**EXHIBIT 14.3**

 

**TradingCove Associates**

**FinancialStatements**

**December 31,2005, 2004 and 2003**

 

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**Trading Cove Associates**

**Index**

**December 31, 2005, 2004 and 2003**

 
| ** **                                                   | ** ** | **Page**   |
|--------------------------------------------------------------|------------|------------|
| ** **                                                   | ** ** | ** ** |
| **Report of  Independent Registered Public Accounting Firm** |       | 1          |
|                                                         |       |       |
| **Financial  Statements**                                    |       |       |
|                                                         |       |       |
| Balance Sheets                                               |       | 2          |
|                                                         |       |       |
| Statements of Operations                                     |       | 3          |
|                                                         |       |       |
| Statements of Changes in  Partners’ Capital             |       | 4          |
|                                                         |       |       |
| Statements of Cash Flows                                     |       | 5          |
|                                                         |       |       |
| Notes to Financial  Statements                               |       | 6-14       |

 

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**Report of Independent RegisteredPublic Accounting Firm**

 

To the Partners of

Trading Cove Associates:

 

In our opinion, the accompanying balance sheets and the relatedstatements of operations, of changes in partners’ capital and of cash flowspresent fairly, in all material respects, the financial position of TradingCove Associates (the “Partnership”) at December 31, 2005 and 2004, and theresults of its operations and its cash flows for each of the three years in theperiod ended December 31, 2005, in conformity with accounting principlesgenerally accepted in the United States of America.  These financial statements are theresponsibility of the Partnership’s management.  Our responsibility is to express an opinion onthese financial statements based on our audits. We conducted our audits of these statements in accordance with thestandards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements, assessing the accountingprinciples used and significant estimates made by management, and evaluatingthe overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 
| /s/ PricewaterhouseCoopers LLP |   |
|--------------------------------|--------|
|                           |
| Hartford, CT                   |
| February 28, 2006              |

 

1

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**Trading Cove Associates**

**Balance Sheets**

**December 31, 2005, and 2004**

 
| ** **                                                                                                                  | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
|                                                                                                                        |       |       |       |       |       |
| **Assets**                                                                                                                  |       |       |       |       |       |
| Current assets                                                                                                              |       |       |       |       |       |
| Cash and cash  equivalents                                                                                                  |       | $          | 1,031,290  |       | $          | 732,886 |   |
| Relinquishment  fee receivable                                                                                              |       | 28,510,862 |       | 26,589,614 |       |
| Other current  assets                                                                                                       |       | 1,736      |       | 151        |       |
| Total current  assets                                                                                                       |       | 29,543,888 |       | 27,322,651 |       |
| Deferred costs,  net of accumulated amortization of $3,504,069 and $3,282,551 at December 31,  2005 and 2004, respectively  |       | 1,994,872  |       | 2,216,390  |       |
| Property and  equipment, net of accumulated depreciation of $2,750 and $14,951 at December  31, 2005 and 2004, respectively |       | 84         |       | 384        |       |
| Total assets                                                                                                                |       | $          | 31,538,844 |       | $          | 29,539,425 |   |
| **Liabilities and Partners’ Capital**                                                                                  |       |       |       |       |       |
| Current liabilities                                                                                                         |       |       |       |       |       |
| Accounts payable  and accrued expenses                                                                                      |       | $          | 83,134     |       | $          | 93,538 |   |
| Subcontracted  services payable                                                                                             |       | 918,425    |       | 465,930    |       |
| Estimated  contract costs due related party                                                                                 |       | 384,032    |       | 413,760    |       |
| Total current  liabilities                                                                                                  |       | 1,385,591  |       | 973,228    |       |
| Commitments and contingent liabilities                                                                                      |       |       |       |       |       |
| Partners’ capital                                                                                                      |       | 30,153,253 |       | 28,566,197 |       |
| Total  liabilities and partners’ capital                                                                               |       | $          | 31,538,844 |       | $          | 29,539,425 |   |

 

The accompanying notesare an integral part of these financial statements.

 

2

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**Trading Cove Associates**

**Statements of Operations**

**For the Years Ended December 31,2005, 2004 and 2003**

 
| ** **                                             | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|--------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
|                                                   |       |       |       |       |       |       |       |
| **Revenue**                                            |       |       |       |       |       |       |       |
| Relinquishment  fee                                    |       | $          | 72,964,466 |       | $          | 69,101,491 |       | $ | 65,099,553 |   |
| Development  services revenue                          |       | 14,000     |       | 43,400     |       | 4,698,055  |       |
| Total revenue                                          |       | 72,978,466 |       | 69,144,891 |       | 69,797,608 |       |
| **Expenses**                                           |       |       |       |       |       |       |       |
| Subcontract  payments to partners and their affiliates |       | 1,851,397  |       | 1,869,157  |       | 1,840,346  |       |
| Cost of  development services revenue                  |       | 14,000     |       | 43,400     |       | 4,662,055  |       |
| Amortization and  depreciation                         |       | 221,818    |       | 222,424    |       | 221,818    |       |
| General and administrative                             |       | 148,603    |       | 130,843    |       | 159,653    |       |
| Total expenses                                         |       | 2,235,818  |       | 2,265,824  |       | 6,883,872  |       |
| Interest and  dividend income                          |       | 21,244     |       | 8,252      |       | 6,041      |       |
| Net income                                             |       | $          | 70,763,892 |       | $          | 66,887,319 |       | $ | 62,919,777 |   |

 

The accompanying notesare an integral part of these financial statements.

 

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**Trading Cove Associates**

**Statements of Changes in Partners’Capital**

**For the Years Ended December 31,2005, 2004 and 2003**

 
| ** **                                    | ** ** | **Kerzner  Investments  Connecticut, Inc.** | ** ** | **Waterford  Gaming, L.L.C.** | ** ** | **Total**   | ** ** |
|-----------------------------------------------|------------|---------------------------------------------|------------|-------------------------------|------------|-------------|------------|
|                                          |       |                                        |       |                          |       |        |       |
| **Partners’ capital, January 1, 2003**   |       | $                                           | 8,947,764  |                          | $          | 7,697,764   |       | $ | 16,645,528 |   |
| Net income                                    |       | 33,959,889                                  |       | 28,959,888                    |       | 62,919,777  |       |
| Contributions                                 |       | 450,000                                     |       | 450,000                       |       | 900,000     |       |
| Distributions                                 |       | (28,976,711                                 | )          | (23,976,710                   | )          | (52,953,421 | )          |
| **Partners’ capital, December 31, 2003** |       | 14,380,942                                  |       | 13,130,942                    |       | 27,511,884  |       |
| Net income                                    |       | 35,943,660                                  |       | 30,943,659                    |       | 66,887,319  |       |
| Distributions                                 |       | (35,416,503                                 | )          | (30,416,503                   | )          | (65,833,006 | )          |
| **Partners’ capital, December 31, 2004** |       | 14,908,099                                  |       | 13,658,098                    |       | 28,566,197  |       |
| Net income                                    |       | 37,881,946                                  |       | 32,881,946                    |       | 70,763,892  |       |
| Distributions                                 |       | (37,088,418                                 | )          | (32,088,418                   | )          | (69,176,836 | )          |
| **Partners’ capital, December 31, 2005** |       | $                                           | 15,701,627 |                          | $          | 14,451,626  |       | $ | 30,153,253 |   |

 

The accompanying notesare an integral part of these financial statements.

 

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**Trading Cove Associates**

**Statements of Cash Flows**

**For the Years Ended December 31,2005, 2004 and 2003**

 
| ** **                                                                        | ** ** | **2005**    | ** ** | **2004**    | ** ** | **2003**    | ** ** |
|-----------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
|                                                                              |       |        |       |        |       |        |       |
| **Cash flows from operating activities**                                          |       |        |       |        |       |        |       |
| Net income                                                                        |       | $           | 70,763,892 |        | $          | 66,887,319  |       | $ | 62,919,777 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities |       |        |       |        |       |        |       |
| Amortization                                                                      |       | 221,518     |       | 222,124     |       | 221,518     |       |
| Depreciation                                                                      |       | 300         |       | 300         |       | 3,303       |       |
| Loss on disposal  of property and equipment                                       |       | —      |       | —      |       | 743         |       |
| Gain on sale of  property and equipment                                           |       | —      |       | —      |       | (1,750      | )          |
| Change in  operating assets and liabilities                                       |       |        |       |        |       |        |       |
| Relinquishment  fee receivable                                                    |       | (1,921,248  | )          | (1,250,342  | )          | (1,669,449  | )          |
| Development fee  receivable                                                       |       | —      |       | —      |       | 84,000      |       |
| Other current  assets                                                             |       | (1,585      | )          | 5,380       |       | (1,531      | )          |
| Accounts payable  and accrued expenses                                            |       | (10,404     | )          | 4,566       |       | (25,884     | )          |
| Subcontracted  services payable                                                   |       | 452,495     |       | (8,837      | )          | 474,767     |       |
| Estimated  contract costs due related party                                       |       | (29,728     | )          | (93,220     | )          | (9,899,359  | )          |
| Net cash  provided by operating activities                                        |       | 69,475,240  |       | 65,767,290  |       | 52,106,135  |       |
| **Cash flows from investing activities**                                          |       |        |       |        |       |        |       |
| Proceeds from  sale of property and equipment                                     |       | —      |       | —      |       | 1,750       |       |
| Net cash  provided by investing activities                                        |       | —      |       | —      |       | 1,750       |       |
| **Cash flows from financing activities**                                          |       |        |       |        |       |        |       |
| Distributions                                                                     |       | (69,176,836 | )          | (65,833,006 | )          | (52,953,421 | )          |
| Partners’  contributions                                                     |       | —      |       | —      |       | 900,000     |       |
| Net cash used in  financing activities                                            |       | (69,176,836 | )          | (65,833,006 | )          | (52,053,421 | )          |
| Net change in  cash and cash equivalents                                          |       | 298,404     |       | (65,716     | )          | 54,464      |       |
| **Cash and cash equivalents**                                                     |       |        |       |        |       |        |       |
| Beginning of year                                                                 |       | 732,886     |       | 798,602     |       | 744,138     |       |
| End of year                                                                       |       | $           | 1,031,290  |        | $          | 732,886     |       | $ | 798,602 |   |

 

The accompanying notesare an integral part of these financial statements.

 

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**Trading Cove Associates**

**Notes to Financial Statements**

**December 31, 2005, 2004 and 2003**

 

**1.****                          Organization, Partnership Agreement and OtherMaterial Agreements**

 

(a)Organization and Partnership Agreement

 

TradingCove Associates (the “Partnership”), a Connecticut general partnership, wasorganized on July 23, 1993.  Theprimary purpose of the Partnership has been:

 

(i)                  to assist theMohegan Tribe of Indians of Connecticut (the “Tribe”) and the Mohegan TribalGaming Authority (the “Authority”) in obtaining federal recognition;

 

(ii)               to negotiate thetribal-state compact with the State of Connecticut on behalf of the Tribe;

 

(iii)            to obtain financingfor the initial development of the Mohegan Sun Casino (the “Mohegan Sun”);

 

(iv)           to negotiate theAmended and Restated Gaming Facility Management Agreement, (the “ManagementAgreement”);

 

(v)              to oversee alloperations of the Mohegan Sun pursuant to the terms of the Management Agreementuntil midnight December 31, 1999, and

 

(vi)           to participate in thedesign 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, thePartnership 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 RJHDevelopment Corp. (“RJH”), a New York corporation, Leisure Resort Technology,Inc. (“Leisure”), a Connecticut corporation, Slavik Suites, Inc. (“Slavik”), aMichigan corporation, and LMW Investments, Inc. (“LMW”), a Connecticutcorporation.  On September 21, 1994,the Partnership Agreement was amended and restated to admit Kerzner InvestmentsConnecticut, Inc. (“Kerzner Investments”), a Connecticut corporation, formerlySun Cove Limited, as a partner.

 

On February 3, 1995,Leisure entered into an acknowledgement and release agreement to withdraw as apartner of the Partnership and hold its interest in the Partnership as abeneficial interest.  On August 6,1997, Leisure filed a lawsuit against the Partnership, Kerzner Investments, RJHand Waterford Gaming, L.L.C. (“Waterford Gaming”) and its owners, claimingbreach of contract, breach of fiduciary duties and other matters in connectionwith the development of the Mohegan Sun. On January 6, 1998, pursuant tothe settlement and release agreement described in Note 6 below, WaterfordGaming paid $5,000,000 to Leisure and, among other things, Leisure gave up, (a)its beneficial interest of 5% of certain fees and excess cash flows, asdefined, of the Partnership and (b) any other claims it may have had againstthe Partnership, Kerzner Investments, RJH, Waterford Gaming and its owners. Inconnection with the settlement of all matters related to such suit, pursuant tothe settlement and release agreement, Waterford Gaming agreed to acquireLeisure’s interests in the Partnership. As a result of this acquisition,Leisure no longer has the right to 5% of the Organizational and Administrativefee, as defined in the Organizational and Administrative Services Agreement,and 5% of the Partnership’s Excess Cash as defined in the Partnership Agreement;instead Waterford Gaming is entitled to such fees and cash.  On March 18, 1999, Waterford Gaming

 

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paid an additional $2,000,000 toLeisure pursuant to the settlement and release agreement. On January 7,2000, Leisure filed a complaint against the Partnership and certain otherdefendants.  For a description of thecomplaint, see Note 6 to these financial statements.

 

On November 8, 1996,Slavik, LMW and RJH withdrew from the Partnership and, concurrently, consentedto the admission of Waterford Gaming to the Partnership.  Waterford Gaming, simultaneously, purchasedRJH’s interest in the Partnership. Waterford Gaming is owned by Waterford Group, LLC.  Waterford Group, LLC is owned by Slavik andLMW.

 

The partners’ percentageinterest in the Partnership as of November 8, 1996 was as follows:

 
| **Partner**                           | ** ** | **Percentage  Interest** | ** ** |
|---------------------------------------|------------|--------------------------|------------|
|                                  |       |                     |       |
| Kerzner Investments Connecticut, Inc. |       | 50                       | %          |
| Waterford Gaming, L.L.C.              |       | 50                       | %          |

 

(b)Other Material Agreements

 

***RelinquishmentAgreement***

On February 7, 1998, thePartnership and the Authority entered into the Relinquishment Agreement (the “RelinquishmentAgreement”). Under the terms of the Relinquishment Agreement the Partnershipcontinued to manage the Mohegan Sun under the Management Agreement untilmidnight December 31, 1999, and on January 1, 2000, the ManagementAgreement terminated and the Tribe assumed day-to-day management of the MoheganSun.

 

Under the RelinquishmentAgreement, to compensate the Partnership for terminating its rights under theManagement Agreement and the Hotel/Resort Management Agreement, the Authorityagreed to pay to the Partnership a fee (the “Relinquishment Fees”) equal to 5%of Revenues, as defined in the Relinquishment Agreement, generated by theMohegan Sun during the 15-year period commencing on January 1, 2000,including revenue generated by the Project Sunburst expansion (the “ProjectSunburst expansion”).

 

The Relinquishment Fees aredivided into senior relinquishment payments and junior relinquishment payments,each of which equals 2.5% of “Revenues”. Revenues are defined as gross gamingrevenues (other than Class II gaming revenue) 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 inthe Project Sunburst expansion and all rental or other receipts from lessees,licensees and concessionaires operating in the facility, but not the grossreceipts of such lessees, licensees and concessionaires. Such revenues excluderevenues generated by any other expansion of the Mohegan Sun.  Senior relinquishment payments are payablequarterly in arrears commencing on April 25, 2000, for the quarter ended March 31,2000 and the junior relinquishment payments are payable semi-annually inarrears commencing on July 25, 2000, for the six months ended June 30,2000, assuming sufficient funds are available after satisfaction of the Authority’ssenior obligations, as defined in the Relinquishment Agreement.

 

7

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***DevelopmentAgreement***

 

On February 7, 1998 thePartnership and the Authority entered into the Development Services Agreement(the “Development Agreement”), which made the Partnership the exclusivedeveloper of the Project Sunburst expansion. Pursuant to the DevelopmentAgreement, the Partnership agreed to oversee the planning, design,construction, furnishing, equipping and staffing of the Project Sunburstexpansion for a $14.0 million development fee (the “Development Fee”).

 

The first phase of the ProjectSunburst 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 approximately 1,200-hotel rooms in the 34-story luxury hotel as wellas the meeting and convention space and spa opened. The balance of the approximately1,200-hotel rooms opened during June 2002. The Project Sunburst expansion iscomplete in terms of the Development Agreement.

 

**Agreements withPartners and/or their Affiliates**

 

***AgreementRelating to Development Services***

 

On February 9, 1998, thePartnership and Kerzner International Management Limited (“KIML”), entered intothe Agreement Relating to Development Services (the “Development ServicesAgreement Phase II”). Pursuant to the Development Services Agreement Phase II,the Partnership subcontracted with KIML who agreed to perform those servicesassigned to KIML by the Partnership in order to facilitate the Partnership’sfulfillment of its duties and obligations to the Authority under theDevelopment Agreement. KIML subsequently assigned the Development ServicesAgreement Phase II to Kerzner Investments.

 

Pursuant to theDevelopment Services Agreement Phase II, the Partnership pays to KerznerInvestments 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 inconnection with the Project Sunburst expansion. The Development Services Fee Phase II shall be paid in installments dueon December 31, 1999 and 2000 and on the Completion Date, as defined in theDevelopment Agreement, with a final payment being made when the actualdevelopment costs of the Project Sunburst expansion are known.  The Partnership pays the Development ServicesFee Phase II, from available cash flow, if any, in accordance with the Amendedand Restated Omnibus Termination Agreement. At December 31, 2005 and 2004, the total of the Development Services FeePhase II and the Partnership’s costs related to the development of the ProjectSunburst expansion exceeded the development services revenue from the Authorityby approximately $15,964,000.  This costoverrun has previously been recorded by the Partnership in its statement ofoperations.

 

Before KIMLassigned the Development Services Agreement Phase II to Kerzner Investments, itentered into the Local Construction Services Agreement (the “LocalConstruction Services Agreement”) with Wolman Construction, LLC (“Construction”)pursuant to which Construction agreed to provide certain of those servicesassigned to KIML by the Partnership pursuant to the Development Services Agreement Phase II.  Kerzner Investments assumed the obligations ofKIML under the Local Construction Services Agreement.  Pursuant to the Local Construction Services Agreement, Kerzner Investments agreed to payto Construction a fee equal to 20.83% of the Development Services Fee Phase II asand when Kerzner Investments receives payment from the Partnership inaccordance with the Development Services

 

8

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Agreement Phase II.

 

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

 

***Amended and Restated OmnibusTermination Agreement***

 

Effective March 18, 1999,the Amended and Restated Omnibus Termination Agreement (the “Amended andRestated 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 andRestated Omnibus Termination Agreement (i) terminated the memorandum ofunderstanding 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 FeeAgreement (the “Financing Arrangement Agreement”); c) the Management ServicesAgreement; d) the Organizational and Administrative Services Agreement; e) theMarketing Services Agreement; and f) a Letter Agreement relating to expensesdated October 19, 1996.

 

In consideration for thetermination of such agreements, the Partnership will use its cash to pay thefollowing obligations in the priority set forth below:

 

(i)                          First, to pay all unpaid amounts which may be dueunder the terminated Letter Agreement and to pay to certain affiliates ofWaterford Gaming and to Kerzner Investments a percentage of an annual fee of$2.0 million less the actual expenses incurred by the Partnership during suchyear.  Such annual fee shall be payablein equal quarterly installments beginning March 31, 2000 and ending December 31,2014.  For the years ended December 31,2005, 2004 and 2003, $1,851,397, $1,869,157, and $1,840,346, respectively, hadbeen incurred by the Partnership in terms of the first priority;

 

(ii)                       Second, to return all capital contributions madeby the partners of the Partnership after September 29, 1995.  As of December 31, 2005, no capitalcontributions remained outstanding;

 

(iii)                    Third, to pay any accrued amounts for obligationsperformed prior to January 1, 2000 under the Financing ArrangementAgreement.  All such required paymentswere made during 2000;

 

(iv)                   Fourth, to make the payments set forth in theagreements relating to the Development Services Agreement Phase II and theLocal Construction Services Agreement as detailed under the Agreement Relatingto Development Services above.  No suchpayments are required or due at December 31, 2005.  The accrued liability to Kerzner Investmentswith respect to such fee at December 31, 2005 was approximately $384,000;

 

(v)                      Fifth, to pay Kerzner Investments an annual fee (inthe form of a priority distribution) of $5.0 million payable in equal quarterlyinstallments of $1.25 million beginning March 31, 2000 and ending December 31,2006;

 

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(vi)                   Sixth, to pay any accrued amounts for obligationsperformed with respect to periods prior to January 1, 2000 under theManagement Services Agreement, the Organizational and Administrative ServicesAgreement 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 andWaterford Gaming twenty-five percent (25%) of the relinquishment payments asdistributions; and

 

(viii)             Eighth, to distribute all excess cash.

 

On January 26, 2006, the Partnershipmade distributions of $1,250,000 pursuant to the fifth priority, $14,262,503 ($7,131,252to Kerzner Investments and $7,131,251 to Waterford Gaming) pursuant to theseventh priority and $12,064,928 ($6,032,464 to each of Kerzner Investments andWaterford Gaming) pursuant to the eighth priority.  Such distributions will be recorded in thefiscal 2006 financial statements.

 

In addition, the Partnershipshall not make any distributions pursuant to the Amended and Restated Omnibus TerminationAgreement until it has annually distributed to its partners, pro rata, theamounts related to the partners tax obligations as described in Section3.03a(1) of the Partnership Agreement less twice the amount of all other fundspaid or distributed to Waterford Gaming during such year pursuant to theAmended and Restated Omnibus Termination Agreement.

 

To the extent the Partnershipdoes not have adequate cash to make the payments pursuant to the Amended andRestated Omnibus Termination Agreement, such amounts due shall be deferredwithout the accrual of interest until the Partnership has sufficient cash topay them.

 

**2.****                          Significant Accounting Policies**

** **

**Cash and Cash Equivalents**

 

Cashand cash equivalents represent cash and short-term, highly liquid investmentswith maturities of three months or less at the date of purchase.

 

**Relinquishment Fees**

 

Revenue is generated in accordance with the terms ofthe Relinquishment Agreement and recognized quarterly based upon the Revenuesof the Authority, as reported by the Authority to the Partnership.

 

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**Development Services Revenue and Cost Recognition**

 

Revenue generated from services performed inaccordance with the terms of the Development Agreement are recognized on thepercentage-of-completion basis, determined by the percentage of costs incurredto date to estimated total costs for the contract.  This method is used because managementconsiders cost incurred to be the best available measure of progress on the contract.

 

Costs of development services revenue performedinclude all direct labor costs and those indirect costs related to servicessuch as subcontractors, consultants, supplies, depreciation and othercosts.  Changes in performance,requirements and estimated profitability may result in revisions to costs andincome and will be recognized in the period in which the revisions aredetermined.  Provisions for estimatedlosses on uncompleted contracts are made in the period in which such losses aredetermined.

 

**Deferred Costs**

 

Costs associated with acquiring the ManagementAgreement were amortized on a straight-line basis over the 84-month period ofthe Management Agreement through March 3, 1999.  As a result of the Relinquishment Agreementbecoming effective, the remaining balance is being amortized over 189 monthsbeginning March 4, 1999.

 

**Property and Equipment**

 

Officeequipment, computer equipment and furniture and fixtures are stated atcost.  Depreciation expense is recognizedover a 3-year estimated life of the office and computer equipment and over a5-year estimated life of furniture and fixtures.  Depreciation expense for the years ended December 31,2005, 2004 and 2003 amounted to $300, $300 and $3,303 of which $-0-, $-0- and $3,003were included in cost of development services revenue, respectively.

 

**I****ncomeTaxes**

 

Noincome tax provision or benefit is recorded on the books of the Partnership, asthe respective share of taxable income or loss is reportable by the partners ontheir individual tax returns.

** **

**Concentration of Credit Risk**

 

ThePartnership’s principal source of revenues and cash flows are the paymentsreceived and to be received pursuant to the Relinquishment Agreement.  The Partnership anticipates regular payments ofthe Relinquishment Fees from the Authority based upon the operating results ofthe Authority.

 

Financialinstruments, which potentially subject the Partnership to a concentration ofcredit risk, principally consist of cash in excess of the financialinstitutions’ insurance limits.  ThePartnership invests available cash with high credit quality institutions.

** **

**Use of Estimates**

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements, as well as the reported amounts of revenues andexpenses 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 accordancewith the terms of the Amended and Restated Omnibus Termination Agreement forcertain subcontracted services rendered and are accounted for as expenses ofthe Partnership.

 

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**3.****                          Deferred Costs**

 

Certain costs borne by the Partnership in connection with obtaining theManagement Agreement and the opening of the Mohegan Sun totaling $5,498,941were capitalized.  Amortization commencedupon the opening of the Mohegan Sun. Amortization expense, which is being recorded over 189 months on astraight line basis, for the years ended December 31, 2005, 2004 and 2003was $221,518, $222,124, and $221,518, respectively.

 

The Partnership’s estimate of amortization expense for each of thesucceeding five years and thereafter is as follows:

 

| **Year ended December 31,** | ** ** | ** ** | ** ** |
|-----------------------------|------------|------------|------------|
| 2006                        |       | $          | 221,518    |   |
| 2007                        |       | 221,518    |       |
| 2008                        |       | 222,124    |       |
| 2009                        |       | 221,518    |       |
| 2010                        |       | 221,518    |       |
| Thereafter                  |       | 886,676    |       |
|                        |       | $          | 1,994,872  |   |

 

**4.****                          Relinquishment Fees**

 

ThePartnership entered into a Relinquishment Agreement with the Authority, whichentitles the Partnership to receive a relinquishment fee of 5% of the Revenuesgenerated by the Mohegan Sun including revenue generated by the ProjectSunburst Expansion.

 

For the years ended December 31, 2005, 2004 and 2003, RelinquishmentFees earned were $72,964,466, $69,101,491 and $65,099,553, respectively. Theamount of Relinquishment Fees reported in these financial statements are basedupon Revenues reported to the Partnership by the Authority. These amounts werepaid by the Authority as follows:

 
| **Date Received by the Partnership** | ** ** | **Amount** | ** ** |
|--------------------------------------|------------|------------|------------|
| ** **                           | ** ** | ** ** | ** ** |
| April 25, 2005                       |       | $          | 8,330,592  |   |
| July 25, 2005                        |       | 26,539,416 |       |
| October 25, 2005                     |       | 9,583,596  |       |
| January 25, 2006                     |       | 28,510,862 |       |
| Relinquishment Fees earned 2005      |       | $          | 72,964,466 |   |
|                                 |       |       |       |
| April 26, 2004                       |       | $          | 8,196,363  |   |
| July 26, 2004                        |       | 25,150,422 |       |
| October 25, 2004                     |       | 9,165,092  |       |
| January 25, 2005                     |       | 26,589,614 |       |
| Relinquishment Fees earned 2004      |       | $          | 69,101,491 |   |
|                                 |       |       |       |
| April 25, 2003                       |       | $          | 7,433,160  |   |
| July 25, 2003                        |       | 23,635,310 |       |
| October 27, 2003                     |       | 8,691,811  |       |
| January 26, 2004                     |       | 25,339,272 |       |
| Relinquishment Fees earned 2003      |       | $          | 65,099,553 |   |

 

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**5.****                          Reconciliation of Financial Statements and TaxInformation**

 
| ** **                                                                                                           | ** ** | **2005**    | ** ** | **2004**    | ** ** | **2003**    | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
|                                                                                                                 |       |        |       |        |       |        |       |
| Financial statement net income                                                                                       |       | $           | 70,763,892 |        | $          | 66,887,319  |       | $ | 62,919,777 |   |
| Guaranteed payments to partners                                                                                      |       | (41,482,232 | )          | (39,550,748 | )          | (39,941,567 | )          |
| Financial  statement depreciation and amortization (greater than) less than tax basis  depreciation and amortization |       | (141        | )          | 305         |       | (3,028      | )          |
| Percentage of completion accounting difference                                                                       |       | (15,783     | )          | (49,505     | )          | (9,236,479  | )          |
| Other                                                                                                                |       | 885         |       | 572         |       | (4,865      | )          |
| Federal income tax basis net income                                                                                  |       | $           | 29,266,621 |        | $          | 27,287,943  |       | $ | 13,733,838 |   |

 

**6.****                          Commitments and Contingent Liabilities**

** **

**Litigation**

 

On January 6, 1998,Leisure Resort Technology, Inc. and defendants Waterford Gaming, thePartnership, LMW Investments, Inc. and Slavik Suites, Inc. settled a priorlawsuit brought by Leisure.  Inconnection with this settlement, Leisure, the Partnership, Waterford Gaming,LMW Investments, Inc. and Slavik Suites, Inc. entered into a settlement andrelease agreement.  Pursuant to thissettlement and release agreement, Waterford Gaming bought out Leisure’sbeneficial interest in the Partnership.

 

By complaint dated January 7,2000, as amended February 4, 2000, Leisure filed a four count complaintnaming as defendants Waterford Gaming, the Partnership, LMW Investments, Inc.,Slavik Suites, Inc., Waterford Group, LLC, Len Wolman and Mark Wolman(collectively, the “Defendants”).  Thematter has been transferred to the complex litigation docket and is pending inWaterbury, Connecticut.  The complaintalleged breach of fiduciary duties, fraudulent non-disclosure, violation ofConnecticut Statutes Section 42-110a, et seq. and unjust enrichment inconnection with the negotiation by certain of the Defendants of the settlementand release agreement.  The complaintalso 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, eachwith respect to all claims.  The Courtgranted Defendants’ Motion to Strike in part and denied Defendants’ Motion forSummary Judgement, on October 13, 2000. The Court’s order dismissed the claim for an accounting and the claim underConnecticut Statutes Section 42-110a, et seq. The Court also struck the alter ego allegations in the complaint againstLMW Investments, Inc., Slavik Suites, Inc., Len Wolman and Mark Wolman. In adecision 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 WaterfordGaming asserted counterclaims for breach of the settlement and release agreementand breach of the implied covenant of good faith against Leisure and itspresident, Lee Tyrol.  In a decisiondated June 6, 2001, the Court dismissed the counterclaims against LeeTyrol.  Leisure moved for summaryjudgment seeking dismissal of the counterclaims in full.  This motion for the summary judgment wasdenied on April 14, 2003.

 

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Fact discovery iscompleted.  On April 15, 2004, thePartnership and its co-defendants filed a motion for summary judgment as to allof Leisure’s claims.  The Court heard argumenton this motion on June 23, 2004.  Inan August 4, 2004 Memorandum of Decision, the Court granted summaryjudgment for the Defendants as to each of the remaining three counts of theplaintiff’s compliant.  The plaintiff hasappealed this decision.  On May 9, 2005,the Supreme Court of Connecticut, without issuing any ruling on the substantiveissues raised by plaintiff’s appeals, transferred the appeal to itself.  Oral argument was heard on September 21,2005.  On January 23, 2006, the SupremeCourt affirmed the trial court’s decision granting summary judgment in favor ofthe Defendants on all of plaintiff’s claims. Defendant’s counterclaims against plaintiff remain pending.

 

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