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Exhibit 99(1)

# Trading Cove Associates
Financial Statements 
December 31, 2002, 2001 and 2000

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# Trading Cove Associates
Index to Financial Statements 
December 31, 2002, 2001 and 2000

|                                                        | Page
|------------------------------------------------------- | ----
|Report of Independent Accountants                       | 1   
|Financial Statements                                   
|Balance Sheets                                          | 2   
|Statements of Operations                                | 3   
|Statements of Changes in Partners' Capital (Deficiency) | 4   
|Statements of Cash Flows                                | 5   
|Notes to Financial Statements                           | 6-21



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# Report of Independent
Accountants

To the Partners of
Trading Cove Associates

In our opinion, the accompanying
balance sheets and the related statements of operations, changes in partners capital
(deficiency) and of cash flows present fairly, in all material respects, the financial
position of Trading Cove Associates (the Partnership) at December 31, 2002 and
2001, and the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2002, in conformity with accounting principles generally
accepted in the United States of America. These financial statements are the
responsibility of the Partnerships management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the United
States of America, which 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, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 8 to the
financial statements, the Partnership has restated its financial statements for each of
its fiscal years to reflect the timing of the recognition of certain liabilities and the
classification of certain payments to its partners.

/s/ Pricewaterhousecoopers LLP
Hartford, Connecticut
March 18, 2003, except for Notes 3, 6 and 8 as to which the date is May 30, 2003

-1-



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# Trading Cove Associates
Balance Sheets
December 31, 2002 and 2001

|                                                                   | 2002 |  | 2001 |           
|------------------------------------------------------------------ | ---- |  | ---- | ----------
|
|
|Assets                                                             |      |  |      |           
|Current assets                                                     |      | 
|Cash and cash equivalents                                          |      |  | $    | 744,138   
|Relinquishment fee receivable                                      |      |  |      | 23,669,823
|Development fee receivable                                         |      |  |      | 84,000    
|Other current assets                                               |      |  |      | 4,000     
|                                                                   |      |  |      |           
|Total current assets                                               |      |  |      | 24,501,961
|                                                                   |      |  |      |           
|Deferred costs, net of accumulated amortization of $2,838,909 and  |      | 
|$2,617,391 at December 31, 2002 and 2001, respectively             |      |  |      | 2,660,032 
|Property and equipment, net of accumulated depreciation of         |      | 
|$48,473 and $40,832 at December 31, 2002 and 2001, respectively    |      |  |      | 4,730     
|                                                                   |      |  |      |           
|Total assets                                                       |      |  | $    | 27,166,723
|                                                                   |      |  |      |           
|Liabilities and Partners' Capital                                  |      | 
|Current liabilities                                                |      | 
|Accounts payable and accrued expenses                              |      |  | $    | 114,856   
|Subcontracted services payable                                     |      |  |      | -         
|Development contract loss provision                                |      |  |      | 5,639,684 
|Amounts billed in excess of development costs and estimated losses |      |  |      | 4,766,655 
|                                                                   |      |  |      |           
|Total current liabilities                                          |      |  |      | 10,521,195
|                                                                   |      |  |      |           
|Commitments and contingencies                                      |      | 
|Partners' capital                                                  |      |  |      | 16,645,528
|                                                                   |      |  |      |           
|Total liabilities and partners' capital                            |      |  | $    | 27,166,723
|                                                                   |      |  |      |           

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

-2-



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# Trading Cove Associates
Statements of Operations
For the Years Ended December 31, 2002, 2001 and 2000

|                                                      | 2002 |  | 2001 |            | 2000 |  
|----------------------------------------------------- | ---- |  | ---- | ---------- | ---- | -
|
|
|Revenue                                               |      |  |      |            |      |  
|Relinquishment fee                                    |      |  | $    | 58,508,703 |      | $
|Development services revenue                          |      |  |      | 556,788    |      |  
|                                                      |      |  |      |            |      |  
|Total revenue                                         |      |  |      | 59,065,491 |      |  
|                                                      |      |  |      |            |      |  
|Expenses                                              |      | 
|Subcontract payments to partners and their affiliates |      |  |      | -          |      |  
|Cost of development services revenue                  |      |  |      | 1,756,788  |      |  
|Amortization and depreciation                         |      |  |      | 221,818    |      |  
|General and administrative                            |      |  |      | 2,017,350  |      |  
|                                                      |      |  |      |            |      |  
|Total expenses                                        |      |  |      | 3,995,956  |      |  
|                                                      |      |  |      |            |      |  
|Interest and dividend income                          |      |  |      | 13,280     |      |  
|                                                      |      |  |      |            |      |  
|Net income                                            |      |  | $    | 55,082,815 |      | $
|                                                      |      |  |      |            |      |  

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

-3-



---

# Trading Cove Associates
Statements of Changes in Partners Capital (Deficiency)
For the Years Ended December 31, 2002, 2001 and 2000

|                                                  | Kerzner Investments Connecticut, Inc. |  | Waterford Gaming L.L.C. |             | Total |  
|------------------------------------------------- | ------------------------------------- |  | ----------------------- | ----------- | ----- | -
|Partners' capital (deficiency), January 1, 2000   |                                       |  |                         |             |       |  
|(restated - see Note 8)                           |                                       |  | $                       | (26,502,532 | )     | $
|Net income                                        |                                       |  |                         | 19,508,092  |       |  
|Contributions                                     |                                       |  |                         | 1,200,000   |       |  
|Distributions                                     |                                       |  |                         | (5,473,112  | )     |  
|                                                  |                                       |  |                         |             |       |  
|Partners' capital (deficiency), December 31, 2000 |                                       | 
|(restated - see Note 8)                           |                                       |  |                         | (11,267,552 | )     |  
|Net income                                        |                                       |  |                         | 24,263,489  |       |  
|Contributions                                     |                                       |  |                         | 1,350,000   |       |  
|Distributions                                     |                                       |  |                         | (7,170,976  | )     |  
|                                                  |                                       |  |                         |             |       |  
|Partners' capital, December 31, 2001              |                                       | 
|(restated - see Note 8)                           |                                       |  |                         | 7,174,961   |       |  
|Net income                                        |                                       |  |                         | 30,041,407  |       |  
|Contributions                                     |                                       |  |                         | 1,000,000   |       |  
|Distributions                                     |                                       |  |                         | (29,268,604 | )     |  
|                                                  |                                       |  |                         |             |       |  
|Partners' capital, December 31, 2002              |                                       | 
|(restated - see Note 8)                           |                                       |  | $                       | 8,947,764   |       | $
|                                                  |                                       |  |                         |             |       |  

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

-4-



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# Trading Cove Associates
Statements of Cash Flows
For the Years Ended December 31, 2002, 2001 and 2000

|                                                           |  | 2002 |   | 2001        |   | 2000 |            
|---------------------------------------------------------- |  | ---- | - | ----------- | - | ---- | -----------
|
|
|Cash flows from operating activities                       |  |      |   |             |   |      |            
|Net income                                                 |  |      | $ | 55,082,815  |   | $    | 43,526,978 
|                                                           |  |      |   |             |   |     
|Adjustments to reconcile net income to net cash provided   |  |     
|by operating activities                                    |  |     
|Amortization                                               |  |      |   | 221,518     |   |      | 221,517    
|Depreciation                                               |  |      |   | 7,641       |   |      | 12,708     
|Decrease in development contract loss provision            |  |      |   | (165,634    | ) |      | (1,325,476 
|Change in assets and liabilities                           |  |     
|Increase in relinquishment fee receivable                  |  |      |   | (4,983,247  | ) |      | (3,113,366 
|Decrease (increase) in development fee receivable          |  |      |   | 1,176,000   |   |      | (672,000   
|Decrease in management fee receivable                      |  |      |   | -           |   |      | -          
|Decrease in development costs and estimated losses         |  |     
|in excess of amounts billed                                |  |      |   | -           |   |      | 1,766,730  
|(Increase) decrease in other current assets                |  |      |   | (4,000      | ) |      | 1,868      
|(Decrease) increase in accounts payable & accrued expenses |  |      |   | (64,237     | ) |      | 38,911     
|(Decrease) increase in subcontracted services payable      |  |      |   | (430,791    | ) |      | (14,051,965
|Increase in amounts billed in excess of development        |  |     
|costs and estimated losses                                 |  |      |   | 759,212     |   |      | 4,007,443  
|Decrease in accrued obligations - affiliates               |  |      |   | -           |   |      | (23,621,754
|                                                           |  |      |   |             |   |     
|Total adjustments                                          |  |      |   | (3,483,538  | ) |      | (36,735,384
|                                                           |  |      |   |             |   |     
|Net cash provided by operating activities                  |  |      |   | 51,599,277  |   |      | 6,791,594  
|                                                           |  |      |   |             |   |     
|Cash flows from investing activities                       |  |     
|Purchase of property and equipment                         |  |      |   | -           |   |      | (1,484     
|                                                           |  |      |   |             |   |     
|Net cash used in investing activities                      |  |      |   | -           |   |      | (1,484     
|                                                           |  |      |   |             |   |     
|Cash flows from financing activities                       |  |     
|Partners' contributions                                    |  |      |   | 2,000,000   |   |      | 2,700,000  
|Distributions                                              |  |      |   | (53,537,209 | ) |      | (9,341,951 
|                                                           |  |      |   |             |   |     
|Net cash used in financing activities                      |  |      |   | (51,537,209 | ) |      | (6,641,951 
|                                                           |  |      |   |             |   |     
|Net increase in cash and cash equivalents                  |  |      |   | 62,068      |   |      | 148,159    
|Cash and cash equivalents at beginning of year             |  |      |   | 682,070     |   |      | 533,911    
|                                                           |  |      |   |             |   |     
|Cash and cash equivalents at end of year                   |  |      | $ | 744,138     |   | $    | 682,070    
|                                                           |  |      |   |             |   |     

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

-5-



---

# Trading Cove Associates
Notes to Financial Statements
December 31, 2002, 2001 and 2000

# 1.         Organization, Partnership Agreement and Other Material Agreements

| | i) Organization and Partnership Agreement
| | -----------------------------------------

| | Trading
Cove Associates (the Partnership), a Connecticut general partnership, was
organized on July 27, 1993. The primary purpose of the Partnership has been:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | a) | to assist the Mohegan Tribe of Indians of Connecticut (the Tribe)
               and the Mohegan Tribal Gaming Authority (the Authority) in obtaining
               federal recognition,
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | b) | to negotiate the tribal-state compact with the State of Connecticut on behalf of
               the Tribe,                                                                                   
| | c) | to obtain financing for the development of the Mohegan Sun Casino
               (the Mohegan Sun),                                                                                        
| | d) | to negotiate the Amended and Restated Gaming
               Facility Management Agreement (the Management Agreement),                                                                      
| | e) | to
               oversee all operations of the Mohegan Sun pursuant to the terms of the
               Management agreement until December 31, 1999, and                                    
| | f) | to participate in the design and development of the Mohegan Sun.                                                                                                                             

| | The
Mohegan Sun commenced operations on October 12, 1996. From the opening of the Mohegan Sun,
and until January 1, 2000, the Partnership oversaw the Mohegan Suns day-to-day
operations.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Partnership will terminate on December 31, 2040, or earlier, in accordance with the
terms of the partnership agreement (the Partnership Agreement).
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
original partners of the Partnership were RJH Development Corp. (RJH), a New
York corporation, Leisure Resort Technology, Inc. (Leisure), a Connecticut
corporation, Slavik Suites, Inc. (Slavik), a Michigan corporation and LMW
Investments, Inc. (LMW), a Connecticut corporation. On September 21, 1994, the
Partnership Agreement was amended and restated to admit Kerzner Investments Connecticut,
Inc. (Kerzner Investments), a Connecticut corporation, formerly Sun Cove
Limited, as a partner.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
February 3, 1995, Leisure entered into an acknowledgement and release agreement to
withdraw as a partner of the Partnership and hold its interest in the Partnership as a
beneficial interest. On August 6, 1997, Leisure filed a lawsuit against the
Partnership, Kerzner Investments, RJH and Waterford Gaming, L.L.C. (Waterford
Gaming) and its owners, claiming breach of contract, breach of fiduciary duties and
other matters in connection with the development of the Mohegan Sun. On January 6, 1998,
pursuant to the settlement and release agreement described in Note 7. below, Waterford
Gaming paid $5,000,000 to Leisure and, among other things Leisure gave up, (a) its
beneficial interest in 5% of certain fees and excess cash flows, as defined, of the
Partnership and (b) any other claims it may have had against the Partnership, Kerzner
Investments, RJH, Waterford Gaming and its owners. In connection with the settlement of
all matters related to such suit, pursuant to the settlement and release agreement,
Waterford Gaming agreed to acquire Leisures interests in the Partnership. As a
result of this acquisition, Leisure no longer has the right to 5% of the Organizational
and Administrative fee, as defined in the Organizational and Administrative Services
Agreement, and 5% of the Partnerships Excess Cash as defined in the Partnership
Agreement, and Waterford Gaming is now entitled to such fees and cash. During March 1999,
Waterford Gamings $65,000,000 senior notes were retired and, on March 18, 1999,
Waterford Gaming paid an additional $2,000,000 to Leisure pursuant to the settlement and
release agreement. On January 7, 2000, Leisure filed a complaint against the Partnership
and certain other defendants. For a description of the complaint, see Note 7 to these
financial statements.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
November 8, 1996, Slavik, LMW and RJH withdrew from the Partnership and, concurrently,
consented to the admission of Waterford Gaming to the Partnership. Waterford Gaming,
simultaneously, purchased RJHs interest in the Partnership. Waterford Gaming is
owned by Waterford Group, LLC. Waterford Group, LLC is owned by Slavik and LMW.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
partners percentage interest in the Partnership as of November 8, 1996 was as
follows:
| | -------------------------------------------------------------------------------------------

|Partner             |  | Percentage Interest | 
|------------------- |  | ------------------- | 
|Kerzner Investments |  | 50.0%               | 
|Waterford Gaming    |  | 50.0%               | 

| | ii) Other Material Agreements
| | -----------------------------

| | Relinquishment Agreement
On February 7, 1998, the Partnership and the Authority entered into the Relinquishment
Agreement (the Relinquishment Agreement). Under the terms of the
Relinquishment Agreement the Partnership continued to manage the Mohegan Sun under the
Management Agreement until midnight December 31, 1999, and on January 1, 2000, the
Management Agreement terminated and the Tribe assumed day-to-day management of the Mohegan
Sun.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Under
the Relinquishment Agreement, to compensate the Partnership for terminating its rights
under the Management Agreement and the Hotel/Resort Management Agreement the Authority
agreed to pay to the Partnership a fee (the Relinquishment Fees) equal to 5%
of Revenues, as defined in the Relinquishment Agreement, generated by the Mohegan Sun
during the 15-year period commencing on January 1, 2000, including revenue generated by
the Project Sunburst expansion (the Project Sunburst expansion).
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Relinquishment Fees are divided into senior relinquishment payments and junior
relinquishment payments, each of which equals 2.5% of Revenues. Revenues are
defined as gross gaming revenues (other than Class II gaming revenue, ie bingo) and all
other facility revenues. Such revenue includes hotel revenues, food and beverage sales,
parking revenues, ticket revenues and other fees or receipts from the convention/events
center in the Project Sunburst expansion and all rental or other receipts from lessees,
licensees and concessionaires operating in the facility, but not the gross receipts of
such lessees, licensees and concessionaires. Such revenues exclude revenues generated by
any other expansion of the Mohegan Sun. Senior relinquishment payments are payable
quarterly in arrears commencing on April 25, 2000, for the quarter ended March 31, 2000
and the junior relinquishment payments are payable semi-annually in arrears commencing on
July 25, 2000, for the six months ended June 30, 2000, assuming sufficient funds are
available after satisfaction of the Tribes senior obligations, as defined in the
Relinquishment Agreement.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Development Agreement
On February 7, 1998 the Partnership and the Authority entered into the Development Services
Agreement (the Development Agreement), which made the Partnership the
exclusive developer of the Project Sunburst expansion. Pursuant to the Development
Agreement, the Partnership agreed to oversee the planning, design, construction,
furnishing, equipping and staffing of the Project Sunburst expansion for a $14.0 million
development fee (the Development Fee).
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On May 24, 2000, the Partnership and the Authority agreed that the Partnership had performed
and completed all its obligations relating to the staffing of the Project Sunburst
expansion and that the Partnership has no further obligations relating to the staffing of
the Project Sunburst expansion.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The first phase of the Project Sunburst expansion, including the Casino of the Sky, The Shops
at Mohegan Sun, and the 10,000-seat Mohegan Sun Arena opened in September 2001. In April
2002, 734 of the 1,200-hotel rooms in the 34-story luxury hotel as well as the meeting and
convention space and spa opened. The balance of the 1,200-hotel rooms opened during June
2002. At December 31, 2002, the Project Sunburst expansion was substantially completed.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Pursuant
to the Development Agreement, the Authority agreed to pay the Development Fee to the
Partnership quarterly beginning on January 15, 2000 based on the incremental completion of
the Project Sunburst expansion as of the previous calendar quarter and thereafter within
fifteen (15) days following the end of each calendar quarter. The last payment of the
Development Fee is to be paid on the Completion Date, as defined in the Development
Agreement, of the Project Sunburst expansion.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Development Agreement terminates after the earlier of the completion of the Project
Sunburst expansion or 10 years. In addition, each party has the right to terminate the
Development Agreement if there is a default or failure to perform by the other party.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Management Agreement
The Partnership entered into the Management Agreement with the Tribe pursuant to which the
Tribe granted to the Partnership the exclusive right and obligation to develop, manage,
operate and maintain the Mohegan Sun. The Management Agreement was amended and restated
effective September 29, 1995 (the Effective Management Agreement Date). The
Partnerships obligations under this agreement began five days after the Effective
Management Agreement Date and were originally intended to end on October 11, 2003, seven
years from the opening of the Mohegan Sun. Pursuant to the Management Agreement the
Partnership received a management fee (the Management Fees) that was
calculated in three tiers based upon the Net Revenues, as defined in the Management
Agreement, of the Mohegan Sun. The Management Agreement terminated at midnight on December
31, 1999. The final management fee was received by the Partnership from the Authority on
January 25, 2000.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Agreements with Partners and/or their Affiliates
| | ------------------------------------------------

| | Agreement Relating to Development Services
On February 9, 1998, the Partnership and Kerzner International Management Limited
(KIML), entered into the Agreement Relating to Development Services (the
Development Services Agreement Phase II). Pursuant to the Development Services
Agreement Phase II, the Partnership subcontracted with KIML who agreed to perform those
services assigned to KIML by the Partnership in order to facilitate the Partnerships
fulfillment of its duties and obligations to the Authority under the Development
Agreement. KIML subsequently assigned the Development Services Agreement Phase II to
Kerzner Investments.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Pursuant
to the Development Services Agreement Phase II, the Partnership pays to Kerzner
Investments a fee, as subcontractor (the Development Services Fee Phase II),
equal to 3% of the development costs of the Project Sunburst expansion, excluding
capitalized interest, less all costs incurred by the Partnership in connection with the
Project Sunburst expansion. The Development Services Fee Phase II shall be paid in
installments due on December 31, 1999 and 2000 and on the Completion Date, as defined in
the Development Agreement, with a final payment being made when the actual development
costs of the Project Sunburst expansion are known. The Partnership pays the Development
Services Fee Phase II, from available cash flow, if any, in accordance with the Amended
and Restated Omnibus Termination Agreement. At December 31, 2002, the total of the
Development Services Fee Phase II and the Partnerships costs related to the
development of the Project Sunburst expansion will exceed the development services revenue
from the Tribe by approximately $16,000,000 as discussed in Note 3.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Before
KIML assigned the Development Services Agreement Phase II to Kerzner Investments, it
entered into the Local Construction Services Agreement (the Local Construction
Services Agreement) with Wolman Construction, LLC (Construction)
pursuant to which Construction agreed to provide certain of those services assigned to
KIML by the Partnership pursuant to the Development Services Agreement Phase II. KIML
assigned the Local Construction Services Agreement to Kerzner Investments. Pursuant to the
Local Construction Services Agreement, Kerzner Investments agreed to pay to Construction a
fee equal to 20.83% of the Development Services Fee Phase II as and when Kerzner
Investments receives payment from the Partnership in accordance with the Development
Services Agreement Phase II.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Construction
has subcontracted with The Slavik Company to provide certain services under the Local
Construction Services Agreement. In connection with this, Construction agreed that The
Slavik Company would be paid a fee equal to 14.30% of its fee under the Local Construction
Services Agreement.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Amended and Restated Omnibus Termination Agreement
Effective March 18, 1999, the Amended and Restated Omnibus Termination Agreement (the Amended
and Restated Omnibus Termination Agreement) was entered into by the Partnership,
Kerzner International Limited (Kerzner International), Waterford Gaming, KIML,
LMW, Kerzner Investments, Slavik and Construction. The Amended and Restated Omnibus
Termination Agreement (i) terminated the memorandum of understanding dated February 7,
1998; and (ii) effective January 1, 2000, terminated a) the Amended and Restated Omnibus
Financing Agreement; b) the Completion Guarantee and Investment Banking and Financing
Arrangement Fee Agreement (the Financing Arrangement Agreement); c) the
Management Services Agreement; d) the Organizational and Administrative Services
Agreement; e) the Marketing Services Agreement; and f) a Letter Agreement relating to
expenses dated October 19, 1996.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In consideration for the termination of such agreements, the Partnership will use its cash to
pay the following obligations in the priority set forth below:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (i) | First, to pay all unpaid amounts which may be due under the terminated Letter
                    Agreement and to pay to certain affiliates of Waterford Gaming and to Kerzner
                    Investments a percentage of an annual fee of $2.0 million less the actual
                    expenses incurred by the Partnership during such year. Such annual fee shall be
                    payable in equal quarterly installments beginning March 31, 2000 and ending
                    December 31, 2014. For the years ended December 31, 2002, 2001 and 2000, $0,
                    $1,712,791 and $1,849,506, respectively, have been paid and incurred by the
                    Partnership in terms of the first priority;
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (ii) | Second, to return all capital contributions made by the partners of the
                    Partnership after September 29, 1995. The Partnership anticipates making
                    capital calls to fund expenses related to the development of the Project
                    Sunburst expansion, and these capital calls will be repaid, based on cash flow,
                    in the quarter following the quarter in which the capital call was made. From
                    January 1, 2000 to December 31, 2002 these contributions aggregated $7,100,000.
                    From January 1, 2000 to December 31, 2002 $6,700,000 has been repaid to the
                    partners of the Partnership. 
                    As of December 31, 2002, $400,000 in capital contributions remained outstanding. On January
                    28, 2003, a cash distribution of $200,000 was made to each partner;
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (iii) | Third, to pay any accrued amounts for obligations performed prior to January 1,
                    2000 under the Financing Arrangement Agreement. All such required payments were
                    made during 2000;
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (iv) | Fourth, to make the payments set forth in the agreements relating to the
                    Development Services Agreement Phase II and the Local Construction Services
                    Agreement as detailed under a) above. No such payments are required or due at
                    December 31, 2002. The accrued liability to Kerzner Investments with respect to
                    such fee at December 31, 2002 was approximately $10,216,000;
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (v) | Fifth, to pay Kerzner Investments an annual fee of $5.0 million payable in equal
                    quarterly installments of $1.25 million beginning March 31, 2000 and ending
                    December 31, 2006. On January 28, 2003 and January 28, 2002, $1,250,000 was
                    distributed in terms of the fifth priority;
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (vi) | Sixth, to pay any accrued amounts for obligations performed with respect to
                    periods prior to January 1, 2000 under the Management Services Agreement, the
                    Organizational and Administrative Services Agreement and the Marketing Services
                    Agreement. The final required payments under this priority were made during
                    2001;
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (vii) | Seventh, for the period beginning March 31, 2000 and ending December 31, 2014,
                    to pay each of Kerzner Investments and Waterford Gaming twenty-five percent
                    (25%) of the relinquishment payments as distributions. On January 28, 2003 and
                    January 28, 2002, $22,043,000 ($11,221,500 to each of Kerzner Investments and
                    Waterford Gaming) and $16,715,209 ($8,357,605 to Kerzner Investments and
                    $8,357,604 to Waterford Gaming), respectively, was distributed by the
                    Partnership in terms of the seventh priority; and
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (viii) | Eighth, to distribute all excess cash.
| | ------ | --------------------------------------

| | In
addition, the Partnership shall not make any distributions pursuant to the Amended and
Restated Omnibus Termination Agreement until it has annually distributed to its partners,
pro rata, the amounts related to the partners tax obligations as described in Section
3.03a(1) of the Partnership Agreement less twice the amount of all other funds paid or
distributed to Waterford Gaming during such year pursuant to the Amended and Restated
Omnibus Termination Agreement.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | To
the extent the Partnership does not have adequate cash to make the payments pursuant to
the Amended and Restated Omnibus Termination Agreement, such amounts due shall be deferred
without the accrual of interest until the Partnership has sufficient cash to pay them.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Amended and Restated Omnibus Financing Agreement
Until January 1, 2000, the Partnerships primary source of revenue and cash flow was
Management Fees. Those fees were utilized by the Partnership to make subcontract payments
to partners and affiliates pursuant to the Amended and Restated Omnibus Financing
Agreement, which was terminated effective January 1, 2000.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# 2.         Significant Accounting Policies

| | Cash and Cash Equivalents
Cash and cash equivalents represent cash and short-term, highly liquid investments with
original maturities of three months or less.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Relinquishment Fee
Revenue is generated in accordance with terms of the Relinquishment Agreement and recognized
quarterly based upon the revenues of the Authority.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Development Services Revenue and Cost Recognition
Revenue generated from services performed in accordance with the terms of the Development
Agreement are recognized on the percentage-of-completion basis, determined by the
percentage of costs incurred to date to estimated total costs for the contract. This
method is used because management considers cost incurred to be the best available measure
of progress on the contract.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Costs
of development services revenue performed include all direct labor costs and those
indirect costs related to services such as subcontractors, consultants, supplies,
depreciation and other costs. Changes in performance, requirements and estimated
profitability may result in revisions to costs and income and will be recognized in the
period in which the revisions are determined. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are determined.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
asset, development costs and estimated losses in excess of amounts billed,
represents revenues recognized in excess of amounts billed. The liability, amounts
billed in excess of costs and estimated losses, represents billings in excess of
revenues recognized.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Deferred Costs
Costs associated with acquiring the Management Agreement were amortized on a straight-line basis
over the 84-month period of the Management Agreement through March 3, 1999. As a result of
the Relinquishment Agreement becoming effective, the remaining balance will be amortized
over 189 months beginning March 4, 1999.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Property and Equipment
Office equipment, computer equipment and furniture and fixtures are stated at cost. Depreciation
is charged against income over a 3-year estimated life of the office and computer
equipment and over a 5-year estimated life of furniture and fixtures. Depreciation expense
for the years ended December 31, 2002, 2001 and 2000 amounted to $7,641, $12,708 and
$14,036 of which $7,341, $12,508 and $14,036 were included in cost of development services
revenue, respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Income Taxes
No income tax provision or benefit is recorded on the books of the Partnership, as the
respective share of taxable income or loss is reportable by the partners on their
individual tax returns.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Concentration of Credit Risk
Financial instruments, which potentially subject the Partnership to a concentration of credit risk,
principally consist of cash in excess of the financial institutions insurance
limits. The Partnership invests available cash with high credit quality institutions.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Use of Estimates
The preparation of financial statements in conformity with accounting principles generally
accepted 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 financial statements, as well as the
reported amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Payments to Partners and their Affiliates
Payments are made to the partners and/or their affiliates in accordance with the terms of the
Amended and Restated Omnibus Termination Agreement for certain subcontracted services
rendered and are accounted for as expenses of the Partnership.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# 3.         Development Contract

| | The
Partnership entered into a Development Agreement with the Authority, which entitles the
Partnership to receive a development fee totaling $14 million. A summary of the quarterly
Development Fee payments received by the Partnership in accordance with the terms of the
Development Agreement is as follows:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Date of Payment  | Amount | 
|---------------- | ------ | 
|January 15, 2000 |        | 
|April 20, 2000   |        | 
|July 17, 2000    |        | 
|October 13, 2000 |        | 
|January 23, 2001 |        | 
|April 16, 2001   |        | 
|July 20, 2001    |        | 
|October 17, 2001 |        | 
|January 25, 2002 |        | 
|April 22, 2002   |        | 
|July 19, 2002    |        | 
|October 18, 2002 |        | 
|January 24, 2003 |        | 
|                 |        | 
|                 |        | 
|                 |        | 

| | Information relative to the development contract in progress is as follows:
| | ---------------------------------------------------------------------------

|                                                  | 2002 |  | 2001 |            
|------------------------------------------------- | ---- |  | ---- | -----------
|Development costs incurred                        |      |  | $    | 25,065,345 
|Estimated loss                                    |      |  |      | (16,000,000
|                                                  |      |  |      |            
|                                                  |      |  |      | 9,065,345  
|Less: billings to date                            |      |  |      | (13,832,000
|                                                  |      |  |      |            
|Amounts billed in excess of development costs and |      | 
|estimated losses                                  |      |  | $    | (4,766,655 
|                                                  |      |  |      |            

| | The
balance sheets include a related loss provision of $5,639,684 and $5,805,318 representing
an accrual for additional contract costs exceeding cumulative revenues earned and
cumulative costs incurred at December 31, 2002 and 2001, respectively.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# 4.         Deferred Costs

| | Certain
costs incurred by the Partnership in connection with obtaining the Management Agreement
and the opening of the Mohegan Sun totaling $5,498,941 were capitalized. Amortization
commenced upon the opening of the Mohegan Sun. Amortization expense for years ended
December 31, 2002, 2001 and 2000 was $221,518, $221,517 and $222,124, respectively.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# 5.         Relinquishment Fee

| | The
Partnership entered into a Relinquishment Agreement with the Authority, which entitles the
Partnership to receive a relinquishment fee of 5% of the Revenues generated by the Mohegan
Sun including revenue generated by the Project Sunburst expansion.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
the years ended December 31, 2002, 2001 and 2000, total relinquishment fees earned were
$58,508,703, $45,715,318 and $41,003,849, respectively. The amount of Relinquishment Fees
reported in these financial statements are based upon Revenues reported to the Partnership
by the Authority. These amounts were paid by the Authority as follows:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Date Received by the Partnership |  | Amount |  
|-------------------------------- |  | ------ | -
|April 25, 2002                   |  |        | $
|July 25, 2002                    |  |        |  
|October 25, 2002                 |  |        |  
|January 27, 2003                 |  |        |  
|                                 |  |       
|Relinqishment Fees earned 2002   |  |        | $
|                                 |  |       
|April 25, 2001                   |  |        | $
|July 25, 2001                    |  |        |  
|September 7, 2001                |  |        |  
|October 25, 2001                 |  |        |  
|January 25, 2002                 |  |        |  
|                                 |  |       
|Relinquishment Fees earned 2001  |  |        | $
|                                 |  |       
|April 25, 2000                   |  |        | $
|July 26, 2000                    |  |        |  
|October 25, 2000                 |  |        |  
|January 25, 2001                 |  |        |  
|                                 |  |       
|Relinquishment Fees earned 2000  |  |        | $
|                                 |  |       

# 6.         Reconciliation of Financial Statements and Tax Information

|                                                       | 2002 |  | 2001 |             | 2000 |  
|------------------------------------------------------ | ---- |  | ---- | ----------- | ---- | -
|Financial statement net income (restated)              |      |  | $    | 55,082,815  |      | $
|Guaranteed payments to partners                        |      |  |      | (55,765,000 | )    |  
|Subcontract payments to affiliates previously          |      | 
|recorded for financial statement purposes              |      |  |      | -           |      |  
|Financial statement depreciation and amortization less |      | 
|than tax basis depreciation and amortization           |      |  |      | 1,560       |      |  
|Conversion from accrual basis to cash basis            |      | 
|method of accounting                                   |      |  |      | -           |      |  
|Percentage of completion accounting differences        |      |  |      | 991,712     |      |  
|Other                                                  |      |  |      | 50,093      |      |  
|                                                       |      |  |      |             |      |  
|Federal income tax basis net income (loss)             |      |  | $    | 361,180     |      | $
|                                                       |      |  |      |             |      |  

| | For
the year ended December 31, 1998, the Partnership was required to change its method of
accounting for tax purposes from the cash method to the accrual method, in accordance with
Internal Revenue Code Section 448. The cumulative difference of $58,640 is amortized
equally over four years at $14,660 per year.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# 7.         Commitments and Contingencies

| | Litigation
On January 6, 1998, Leisure and defendants Waterford Gaming, the Partnership, LMW and Slavik
settled a prior lawsuit brought by Leisure. In connection with this settlement, Leisure,
the Partnership, Waterford Gaming, LMW and Slavik entered into a settlement and release
agreement. Pursuant to this settlement and release agreement, Waterford Gaming bought out
Leisures beneficial interest in the Partnership.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | By
complaint dated January 7, 2000, as amended February 4, 2000, Leisure filed a four count
complaint naming as defendants Waterford Gaming, the Partnership, LMW, Slavik, Waterford
Group, LLC, Len Wolman and Mark Wolman (collectively, the Defendants). The
matter has been transferred to the complex litigation docket and is pending in Waterbury,
Connecticut. The complaint alleged breach of fiduciary duties, fraudulent non-disclosure,
violation of Connecticut Statutes Section 42-110a, et seq. and unjust enrichment in
connection with the negotiation by certain of the Defendants of the settlement and release
agreement. The complaint also brought a claim for an accounting. The complaint seeks
unspecified legal and equitable damages. On February 29, 2000 Defendants filed a Motion to
Strike and a Motion for Summary Judgement, each with respect to all claims. The Court
granted Defendants Motion to Strike in part and denied Defendants Motion for
Summary Judgement, on October 13, 2000. The Courts order dismissed the claim for an
accounting and the claim under Connecticut Statutes Section 42-110a, et seq. The Court
also struck the alter ego allegations in the complaint against LMW, Slavik, Len Woman, and
Mark Wolman. In a decision dated August 6, 2001, the Court dismissed all claims against
LMW, Slavik, Len Wolman and Mark Wolman.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
November 15, 2000, the Partnership and its co-defendants answered the complaint. In
addition, the Partnership and Waterford Gaming asserted counterclaims for breach of the
settlement and release agreement and breach of the implied covenant of good faith against
Leisure and its president, Lee Tyrol. In a decision dated June 6, 2001, the Court
dismissed the counterclaims against Lee Tyrol. Leisure has moved for summary judgment
seeking dismissal of the counterclaims in full. This motion for summary judgment was
denied.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Discovery
has commenced. Pursuant to the current scheduling order all depositions are to be
completed by June 30, 2003. A trial date has not been set.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Partnership believes that it has meritorious defenses and intends to vigorously contest
the claims in this action and to assert all available defenses. At the present time, the
Partnership is unable to express an opinion on the likelihood of an unfavorable outcome or
to give an estimate of the amount or range of possible loss to the Partnership as a result
of this litigation due to the disputed issues of law and/or facts on which the outcome of
this litigation depends and due to the infancy of both the action and discovery in the
action.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
addition, the Partnership is a defendant in certain litigation incurred in the normal
course of business. In the opinion of the Partnerships management, based on the
advice of counsel, the aggregate liability, if any, arising from such litigation will not
have a material adverse effect on the Partnerships financial condition or results of
operations.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# 8.         Restatement and Reclassifications

| | The Partnership has restated its financial statements for each of the fiscal years 1996
through 2002.
| | -----------------------------------------------------------------------------------------------------

| | The
restatement is the result of a change by the Partnership in the way it has historically
recorded certain contractual liabilities to its partners and their affiliates, recognized
certain revenue, and classified certain distributions to its partners. As described in
more detail below, the Partnership has restated its historical financial statements to:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | i) | recognize as an expense certain contractual liabilities owed its partners and
               their affiliates for prior services performed under contract when their payment
               became probable pursuant to Statement of Financial Accounting Standard No. 5
               (SFAS 5), as opposed to when such expenses were paid or payable
               (these expenses were previously disclosed as contingent obligations);
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | ii) | recognize as revenue junior relinquishment fees from the Authority pursuant to
               the Relinquishment Agreement in the quarter in which such fees are earned, as
               opposed to at the end of every six months, when such fees became payable; and
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | iii) |  | reclassify certain payments by the Partnership to its partners as distributions on partnership
interests which were previously classified as expenses in the statement of operations.
| | ---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
effect of the restatement is to change the timing of the recognition of certain revenues
and certain liabilities of the Partnership, owed to partners and their affiliates, and not
to change the amount of such revenues or such liabilities or the amounts paid to partners
or their affiliates.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
noted above, the Partnership changed how it has accounted for certain contractual
liabilities it owed to its partners and their affiliates for services performed under
contract. The Partnership has recorded a liability for previously provided services
pursuant to SFAS 5 when it became probable that it had been incurred and when it was
reasonably estimable rather than when such payments became payable. As a result of this
change, some payments will be recorded as liabilities and expenses on the
Partnerships financial statements several years before they are due and payable.
Previously, these payments were recorded as liabilities only when payment was certain.
These payments are related to amounts due under (a) the third, fourth, fifth, seventh,
eighth, ninth and eleventh priority distributions described in the Amended and Restated
Omnibus Financing Agreement and (b) the third and fourth priority distributions described
in the Amended and Restated Omnibus Termination Agreement.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | One
effect of the change described in the preceding paragraph is that the Partnership will
recognize an additional loss on the Development Agreement between it and the Authority,
which is accounted for in accordance with Statement of Position 81-1. Through December 31,
2002 the Partnership had recorded a cumulative loss of $7,007,000 and disclosed a
liability to affiliates of approximately $10.2 million. After the restatement, it has
recorded a cumulative loss of $16,000,000 as of December 31, 2002. As a result, an
additional development loss of $1,200,000 was accrued during 2002 and the development loss
in 2000 was reduced by $2,207,000 to give effect to a $10,000,000 development loss at
December 31, 1999. Prior to making the change described in the preceding paragraph, the
Partnership would have recorded this loss in the second quarter of 2003, when the related
amount would have been payable.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
described above, the Partnership changed its historical method of accruing junior
relinquishment payments it receives from the Authority pursuant to the Relinquishment
Agreement. The Partnership will now accrue for such payments in each quarter as they are
earned. Prior to the restatement, the Partnership recognized such payments as revenue as
they became payable every six months. There is no impact on annual relinquishment fee
revenues.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Also
as noted above, the Partnership reclassified certain payments to its partners as
distributions on partnership interests. The payments, the classification of which changed,
are payments the Partnership has historically made under the fifth and seventh priorities
under the Amended and Restated Omnibus Termination Agreement, for the periods commencing
January 1, 2000.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
following tables show the effect of the restatement on the Partnerships Balance
Sheets as of December 31, 2002 and 2001, as well as the Statements of Operations,
Statements of Changes in Partners Capital (Deficiency), and Statements of Cash Flows
for the years ended December 31, 2002, 2001 and 2000. The restatement adjustments do not
impact total cash flows of the Partnership or its reported cash balances.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



---

# Trading Cove Associates
Notes to Financial Statements
December 31, 2002, 2001 and 2000

# Balance Sheets

|                                                                   | Previously |  |   |            | Previously |   |            | 
|------------------------------------------------------------------ | ---------- |  | - | ---------- | ---------- | - | ---------- | 
|
|
|Assets                                                             |            |  |   |            |            |   |            | 
|Current Assets                                                     |            | 
|Cash and cash equivalents                                          |            |  | $ | 744,138    |            | $ | 744,138    | 
|Relinquishment fee receivable                                      |            |  |   | 23,669,823 |            |   | 23,669,823 | 
|Development fee receivable                                         |            |  |   | 84,000     |            |   | 84,000     | 
|Other current assets                                               |            |  |   | 4,000      |            |   | 4,000      | 
|                                                                   |            |  |   |            |            |   |            | 
|Total current assets                                               |            |  |   | 24,501,961 |            |   | 24,501,961 | 
|                                                                   |            |  |   |            |            |   |            | 
|Deferred costs, net of accumulated amortization of $2,838,909 and  |            | 
|$2,617,391 at December 31, 2002 and 2001, respectively             |            |  |   | 2,660,032  |            |   | 2,660,032  | 
|Property and equipment, net of accumulated depreciation of $48,473 |            | 
|and $40,832 at December 31, 2002 and 2001, respectively            |            |  |   | 4,730      |            |   | 4,730      | 
|                                                                   |            |  |   |            |            |   |            | 
|Total assets                                                       |            |  | $ | 27,166,723 |            | $ | 27,166,723 | 
|                                                                   |            |  |   |            |            |   |            | 
|Liabilities and Partners' Capital                                  |            | 
|Current liabilities                                                |            | 
|Accounts payable and accrued expenses                              |            |  | $ | 114,856    |            | $ | 114,856    | 
|Subcontracted services payable                                     |            |  |   | 23,293,000 |            |   | ---        | 
|Development contract loss provision                                |            |  |   | ---        |            |   | 5,639,684  | 
|Amounts billed in excess of development costs and estimated loss   |            |  |   | 1,413,339  |            |   | 4,766,655  | 
|                                                                   |            |  |   |            |            |   |            | 
|Total current liabilities                                          |            |  |   | 24,821,195 |            |   | 10,521,195 | 
|                                                                   |            |  |   |            |            |   |            | 
|Commitments and contingencies                                      |            | 
|Partners' capital                                                  |            |  |   | 2,345,528  |            |   | 16,645,528 | 
|                                                                   |            |  |   |            |            |   |            | 
|Total liabilities and partners' capital                            |            |  | $ | 27,166,723 |            | $ | 27,166,723 | 
|                                                                   |            |  |   |            |            |   |            | 



---

# Trading Cove Associates
Notes to Financial Statements
December 31, 2002, 2001 and 2000

# Statements of Operations

|                                     | Previously reported 2002 |  | Restated 2002 |            | Previously reported 2001 |   | Restated 2001 |  | Previously reported 2000 |            | Restated 2000 |  
|------------------------------------ | ------------------------ |  | ------------- | ---------- | ------------------------ | - | ------------- |  | ------------------------ | ---------- | ------------- | -
|Revenue                              |                          |  |               |            |                          |   |               |  |                          |            |               |  
|Relinquishment fee                   |                          |  | $             | 58,508,703 |                          | $ | 58,508,703    |  | $                        | 45,715,318 |               | $
|Development services revenue         |                          |  |               | 2,722,422  |                          |   | 556,788       |  |                          | 2,579,303  |               |  
|                                     |                          |  |               |            |                          |   |               |  |                          |            |               |  
|Total revenue                        |                          |  |               | 61,231,125 |                          |   | 59,065,491    |  |                          | 48,294,621 |               |  
|                                     |                          |  |               |            |                          |   |               |  |                          |            |               |  
|Expenses                             |                          | 
|Subcontract payments to partners     |                          | 
|and their affiliates                 |                          |  |               | 55,765,000 |                          |   | ---           |  |                          | 49,791,705 |               |  
|Cost of development services revenue |                          |  |               | 1,922,422  |                          |   | 1,756,788     |  |                          | 2,579,303  |               |  
|Amortization and depreciation        |                          |  |               | 221,818    |                          |   | 221,818       |  |                          | 221,717    |               |  
|General and administrative           |                          |  |               | 2,017,350  |                          |   | 2,017,350     |  |                          | 287,209    |               |  
|                                     |                          |  |               |            |                          |   |               |  |                          |            |               |  
|Total expenses                       |                          |  |               | 59,926,590 |                          |   | 3,995,956     |  |                          | 52,879,934 |               |  
|                                     |                          |  |               |            |                          |   |               |  |                          |            |               |  
|Interest and dividend income         |                          |  |               | 13,280     |                          |   | 13,280        |  |                          | 33,377     |               |  
|                                     |                          |  |               |            |                          |   |               |  |                          |            |               |  
|Net income (loss)                    |                          |  | $             | 1,317,815  |                          | $ | 55,082,815    |  | $                        | (4,551,936 | )             | $
|                                     |                          |  |               |            |                          |   |               |  |                          |            |               |  



---

# Trading Cove Associates
Notes to Financial Statements
December 31, 2002, 2001 and 2000

# Statements of Changes in
Partners Capital (Deficiency)

|                                                  | Previously reported |  | Restated |           
|------------------------------------------------- | ------------------- |  | -------- | ----------
|
|Partners' capital (deficiency), January 1, 2000   |                     |  | $        | 3,446,911 
|Net income (loss)                                 |                     |  |          | (133,974  
|Contributions                                     |                     |  |          | 1,200,000 
|Distributions                                     |                     |  |          | (1,723,112
|                                                  |                     |  |          |           
|Partners' capital (deficiency), December 31, 2000 |                     |  |          | 2,789,825 
|Net income (loss)                                 |                     |  |          | (2,275,968
|Contributions                                     |                     |  |          | 1,350,000 
|Distributions                                     |                     |  |          | (800,000  
|                                                  |                     |  |          |           
|Partners' capital, December 31, 2001              |                     |  |          | 1,063,857 
|Net income                                        |                     |  |          | 658,907   
|Contributions                                     |                     |  |          | 1,000,000 
|Distributions                                     |                     |  |          | (1,550,000
|                                                  |                     |  |          |           
|Partners' capital, December 31, 2002              |                     |  | $        | 1,172,764 
|                                                  |                     |  |          |           



---

# Trading Cove Associates
Notes to Financial Statements
December 31, 2002, 2001 and 2000

# Statements of Cash Flows

|                                                             | Previously reported 2002 |  | Restated 2002 |            | Previously reported 2001 |   | Restated 2001 |   | Previously reported 2000 |            | Restated 2000 |  
|------------------------------------------------------------ | ------------------------ |  | ------------- | ---------- | ------------------------ | - | ------------- | - | ------------------------ | ---------- | ------------- | -
|Cash flows from operating activities                         |                          |  |               |            |                          |   |               |   |                          |            |               |  
|Net income (loss)                                            |                          |  | $             | 1,317,815  |                          | $ | 55,082,815    |   | $                        | (4,551,936 | )             | $
|                                                             |                          |  |               |            |                          |   |               |   |                          |            |               |  
|Adjustments to reconcile net income (loss)                   |                          | 
|to net cash provided by (used in) operating activities       |                          | 
|Amortization                                                 |                          |  |               | 221,518    |                          |   | 221,518       |   |                          | 221,517    |               |  
|Depreciation                                                 |                          |  |               | 7,641      |                          |   | 7,641         |   |                          | 12,708     |               |  
|Change in assets and liabilities                             |                          | 
|Increase in relinquishment fee receivable                    |                          |  |               | (4,983,247 | )                        |   | (4,983,247    | ) |                          | (3,113,366 | )             |  
|Decrease (increase) in development fee receivable            |                          |  |               | 1,176,000  |                          |   | 1,176,000     |   |                          | (672,000   | )             |  
|Decrease in management fee receivable                        |                          |  |               | -          |                          |   | -             |   |                          | -          |               |  
|Decrease in development costs and estimated                  |                          | 
|loss in excess of amounts billed                             |                          |  |               | -          |                          |   | -             |   |                          | 1,628,936  |               |  
|(Increase) decrease in other current assets                  |                          |  |               | (4,000     | )                        |   | (4,000        | ) |                          | 1,868      |               |  
|(Decrease) increase in accounts payable and accrued expenses |                          |  |               | (64,237    | )                        |   | (64,237       | ) |                          | 38,911     |               |  
|Increase (decrease) in subcontracted services payable        |                          |  |               | 4,897,000  |                          |   | (430,791      | ) |                          | 2,663,244  |               |  
|Decrease in development loss provision                       |                          |  |               | -          |                          |   | (165,634      | ) |                          | -          |               |  
|(Decrease) increase in amounts billed in excess of           |                          | 
|development costs and estimated loss                         |                          |  |               | (1,406,422 | )                        |   | 759,212       |   |                          | 2,819,761  |               |  
|Decrease in accrued obligations                              |                          |  |               | -          |                          |   | -             |   |                          | -          |               |  
|                                                             |                          |  |               |            |                          |   |               |   |                          |            |               |  
|Total adjustments                                            |                          |  |               | (155,747   | )                        |   | (3,483,538    | ) |                          | 3,601,579  |               |  
|                                                             |                          |  |               |            |                          |   |               |   |                          |            |               |  
|Net cash provided by (used in) operating activities          |                          |  |               | 1,162,068  |                          |   | 51,599,277    |   |                          | (950,357   | )             |  
|                                                             |                          |  |               |            |                          |   |               |   |                          |            |               |  
|Cash flows from investing activities                         |                          | 
|Purchase of property and equipment                           |                          |  |               | -          |                          |   | -             |   |                          | (1,484     | )             |  
|                                                             |                          |  |               |            |                          |   |               |   |                          |            |               |  
|Net cash used in investing activities                        |                          |  |               | -          |                          |   | -             |   |                          | (1,484     | )             |  
|                                                             |                          |  |               |            |                          |   |               |   |                          |            |               |  
|Cash flows from financing activities                         |                          | 
|Partners' contributions                                      |                          |  |               | 2,000,000  |                          |   | 2,000,000     |   |                          | 2,700,000  |               |  
|Distributions                                                |                          |  |               | (3,100,000 | )                        |   | (53,537,209   | ) |                          | (1,600,000 | )             |  
|                                                             |                          |  |               |            |                          |   |               |   |                          |            |               |  
|Net cash (used in) provided by financing activities          |                          |  |               | (1,100,000 | )                        |   | (51,537,209   | ) |                          | 1,100,000  |               |  
|                                                             |                          |  |               |            |                          |   |               |   |                          |            |               |  
|Net increase in cash and cash equivalents                    |                          |  |               | 62,068     |                          |   | 62,068        |   |                          | 148,159    |               |  
|Cash and cash equivalents at beginning of year               |                          |  |               | 682,070    |                          |   | 682,070       |   |                          | 533,911    |               |  
|                                                             |                          |  |               |            |                          |   |               |   |                          |            |               |  
|Cash and cash equivalents at end of year                     |                          |  | $             | 744,138    |                          | $ | 744,138       |   | $                        | 682,070    |               | $
|                                                             |                          |  |               |            |                          |   |               |   |                          |            |               |