The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to help the reader understand Canterbury Park Holding Corporation, our operations and our present business environment. This MD&A is provided as a supplement to - and should be read in conjunction with - our condensed consolidated financial statements and the accompanying notes to the financial statements (the "Notes").

Overview:

Canterbury Park Holding Corporation (the "Company") owns and operates the Canterbury Park Racetrack and Card Casino in Shakopee, Minnesota (the "Racetrack"). The primary businesses of the Company are simulcast and live pari-mutuel horse racing, hosting unbanked card games, and food and beverage operations.

The Racetrack is the only pari-mutuel thoroughbred and quarter horse racing facility in the State of Minnesota. The Racetrack earns revenues from pari-mutuel take-out on races simulcast year-round to Canterbury Park from racetracks throughout the country and from live race meets featuring thoroughbred and quarter horse racing. Live race meets commence in the month of May and conclude in early September. During live race meets, the Company televises its races to out-of-state racetracks around the country, and earns additional pari-mutuel revenue on wagers placed on its races at the out-of-state racetracks.

The Card Casino at Canterbury Park currently hosts "unbanked" card games in which players compete against each other and not against the house. In addition, changes to the law governing Card Casino operations will enable us to begin offering banked games in the future. The Card Casino is open twenty-four hours a day, seven days a week. Under Minnesota law, the Company is required to pay up to 14% of gross Card Casino revenues to the Racetrack's purse fund and the State of Minnesota Breeders' Fund.

The Company also generates revenues from other activities such as parking and admission fees and from the sale of food and beverage, programs and other racing publications, and corporate sponsorships. Additional revenues are derived from the use of the Racetrack facilities for special events, such as concerts and craft shows.

Operations Review for the Three and Six Months Ended June 30, 2012 and June 30, 2011:

The following table sets forth a reconciliation of net income, a GAAP financial measure, to EBITDA (defined below), which is a non-GAAP measure, for the six month periods ended June 30, 2012 and 2011:

                                                    June 30,      June 30,
                                                      2012          2011
        Net income (loss)                          $   365,968   $  (137,501 )
        Interest income, net of interest expense        (3,339 )      (2,030 )
        Income tax expense                             348,980       751,000
        Depreciation                                   884,580       937,230
        EBITDA                                     $ 1,596,189   $ 1,548,699

EBITDA represents earnings before interest income, income tax expense, and depreciation and amortization. EBITDA is not a measure of performance or liquidity calculated in accordance with generally accepted accounting principles ("GAAP"), and should not be considered an alternative to, or more meaningful than, net income as an indicator of our operating performance or cash flows from operating activities as a measure of liquidity. EBITDA has been presented as a supplemental disclosure because it is a widely used measure of performance and basis for valuation of companies in our industry. Moreover, other companies that provide EBITDA information may calculate EBITDA differently than we do.

EBITDA as a percentage of net revenues was 7.4% for the first six months ended June 30, 2012, as compared to 7.8% for the first six months ended June 30, 2011.

Total net revenues increased $1,599,464, or 8.0%, during the six months ended June 30, 2012 compared to the six months ended June 30, 2011, and increased $298,564, or 2.6%, for the three months ended June 30, 2012 compared to the three months ended June 30, 2011. The six month improvement was due primarily to an increase in Card Casino revenues of 7.3%, an increase in pari-mutuel revenues of 2.8% and an increase in concessions revenue of 15.5% compared to the same period in the prior year. The three month increase represented an increase in pari-mutuel revenues of 1.3% and an increase in concessions revenues of 9.6% offset by a reduction of 1.3% in Card Casino revenues for the three months ended June 30, 2012 compared to the same period in the prior year. See below for a further discussion of revenue.

Summary of Pari-mutuel Data:


                                                      Six Months Ended June 30,
                                                         2012            2011
   Racing Days
   Simulcast only                                              158            159
   Live and Simulcast                                           24             22
   Total Number of Racing Days                                 182            181

   On-Track Handle
   Simulcast racing handle on simulcast only days   $   13,853,000   $ 13,912,000
   Live and Simulcast days:
   Live racing handle                                    4,279,000      3,755,000
   Simulcast racing handle                               3,894,000      3,633,000
   Total On-Track Handle                                22,026,000     21,300,000

   Out-of-State Live Handle                              5,197,000      4,321,000

   Total Handle                                     $   27,223,000   $ 25,621,000

   On-Track Average Daily Handle
   Simulcast only racing days                       $       87,677   $     87,497
   Live and simulcast racing days                   $      340,542   $    335,818

Pari-mutuel revenues increased $131,598, or 2.8%, in the six-month period ended June 30, 2012 compared to the same period in 2011, and increased $39,517, or 1.3%, for the three-month period ended June 30, 2012 compared to the same period in 2011. Total handle wagered for the first half of 2012 was up $1,602,000, or 6.3%, compared to the same period last year. The six-month increase is primarily attributable to unusually mild weather in the first quarter of 2012 compared to inclement weather during the first quarter of 2011, when Minnesota experienced one of the snowiest winters on record which discouraged customers from coming to the track and wagering. Similar harsh weather in other parts of the United States in the first quarter of 2011 caused the cancellation of a significant number of races at racetracks simulcasting their signal to our racetrack. The three-month increase is primarily attributable to the Company scheduling two more live race days in the 2012 second quarter, which contributed to an increase in live meet handle compared to the same period in 2011.

Summary of Card Casino Data:


                                            Six Months Ended June 30,
                                               2012            2011
              Poker Games                 $    5,205,000   $  5,237,000
              Table Games                      6,164,000      5,367,000
              Total Collection Revenue        11,369,000     10,604,000

              Other Revenue                    1,224,000      1,130,000
              Total Card Casino Revenue   $   12,593,000   $ 11,734,000

              Number of Days Offered                 182            181
              Average Revenue per Day     $       69,192   $     64,829

Total Card Casino revenue increased $859,478, or 7.3%, for the first six months of 2012 and decreased $82,793, or 1.3%, for the second quarter of 2012 compared to the same periods in 2011. The primary source of Card Casino revenue is a percentage of the wagers received from the players as compensation for providing the Card Casino facility and services, which is referred to as the "collection revenue." Other revenue includes fees collected for the administration of tournaments, and amounts earned as reimbursement of the administrative costs of maintaining jackpot funds. Poker collection revenue during the first six months of 2012 remained relatively stable, decreasing $31,487, or 0.6%, compared to the first six months of 2011, and also decreased $205,182, or 7.8%, for the quarter ended June 30, 2012 compared to the same period in 2011. The Company believes that the decrease is largely attributable to the ban on Internet poker that began on April 15, 2011 which resulted in increased play during the second quarter of 2011 which has since subsided. Table games collection revenue increased $796,933, or 14.8%, compared to the first half of 2011 and $162,484, or 5.6%, for the quarter ended June 30 compared to the same period in 2011. The Company believes these increases are primarily due to a strengthening economy that encouraged increased interest in card play and the unusually mild weather in 2012 described above. Total Card Casino revenues represented 58.4% and 50.6% of net revenues for the six-month and three-month periods ended June 30, 2012, respectively. The second quarter percentage is usually lower in every calendar year due to substantially increased revenue from live racing.

Concession revenues increased $367,172, or 15.5%, for the first six months of 2012 and $157,499, or 9.6%, for the second quarter of 2012 compared to the same periods in 2011. The increases are primarily attributable to an additional two days of live racing conducted in the second quarter of 2012 compared to 2011, which also contributed to an increase in concession sales.

Total operating expenses increased $1,499,324, or 7.7%, and $566,415, or 4.8%, for the six-month and three-month periods ended June 30, 2012, respectively, compared to the same period in the prior year. See below for a further discussion of operating expenses.

Summary of Purse and Breeders' Fund Expense:


                                                                   Minnesota
                                 Purse Expense              Breeders' Fund Expense
                           Six Months Ended June 30,       Six Months Ended June 30,
                              2012            2011             2012            2011

Card Casino              $    1,371,000    $ 1,263,000   $        152,000    $ 140,000

Simulcast Horse Racing          951,000        954,000            200,000      199,000

Live Horse Racing               429,000        371,000             43,000       37,000

                         $    2,751,000    $ 2,588,000   $        395,000    $ 376,000

Due to the increases in pari-mutuel and Card Casino revenues, total expense for statutory purses and the Minnesota Breeders' Fund increased 6.1% to $3,145,448 for the first six months ended June 30, 2012 compared to the first six months ended June 30, 2011.

Salaries and benefits increased $751,741, or 8.7%, in the 2012 six-month period ended June 30, 2012 and $274,768, or 5.6%, in the three-month period ended June 30, 2012 compared to the same periods last year. The increases are partially due to supporting the increased revenue from all revenue categories during the three and six-month periods ending June 30, 2012 compared to the same periods in 2011. Additionally, there were increased salary and benefit costs as compared to the first six months of last year due to annual increases in wage rate.

Advertising and marketing costs increased $154,573, or 29.4%, in the 2012 six-month period ended June 30, 2012 and $61,309, or 14.5%, in the three-month period ended June 30, 2012 compared to the same periods last year primarily as a result of increased radio and billboard expenditures promoting the Card Casino and Racetrack.

Other operating expenses increased $317,971, or 8.8%, in the six-month period ended June 30, 2012 and $211,131, or 9.7%, in the three-month period ended June 30, 2012 compared to the same periods last year. The increases are primarily due to increased professional fees associated with the creation and signing of the Cooperative Marketing Agreement (the "Agreement") entered into with the Shakopee Mdewakanton Sioux Community (the "SMSC"). The increases are also attributable to the fair value of the stock appreciation rights that were granted on June 14, 2012 as part of the Agreement with the SMSC. This is further discussed in "Cooperative Marketing Agreement" below.

Income before income taxes was $714,948 for the six months ended June 30, 2012 compared to $613,499 for the six months ended June 30, 2011. After income tax expense of $348,980 for the six months ended June 30, 2012, the Company reported net income of $365,968 in 2012 compared to a net loss of $137,501 in 2011. For the quarter ended June 30, 2011, the Company recorded a net loss of $291,125 before income tax benefit compared to a loss before income tax expense of $24,822 for the quarter ended June 30, 2011. After income tax benefit of $124,589, the net loss in the second quarter of 2012 was $166,536 compared to a net loss of $348,056 for the second quarter of 2011. The significant level of income taxes estimated for the second quarter and six-month periods ending June 30, 2012 is primarily due to the non-deductibility of lobbying expenses incurred by the Company.

Contingencies:

As noted below, on June 4, 2012, the Company entered into a Cooperative Marketing Agreement with the Shakopee Mdewakanton Sioux Community, a federally recognized Indian tribe. If the Company breaches certain obligations as a result of the Agreement, that became effective on June 15, 2012, the Company will be forced to repay various amounts (depending on the breach).

Liquidity and Capital Resources:

Cash provided by operating activities for the six months ended June 30, 2012 was $1,765,502 and was due to several factors. First, the Company reported net income of $365,968. Additionally, the Company recorded depreciation of $884,580. The Company also experienced an increase in accounts payable and accrued wages and payroll taxes of $2,899,089, caused primarily by a seasonal increase of $1.43 million in horsemen payables. These items were somewhat offset by an increase in other current assets of $389,749 and an increase in restricted cash of $1,369,351, resulting primarily from the increase in horsemen payables of $1.34 million. Cash provided by operating activities for the six months ended June 30, 2011 was $3,046,371 and was the result of several factors. Depreciation during the first six months of 2011 was $937,230, and the Company experienced an increase in accounts payable and accrued wages and payroll taxes of $3,011,184, caused primarily by a seasonal increase of $1.33 million in horsemen payables. These items were somewhat offset by a net loss of $137,501 and an increase in restricted cash of $1,329,973, resulting primarily from the increase in horsemen payables of $1.33 million.

Net cash used in investing activities for the first six months of 2012 was $754,510 and was used primarily for a variety of equipment purchases. Net cash used in investing activities for the first six months of 2011 was $418,035 due to purchasing a variety of fixtures and equipment for operational purposes.

During the period January 1, 2012 through June 30, 2012, cash provided by financing activities consisted of proceeds and excess tax benefits received upon the exercise of stock options of $210,300. During the period January 1, 2011 through June 30, 2011, cash provided by financing activities consisted of proceeds and excess tax benefits received upon the exercise of stock options of $225,495.

The Company has a general credit agreement with Bremer Bank, which provides a revolving credit line of up to $3,000,000 until May 5, 2013 with interest at the prime rate but not less than 4.5% per annum. The Company had no borrowings under the line of credit at June 30, 2012 or December 31, 2011. This credit agreement contains covenants requiring the Company to maintain certain financial ratios. The Company was in compliance with these requirements at all times throughout the quarter ended June 30, 2012.

Unrestricted cash balances at June 30, 2012 were $9,490,071 compared to $8,268,779 at December 31, 2011. The Company believes that funds available in its cash accounts, amounts available under the general credit and security agreement, along with funds generated from operations, will be sufficient to satisfy its liquidity and capital resource requirements during 2012 for regular operations.

Critical Accounting Policies and Estimates:

The preparation of consolidated financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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 assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time the consolidated financial statements are prepared. On a regular basis, management reviews the accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in accordance with generally accepted accounting principles. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.

Our significant accounting policies are included in Note 1 to our consolidated financial statements in our 2011 Annual Report on Form 10-K. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Property and Equipment - We have significant capital invested in our property and equipment, which represents approximately 60.1% of our total assets at June 30, 2012. We utilize our judgment in various ways including: determining whether an expenditure is considered a maintenance expense or a capital asset; determining the estimated useful lives of assets; and determining if or when an asset has been impaired or has been disposed. Management periodically reviews the carrying value of property and equipment for potential impairment by comparing the carrying value of these assets with their related expected future net cash flows. If the sum of the related expected future net cash flows is less than the carrying value, we will determine whether an impairment loss should be recognized. An impairment loss would be measured by the amount by which the carrying value of the asset exceeds the fair value of the asset. To date, we have determined that no impairment of these assets exists.

Stock Based Employee Compensation - ASC 718, Compensation - Stock Compensation ("ASC 718"), requires recognition of services provided in exchange for a share-based payment based on the grant date fair market value. We utilize our judgment in determining the assumptions used to determine the fair value of options granted using a Black-Scholes model.

Commitments and Contractual Obligations:

On June 4, 2012, the Company entered into a Cooperative Marketing Agreement with the Shakopee Mdewakanton Sioux Community, a federally recognized Indian tribe that expires December 31, 2022. See "Cooperative Marketing Agreement" below.

Legislation:

On May 4, 2012, Minnesota Governor Mark Dayton signed legislation approved by the Minnesota Legislature that amended laws governing the Company's Card Casino. The amendments, which were effective immediately, will increase the Company's flexibility to operate its Card Casino which should lead to increased revenues, as well as increased purses for live races at Canterbury Park's Racetrack.

As amended, the law authorizes the Company to increase the number of tables in its Card Casino from 50 to 80 and increases the poker bet limit from $60 to $100. It also removes limits on the number of poker tournaments the Company can conduct, as well as limits on the number of tables used in poker tournaments. In addition, it allows Canterbury to conduct "banked" card games, in which customers play against the house, along with the unbanked games it currently conducts. In a separate provision, the amended law establishes a framework for the possible implementation of pari-mutuel simulcasting of horse races conducted at Canterbury and other racetracks to Tribal casinos in Minnesota.

Implementation of the amended law will occur in stages. The Company has increased the number of tables hosting live play from 50 to approximately 60 to accommodate customers during peak periods. Additional expansion, higher betting limits and expanded poker tournaments will be implemented based on market demand. While it will take some time to determine the incremental revenue and purse enhancements from the amended law, management believes it will enable the Company to better meet customer demand and grow Card Casino revenues.

Cooperative Marketing Agreement:

On June 4, 2012, the Company entered into a Cooperative Marketing Agreement (the "Agreement") with the Shakopee Mdewakanton Sioux Community ("SMSC"), a federally recognized Indian tribe. The primary purpose of the Agreement is to increase purses paid during live horse racing at the Canterbury Park racetrack. Under the terms of the Agreement, SMSC will make purse enhancement payments in order to strengthen Minnesota's horse industry. Under the Agreement, SMSC has agreed to contribute $2.7 million for purse enhancements in 2012 and, after 2012, the additional amounts listed below.

In addition, the Company and SMSC have also agreed to partner in joint marketing efforts for their mutual benefit, including events, cross promotions, cooperative poker tournaments, shared promotions and player benefits and signage. Under the agreement, SMSC has agreed to pay the Company an additional $300,000 for 2012 marketing purposes and, after 2012, the additional amounts listed below.

After 2012, under the Agreement, SMSC has agreed to make the following purse enhancement and marketing payments in the years 2013 through 2022:

Year Purse Enhancement Marketing Payment

                     2013     5,300,000          600,000
                     2014     5,840,000          660,000
                     2015     6,434,000          726,000
                     2016     7,087,400          798,600
                     2017     7,806,140          878,460
                     2018     8,000,000          900,000
                     2019     8,000,000          900,000
                     2020     8,000,000          900,000
                     2021     8,000,000          900,000
                     2022     8,000,000          900,000

The Company will not receive any part of any purse enhancement payment. As the Company will not directly be handling these funds, there will be no impact on the Company's financial statements.

The amounts earned from the marketing payments will be recorded as a component of other revenue and the related expenses will be recorded as a component of marketing and advertising expense in the Company's financial statements. For the period ended June 30, 2012, the Company did not earn any revenues and did not incur any expenses related to the 2012 marketing payment.

The Agreement also requires that the Company and Minnesota Horse Associations (as defined in the Agreement) will not promote or lobby the Minnesota legislature in the media or in other forums for expanded gambling authority and will support SMSC's lobbying efforts against expanding gaming authority. Under the agreement, the Company and SMSC also agree to work together to assist SMSC to implement simulcast horse racing on their property, to the extent allowed by Minnesota's Gaming Compacts, state law and applicable court decisions.

As part of the Agreement, on June 14, 2012, the Company signed a Stock Appreciation Rights Agreement (the "SAR Agreement") and issued stock appreciation rights to SMSC. The SAR Agreement granted rights to SMSC to benefit from the appreciation in the value of 165,000 shares of Company common stock above $14.30 per share, a price agreed upon by the two parties. Each right represents the right to be paid the appreciation in the value of one share of stock above $14.30. Ten percent of the rights (16,500 rights) vested immediately and the remaining rights vest at the rate of 16,500 per year beginning in 2013. The SAR Agreement provides for the cash payment of the excess of the fair market value of Canterbury Park Holding Corporation's common stock price on the date of exercise over the grant price. The SAR Agreement and all rights granted expire on December 31, 2022. The liability related to these stock appreciation rights is recorded as a long-term liability and the Company will recognize the expense related to these stock appreciation rights as a component of other operating expenses due to the nature of the agreement. During the period ended June 30, 2012, the Company recognized $117,226 of expense related to these stock appreciation rights. In the future, changes in the fair value of these stock appreciation rights will increase or decrease the stock appreciation rights liability, and the Company will recognize additional expense or income related to these changes.

Forward-Looking Statements:

From time to time, in reports filed with the Securities and Exchange Commission, in press releases, and in other communications to shareholders or the investing public, the Company may make forward-looking statements concerning possible or anticipated future financial performance, business activities or plans which are typically preceded by the words "believes," "expects," "anticipates," "intends" or similar expressions. For such forward-looking statements, the Company claims the protection of the safe harbor for forward-looking statements contained in federal securities laws. Shareholders and the investing public should understand that such forward-looking statements are subject to risks and uncertainties which could cause actual performance, activities or plans to differ significantly from those indicated in the forward-looking statements. Such risks and uncertainties include, but are not limited to: fluctuations in attendance at the Racetrack, material changes in the level of wagering by patrons, decline in interest in the unbanked card games offered in the Card Casino, legislative and regulatory changes, the impact of wagering products and technologies introduced by competitors; increases in the . . .