matures on July 31, 2006 and our $100.0 million bridge loan matures on August 31, 2006. We will need to be able to repay these facilities when they become due, extend the terms of the agreements or find alternative financing arrangements acceptable to us. There is no guarantee that we will be able to do so. This would adversely affect our ability to repay our debt securities and would adversely affect the trading price of our Class A Subordinate Voting Stock.

Our operating income includes gains from the sale of non-core real estate, which sales may soon cease, causing our future operating income and cash flow to decrease.

        We generated earnings of approximately $0, $9.6 million, $0 and $2.2 million, for the years ended December 31, 2005, 2004, 2003 and 2002, respectively, from non-core real estate sales. Although we may realize some gains from sales of our non-core real estate over the next year or so, we expect those gains to be reduced to zero as the balance of our non-core real estate portfolio is sold. As a result, our short-term and annual operating income and cash flow may be adversely affected by decreases in non-core real estate sales. If we do not replace these 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.

        Six of our racetracks, Santa Anita Park, Laurel Park, Pimlico Race Course, Gulfstream Park, Lone Star Park and Golden Gate Fields accounted for approximately 70.6% of our revenue for the year ended December 31, 2005. 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.

In the state of Maryland, our operating agreement with the owner of Rosecroft Raceway expired on April 30, 2005.

        The Maryland Jockey Club, the trade name for the entities that own and operate Pimlico and Laurel Park, is a party to an agreement (the "Maryland Operating Agreement") with Cloverleaf Enterprises, Inc., the current owner of Rosecroft Raceway, a standardbred track located in Prince George's County in Maryland. The Maryland Operating Agreement replaced a previous agreement (the "Maryland Revenue Sharing Agreement"), which was effective as of January 1, 2000 and expired on April 18, 2004. The Maryland Operating Agreement has been in effect since June 9, 2004 and expired on April 30, 2005, however, both parties continue to informally operate under its terms until a new agreement can be finalized.

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        The Maryland Revenue Sharing Agreement enabled wagering to be conducted, both day and evening, on live and simulcast thoroughbred and harness races at Pimlico, Laurel Park and Rosecroft and the three Maryland OTBs operated by them. Under the Maryland Revenue Sharing Agreement, wagering revenue from these sources was pooled and certain expenses and obligations were pooled and paid from those revenues to generate net wagering revenue. This net wagering revenue was then distributed 80% to The Maryland Jockey Club and 20% to Rosecroft. Commencing April 19, 2004, The Maryland Jockey Club and Rosecroft no longer pool their wagering revenue and distribute net wagering revenue as they did under the Maryland Revenue Sharing Agreement. For a period from April 19, 2004 until June 9, 2004, The Maryland Jockey Club and Rosecroft each conducted simulcast wagering under a combination of state law, which precluded The Maryland Jockey Club from operating 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 either Pimlico or Laurel Park is running live races.

        Since coming into effect on June 9, 2004, the Maryland Operating Agreement has enabled Pimlico, Laurel Park and Rosecroft to conduct simulcast wagering on thoroughbred and harness race signals during the day and evening hours without restriction. Under the Maryland Operating Agreement, Cloverleaf pays the thoroughbred industry a 12% premium on pari-mutuel wagering (net of refunds) conducted at Rosecroft on all thoroughbred race signals, and The Maryland Jockey Club agrees to pay Cloverleaf a 12% premium on pari-mutuel wagering (net of refunds) conducted at Pimlico and Laurel on all standardbred race signals.

        Under the Maryland Operating Agreement, the parties have agreed to make a good faith effort to reach a long-term agreement on cross-breed simulcasting and OTB facilities in the State of Maryland. Without an arrangement similar in effect to the Maryland Revenue Sharing Agreement or the Maryland Operating Agreement, there would be a material decline in the revenues, earnings and purses of The Maryland Jockey Club. At this time, the Company is uncertain as to the likelihood of a renewal of this agreement on comparable terms. In addition, the Company is uncertain whether the Maryland General Assembly will pass legislation that addresses the simulcast issue, including the possibility of giving broader simulcast rights to the owners of Rosecroft. Any failure to reach a long-term agreement with Rosecroft similar to the Maryland Revenue Sharing Agreement or the Maryland Operating Agreement or any enactment of legislation that gives broader simulcast rights to Rosecroft could have a material adverse effect on our operating results.

We are controlled by MI Developments Inc. and therefore MI Developments Inc. is able to prevent any takeover of us by a third party.

        MI Developments Inc. owns all our outstanding Class B Stock, which is entitled to 20 votes per share, and approximately 4.36 million shares of our Class A Stock, 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, MI Developments Inc. is able to cause or prevent a change in our control.

Our relationship with MI Developments Inc. is not at "arm's length", and therefore MI Developments Inc. may influence us to make decisions that are not in the best interests of our other stockholders.

        Our relationship with MI Developments Inc. is not at "arm's length". In addition to the ownership of our stock as described in the preceding risk factor (and in the risks described below in "— Risks Relating to Our Securities — Sales or a spin-off or other distribution of our Class A Subordinate Voting Stock by MI Developments Inc. or by certain of our other significant stockholders under our registration statements could depress our stock price"), two members of our board of directors are also members of MI Development Inc.'s board of directors, including our chairman and vice-chairman, each of whom hold the same position with MI Developments Inc. In some cases, the interests of MI Developments Inc. 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. MI Developments Inc. 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 MI Developments Inc. 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. See "— Our History" above.

We may not be able to attract or retain the personnel necessary to achieve our business objectives, in particular in respect of our search for a successor Chief Executive Officer.

        Our future success depends in part on our continued ability to hire, assimilate in a timely manner and retain qualified personnel, particularly in key senior management positions and particularly as it pertains to our Chief Executive Officer. The loss of key managers could have a material adverse effect on our business, results of operations and financial condition. We may find it difficult to attract and retain a qualified Chief Executive Officer because of our management changes, the uncertainty facing our business, and the specific horseracing and gaming industry knowledge we are searching for. If we are not successful in promptly hiring a successor Chief Executive Officer, we may not have the personnel necessary to achieve our business objectives.

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We are exposed to currency exchange rate fluctuations which could aversely affect our profitability as reported in U.S. Dollars.

        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 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 Wagering and Gaming Operations

The passage of legislation permitting alternative gaming at racetracks, such as slot machines, VLTs 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. In 2004, Pennsylvania passed legislation enabling racetracks to apply for licenses to operate slots or other legal electronic gaming machines and we have filed an application with the Pennsylvania State Gaming Control Board for a license to conduct slots at The Meadows racetrack in Pennsylvania. See "Our Properties — The Meadows" above for more details. In addition, on December 8, 2005 voters in Broward County approved a local referendum that would permit electronic gaming to be conducted by pari-mutuel operators located in that county. Chapter 551 of the Florida Statutes was signed into law by Governor Jeb Bush on January 4, 2006. Under the terms of this legislation, Gulfstream Park and three other pari-mutuel facilities in Broward County are permitted up to 1,500 slot machines at each of their gaming facilities. The Florida Division of Pari-Mutuel Wagering is currently in the process of drafting rules to regulate gaming at these four pari-mutuel facilities.

        There is a provision in the legislation that requires the Division of Pari-Mutuel Wagering to issue us a temporary license, provided we are in good standing under our pari-mutuel license, 180 days following the effective date of the Act (this would be July 3, 2006) if it has not by then adopted rules allowing for the issuance of permanent slot machine licenses within such time period. The temporary license would then roll into a permanent license once the rules are adopted, provided we meet the licensing requirements. See "Our Properties — Gulfstream Park" above for more details.

        Notwithstanding the passage of legislation permitting slots and electronic gaming in Pennsylvania and Broward County, Florida, there can be no assurance that alternative gaming will be permitted at our racetracks located in those jurisdictions until the applicable license is granted and if alternative gaming is permitted at any of our racetracks, what the timetable, conditions, costs and profitability of such alternative gaming operations will be. In the event that we do not obtain the required licenses to operate alternative gaming in these jurisdictions within the timeframe anticipated by our stockholders, investment analysts and other interested parties, or at all, the market price for our securities may be materially adversely affected.

        Furthermore, other states are at various stages of considering alternative gaming but 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.

        In the event that alternative gaming legislation is enacted in additional jurisdictions, 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 proceed to conduct alternative gaming at any of our racetracks, 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.

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        The regulatory risks and uncertainties that are inherent in the conduct of alternative gaming also apply in other jurisdictions outside the United States. The Magna Racino™, located approximately 20 miles south of Vienna, Austria, serves as landlord to VLT operations conducted by a licensed casino operator. Under that arrangement, the racetrack retains 50% of the gross profit (excluding certain costs). This arrangement has an indefinite term (with a minimum 5 year term ending in September 2009) and is terminable by either party on 12 months prior notice. There can be no assurance as to how long this arrangement will continue, and if it does, whether the terms will remain the same.

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 and account 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 strategy of increasing international distribution of North American horse racing may not be successful.

        We believe that there is a demand for North American horse racing in the international market, but we may not be correct in our belief. Our plan to distribute our content internationally has not been successfully carried out by any other company to date. We are spending financial capital and deploying human capital in an effort to capture the international market. If we are not successful, it may have a material adverse effect on our ability to meet any future revenue expectations and, therefore, our operating results.

Both our pari-mutuel gaming and alternative gaming activities at racetracks 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 and alternative gaming operations at racetracks 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.

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        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 wagering, simulcast wagering and alternative gaming at racetracks must be obtained from each jurisdiction's regulatory authority, in many cases annually. In addition, licenses or approvals to conduct account wagering must be obtained in certain jurisdictions in which our account wagering customers reside, 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 and other gaming activities 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 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.

Any future expansion of our pari-mutuel and gaming operations will likely require us to obtain additional governmental approvals or, in some cases, amendments to current laws governing such activities.

        The high degree of regulation in the pari-mutuel and gaming industry is a significant obstacle to our growth strategy, especially with respect to alternative gaming at racetracks and account wagering, including telephone, interactive television and Internet-based wagering. We currently are only able to offer non-pari-mutuel gaming at Remington Park in the United States, expect to be able to open facilities at Gulfstream Park in 2006 and gaming will be legal at The Meadows in 2006.

        Account wagering in the United States may currently be conducted only through hubs or bases located in certain states. Our expansion opportunities with respect to account wagering 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 legislation, 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, on June 13, 2003, the United States House of Representatives approved a bill in the form of the Unlawful Internet Gambling Funding Prohibition Act that, if enacted, would prohibit the use of credit cards, checks, electronic funds transfers and certain other funding methods for most forms of Internet gambling. The United States Senate Banking, Housing and Urban Affairs Committee adopted a different bill with a similar effect on August 31, 2003; however, neither this bill nor the House-passed version were considered by the full Senate before the end of the 2003-2004 Congressional session and therefore both bills expired. In 2005, a similar bill was introduced in the U.S. House of Representatives containing exemptions which we believe are intended at the very least to permit such funding for pari-mutuel account wagering under certain conditions in states that authorize pari-mutuel account wagering. It is unclear, however, whether and to what extent such exemptions will remain in the current legislation or any future Internet gambling funding bill that ultimately may be enacted, or the extent to which we will be able to utilize those exemptions with respect to our account wagering operations as currently conducted. In February 2006, another bill was introduced in the U.S. House of Representatives which seeks to amend the Federal Wire Act by placing further limits on the conduct of internet gaming. We believe that this bill, as with the current Unlawful Internet Gambling Funding Prohibition Act, includes an exemption for pari-mutuel wagers placed pursuant to the Federal Interstate Horseracing Act. As with any piece of legislation, however, it is difficult to predict the ultimate chances for passage of these or future bills. We nonetheless anticipate 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, including account wagering.

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        Furthermore, even in the absence of such 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.

The U.S. Federal Government's response to a recent ruling by the World Trade Organization on the U.S.'s internet gambling policy could adversely affect our financial performance.

        In the spring of 2005, the World Trade Organization Appellate Body ruled that a claim from the island country of Antigua regarding U.S. federal policy regarding international gambling may have merit due to an apparent inconsistency in how the U.S. treats interstate pari-mutuel wagers under the Interstate Horseracing Act and all other sports wagers, both on an interstate and international basis. The WTO Appellate Body ruled that the Interstate Horseracing Act raised questions regarding whether the U.S. has taken a consistently negative position regarding internet wagering across state and international boundaries. As a part of its ruling, the WTO Appellate Body ordered the U.S. to clarify its position on interstate pari-mutuel wagering on or before April 3, 2006. One of the options available to Congress and the White House is to outlaw or restrict substantially the conduct of interstate simulcast wagering and account wagering. If the Federal government elects to take such an approach, it will have a material adverse effect on our business, financial condition and operating results and financial performance. Alternatively, if offshore wagering is permitted into the United States, that also could have a material adverse effect on our revenues and financial performance.

Uncertainty as to the effect of Congress' attempt to eliminate the federal income tax withholding requirement on winning wagers by foreign nationals could delay our ability to open our pools to foreign wagers or subject us to tax liability.

        In October 2004, a bill was implemented that will enable U.S. pari-mutuel wagering operators to accept foreign wagers into their pari-mutuel pools. The previous law required U.S. pari-mutuel wagering operators to withhold federal income tax on any winning wagers placed by foreign nationals. Any failure to withhold income tax from these wagers would make the payer entity liable instead. We believe that the new law reflects Congress' intent to eliminate the tax withholding requirement from winning pari-mutuel wagers placed by foreign nationals. In the absence of specific rules expressing how this new law is to be interpreted, however, there is a risk that the law will be interpreted differently from Congress' apparent intent, thus imposing an obligation on tracks to continue withholding federal income tax from winning wagers by foreign nationals. This uncertainty either could affect the rate at which we open our pools to foreign-based bettors or could expose us to tax liability if it is determined that our method for accepting foreign wagers into our pools is incorrect. Any resulting delay in opening our pools or tax liability imposed could have a material adverse impact on our revenues and financial performance.

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Ongoing litigation concerning our proposed facility in Romulus, Michigan, could threaten the license issued for that facility or cause us to expend greater sums to defend it.

        On May 17, 2005, the Michigan Office of Racing Commissioner awarded a racetrack license to our subsidiary, Michigan Racing, Inc., that would allow us to construct and operate a thoroughbred racetrack in Romulus, Michigan. Appeals to this award have been filed by an existing racetrack operator in Northville, Michigan, and by a competing applicant who proposed an alternative site in the Detroit metropolitan area. If either appeal succeeds in reversing or negating the license awarded to us, we could face either substantial losses associated with the unsuccessful efforts to secure and maintain this license or additional costs associated with reestablishing our right to receive this license.

We may not be able to install synthetic racing surfaces at our California tracks on the timeline set out by the California Horse Racing Board.

        In February 2006, the CHRB passed a motion which would require all thoroughbred racetracks in California to install synthetic racing surfaces by the end of 2007 or lose race dates. We are currently evaluating the options available at Santa Anita and Golden Gate Fields and are in discussions with the CHRB, but it is unclear that we will be able to meet the timeline set out by the CHRB. It is possible that this could put our 2008 racing meets at Santa Anita and Golden Gate Fields in jeopardy and this would have a material adverse effect on our financial conditions and operating results.

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 VLTs 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, CDI, 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.

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.

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. Christiansen Capital Advisors LLC estimated global consumer spending on Internet gaming in 2004 at $8.2 million and in the United States alone this spending amounted to $4.2 million in 2004. 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 generally 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.

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        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 has led to, and may continue to lead to, increased competition and may have an adverse effect on the profitability of Santa Anita Park and Golden Gate Fields 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. 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.

Industry controversies 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.

        In general, the pari-mutuel wagering industry is adversely affected by negative information that can erode bettor confidence. Any materially negative information discovered as a result of FBI or any other investigation, and any negative information concerning the internal controls and security of totalisator systems resulting from pari-mutuel wagering activities, such as the fraudulent conduct in connection with certain Pick 6 wagers made on the 2002 Breeders' Cup hosted by Arlington Park in Chicago, Illinois, 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.

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        In January 2005, the FBI announced indictments against 17 individuals alleged to have been engaged in money laundering, tax evasion and an illegal gambling conspiracy, in each case arising out of incidents connected with the horseracing industry. Certain of the alleged criminal acts are purported to have occurred through the facilities of certain rebate wagering operations, known as "rebate shops", that commingle significant amounts of wagers into wager pools hosted by U.S. racetrack operators, including MEC. In addition, one of the indictments arises out of an alleged scheme of doping horses to enhance performance. None of the indictments accused any rebate shops or U.S. racetrack operators of wrongdoing, however, the full impact of this controversy is uncertain at this time.

        A perceived lack of integrity in U.S. horse racing operations or wagering systems could result in a decline in bettor confidence, and would likely lead to a decline in the amount wagered on horse racing. In addition, although we are taking steps to improve wagering systems, security and customer verification, the foregoing controversies may lead to changes in legislation, regulation or industry practices, which could result in a material adverse effect on our business and results of operations.

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.

        We may be subject to claims from customers for fraudulent "winning" wagers. 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.

We periodically enter into agreements with third parties over whom we have limited control but whose conduct could affect the licenses that we hold in various jurisdictions.

        From time to time, we may enter into agreements with third parties over whom we have limited control. Conduct arising from or related to these agreements or joint venture arrangements could have an impact on the various licenses that our subsidiaries hold in multiple jurisdictions. If one of these agreements or joint venture arrangements has an adverse impact on any of these licenses, such adverse impact could have a material adverse impact on us or our financial condition, operating results or prospects, primarily through the impact associated with any loss, denial, suspension or other penalty imposed on such licenses.

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The profitability of our racetracks is partially dependent upon the size and health 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 both short-term and long-term 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 the effects of the Mare Reproductive Loss Syndrome, which caused a large number of mares in Kentucky to sustain late term abortions or early embryonic loss in 2001 and the spread of various debilitating and contagious equine diseases, such as the neurologic form of Equine Herpes Virus-1 and Strangles, which is caused by the organism Streptococcus equi. If any of our tracks are faced with a sustained outbreak of a contagious equine disease, or 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 and, in some cases conduct live racing, 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 or account wagering from hubs located 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, 2005, we employed approximately 5,200 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.

        Legislation enacted in California in 2002 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 adversely affect our operating results.

An earthquake in California could interrupt our operations at Santa Anita Park and Golden Gate Fields, which would adversely impact our cash flow from these racetracks.

        Two of our largest racetracks, Santa Anita Park and Golden Gate Fields, are located in California and are therefore subject to greater earthquake risks than our other operations. 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.

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A severe hurricane hitting the Miami area could interrupt our operations at Gulfstream Park, which would adversely impact our cash flow from this track.

        Gulfstream Park is located in Aventura, Florida, just inland from the Atlantic Ocean. The new construction at Gulfstream Park has been built to withstand severe winds but significant flooding resulting from a hurricane or other tropical storm could result in significant damage to the facility. If the facility sustained serious damage the operations and results would be negatively impacted.

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, including AmTote in which we own a 30% equity interest. 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.

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 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.

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

Redevelopment projects at our racetracks may result in a write down of the value of certain assets and have caused and may continue to cause temporary disruptions of our racing operations.

        We have completed the redevelopment of the racing surfaces and the redevelopment of the grandstand and backstretch facilities at Gulfstream Park in Florida. We have also completed the redevelopment of the dirt racing surfaces and the turf track at Laurel Park. These redevelopments resulted in write-downs in 2004 of $26.3 million and $0.4 million, respectively. The redevelopment at Gulfstream Park has resulted in a racing meet using temporary facilities for 2005 and the re-opening of Laurel Park for its 2004 - 2005 meet was delayed due to construction delays, which also resulted in a loss of a number of racing days.

We may not be able to complete expansion or redevelopment 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 as permitted. 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, Gulfstream Park was forced to run its 2005 meet from temporary facilities which reduced total on-track wagering at Gulfstream Park and attendance in 2005. In addition, we encountered delays in the rebuilding of the racetrack surfaces at Laurel Park, which resulted in a late re-opening of Laurel Park for its 2004 - 2005 meet and a loss of certain race dates. 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 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. For example, the Water Quality Board Permit for the discharge of surface waste water at Santa Anita Park is currently being renewed at Santa Anita Park; such renewal will require certain remedial work to its existing barns and uncovered backstretch areas. The cost of such remediation is currently estimated at $5.0 million over four years. No citations on violations are contemplated; provided that Santa Anita Park proceeds with the remediation work.

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        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. See "Our Business — Environmental Matters".

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 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 or credit facilities, 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 the registered owner 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.

Risks Relating to Our Securities

Our stock price may be volatile, and future issuances or sales of our stock may decrease our stock price.

        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:

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•

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. We have an effective shelf registration statement outstanding that permits us to sell up to $300,000,000 of certain types of debt and/or equity securities. As of March 8, 2006, we have not sold any securities registered under this shelf registration statement;



•

sales or the expectation of sales by MI Developments Inc. of a portion of our shares held by it, 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 or a spin-off or other distribution of our Class A Subordinate Voting Stock by MI Developments Inc. or by certain of our other significant stockholders under our registration statements could depress our stock price.

        As of March 8, 2006, MI Developments Inc. owned, directly or indirectly, 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). In addition, we have an effective 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 4,793,043 shares were initially registered pursuant to that registration statement. In December 2002, we issued $75.0 million aggregate principal amount of our 7¹/4% Convertible Subordinated Notes due December 15, 2009 that are currently convertible into 8,823,529 shares of our Class A Subordinate Voting Stock (subject to certain potential adjustments). In June 2003, we issued $150.0 million aggregate principal amount of our 8.55% Convertible Subordinated Notes due June 15, 2010 that are convertible into 21,276,595 shares of our Class A Subordinate Voting Stock. We have effective registration statements filed with the SEC covering all such shares of our Class A Subordinate Voting Stock issuable upon the conversion of such notes. Sales of a substantial number of shares of our Class A Subordinate Voting Stock, either by MI Developments Inc. or upon conversion of our Convertible Notes could depress the prevailing market price of our Class A Subordinate Voting Stock.

        On August 2, 2005, Greenlight Capital, Inc and certain of its affiliates filed an oppression application in the Ontario Superior Court of Justice against MI Developments Inc. and certain of its current and former directors and officers. The application seeks, among other things, the spin-off or sale by MI Developments Inc. of its holdings of our shares. Any such spin-off, sale or other distribution could depress the prevailing market price of our Class A Subordinate Voting Stock. In particular, such a spin-off could result in our shares being distributed to MI Developments Inc. shareholders, who may not wish to hold our shares and who therefore may quickly sell a large number of our shares on the Nasdaq Stock Market or the TSX, which would likely create large downward pressure on the price of our stock.

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We have no current plans to pay dividends and may never pay dividends.

        We have not paid any dividends to date on our Class A Subordinate Voting Stock and we do not anticipate declaring or paying cash dividends until we generate after-tax profits, if ever. See "Dividends and Dividend Policy".

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 1B.    Unresolved Staff Comments.

        None.

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

        We are not involved in any material litigation nor, to our knowledge, is any material litigation threatened against us, other than routine litigation arising in the ordinary course of business or that which is expected to be covered by insurance.

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.

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Part II

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Trading History

        Our Class A Subordinate Voting Stock is listed and traded on the Nasdaq National Market ("Nasdaq") under the symbol "MECA" and listed and traded on the Toronto Stock Exchange ("TSX") under the symbol "MEC.SV.A". Class A Subordinate Voting Stock commenced trading on Nasdaq on February 23, 2000 and closed at a price of $3.06 per share, and on the TSX 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 Nasdaq and the TSX.

		Nasdaq				TSX
		High		Low		High	Low
2004:
	First Quarter	$	5.46	$	5.20	Cdn. $7.95	Cdn. $6.25
	Second Quarter	$	5.52	$	5.25	Cdn. $8.58	Cdn. $6.40
	Third Quarter	$	6.12	$	5.90	Cdn. $9.40	Cdn. $6.35
	Fourth Quarter	$	5.90	$	5.65	Cdn. $7.66	Cdn. $5.70
2005:
	First Quarter	$	7.12	$	5.35	Cdn. $8.75	Cdn. $6.51
	Second Quarter	$	6.36	$	4.85	Cdn. $7.80	Cdn. $6.06
	Third Quarter	$	7.19	$	5.52	Cdn. $8.56	Cdn. $6.78
	Fourth Quarter	$	7.91	$	5.86	Cdn. $9.25	Cdn. $7.04
2006:
	First Quarter (through March 8, 2006)	$	7.55	$	6.39	Cdn. $8.64	Cdn. $7.35

        On March 8, 2006, the last sale price of the Class A Subordinate Voting Stock as reported by Nasdaq was $6.39 and by the TSX was Cdn. $7.52.

        Our Class B Stock is unlisted and not actively traded.

        The number of security holders of record as of March 8, 2006 was as follows: Class A Subordinate Voting Stock: 601; Class B Stock: two.

Dividends and Dividend Policy

        We have never declared or paid dividends on our Class A Subordinate Voting Stock or Class B Stock and we do not anticipate declaring or paying cash dividends until we generate after-tax profits, if ever. 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. 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 if we generate after-tax profits, subject to applicable law.

Securities Authorized for Issuance Under Equity Compensation Plans

        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 "Executive Compensation—Long-Term Incentive Plan", which Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after our fiscal year end of December 31, 2005.

Recent Sales of Unregistered Securities

        None.

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Issuer Purchases of Equity Securities

        None.

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 years ended December 31, 2001, 2002, 2003, 2004 and 2005 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, 2001 (as filed with our Annual Report for the fiscal year ended December 31, 2001), December 31, 2002 (as filed with our Annual Report for the year ended December 31, 2002), December 31, 2003 (as filed with our Annual Report for the year ended December 31, 2003), December 31, 2004 (as filed with our Annual Report for the year ended December 31, 2004) and December 31, 2005 (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 Financial Condition and Results of Operations" included in this Annual Report.

(U.S. dollars in thousands, except per share figures)

	Years Ended December 31,
Income Statement Data(1):
	2001			2002			2003			2004			2005
Racing and Gaming Revenues	$	459,411		$	522,562		$	664,828		$	662,456		$	599,785
Real Estate and Other Revenues		59,650			26,600			21,770			40,017			24,870
Total Revenues	$	519,061		$	549,162		$	686,598		$	702,473		$	624,655
Racing and Gaming Costs and Expenses	$	427,042		$	500,874		$	648,372		$	673,832		$	622,938
Real Estate and Other Costs and Expenses		37,090			22,605			21,580			26,420			20,311
Pre-development, pre-opening and other		3,240			2,299			8,767			20,508			11,882
Depreciation and amortization		26,194			22,834			31,315			36,616			39,222
Write-down of long-lived and intangible assets		—			17,493			134,856			26,685			—
Write-down of excess real estate		—			5,823			—			—			—
Equity income		—			—			(161	)		(635	)		(1,122	)
Interest expense, net		2,682			709			11,726			21,675			35,132
Income (loss) before income taxes	$	22,813		$	(23,475	)	$	(169,857	)	$	(102,628	)	$	(103,708	)
Net income (loss) from continuing operations	$	13,464		$	(14,880	)	$	(106,378	)	$	(98,851	)	$	(103,110	)
Net income (loss) from discontinued operations		—			485			1,281			3,215			(2,183	)
Net income (loss)	$	13,464		$	(14,395	)	$	(105,097	)	$	(95,636	)	$	(105,293	)
Earnings (loss) per share for Class A Subordinate Voting Stock, Class B Stock and Exchangeable Share:
Basic and Diluted
Continuing operations	$	0.16		$	(0.15	)	$	(0.99	)	$	(0.92	)	$	(0.96	)
Discontinued operations		—			0.01			0.01			0.03			(0.02	)
Earnings (loss) per share	$	(0.16	)	$	(0.14	)	$	(0.98	)	$	(0.89	)	$	(0.98	)
Average number of shares of Class A Subordinate Voting Stock, Class B Stock and Exchangeable Shares outstanding during the year:
Basic		82,930			100,674			107,143			107,323			107,356
Diluted		83,242			100,674			107,143			107,323			107,356

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	Years Ended December 31,
Other Data:	2001			2002			2003			2004			2005
EBITDA from continuing operations(2)	$	51,689		$	68		$	(126,816	)	$	(44,337	)	$	(29,354	)
Capital expenditures(3)		32,278			97,741			102,011			136,229			149,549
Cash provided from (used for)
Operating activities		25,629			20,065			10,910			(40,862	)		(64,904	)
Investing activities		(7,546	)		(226,085	)		(109,032	)		(119,897	)		(145,525	)
Financing activities		(10,159	)		249,175			102,659			119,162			171,440

	At December 31,
Balance Sheet Data(1):	2001		2002		2003		2004		2005
Cash and cash equivalents	$	39,212	$	87,635	$	95,602	$	60,005	$	50,882
Real estate properties and fixed assets, net		574,677		724,870		822,853		913,759		1,012,057
Total assets		857,773		1,256,805		1,322,940		1,403,353		1,414,245
Total debt(4)		85,901		254,558		362,539		486,061		657,030
Shareholders' equity		567,854		720,902		657,054		578,680		459,594

(1)

We prepare our financial statements in accordance with U.S. generally accepted accounting principles, or U.S. GAAP.

(2)

"EBITDA" is not intended to represent cash flows or results of operations in accordance with U.S. 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 acquired.

(4)

Total debt includes bank indebtedness, long-term debt (including long-term debt due within one year), amounts due to parent and convertible subordinated notes.

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), income (loss) before income taxes, net income (loss) and diluted earnings (loss) per share. We measure and present EBITDA because it is a measure that is widely used by analysts and investors in evaluating our operating performance. This measure 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.

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

Reconciliation of Non-GAAP to GAAP Financial Measures

	Years Ended December 31,
	2001		2002			2003			2004			2005
	(U.S. dollars in thousands) (unaudited)
Earnings (Loss) Before Interest, Income Taxes, Depreciation and Amortization ("EBITDA")
Income (loss) before income taxes from continuing operations	$	22,813	$	(23,475	)	$	(169,857	)	$	(102,628	)	$	(103,738	)
Interest expense, net		2,682		709			11,726			21,675			35,132
Depreciation and amortization		26,194		22,834			31,315			36,616			39,222
EBITDA	$	51,689	$	68		$	(126,816	)	$	(44,337	)	$	(29,354	)

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

        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, 2005.

Overview

        Magna Entertainment Corp. ("MEC", "we" or the "Company") owns and operates horse racetracks in California, Florida, Maryland, Texas, Oklahoma, Pennsylvania, Ohio, Michigan, Oregon and Ebreichsdorf, Austria. Based on revenues, MEC is North America's number one owner and operator of horse racetracks, and is 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 (harness racing) racetrack and one racetrack that runs both thoroughbred and standardbred meets, as well as the simulcast wagering venues at these tracks. In October 2005, we completed the sale of Flamboro Downs, a standardbred racetrack and in September 2005, we completed the sale of our interest in Maryland-Virginia Racing Circuit, Inc. ("MVRC"), which managed the operations of Colonial Downs, a thoroughbred and standardbred racetrack. On December 31, 2004, we ceased operations at Bay Meadows and Multnomah Greyhound Park as these were operations in leased facilities and the leases were not renewed for 2005. In addition, we operate off-track betting ("OTB") facilities, a United States national account wagering business known as XpressBet®, which permits customers to place wagers by telephone and over the Internet on horse races at over 100 North American racetracks and internationally on races in Australia, South Africa and Dubai and a European account wagering service known as MagnaBet™. We also own and operate HorseRacing TV™ ("HRTV™"), a television network focused on horse racing that we initially launched on the Racetrack Television Network ("RTN"). HRTV™ is currently distributed to more than 12 million cable and satellite TV subscribers. RTN, in which we have a minority interest, was formed to telecast races from our racetracks and other racetracks, via private direct to home satellite, to paying subscribers. In 2004, we launched RaceONTV™ in Europe to distribute North American racing content from our racetracks and other U.S. racetracks that have agreed to participate in our international distribution network to locations outside North America. We also own a 30% equity interest in AmTote International, Inc. ("AmTote"), a provider of totalisator services to the pari-mutuel industry. To support certain of our thoroughbred racetracks, we own and operate thoroughbred training centers situated near San Diego, California, in Palm Beach County, Florida and in the Baltimore, Maryland area. We also own and operate production facilities in Austria and in North Carolina for StreuFex™, a straw-based horse bedding product.

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        In addition to our racetracks, we own a significant real estate portfolio, which includes two golf courses and related recreational facilities as well as three residential developments in various stages of development in Austria, the United States and Canada. In November 2005, we announced that we had entered into an agreement to sell our residential development property in the United States and the proposed sale is subject to the completion of due diligence by the purchaser by April 3, 2006 and a closing by April 28, 2006. We are also working with potential developers and strategic partners for the development of leisure and entertainment or retail-based real estate projects on the excess land surrounding, or adjacent to, certain of our premier racetracks. We have entered into a Limited Liability Company Agreement with Forest City Enterprises, Inc. with respect to the planned development of "The Village at Gulfstream Park™", a mixed-use retail, entertainment and residential project on a portion of the Gulfstream Park property. While we are exploring the development of some of our real estate, we intend to continue to sell our remaining Non-Core Real Estate (which had a book value of $2.5 million as of December 31, 2005) and may also sell our residential developments and certain other real estate in order to generate additional capital for our racing business.

        The amounts described below are based on our consolidated financial statements, which we prepare in accordance with United States generally accepted accounting principles ("GAAP").

Recent Developments and Initiatives

        On February 27, 2006, we announced the formation of PariMax Inc., a new company to oversee the development of our various electronic distribution platforms including XpressBet®, HRTV™, MagnaBet™, RaceONTV™ and our 30% stake in AmTote. PariMax will focus on the development of complete wagering solutions and will concentrate on serving the global wagering market by developing product lines which meet the needs of both distribution partners and end consumers worldwide.

        On January 9, 2006, we announced that we had entered into a memorandum of understanding with Churchill Downs Incorporated ("CDI") and Racing UK, a media rights company and subscription television channel owned by 31 British racecourses, for media rights and to develop a subscription television channel called "Racing World" to broadcast races from MEC and CDI racetracks, as well as other North American and international racetracks, into the United Kingdom and Ireland. Racing World would be the exclusive distributor of MEC and CDI wagering rights to the in-home market, and will also aggregate other racetracks for distribution. The new international television channel would bring the best North American and international racing to British and Irish viewers. The subscription channel launched in March 2006.

        On December 8, 2005, we announced that legislation authorizing the operation of slot machines within existing, licensed Broward County, Florida pari-mutuel facilities that have conducted live racing or games during each of 2002 and 2003 had been passed by the Florida Legislature. Our Gulfstream Park racetrack, located in Broward County, is a licensed pari-mutuel facility that has conducted live racing during each of 2002 and 2003. Under the legislation, a qualifying facility will be entitled to offer up to 1,500 Class III slot machines, subject to a state tax rate of 50% on gross gaming revenues ("GGR"). All proceeds from that tax will be used to supplement Florida education. Each facility will also be subject to a $3.0 million annual license fee intended to cover administrative costs. In addition, each facility has entered into separate contracts under which Broward County and the city in which the facility conducts pari-mutuel gaming will receive an aggregate of 3.2% of that facility's GGR not exceeding $250.0 million and 4.5% of that facility's GGR in excess of $250.0 million. On January 4, 2006, the Governor of Florida signed the legislation into law and the Division of Pari-mutuel Wagering will oversee the conduct of slot machine operations and will be required to develop the governing rules and regulations within 180 days, failing which the facilities will be entitled to operate pursuant to temporary licenses. We are currently considering redevelopment opportunities with respect to a slot facility at Gulfstream Park and, provided that we are able to obtain adequate funding and are able to reach agreements with the horsemen and breeders, we expect the slot facility to be operational during 2006.

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        On November 21, 2005, we opened a gaming facility with 650 electronic gaming machines at Remington Park, our Oklahoma City racetrack. Under the terms of the legislation, gaming operations at the racetrack are permitted for up to 18 hours per day, not to exceed 106 hours per week. The distribution of revenues from the racetrack's electronic gaming operations will vary based on the annual gross revenues of the racetrack from gaming less all monetary payouts ("Adjusted Gross Revenues"). The legislation allocates between 10% and 30% of the Adjusted Gross Revenues to the State, primarily for the funding of education, between 20% and 30% for the benefit of the horsemen and the remaining 50% to 60% to the racetrack, out of which the racetrack operator will pay its capital and operating costs. Remington Park may be eligible for an additional 50 machines in each of 2008 and 2010. It is anticipated that the gaming facility will significantly improve Remington Park's operating results and contribute to the horse racing industry through increased purses.

        On November 9, 2005, we announced that we had entered into a share purchase agreement with PA Meadows, LLC, a company jointly owned by William Paulos and William Wortman, controlling shareholders of Millennium Gaming, Inc. and a fund managed by Oaktree Capital Management, LLC ("Oaktree" and together, with PA Meadows, LLC, "Millennium-Oaktree"), providing for the acquisition by Millennium-Oaktree of all of the outstanding shares of Washington Trotting Association, Inc., Mountain Laurel Racing, Inc. and MEC Pennsylvania Racing, Inc., each wholly-owned subsidiaries through which we currently own and operate The Meadows, our standardbred racetrack in Pennsylvania. The sale is scheduled to close following receipt of approval from the Pennsylvania Harness Racing Commission, receipt by The Meadows of a Conditional Category 1 slot license pursuant to the Pennsylvania Race Horse Development and Gaming Act, and satisfaction of certain other customary closing conditions. Under the terms of the share purchase agreement, Millennium-Oaktree will pay the Company $225.0 million and we will continue to manage the racing operations at The Meadows on behalf of Millennium-Oaktree pursuant to a minimum five-year racing services agreement. The purchase price is payable in cash at closing, subject to a holdback amount of $39.0 million, which will be released over time in accordance with the terms of the share purchase agreement.

        On November 3, 2005, we announced that one of our subsidiaries that owns approximately 157 acres of excess real estate in Palm Beach County, Florida (our residential development property in the United States previously referred to) had entered into an agreement to sell the real property to Toll Bros, Inc., a Pennsylvania real estate development company for $51.0 million in cash. The proposed sale is subject to the completion of due diligence by the purchaser by April 3, 2006 and a closing by April 28, 2006.

        On October 19, 2005, we announced that we had completed the sale of all of the outstanding shares of Ontario Racing Inc. ("ORI"), a wholly-owned subsidiary of the Company, which owned and operated Flamboro Downs, a standardbred racetrack and site holder for slot machines operated by the Ontario Lottery and Gaming Corporation, located in Hamilton, Ontario, Canada. The purchaser, Great Canadian Gaming Corporation ("GCGC"), paid aggregate consideration of Cdn. $50.7 million and US $23.6 million, in cash and by the assumption of ORI's existing debt. In accordance with the terms of our bridge loan agreement with a subsidiary of our parent company, MI Developments Inc. ("MID") and the terms of our senior secured revolving credit facility, we were required to use the net proceeds from the sale of Flamboro Downs to pay down the principal amount owing under the two loans in equal portions. However, both MID and the lender under the senior secured revolving credit facility agreed to mutually waive this repayment requirement, subject to certain other amendments, including provisions for repayment upon closing of certain future asset sales.

        On September 30, 2005, we announced the completion of the sale to Colonial Downs, L.P. of all of the outstanding shares of MVRC, our indirect subsidiary, which managed the operations of Colonial Downs, a thoroughbred and standardbred racetrack located in New Kent, Virginia pursuant to a management agreement. On closing we received cash consideration of $6.8 million, net of transaction costs, and a one-year interest bearing note in the principal amount of $3.0 million.

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        On July 27, 2005, we amended and extended our $50.0 million senior secured revolving credit facility. The primary amendments to the agreement included extending the term to July 31, 2006, the financial covenants are now earnings before interest, taxes, depreciation and amortization ("EBITDA") maintenance tests relating to Santa Anita Park and Golden Gate Fields, the addition of mandatory repayment provisions and interest rates have been changed such that borrowings are now available by way of U.S. Base Rate loans plus 3% or the London Interbank Offered Rate ("LIBOR") plus 4%. We have also agreed with the lender of this facility that upon closing of certain future asset sales, we will use such proceeds to repay, in part, this facility.

        On July 22, 2005, we announced that as part of our strategic plan, our Board of Directors approved a Recapitalization Plan which is intended to recapitalize our balance sheet over the following 12 months through the sale of certain non-strategic assets, with proceeds realized from those asset sales being applied to reduce debt. The Recapitalization Plan also contemplates possible partnerships to pursue alternative gaming opportunities at our racetracks and the possible raising of equity in 2006. The proceeds of such an equity offering would be used to further reduce debt and for general corporate purposes. In connection with this Recapitalization Plan, on July 27, 2005, we entered into two new loan arrangements with MID. The first loan effectively replaced the existing $77.0 million construction loan commitment for The Meadows racetrack and slots facility in Pennsylvania with a loan of up to $34.2 million to fund the development, design and construction of the alternative gaming facility at Remington Park in Oklahoma. The second loan is for a non-revolving bridge loan facility of up to $100.0 million. In addition, certain terms of the existing $115.0 million Gulfstream Park loan were amended.

        Initiatives related to the passage of legislation permitting alternative gaming at racetracks, such as slot machines, video lottery terminals and other forms of non-pari-mutuel gaming, are actively underway in a number of states in which we operate. The passage of such legislation can be a long and uncertain process. In addition, should alternative gaming legislation be enacted in any jurisdiction, there are a number of factors which will determine the viability and profitability of such an operation at our racetracks. These factors include, without limitation, the income or revenue sharing terms contained in the legislation and applicable licenses, the conditions governing the operation of the gaming facility, the number, size and location of the other sites which are licensed to offer alternative gaming in competition with the Company, the availability of financing on acceptable terms and the provisions of any ongoing agreements with the parties from whom we purchased the racetrack in question. Alternative gaming legislation was passed in each of Pennsylvania and Oklahoma in 2004 and in Florida in early 2006.

        The Pennsylvania Race Horse Development and Gaming Act was passed and signed into legislation in July 2004. This legislation authorizes the granting of slot machine licenses to up to seven Category 1 licensed facilities (i.e. racetracks) and up to five Category 2 licensed facilities (i.e. non-tracks), along with limited licenses to up to two Category 3 licensed facilities (i.e. resort hotels). Those racetracks and non-track facilities, which successfully apply for slot machine licenses, will be permitted to operate between 1,500 and 3,000 slot machines each, subject to future expansion of up to 2,000 additional machines per facility upon the approval of the Pennsylvania Gaming Control Board ("PGCB"). The licensed resort facilities will be permitted to operate, on a limited basis, up to 500 machines each. Each racetrack slot machine licensee in Pennsylvania will be required to pay 34% of its daily gross revenues from gaming less all monetary payouts ("Gross Terminal Revenues") to the State Gaming Fund, 4% of its Gross Terminal Revenues as a local share assessment, 5% of its Gross Terminal Revenues to the Pennsylvania Gaming Economic Development and Tourism Fund and a maximum of 12% of its Gross Terminal Revenues to a pool (the "Horsemen Pool") for distribution to each racetrack's horsemen, in the form of purses and other awards. Non-track and resort facilities will be bound to make the same percentage distributions but, since they do not conduct horse racing, they will contribute to the Horsemen Pool that portion of their Gross Terminal Revenues which is equal, on a pro rata basis, to the amount contributed to the Horsemen Pool by Category 1 licensees. The Horsemen Pool will then be allocated among the horsemen at each of the Category 1 licensed facilities, with the intention of providing payments to the horsemen at each racetrack, which are equivalent to 18% of that track's Gross Terminal Revenues. All racetrack licensees offering slot machines in Pennsylvania must pay an upfront fee of $50.0 million and will be required to commit a minimum of $5.0 million over a five year period, and a minimum of $0.25 million annually for five years thereafter, for improvements and maintenance of its backstretch. The legalization of alternative gaming at Pennsylvania racetracks is anticipated to have a significant positive impact on purses and on the Pennsylvania horse racing industry in general. We have submitted an application for a Conditional Category 1 slot license in connection with and reflecting, the transaction announced on November 9, 2005 with Millenium-Oaktree as noted above.

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        The redevelopment of Gulfstream Park, which commenced in 2004, continued through 2005. The project includes significant modifications and enhancements to the racing surfaces and stable area, including the construction of a new, wider turf course, which was completed prior to the start of the 2005 race meet. The project also includes the construction of a modern clubhouse/grandstand offering an array of restaurants and entertainment facilities. The capital budget for the redevelopment of Gulfstream Park has been increased from $145.0 million to $171.5 million which is partially financed through the $115.0 million Gulfstream Park project financing facility from MID. The most significant portion of the budget increase relates to the construction of the clubhouse as a result of additional material and labor costs, changes in scope and damage and delays resulting from recent hurricanes. Funding for the additional construction costs at Gulfstream Park will be provided pursuant to a loan of up to $13.5 million from BE&K, Inc., the parent company of Suitt Construction Co. Inc., the general contractor for the Gulfstream Park redevelopment project and from our general corporate funds, including the net proceeds from the sale of Flamboro Downs. As security for the loan from BE&K, Inc., certain of our subsidiaries that own land in Ocala, Florida will provide a guarantee to BE&K, Inc., which will be secured by a mortgage over the land in Ocala. On November 17, 2005, our subsidiary that owns Gulfstream Park signed a loan agreement with BE&K, Inc., which had not been drawn upon as at December 31, 2005. Since the project included the demolition of a substantial portion of the existing buildings and related structures, temporary facilities were erected to house the 2005 race meet and best efforts were made to minimize the disruption to the live racing operations, however, as with any disruption to the racing operations during a race meet, revenues and earnings generated during the 2005 race meet were negatively impacted compared to prior year results. On October 24, 2005, South Florida was struck by Hurricane Wilma and Gulfstream Park sustained damage. Despite hurricane damage, Gulfstream Park opened for its 2006 live race meet on January 4, 2006. Racing and patron areas were sufficiently complete to open the meet. Construction is on-going and best efforts are being made to complete the facility as soon as possible and minimize interference with the 2006 live race meet. Interference with the racing operations will result in a reduction in revenues and earnings generated at Gulfstream Park during the meet.

        On May 17, 2005, one of our wholly-owned subsidiaries was awarded a license to construct and operate a horse racetrack in the Greater Detroit area. The license is subject to a number of conditions, including among others, the commencement of construction of a racetrack at the proposed site no later than September 1, 2007 and the commencement of live racing no later than October 1, 2009. 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 and less than 25 miles from the center of the business districts of both Detroit and Ann Arbor. In October 2003, a subsidiary of MID purchased vacant land in Romulus, Michigan, which may serve as the site of the proposed racetrack. In September 2004, one of our subsidiaries entered into an option agreement with MID and one of its subsidiaries to acquire 100% of the shares of the MID subsidiary that owns the land in Romulus, Michigan for $33.5 million. On February 20, 2006, the option was extended to April 3, 2006. If we are unable to renew or further extend this option agreement with MID, then we may incur a write-down of certain costs that have been incurred with respect to this specific property. At December 31, 2005, we have incurred approximately $2.9 million of costs related to this property and in pursuit of the license.

        The Maryland Jockey Club is a party to an agreement (the "Maryland Operating Agreement") with Cloverleaf Enterprises, Inc., the current owner of Rosecroft Raceway, a standardbred track located in Prince George's County in Maryland. The Maryland Operating Agreement replaced a previous agreement (the "Maryland Revenue Sharing Agreement"), which was effective as of January 1, 2000 and expired on April 18, 2004. The Maryland Operating Agreement has been in effect since June 9, 2004 and expired on April 30, 2005, however, both parties continue to informally operate under its terms until a new agreement can be finalized. Under the Maryland Operating Agreement, the parties have agreed to make a good faith effort to reach a long-term agreement on cross-breed simulcasting and OTB facilities in the State of Maryland. Without an arrangement similar in effect to the Maryland Revenue Sharing Agreement or the Maryland Operating Agreement, there would be a material decline in the revenues, earnings and purses of The Maryland Jockey Club. At this time, we are uncertain as to the likelihood of a renewal of this agreement on comparable terms.

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        In October 2003, we signed a Letter of Intent to explore the possibility of a joint venture between Forest City Enterprises, Inc., ("Forest City") and various MEC affiliates, anticipating the ownership and development of a portion of the Gulfstream Park racetrack property. Forest City has paid $2.0 million to MEC in consideration for their right to work exclusively with MEC on this project. This deposit has been included in other accrued liabilities on our consolidated balance sheets. In 2005, a Limited Liability Company Agreement was entered into with Forest City concerning the planned development of "The Village at Gulfstream Park™". The Limited Liability Company Agreement contemplates the development of a mixed-use project consisting of residential units, parking, restaurants, hotels, entertainment, retail outlets and other commercial uses on a portion of the Gulfstream Park property. Under the Limited Liability Company Agreement, Forest City is required to contribute up to a maximum of $15.0 million as an initial capital contribution. The $2.0 million deposit received to date from Forest City shall constitute the final $2.0 million of the initial capital contribution. We are obligated to contribute 50% of any and all equity amounts in excess of $15.0 million as and when needed, however, to December 31, 2005, we have not made any such contributions. In the event the development does not proceed, we may have an obligation to fund a portion of those pre-development costs incurred to that point in time. The Limited Liability Company Agreement further contemplates additional agreements including a ground lease, a reciprocal easement agreement, a development agreement, a leasing agreement and a management agreement to be executed in due course and upon satisfaction of certain conditions.

        In April 2004, we signed a Letter of Intent to explore the possibility of joint ventures between Caruso Affiliates Holdings and certain of our affiliates to develop certain undeveloped lands surrounding Santa Anita Park and Golden Gate Fields racetracks. Upon execution of this Letter of Intent, we agreed to fund 50% of approved pre-development costs in accordance with a preliminary business plan for each of these projects, with the goal of entering into Operating Agreements by May 31, 2005, which has been extended by mutual agreement of the parties to March 29, 2006. To date, we have expended approximately $1.8 million on this initiative, of which $1.4 million was paid during 2005. These amounts have been recorded as fixed assets on our consolidated balance sheets. We are continuing to explore these developmental opportunities, but to December 31, 2005 we have not entered into definitive Operating Agreements on either of these potential developments. Under the terms of the Letter of Intent, we may be responsible to fund additional costs, however to December 31, 2005, we have not made any such payments.

        The lease on our Bay Meadows site expired December 31, 2004, and as a result we are continuing to explore alternative venues, including vacant land that we purchased in Dixon, California, for future development of a thoroughbred racetrack with an associated retail shopping and entertainment complex. This project is still in the early stages of planning and is subject to regulatory and other approvals.

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Racing Operations

        Information about our racing operations is set forth below:

			Year ended December 31, 2005
Track / Operation(1)	Date Acquired	Local Market Population(2) (in millions)	Racing Season	Live Racing Days	Total Handle(3) (in millions)			Revenue(3) (in millions)
Santa Anita Park  — Los Angeles	Dec. 1998	10.9	Jan. 1 to Apr. 18 and Dec. 26 to 31	85	$	989.3		$	138.6
			The Oak Tree Meet Sep. 28 to Nov. 6	31		261.0	(4)
Gulfstream Park — Miami	Sep. 1999	4.3	Jan. 3 to Apr. 24	86		797.4			72.4
Laurel Park — Baltimore	Nov. 2002	6.6	Jan. 26 to Apr. 17 and Sep. 7 to Dec. 31	135		470.8			57.7
Golden Gate Fields — San Francisco	Dec. 1999	5.2	Jan. 1 to Jan. 30, May 11 to Jun. 19 and Oct. 19 to Dec. 31	96		457.6			54.1
Pimlico Race Course — Baltimore	Nov. 2002	5.2	Jan. 5 to Jan. 17, Apr. 20 to Jun. 12 and Aug. 12 to Aug. 26	59		334.2			53.6
Lone Star Park — Dallas	Oct. 2002	5.1	Apr. 14 to Jul. 17 and Sep. 30 to Nov. 27	100		333.5			64.8
The Meadows — Pittsburgh	Apr. 2001	2.8	All year	206		247.9			38.1
Thistledown — Cleveland	Nov. 1999	3.0	Apr. 7 to Dec. 23	185		234.0			31.2
XpressBet® — National	Apr. 2001	N/A	All year	N/A		135.1			30.3
Remington Park — Oklahoma City	Nov. 1999	1.1	Mar. 19 to Jun. 5 and Aug. 5 to Nov. 27	98		106.5			25.0
Portland Meadows — Portland	Jul. 2001	2.0	Jan. 1 to Apr. 24 and Oct. 16 to Dec. 31	70		68.9			16.2
Great Lakes Downs — Muskegon, Michigan	Feb. 2000	1.2	Apr. 25 to Nov. 5	100		62.6			5.9
Magna Racino™ — Ebreichsdorf, Austria	Apr. 2004	2.5	Mar. 13 to Nov. 20	45		4.5			8.2
TOTAL:								$	596.1

(1)

Excludes Colonial Downs, which is owned by a third party whose racing operations were managed by The Maryland Jockey Club to September 30, 2005 and Flamboro Downs, a standardbred racetrack and site holder for slot machines operated by the Ontario Lottery and Gaming Corporation, which was sold on October 19, 2005. Both of these operations are reported as discontinued operations in our consolidated financial statements.

(2)

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

(3)

Amounts comprising total handle and revenue include inter-company transactions for our racetracks, account wagering operations and separate OTB facilities, for both our importing and our exporting facilities.

(4)

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

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        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 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 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, 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 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 (i.e. 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 XpressBet® or MagnaBet™, our account wagering programs.

        Wagers placed at our racetracks or our OTB facilities on live racing conducted at one of our racetracks produce more net 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.

        We also generate gaming revenues from our Remington Park gaming operations. Gaming revenues represent the net win earned on slot wagers. Net win is the difference between wagers placed and winning payouts to patrons.

        We also generate non-wagering revenues consisting primarily of food and beverage sales, program sales, admissions income, parking revenues, sponsorship revenues and rental fees and other.

        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. Such factors include, but are not limited to: attendance at our racetracks, inter-track simulcast locations and OTB facilities; activity through our XpressBet® and MagnaBet™ systems; the number of races conducted at our racetracks and at racetracks whose signals we import 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.

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        Set forth below is a list of the total live race days by racetrack for the years ended December 31, 2005, 2004 and 2003:

	Years ended December 31,
	2005	2004	2003
Largest Racetracks
Santa Anita Park(1)	85	84	86
Gulfstream Park	86	91	89
Golden Gate Fields	96	105	106
Bay Meadows(2)	—	104	105
Laurel Park	135	58	142
Lone Star Park	100	81	103
Pimlico Race Course	59	137	71
	561	660	702
Other Racetracks(3)
The Meadows	206	206	207
Thistledown	185	183	188
Remington Park	98	93	82
Portland Meadows	70	78	86
Great Lakes Downs	100	118	118
Magna Racino™	45	50	—
	704	728	681
Total	1,265	1,388	1,383

(1)

Excludes The Oak Tree Meet which consisted of 31 days in 2005, 26 days in 2004 and 32 days in 2003.

(2)

The lease on the Bay Meadows site expired December 31, 2004.

(3)

Flamboro Downs had 203 live race days to the date of its sale on October 19, 2005, compared to 258 live race days in the full year 2004 and 188 in 2003 after our acquisition in April 2003. The results of Flamboro Downs have been reported as discontinued operations in our consolidated financial statements.

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

        Our operating costs principally include 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, license fees and insurance premiums.

Seasonality

        Most of 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 our racing revenues and operating results for any other quarter or for the year as a whole. Because five of our largest racetracks, Santa Anita Park, Gulfstream Park, Lone Star Park at Grand Prairie, Pimlico Race Course 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 operating loss. This seasonality has resulted in large quarterly fluctuations in revenue and operating results.

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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 under development, or that we are holding for development, either as a racetrack or other project;

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 are holding for sale.

        As of December 31, 2005, the aggregate net book values of our real estate properties is as follows:

	$ millions
Revenue-Producing Racing Real Estate	730.1
Excess Racing Real Estate	96.3
Development Real Estate	43.8
Revenue-Producing Non-Racing Real Estate	77.3
Non-Core Real Estate	2.5
	950.0

        Included in our Excess Racing Real Estate is land adjacent to several of our racetracks, Santa Anita Park, Gulfstream Park, Lone Star Park at Grand Prairie, Laurel Park, Pimlico Race Course and Magna Racino™, totaling approximately 786 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.

        Our Development Real Estate, which is largely undeveloped, includes approximately 27 acres of land in Oberwaltersdorf, Austria, located approximately 20 miles south of Vienna, Austria; approximately 800 acres of land in upstate New York; approximately 260 acres of land in Dixon, California, located approximately 20 miles southwest of Sacramento; approximately 491 acres of land in Ocala, Florida and approximately 21 acres of land in Aurora, Ontario, adjacent to one of our golf courses, which is currently under development for a residential community.

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        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 tennis club, and a clubhouse which contains a dining facility, a pro shop and a fitness facility. The Magna Golf Club, an 18-hole golf course in Aurora, Ontario, adjacent to our and Magna's 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.

Critical Accounting Policies

        The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates that affect: the amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. We base our estimates on historical experience and various other assumptions that are believed to be reasonable and prudent in the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. On an ongoing basis, we evaluate our estimates. However, actual results could differ from those estimates under different assumptions or conditions.

        Our significant accounting policies are included in Note 1 to our consolidated financial statements. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Impairment of Intangible and Long-Lived Assets

        Our most significant intangible assets are racing licenses which represent the value attributed to licenses to conduct race meets acquired through our acquisition of racetracks. In accordance with Financial Accounting Standards Board Statement No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets", intangibles 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, less charges for contributory assets assumed to be owned by third parties is less than the carrying value of the racing license.

        Under Financial Accounting Standards Board Statement No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-lived Assets", our long-lived assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If such events or changes in circumstances are present, we assess 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.

        We believe the accounting estimates related to intangibles and long-lived asset impairment assessments are "critical accounting estimates" because they are subject to significant measurement uncertainty and are susceptible to change as management is required to make forward looking assumptions regarding cash flows and business operations. Any resulting impairment loss could have a material impact on our consolidated operating results and on the amount of assets reported on our consolidated balance sheets.

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Future Income Tax Assets

        At December 31, 2005, we recorded future tax assets (net of related valuation allowances) in respect of loss carryforwards and other deductible temporary differences. We evaluate quarterly the realizability of our future tax assets by assessing our valuation allowance and by adjusting the allowance as necessary. The assessment considers forecasts of future taxable income and tax planning strategies that could be implemented to realize the future tax assets. Should operations not yield future taxable income or if tax planning strategies could not be implemented, then there could be a material impact on our consolidated tax expense or recovery and on the amount of future tax assets reported on our consolidated balance sheets.

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. The pronouncement 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 the intrinsic value method under APB Opinion No. 25 ("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. We account for stock based compensation under the intrinsic value method and provide pro-forma disclosure as required by SFAS 123. On December 16, 2004, the Financial Accounting Standards Board ("FASB") issued FASB Statement No. 123 (revised 2004), Share-Based Payment ("Statement 123(R)"), which is a revision of SFAS 123. Statement 123(R) supersedes APB 25 and amends FASB Statement No. 95, Statement of Cash Flows. Generally, the approach in Statement 123(R) is similar to the approach described in SFAS 123, however, Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the statement of operations based on their fair values. Pro-forma disclosure is no longer an alternative. Accordingly, the adoption of Statement 123(R)'s fair value method will have a significant impact on the results of operations, although it will have no impact on the Company's overall financial position. The impact of adoption of Statement 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future, however, had the Company adopted Statement 123(R) in prior periods, the impact of that standard would have approximated the impact of Statement 123 as described in the disclosure of pro-forma net loss and loss per share in Note 16 of our consolidated financial statements. Statement 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. Statement 123(R) must be adopted no later than January 1, 2006. The Company will be implementing the revised standard in the first quarter of 2006 and expects that the impact will be consistent with the pro-forma results that have been previously disclosed in our consolidated financial statements.

Litigation

        In the ordinary course of business, we may be contingently liable for litigation and claims with, among others, 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 our financial position.

Off-Balance Sheet Arrangements

        At December 31, 2005, we do not have any material off-balance sheet arrangements which should be disclosed.

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Related Party Transactions

        Refer to Note 20 to our 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, 2005, 2004 and 2003.

Year Ended December 31, 2005 Compared to December 31, 2004

Racing and gaming operations

        In 2005, we operated our largest racetracks for 99 fewer live race days compared to the prior year, primarily due to the expiration of the Bay Meadows lease and fewer live race days at Golden Gate Fields and Gulfstream Park due to reductions in awarded live race days, partially offset by the resumption of the quarter horse meet at Lone Star Park in 2005, which was cancelled in the prior year as the track hosted the Breeders' Cup™ in 2004. Our other racetracks operated for 24 fewer live race days in 2005, compared to the prior year, primarily due to a desired reduction in race days at Great Lakes Downs.

        In 2005, revenues from our racing and gaming operations decreased $62.7 million or 9.5% to $599.8 million, compared to $662.5 million in 2004, primarily due to:

• California revenues below the prior year by $69.3 million or 26.2% due to:

—
the expiry of the Bay Meadows lease on December 31, 2004;

—
nine fewer live race days at Golden Gate Fields due to a change in the racing calendar; and

—
lower levels of handle and gross wagering at Santa Anita Park as a result of significant rainfall in Southern California in the first quarter of 2005, which resulted in the cancellation of a live race day and significantly reduced the number of races on the turf course. Turf course races typically generate higher levels of wagering;

•
Florida revenues below the prior year by $5.5 million or 6.9% due to the disruption of the racing operations as a result of the redevelopment project at Gulfstream Park. The live race meet conducted in the first half of 2005 operated out of temporary facilities and best efforts were made to minimize the negative impact of the disruption;

•
Northern U.S. operations below the prior year by $1.5 million or 1.6% due primarily to the expiry of the Multnomah Greyhound Park lease on December 31, 2004;

•
Southern U.S. operations below the prior year by $1.2 million or 1.3% due to reductions in attendance and wagering at Lone Star Park due to increased competition from nearby casinos, decreased horse population as a result of intense competition for horses and higher purse offerings at neighbouring tracks, partially offset by increases in gaming revenues at Remington Park with the opening of its casino facility in late November 2005;

•
Increased revenues in our Maryland operations, where revenues were above the prior year by $8.7 million or 8.5% due to a record setting Preakness® in terms of admissions, handle and wagering and as a result of the new turf course at Laurel Park, which since being available for racing, has resulted in increased field sizes and increased handle;

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• Increased revenues in our European operations, where revenues were above the prior year by $5.4 million or 72.8% due to the opening of the Magna Racino™ in the second quarter of 2004 and increased wagering activity through MagnaBet™; and

•
Increased revenues in our technology operations, where revenues were above the prior year period by $1.4 million or 4.9% due to increased wagering activity through XpressBet® and additional advertising revenues generated by HRTV™.

        Pari-mutuel purses, awards and other decreased $28.1 million or 8.5% to $303.6 million in 2005, from $331.8 million in 2004, primarily due to the expiry of the Bay Meadows and Multnomah Greyhound Park leases, fewer live race days at Golden Gate Fields and decreased wagering at Santa Anita Park, Gulfstream Park and Lone Star Park for reasons noted above, partially offset by an increase in pari-mutuel taxes at XpressBet® as a result of a $1.6 million provision for state pari-mutuel taxes for 2003, 2004 and 2005, which was recorded in the current year. As a percentage of pari-mutuel wagering revenues, pari-mutuel purses, awards and other increased from 60.7% in 2004 to 62.2% in 2005, primarily due to lower pari-mutuel wagering revenues and the increase in pari-mutuel taxes at XpressBet® as noted above.

        Gaming taxes, purses and other were $2.6 million in 2005 with no prior year comparative due to the opening of the casino facility at Remington Park in late November 2005.

        Operating costs in our racing and gaming operations decreased $22.8 million to $253.5 million in 2005, from $276.3 million in 2004, primarily due to:

• a decrease of $23.3 million in our California operations primarily as a result of the expiry of the Bay Meadows lease;

•
a decrease of $2.9 million in our Northern U.S. operations primarily due to the expiry of the Multnomah Greyhound Park lease on December 31, 2004;

•
a decrease of $1.7 million in our Southern U.S. operations primarily due to reduced marketing costs and other expense reductions at Lone Star Park, partially offset by increases in operating costs related to the casino facility at Remington Park which opened in late November 2005; partially offset by

•
an increase of $3.1 million in our Maryland operations primarily due to a $1.9 million provision for an amount due from the horsemen with respect to their contribution to the costs of simulcasting in 2004 and 2005 as well as increased costs incurred to generate additional revenues at the Preakness®; and

•
an increase of $3.2 million in our Florida operations as cost savings and expense reductions were offset by $5.7 million of amortization relating to the temporary facility construction costs at Gulfstream Park, which were amortized over Gulfstream Park's 2005 race meet.

As a percentage of total racing and gaming revenues, operating costs increased from 41.7% in 2004 to 42.3% in 2005, primarily as a result of the decline in racing revenues.

        General and administrative expenses in our racing and gaming operations decreased $2.6 million to $63.1 million in 2005, from $65.7 million in 2004, primarily due to:

• a decrease of $5.4 million as a result of the expiry of the Bay Meadows lease; offset by

•
an increase of $2.3 million in our European operations due to the start-up during 2004 of certain of our European operations compared to a full year of operations in 2005; and

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• increases at several of our facilities as a result of increased health and benefit costs.

        As a percentage of total racing and gaming revenues, general and administrative expenses increased from 9.9% in 2004 to 10.5% in 2005 due primarily to the decline in racing revenues.

Real estate and other operations

        Revenues from real estate and other operations decreased $15.1 million from $40.0 million in 2004 to $24.9 million in 2005. The decrease in revenues is primarily attributable to:

• in 2004, four Non-Core Real Estate properties were sold which generated revenues of $16.4 million and income before income taxes of $9.6 million, whereas in 2005, there were no sales of Non-Core Real Estate; partially offset by

•
an increase in golf and other revenues of $1.2 million primarily due to increased revenues at our Magna Golf Club as a result of increased membership activity.

Predevelopment, pre-opening and other costs

        Predevelopment, pre-opening and other costs decreased $8.6 million from $20.5 million in 2004 to $11.9 million in 2005. Predevelopment, pre-opening and other costs of $11.9 million in 2005 represent costs of $6.3 million incurred in the pursuit of alternative gaming opportunities, $2.2 million of pre-opening costs incurred in the opening of the Remington Park casino facility, $1.0 million of legal costs relating to the protection of our distribution rights, $0.6 million on the write-off of information technology costs which were determined to have no future benefit, $0.4 million of costs relating to the Laurel Park redevelopment and $1.4 million of costs relating to development initiatives undertaken to enhance our racing operations. In 2004, the predevelopment, pre-opening and other costs of $20.5 million represented costs of $13.5 million pursuing alternative gaming opportunities, $2.7 million on the development of a simplified wagering machine, $1.3 million of costs relating to the Laurel Park redevelopment and $3.0 million of costs relating to developmental initiatives undertaken to enhance our racing operations.

Depreciation and amortization

        Depreciation and amortization increased $2.6 million from $36.6 million in 2004 to $39.2 million in 2005, primarily due to increased depreciation in our European operations primarily at the Magna Racino™, which commenced operations and depreciation of fixed assets on April 4, 2004 and increased depreciation at certain of our facilities on recent fixed asset additions.

Interest income and expense

        Our net interest expense in 2005 increased $13.4 million to $35.1 million from $21.7 million in 2004. The higher net interest expense is primarily attributable to increased borrowings on our senior secured revolving credit facility and on our bridge loan facility with MID and in our European and golf operations.    In 2005, $5.9 million of interest was capitalized with respect to projects under development, compared to $4.0 million in 2004.

Write-down of long-lived and intangible assets

        During 2004, we commenced a major redevelopment of the Gulfstream Park racetrack and the racing surfaces at Laurel Park. As a result, we recognized a non-cash write-down of $26.3 million related to Gulfstream Park's long-lived assets and $0.4 million related to Laurel Park's long-lived assets in connection with these redevelopments.

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Income tax benefit

        We recorded an income tax benefit of $0.6 million on a loss before income taxes of $103.7 million in 2005, whereas in 2004, we recorded an income tax benefit of $3.8 million on a loss before income taxes of $102.6 million. The income tax benefit in 2005 of $0.6 million represents primarily certain Austrian income tax losses benefited, partially offset by income tax expense recognized by certain U.S. operations. The income tax benefit in 2004 of $3.8 million represents a reduction in enacted income tax rates in Austria, which resulted in a revaluation of our European net future tax liabilities, partially offset by income tax expense recognized by certain U.S. operations.

Discontinued operations

        Discontinued operations in 2005 and 2004 include the operations of Flamboro Downs and MVRC. The following table presents revenues and earnings (loss) from discontinued operations for 2005 and 2004:

	Year ended December 31,
	2005			2004
Revenues	$	22,483		$	29,104
Costs and expenses		17,342			20,471
		5,141			8,633
Depreciation and amortization		783			894
Interest expense, net		1,566			2,416
Write-down of racing license(i)		14,961			—
Income (loss) before gain on disposition		(12,169	)		5,323
Gain on disposition(ii)		9,837			—
Income (loss) before income taxes		(2,332	)		5,323
Income tax expense (benefit)		(149	)		2,108
Net income (loss)	$	(2,183	)	$	3,215

(i)

Upon entering into an agreement in principle with GCGC in July 2005 for the disposition of Flamboro Downs, which established fair values for certain assets, we performed impairment testing of these assets. Based on this analysis, a non-cash impairment charge of $15.0 million before income taxes or $12.5 million after income taxes, was required of Flamboro Downs' racing license in the year ended December 31, 2005.

(ii)

The gain on disposition of $9.8 million represents the gain recognized on the disposition of the investment in MVRC on September 30, 2005.

Year Ended December 31, 2004 Compared to December 31, 2003

Racing and gaming operations

        In 2004, we operated our largest racetracks for 42 fewer live race days compared to the prior year, primarily due to the cancellation of the quarter horse meet at Lone Star Park and The Maryland Jockey Club's desired reduction in race days. Pimlico Race Course and Laurel Park combined had 195 live race days in 2004 as compared to 213 live race days in 2003. Our other racetracks operated an additional 47 live race days in 2004, compared to the prior year, primarily due to the opening of Magna Racino™ on April 4, 2004 which added 50 live race days, the return of the spring quarter horse meet at Remington Park which added 11 live race days, partially offset by eight fewer live race days at Portland Meadows as a result of Portland Meadows' desired reduction in race days.

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        In 2004, revenues from our racing and gaming operations decreased $2.4 million or 0.4% to $662.5 million, compared to $664.8 million in 2003, primarily due to:

• California revenues below the prior year by $12.8 million or 4.6% due to:

—
the 2003 revenues included $8.5 million of revenue generated on the sale of excess land at Golden Gate Fields; and

—
lower levels of handle and gross wagering at Santa Anita Park as a result of two less live race days coupled with lower average daily attendance. In addition, the Oak Tree meet ran only 26 days in 2004 compared to 32 days 2003 thereby reducing rental fees earned in 2004;

•
Northern U.S. operations below the prior year by $3.6 million or 3.7% due primarily to fewer live race days at Thistledown and Portland Meadows coupled with lower average daily attendance at certain of the racetracks included in this segment and a reduction in the number of OTB locations in our Oregon operations;

•
Increased revenues in our European operations, where revenues were above the prior year by $6.5 million due to the opening of the Magna Racino™ in the second quarter of 2004;

•
Increased revenues in our Maryland operations, where revenues were above the prior year by $2.0 million or 2.0% due to increased attendance and wagering at Pimlico on the Preakness Stakes®;

•
Florida revenues above the prior year by $1.7 million or 2.2% due to increased stall rent at Palm Meadows®, our thoroughbred training center in Palm Beach County, Florida; and

•
A decrease of $2.6 million of revenues earned through inter-company transactions from our racetracks, account wagering operations and separate OTB facilities.

        Pari-mutuel purses, awards and other increased $1.1 million or 0.3% to $331.8 million in 2004, from $330.7 million in 2003, primarily due to increased wagering at Pimlico during the Preakness Stakes® and the opening of Magna Racino™ for live racing, partially offset by reduced pari-mutuel wagering revenues at several of our facilities in 2004. As a percentage of pari-mutuel wagering revenues, pari-mutuel purses, awards and other increased from 59.8% in 2003 to 60.7% in 2004, primarily due to the mix of wagers made, the states the wagers were made in and the mix of on-track versus off-track wagering.

        Operating costs in our racing and gaming operations increased $24.4 million or 9.7% to $276.3 million in 2004, from $251.9 million in 2003, primarily due to:

• an increase of $21.3 million in our European operations due to the opening of the Magna Racino™ for live racing, pre-operating and start-up costs related to RaceONTV™ and MagnaBet™;

•
an increase of $3.9 million in our technology operations due to additional distribution and production costs at HRTV™ as a result of the Dish Network™ carriage agreement;

•
an increase of $3.2 million in our Southern U.S. operations primarily due to costs incurred at Lone Star Park in connection with hosting the 2004 Breeders' Cup™; partially offset by

•
a decrease of $4.5 million in our California operations primarily as a result of the inclusion of $8.5 million with regard to the sale of the excess land at Golden Gate Fields in 2003, partially offset by increased costs in 2004 at Santa Anita Park with the opening of an entertainment facility, including a new restaurant and sports bar.

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        As a percentage of total racing and gaming revenues, operating costs increased from 37.9% in 2003 to 41.7% in 2004, primarily due to increased operating costs as described above.

        General and administrative expenses in our racing and gaming operations remained consistent in both years at $65.7 million in 2004 and $65.8 million in 2003 primarily due to:

• an increase of $2.8 million in our European operations due to the start-up in 2004 of certain of our European operations; partially offset by

•
decreases at several of our facilities as a result of focused efforts to reduce costs.

Corporate costs included in general and administrative expenses declined approximately $0.9 million as a result of reduced salaries and wages, which were largely offset by expenses related to Sarbanes-Oxley requirements, bank service charges, increased rent at our head office and costs incurred in connection with MID's decision not to proceed with an unsolicited offer to take MEC private. As a percentage of total racing and gaming revenues, general and administrative expenses remained constant at 9.9% in 2004 and 2003.

Real estate and other operations

        Revenues from real estate and other operations increased $18.2 million from $21.8 million in 2003 to $40.0 million in 2004. The increase in revenues is primarily attributable to:

• in 2004, four Non-Core Real Estate properties were sold which generated revenues of $16.4 million and income before income taxes of $9.6 million, whereas in 2003, there was only one sale of Non-Core Real Estate which generated revenues of $2.6 million which was equal to the carrying value of the property; and

•
an increase in golf and other revenues of $4.5 million primarily due to higher annual dues and initiation fee revenues from our Magna Golf Club and Fontana Sports facilities as a result of increased membership at both facilities.

Predevelopment, pre-opening and other costs

        Predevelopment, pre-opening and other costs increased $11.7 million from $8.8 million in 2003 to $20.5 million in 2004. Predevelopment, pre-opening and other costs of $20.5 million in 2004 represent $13.5 million incurred pursuing alternative gaming opportunities, $2.7 million on the development of a simplified wagering machine, $1.3 million of costs relating to the Laurel Park redevelopment and $3.0 million of costs relating to development initiatives undertaken to enhance our racing operations. In 2003, the predevelopment, pre-opening and other costs of $8.8 million represented costs of $4.2 million pursuing alternative gaming opportunities, $0.8 million of information technology costs which were determined to have no future benefit, $0.7 million of disposal costs related to excess real estate at Golden Gate Fields and $3.1 million of costs relating to developmental initiatives undertaken to enhance our racing operations.

Depreciation and amortization

        Depreciation and amortization increased $5.3 million from $31.3 million in 2003 to $36.6 million in 2004, primarily due to depreciation at Magna Racino™, which commenced operations on April 4, 2004 and increased depreciation at our Palm Meadows® training center related to additional stall and dormitory construction, partially offset by reduced depreciation at Gulfstream Park as a result of the write-down of long-lived assets recorded in the second quarter of 2004 and at Remington Park as a result of the write-down of long-lived assets recorded in the fourth quarter of 2003.

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Interest income and expense

        Our net interest expense in 2004 increased $10.0 million to $21.7 million in 2004 from $11.7 million in 2003. The higher net interest expense is primarily attributable to the issuance of $150.0 million of convertible subordinated notes in June 2003, the issuance of a 15 million Euro term loan facility in the first quarter of 2004, borrowings on our Corporate revolving credit facility as well as less interest being capitalized with respect to projects under development. In 2004, $4.0 million of interest was capitalized with respect to projects under development, compared to $7.3 million in 2003.

Write-down of long-lived assets

        During 2004, we commenced a major redevelopment of the Gulfstream Park racetrack and the racing surfaces at Laurel Park. As a result, we recognized a non-cash write-down of $26.3 million related to Gulfstream Park's long-lived assets and $0.4 million related to Laurel Park's long-lived assets in connection with these redevelopments.

Income tax benefit

        We recorded an income tax benefit of $3.8 million on a loss before income taxes of $102.6 million in 2004, whereas in 2003 we recorded an income tax benefit of $63.5 million on a loss before income taxes of $169.9 million. The income tax benefit in 2004 of $3.8 million represents a reduction in enacted income tax rates in Austria, which resulted in a revaluation of our European net future tax liabilities, partially offset by income tax expense recognized by certain U.S. operations. Our effective income tax rate for 2003 was 37.4%.

Discontinued operations

        Discontinued operations in 2004 and 2003 include the operations of Flamboro Downs and MVRC. The following table presents revenues and earnings from discontinued operations for 2004 and 2003:

	Year ended December 31,
	2004		2003
Revenues	$	29,104	$	22,337
Costs and expenses		20,471		14,449
		8,633		7,888
Depreciation and amortization		894		582
Interest expense, net		2,416		1,894
Equity income		—		(992	)
Income before income taxes		5,323		6,404
Income tax expense		2,108		5,123
Net income	$	3,215	$	1,281

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Year Ended December 31, 2003 Compared to December 31, 2002

Racing and gaming operations

        In 2003, we operated our largest racetracks for an additional 287 live race days compared to the prior year. The overall increase in live race days at those racetracks is primarily attributable to our acquisitions of The Maryland Jockey Club and Lone Star Park at Grand Prairie, which were both acquired in the fourth quarter of 2002. Our other racetracks operated an additional 14 live race days in 2003, compared to the prior year, primarily due to additional live race days at Portland Meadows as a result of the 2002 live race meet concluding early in order to permit construction of a storm water retention system, partially offset by a decrease in live race days at Remington Park as a result of our desired reduction in race days at that location.

        In 2003, revenues from our racing and gaming operations increased $142.2 million or 27.2% to $664.8 million, compared to $522.6 million in 2002, primarily due to:

• Increased revenues in our Maryland operations, where revenues were above the prior year by $95.5 million due to the acquisition of The Maryland Jockey Club in November 2002;

•
Southern U.S. operations were above the prior year by $57.3 million due to the acquisition of Lone Star Park at Grand Prairie in October 2002;

•
Increased revenues in our Technology operations, where revenues were above the prior year by $23.1 million due to a change in reporting whereby all account wagering activity was recorded through XpressBet® in 2003, whereas it had previously been recognized in The Meadows;

•
California revenues above the prior year by $4.8 million or 1.8% due to:

—
the 2003 revenues included $8.5 million of revenue generated on the sale of excess land at Golden Gate Fields; partially offset by

—
lower levels of handle and pari-mutuel wagering at Santa Anita Park despite two additional live race days in 2003 compared to 2002 as a result of lower average daily attendance and decreased on-track wagering activity at the facility; partially offset by,

•
Northern U.S. operations below the prior year by $23.4 million or 19.3% primarily due to a decline of $20.4 million at The Meadows as the account wagering activities were no longer being recorded in The Meadows but were now being recorded in XpressBet®; and

•
Florida revenues below the prior year by $3.5 million or 4.3% due to lower levels of handle and pari-mutuel wagering at Gulfstream Park as a result of lower average daily attendance and decreased on-track wagering activity at the facility.

        Pari-mutuel purses, awards and other increased $54.7 million or 19.8% to $330.7 million in 2003, from $276.0 million in 2002, primarily due to the increase in pari-mutuel wagering revenues in 2003. As a percentage of pari-mutuel wagering revenues, pari-mutuel purses, awards and other decreased from 61.2% in 2002 to 59.8% in 2003, primarily due to the mix of wagers made, the states the wagers were made in and the mix of on-track versus off-track wagering and purse subsidies received by The Maryland Jockey Club which lowered their purse expense.

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        Operating costs in our racing and gaming operations increased $68.5 million to $251.9 million in 2003, from $183.4 million in 2002, primarily due to:

• an increase of $35.5 million in our Maryland operations due to the acquisition of The Maryland Jockey Club in November 2002;

•
an increase of $24.0 million in our Southern U.S. operations due to the acquisition of Lone Star Park at Grand Prairie in October 2002;

•
an increase of $16.5 million in our California operations primarily as a result of the inclusion of $8.5 million of costs related to the sale of the excess land at Golden Gate Fields in 2003, additional rent expense incurred at our Bay Meadows facility of $2.9 million and increased costs incurred in the inaugural running of the Sunshine Millions™;

•
an increase of $4.3 million in our Technology operations due to a change in reporting whereby all account wagering activity was now recorded through XpressBet®, whereas it had previously been recognized in The Meadows; and

•
an increase of $3.3 million in our Florida operations primarily due to the opening of the Palm Meadows training facility and the costs associated with the operation of the training facility and increased costs incurred in the inaugural running of the Sunshine Millions™; partially offset by

•
a decrease of $11.7 million in our Northern U.S. operations primarily due to a change in reporting whereby all account wagering activity was now recorded through XpressBet®, whereas it had previously been recognized in The Meadows.

        As a percentage of total racing and gaming revenues, operating costs increased from 35.1% in 2002 to 37.9% in 2003. The increase in operating costs as a percentage of total racing and gaming revenues was primarily the result of additional costs incurred by our recent acquisitions, the sale of the excess real estate at Golden Gate Fields and additional rent expense incurred at our Bay Meadows facility. Excluding these factors, operating costs as a percentage of total racing revenues were 27.2% in 2003.

        General and administrative expenses in our racing and gaming operations increased $24.3 million from $41.5 million in 2002 to $65.8 million in 2003 primarily due to:

• an increase of $8.0 million in our Maryland operations due to the timing of the acquisition of The Maryland Jockey Club in November 2002;

•
an increase of $4.6 million in our Southern U.S. operations due to the timing of the acquisition of Lone Star Park at Grand Prairie in October 2002;

•
an increase of $4.0 million in our Technology operations due to the timing of the launch of XpressBet® in 2002 and the launch of HRTV™ in 2003; and

•
higher costs of our head office.

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Real estate and other operations

        Revenues from real estate and other operations decreased $4.8 million from $26.6 million in 2002 to $21.8 million in 2003. The decrease in revenues is primarily attributable to:

• in 2002, four Non-Core Real Estate properties were sold which generated revenues of $8.9 million and income before income taxes of $2.2 million. In 2003, there was only one sale of Non-Core Real Estate which generated revenue of $2.6 million which was equal to the carrying value of the property; and

•
an increase in golf and other revenues of $1.4 million primarily due to increased revenues from our Magna Golf Club operations as a result of new members.

Predevelopment, pre-opening and other costs

        Predevelopment, pre-opening and other costs were $8.8 million in 2003, compared to $2.3 million in 2002. Predevelopment, pre-opening and other costs of $8.8 million in 2003 represent $4.2 million incurred pursuing alternative gaming opportunities, $0.8 million of information technology costs which were determined to have no future benefit, $0.7 million of disposal costs related to excess real estate at Golden Gate Fields and $3.1 million of costs relating to developmental initiatives undertaken to enhance our racing operations. In 2002, the predevelopment, pre-opening and other costs of $2.3 million related to developmental initiatives undertaken to enhance our racing operations.

Write-downs of long-lived and intangible assets and excess real estate

        Pursuant to SFAS 144 and SFAS 142, our long-lived assets, racing licenses and other intangible assets were tested for impairment after completion of our annual business planning process. As a result of the assets' carrying value at December 31, 2003 exceeding their fair value at certain of our business units, we recognized a non-cash impairment charge of $3.9 million related to long-lived assets and a non-cash impairment charge of $130.9 million related to the racing licenses and other intangible assets. In 2002, 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 and based on the 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 addition, in 2002, we recognized a write-down of excess real estate of $5.8 million with respect to the sale of excess real estate located at Golden Gate Fields whereby the consideration received on the sale of this excess real estate exceeded the carrying value of the property.

Depreciation and amortization

        Depreciation and amortization increased $8.5 million to $31.3 million in 2003 from $22.8 million in 2002, primarily as a result of our recent acquisitions recording additional depreciation and amortization of $7.1 million and increased depreciation and amortization on recent fixed asset additions.

Interest income and expense

        Our net interest expense for 2003 increased $11.0 million to $11.7 million from $0.7 million in 2002. The higher net interest expense is attributable to the issuance of $150.0 million of convertible subordinated notes in June 2003 and the issuance of $75.0 million of convertible subordinated notes in December 2002, as well as higher levels of long-term debt related to our acquisitions of The Maryland Jockey Club and Lone Star Park at Grand Prairie. In 2003, $7.3 million of interest was capitalized with respect to projects under development, compared to $2.7 million in the prior year period.

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Income tax benefit

        We recorded an income tax benefit of $63.5 million on losses before income taxes of $169.9 million in 2003, compared to an income tax benefit of $8.6 million on losses before income taxes of $23.5 million in 2002. Our effective income tax rate in 2003 was 37.4%, compared to 36.6% in 2002, primarily due to increased non-deductible expenditures.

Discontinued operations

        Discontinued operations in 2003 and 2002 include the operations of Flamboro Downs and MVRC. The following table presents revenues and earnings from discontinued operations for 2003 and 2002:

	Year ended December 31,
	2003			2002
Revenues	$	22,337		$	59
Costs and expenses		14,449			37
		7,888			22
Depreciation and amortization		582			—
Interest expense, net		1,894			—
Equity income		(992	)		(463	)
Income before income taxes		6,404			485
Income tax expense		5,123			—
Net income	$	1,281		$	485

Liquidity and Capital Resources

Year Ended December 31, 2005

Operating activities

        Cash provided by operations before changes in non-cash working capital decreased $20.8 million to a use of cash of $70.8 million in 2005 from a use of cash of $50.0 million in 2004, primarily due to decreased earnings adjusted for the write-downs of long-lived and intangible assets. In 2005, cash provided by non-cash working capital balances was $5.9 million compared to cash provided from non-cash working capital balances of $9.1 million in 2004. Cash provided by non-cash working capital balances of $5.9 million in 2005 is primarily due to an increase in accounts payable and income taxes payable, partially offset by an increase in accounts receivable and a decrease in deferred revenue at December 31, 2005 compared to the respective balances at December 31, 2004.

Investment activities

        Cash used in investment activities in 2005 was $145.5 million, including expenditures of $149.5 million on real estate property and fixed asset additions and $1.8 million on other asset additions, partially offset by $5.8 million of net proceeds received on the disposal of real estate properties and fixed assets. Expenditures on real estate property and fixed asset additions in 2005 of $149.5 million consisted of $91.0 million on the Gulfstream Park redevelopment, $25.6 million on the Remington Park gaming facility, $11.0 million at The Maryland Jockey Club, $8.7 million on maintenance capital improvements and $13.2 million of expenditures related to other racetrack property enhancements, infrastructure and development costs on certain of our properties and technology operations.

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Financing activities

        Cash provided by financing activities was $171.4 million in 2005 arising from advances and long-term debt from our parent company of $156.5 million, the issuance of debt of $27.7 million, net advances on our bank indebtedness of $2.8 million, partially offset by repayments of long-term debt of $15.6 million. The advances and long-term debt from our parent company of $156.5 million consists of $70.6 million on the bridge loan, $66.2 million on the Gulfstream Park project financing arrangement and $19.7 million on the Remington Park project financing arrangement. The issuance of debt of $27.7 million represents $27.5 million of debt incurred by the Magna Golf Club through a financing arrangement, which is secured by an assignment of the future amounts receivable under the Magna Golf Club access agreement and $0.2 million on an equipment loan at The Maryland Jockey Club. The net advances of $2.8 million on our bank indebtedness relates to a $3.0 million bank term line of credit at one of our European subsidiaries.

Year Ended December 31, 2004

Operating activities

        Cash provided by operations before changes in non-cash working capital decreased $46.0 million to a use of cash of $50.0 million in 2004 from a use of cash of $4.0 million in 2003, primarily due to decreased earnings in 2004 adjusted for the write-downs of long-lived and intangible assets. In 2004, cash provided from non-cash working capital balances was $9.1 million compared to cash provided from non-cash working capital balances of $14.9 million in 2003. Cash provided from non-cash working capital balances of $9.1 million in 2004 is primarily due to an increase in accounts receivable, partially offset by increases in accounts payable, accrued salaries and wages, other accrued liabilities and deferred revenues at December 31, 2004 compared to the respective balances at December 31, 2003.

Investment activities

        Cash used in investment activities in 2004 was $119.9 million, including expenditures of $139.2 million on real estate property and fixed asset additions and $0.6 million on other asset additions, partially offset by $19.8 million of net proceeds received on the disposal of Non-Core Real Estate and fixed assets. Expenditures on real estate property and fixed asset additions in 2004 consisted of $41.7 million on the Gulfstream Park redevelopment, $36.6 million on Magna Racino™, $19.4 million at The Maryland Jockey Club, $12.1 million for construction at our Palm Meadows training center, $9.0 million on maintenance capital improvements, $4.0 million on the entertainment facility, including a new restaurant and sports bar at Santa Anita Park, $0.8 million for the purchase of land in Ocala, Florida and $15.6 million of expenditures related to other racetrack property enhancements, infrastructure and development costs on certain of our properties and technology operations.

Financing activities

        Cash provided by financing activities was $119.2 million in 2004 arising from the issuance of debt of $119.2 million, $23.4 million from long-term debt from our parent company (net of loan origination expenses of $3.0 million) related to the Gulfstream Park project financing arrangement, the utilization of our credit facilities of $29.5 million, the issuance of $0.9 million of share capital on the exercise of stock options, partially offset by repayments of long-term debt of $53.8 million. The issuance of debt of $119.2 million is comprised of $75.0 million of debt incurred by The Santa Anita Companies, Inc., debt of $23.6 million incurred by one of our European subsidiaries, debt incurred by another of our European subsidiaries of $18.4 million, $1.3 million of debt incurred by Pimlico Racing Association, Inc. and debt incurred to fund the purchase of a mobile video screen that will be used at our racetracks of $0.9 million.

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Year Ended December 31, 2003

Operating activities

        Cash used in operations before changes in non-cash working capital decreased $23.7 million to a use of cash of $4.0 million in 2003 from a source of cash of $19.7 million in 2002 primarily due to lower net income. In 2003, cash provided by non-cash working capital balances was $14.9 million compared to cash provided by non-cash working capital balances of $0.3 million in 2002 primarily as a result of the collection of a receivable during 2003 from a land sale which was recorded in a prior year.

Investment activities

        Cash used in investment activities in 2003 was $109.0 million, including expenditures of $105.7 million on real estate property and fixed asset additions and $16.5 million on other asset additions, including $12.1 million on our acquisition of the master lease on the Portland Meadows racetrack and an interest in the underlying real estate and $4.3 million on our 30% equity investment in AmTote International, Inc., partially offset by $13.2 million of net proceeds received on the disposal of real estate and fixed assets. Expenditures relating to real estate property and fixed asset additions in 2003 were comprised of $31.9 million for our Austrian racetrack under development, $29.4 million for the construction of our Palm Meadows training center, maintenance capital improvements of $15.9 million, $4.9 million for the construction of our horse bedding manufacturing facility in North Carolina, $3.7 million for the purchase of land adjacent to the Pimlico Race Course, $2.1 million for improvements at Lone Star Park at Grand Prairie and $17.8 million of expenditures related to other racetrack property enhancements, infrastructure and development costs on certain of our properties and account wagering and television related activities.

Financing activities

        Cash provided by financing activities was $102.7 million in 2003. We issued $150.0 million of 8.55% convertible subordinated notes in June 2003 which are due June 15, 2010 and received net proceeds of $145.0 million. Our revolving credit facility of $49.5 million was repaid early in the year from proceeds on the sale of Non-Core Real Estate received late in 2002. One of our subsidiaries had borrowed $6.7 million under an operating facility as at December 31, 2003. We incurred additional long-term debt of $16.1 million and made repayments of $15.7 million.

Working Capital, Cash and Other Resources

        Our net working capital, excluding assets and liabilities held for sale and discontinued operations, was ($160.9) million at December 31, 2005, compared to ($42.1) million at December 31, 2004.

        On July 22, 2005, we announced that as part of our strategic plan, the Board of Directors approved a Recapitalization Plan, which is intended to recapitalize our balance sheet over the following 12 months through the sale of certain non-strategic assets, with proceeds realized from those asset sales being applied to reduce debt. The Recapitalization Plan also contemplates a possible partnership to pursue alternative gaming opportunities at our racetracks and the possible raising of equity in 2006. The proceeds of such an equity offering would be used to further reduce debt and for general corporate purposes. In connection with this Recapitalization Plan, in July 2005, we entered into two loan agreements with MID. The first loan agreement effectively replaced the existing $77.0 million construction loan commitment for The Meadows racetrack and slots facility in Pennsylvania with a loan for up to $34.2 million to fund the development, design and construction of the alternative gaming facility at Remington Park in Oklahoma. No advances had been made under The Meadows project financing. In addition, certain terms of the existing $115.0 million Gulfstream Park loan were amended. The second loan agreement provided for a non-revolving bridge loan facility of up to $100.0 million.

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        A subsidiary of MID has provided a non-revolving bridge loan facility of up to $100.0 million. $50.0 million was available to us as of the closing of the bridge loan, a second tranche of $25.0 million was made available to us on October 17, 2005 and a third tranche of $25.0 million was made available to us on February 10, 2006. The bridge loan terminates on August 31, 2006. An arrangement fee of $1.0 million was paid on closing, a second arrangement fee of $0.5 million was paid when the second tranche was made available to us and an additional arrangement fee of $0.5 million was paid when the third tranche of the loan was made available to us. There is a commitment fee of 1.0% per year on the undrawn portion of the $100.0 million maximum amount of the loan commitment, payable quarterly in arrears. At our option, the loan bears interest either at: (1) floating rate, with annual interest equal to the greater of (a) U.S. Base rate, as announced from time to time, plus 5.5% and (b) 9.0% (with interest in each case payable monthly in arrears); or (2) fixed rate with annual interest equal to the greater of: (a) LIBOR plus 6.5% and (b) 9.0%, subject to certain conditions. The overall weighted average interest rate on the advances under the bridge loan at December 31, 2005 was 10.9%. The bridge loan may be repaid at any time, in whole or in part, without penalty. The bridge loan requires that the net proceeds of any equity offering be used to reduce outstanding indebtedness under the bridge loan, subject to specified amounts required to be paid to reduce other indebtedness. Also, subject to specified exceptions, the proceeds of any debt offering or asset sale must be used to reduce outstanding indebtedness under the bridge loan or other specified indebtedness. The bridge loan is secured by substantially all of MEC's assets and guaranteed by certain of our subsidiaries. The guarantees are secured by first ranking security over the lands owned by The Meadows (ahead of the Gulfstream Park project financing), second ranking security over the lands owned by Golden Gate Fields (behind an existing third party lender) and third ranking security over the lands owned by Santa Anita Park (behind existing third party lenders). In addition, we have pledged the shares and licences of certain subsidiaries (or provided negative pledges where a pledge is not available due to regulatory constraints or due to a prior pledge to an existing third party lender). As security for the loan, we have also assigned all inter-company loans made between us and our subsidiaries and all insurance proceeds to the lender, and taken out title insurance for all real property subject to registered security. The bridge loan is cross-defaulted to all other obligations of MEC and its subsidiaries to the lender and to the Company's other principal indebtedness. The security over the lands owned by The Meadows may be subordinated to new third party financings of up to U.S. $200.0 million for the redevelopment of The Meadows. During the year ended December 31, 2005, $74.1 million was advanced on this bridge loan, such that at December 31, 2005, $74.1 million was outstanding under the bridge loan. Net loan origination expenses of $2.6 million have been recorded as a reduction of the outstanding bridge loan balance. The bridge loan balance is being accreted to its face value over the term to maturity. In addition, during the year ended December 31, 2005, $0.2 million of commitment fees and $2.3 million of interest expense was incurred related to the bridge loan, of which $0.6 million was outstanding at December 31, 2005. The Company and MID entered into an agreement to amend the bridge loan agreement to provide that (i) we place $13.0 million from the Flamboro Downs sale proceeds into escrow with MID, and such additional amounts as necessary to ensure that future Gulfstream Park construction costs can be funded, (ii) MID waive its negative pledge over our land in Ocala, Florida, (iii) Gulfstream Park enter into a definitive agreement with BE&K, Inc., for debt financing of $13.5 million to be used to pay for construction costs for the Gulfstream Park construction project, (iv) we will use commercially reasonable efforts to sell certain assets and use the proceeds of such sales to pay down the bridge loan, and (v) in the event that we did not enter into definitive agreements prior to December 1, 2005 to sell certain additional assets or repay the full balance of the bridge loan by January 15, 2006, MID would be granted mortgages on certain additional properties owned by us. Upon the closing of the sale of certain assets, we will also be required to put into escrow with MID, the amount required to pre-pay the loan from BE&K, Inc. On November 17, 2005, Gulfstream Park signed a loan agreement with BE&K, Inc., which to December 31, 2005 had not been drawn upon. On February 9, 2006, the bridge loan was amended such that certain subsidiaries were added as guarantors of the bridge loan. The guarantees are secured by charges over the lands commonly known as San Luis Rey Downs in California, Dixon Downs in California, the New York lands in New York and the Thistledown lands in Ohio, and by pledges of the shares of certain subsidiaries. At December 31, 2005, we had placed $13.7 million into escrow with MID, which is included in accounts receivable on the consolidated balance sheets. In accordance with the terms of the senior secured revolving credit facility and the bridge loan agreement, we were required to use the net proceeds from the sale of Flamboro Downs to pay down the principal amount owing under the two loans in equal portions. However, both MID and the lender under the senior secured revolving credit facility agreed to mutually waive this repayment requirement, subject to certain other amendments, including provisions for repayment upon closing of certain future asset sales.

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        In December 2004, certain of our subsidiaries entered into a $115.0 million project financing arrangement with MID for the reconstruction of facilities at Gulfstream Park. This project financing arrangement was amended on July 27, 2005 in connection with the Remington Park loan as described below. The project financing is made by way of progress draw advances to fund reconstruction. The loan has a ten-year term from the completion date of the reconstruction project. The anticipated completion date for the Gulfstream Park reconstruction project is the first quarter of 2006. Prior to the completion date, amounts outstanding under the loan will bear interest at a floating rate equal to 2.55% per annum above MID's notional cost of borrowing under its floating rate credit facility, compounded monthly. After the completion date, amounts outstanding under the loan will bear interest at a fixed rate of 10.5% per annum, compounded semi-annually. Prior to January 1, 2007, payment of interest will be deferred. Commencing January 1, 2007, we will make monthly blended payments of principal and interest based on a 25-year amortization period commencing on the completion date. The loan contains cross-guarantee, cross-default and cross-collateralization provisions. The loan is guaranteed by our subsidiaries that own and operate The Meadows, Remington Park and the Palm Meadows training center and is collateralized principally by security over the lands forming part of the operations at Gulfstream Park, Remington Park, Palm Meadows and The Meadows and over all other assets of Gulfstream Park, Remington Park, Palm Meadows and The Meadows, excluding licenses and permits. During the year ended December 31, 2005, $67.0 million (for the year ended December 31, 2004 — $26.4 million) was advanced such that at December 31, 2005, $97.1 million was outstanding under the Gulfstream Park loan, which includes $3.7 million of accrued interest. Net loan origination expenses of $3.5 million have been recorded as a reduction of the outstanding loan balance. The loan balance is being accreted to its face value over the term to maturity.

        MID provided project financing of $34.2 million to finance the build-out of the casino facility at Remington Park. Advances under the loan are made by way of progress draw advances to fund the capital expenditures relating to the development, design and construction of the casino facility, including the purchase and installation of electronic gaming machines. The loan has a ten-year term from the completion date of the reconstruction project, which was November 28, 2005. Prior to the completion date, amounts outstanding under the loan bore interest at a floating rate equal to 2.55% per annum above MID's notional cost of LIBOR borrowing under its floating rate credit facility, compounded monthly. After the completion date, amounts outstanding under the loan bear interest at a fixed rate of 10.5% per annum, compounded semi-annually. Prior to January 1, 2007, payment of interest will be deferred. Commencing January 1, 2007, we will make monthly blended payments of principal and interest based on a 25-year amortization period commencing on the completion date. Certain cash from the operations of Remington Park must be used to pay deferred interest on the loan plus a portion of the principal under the loan equal to the deferred interest on the Gulfstream Park construction loan. The loan is secured by all assets of Remington Park, excluding licenses and permits. The loan is also secured by a charge over the lands owned by Gulfstream Park and a charge over the Palm Meadows training center and contains cross-guarantee, cross-default and cross-collateralization provisions. As at December 31, 2005, $20.7 million has been advanced under the loan and $0.3 million of interest has accrued on the loan, such that at December 31, 2005, $21.0 million was outstanding under this loan. Net loan origination expenses of $1.1 million have been recorded as a reduction of the outstanding loan balance and the loan balance will be accreted to its face value over the term to maturity.

        One of our subsidiaries, The Santa Anita Companies, Inc. ("SAC"), is party to a secured term loan facility that matures on October 7, 2007, however may be extended at SAC's option to October 7, 2009. Under the facility, SAC is entitled to borrow up to a maximum of $75.0 million. Borrowings under the facility bear interest at LIBOR plus 2.0% per annum. Effective November 30, 2005, we have entered into an interest rate swap contract and fixed the rate of interest at 7.05% per annum to October 7, 2007 on a notional amount of $10.0 million. Effective November 1, 2004, we have entered into an interest rate swap contract and fixed the rate of interest at 5.38% per annum to October 31, 2007 on a notional amount of 40% of the outstanding balance under this secured term loan facility. The loan facility is guaranteed by the Los Angeles Turf Club, Incorporated ("LATC"), our wholly-owned subsidiary, and is secured by a first deed of trust on Santa Anita Park and the surrounding real property, an assignment of the lease between LATC, the racetrack operator, and SAC and a pledge of all of the outstanding capital stock of LATC and SAC. The loan contains cross-default provisions with respect to our $50.0 million senior secured revolving credit facility and our bridge loan from MID. At December 31, 2005, $69.2 million was outstanding under this fully drawn facility.

82

        Loans under our $50.0 million senior secured revolving credit facility are secured by a first charge on the assets of Golden Gate Fields and a second charge on the assets of Santa Anita Park, and are guaranteed by certain of our subsidiaries. At December 31, 2005, we had borrowed $27.3 million and issued letters of credit totaling $21.7 million under this facility, such that $1.0 million was unused and available. Effective July 27, 2005, the facility's term was extended to July 31, 2006, the financial covenants were amended and are now EBITDA maintenance tests relating to Santa Anita Park and Golden Gate Fields, mandatory repayment provisions were added and interest rates have been changed such that borrowings are now available by way of U.S. Base rate loans plus 3% or LIBOR plus 4%.

        In June 2003, we issued $150.0 million of 8.55% convertible subordinated notes, which are convertible at any time at the option of the holders into shares of our Class A Subordinate Voting Stock at a conversion price of $7.05 per share, subject to adjustment under certain circumstances, and mature on June 15, 2010. The notes are redeemable at the principal amount together with accrued and unpaid interest, at our option, under certain conditions in the period from June 2, 2006 to June 2, 2008. At December 31, 2005, all of the notes remained outstanding.

        In December 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 our Class A Subordinate Voting Stock at a conversion price of $8.50 per share, subject to adjustment under certain circumstances, and mature on December 15, 2009. The notes are redeemable at the principal amount together with accrued and unpaid interest, at our option, under certain conditions in the period from December 21, 2005 to December 15, 2007. At December 31, 2005, all of the notes remained outstanding.

        In December 2004, one of our European subsidiaries entered into a loan arrangement which is secured by an assignment of the future amounts receivable under the Fontana Sports access agreement. We received proceeds of 17.6 million Euros in December 2004 that is repayable in nine annual installments of 2.5 million Euros commencing January 1, 2006 until the last installment has been made in 2014. The interest rate implicit in the arrangement is 5.17%. At December 31, 2005, $20.9 million was outstanding under this arrangement. On February 18, 2005, one of our Canadian subsidiaries entered into a financing arrangement that is secured by an assignment of the future amounts receivable under the Magna Golf Club access agreement for the years 2006 through 2008. We received proceeds of Cdn. $13.7 million that is repayable in three annual installments of Cdn. $5.0 million commencing January 1, 2006 until the third installment has been made in 2008. The interest rate implicit in the arrangement is 5.08%. At December 31, 2005, $11.7 million was outstanding under this arrangement. On April 5, 2005, the same Canadian subsidiary entered into a loan agreement that is secured by an assignment of the future amounts receivable under the Magna Golf Club access agreement for the years 2009 through 2014. We received proceeds of Cdn. $20.5 million that is repayable in six annual installments of Cdn. $5.0 million commencing January 1, 2009 until the last installment has been made in 2014. The loan bears interest at a rate of 6.36% per annum. At December 31, 2005, $17.6 million was outstanding under this arrangement.

        One of our European subsidiaries is party to a Euro denominated term loan facility, secured by a pledge of land and a guarantee by MEC, which bears interest at 4% per annum. At December 31, 2005, $17.8 million was outstanding on this facility which matures on February 9, 2007.

        One of our European subsidiaries has a 15.0 million Euro term loan facility, secured by a first and second mortgage on land in Austria owned by the European subsidiary, which bears interest at the European Interbank Offered Rate ("EURIBOR") plus 2% per annum. At December 31, 2005, $17.8 million was outstanding under this facility, which matures on December 15, 2006.

83

        On November 27, 2002, contemporaneous with our acquisition of The Maryland Jockey Club, we 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, 2005, this obligation has been reflected on our balance sheet as long-term debt due after one year.

        Also, two of our subsidiaries, which are part of The Maryland Jockey Club, are party to secured term loan facilities that bear interest at the U.S. Prime rate or LIBOR plus 2.6% and 7.0% per annum, respectively. Both term loans have interest rate adjustment clauses that reset to the market rate for U.S. Treasury security of an equivalent term plus 2.6% at set dates prescribed in the agreements. At December 31, 2005, $13.7 million and $4.3 million, respectively, were outstanding under these fully drawn term loan facilities which mature on December 1, 2013 and June 7, 2017, respectively.

        A subsidiary of the Company, Pimlico Racing Association, Inc., has a $10.0 million term loan facility, which matures on December 15, 2019. The term loan facility, which bears interest at either the U.S. Prime rate or LIBOR plus 2.6% per annum, is secured by deeds of trust on land, buildings and improvements and security interests in all other assets of the subsidiary and certain affiliates of The Maryland Jockey Club. At December 31, 2005, $9.6 million was outstanding under this term loan facility.

        At December 31, 2005, we had cash and cash equivalents of $50.9 million, bank indebtedness of $30.3 million and total shareholders' equity of $459.6 million. At December 31, 2005, we were not in compliance with one of the financial covenants of our senior secured revolving credit facility and our bridge loan facility. In February 2006, the lender of our senior secured revolving credit facility and MID agreed to waive compliance with the financial covenant contained in both loan agreements in relation to Golden Gate Fields. Under both loan agreements, the financial covenant related to the earnings before interest, income taxes, depreciation and amortization of Golden Gate Fields. Earnings in the fourth quarter at Golden Gate Fields were below expectation primarily as a result of a change in the racing calendar which resulted in six fewer live race days than planned. This is a situation specific to the fourth quarter of 2005 which is not expected to recur again or negatively impact financial covenant calculations at the quarter end dates remaining in the terms of these facilities. We were in compliance with all other debt agreements and related covenants as at December 31, 2005.

        We believe that our current cash resources, cash flow from our racing and gaming and real estate operations as well as proceeds from the anticipated sales of real estate holdings and other assets including The Meadows and our residential development property in Palm Beach County, Florida, will be sufficient to finance our operations and our maintenance capital expenditure program during the next year. In order to implement our strategic plan, including the addition of a slots facility at Gulfstream Park and capitalizing on future growth opportunities, we will be required to seek additional financing and funds from one or more possible sources, which may include MID, asset sales, project financings for racing and/or alternative gaming developments, investments by partners in certain of our racetracks and other business operations and debt or equity offerings through public or private sources. If additional financing or other sources of funds are not available to us as needed, or are not available on terms that are acceptable to us, our ability to add alternative gaming to our racetracks where and when permitted or improve or expand our operations as planned may be adversely affected.

84

Contractual Obligations and Commitments

        Our commitments to make future payments consist primarily of repayments of long-term debt including capital lease obligations, amounts due to our parent, obligations under operating and facility leases, construction commitments and other long-term liabilities. Our contractual obligations and commitments at December 31, 2005 are as follows:

($ thousands)	Less than 1 year	1 to 3 years	3 to 5 years	More than 5 years	Total
Long-term debt	38,033	62,334	69,361	51,135	220,863
Amounts due to Parent	74,712	3,178	2,654	112,313	192,857
Convertible subordinated notes	—	—	225,000	—	225,000
Capital lease obligations	1,320	2,904	2,904	28,512	35,640
Operating leases(1)	1,225	1,829	420	—	3,474
Facility leases	1,491	2,566	1,636	1,509	7,202
Construction and development project commitments	20,100	—	—	—	20,100
Other long-term liabilities	2,254	3,481	2,329	4,808	12,872
	139,135	76,292	304,304	198,277	718,008

(1)

Operating lease obligations do not include contingent rental payments.

        The racetrack and associated land under capital lease at Lone Star Park at Grand Prairie is included in the Grand Prairie Metropolitan Utility and Reclamation District ("GPMURD"). Lone Star Park entered into an agreement with GPMURD whereby it is required to make certain payments to GPMURD in lieu of property taxes. Such payments include amounts necessary to cover GPMURD operating expenses and debt service for certain bonds issued by GPMURD to fund improvements on the land up to the debt service requirements. Lone Star Park incurred $1.8 million in regards to this arrangement in the year ended December 31, 2005.

        We have a 30% equity interest in AmTote, a provider of totalisator services to the pari-mutuel industry. We have an option (the "First Option") to acquire an additional 30% equity interest in AmTote, exercisable at any time during the three year period commencing after the date of acquisition. If we exercise the First Option, we have a second option to acquire the remaining 40% equity interest in AmTote, exercisable at any time during the three year period commencing after the date of exercise of the First Option. The shareholders of AmTote also have the right to sell to us their remaining equity interest during the 120 day period following the exercise of the First Option.

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.

85

        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, 2005 and our current credit facilities, a 1% per annum increase or decrease in interest rates on our short-term credit facility 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 The Santa Anita Companies, Inc. term loan facility, we have entered into two interest rate swap contracts. Effective November 30, 2005, we have entered into an interest rate swap contract and fixed the rate of interest at 7.05% per annum to October 7, 2007 on a notional amount of $10.0 million. Effective November 1, 2004, we have entered into an interest rate swap contract and fixed the rate of interest at 5.38% per annum to October 31, 2007 on a notional amount of 40% of the outstanding balance under this secured term loan facility, which is $69.2 million as at December 31, 2005.

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.

        On December 16, 2004, the Financial Accounting Standards Board ("FASB") issued FASB Statement No. 123 (revised 2004), Share-Based Payment ("Statement 123(R)"), which is a revision of SFAS 123. Statement 123(R) supersedes APB Opinion No. 25 ("APB 25") and amends FASB Statement No. 95, Statement of Cash Flows. Generally, the approach in Statement 123(R) is similar to the approach described in SFAS 123, however, Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the statement of operations based on their fair values. Pro-forma disclosure is no longer an alternative. As permitted by Statement 123, the Company currently accounts for share-based payments to employees using APB 25's intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options. Accordingly, the adoption of Statement 123(R)'s fair value method will have a significant impact on the results of operations, although it will have no impact on the Company's overall financial position. The impact of adoption of Statement 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future, however, had the Company adopted Statement 123(R) in prior periods, the impact of that standard would have approximated the impact of Statement 123 as described in the disclosure of pro-forma net loss and loss per share in our consolidated financial statements. Statement 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. Statement 123(R) must be adopted no later than January 1, 2006. The Company will be implementing the revised standard in the first quarter of 2006 and expects that the impact will be consistent with the pro-forma results that have been previously disclosed.

Forward-looking Statements

        This Report, contains "forward-looking statements" within the meaning of applicable securities legislation, including the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended. These forward-looking statements may include, among others, statements regarding: our strategies and plans; expectations as to financing and liquidity requirements and arrangements; expectations as to operational improvements; expectations as to cost savings, revenue growth and earnings; the time by which certain redevelopment projects, transactions or other objectives will be achieved; estimates of costs relating to environmental remediation and restoration; proposed new racetracks or other developments, products and services; expectations as to the timing and receipt of government approvals and regulatory changes in gaming and other racing laws and regulations; 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, beliefs or forecasts as to our financial and operating results and future economic performance; and other matters that are not historical facts.

86

        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 performance or results will be achieved. Undue reliance should not be placed on such statements. Forward-looking statements are based on information available at the time and/or management's good faith assumptions and analyses made in the light of our perception of historical trends, current conditions and expected future developments, as well as other factors we believe are appropriate in the circumstances and are subject to known and unknown risks, uncertainties and other unpredictable factors, many of which are beyond the Company's control, that could cause actual events or results to differ materially from such forward-looking statements.

        Important factors that could cause such differences include, but are not limited to, the factors discussed below under "Management's Discussion and Analysis of Results of Operations and Financial Position" and "Risk Factors" sections of our subsequent public filings.

        Forward-looking statements speak only as of the date the statements were 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.

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 Financial Condition and Results of Operations" of this Annual Report.

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Item 8.    Financial Statements and Supplementary Data

REPORT OF THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders of Magna Entertainment Corp.

        We have audited the accompanying consolidated balance sheets of Magna Entertainment Corp. as of December 31, 2005 and 2004, and the related consolidated statements of operations and comprehensive loss, changes in shareholders' equity and cash flows for each of the years in the three year period ended December 31, 2005. Our audits also included the financial statement 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 the standards of the Public Company Accounting Oversight Board (United States). 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, 2005 and 2004, and the consolidated results of its operations and its cash flows for each of the years in the three year period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement 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.

        We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Magna Entertainment Corp.'s internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 3, 2006 expressed an unqualified opinion thereon.

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

	/s/ Ernst & Young LLP
Toronto, Canada	Ernst & Young LLP
February 3, 2006, except for Note 20(a)(i) as to which the date is February 9, 2006 and Note 23 as to which the date is March 15, 2006.

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MAGNA ENTERTAINMENT CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(U.S. dollars in thousands, except per share figures)

				Years ended December 31,
			Note	2005			2004			2003
							(restated-note 5)			(restated-note 5)
Revenues			19,20
Racing and gaming
	Pari-mutuel wagering			$	488,480		$	546,784		$	552,755
	Gaming				6,132			—			—
	Non-wagering		8		105,173			115,672			112,073
					599,785			662,456			664,828
Real estate and other
	Sale of real estate				—			16,387			2,649
	Golf and other				24,870			23,630			19,121
					24,870			40,017			21,770
					624,655			702,473			686,598
Costs and expenses
Racing and gaming
	Pari-mutuel purses, awards and other				303,638			331,755			330,668
	Gaming taxes, purses and other				2,630			—			—
	Operating costs		8		253,535			276,335			251,866
	General and administrative				63,135			65,742			65,838
Real estate and other
	Cost of real estate sold				—			6,762			2,618
	Operating costs				18,987			17,511			16,600
	General and administrative				1,324			2,147			2,362
Predevelopment, pre-opening and other costs					11,882			20,508			8,767
Depreciation and amortization					39,222			36,616			31,315
Interest expense, net			14		35,132			21,675			11,726
Write-down of long-lived and intangible assets			7		—			26,685			134,856
Equity income					(1,122	)		(635	)		(161	)
					728,363			805,101			856,455
Loss from continuing operations before income taxes					(103,708	)		(102,628	)		(169,857	)
Income tax benefit			12		(598	)		(3,777	)		(63,479	)
Net loss from continuing operations					(103,110	)		(98,851	)		(106,378	)
Net income (loss) from discontinued operations			5		(2,183	)		3,215			1,281
Net loss					(105,293	)		(95,636	)		(105,097	)
Other comprehensive income (loss)
	Foreign currency translation adjustment		17		(14,971	)		15,627			40,493
	Change in fair value of interest rate swap		18		415			660			583
Comprehensive loss				$	(119,849	)	$	(79,349	)	$	(64,021	)
Earnings (loss) per share for Class A Subordinate
	Voting Stock or Class B Stock
	Basic and Diluted
		Continuing operations	16	$	(0.96	)	$	(0.92	)	$	(0.99	)
		Discontinued operations	16		(0.02	)		0.03			0.01
Total loss per share				$	(0.98	)	$	(0.89	)	$	(0.98	)
Average number of shares of Class A Subordinate
	Voting Stock or Class B Stock outstanding
	during the year (in thousands):
	Basic and Diluted		16		107,356			107,323			107,143

See accompanying notes

89

MAGNA ENTERTAINMENT CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(U.S. dollars in thousands)

				Years ended December 31,
			Note	2005			2004			2003
							(restated-note 5)			(restated-note 5)
Cash provided from (used for):
OPERATING ACTIVITIES:
Net loss from continuing operations				$	(103,110	)	$	(98,851	)	$	(106,378	)
Adjustments to reconcile net loss to net cash provided from (used for) operating activities
	Depreciation and amortization				39,222			36,616			31,315
	Future income taxes		12		(5,996	)		(5,452	)		(67,121	)
	Gain on disposal of real estate properties				—			(9,625	)		(31	)
	Loss (gain) on disposal of fixed assets				(2,555	)		96			—
	Write-down of long-lived and intangible assets		7		—			26,685			137,436
	Equity income				(1,122	)		(635	)		(161	)
	Amortization of loan origination costs				1,541			—			—
	Amortization of convertible subordinated notes issue costs		15		1,090			1,090			800
	Issuance of Class A Subordinate Voting Stock under the
		Long-term Incentive Plan	16		102			123			144
					(70,828	)		(49,953	)		(3,996	)
Changes in non-cash working capital
	Restricted cash				(1,817	)		405			(4,617	)
	Accounts receivable				(7,144	)		(10,118	)		16,707
	Income taxes receivable/payable				6,036			(47	)		(490	)
	Prepaid expenses and other				(111	)		446			2,747
	Accounts payable				16,766			4,529			518
	Accrued salaries and wages				(1,829	)		2,669			(915	)
	Customer deposits				(356	)		337			(165	)
	Other accrued liabilities				1,650			3,044			(1,134	)
	Deferred revenue				(7,271	)		7,826			2,255
					5,924			9,091			14,906
					(64,904	)		(40,862	)		10,910
INVESTING ACTIVITIES:
Real estate property additions					(143,555	)		(129,729	)		(102,195	)
Fixed asset additions					(5,994	)		(9,427	)		(3,536	)
Other asset additions					(1,779	)		(582	)		(16,549	)
Proceeds on real estate sold to a related party			20		1,400			—			—
Proceeds on disposal of real estate properties					4,403			18,801			13,248
Proceeds on disposal of fixed assets					—			1,040			—
					(145,525	)		(119,897	)		(109,032	)
FINANCING ACTIVITIES:
Net increase (decrease) in bank indebtedness			13		2,760			29,500			(42,779	)
Issuance of long-term debt					27,714			119,208			16,110
Proceeds from advances and long-term debt with parent			20		156,519			23,408			—
Repayment of long-term debt					(15,553	)		(53,806	)		(15,701	)
Issuance of share capital			16		—			852			29
Issuance of convertible subordinated notes			15		—			—			145,000
					171,440			119,162			102,659
Effect of exchange rate changes on cash and cash equivalents					704			3,202			11,995
Net cash flows provided from (used for) continuing operations					(38,285	)		(38,395	)		16,532
Net cash flows provided from (used for) discontinued operations			5		29,162			2,798			(8,565	)
Net increase (decrease) in cash and cash equivalents during the year					(9,123	)		(35,597	)		7,967
Cash and cash equivalents, beginning of year					60,005			95,602			87,635
Cash and cash equivalents, end of year				$	50,882		$	60,005		$	95,602

See accompanying notes

90

MAGNA ENTERTAINMENT CORP.

CONSOLIDATED BALANCE SHEETS

(U.S. dollars and share amounts in thousands)

			December 31,
		Note	2005			2004
						(restated-notes 4 & 5)
ASSETS
Current assets:
	Cash and cash equivalents		$	50,882		$	60,005
	Restricted cash			24,776			23,231
	Accounts receivable			51,918			45,068
	Income taxes receivable			—			947
	Prepaid expenses and other			7,591			12,129
	Assets held for sale	4		89,720			1,863
	Discontinued operations	5		—			5,398
				224,887			148,641
Real estate properties, net		9		950,041			865,517
Fixed assets, net		10		62,016			48,242
Racing licenses				109,868			109,868
Other assets, net		11		14,976			14,541
Future tax assets		12		52,457			34,388
Assets held for sale		4		—			87,900
Discontinued operations		5		—			94,256
			$	1,414,245		$	1,403,353
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
	Bank indebtedness	13	$	30,260		$	27,500
	Accounts payable			63,382			47,989
	Accrued salaries and wages			8,254			10,041
	Customer deposits			2,549			2,905
	Other accrued liabilities			68,887			64,966
	Income taxes payable			3,793			—
	Long-term debt due within one year	14		38,033			13,401
	Due to parent	20		72,060			—
	Deferred revenue			8,846			16,673
	Liabilities related to assets held for sale	4		27,737			3,331
	Discontinued operations	5		—			8,867
				323,801			195,673
Long-term debt		14		182,830			202,495
Long-term debt due to parent		20		113,500			23,408
Convertible subordinated notes		15		220,347			219,257
Other long-term liabilities		22		12,872			11,919
Future tax liabilities		12		101,301			89,631
Liabilities related to assets held for sale		4		—			25,016
Discontinued operations		5		—			57,274
				954,651			824,673
Commitments and contingencies		20,21
Shareholders' equity:
Class A Subordinate Voting Stock
	(Issued: 2005 — 48,895; 2004 — 48,879)	16		318,105			318,003
Class B Stock
	(Issued: 2005 and 2004 — 58,466)	16		394,094			394,094
Contributed surplus		20		17,943			17,282
Deficit				(308,947	)		(203,654	)
Accumulated comprehensive income		17,18		38,399			52,955
				459,594			578,680
			$	1,414,245		$	1,403,353

On behalf of the Board:

/s/ W. Thomas Hodgson
Director /s/ William J. Menear
Director

See accompanying notes

91

MAGNA ENTERTAINMENT CORP.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

(U.S. dollars in thousands)

		Class A Subordinate Voting Stock		Class B Stock		Contributed Surplus		Deficit			Accumulated Comprehensive Income (Loss)
Balances at December 31, 2002		$	316,855	$	394,094	$	17,282	$	(2,921	)	$	(4,408	)
Activity for the year ended December 31, 2003:
Net loss									(105,097	)
Foreign currency translation adjustment (note 17)												40,493
Change in fair value of interest rate swap (note 18)												583
Issue of Class A Subordinate Voting Stock
	under the Long-term Incentive Plan (note 16)		144
Issue of Class A Subordinate Voting Stock
	on exercise of stock options (note 16)		29
Balances at December 31, 2003			317,028		394,094		17,282		(108,018	)		36,668
Activity for the year ended December 31, 2004:
Net loss									(95,636	)
Foreign currency translation adjustment (note 17)												15,627
Change in fair value of interest rate swap (note 18)												660
Issue of Class A Subordinate Voting Stock
	under the Long-term Incentive Plan (note 16)		123
Issue of Class A Subordinate Voting Stock
	on exercise of stock options (note 16)		852
Balances at December 31, 2004			318,003		394,094		17,282		(203,654	)		52,955
Activity for the year ended December 31, 2005:
Net loss									(105,293	)
Foreign currency translation adjustment (note 17)												(14,971	)
Change in fair value of interest rate swap (note 18)												415
Issue of Class A Subordinate Voting Stock
	under the Long-term Incentive Plan (note 16)		102
Net gain on sale of real estate to a related party (note 20)							661
Balances at December 31, 2005		$	318,105	$	394,094	$	17,943	$	(308,947	)	$	38,399

See accompanying notes

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)

1.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Basis of Presentation

Magna Entertainment Corp. (the "Company") owns and operates horse racetracks in California, Florida, Maryland, Texas, Oklahoma, Pennsylvania, Ohio, Michigan, Oregon and Ebreichsdorf, Austria and supplies, via simulcasting, live racing content to the growing inter-track, off-track and account wagering markets. The Company operates or manages eleven thoroughbred racetracks, one standardbred (harness racing) racetrack and one racetrack that runs both thoroughbred and standardbred meets, as well as the simulcast wagering venues at these tracks. In October 2005, the Company completed the sale of Flamboro Downs, a standardbred racetrack and in September 2005, the Company completed the sale of our interest in Maryland-Virginia Racing Circuit, Inc. ("MVRC"), which managed the operations of Colonial Downs, a thoroughbred and standardbred racetrack. On December 31, 2004, the Company ceased operations at Bay Meadows and Multnomah Greyhound Park as these were operations in leased facilities and the leases were not renewed for 2005. In addition, the Company operates off-track betting facilities, a United States national account wagering business known as XpressBet®, which permits customers to place wagers by telephone and over the Internet on horse races at over 100 North American racetracks and internationally on races in Australia, South Africa and Dubai and a European account wagering service known as MagnaBet™. The Company also owns and operates HorseRacing TV™ ("HRTV™"), a television network focused on horse racing that was initially launched on the Racetrack Television Network, a network in which the Company has a minority interest and which was formed to telecast races from the Company's racetracks and other racetracks, via private direct to home satellite, to paying subscribers. In 2004, the Company launched RaceONTV™ in Europe to provide North American racing content from the Company's racetracks and other U.S. racetracks that have agreed to participate in the Company's international distribution network to locations outside North America. The Company also owns a 30% equity interest in AmTote International, Inc., a provider of totalisator services to the pari-mutuel industry. To support certain of the Company's thoroughbred racetracks, the Company also owns and operates thoroughbred training centers situated near San Diego, California, in Palm Beach County, Florida and in the Baltimore, Maryland area. The Company also owns and operates production facilities in Austria and in North Carolina for StreuFex™, a straw-based horse bedding product.

In addition to racetracks, the Company owns a significant real estate portfolio, which includes two golf courses and related recreational facilities in Austria and Canada, as well as two residential developments in various stages of development in Austria and Canada and one residential development held for sale in the United States.

These consolidated financial statements have been prepared in U.S. dollars following United States generally accepted accounting principles ("U.S. GAAP").

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. For those entities in which the Company holds less than 50% ownership interest, the equity or cost method of accounting is utilized based on an assessment of the Company's ability to exercise significant influence over the operations of the entity.

Cash and Cash Equivalents

Cash and cash equivalents include cash on account, demand deposits and short-term investments with remaining 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

Long-lived assets not available for sale are tested for recoverability whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If such events or changes in circumstances 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.

93

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 periods ranging from 20 to 40 years.

Excess Racing Real Estate

Excess racing real estate is real estate at the Company's racetracks that is being considered for development with potential strategic partners or otherwise. Excess racing real estate currently consists of land adjacent to certain of the Company's racetracks including Santa Anita Park, Gulfstream Park, Lone Star Park at Grand Prairie, Laurel Park, Pimlico Race Course and Magna Racino™. 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 periods ranging from 20 to 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, computer hardware and software over 3 to 5 years and furniture and fixtures over 5 to 7 years.

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

Racing Licenses

Racing licenses, which were acquired through the Company's acquisition of racetracks, represent the value attributed to licenses to conduct race meets. Racing licenses are intangible assets that meet the definition of an indefinite life intangible and are not subject to amortization, but are evaluated for impairment on an annual basis or when impairment indicators are present. Racing license impairment is assessed based on a comparison of the fair value of an individual reporting unit's racing license to its carrying value. An impairment write-down to fair value would occur if the discounted cash flows from operations less charges for contributory assets assumed to be owned by third parties is less than the carrying value of the racing license.

94

Revenue Recognition

The Company records operating revenues associated with horse racing on a daily basis. Pari-mutuel wagering revenues are recognized gross of purses, stakes and awards and pari-mutuel wagering taxes. The costs relating to these amounts are shown as "pari-mutuel purses, awards and other".

Gaming revenues represent the net win earned on slot wagers. Net win is the difference between wagers placed and winning payouts to patrons, and is recorded at the time wagers are made. Gaming taxes, purses and other represent statutory required amounts to be distributed to the state as tax and to the horsemen to supplement purses.

Non-wagering revenues include food and beverage sales, program sales, admissions, parking, sponsorship, rental fees and other revenues. Revenues from food and beverage and program sales are recorded at the time of sale. Revenues from admissions and parking are recorded on a daily basis, except for seasonal amounts which are recorded ratably over the racing season. Revenues from sponsorship and rental fees are recorded ratably over the terms of the respective agreements or when the related event occurs.

Revenues from the sale of residential development inventory are recognized when title passes to the purchaser and collection is reasonably assured. Properties which have been sold, but for which these criteria have not been satisfied, are included in development real estate.

Golf course annual membership fee revenues are recognized as revenue ratably over the applicable season.

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 or when the related racing event occurs.

Golf membership initiation fees are deferred and amortized over the expected membership life.

Seasonality

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 racing revenues and operating results for the year. The Company's racing operations have historically operated at a loss in the second half of the year, with the third quarter generating the largest operating loss. This seasonality has resulted in large quarterly fluctuations in revenue and operating results.

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 accumulated comprehensive income in shareholders' equity. The appropriate amounts of exchange gains or losses included in accumulated comprehensive income are reflected in operations 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. A valuation allowance is provided to the extent that it is more likely than not that future tax assets will not be realized.

95

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.

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

		Years ended December 31,
		2005			2004			2003
Net loss, as reported		$	(105,293	)	$	(95,636	)	$	(105,097	)
Pro-forma stock compensation expense determined under the fair value method, net of tax			(877	)		(972	)		(2,181	)
Pro-forma net loss		$	(106,170	)	$	(96,608	)	$	(107,278	)
Loss per share
	Basic — as reported	$	(0.98	)	$	(0.89	)	$	(0.98	)
	Basic — pro-forma	$	(0.99	)	$	(0.90	)	$	(1.00	)
	Diluted — as reported	$	(0.98	)	$	(0.89	)	$	(0.98	)
	Diluted — pro-forma	$	(0.99	)	$	(0.90	)	$	(1.00	)

Loss per Share

Basic loss per share is computed by dividing net loss by the weighted average number of shares of Class A Subordinate Voting Stock and Class B Stock outstanding during the year. Diluted loss per share reflects the assumed conversion of all dilutive securities using the "if converted" method for convertible debentures and the "treasury stock" method for options.

Under the "if converted" 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 (loss) is increased (decreased) by related interest.

Under the "treasury stock" method:

•

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 (loss) per share calculation.

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 (loss), 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 (loss).

96

Self Insurance

The Company self-insures for employee medical and dental coverages up to $125 thousand per incident. Self-insurance reserves include known claims and estimates of incurred but not reported claims based upon the Company's claims experience. The Company also maintains stop-loss insurance coverage for medical claims that exceed $125 thousand per incident.

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 reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. Management believes that the estimates utilized in preparing the consolidated financial statements are reasonable and prudent, however, actual results could differ from these estimates.

Comparative Amounts

Certain of the comparative amounts have been reclassified to conform to the current year presentation and to reflect discontinued operations and assets and liabilities held for sale.

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.

On December 16, 2004, the Financial Accounting Standards Board ("FASB") issued FASB Statement No. 123 (revised 2004), Share-Based Payment ("Statement 123(R)"), which is a revision of SFAS 123. Statement 123(R) supersedes APB 25 and amends FASB Statement No. 95, Statement of Cash Flows. Generally, the approach in Statement 123(R) is similar to the approach described in SFAS 123, however, Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the statement of operations based on their fair values. Pro-forma disclosure is no longer an alternative.

The provisions of Statement 123(R) are effective in the first annual reporting period beginning after June 15, 2005 with calendar year-end companies being required to adopt Statement 123(R) in the first quarter of 2006. The Company expects to adopt Statement 123(R) on January 1, 2006.

Statement 123(R) permits public companies to adopt its requirements using one of two methods:

•

A "modified prospective" method in which compensation cost is recognized beginning with the effective date: (a) based on the requirements of Statement 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS 123 for all awards granted to employees prior to the effective date of Statement 123(R) that remain unvested on the effective date.



•

A "modified retrospective" method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under Statement 123 for purposes of pro-forma disclosures either: (a) all prior periods presented or (b) prior interim periods of the year of adoption.

The Company is currently reviewing the alternatives for implementation and has not yet determined the methodology for implementation.

97

As permitted by SFAS 123, the Company currently accounts for share-based payments to employees using APB 25's intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options. Accordingly, the adoption of Statement 123(R)'s fair value method will have a significant impact on the results of operations, although it will have no impact on the Company's overall financial position. The impact of adoption of Statement 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future, however, had the Company adopted Statement 123(R) in prior periods, the impact of that standard would have approximated the impact of SFAS 123 as described in the disclosure of pro-forma net loss and loss per share in note 16 to these consolidated financial statements. Statement 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature.

2.     ACCOUNTING CHANGE

In accordance with a United States Securities and Exchange Commission staff announcement, effective January 1, 2005, the Company changed its method of performing its annual impairment test for its racing licenses from a residual method to a direct value method. This change had no impact on the results of operations for the year ended December 31, 2005.

3.     ACQUISITIONS

(a)

Flamboro Downs Holdings Limited

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 houses a gaming facility with 750 slot machines operated by the Ontario Lottery and Gaming Corporation. ORI was owned by an employee of the Company. On April 16, 2003, the Company received all necessary regulatory approvals for the acquisition of Flamboro Downs, and accordingly, the shares of ORI were transferred to the Company. As the terms of the arrangements between the Company and ORI provided the Company with significant influence over ORI and entitlement to the undistributed earnings of ORI, the results of operations of ORI were accounted for under the equity method for the period from October 18, 2002 to April 16, 2003 (refer to note 5).

The acquisition has been accounted for using the purchase method and the purchase price has been allocated to the assets and liabilities acquired as follows:

Non-cash working capital deficit	$	(1,549	)
Real estate properties and fixed assets		16,494
Racing license		55,491
Future taxes		(11,031	)
Net assets acquired and total purchase price, net of cash acquired	$	59,405
The purchase consideration for this acquisition is as follows:
Cash	$	23,055
Issuance of secured notes		32,855
Obligation with respect to the extension of the slot agreement		3,495
	$	59,405

(b)

AmTote International, Inc.

On August 22, 2003, the Company completed the acquisition of a 30% equity interest in AmTote International, Inc. ("AmTote") for a total cash purchase price, including transaction costs, of $4.3 million. The Company has an option (the "First Option") to acquire an additional 30% equity interest in AmTote, exercisable at any time during the three year period commencing after the date of acquisition. If the Company exercises the First Option, it has a second option to acquire the remaining 40% equity interest in AmTote, exercisable at any time during the three year period commencing after the date of exercise of the First Option. Also, the shareholders of AmTote have the right to sell to the Company their remaining equity interest during the 120 day period following the exercise of the First Option. AmTote is a provider of totalisator services to the pari-mutuel industry and has service contracts with over 70 North American racetracks and other wagering entities. The Company's 30% share of the results of operations of AmTote is accounted for under the equity method.

98

4.     ASSETS HELD FOR SALE

(a)

On November 3, 2005, the Company announced that one of its subsidiaries that owns approximately 157 acres of excess real estate in Palm Beach County, Florida had entered into an agreement to sell the real property to Toll Bros, Inc., a Pennsylvania real estate development company for $51.0 million in cash. The proposed sale is subject to the completion of due diligence by the purchaser by February 28, 2006 and a closing by March 30, 2006 (refer to note 23(b)).



(b)

On November 9, 2005, the Company announced that it had entered into a share purchase agreement with PA Meadows, LLC, a company jointly owned by William Paulos and William Wortman, controlling shareholders of Millennium Gaming, Inc. and a fund managed by Oaktree Capital Management, LLC ("Oaktree" and together, with PA Meadows, LLC, "Millennium-Oaktree"), providing for the acquisition by Millennium-Oaktree of all of the outstanding shares of Washington Trotting Association, Inc., Mountain Laurel Racing, Inc. and MEC Pennsylvania Racing, Inc., each wholly-owned subsidiaries of the Company, through which the Company currently owns and operates The Meadows, a standardbred racetrack in Pennsylvania. The sale is scheduled to close following receipt of approval from the Pennsylvania Harness Racing Commission, receipt by The Meadows of a Conditional Category 1 slot license pursuant to the Pennsylvania Race Horse Development and Gaming Act, and satisfaction of certain other customary closing conditions. Under the terms of the share purchase agreement, Millennium-Oaktree will pay the Company $225.0 million and the Company will continue to manage the racing operations at The Meadows on behalf of Millennium-Oaktree pursuant to a minimum five-year racing services agreement. The purchase price is payable in cash at closing, subject to a holdback amount of $39.0 million, which will be released over time in accordance with the terms of the share purchase agreement.



(c)

The Company's assets and liabilities held for sale as at December 31, 2005 and 2004 are shown below. All assets held for sale and related liabilities have been classified as current at December 31, 2005 as the transactions described in sections (a) and (b) above are expected to close within one year from the balance sheet date.

		December 31,
		2005		2004
ASSETS
Current assets:
	Restricted cash	$	443	$	192
	Accounts receivable		450		272
	Income taxes receivable		857		593
	Prepaid expenses and other		969		806
	Real estate properties, net		26,562		—
	Fixed assets, net		1,576		—
	Racing license		58,266		—
	Other assets, net		200		—
	Future tax assets		397		—
			89,720		1,863
Real estate properties, net			—		26,830
Fixed assets, net			—		1,971
Racing license			—		58,266
Other assets, net			—		252
Future tax assets			—		581
			—		87,900
		$	89,720	$	89,763

99

		December 31,
		2005		2004
LIABILITIES
Current liabilities:
	Accounts payable	$	2,012	$	2,046
	Accrued salaries and wages		44		259
	Other accrued liabilities		623		725
	Deferred revenue		312		301
	Future tax liabilities		24,746		—
			27,737		3,331
Future tax liabilities			—		25,016
		$	27,737	$	28,347

(d)

In accordance with the terms of the senior secured revolving credit facility and the Company's bridge loan agreement with MI Developments Inc. ("MID"), the Company is required to use the net proceeds from the sale of excess real estate in Palm Beach County, Florida and the sale of The Meadows, as described in sections (a) and (b) above, to fully pay down principal amounts outstanding under the bridge loan and to permanently pay down a portion of the principal amounts outstanding under the senior secured revolving credit facility up to $12.0 million.

5.     DISCONTINUED OPERATIONS

(a)

On August 16, 2005, the Company and Great Canadian Gaming Corporation ("GCGC") entered into a share purchase agreement under which GCGC acquired all of the outstanding shares of ORI. Required regulatory approval for the sale transaction was obtained on October 17, 2005 and the Company completed the transaction on October 19, 2005. On closing, GCGC paid Cdn. $50.7 million and U.S. $23.6 million, in cash and assumed ORI's existing debt.

As required under U.S. GAAP, the Company's long-lived assets and racing licenses are tested for impairment on an annual basis or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The sale transaction described above established fair values of certain assets of Flamboro Downs and accordingly, the Company performed impairment testing of these assets at June 30, 2005. Based on this analysis, the Company recognized a non-cash impairment loss of $15.0 million before income taxes or $12.5 million after income taxes of Flamboro Downs' racing license.

(b)

On August 18, 2005, three subsidiaries of the Company entered into a share purchase agreement with Colonial Downs, L.P. ("Colonial LP") pursuant to which Colonial LP purchased all of the outstanding shares of MVRC. MVRC was an indirect subsidiary of the Company that managed the operations of Colonial Downs, a thoroughbred and standardbred horse racetrack located in New Kent, Virginia, pursuant to a management agreement with Colonial LP, the owner of Colonial Downs. Required regulatory approval for the sale transaction was obtained on September 28, 2005 and the Company completed the transaction on September 30, 2005. On closing, the Company received cash consideration of $6.8 million, net of transaction costs, and a one-year interest-bearing note in the principal amount of $3.0 million, which is included in accounts receivable on the consolidated balance sheets.

100

(c)

The Company's results of operations and cash flows related to discontinued operations for the years ended December 31, 2005, 2004 and 2003 are as follows:

	Years ended December 31,
	2005			2004		2003
Revenues	$	22,483		$	29,104	$	22,337
Costs and expenses		17,342			20,471		14,449
		5,141			8,633		7,888
Depreciation and amortization		783			894		582
Interest expense, net		1,566			2,416		1,894
Write-down of racing license		14,961			—		—
Equity income		—			—		(992	)
Income (loss) before gain on disposition		(12,169	)		5,323		6,404
Gain on disposition		9,837			—		—
Income (loss) before income taxes		(2,332	)		5,323		6,404
Income tax expense (benefit)		(149	)		2,108		5,123
Net income (loss)	$	(2,183	)	$	3,215	$	1,281

	Years ended December 31,
	2005			2004			2003
Cash provided from (used for):
Operating activities	$	994		$	4,342		$	2,895
Investing activities		35,972			(784	)		(227	)
Financing activities		(6,989	)		(1,845	)		(1,812	)
Effect of exchange rate changes on cash and cash equivalents		(1,451	)		(2,484	)		(5,262	)
Net increase (decrease) in cash and cash equivalents during the year from operations		28,526			(771	)		(4,406	)
Payments from (to) the Company's continuing operations		(29,162	)		(2,798	)		8,565
Net increase (decrease) in cash and cash equivalents during the year		(636	)		(3,569	)		4,159
Cash and cash equivalents, beginning of year		636			4,205			46
Cash and cash equivalents, end of year	$	—		$	636		$	4,205

The Company's assets and liabilities related to discontinued operations as at December 31, 2005 and 2004 are shown below:

		December 31,
		2005		2004
ASSETS
Current assets:
	Cash and cash equivalents	$	—	$	636
	Restricted cash		—		2,055
	Accounts receivable		—		2,315
	Income taxes receivable		—		258
	Prepaid expenses and other		—		134
			—		5,398
Real estate properties, net			—		19,896
Fixed assets, net			—		1,325
Racing license			—		72,759
Future tax assets			—		276
			—		94,256
		$	—	$	99,654

101

		December 31,
		2005		2004
LIABILITIES
Current liabilities:
	Accounts payable	$	—	$	2,901
	Accrued salaries and wages		—		6
	Other accrued liabilities		—		621
	Long-term debt due within one year		—		4,362
	Deferred revenue		—		977
			—		8,867
Long-term debt			—		39,003
Future tax liabilities			—		18,271
			—		57,274
		$	—	$	66,141

6.     SALE AND LEASE ARRANGEMENT OF GREAT LAKES DOWNS

On August 24, 2004, MI Racing Inc., a wholly-owned subsidiary of the Company, sold the real property and associated racetrack license of Great Lakes Downs to Richmond Racing Co., LLC ("Richmond Racing") for approximately $4.2 million. The consideration included cash of $0.2 million and the issuance of a 20-year promissory note with a principal amount of $4.0 million.

The promissory note, which bears interest at 5% per annum, is repayable by Richmond Racing in monthly principal and interest payments of $26 thousand until maturity. MI Racing Inc. also has an option to repurchase the property and associated racetrack license of Great Lakes Downs from Richmond Racing in the event the Company is unsuccessful in obtaining a racetrack license for a proposed racetrack in Romulus, Michigan or in the event that state law in Michigan is amended to allow an entity to hold more than one racetrack license.

MI Racing Inc. has also entered into a lease agreement with Richmond Racing, which gives MI Racing Inc. the conditional right to continue operating Great Lakes Downs and conducting thoroughbred race meetings at the racetrack. The lease is for an initial term of five years with an option to renew the lease for up to three additional periods of five years each. The lease requires MI Racing Inc. to make monthly rental payments of $30 thousand to Richmond Racing.

Based on the terms contained in the sale and lease arrangement between MI Racing Inc. and Richmond Racing, for accounting purposes, the transaction has not been accounted for as a sale and leaseback, but rather using the financing method of accounting under U.S. GAAP.

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

The Company's long-lived assets and racing licenses are tested for impairment upon completion of the Company's annual business planning process. The fair value of the racetracks is 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 of each of the racing licenses and long-lived assets was then compared to their respective carrying values in order to determine the amount of the impairment. The long-lived assets consist of fixed assets and real estate properties.

Write-downs and impairment charges relating to long-lived and intangible assets recognized are as follows:

	Years ended December 31,
	2005		2004(i)		2003(ii)
Gulfstream Park	$	—	$	26,252	$	49,078
The Maryland Jockey Club		—		433		47,712
Bay Meadows		—		—		20,294
Multnomah Greyhound Park		—		—		5,538
Remington Park		—		—		4,780
Portland Meadows		—		—		3,754
Thistledown		—		—		3,700
	$	—	$	26,685	$	134,856

(i)

During the year ended December 31, 2004, the Company commenced a major redevelopment of its Gulfstream Park racetrack and demolished certain long-lived assets. As a result, the Company recognized a non-cash write-down of $26.3 million related to Gulfstream Park's long-lived assets in connection with the redevelopment.

102

During the year ended December 31, 2004, the Company also commenced the redevelopment of the racing surfaces at Laurel Park. As a result, the Company recognized a non-cash write-down of $0.4 million related to Laurel Park's long-lived assets in connection with the redevelopment.

(ii)

During the year ended December 31, 2003, Gulfstream Park and The Maryland Jockey Club ("MJC") experienced lower average daily attendance and decreased on-track wagering activity compared to the prior year. Based on these impairment indicators, the Company tested Gulfstream Park's and MJC's long-lived and intangible assets for recoverability. The Company used an expected present value approach of estimated future cash flows, including a probability weighted approach in considering the likelihood of possible outcomes, to determine the fair value of the long-lived and intangible assets. Based on this analysis, non-cash impairment charges were required of Gulfstream Park's racing license of $49.1 million and a portion of MJC's racing license of $47.7 million.

A non-cash impairment charge of the Bay Meadows' racing license of $19.6 million and goodwill of $0.7 million was required based on uncertainty regarding future renewals of the lease of the Bay Meadows facility, which was renewed on a year-to-year basis in each of 2002 and 2003, but expired on December 31, 2004.

The operations at Multnomah Greyhound Park, Remington Park, Portland Meadows and Thistledown produced operating losses in 2003. Based on this impairment indicator, the Company tested these racetrack's respective long-lived and intangible assets for recoverability. The Company used an expected present value approach of estimated future cash flows, including a probability weighted approach in considering the likelihood of possible outcomes, to determine the fair value of the long-lived and intangible assets. Based on this analysis, non-cash impairment charges were required of Multnomah Greyhound Park's racing license of $5.5 million, Remington Park's fixed assets of $3.9 million and other intangible assets of $0.9 million, Portland Meadows' racing license of $0.2 million and other intangible assets of $3.6 million and Thistledown's racing license of $3.7 million.

8.     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 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. In 2002, the Company recorded a non-cash 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. In December 2003, the Company completed the transaction for consideration of $8.5 million and recorded the proceeds in non-wagering revenues and the cost of the excess real estate in operating costs. There was no gain or loss on this transaction in 2003.

103

9.     REAL ESTATE PROPERTIES

Real estate properties consist of:

		December 31,
		2005			2004
Revenue-producing racing real estate
Cost
	Land and improvements	$	206,873		$	208,841
	Buildings		495,018			395,338
	Construction in progress		119,247			104,583
			821,138			708,762
Accumulated depreciation
	Buildings		(91,005	)		(68,280	)
Revenue-producing racing real estate, net			730,133			640,482
Excess racing real estate			96,303			98,332
Development real estate
Cost
	Land and improvements		40,611			39,494
	Construction in progress		3,155			1,222
Development real estate			43,766			40,716
Revenue-producing non-racing real estate
Cost
	Land and improvements		37,130			37,543
	Buildings		51,299			56,957
			88,429			94,500
Accumulated depreciation
	Buildings		(11,090	)		(11,025	)
Revenue-producing non-racing real estate, net			77,339			83,475
Non-core real estate
Cost
	Land and improvements		2,482			2,487
	Buildings		71			74
			2,553			2,561
Accumulated depreciation
	Buildings		(53	)		(49	)
Non-core real estate, net			2,500			2,512
		$	950,041		$	865,517

Included in revenue-producing racing real estate properties are land and improvements and buildings under capital lease with a cost of $45.6 million (December 31, 2004 — $45.6 million) and accumulated depreciation of $6.8 million (December 31, 2004 — $4.6 million).

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

104

10.   FIXED ASSETS

Fixed assets consist of:

		December 31,
		2005			2004
Revenue-producing racing fixed assets
Cost
	Machinery and equipment	$	62,755		$	42,662
	Furniture and fixtures		49,594			46,064
			112,349			88,726
Accumulated depreciation
	Machinery and equipment		(24,969	)		(20,019	)
	Furniture and fixtures		(29,800	)		(25,499	)
Revenue-producing racing fixed assets, net			57,580			43,208
Revenue-producing non-racing fixed assets
Cost
	Machinery and equipment		5,541			4,693
	Furniture and fixtures		7,897			8,102
			13,438			12,795
Accumulated depreciation
	Machinery and equipment		(4,033	)		(3,280	)
	Furniture and fixtures		(4,969	)		(4,481	)
Revenue-producing non-racing fixed assets, net			4,436			5,034
		$	62,016		$	48,242

Included in revenue-producing racing fixed assets are machinery and equipment and furniture and fixtures under capital lease with a cost of $1.9 million (December 31, 2004 — $1.9 million) and accumulated depreciation of $1.6 million (December 31, 2004 — $1.4 million).

11.   OTHER ASSETS

Other assets consist of:

	December 31,
	2005		2004
Long-term receivables and other	$	8,099	$	8,093
Equity investment		5,878		5,708
Fair value of interest rate swaps (note 18(c))		586		—
Goodwill		413		740
	$	14,976	$	14,541

105

12.   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:

	Years ended December 31,
	2005			2004			2003
Expected provision:
Federal statutory income tax rate (35%)	$	(36,298	)	$	(35,920	)	$	(59,450	)
State income tax, net of federal benefit		309			586			(6,223	)
Tax losses not benefited (utilized)		29,499			30,624			(1,082	)
Foreign rate differentials		1,080			87			(42	)
Change in enacted income tax rates		—			(5,108	)		—
Foreign dividends		1,599			1,894			—
Non-deductible expenses		2,985			4,530			2,617
Other		228			(470	)		701
Income tax benefit	$	(598	)	$	(3,777	)	$	(63,479	)

At December 31, 2005, the Company had United States, Canadian and Austrian federal income tax loss carry-forwards totaling approximately $266.0 million. Of the $266.0 million in loss carry-forwards at December 31, 2005, $54.1 million have no expiration date and the remainder expire as follows:

Years:
2008 to 2010	$	3,100
2012 to 2018		4,700
2020 to 2025		204,100
	$	211,900

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

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

(b)

The details of the loss from continuing operations before income taxes by jurisdiction are as follows:

	Years ended December 31,
	2005			2004			2003
United States	$	(77,377	)	$	(84,978	)	$	(171,292	)
Foreign		(26,331	)		(17,650	)		1,435
	$	(103,708	)	$	(102,628	)	$	(169,857	)

(c)

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

		Years ended December 31,
		2005			2004			2003
Current income tax provision
	United States	$	746		$	679		$	698
	Foreign		4,652			996			2,944
			5,398			1,675			3,642
Future income tax provision (benefit)
	United States		(75	)		14			(63,661	)
	Foreign		(5,921	)		(5,466	)		(3,460	)
			(5,996	)		(5,452	)		(67,121	)
		$	(598	)	$	(3,777	)	$	(63,479	)

106

(d)

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

	Years ended December 31,
	2005			2004			2003
Tax deferral on sale of real estate	$	(570	)	$	1,956		$	2,536
Amortization of purchase accounting fair value increments, for tax purposes in excess of book		1,131			1,928			1,901
Tax gain in excess of book gain on disposal of real estate property		(198	)		(1,404	)		(6,403	)
Tax benefit of charitable contribution carry-forward		—			—			(269	)
Tax benefit of loss carry-forwards		(29,080	)		(31,220	)		(10,932	)
Fee revenue in excess of tax (tax in excess of book)		459			66			(1,305	)
Securitization of future amounts receivable under access fee agreements		(4,176	)		—			—
Write-down of assets for book purposes		—			—			(53,194	)
Increase (reduction) in valuation allowance		27,685			30,853			(920	)
Change in enacted income tax rates		—			(5,108	)		—
Other		(1,247	)		(2,523	)		1,465
	$	(5,996	)	$	(5,452	)	$	(67,121	)

(e)

Future tax assets and liabilities consist of the following temporary differences:

		December 31,
		2005			2004
Assets
Real estate properties tax value in excess of book value		$	20,456		$	20,850
Tax benefit of loss carry-forwards
	Pre-acquisition		3,525			4,282
	Post-acquisition		97,121			49,012
Tax benefit of charitable contribution carry-forward			1,400			1,400
Benefit of various tax credit carry-forwards			2,749			2,700
			125,251			78,244
Valuation allowance
Valuation allowance against tax basis of loss carry-forwards
	Pre-acquisition		(3,349	)		(4,107	)
	Post-acquisition		(59,451	)		(29,755	)
Valuation allowance against tax basis of real estate
	properties in excess of book value		(9,994	)		(9,994	)
Future tax assets		$	52,457		$	34,388
Liabilities
Real estate properties book basis in excess of tax basis		$	68,744		$	62,547
Other assets book basis in excess of tax basis			20,553			22,038
Foreign branch tax deferral and other			12,004			5,046
Future tax liabilities		$	101,301		$	89,631

(f)

Income taxes paid in cash were $4.2 million for the year ended December 31, 2005 (for the year ended December 31, 2004 — $2.9 million; for the year ended December 31, 2003 — $2.1 million).

107

13.   BANK INDEBTEDNESS

(a)

On July 27, 2005, the Company amended and extended its $50.0 million senior revolving credit facility to July 31, 2006. The credit facility is available by way of U.S. dollar loans and letters of credit for general corporate purposes. Loans under the facility are secured by a first charge on the assets of Golden Gate Fields and a second charge on the assets of Santa Anita Park, and are guaranteed by certain subsidiaries of the Company. At December 31, 2005, the Company had borrowings under the facility of $27.3 million (December 31, 2004 — $27.5 million) and had issued letters of credit totaling $21.7 million (December 31, 2004 — $21.9 million) under the credit facility, such that $1.0 million was unused and available.

The loans under the facility bear interest at either the U.S. Base rate plus 3% or the London Interbank Offered Rate ("LIBOR") plus 4%. The weighted average interest rate on the loans outstanding under the credit facility as at December 31, 2005 was 9.3% (December 31, 2004 — 6.0%).

In accordance with the terms of the senior secured revolving credit facility and the Company's bridge loan agreement with MID (refer to note 20), the Company was required to use the net proceeds from the sale of Flamboro Downs to pay down the principal amount owing under the two loans in equal portions. However, both MID and the lender under the senior secured revolving credit facility agreed to mutually waive this repayment requirement, subject to certain other amendments, including provisions for repayment upon closing of certain future asset sales.

At December 31, 2005, the Company was not in compliance with one of the financial covenants contained in the credit agreement. A waiver was obtained from the lender for the financial covenants breach at December 31, 2005.

(b)

On July 27, 2005, one of the Company's European subsidiaries entered into a bank term line of credit agreement of Euros 2.5 million (U.S. $3.0 million) bearing interest at the European Interbank Offered Rate ("EURIBOR") plus 0.75% per annum (3.2% at December 31, 2005). The term line of credit is due on July 31, 2006. A European subsidiary has provided two first mortgages on real estate as security for this facility. At December 31, 2005, the bank term line of credit is fully drawn.

14.   DEBT AND COMMITMENTS

(a)

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

	December 31,
	2005		2004
Term loan facility, bearing interest at LIBOR plus 2.0% per annum (6.3% at December 31, 2005) with a maturity date of October 7, 2007, subject to a further extension at the Company's option to October 7, 2009. The facility is guaranteed by the Los Angeles Turf Club, Incorporated ("LATC") and is secured by a first deed of trust on Santa Anita Park and the surrounding real property, an assignment of the lease between LATC, the racetrack operator, and The Santa Anita Companies, Inc. ("SAC") and a pledge of all of the outstanding capital stock of LATC and SAC. At December 31, 2005, the term loan is fully drawn and is repayable in monthly principal amounts of $417 thousand until maturity.	$	69,167	$	73,750
Loan of Euros 17.6 million, bearing interest at an implicit rate of 5.17% per annum, secured by an assignment of future amounts receivable under the Fontana Sports access agreement, repayable in nine annual principal and interest payments of Euros 2.5 million commencing January 1, 2006 until the last installment has been made in 2014.		20,880		23,869
Obligation to pay $18.3 million on exercise of either the put or call option to acquire the remaining voting and equity interests in MJC, bearing interest at the six-month LIBOR (4.6% at December 31, 2005). The Company can exercise the call option at any time during the period starting 48 months and ending 60 months after November 27, 2002 (the date on which MJC was acquired), and the put option can be exercised by the other party at any time during the first five years after November 27, 2002.		18,312		18,312
Term loan facility of Euros 15.0 million, bearing interest at 4.0% per annum with a maturity date of February 9, 2007, secured by a pledge of land and a guarantee by the Company.		17,761		20,304
Term loan facility of Euros 15.0 million, bearing interest at EURIBOR plus 2% per annum (4.3% at December 31, 2005) with a maturity date of December 15, 2006, secured by a first and second mortgage on land in Austria owned by the European subsidiary.		17,761		20,304
Loan of Cdn. $20.5 million, bearing interest at a rate of 6.36% per annum, secured by an assignment of the future amounts receivable under the Magna Golf Club access agreement for the years 2009 through 2014, repayable in six annual principal and interest payments of Cdn. $5.0 million commencing January 1, 2009 until the last installment has been made in 2014.		17,595		—

108

	December 31,
	2005			2004
Capital lease (imputed interest rate of 8.5%) maturing April 1, 2027, secured by buildings and improvements at Lone Star Park at Grand Prairie.		15,520			15,520
Term loan facilities, bearing interest at either the U.S. Prime rate or LIBOR plus 2.6% per annum (7.0% at December 31, 2005) until December 1, 2008, with a maturity date of December 1, 2013. On December 1, 2008, the interest rate is reset to the market rate for a United States Treasury security of an equivalent term plus 2.6%. The term loans are repayable in quarterly principal and interest payments. The loans are secured by deeds of trust on land, buildings and improvements and security interests in all other assets of certain affiliates of The Maryland Jockey Club.		13,698			17,786
Financing arrangement of Cdn. $13.7 million, bearing interest at an implicit rate of 5.08% per annum, secured by an assignment of the future amounts receivable under the Magna Golf Club access agreement for the years 2006 through 2008, repayable in three annual principal and interest payments of Cdn. $5.0 million commencing January 1, 2006 until the third installment has been made in 2008.		11,733			—
Term loan facility, bearing interest at either the U.S. Prime rate or LIBOR plus 2.6% per annum (7.0% at December 31, 2005), with a maturity date of December 15, 2019. The term loan is repayable in quarterly principal and interest payments. The loan is secured by deeds of trust on land, buildings and improvements and security interests in all other assets of certain affiliates of The Maryland Jockey Club.		9,608			10,000
Term loan facility, bearing interest at 7.0% per annum until June 7, 2007, with a maturity date of June 7, 2017. On June 7, 2007 and June 7, 2012, the interest rate is reset to the market rate for a United States Treasury security of an equivalent term plus 2.6%. The term loan is repayable in quarterly principal and interest payments. The term loan is callable on December 31, 2006 or December 31, 2011. The loan is secured by a deed of trust on land, buildings and improvements and security interests in all other assets of certain affiliates of The Maryland Jockey Club.		4,274			4,501
Bank term loan of Euros 2.9 million, bearing interest at EURIBOR plus 0.625% per annum (3.1% at December 31, 2005). The term loan is due in July 2006. A European subsidiary has provided two first mortgages on real estate properties as security for this facility.		3,442			7,870
Other loans to various subsidiaries from various banks and city governments, including equipment loans and a term loan, with interest rates ranging from 4.0% to 8.1%.		1,112			1,180
Unsecured promissory note bearing interest at 6.1% per annum, which matured on September 14, 2005.		—			2,500
	$	220,863		$	215,896
Less: due within one year		(38,033	)		(13,401	)
	$	182,830		$	202,495

At December 31, 2005, the Company is in compliance with all of these long-term debt agreements and related financial covenants.

The overall weighted average interest rate on long-term debt, long-term debt due to parent and convertible subordinated notes at December 31, 2005 was 6.8% (December 31, 2004 — 6.7%; December 31, 2003 — 6.7%).

(b)

Future principal repayments on long-term debt at December 31, 2005 are as follows:

2006	$	38,033
2007		49,007
2008		13,327
2009		61,401
2010		7,960
Thereafter		51,135
	$	220,863

109

(c)

Included within the above schedule of future principal repayments of long-term debt (note 14(b)) is an obligation under a capital lease. Future minimum lease payments under the capital lease in effect at December 31, 2005 are as follows:

2006	$	1,320
2007		1,452
2008		1,452
2009		1,452
2010		1,452
Thereafter		28,512
Total payments		35,640
Less: capital lease minimum payments representing interest		(20,120	)
Present value of lease payments	$	15,520

(d)

Interest expense and interest income include:

	Years ended December 31,
	2005			2004			2003
Interest cost, gross	$	42,117		$	26,747		$	20,629
Less: Interest capitalized		(5,864	)		(4,043	)		(7,281	)
Interest expense		36,253			22,704			13,348
Interest income		(1,121	)		(1,029	)		(1,622	)
Interest expense, net	$	35,132		$	21,675		$	11,726

Interest capitalized relates to real estate properties under development.

Interest paid in cash for the year ended December 31, 2005 was $29.9 million (for the year ended December 31, 2004 — $25.1 million; for the year ended December 31, 2003 — $19.9 million).

15.   CONVERTIBLE SUBORDINATED NOTES

(a)

8.55% Convertible Subordinated Notes

In June 2003, the Company issued $150.0 million of 8.55% convertible subordinated notes which mature on June 15, 2010. 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 $7.05 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 June 2, 2006, at the principal amount plus accrued and unpaid interest, provided that, in connection with any redemption occurring on or after June 2, 2006 and before June 2, 2008, 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, 2005, all the notes remained outstanding.

The Company incurred issue expenses of $5.0 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.

(b)

7.25% Convertible Subordinated Notes

In December 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, 2005, 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.

110

16.   CAPITAL STOCK AND LONG-TERM INCENTIVE PLAN

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.

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.



(iii)

Each share may be converted 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 and Class B Stock for the years ended December 31, 2005, 2004 and 2003 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):

	Class A Subordinate Voting Stock			Class B Stock			Total
	Number of shares	Stated value		Number of shares	Stated value		Number of shares	Stated value
Issued and outstanding at December 31, 2002	48,647,831	$	316,855	58,466,056	$	394,094	107,113,887	$	710,949
Issued on exercise of Stock Options	6,000		29	—		—	6,000		29
Issued under the Long- term Incentive Plan	25,965		144	—		—	25,965		144
Issued and outstanding at December 31, 2003	48,679,796		317,028	58,466,056		394,094	107,145,852		711,122
Issued on exercise of Stock Options	175,000		852	—		—	175,000		852
Issued under the Long- term Incentive Plan	24,000		123	—		—	24,000		123
Issued and outstanding at December 31, 2004	48,878,796		318,003	58,466,056		394,094	107,344,852		712,097
Issued under the Long-term Incentive Plan	16,567		102	—		—	16,567		102
Issued and outstanding at December 31, 2005	48,895,363	$	318,105	58,466,056	$	394,094	107,361,419	$	712,199

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Loss Per Share

(c)

The following table is a summary of the elements used in calculating basic and diluted loss per share (number of shares in the following table are expressed in whole numbers and have not been rounded to the nearest thousand):

		Years ended December 31,
		2005			2004			2003
Net loss from continuing operations		$	(103,110	)	$	(98,851	)	$	(106,378	)
Net income (loss) from discontinued operations			(2,183	)		3,215			1,281
Net loss		$	(105,293	)	$	(95,636	)	$	(105,097	)
Weighted average shares outstanding			107,356,108			107,323,300			107,143,107
Net effect of dilutive instruments(i)			—			—			—
Diluted weighted average shares outstanding			107,356,108			107,323,300			107,143,107
Earnings (loss) per share:
Basic and Diluted
	Continuing operations	$	(0.96	)	$	(0.92	)	$	(0.99	)
	Discontinued operations		(0.02	)		0.03			0.01
Total loss per share		$	(0.98	)	$	(0.89	)	$	(0.98	)

(i)

As a result of the net loss for the years ended December 31, 2005, 2004 and 2003, options to purchase 4,827,500 shares (for the year ended December 31, 2004 — 4,500,500; for the year ended December 31, 2003 — 4,841,500), notes convertible into 30,100,124 shares (for the year ended December 31, 2004 — 30,100,124; for the year ended December 31, 2003 — 20,790,421) and 199,471 performance share awards (for the years ended December 31, 2004 and 2003 — nil) have been excluded from the computation of diluted loss per share since their effect is anti-dilutive.

Maximum Shares

(d)

The following table (number of shares have been rounded to the nearest thousand) presents the maximum number of shares of Class A Subordinate Voting Stock and Class B Stock that would be outstanding if all of the outstanding options, convertible subordinated notes and performance shares issued and outstanding as at December 31, 2005 were exercised or converted:

	Number of Shares
Class A Subordinate Voting Stock outstanding at December 31, 2005	48,895
Class B Stock outstanding at December 31, 2005	58,466
Options to purchase Class A Subordinate Voting Stock	4,828
8.55% Convertible Subordinated Notes, convertible at $7.05 per share	21,276
7.25% Convertible Subordinated Notes, convertible at $8.50 per share	8,824
Performance share awards of Class A Subordinate Voting Stock	199
	142,488

Long-term Incentive Plan

(e)

The Company has a Long-term Incentive Plan (the "Plan") (adopted in 2000), which allows for the grant of non-qualified 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 7.6 million shares of Class A Subordinate Voting Stock are available to be issued under the Plan, of which 6.3 million are available for issuance pursuant to stock options and tandem stock appreciation rights and 1.3 million are available for issuance pursuant to any other type of award under the Plan.

During 2005, the Company introduced an incentive compensation program for certain officers and key employees, which will award performance shares of Class A Subordinate Voting Stock as contemplated under the Plan in 2005. The number of shares of Class A Subordinate Voting Stock underlying the performance share awards is based either on a percentage of a guaranteed bonus or a percentage of total 2005 compensation divided by the market value of the stock on the date the program was approved by the Compensation Committee of the Board of Directors. These performance shares vested over a six or eight month period to December 31, 2005 and are to be distributed, subject to certain conditions, in two equal installments. The first distribution date is on or about March 31, 2006 and the second distribution date is on or about March 31, 2007. During the year ended December 31, 2005, 201,863 performance share awards were granted under the Plan with a weighted average grant-date market value of either U.S. $6.26 or Cdn. $7.61 per share. At December 31, 2005, there were 199,471 performance share awards vested with a weighted average grant-date market value of either U.S. $6.26 or Cdn. $7.61 per share. During the year ended December 31, 2005, 2,392 performance shares were issued under this program for consideration of approximately $17 thousand.

112

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 1/7^th to 1/3^rd per year and expire on or before the tenth anniversary of the date of grant, subject to earlier cancellation upon the occurrence of certain events specified in the stock option agreements entered into by the Company with each recipient of options.

Information with respect to shares under option is as follows (number of shares subject to option in the following table are expressed in whole numbers and have not been rounded to the nearest thousand):

	Shares Subject to Option						Weighted Average Exercise Price
	2005		2004		2003		2005		2004		2003
Balance, Beginning of Year	4,500,500		4,841,500		5,361,833		$	6.18	$	6.14	$	6.18
Granted	720,000		200,000		640,000			6.55		6.41		6.93
Exercised	—		(175,000	)	(6,000	)		—		4.87		4.88
Forfeited(i)	(393,000	)	(366,000	)	(1,154,333	)		7.39		6.30		6.78
Balance, End of Year	4,827,500		4,500,500		4,841,500		$	6.14	$	6.18	$	6.14

(i)

For the years ended December 31, 2005 and 2004, options forfeited were primarily as a result of employment contracts being terminated and voluntary employee resignations. For the year ended December 31, 2003, options forfeited were primarily as a result of employment contracts being terminated for certain employees due to down-sizing of the corporate office. No options that were forfeited for the years ended December 31, 2005, 2004 and 2003 were subsequently reissued.

Information regarding stock options outstanding is as follows:

		Options Outstanding						Options Exercisable
		2005		2004		2003		2005		2004		2003
Number			4,827,500		4,500,500		4,841,500		4,127,715		3,909,430		3,996,811
Weighted average
	exercise price	$	6.14	$	6.18	$	6.14	$	6.07	$	6.14	$	6.10
Weighted average
	remaining contractual
	life (years)		5.1		5.6		6.6		4.5		5.3		6.3

Pro-forma information regarding net loss and loss per share is required by SFAS 123 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 value of the stock option grants in 2005 was $2.94 (for the year ended December 31, 2004 — $2.38; for the year ended December 31, 2003 — $1.50). The fair value of stock option grants in 2005 was estimated at the date of grant using the following assumptions:

		Years ended December 31,
		2005	2004	2003
Risk free interest rates		4.0%	3.0%	2.0%
Dividend yields		—	0.84%	0.84%
Volatility factor of expected market price of
	Class A Subordinate Voting Stock	0.547	0.574	0.534
Weighted average expected life (years)		4.00	4.00	4.00

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.

113

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

		Years ended December 31,
		2005			2004			2003
Net loss, as reported		$	(105,293	)	$	(95,636	)	$	(105,097	)
Pro-forma stock compensation expense determined
	under the fair value method, net of tax		(877	)		(972	)		(2,181	)
Pro-forma net loss		$	(106,170	)	$	(96,608	)	$	(107,278	)
Loss per share
	Basic — as reported	$	(0.98	)	$	(0.89	)	$	(0.98	)
	Basic — pro-forma	$	(0.99	)	$	(0.90	)	$	(1.00	)
	Diluted — as reported	$	(0.98	)	$	(0.89	)	$	(0.98	)
	Diluted — pro-forma	$	(0.99	)	$	(0.90	)	$	(1.00	)

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

17.   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, 2005, the Company incurred unrealized currency translation losses of $15.0 million, primarily from the weakening of the Euro against the U.S. dollar (an unrealized gain of $15.6 million for the year ended December 31, 2004; an unrealized gain of $40.5 million for the year ended December 31, 2003).

18.   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, restricted cash, accounts receivable, income taxes receivable/payable, bank indebtedness, accounts payable, customer deposits, other accrued liabilities and due to parent.

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, long-term debt due to parent and convertible subordinated notes

The fair value of the Company's long-term debt, long-term debt due to parent and convertible subordinated notes is estimated using discounted cash flow analysis based on the Company's current incremental borrowing rates for similar types of arrangements. Based on current rates for debt with similar terms and maturities, the fair values of the Company's long-term debt, long-term debt due to parent and convertible subordinated notes are not materially different from their carrying values.

(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 include 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 which 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.

114

(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, 2005, the Company entered into an interest 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 7.05% on a notional amount of $10.0 million under The Santa Anita Companies, Inc. facility, reduced by monthly amounts of $60 thousand until maturity. The maturity date of the contract is October 7, 2007.

During the year ended December 31, 2004, the Company entered into an interest rate swap contract with the same major financial institution. Under the terms of the contract, the Company receives a LIBOR based variable interest rate and pays a fixed rate of 5.38% on a notional amount of 40% of the outstanding balance under The Santa Anita Companies, Inc. facility, reduced by monthly amounts of $417 thousand until maturity. The maturity date of the contract is October 31, 2007.

U.S. GAAP requires companies to recognize all of 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 (loss) if certain hedge criteria are met, and recognized in the statement of operations along with the related results of the hedged item. The Company formally documents, designates and assesses the effectiveness of such transactions.

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

The Company's interest rate swaps are an asset of approximately $0.6 million at December 31, 2005, which is included in other assets (refer to note 11) on the consolidated financial statements (December 31, 2004 — payable of $0.1 million (refer to note 22); December 31, 2003 — payable of $1.2 million), using current interest rates.

The Company expects to reclassify approximately $0.3 million before income taxes, or $0.2 million after income taxes, of the amount included in accumulated comprehensive income (loss) as of December 31, 2005, into net interest expense over the next twelve months.

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.

19.   SEGMENT INFORMATION

Operating Segments

The Company's reportable segments reflect how the Company is organized and managed by senior management, including its President and Chief Executive Officer. The Company has two principal operating segments: racing and gaming operations and real estate and other operations. The racing and gaming segment has been further segmented to reflect geographical and other operations as follows: (1) California operations include Santa Anita Park, Golden Gate Fields, Bay Meadows and San Luis Rey Downs; (2) Florida operations include Gulfstream Park and the Palm Meadows training center; (3) Maryland operations include Laurel Park, Pimlico Race Course, Bowie Training Center and the Maryland OTB network; (4) Southern United States operations include Lone Star Park, Remington Park's racing and gaming operations and its OTB network; (5) Northern United States operations include The Meadows and its OTB network, Thistledown, Great Lakes Downs, Portland Meadows, Multnomah Greyhound Park and the Oregon OTB network and the North American production facility for StreuFex™; (6) European operations include Magna Racino™, MagnaBet™, RaceONTV™ and the European production facility for StreuFex™; and (7) Technology operations include XpressBet®, HorseRacing TV™ and a 30% equity investment in AmTote International, Inc. The Corporate and other segment includes costs related to the Company's corporate head office, cash and other corporate office assets and investments in racing related real estate held for development. Eliminations reflect the elimination of revenues between business units. The real estate and other operations segment has also been further segmented to reflect the sale of Non-Core Real Estate and golf and other operations which include the operation of two golf courses and related facilities and other real estate holdings including residential housing developments adjacent to the Company's golf courses.

The Company, including its President and Chief Executive Officer, uses revenues and earnings (loss) before interest, income taxes, depreciation and amortization ("EBITDA") as key performance measures of results of operations for purposes of evaluating operating and financial performance internally. Management believes that the use of these measures enables management and investors to evaluate and compare, from period to period, operating and financial performance of companies within the horse racing industry in a meaningful and consistent manner as EBITDA eliminates the effects of financing and capital structures, which vary between companies. Because the Company uses EBITDA as a key measure of financial performance, the Company is required by U.S. GAAP to provide the information in this note concerning EBITDA. However, these measures should not be considered as an alternative to, or more meaningful than, net income (loss) as a measure of the Company's operating results or cash flows, or as a measure of liquidity.

115

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.

		Years ended December 31,
		2005			2004			2003
Revenues
	California operations (i)	$	195,527		$	264,777		$	277,561
	Florida operations		74,542			80,035			78,320
	Maryland operations		111,252			102,521			100,489
	Southern U.S. operations		89,793			91,008			90,588
	Northern U.S. operations (i)		92,532			94,039			97,633
	European operations		12,816			7,417			890
	Technology operations		31,088			29,649			29,452
			607,550			669,446			674,933
	Corporate and other		116			936			423
	Eliminations		(7,881	)		(7,926	)		(10,528	)
	Total racing and gaming operations		599,785			662,456			664,828
	Sale of real estate		—			16,387			2,649
	Golf and other		24,870			23,630			19,121
	Total real estate and other operations		24,870			40,017			21,770
Total revenues		$	624,655		$	702,473		$	686,598

		Years ended December 31,
		2005			2004(ii)			2003(iii)
Earnings (loss) before interest, income taxes, depreciation and amortization ("EBITDA")
	California operations (i)	$	16,674		$	25,366		$	11,365
	Florida operations		(254	)		(17,987	)		(41,495	)
	Maryland operations		4,956			4,903			(43,037	)
	Southern U.S. operations		4,665			3,915			(1,522	)
	Northern U.S. operations (i)		(191	)		(2,265	)		(14,851	)
	European operations		(19,481	)		(20,963	)		(131	)
	Technology operations		(4,329	)		(2,798	)		(26	)
			2,040			(9,829	)		(89,697	)
	Corporate and other		(24,071	)		(27,597	)		(28,542	)
	Predevelopment, pre-opening and other costs		(11,882	)		(20,508	)		(8,767	)
	Total racing and gaming operations		(33,913	)		(57,934	)		(127,006	)
	Sale of real estate		—			9,625			31
	Golf and other		4,559			3,972			159
	Total real estate and other operations		4,559			13,597			190
Total EBITDA		$	(29,354	)	$	(44,337	)	$	(126,816	)

(i)

For the years ended December 31, 2004 and 2003, the California operations segment included the operations of Bay Meadows, the facility lease for which expired on December 31, 2004. Bay Meadows' revenues were $60.6 million and $61.2 million and earnings (loss) before interest, income taxes, depreciation and amortization were $4.9 million and $(15.1) million, respectively, for the years ended December 31, 2004 and 2003.

For the years ended December 31, 2004 and 2003, the Northern U.S. operations segment included the operations of Multnomah Greyhound Park in Portland, Oregon, the facility lease for which expired on December 31, 2004. Multnomah Greyhound Park's revenues were $3.4 million and $4.4 million and loss before interest, income taxes, depreciation and amortization was $2.4 million and $7.7 million, respectively, for the years ended December 31, 2004 and 2003.

(ii)

For the year ended December 31, 2004, the Florida operations segment includes a non-cash write-down of long-lived assets of $26.3 million and the Maryland operations segment includes a non-cash write-down of long-lived assets of $0.4 million.

116

(iii)

For the year ended December 31, 2003, the California operations segment includes a non-cash write-down of $20.3 million related to racing licenses and goodwill, the Florida operations segment includes a non-cash write-down of $49.1 million related to racing licenses, the Maryland operations segment includes a non-cash write-down of $47.7 million related to racing licenses, the Southern U.S. operations segment includes a non-cash write-down of $4.8 million related to long-lived and intangible assets and the Northern U.S. operations includes a non-cash write-down of $13.0 million related to racing licenses and long-lived assets.

		December 31,
		2005		2004
Total Assets
	California operations	$	295,066	$	310,026
	Florida operations		303,069		205,149
	Maryland operations		178,022		167,682
	Southern U.S. operations		140,786		105,024
	Northern U.S. operations		40,307		39,657
	European operations		132,921		176,906
	Technology operations		17,298		15,439
			1,107,469		1,019,883
	Corporate and other		115,038		74,701
	Total racing and gaming operations		1,222,507		1,094,584
	Non-Core Real Estate		2,500		2,512
	Golf and other		99,518		116,840
	Total real estate and other operations		102,018		119,352
Total assets from continuing operations			1,324,525		1,213,936
Total assets held for sale			89,720		89,763
Total assets from discontinued operations			—		99,654
Total assets		$	1,414,245	$	1,403,353

		Years ended December 31,
		2005		2004		2003
Real estate properties and fixed asset additions
	Racing and gaming operations	$	148,548	$	136,238	$	102,713
	Real estate and other operations		1,001		2,918		3,018
Total real estate properties and fixed asset additions		$	149,549	$	139,156	$	105,731

Reconciliation of EBITDA to Net Loss

		Year ended December 31, 2005
		Racing and Gaming Operations			Real Estate and Other Operations			Total
EBITDA (loss) from continuing operations		$	(33,913	)	$	4,559		$	(29,354	)
Interest expense, net			33,274			1,858			35,132
Depreciation and amortization			36,017			3,205			39,222
Loss from continuing operations
	before income taxes	$	(103,204	)	$	(504	)		(103,708	)
Income tax benefit									(598	)
Net loss from continuing operations									(103,110	)
Net loss from discontinued operations									(2,183	)
Net loss								$	(105,293	)

117

		Year ended December 31, 2004
		Racing and Gaming Operations			Real Estate and Other Operations			Total
EBITDA (loss) from continuing operations		$	(57,934	)	$	13,597		$	(44,337	)
Interest expense (income), net			23,040			(1,365	)		21,675
Depreciation and amortization			33,601			3,015			36,616
Income (loss) from continuing operations
	before income taxes	$	(114,575	)	$	11,947			(102,628	)
Income tax benefit									(3,777	)
Net loss from continuing operations									(98,851	)
Net income from discontinued operations									3,215
Net loss								$	(95,636	)

		Year ended December 31, 2003
		Racing and Other Operations			Real Estate and Other Operations			Total
EBITDA (loss) from continuing operations		$	(127,006	)	$	190		$	(126,816	)
Interest expense (income), net			12,117			(391	)		11,726
Depreciation and amortization			28,443			2,872			31,315
Loss from continuing operations
	before income taxes	$	(167,566	)	$	(2,291	)		(169,857	)
Income tax benefit									(63,479	)
Net loss from continuing operations									(106,378	)
Net income from discontinued operations									1,281
Net loss								$	(105,097	)

Geographic Segments

Revenues by geographic segment of the Company are as follows:

	Years ended December 31,
	2005		2004		2003
United States	$	589,229	$	661,390	$	668,477
Canada		11,668		14,744		8,481
Europe		23,758		26,339		9,640
	$	624,655	$	702,473	$	686,598

Real estate properties, fixed assets, racing licenses and other assets, net of accumulated depreciation and amortization, by geographic segment are as follows:

	December 31,
	2005		2004
United States	$	919,971	$	794,397
Canada		66,547		65,550
Europe		150,383		178,221
Total from continuing operations		1,136,901		1,038,168
Total assets held for sale		86,604		87,319
Total from discontinued operations		—		93,980
	$	1,223,505	$	1,219,467

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20.     TRANSACTIONS WITH RELATED PARTIES

(a)

The Company's indebtedness and long-term debt due to parent consists of the following:

		December 31,
		2005			2004
Bridge loan facility, including accrued interest and commitment
	fees payable of $0.6 million(i)	$	72,060		$	—
Gulfstream Park project financing, including long-term accrued interest
	payable of $3.7 million(ii)		93,646			23,408
Remington Park project financing, including long-term accrued interest
	payable of $0.3 million(iii)		19,854			—
		$	185,560		$	23,408
Less: due within one year			(72,060	)		—
		$	113,500		$	23,408

(i)

Bridge Loan Facility

In July 2005, a subsidiary of the Company's parent company, MID, provided to the Company a non-revolving bridge loan facility of up to $100.0 million. $50.0 million was available to the Company as of the closing of the bridge loan, a second tranche of $25.0 million was made available to the Company on October 17, 2005 and a third tranche of $25.0 million was made available to the Company on February 10, 2006. The bridge loan terminates on August 31, 2006. An arrangement fee of $1.0 million was paid on closing, a second arrangement fee of $0.5 million was paid when the second tranche was made available to the Company and an additional arrangement fee of $0.5 million was paid when the third tranche was made available to the Company. There is a commitment fee of 1.0% per year on the undrawn portion of the $100.0 million maximum amount of the loan commitment, payable quarterly in arrears. At the Company's option, the loan bears interest either at: (1) floating rate, with annual interest equal to the greater of (a) U.S. Base rate, as announced from time to time, plus 5.5% and (b) 9.0% (with interest in each case payable monthly in arrears); or (2) fixed rate with annual interest equal to the greater of: (a) LIBOR plus 6.5% and (b) 9.0%, subject to certain conditions. The overall weighted average interest rate on the advances under the bridge loan at December 31, 2005 was 10.9%. The bridge loan may be repaid at any time, in whole or in part, without penalty. The bridge loan requires that the net proceeds of any equity offering by the Company be used to reduce outstanding indebtedness under the bridge loan, subject to specified amounts required to be paid to reduce other indebtedness. Also, subject to specified exceptions, the proceeds of any debt offering or asset sale must be used to reduce outstanding indebtedness under the bridge loan or other specified indebtedness. The bridge loan is secured by substantially all of the assets of the Company and guaranteed by certain subsidiaries of the Company. The guarantees are secured by first ranking security over the lands owned by The Meadows (ahead of the Gulfstream project financing (refer to note 20(b)), second ranking security over the lands owned by Golden Gate Fields (behind an existing third party lender) and third ranking security over the lands owned by Santa Anita Park (behind existing third party lenders). In addition, the Company has pledged the shares and licenses of certain subsidiaries (or provided negative pledges where a pledge is not available due to regulatory constraints or due to a prior pledge to an existing third party lender). As security for the loan, the Company has also assigned all inter-company loans made between the Company and its subsidiaries and all insurance proceeds to the lender, and taken out title insurance for all real property subject to registered security. The bridge loan is cross-defaulted to all other obligations of the Company and its subsidiaries to the lender and to the Company's other principal indebtedness. The security over the lands owned by The Meadows may be subordinated to new third party financings of up to U.S. $200.0 million for the redevelopment of The Meadows.

During the year ended December 31, 2005, $74.1 million was advanced on this bridge loan, such that at December 31, 2005, $74.1 million was outstanding under the bridge loan. Net loan origination expenses of $2.6 million have been recorded as a reduction of the outstanding bridge loan balance. The bridge loan balance is being accreted to its face value over the term to maturity. In addition, during the year ended December 31, 2005, $0.2 million of commitment fees and $2.3 million of interest expense were incurred related to the bridge loan, of which $0.6 million was outstanding as at December 31, 2005.

119

The Company and MID have entered into an agreement to amend the bridge loan agreement to provide that (i) the Company place $13.0 million from the Flamboro Downs sale proceeds into escrow with MID, and such additional amounts as necessary to ensure that future Gulfstream Park construction costs can be funded, (ii) MID waive its negative pledge over the Company's land in Ocala, Florida, (iii) Gulfstream Park enter into a definitive agreement with BE&K, Inc., for debt financing of $13.5 million to be used to pay for construction costs for the Gulfstream Park construction project, (iv) the Company will use commercially reasonable efforts to sell certain assets and use the proceeds of such sales to pay down the bridge loan, and (v) in the event that the Company does not enter into definitive agreements prior to December 1, 2005 to sell certain additional assets or repay the full balance of the bridge loan by January 15, 2006, MID will be granted mortgages on certain additional properties owned by the Company. Upon the closing of the sale of certain assets, the Company will also be required to put into escrow with MID, the amount required to pre-pay the loan from BE&K, Inc. On November 17, 2005, Gulfstream Park signed a loan agreement with BE&K, Inc., which to December 31, 2005 had not been drawn upon. On February 9, 2006, the bridge loan was amended such that certain subsidiaries of the Company were added as guarantors of the bridge loan. The guarantees are secured by charges over the lands commonly known as San Luis Rey Downs in California, Dixon Downs in California, the New York lands in New York and the Thistledown lands in Ohio, and by pledges of the shares of certain subsidiaries.

As at December 31, 2005, the Company has placed $13.7 million into escrow with MID, which is included in accounts receivable on the consolidated balance sheets.

In accordance with the terms of the senior secured revolving credit facility and the bridge loan agreement, the Company was required to use the net proceeds from the sale of Flamboro Downs to pay down the principal amount owing under the two loans in equal portions. However, both MID and the lender under the senior secured revolving credit facility agreed to mutually waive this repayment requirement, subject to certain other amendments, including provisions for repayment upon closing of certain future asset sales.

At December 31, 2005, the Company was not in compliance with one of the financial covenants contained in the bridge loan agreement. A waiver was obtained from MID for the financial covenants breach at December 31, 2005.

(ii)

Gulfstream Park Project Financing

In December 2004, certain of the Company's subsidiaries entered into a $115.0 million project financing arrangement with MID for the reconstruction of facilities at Gulfstream Park. This project financing arrangement was amended on July 27, 2005 in connection with the Remington Park loan as described in note 20(c). The project financing is made by way of progress draw advances to fund reconstruction. The loan has a ten-year term from the completion date of the reconstruction project. The anticipated completion date for the Gulfstream Park reconstruction project is the first quarter of 2006. Prior to the completion date, amounts outstanding under the loan will bear interest at a floating rate equal to 2.55% per annum above MID's notional cost of borrowing under its floating rate credit facility, compounded monthly (December 31, 2005 — 7.9%). After the completion date, amounts outstanding under the loan will bear interest at a fixed rate of 10.5% per annum, compounded semi-annually. Prior to January 1, 2007, payment of interest will be deferred. Commencing January 1, 2007, the Company will make monthly blended payments of principal and interest based on a 25-year amortization period commencing on the completion date. The loan contains cross-guarantee, cross-default and cross-collateralization provisions. The loan is guaranteed by the Company's subsidiaries that own and operate The Meadows, Remington Park and the Palm Meadows training center and is collateralized principally by security over the lands forming part of the operations at Gulfstream Park, Remington Park, Palm Meadows and The Meadows and over all other assets of Gulfstream Park, Remington Park, Palm Meadows and The Meadows, excluding licenses and permits. During the year ended December 31, 2005, $67.0 million (for the year ended December 31, 2004 — $26.4 million) was advanced and $3.6 million (for the year ended December 31, 2004 — $0.1 million) of interest expense was incurred on this loan, such that at December 31, 2005, $97.1 million was outstanding under the Gulfstream Park loan, which includes $3.7 million of accrued interest. Net loan origination expenses of $3.5 million have been recorded as a reduction of the outstanding loan balance. The loan balance is being accreted to its face value over the term to maturity.

120

(iii)

Remington Park Project Financing

In July 2005, the Company's subsidiary that owns and operates Remington Park entered into a $34.2 million project financing arrangement with MID for the build-out of the casino facility at Remington Park. Advances under the loan are made by way of progress draw advances to fund the capital expenditures relating to the development, design and construction of the casino facility, including the purchase and installation of electronic gaming machines. The loan has a ten-year term from the completion date of the reconstruction project, which was November 28, 2005. Prior to the completion date, amounts outstanding under the loan bore interest at a floating rate equal to 2.55% per annum above MID's notional cost of LIBOR borrowing under its floating rate credit facility, compounded monthly. After the completion date, amounts outstanding under the loan bear interest at a fixed rate of 10.5% per annum, compounded semi-annually. Prior to January 1, 2007, payment of interest will be deferred. Commencing January 1, 2007, the Company will make monthly blended payments of principal and interest based on a 25-year amortization period commencing on the completion date. However, commencing on the completion date of Remington Park's reconstruction project, under certain circumstances a portion of cash from the operations of Remington Park must be used to pay deferred interest on the loan plus a portion of the principal under the loan equal to the deferred interest on the Gulfstream Park construction loan. The loan is secured by all assets of Remington Park, excluding licenses and permits. The loan is also secured by a charge over the lands owned by Gulfstream Park and a charge over the Palm Meadows training center and contains cross-guarantee, cross-default and cross-collateralization provisions. During the year ended December 31, 2005, $20.7 million was advanced and $0.3 million of interest has accrued on this loan, such that at December 31, 2005, $21.0 million was outstanding under the Remington Park loan. Net loan origination expenses of $1.1 million have been recorded as a reduction of the outstanding loan balance and the loan balance will be accreted to its face value over the term to maturity.

(iv)

Future principal repayments on the indebtedness and long-term debt due to parent at December 31, 2005 are expected to occur as follows:

2006	$	72,060
2007		1,965
2008		1,088
2009		1,208
2010		1,342
Thereafter		107,897
	$	185,560

(b)

On November 14, 2005, a subsidiary of the Company extended its option agreement with MID to acquire 100% of the shares of the MID subsidiary that owns land in Romulus, Michigan to February 28, 2006. If the Company is unable to renew this option arrangement with MID upon its expiry, then the Company may incur a write-down of the costs that have been incurred with respect to entitlements on this property and in pursuit of a racing license. At December 31, 2005, the Company has incurred approximately $2.9 million of costs related to this property and in pursuit of the license (refer to note 23(a)).



(c)

During the year ended December 31, 2005, a wholly-owned subsidiary of the Company sold to Mr. Frank Stronach, the Chairman of the Board and a Director of the Company, two housing lots and a housing unit. These sales were in the normal course of operations of the Company and the total sales price for these properties was $1.4 million. The gain on the sale of the properties of approximately $0.7 million, net of tax, is reported as a contribution to equity.



(d)

On November 1, 2004, a wholly-owned subsidiary of the Company entered into an access agreement with Magna International Inc. ("Magna") and one of its subsidiaries for their use of the golf course and the clubhouse meeting, dining and other facilities at the Magna Golf Club in Aurora, Ontario. The agreement, which was retroactive to January 1, 2004, expires on December 31, 2014 and stipulates an annual fee of Cdn. $5.0 million. During the year ended December 31, 2005, $4.1 million (for the year ended December 31, 2004 — $3.9 million) has been recognized in real estate and other revenue related to this agreement. During the year ended December 31, 2003, $3.2 million was recognized in real estate and other revenues related to an access agreement that expired on December 31, 2003.

121

(e)

On November 1, 2004, a wholly-owned subsidiary of the Company entered into an access agreement with Magna and one of its subsidiaries for their use of the golf course and the clubhouse meeting, dining and other facilities at Fontana Sports in Oberwaltersdorf, Austria. The agreement, which was retroactive to March 1, 2004, expires on December 31, 2014 and stipulates an annual fee of Euros 2.5 million. During the year ended December 31, 2005, $3.1 million (for the year ended December 31, 2004 — $3.2 million) has been recognized in real estate and other revenue related to this agreement. During the year ended December 31, 2003, $3.1 million was recognized in real estate and other revenue related to an access agreement that expired on March 1, 2004.

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

(f)

On August 19, 2003, the shareholders of the Company's former parent company, Magna, approved the spin-off to its shareholders of its wholly-owned subsidiary, MID. As a result of the spin-off transaction, which was effected on September 2, 2003, MID has acquired Magna's controlling interest in the Company. The Company and MID operate as separate public companies each having its own board of directors and management team.



(g)

Development real estate includes $10.9 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 $10.9 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.



(h)

During the year ended December 31, 2005, the Company paid $2.4 million (for the year ended December 31, 2004 — $1.8 million; for the year ended December 31, 2003 — $2.5 million) of rent for totalisator equipment and fees for totalisator services to AmTote, a company in which the Company has a 30% equity interest.



(i)

During the year ended December 31, 2005, the Company incurred $4.5 million (for the year ended December 31, 2004 — $4.3 million; for the year ended December 31, 2003 — $2.2 million) of rent for facilities and central shared and other services to Magna and its subsidiaries.

21.   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, among others, 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 has letters of credit issued with various financial institutions of $4.5 million to guarantee various construction projects related to activity of the Company. These letters of credit are secured by cash deposits of the Company. The Company also has letters of credit issued under its senior revolving credit facility of $21.7 million.



(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. At December 31, 2005, these indemnities amounted to $4.8 million with expiration dates through 2006.

122

(e)

At December 31, 2005, the Company had commitments under operating leases requiring minimum annual rental payments for the years ending December 31 as follows:

2006	$	2,717
2007		2,423
2008		1,972
2009		1,156
2010		899
Thereafter		1,509
	$	10,676

Commitments under operating leases do not include contingent rental payments.

For the year ended December 31, 2005, payments under these operating leases amounted to approximately $4.2 million (for the year ended December 31, 2004 — $9.1 million; for the year ended December 31, 2003 — $8.4 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 $5.2 million for the year ended December 31, 2005 (for the year ended December 31, 2004 — $5.5 million; for the year ended December 31, 2003 — $6.2 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. The Company is obligated to pay rent based on minimum annual rental payments ranging from $470 thousand to $503 thousand plus one-half of one percent of the pari-mutuel wagers made at the track in excess of $187.0 million during the racing season and one percent of gaming revenue in excess of $60.0 million. The percentage rent was not applicable for the years ended December 31, 2005, 2004 and 2003.

In June 2003, the Company purchased approximately a 22% interest in the real property upon which Portland Meadows is located, and also purchased the long-term rights to operate the facility pursuant to an operating lease. The operating lease requires the Company to pay rent equal to one percent of the wagers made at the track (including wagers on both live and import races), and also an additional percentage of revenues for other activities as follows: (a) one percent of revenues for horse-related activities, including simulcasting of horse races during the non-live season, (b) five percent of revenues not related to horse racing up to $800 thousand, and (c) three percent of revenues not related to horse racing in excess of $800 thousand. As the owner of approximately 22% interest in the real property, the Company receives approximately 22% of the rent payments, which are applied to the rental payments made by the Company in order to reduce rent expense which is reflected in racing operating costs on the consolidated statements of operations and comprehensive loss.

The racetrack and associated land under capital lease at Lone Star Park are included in the Grand Prairie Metropolitan Utility and Reclamation District ("GPMURD"). MEC Lone Star, L.P., a wholly-owned subsidiary of the Company, entered into an agreement with GPMURD, whereby it is required to make certain payments to GPMURD in lieu of property taxes. Such payments include amounts necessary to cover GPMURD operating expenses and debt service for certain bonds issued by GPMURD to fund improvements on the land up to the debt service requirements. The Company expensed $1.8 million for the year ended December 31, 2005 (for the year ended December 31, 2004 — $2.0 million; for the year ended December 31, 2003 — $2.0 million).

(f)

Contractual commitments outstanding at December 31, 2005, which related to construction and development projects, amounted to approximately $20.1 million.



(g)

The Maryland Jockey Club is a party to an agreement (the "Maryland Operating Agreement") with Cloverleaf Enterprises, Inc. ("Cloverleaf"), the current owner of Rosecroft Raceway ("Rosecroft"), a standardbred track located in Prince George's County in Maryland. The Maryland Operating Agreement replaced a previous agreement (the "Maryland Revenue Sharing Agreement"), which was effective as of January 1, 2000 and expired on April 18, 2004. The Maryland Operating Agreement has been in effect since June 9, 2004, however both parties continue to informally operate under its terms until a new agreement can be finalized.

123

The Maryland Revenue Sharing Agreement enabled wagering to be conducted, both day and evening, on live and simulcast thoroughbred and harness races at Pimlico, Laurel Park and Rosecroft and the three Maryland off-track betting facilities operated by them. Under the agreement, wagering revenue from these sources was pooled and certain expenses and obligations were pooled and paid from those revenues to generate net wagering revenue. This net wagering revenue was then distributed 80% to The Maryland Jockey Club and 20% to Rosecroft. Commencing April 19, 2004, The Maryland Jockey Club and Rosecroft are no longer pooling their wagering revenue and distributing net wagering revenue as they did under the Maryland Revenue Sharing Agreement. From April 19, 2004 until June 9, 2004, they operated under a state law which precluded The Maryland Jockey Club from operating 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 Park are running live races.

Since coming into effect on June 9, 2004, the Maryland Operating Agreement has enabled Pimlico, Laurel Park and Rosecroft to conduct simulcast wagering on thoroughbred and harness race signals during the day and evening hours without restriction. Under the Maryland Operating Agreement, Cloverleaf agrees to pay the thoroughbred industry a 12% premium on pari-mutuel wagering (net of refunds) conducted at Rosecroft on all thoroughbred race signals, and The Maryland Jockey Club agrees to pay Cloverleaf a 12% premium on pari-mutuel wagering (net of refunds) conducted at Pimlico and Laurel Park on all standardbred race signals.

Under the Maryland Operating Agreement, the parties have agreed to make a good faith effort to reach a long-term agreement on cross-breed simulcasting and off-track betting facilities in the State of Maryland. Without an arrangement similar in effect to the Maryland Revenue Sharing Agreement or the Maryland Operating Agreement, there would be a material decline in the revenues, earnings and purses of The Maryland Jockey Club. At this time, the Company is uncertain as to the likelihood of a renewal of this agreement on comparable terms.

(h)

In October 2003, the Company signed a Letter of Intent to explore the possibility of a joint venture between Forest City Enterprises, Inc. ("Forest City") and various affiliates of the Company, anticipating the ownership and development of a portion of the Gulfstream Park racetrack property. Forest City has paid $2.0 million to the Company in consideration for its right to work exclusively with the Company on this project. This deposit has been included in other accrued liabilities on the Company's consolidated balance sheets. In 2005, a Limited Liability Company Agreement was entered into with Forest City concerning the planned development of "The Village at Gulfstream Park™". The Limited Liability Company Agreement contemplates the development of a mixed-use project consisting of residential units, parking, restaurants, hotels, entertainment, retail outlets and other commercial uses on a portion of the Gulfstream Park property. Under the Limited Liability Company Agreement, Forest City is required to contribute up to a maximum of $15.0 million as an initial capital contribution. The $2.0 million deposit received to date from Forest City shall constitute the final $2.0 million of the initial capital contribution. The Company is obligated to contribute 50% of any and all equity amounts in excess of $15.0 million as and when needed, however, to December 31, 2005, the Company has not made any such contributions. In the event the development does not proceed, the Company may have an obligation to fund a portion of those pre-development costs incurred to that point in time. The Limited Liability Company Agreement further contemplates additional agreements, including a ground lease, a reciprocal easement agreement, a development agreement, a leasing agreement and a management agreement to be executed in due course and upon satisfaction of certain conditions.



(i)

In April 2004, the Company signed a Letter of Intent to explore the possibility of joint ventures between Caruso Affiliates Holdings and certain affiliates of the Company to develop certain undeveloped lands surrounding Santa Anita Park and Golden Gate Fields racetracks. Upon execution of this Letter of Intent, the Company agreed to fund 50% of approved pre-development costs in accordance with a preliminary business plan for each of these projects, with the goal of entering into Operating Agreements by May 31, 2005, which has been extended by mutual agreement of the parties to February 28, 2006 (refer to note 23[c]). To date, the Company has expended approximately $1.8 million on this initiative, of which $1.4 million was paid during the year ended December 31, 2005. These amounts have been recorded as fixed assets on the Company's consolidated balance sheets. The Company is continuing to explore these developmental opportunities, but to December 31, 2005 has not entered into definitive Operating Agreements on either of these potential developments. Under the terms of the Letter of Intent, the Company may be responsible to fund additional costs, however to December 31, 2005, the Company has not made any such payments.

124

22.   OTHER LONG-TERM LIABILITIES

Other long-term liabilities is comprised as follows:

	December 31,
	2005		2004
Deferred initiation fees and other revenue	$	11,446	$	11,555
Fair value of interest rate swap (note 18(c))		—		106
Pension liability		453		173
Other		973		85
	$	12,872	$	11,919

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.

The net periodic pension cost of the Company for the years ended December 31, 2005, 2004 and 2003 included the following components:

	Years ended December 31,
	2005			2004			2003
Components of net periodic pension cost:
Service cost	$	532		$	437		$	413
Interest cost on projected benefit obligation		690			685			647
Actual return on plan assets		(840	)		(825	)		(1,015	)
Net amortization and deferral		342			271			452
Net periodic pension cost	$	724		$	568		$	497

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

	Years ended December 31,
	2005			2004			2003
Change in benefit obligation:
Benefit obligation at beginning of year	$	14,104		$	11,711		$	12,237
Service cost		532			437			413
Interest cost		690			685			647
Benefits paid		(623	)		(569	)		(540	)
Actuarial (gains) losses		(111	)		1,840			(1,046	)
Benefit obligation at end of year		14,592			14,104			11,711
Change in plan assets:
Fair value of plan assets at beginning of year		10,688			9,962			9,062
Actual return on plan assets		840			825			1,015
Company contributions		444			470			425
Benefits paid		(623	)		(569	)		(540	)
Fair value of plan assets at end of year		11,349			10,688			9,962
Funded status of plan (underfunded)		(3,243	)		(3,416	)		(1,749	)
Unrecognized net gain		2,790			3,243			1,675
Net pension liability	$	(453	)	$	(173	)	$	(74	)

125

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

	Years ended December 31,
	2005	2004	2003
Weighted average discount rate	5.0%	5.0%	6.0%
Weighted average rate of increase in compensation levels	4.0%	4.0%	5.0%
Expected long-term rate of return	6.0%	6.0%	6.0%

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 $4.0 million in the year ended December 31, 2005 (year ended December 31, 2004 — $5.0 million; year ended December 31, 2003 — $5.9 million). 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 a 401(k) plan (the "401(k) Plan") to provide retirement benefits for employees. All employees who meet certain eligibility requirements are able to participate in the 401(k) Plan. Discretionary matching contributions are determined each year by the Company. The Company contributed $0.8 million in the year ended December 31, 2005 (year ended December 31, 2004 — $1.5 million; year ended December 31, 2003 — $0.7 million) to the 401(k) Plan.

23.   SUBSEQUENT EVENTS

(a)

On February 20, 2006, a subsidiary of the Company entered into an agreement with MID to extend the option to acquire 100% of the shares of the MID subsidiary that owns land in Romulus, Michigan to April 3, 2006.



(b)

On February 27, 2006, the Company's subsidiary that owns approximately 157 acres of excess real estate in Palm Beach County, Florida entered into an amendment to the sale agreement dated November 3, 2005 to sell the real property to Toll Bros, Inc., which extends the due diligence period to March 15, 2006. On March 15, 2006, the Company's subsidiary entered into a second amendment to the sale agreement, which further extends the due diligence period to April 3, 2006 and the closing date to April 28, 2006.



(c)

On March 1, 2006, the Company amended the Letter of Intent between Caruso Affiliates Holdings and certain affiliates of the Company, as described in note 21[i], to agree upon a business plan and execute an Operating Agreement by March 15, 2006, with a further extension or March 13, 2006 to March 29, 2006.

126

MAGNA ENTERTAINMENT CORP.
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2005
(Amounts in thousands, U.S. dollars)

			Initial Costs to Company		Costs Capitalized Subsequent to Acquisition			Foreign Exchange Impact			Gross Amount at which Carried at Close of Period
Description		Encumbrance	Land	Building and Improvements	Land	Building and Improvements		Land		Building and Improvements	Land	Building and Improvements	Total
Excess Real Estate
Racing Operations
	Santa Anita Park (Arcadia, California, U.S.A.)	52,781	52,500	—	—	281		—		—	52,500	281	52,781
	Gulfstream Park (Hallandale, Florida, U.S.A.)	14,201	14,201	—	—	—		—		—	14,201	—	14,201
	Lone Star Park (Grand Prairie, Texas, U.S.A.)	—	4,245	—	—	—		—		—	4,245	—	4,245
	Maryland Jockey Club (Baltimore, Maryland, U.S.A.)	—	10,900	—	—	—		—		—	10,900	—	10,900
	MEC Grundstucksentwicklungs GmbH (Niederoesterreich, Austria)	—	9,974	—	3,651	—		551		—	14,176	—	14,176
Real Estate Held for Development
Racing Operations
	Dixon Downs (Dixon, California, U.S.A.)	—	6,584	—	9,194	22		—		—	15,778	22	15,800
	Ocala (Ocala, Florida, U.S.A.)	8,439	7,227	—	1,212	—		—		—	8,439	—	8,439
Real Estate Operations
	New York, U.S.A.	—	725	—	2,188	—		—		—	2,913	—	2,913
	Ontario, Canada	—	2,334	—	6,941	—		1,652		—	10,927	—	10,927
	Niederoesterreich, Austria	—	6,804	—	—	—		(1,117	)	—	5,687	—	5,687
Non-Core Real Estate
Land
	Florida, U.S.A.	—	1,918	—	540	—		—		—	2,458	—	2,458
Residential Properties
	Niederoesterreich, Austria	—	18	1,553	4	(1,870	)	2		388	24	71	95
Residential Property Held for Sale
Real Estate Operations
	Palm Meadows Estates (Boynton, Florida, U.S.A.)	—	7,488	—	2,920	—		—		—	10,408	—	10,408
		75,421	124,918	1,553	26,650	(1,567	)	1,088		388	152,656	374	153,030

127

Description		Accumulated Depreciation	Date of Construction	Date Acquired	Life on which Depreciation in Latest Income Statement is Computed
Excess Real Estate
Racing Operations
	Santa Anita Park (Arcadia, California, U.S.A.)	—	n/a	1998	n/a
	Gulfstream Park (Hallandale, Florida, U.S.A.)	—	n/a	1999	n/a
	Lone Star Park (Grand Prairie, Texas, U.S.A.)	—	n/a	2002	n/a
	Maryland Jockey Club (Baltimore, Maryland, U.S.A.)	—	n/a	2002	n/a
	MEC Grundstucksentwicklungs GmbH (Niederoesterreich, Austria)	—	n/a	1996	n/a
Real Estate Held for Development
Racing Operations
	Dixon Downs (Dixon, California, U.S.A.)	—	n/a	2001	n/a
	Ocala (Ocala, Florida, U.S.A.)	—	n/a	2002	n/a
Real Estate Operations
	New York, U.S.A.	—	n/a	1998	n/a
	Ontario, Canada	—	n/a	1997	n/a
	Niederoesterreich, Austria	—	n/a	1994	n/a
Non-Core Real Estate
Land
	Florida, U.S.A.	—	n/a	1994	n/a
Residential Properties
	Niederoesterreich, Austria	53	n/a	1998	23 years
Residential Property Held for Sale
Real Estate Operations
	Palm Meadows Estates (Boynton, Florida, U.S.A.)	—	n/a	2000	n/a
		53

128

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

        None.

Item 9A.    Controls and Procedures

        Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process defined to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

        Based on an evaluation of the Company's internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the U.S. Securities Exchange Act of 1934) as of December 31, 2005, under the supervision and with the participation of the Company's management, including its Chief Executive Officer and Chief Financial Officer, the Chief Executive officer and Chief Financial Officer have concluded that the Company maintained effective internal control over financial reporting as of December 31, 2005.

        Based on an evaluation carried out, as of December 31, 2005, under the supervision and with the participation of the Company's management, including its Chief Executive Officer and Chief Financial Officer, the Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and 15(d)-15(e) under the U.S. Securities Exchange Act of 1934) are effective.

        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.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of Magna Entertainment Corp.

        We have audited management's assessment, included in the accompanying Management's Report on Internal Controls Over Financial Reporting under Item 9A, that Magna Entertainment Corp. maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Magna Entertainment Corp.'s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the company's internal control over financial reporting based on our audit.

        We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

        A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

        Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

        In our opinion, management's assessment that Magna Entertainment Corp. maintained effective internal control over financial reporting as of December 31, 2005 is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Magna Entertainment Corp. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on the COSO criteria.

        We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Magna Entertainment Corp. as of December 31, 2005 and 2004, and the related consolidated statements of operations and comprehensive loss, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2005 of Magna Entertainment Corp. and our report dated February 3, 2006, except for Note 20[a][i] as to which the date is February 9, 2006 and Note 23 as to which the date is March 15, 2006 expressed an unqualified opinion thereon.

February 3, 2006	/s/  ERNST & YOUNG LLP
Toronto, Canada	Ernst & Young LLP

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", "The Board of Directors and Committees of the Board — Audit Committee", "Section 16(a) Beneficial Ownership Reporting Compliance" and "Code of Conduct", which Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after our fiscal year end of December 31, 2005.

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 will be filed with the Securities and Exchange Commission within 120 days after our fiscal year end of December 31, 2005.

129

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 will be filed with the Securities and Exchange Commission within 120 days after our fiscal year end of December 31, 2005.

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 "Certain Relationships and Related Transactions", which Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after our fiscal year end of December 31, 2005.

Item 14.    Principal Accountant Fees and Services

        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 "Principal Accountant Fees and Services", which Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after our fiscal year end of December 31, 2005.

Part IV
Item 15.    Exhibits, Financial Statement Schedules

(a)

Financial Statements and Schedule

        The following Consolidated Financial Statements of Magna Entertainment Corp. as at or for the year ended December 31, 2005 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)

Exhibits

        Please refer to the exhibit index below.

130

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 16th day of March, 2006.

MAGNA ENTERTAINMENT CORP.
By:	/s/  W. THOMAS HODGSON W. Thomas Hodgson 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.

Signature	Title	Date
/s/  W. THOMAS HODGSON W. Thomas Hodgson	President and Chief Executive Officer and Director (Principal Executive Officer)	March 16, 2006
/s/  BLAKE TOHANA Blake Tohana	Executive Vice-President and Chief Financial Officer (Principal Financial Officer)	March 16, 2006
/s/  MARY LYN SEYMOUR Mary Lyn Seymour	Controller (Principal Accounting Officer)	March 16, 2006
/s/  JOHN R. BARNETT John R. Barnett	Director	March 16, 2006
/s/  JERRY D. CAMPBELL Jerry D. Campbell	Director	March 16, 2006
/s/  LOUIS E. LATAIF Louis E. Lataif	Director	March 16, 2006
/s/  EDWARD C. LUMLEY Edward C. Lumley	Director	March 16, 2006
/s/  WILLIAM J. MENEAR William J. Menear	Director	March 16, 2006
/s/  DENNIS MILLS Dennis Mills	Director	March 16, 2006

131

/s/  GINO RONCELLI Gino Roncelli	Director	March 16, 2006
/s/  FRANK STRONACH Frank Stronach	Chairman and Director	March 16, 2006

132

EXHIBIT INDEX

The following documents are filed as part of this Annual Report.

Exhibit No.	Description of Document
3.1	Restated Certificate of Incorporation of Magna Entertainment Corp. (incorporated by reference to the corresponding exhibit number of the registrant's Report on Form 8-K filed on March 16, 2000).
3.2	By-Laws of Magna Entertainment Corp. (incorporated by reference to the corresponding exhibit number of the registrant's Report on Form 10-Q filed on May 10, 2004).
4.1	Form of Stock Certificate for Class A Subordinate Voting Stock (incorporated by reference to exhibit 4 of the registrant's Registration Statement on Form S-1 originally filed on January 14, 2000 (File number 333-94791).
4.2	Indenture dated as of December 2, 2002, between Magna Entertainment Corp. and The Bank of New York, as trustee, including the form of 71/4% Convertible Subordinated Notes due December 15, 2009. (incorporated by reference to exhibit 4.1 to registrant's registration statement on Form S-3 filed January 31, 2003 (File number 333-102889)).
4.3	Indenture dated as of June 2, 2003, between Magna Entertainment Corp. and the Bank of New York, as trustee, including the form of 8.55% Convertible Subordinated Notes due June 15, 2010 (incorporated by reference to exhibit 4.1 of the Registrant's Registration Statement on Form S-3 filed July 25, 2003 (file number 333-107368)).
10.1	Stock Purchase Agreement dated as of June 30, 1999 between Magna Entertainment Corp. and Gulfstream Park Racing Association Inc. (incorporated by reference to exhibit 10.2 of the registrant's Registration Statement on Form S-1 originally filed on January 14, 2000 (File number 333-94791)).
10.2	Stock Purchase Agreement dated as of October 21, 1999 between Magna Entertainment Corp., The Edward J. DeBartolo Corporation and Oklahoma Racing LLC (incorporated by reference to exhibit 10.3 of the registrant's Registration Statement on Form S-1 originally filed on January 14, 2000 (File number 333-94791)).
10.3	Stock Purchase Agreement dated as of November 5, 1999 between Magna Entertainment Corp. and Ladbroke Racing Corporation (incorporated by reference to exhibit 10.4 of the registrant's Registration Statement on Form S-1 originally filed on January 14, 2000 (File number 333-94791)).
10.4	Term Loan Credit Agreement dated as of November 15, 1999, as amended from time to time, between The Santa Anita Companies, Inc. and Wells Fargo Bank, National Association (incorporated by reference to the exhibit 10.6 of the registrant's Registration Statement on Form S-1 originally filed on January 14, 2000 (File number 333-94791)).

133

10.5	Forbearance Agreement dated as of February 8, 2000 between Magna International Inc. and Magna Entertainment Corp. (incorporated by reference to the exhibit 10.8 of the registrant's Registration Statement on Form S-1 originally filed on January 14, 2000 (File number 333-94791)).
10.6	Magna Entertainment Corp. Long-Term Incentive Plan (incorporated by reference to exhibit 10.11 of the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1999).
10.7	Employment Agreement between the Company and Donald Amos dated August 3, 2000 (incorporated by reference to exhibit 10.15 to registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2000).
10.8	Amendment No. 1 to the Term Loan Credit Agreement dated as of November 15, 1999, between The Santa Anita Companies, Inc. and Wells Fargo Bank, National Association (incorporated by reference to exhibit 10.21 of the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2000).
10.9	Amendment No. 2 to the Term Loan Credit Agreement dated as of November 15, 1999, between The Santa Anita Companies, Inc. and Wells Fargo Bank, National Association (incorporated by reference to exhibit 10.22 of the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2000).
10.10	Amendment No. 3 to the Term Loan Credit Agreement dated as of November 1, 2001, between The Santa Anita Companies, Inc. and Wells Fargo Bank, National Association (incorporated by reference to exhibit 10.16 of the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2002).
10.11	Stock Purchase Agreement dated as of December 21, 2000 among Ladbroke Racing Wyoming, Inc., Ladbroke Racing Corporation and Magna Entertainment Corp. (incorporated by reference to exhibit 2 to registrant's Report on Form 8-K filed March 16, 2001).
10.12	Amendment No. 1, effective as of the Closing Date, to the Stock Purchase Agreement, dated as of December 21, 2000, among Ladbroke Racing Wyoming, Inc., Ladbroke Racing Corporation and Magna Entertainment Corp. (incorporated by reference to exhibit 2.1 to registrant's Report on Form 8-K filed March 16, 2001).
10.13	Amending letter agreement dated March 28, 2001 to the Stock Purchase Agreement dated as of December 21, 2000, among Ladbroke Racing Wyoming, Inc., Ladbroke Racing Corporation and Magna Entertainment Corp. (incorporated by reference to exhibit 2.2 to registrant's Report on Form 8-K filed March 16, 2001).
10.14	Asset Purchase Agreement dated as of March 6, 2002 among MEC Lone Star, L.P., Lone Star Race Park, Ltd. and LSJC Development Corporation. (The Exhibits to this Agreement, which are identified in the list appearing at the end of the Agreement, have been omitted but will be furnished supplementally to the Commission upon request.) (Incorporated by reference to exhibit 2 to registrant's Report on Form 8-K filed on November 6, 2002).

134

10.15	First Amendment to Asset Purchase Agreement among MEC Lone Star, L.P., Lone Star Race Park, Ltd. and LSJC Development Corporation made as of September 30, 2002. (incorporated by reference to exhibit 2.1 to registrant's Report on Form 8-K filed on November 6, 2002).
10.16	Second Amendment to Asset Purchase Agreement among MEC Lone Star, L.P., Lone Star Race Park, Ltd. and LSJC Development Corporation made as of October 23, 2002. (incorporated by reference to exhibit 2.2 to registrant's Report on Form 8-K filed on November 6, 2002).
10.17	Stock Purchase Agreement dated July 15, 2002 by and among the Company, all the Stockholders of Laurel Racing Assoc., Inc., and Pimlico Racing Association, Inc., and Laurel Guida Group. (The Exhibits to this Agreement, which are identified in the list appearing at the end of the Agreement, have been omitted but will be furnished supplementally to the Commission upon request.) (Incorporated by reference to exhibit 2.1 to registrant's Report on Form 8-K filed on December 12, 2002).
10.18	Option Agreement dated November 27, 2002 by and among the Company, Joseph LLC, Karin LLC, Joseph A. De Francis and Karin M. De Francis. (Exhibit A to this Agreement has been omitted but will be furnished supplementally to the Commission upon request.) (Incorporated by reference to exhibit 2.2 to registrant's Report on Form 8-K filed on December 12, 2002).
10.19	Amended and Restated Credit Agreement between the Company and the Bank of Montreal, et al, dated as of October 10, 2003. (incorporated by reference to exhibit 10.25 to the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2003).
10.20	Loan Agreement dated January 24, 2003 between MEC Gründstucksentwicklungs GmbH and Österreichische Lotterien Gesellschaft m.b.H. (incorporated by reference to exhibit 10.1 to the Registrant's Form 10-Q for the Quarter ended March 31, 2003).
10.21	Employment Agreement between the Company and Blake Tohana dated July 1, 2003 (incorporated by reference to exhibit 10.29 to the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2003).
10.22	Loan Agreement dated March 5, 2004 between MEC Grundstucksentwicklungs GmbH and Raiffeisenlandesbank Niederosterreich-Wien AG in the amount of Euro 15,000,000 (incorporated by reference to Exhibit 10.1 to the registrant's Form 10-Q for the Quarter ended March 31, 2004).

135

10.23	First Amending Agreement to the Amended and Restated Credit Agreement, dated as of June 2, 2003, between the registrant and the Bank of Montreal, et al, dated as of June 8, 2004 (incorporated by reference to exhibit 10.2 to the registrant's Form 10-Q for the Quarter ended June 30, 2004).
10.24	Term Loan Credit Agreement dated as of October 8, 2004 between Wells Fargo Bank, National Association and The Santa Anita Companies, Inc. (incorporated by reference to exhibit 10.1 to the registrant's Report on Form 8-K filed on October 14, 2004).
10.25	Second Amending Agreement to the Amended and Restated Credit Agreement, dated as of June 2, 2003, between the registrant and the Bank of Montreal, et al, made as of October 14, 2004 (incorporated by reference to exhibit 10.1 to the registrant's Report on Form 8-K filed on October 20, 2004).
10.26	Third Amending Agreement to the Amended and Restated Credit Agreement, dated as of June 2, 2003, between the registrant and the Bank of Montreal, et al, made as of December 7, 2004. (incorporated by reference to the corresponding exhibit number of the Registrant's Report on Form 10-K filed on March 15, 2005 for the fiscal year ended December 31, 2004).
10.27	Fourth Amending Agreement to the Amended and Restated Credit Agreement, dated as of June 2, 2003, between the registrant and the Bank of Montreal, et al, made as of February 18, 2005. (incorporated by reference to the corresponding exhibit number of the Registrant's Report on Form 10-K filed on March 15, 2005 for the fiscal year ended December 31, 2004).
10.28	Magna Golf Club Preferred Access Agreement dated November 1, 2004 between MEC Holdings (Canada) Inc. and Magna International Inc. (incorporated by reference to the corresponding exhibit number of the Registrant's Report on Form 10-K filed on March 15, 2005 for the fiscal year ended December 31, 2004).
10.29	Preferred Access Agreement made November 1, 2004 between Magna International Europe AG and Fontana Beteiligungs AG. (incorporated by reference to the corresponding exhibit number of the Registrant's Report on Form 10-K filed on March 15, 2005 for the fiscal year ended December 31, 2004).
10.30	Offer for Purchase of Receivables dated December 30, 2004 between Fontana Beteiligungs AG and Magna International Europe AG to Bank Austria Creditanstalt AG. (incorporated by reference to the corresponding exhibit number of the Registrant's Report on Form 10-K filed on March 15, 2005 for the fiscal year ended December 31, 2004).
10.31	Offer for Purchase of Receivables dated February 17, 2005 between MEC Holdings (Canada) Inc. and Magna International Inc. to bank Austria Creditanstalt AG. (incorporated by reference to the corresponding exhibit number of the Registrant's Report on Form 10-K filed on March 15, 2005 for the fiscal year ended December 31, 2004).
10.32	Employment Agreement between the Registrant and W. Thomas Hodgson dated March 22, 2005 (incorporated by reference to exhibit 10.1 of the Registrant's Report on Form 10-Q filed on May 10, 2005).
10.33	Employment Agreement between the Registrant and Paul Cellucci dated February 3, 2005 (incorporated by reference to exhibit 10.1 of the Registrant's Report on Form 10-Q filed on May 10, 2005).
10.34	Form of Election for Performance Shares in Lieu of Guaranteed Bonus for W. Thomas Hodgson, Jim McAlpine, Donald Amos, Paul Cellucci, Blake Tohana and certain other employees of the Registrant (incorporated by reference to exhibit 10.1 of the Registrant's Report on Form 8-K filed on May 9, 2005).
10.35	Agreement in principle dated July 6, 2005 with respect to the proposed Acquisition of all the Issued and Outstanding Shares of Ontario Racing Inc. by Great Canadian Gaming Corporation or its nominee from the Registrant (incorporated by reference to exhibit 99.1 of the Registrant's Report on Form 8-K filed on July 12, 2005).
10.36	Term Sheet for Bridge Loan between the Registrant and MI Developments Inc. dated as of July 21, 2005 (incorporated by reference to exhibit 99.1 of the Registrant's Report on Form 8-K filed on July 22, 2005).
10.37	Term Sheet for Remington Construction Loan between the Registrant and MI Developments Inc. dated as of July 21, 2005 (incorporated by reference to exhibit 99.1 of the Registrant's Report on Form 8-K filed on July 22, 2005).
10.38	Loan Agreement dated April 5, 2005 between MEC Holdings (Canada) Inc. and Bank Austria Creditanstalt (incorporated by reference to exhibit 10.1 to the registrant's Report on Form 10-Q filed on August 9, 2005).

136

10.39	Form of Indemnity Agreement dated as of October 31, 2005 (incorporated by reference to exhibit 10.1 of the registrant's Report on Form 8-K filed on November 2, 2005).
10.40	Fifth Amending Agreement to the Amended and Restated Credit Agreement, dated as of June 2, 2003, between the registrant and the Bank of Montreal, et al, made as of July 22, 2005 (incorporated by reference to exhibit 10.5 to the registrant's Report on Form 10-Q filed on November 9, 2005).
10.41	Stock Purchase Agreement, dated November 8, 2005 between the registrant and PA Meadows, LLC. (incorporated by reference to exhibit 10.1 of the Registrant's Report on Form 10-Q filed on November 9, 2005).
10.42	Loan Agreement between the Registrant and Remington Park, Inc., MID Islandi SF, GPRA Thoroughbred Training Center, Inc. and Gulfstream Park Racing Association, Inc. made as of July 22, 2005. (The exhibits to this agreement have not been included and will be furnished to the SEC upon request.). (Incorporated by reference to exhibit 10.1 of the Registrant's Report on Form 10-Q filed on November 9, 2005).
10.43	Share Purchase Agreement between the Registrant, 207682 Ontario Inc. and Great Canadian Gaming Corporation dated as of August 16, 2005. (The exhibits to this agreement have not been included and will be furnished to the SEC upon request). (Incorporated by reference to exhibit 10.1 of the Registrant's Report on Form 10-Q filed on November 9, 2005).
10.44	Amended and Restated Loan Agreement between Gulfstream Park Racing Association, Inc., MID Islandi SF., MEC Pennsylvania Racing, Inc., Washington Trotting Association, Inc., Mountain Laurel Racing, Inc., Remington Park, Inc. and GPRA Thoroughbred Training Center, Inc. made as of July 22, 2005. (The exhibits to this agreement have not been included and will be furnished to the SEC upon request). (Incorporated by reference to exhibit 10.1 of the Registrant's Report on Form 10-Q filed on November 9, 2005).
10.45	Bridge Loan Agreement between the Registrant, MID Islandi SF., MEC Pennsulvania Racing, Inc., Washington Trotting Association, Inc., Mountain Laurel Racing, Inc., Pacific Racing Association, MEC Land Holdings (California) Inc., The Santa Anita Companies, Inc., Los Angeles Turf Club, Incorporated, Gulfstream Park Racing Association, Inc., GPRA Thoroughbred Training Center Inc., SLRD Thoroughbred Training Center, Inc., MEC Dixon, Inc. and Sunshine Meadows Racing Inc., made as of July 22, 2005. (The exhibits to this agreement have not been included and will be furnished to the SEC upon request). (Incorporated by reference to exhibit 10.1 of the Registrant's Report on Form 10-Q filed on November 9, 2005).
10.46	Agreement of Sale between Palm Meadows Estates, LLC and Toll Bros., Inc. made November 3, 2005 (incorporated by reference to exhibit 10.1 of the registrant's Report on Form 8-K filed on November 11, 2005).
10.47	First Amending Agreement made as of the 1st day of February, 2006 between the registrant and MID Islandi SF, et al. (incorporated by reference to Exhibit 10.1 of the registrant's Report on Form 8-K filed on February 9, 2006).
12	Statement re: Computation of Earnings to Fixed Charges.*
14	Code of Business Conduct.*
21	Subsidiaries of the Registrant.*
23	Consent of Ernst & Young LLP.*
24	Power of Attorney.*
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.*
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.*
32.1	Certification by the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as added by Section 906 of the Sarbanes-Oxley Act of 2002.*
32.2	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.*

*

Filed herewith.

137

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Documents Incorporated by Reference
INDEX
OUR BUSINESS
Part II
REPORT OF THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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
MAGNA ENTERTAINMENT CORP. SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 2005 (Amounts in thousands, U.S. dollars)
SIGNATURES
EXHIBIT INDEX

EX-12

Exhibit 12

Earnings to Fixed Charges Ratio	Year ended December 31, 2005		Year ended December 31, 2004		Year ended December 31, 2003		Year ended December 31, 2002		Year ended December 31, 2001	Year ended December 31, 2000	Year ended December 31, 1999	5 months ended December 31, 1998		Year ended July 31, 1998
Part I — Earnings
Pretax income from continuing operations	(103,708	)	(102,628	)	(169,857	)	(23,475	)	22,813	1,553	2,773	(4,408	)	(8,610	)
Add:
Fixed Charges
Interest expense — not income	42,117		26,747		20,629		7,099		6,930	3,263	2,009	1,426		2,007
Amortization of debt issue costs and discount or premium relating to indebtedness	3,070		1,625		1,466		1,042		106	3	—	—		—
Interest portion of rental expense	267		569		523		272		247	223	57	1		3
Preferred stock dividends	—		—		—		—		—	—	—	—		—
Fixed Charges reduced by:
Interest capitalized during the period	5,864		4,043		7,281		2,726		1,657	—	343	190		608
Preferred stock dividends	—		—		—		—		—	—	—	—		—
Amortization related to capitalized interest	281		247		—		—		—	—	—	—		—
	(64,399	)	(77,977	)	(154,520	)	(17,788	)	28,439	5,042	4,496	(3,171	)	(7,208	)
Part II — Fixed Charges
Interest Expense — not income	42,117		26,747		20,629		7,099		6,930	3,263	2,009	1,426		2,007
Amortization of debt issue costs and discount or premium relating to indebtedness	3,070		1,625		1,466		1,042		106	3	—	—		—
Interest portion of rental expense	267		569		523		272		247	223	57	1		3
Preferred stock dividends	—		—		—		—		—	—	—	—		—
	45,454		28,941		22,618		8,413		7,283	3,489	2,066	1,427		2,010
Fixed charge coverage	(1.42	)	(2.69	)	(6.83	)	(2.11	)	3.90	1.45	2.18	(2.22	)	(3.59	)

EX-14

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Exhibit 14

MAGNA ENTERTAINMENT CORP.
Code of Business Conduct

GENERAL

        This Code of Business Conduct (this "Code") is a statement of guiding principles for the conduct of all of our employees with respect to our business. This Code applies to employees of Magna Entertainment Corp. and its consolidated subsidiaries, collectively referred to in this Code as "our company" or "MEC".

        All of our employees are required to use sound judgment and to act ethically in the performance of their employment responsibilities. Specifically, each of our employees is expected to be familiar with the principles outlined in this Code and to adhere to such principles and to all applicable laws governing our company and its business.

        All employees are expected to report appropriately any indications of illegal or improper conduct of any person or entity involving our company or its business.

        This Code is only intended to be a statement of guiding principles. It is not a contract and is not intended as a detailed guide for all situations you may face.

WAIVERS OF THIS CODE

        This Code applies to our officers and our employees equally. Our directors are also required to abide by the principles of this Code, within the scope of their duties as directors of our company, as if they were employees of our company. Any waiver of this Code for any officer or director of our company must be approved in advance by the Corporate Governance, Human Resources and Compensation Committee of our Board of Directors. Any such waivers will be publicly disclosed by appropriate means and as required by applicable law.

QUESTIONS, REPORTING YOUR CONCERNS AND ENFORCEMENT

•

Questions About this Code of Conduct.  If you have questions regarding this Code or the matters addressed by this Code, please speak with your Manager or immediate Supervisor ("Supervising Manager"). If you do not wish to communicate with that person or you are uncomfortable with the guidance provided, please feel free to contact either the Corporate Secretary (lee.jackson@magnaent.com) or the Chief Operating Officer (don.amos@magnaent.com) at 905-726-2462. If you wish to remain anonymous, you may contact the MEC FYI Line with any questions by calling 1-866-9 MEC FYI (1-866-963-2394) or 905-726-7442.



•

How to Report Your Concerns.  If you wish to report or discuss any breaches of this Code or any illegal or unethical conduct relating to our business, please promptly inform your Supervising Manager. Your Supervising Manager will be responsible for resolving the issue and, if necessary, reporting the matter to senior management and our Legal Department.

        If your report involves wrongdoing by your Supervising Manager or you are uncomfortable reporting to your Supervising Manager, please promptly contact your Human Resources Department, the General Manager of your facility or MEC's Chief Executive Officer (tom.hodgson@magnaent.com) at 905-726-2462. If necessary, the person receiving the report will then contact senior management to investigate the matter or delegate its investigation to the appropriate person or committee. Generally, non-material technical violations of this Code or isolated incidents that do not have a material effect on our company should be reported to your Supervising Manager. If you are unsure who to report your concerns to, please call the MEC FYI Line at 1-866-9 MEC FYI (1-866-963-2394) or 905-726-7442.

        If you wish to communicate anonymously, you are free to do so, and we will maintain the confidentiality of your communication to the extent possible under applicable laws. Communications intended to be confidential can be made in one of two ways. You may communicate in writing without indicating your name or address by writing to: Magna Entertainment Corp., 337 Magna Drive, Aurora, Ontario, L4G 7K1, Attention: Chief Executive Officer. Please write "CONFIDENTIAL" conspicuously on the front of the envelope. Alternatively, you can call the MEC FYI Line anonymously at 1-866-9 MEC FYI (1-866-963-2394) or 905-726-7442 to report any violations of this Code or to seek guidance on matters involving this Code.

        If you have concerns about accounting, internal accounting controls, or auditing matters relating to our company or your report involves senior management of our company, in addition to making a report as described above, you may also contact the Audit Committee of our Board of Directors directly. Inquiries or communications intended to be anonymous should be mailed in writing without indicating your name or address to Magna Entertainment Corp., 337 Magna Drive, Aurora, Ontario, L4G 7K1, Attention: Chairman, Audit Committee. Please write "CONFIDENTIAL" conspicuously on the front of the envelope.

•

No Retaliation for Reports.  We encourage our employees to report any concerns about breaches of this Code or any illegal or unethical conduct relating to our business. We do not retaliate or discriminate against employees who honestly report their concerns to us.



•

Do Not Make False Claims.  It is a violation of this Code for any employee knowingly to make false reports of illegal or unethical conduct.



•

Enforcement.  We are committed to enforcing this Code consistently with respect to all of our employees, regardless of title or position. Our officers and other supervising employees are expected to be leaders in demonstrating this personal commitment to the standards outlined in this Code and recognizing indications of illegal or unethical conduct. We will not tolerate violation or circumvention of any laws applicable to our business by any employee during the course of his/her employment or by any agent or representative acting on behalf of our company. We will not tolerate the disregard or circumvention of this Code, any other policies of our company or the engagement in unethical dealings in connection with our company's business. Employees who fail to comply with this Code or to cooperate with any investigation will be subject to disciplinary action, the nature and severity of which will depend upon the violation. Disciplinary action may include termination, referral for criminal prosecution and actions to seek reimbursement of our company or others for any losses or damages resulting from the violation. In addition, consultants, agents, independent contractors and representatives will be required to meet the same standards as our employees and will face the same types of consequences, including termination of any consulting contract, agency or representative relationship with our company.

2

        Any person making a report of a breach of this Code has the right, if they so choose, to be informed of the resolution of their report.

WE HAVE A DUTY TO ACT IN THE BEST INTERESTS OF OUR STOCKHOLDERS

        Our employees share a duty to protect our assets and manage our business in the best interests of our stockholders.

•

Records and reporting:  All business information, financial or otherwise, pertaining to our company must be accurately and honestly recorded, whether in internal records or in information we release to the public or file with government agencies, and no one shall enter any false or artificial information in our records or reporting systems. Employees are expected to follow any records retention and destruction policies that we may implement and communicate from time to time. It is our company's policy not to destroy or alter our records or documents (in any form) in response to or in anticipation of any legal proceeding or government inquiry or investigation. Criminal liability may be incurred by any person who knowingly falsifies, alters, destroys, mutilates or conceals a record, document or other object with the intent to impede or obstruct an investigation or impair its availability for use in an official proceeding.



•

Disclosure Controls and Procedures.  We are required by applicable securities laws, rules and regulations to maintain effective disclosure controls and procedures so that financial and non-financial information we are required to report in our securities filings is timely and accurately reported both to our senior management and in the filings we make. All employees are expected, within the scope of their employment duties, to support the effectiveness of our disclosure controls and procedures and to provide information which promotes full, fair, accurate, timely and understandable disclosure in reports and documents that our company files with, or submits to government agencies and in our company's other public communications.



•

Stock Trading; Use of Confidential Information.  Any employee who is aware of material nonpublic information concerning our company, or concerning third parties with whom our company does business, is prohibited from buying or selling securities of our company or of those third parties until after the material information has been fully disclosed to the public. Employees must not disclose any of this material nonpublic information to family, friends or others outside the company. Generally, all information concerning the affairs of our company is to be kept confidential and disclosed only to authorized persons for legitimate business purposes, unless and until such information has been publicly disclosed by authorized employees in accordance with our disclosure policies. For more information about this prohibition, please refer to the MEC Insider Trading Policy, a copy of which can be obtained from the Corporate Secretary (lee.jackson@magnaent.com) at 905-726-2462.

3

        Selective Disclosure Prohibited.    Applicable securities laws, rules and regulations generally prohibit selective disclosure of material nonpublic information to persons outside our company. All employees are expected to keep all material nonpublic information about our company strictly confidential unless and until we have made full public disclosure regarding the information by way of a press release or appropriate filing with securities regulatory authorities.

        Providing Information to the Public.    Our policy is to disseminate material information about our business in a timely manner and only through our employees authorized for this purpose. Employees are not under any circumstance to discuss our company's financial, business or other information with the press (except for those employees expressly authorized for this purpose), at any public venue or on any website, chat room or similar forum. Requests from the media, analysts or stockholders about our company must be forwarded promptly in accordance with our Corporate Disclosure Policy.

        For more information concerning the foregoing disclosure practices, please refer to the MEC Corporate Disclosure Policy, a copy of which can be obtained from the Corporate Secretary (lee.jackson@magnaent.com) at 905-726-2462.

•

Communications.  Communications by our employees on behalf of our company must be for a legitimate business purpose, be appropriate and avoid inappropriate or derogatory comments about other individuals or companies, unprofessional language and unauthorized statements.



•

Use of Company Assets.  Our company's assets are to be used only for our lawful, corporate purposes. All employees should help our company protect its assets from misuse, theft, damage or other loss. Improper or unauthorized personal use of company assets is prohibited. Employees have a duty to protect our trade secrets and other nonpublic information and keep them confidential. Access to our intellectual property and other confidential information is to be limited to those authorized to use them in their duties for the company. If customers or suppliers provide nonpublic information to us in their dealings with us, our employees are expected to protect that information in the same manner as our company's non-public information.



•

Suppliers.  Our contracts with suppliers of products and services to us are to be based exclusively on the best interests of our company and its business, reflect a fair price for the deliverables provided to us and be documented in accordance with appropriate approval, contracting and internal control procedures.

4

WE ARE COMMITTED TO OUR CUSTOMERS

        We are committed to excellence in service and performance and building strong customer relationships.

•

Customer Relationships.  Our goal is to develop customer loyalty by delivering high quality racing, entertainment, pari-mutuel wagering and hospitality services. We will comply strictly with all applicable horse racing, gaming and other industry laws and standards. Our advertising will be truthful, non-deceptive and fair and we will not make false or deceptive statements about our competitors.



•

Protecting Our Customers' Private Information.  We are committed to treating the confidential information of our customers with a standard of care that meets or exceeds the care we use to protect our own proprietary and confidential information. We are also subject to various privacy laws restricting the manner in which we handle customer and employee information. Our employees are expected to limit access to confidential information about our customers and employees to those individuals in our company who need to know this information to carry out their jobs, and at all times in compliance with applicable privacy laws.

WE RESPECT OUR EMPLOYEES AND OUR EMPLOYEES ARE EXPECTED TO RESPECT EACH OTHER

        Each MEC employee has a duty to promote a positive working environment for all of our employees, our horsemen and their employees who work at our racetracks.

•

Health and Safety.  We are committed to maintaining a healthy and safe working environment. We require all employees to report promptly any unsafe or hazardous conditions, injuries, or accidents connected with our business to their Supervising Manager. If you have any doubts about whether to raise safety-related concerns with your Supervising Manager, always err on the side of disclosure.



•

Duties to Our Fellow Employees.  Harassment or abuse by one employee towards another is prohibited. We will not tolerate any harassment in the workplace on the basis of sex, race, color, religion, national origin, age, disability or any other characteristic protected by law. All of our employees must be allowed to work in an environment free from abuse and harassment. For more information, please refer to our company's Harassment Policy in your employee handbook. If you require a copy of the Harassment Policy, please contact your Human Resources Department or the General Manager of your facility. If you wish to make a report of harassment, please contact your Supervising Manager or Human Resources Department. If you do not feel comfortable reporting an incident of harassment to anyone at your facility, please call the MEC Employee Hotline at 1-800-263-1691. Any good faith reports of harassment or abuse can be made without fear of retaliation although, for legal and practical reasons, they cannot be made anonymously.

5

•

Compliance with Fair Labor Standards.  Our employment decisions will be based on business-related factors, such as job performance, individual skills and talents, and other business-related factors. We do not discriminate in any aspect of employment based on race, color, religion, sex, marital status, national origin, disability or age, within the meaning of applicable laws.



•

Working Within Our Communities.  We respect our employees' participation in their community and in charitable, religious and political activities, provided that these activities do not unreasonably interfere with their job responsibilities to us. Our employees may not represent that their personal views or activities represent those of our company. Our employees must not engage in any unwanted solicitations or pressure toward other employees relating to charitable, religious or political causes, unrelated to our business.

WE COMPLY WITH ALL APPLICABLE LAWS

        We expect our employees to comply with all applicable laws and regulations affecting our company and its business, whether or not referred to explicitly in this Code. The following is a non-exhaustive summary of certain laws and regulations applicable to our company and its business.

•

Prohibited Corrupt Practices.  Our company must comply with anti-corruption laws that apply to our company's business. Our employees and agents must not directly or indirectly offer or make a corrupt payment to any domestic or foreign government officials, or employees of enterprises owned or controlled by a government agency. Our employees must not engage in any form of fraud, including but not limited to embezzlement, theft, hiding or misuse of company assets, or falsification of records.



•

Prohibited Political Contributions.  

U.S. Political Contributions.    There are various complex laws governing political contributions in the U.S. As a result, we have adopted a policy in respect of U.S. political contributions and gifts to U.S. public officials. All U.S. political contributions and gifts to U.S. public officials (whether in the form of cash, property or services) must be made in compliance with this policy which essentially requires that any U.S. political contributions made by or on behalf of our company be made only after approval is obtained from the applicable political contributions officer. For more details on our policy on U.S. political contributions, please consult the MEC U.S. Political Contributions Policy, a copy of which can be obtained by contacting the Corporate Secretary (lee.jackson@magnaent.com) at 905-726-2462.

Political Contributions Outside the U.S.    None of our employees shall contribute in our company's name or on our company's behalf, any cash, property or services of any kind for or in support of any political candidate, committee, initiative, or activity outside the U.S. unless it is first approved by an executive officer of our company. No lobbying efforts shall be undertaken in our company's name or on our company's behalf without prior authorization from our Legal Department.

6

•

Prohibited Loans to Executive Officers and Directors.  Under U.S. law, our company may not, directly or indirectly, extend or maintain credit, arrange for the extension of credit, or renew an extension of credit, in the form of a personal loan to or for any director or executive officer of our company.



•

Environmental Laws.  Our employees are required to adhere in all material respects to applicable environmental laws and ensure that all hazardous materials and substances they handle are being handled and disposed of properly. For further information concerning our environmental policies and procedures, please consult our Health & Safety and Environmental Policy, a copy of which can be obtained from the General Manager of your facility.



•

Intellectual Property Laws.  Our employees must take reasonable steps to avoid any violations of copyright, trademark, service mark, patent, trade secret or other intellectual property rights held by third parties when conducting business on behalf of our company or using our business systems and facilities.



•

Pari-Mutuel and Other Horse Racing Industry Specific Regulation.  Our employees must adhere in all material respects to all rules and regulations applicable to them as employees working within the horse racing industry, including, without limitation, pari-mutuel wagering laws concerning wagers placed by pari-mutuel staff, if applicable.

OUR EMPLOYEES ARE EXPECTED TO ACT IN THE BEST INTERESTS OF OUR COMPANY AND AVOID CONFLICTS OF INTEREST

        All of our employees must be wary of any investment, business interest or other personal interest that interferes, or even appears to interfere, with their objective ability to act in the best interests of our company. A conflict of interest arises in any situation where an employee's private interests or personal considerations, including potential benefits to the employee's family, may detrimentally affect the independent judgment of the employee to act in the best interests of our company. A conflict of interest also arises where an employee uses his position, confidential information or corporate time or facilities for private gain.

        All employees who, by virtue of their employment duties and responsibilities are in a position to retain or influence the retention of persons or companies to provide goods and services to our company, are required to complete a questionnaire disclosing the direct or indirect business interests of themselves and their immediate family members. For more information on this area, please refer to the MEC Conflict of Interest Policy, a copy of which can be obtained from the Human Resources Department (erna.lennard-white@magnaent.com) by calling 905-726-2462.

7

WE COMPETE FAIRLY AND ETHICALLY

        We are committed to providing high quality racing, entertainment, pari-mutuel wagering and hospitality services to our customers on a lawful and ethical basis. Our company and its employees must comply with the antitrust and unfair competition laws of the countries in which our company engages in business. Antitrust is the general term for laws that protect the free enterprise system by promoting fair competition and restricting restraints on trade. Generally, these laws prohibit or regulate: attempts to monopolize or otherwise restrain trade, price fixing or other agreements with competitors that would divide or allocate customers or otherwise harm customers, selling products and services below cost, "tied selling", and certain other overly restrictive agreements. Employees responsible for any dealings with competitors are expected to know the laws that apply to their business activities, and should speak to the Legal Department as questions arise.

EFFECTIVE DATE

        This Code was implemented and became effective on May 4, 2004.

8

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MAGNA ENTERTAINMENT CORP. Code of Business Conduct

EX-21

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Exhibit 21

LIST OF SUBSIDIARIES

United States

    The Santa Anita Companies, Inc. (Delaware)
        Los Angeles Turf Club, Incorporated (California) (Santa Anita Park)
    SLRD Thoroughbred Training Center, Inc. (Delaware) (San Luis Rey Downs)
    Gulfstream Park Racing Association, Inc. (Florida)
        Orchid Concessions, Inc. (Florida) (Gulfstream Park Food and Beverage)
        GPRA Commercial Enterprises, Inc.
            The Village at Gulfstream Park, LLC
    Pacific Racing Association (California) (Golden Gate Fields)
    MEC Land Holdings (California) Inc. (California)
    Remington Park, Inc. (Oklahoma)
    Thistledown, Inc. (Ohio)
    MI Racing Inc. (Delaware) (Great Lakes Downs)
    MEC Holdings (USA) Inc. (Delaware)
    Bay Meadows Operating Company, LLC (Delaware)
    Bay Meadows Catering Company (California)
    MEC Pennsylvania Racing, Inc. (Pennsylvania) (The Meadows)
        MEC Pennsylvania Food Service Inc. (Pennsylvania)
            (The Meadows Food and Beverage)
        20002 Delaware Inc. (Delaware)
        Allegheny Thoroughbred Racing Association, Inc. (Delaware)
        Allegheny Harness Racing Association, Inc. (Delaware)
    MEC Pennsylvania Racing Services, Inc. (Delaware)
    Mountain Laurel Racing, Inc. (Delaware)
        MEC Racing Management (Pennsylvania Partnership)
    Washington Trotting Association, Inc. (Delaware)
        MEC Racing Management (Pennsylvania Partnership)
    GPRA Thoroughbred Training Center, Inc. (Delaware) (Palm Meadows)
        Palm Meadows Estates, LLC (Delaware)
    MKC Acquisition Co. (Oregon) (Multnomah Greyhound Park)
    MEC Land Holdings (Oregon) LLC (Delaware)
    MEC Oregon Racing, Inc. (Delaware) (Portland Meadows)
    MEC Dixon, Inc. (Delaware)
    DLR, Inc.
    OTL, Inc.
    MEC Texas Racing, Inc. (Delaware)
    Racetrack Holdings, Inc. (Delaware)
        MEC Lone Star, L.P. (Delaware) (Lone Star Park at Grand Prairie)
            MEC Texas Concessions, LLC (Texas)
    MEC Maryland Ventures, LLC (Maryland)
    MEC Maryland Investments, Inc. (Delaware)
    Maryland Racing, Inc. (Delaware)
        20004 Maryland, Inc.
        Laurel Racing Assoc., Inc. (Maryland) (Laurel Park)
            Laurel Racing Association Limited Partnership (Maryland)
                Prince George's Racing, Inc. (Maryland)
                    Southern Maryland Agricultural Association (Maryland)
                    Maryland OTB Facilities, LLC (Maryland)
                New Maryland OTB Facilities, LLC (Maryland)
        Pimlico Racing Association, Inc. (Maryland)
            The Maryland Jockey Club of Baltimore City, Inc. (Maryland)
                    (Pimlico)
                Southern Maryland Racing, Inc. (Maryland)
                    Southern Maryland Agricultural Association (Maryland)
                Maryland OTB Facilities, LLC (Maryland)
                New Maryland OTB Facilities, LLC (Maryland)
    Michigan Racing, Inc. (Delaware)
    XpressBet, Inc. (Delaware)

    MEC Media Distribution Corp. (Delaware)
        HorseRacing TV, Inc. (Delaware)
    Sunshine Meadows Racing, Inc.
    Vista Hospitality Inc. (Delaware) (Splendido)
    Aurora Hospitality Services, Inc. (Delaware)
    MEC Developments, Inc. (Delaware)
    MEC Services Corp. (Delaware)
    Fex Straw Manufacturing Inc. (Delaware)

Canada

    MEC Holdings (Canada) Inc. (Ontario)
        Adena Meadows II Limited (Ontario)

Europe

    Fontana Beteiligungs AG (Austria)
    MEC Projektentwicklungs AG (Austria)
        FEX ÖKO-Faserverarbeitungs GmbH (Austria)
        MEC Grundstücksentwicklungs GmbH (Austria)
            MEC Sport and Entertainment Holding GmbH
                MEC Sport and Entertainment GmbH
    MEC Racino Holding GmbH
        MEC Magna Racino Veranstaltungs GmbH

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LIST OF SUBSIDIARIES

EX-23

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EXHIBIT 23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the following Registration Statements:

(a)

the Registration Statement (Form S-8 No. 333-32414) pertaining to the Long-Term Incentive Plan of Magna Entertainment Corp.;

(b)

the Registration Statement (Form S-3 No. 333-102889) and related prospectus of Magna Entertainment Corp. for the registration of 7¹/4% Convertible Subordinated Notes due December 15, 2009 and Shares of Class A Subordinate Voting Stock issuable upon the Conversion of such Notes;

(c)

the Registration Statement (Form S-3 No. 333-107368) and related prospectus of Magna Entertainment Corp. for the registration of 8.55% Convertible Subordinated Notes due June 15, 2010 and Shares of Class A Subordinate Voting Stock issuable upon the Conversion of such Notes and

(d)

the Registration Statement (Form S-3 No. 333-109922) and related prospectus of Magna Entertainment Corp. for the sale of up to $300,000,000 of Magna Entertainment Corp.'s Warrants to Purchase Debt Securities, Warrants to Purchase Class A Subordinate Voting Stock, Debt Securities, including the Debt Securities issuable upon exchange of other Debt Securities or the exercise of such Warrants, and Class A Subordinate Voting Stock, including the Shares of Class A Subordinate Voting Stock issuable upon the exercise of such Warrants or the conversion or exchange of such Debt Securities.

of our report dated February 3, 2006, except for Note 20(a)(i) as to which the date is February 9, 2006, and Note 23 as to which the date is March 15, 2006, with respect to the consolidated financial statements and schedule of Magna Entertainment Corp. and of our report dated February 3, 2006 with respect to Magna Entertainment Corp. management's assessment of the effectiveness of internal control over financial reporting, and the effectiveness of internal control over financial reporting of Magna Entertainment Corp., included in this Annual Report (Form 10-K) for the year ended December 31, 2005.

March 16, 2006	/s/  ERNST & YOUNG LLP
Toronto, Canada	Ernst & Young LLP

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CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

EX-24

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Exhibit 24

POWER OF ATTORNEY

        The undersigned directors of Magna Entertainment Corp. (the "Company") hereby appoint W. Thomas Hodgson, President and Chief Executive Officer, Blake S. Tohana, Executive Vice-President and Chief Financial Officer, and William G. Ford, Legal Counsel, as their true and lawful attorneys-in-fact, with full power for and on their behalf to execute, in their names and capacities as directors of the Company, and to file with the Securities and Exchange Commission on behalf of the Company under the Securities Exchange Act of 1934, as amended, an Annual Report on Form 10-K for the year ended December 31, 2005 (including any and all amendments thereto).

        This Power of Attorney automatically ends upon the termination of Mr. Hodgson's, Mr. Tohana's and Mr. Ford's service with the Company.

        In witness whereof, the undersigned have executed this Power of Attorney on this 16th day of March, 2006.

/s/ JOHN R. BARNETT John R. Barnett	/s/ JERRY D. CAMPBELL Jerry D. Campbell
/s/ W. THOMAS HODGSON W. Thomas Hodgson	/s/ LOUIS E. LATAIF Louis E. Lataif
/s/ EDWARD C. LUMLEY Edward C. Lumley	/s/ WILLIAM J. MENEAR William J. Menear
/s/ DENNIS MILLS Dennis Mills	/s/ GINO RONCELLI Gino Roncelli

/s/ FRANK STRONACH Frank Stronach

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POWER OF ATTORNEY

EX-31.1

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Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER
REGARDING MAGNA ENTERTAINMENT CORP.'S
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2005

I, W. Thomas Hodgson, certify that:

1.

I have reviewed this Annual Report on Form 10-K of Magna Entertainment Corp.;

2.

Based on my knowledge, this 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 report;

3.

Based on my knowledge, the financial statements, and other financial information included in this 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 report;

4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)

designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;

(b)

designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)

evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)

disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to material affect, the registrant's internal control over financial reporting;

5.

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a)

all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: March 16, 2006.	/s/  W. THOMAS HODGSON
	W. Thomas Hodgson President and Chief Executive Officer

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CERTIFICATION OF CHIEF EXECUTIVE OFFICER REGARDING MAGNA ENTERTAINMENT CORP.'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2005

EX-31.2

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Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER
REGARDING MAGNA ENTERTAINMENT CORP.'S
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2005

I, Blake Tohana, certify that:

1.

I have reviewed this Annual Report on Form 10-K of Magna Entertainment Corp.;

2.

Based on my knowledge, this 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 report;

3.

Based on my knowledge, the financial statements, and other financial information included in this 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 report;

4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)

designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;

(b)

designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)

evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)

disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to material affect, the registrant's internal control over financial reporting;

5.

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a)

all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: March 16, 2006.	/s/  BLAKE S. TOHANA
	Blake S. Tohana Executive Vice-President and Chief Financial Officer

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CERTIFICATION OF CHIEF FINANCIAL OFFICER REGARDING MAGNA ENTERTAINMENT CORP.'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2005

EX-32.1

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Exhibit 32.1

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

I, Thomas Hodgson, the Chief Executive Officer of Magna Entertainment Corp. ("MEC"), certify pursuant to 18 U.S.C. Section 1350 that (i) the Annual Report on Form 10-K (the "Report") of MEC for the year ended December 31, 2005 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and (ii) the information contained in such Report fairly presents, in all material respects, the financial condition and results of operations of MEC.

/s/  W. THOMAS HODGSON W. Thomas Hodgson, Chief Executive Officer

Date: March 16, 2006

A signed original of this written statement required by Section 906 has been provided to Magna Entertainment Corp. and will be retained by Magna Entertainment Corp. and furnished to the Securities and Exchange Commission or its staff upon request.

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

EX-32.2

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Exhibit 32.2

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

I, Blake Tohana, the Chief Financial Officer of Magna Entertainment Corp. ("MEC"), certify pursuant to 18 U.S.C. Section 1350 that (i) the Annual Report on Form 10-K (the "Report") of MEC for the year ended December 31, 2005 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and (ii) the information contained in such Report fairly presents, in all material respects, the financial condition and results of operations of MEC.

/s/  BLAKE S. TOHANA Blake S. Tohana, Chief Financial Officer

Date: March 16, 2006

A signed original of this written statement required by Section 906 has been provided to Magna Entertainment Corp. and will be retained by Magna Entertainment Corp. and furnished to the Securities and Exchange Commission or its staff upon request.

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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