**As filed with theSecurities and Exchange Commission on March 30, 2005**

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM20-F**

 

**o****        ****REGISTRATION STATEMENT PURSUANTTO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**OR**

 

**ý****        ****ANNUAL REPORT PURSUANT TO SECTION13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**Forthe fiscal year ended December 31, 2004**

 

**OR**

 

**o****        ****TRANSITION REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the transition periodfrom            to**

** **

**Commission file number001-04226**

 

**KERZNERINTERNATIONAL LIMITED**

(Exact name of Registrant as specified in its charter)

 

**Commonwealth of TheBahamas**

(Jurisdiction of incorporation or organization)

 

**Executive OfficesCoral TowersParadise Island, The Bahamas(242) 363-6018**

(Address and telephone number of principal executive offices)

 

Securities registered orto be registered pursuant of Section 12(b) of the Act:

 
| **Title  of each class  on which registered** |   | **Name  of each exchange** |
|-----------------------------------------------|--------|----------------------------|
| Ordinary Shares, $.001  par value per share   |   | New York Stock Exchange    |

 

Securities registered orto be registered pursuant to Section 12(g) of the Act.  **None**

 

Securities for whichthere is a reporting obligation pursuant to Section 15(d) of the Act.  **None**

 

Indicate the number ofoutstanding shares of each of the issuer’s classes of capital or common stockas of the close of the period covered by the annual report.  Ordinary Shares, net of treasuryshares:  **35,899,849**

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

Yes ý  No o

 

Indicate by check markwhich financial statement Item the Registrant has elected to follow.

Item 17 o  Item 18 ý

 

 

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**KERZNERINTERNATIONAL LIMITED**

**FORM20-FANNUAL REPORT FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004**

**TABLEOF CONTENTS**

** **
| Presentation  of Financial and Other Information | 3      |
|--------------------------------------------------|--------|
| Forward-Looking  Statements                      | 4      |
| Item 1.                                     |   | Identity  of Directors, Senior Management and Advisers | 5 |
| Item 2.                                     |   | Offer  Statistics and Expected Timetable | 5 |
| Item 3.                                     |   | Key  Information | 5 |
| Item  4.                                         |   | Information  on the Company | 14 |
| Item 5.                                     |   | Operating and Financial Review and Prospects | 42 |
| Item 6.                                     |   | Directors, Senior Management and Employees | 65 |
| Item 7.                                     |   | Major Shareholders and Related Party Transactions | 70 |
| Item 8.                                     |   | Financial Information | 75 |
| Item 9.                                     |   | The Offer and Listing | 76 |
| Item 10.                                    |   | Additional Information | 77 |
| Item 11.                                    |   | Quantitative and Qualitative Disclosures  About Market Risk | 83 |
| Item 12.                                    |   | Description of Securities Other than Equity  Securities | 84 |
| Item 13.                                    |   | Defaults, Dividend Arrearages and  Delinquencies | 85 |
| Item 14.                                    |   | Material Modifications to the Rights of  Security Holders and Use of Proceeds | 85 |
| Item 15.                                    |   | Controls and Procedures | 85 |
| Item 16A.                                   |   | Audit Committee Financial Expert | 85 |
| Item 16B.                                   |   | Code of Ethics | 85 |
| Item 16C.                                   |   | Principal Accountant Fees and Services | 86 |
| Item 16D.                                   |   | Exemptions from the Listing Standards for  Audit Committees | 86 |
| Item 16E.                                   |   | Purchases of Equity Securities by the  Issuer and Affiliated Purchasers | 86 |
| Item 17.                                    |   | Financial Statements | 87 |
| Item 18.                                    |   | Financial Statements | 87 |
| Item 19.                                    |   | Exhibits | 88 |

 

2

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# **PRESENTATION****OF FINANCIAL AND OTHER INFORMATION**

 

In this Annual Report, “Kerzner”or “the Company” refers to Kerzner International Limited, and the terms “we,” “us,”“our” and similar terms refer to Kerzner and any or all of its subsidiaries andjoint ventures as the context requires.

 

Our fiscal year is thecalendar year.

 

The financial statementscontained in this Annual Report have been prepared in accordance withaccounting principles generally accepted in the United States of America (“U.S.GAAP”).  Financial information in thisAnnual Report, including the financial statements, has been presented in U.S. dollars,unless otherwise specified.

 

“Our properties” refersto both our owned and/or managed resorts, or properties under development, asthe context requires.

 

3

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# **FORWARD****-LOOKING STATEMENTS**

 

This Annual Reportcontains certain “forward-looking statements” within the meaning of the PrivateSecurities Litigation Reform Act of 1995 with respect to financial condition,results of operations, business strategies, operating efficiencies orsynergies, plans for future expansion and other business development activitiesas well as other capital spending, financing sources and the effects ofregulation (including gaming and tax regulation) and competition, markets forKerzner’s issued and outstanding ordinary shares (“Ordinary Shares”) and othermatters.  Statements in this AnnualReport that are not historical facts are “forward-looking statements” for thepurpose of the safe harbor provided by Section 21E of the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”) and Section 27A ofthe Securities Act of 1933, as amended (the “Securities Act”).  Forward-looking statements, including,without limitation, those relating to our future business prospects, revenuesand income, wherever they occur in this Annual Report, are necessarilyestimates reflecting the best judgment of our senior management and involve anumber of risks and uncertainties that could cause actual results to differmaterially from those suggested by forward-looking statements.  You should consider forward-lookingstatements, therefore, in light of various important factors, including thoseset forth in this Annual Report.  Theserisks and uncertainties include, but are not limited to, those relating todevelopment and construction activities, dependence on existing management,leverage and debt service (including sensitivity to fluctuations in interestrates), availability of financing, global economic conditions, foreign currencyfluctuations, pending litigation, the impact of actual or threatened terroristactivity or war on the economy in general and the travel and leisure industriesin particular, acts of God, including hurricanes, earthquakes, tsunamis andother natural disasters (which may result in uninsured losses), changes in taxlaws or the administration of such laws and changes in gaming laws orregulations (including the legalization of gaming in certain jurisdictions) andthe risk factors discussed under the heading “Risk Factors” in this AnnualReport and our other filings with the SEC.

 

Words such as “estimate,”“project,” “plan,” “intend,” “expect,” “believe” and similar expressions areintended to identify forward-looking statements.  You will find these forward-lookingstatements at various places throughout this Annual Report.  You are cautioned not to place undue relianceon these forward-looking statements, which speak only as of the date they weremade.  We do not undertake any obligationto publicly update or release any revisions to these forward-looking statementsto reflect events or circumstances after the date of this Annual Report or toreflect the occurrence of unanticipated events.

 

In compiling theinformation in this Annual Report, we have also used industry data andprojections obtained from industry surveys, market research, publicly availableinformation and industry publications. Industry publications generally state that the information they containhas been obtained from sources believed to be reliable but that the accuracyand completeness of such information is not guaranteed and that the projectionsthey contain are based on a number of significant assumptions.  We have not independently verified this dataor determined the reasonableness of such assumptions.  We have indicated where information has comefrom internal sources.  Such informationreflects our management’s best estimates based upon information obtained fromour customers and from trade and business organizations and other contactswithin the businesses in which we operate.

 

4

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**PART I**

 

## **Item 1**.          Identity ofDirectors, Senior Management and Advisers

 

Not applicable.

 

## **Item 2**.          OfferStatistics and Expected Timetable

 

Not applicable.

 

## **Item 3**.          KeyInformation

 

**(A)**       Selected Financial Data

 

The following table setsforth certain historical consolidated financial information of the Company foreach of the five years ended December 31, 2004.  The historical financial information as of December 31,2004 and 2003 and for each of the three years in the period ended December 31,2004, as set forth below, has been derived from our audited consolidatedfinancial statements, prepared in accordance with U.S. GAAP, included in thisAnnual Report.  The information set forthbelow is not necessarily indicative of future results and should be read inconjunction with “Item 5.  Operatingand Financial Review and Prospects” and the consolidated financial statements,related notes and other financial information included elsewhere in this AnnualReport.  Amounts are reported in U.S.dollars and have been prepared in accordance with U.S. GAAP.  We have not paid dividends for the five yearsended December 31, 2004.

 

5

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**(Inthousands of U.S. dollars, except share data)**

 

**CONSOLIDATED STATEMENTS OF OPERATIONS DATA:**

 
| ** **                                       | ** ** | **For the Year Ended December 31,** | ** ** |
|--------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                       | ** ** | **2004(a)**                              | ** ** | **2003(b)** | ** ** | **2002(c)** | ** ** | **2001(d)** | ** ** | **2000(e)** | ** ** |
|                                             |       |                                     |       |   |   |   |   |   |   |   |   |
| Gross  revenues                                  |       | $                                        | 644,119    |   | $ | 582,092 |   | $ | 564,472 |   | $ | 614,209 |   | $ | 920,143 |   |
| Net  revenues                                    |       | 621,085                                  |       | 558,513 |   | 542,262 |   | 573,436 |   | 868,364 |   |
| Income  (loss) from operations                   |       | 50,347                                   |       | 63,206 |   | 64,619 |   | 66,960 |   | (90,695 | ) |
| Relinquishment  fees - equity in earnings of TCA |       | 35,909                                   |       | 33,960 |   | 30,041 |   | 24,263 |   | 19,508 |   |
| Income  (loss) from continuing operations        |       | 68,132                                   |       | 70,267 |   | 47,664 |   | 37,269 |   | (115,447 | ) |
| Net  income (loss)                               |       | 68,132                                   |       | 71,572 |   | 39,603 |   | 32,661 |   | (115,447 | ) |
| Basic  earnings (loss) per share:                |       |                                     |       |   |   |   |   |   |   |   |   |
| Income  (loss) from continuing operations        |       | $                                        | 2.09       |   | $ | 2.46 |   | $ | 1.71 |   | $ | 1.39 |   | $ | (3.74 | ) |
| Income  (loss) from discontinued operations      |       | —                                   |       | 0.04 |   | (0.29 | ) | (0.18 | ) | — |   |
| Net  income (loss) per share                     |       | $                                        | 2.09       |   | $ | 2.50 |   | $ | 1.42 |   | $ | 1.21 |   | $ | (3.74 | ) |
| Diluted  earnings (loss) per share:              |       |                                     |       |   |   |   |   |   |   |   |   |
| Income  (loss) from continuing operations        |       | $                                        | 2.01       |   | $ | 2.39 |   | $ | 1.67 |   | $ | 1.34 |   | $ | (3.74 | ) |
| Income  (loss) from discontinued operations      |       | —                                   |       | 0.05 |   | (0.28 | ) | (0.17 | ) | — |   |
| Net  income (loss) per share                     |       | $                                        | 2.01       |   | $ | 2.44 |   | $ | 1.39 |   | $ | 1.17 |   | $ | (3.74 | ) |

 

**CONSOLIDATED BALANCE SHEET DATA:**

 
| ** **                                            | ** ** | **For the Year Ended December 31,** | ** ** |
|-------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                            | ** ** | **2004(a)**                              | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
|                                                  |       |                                     |       |   |   |   |   |   |   |   |   |
| Total  assets                                         |       | $                                        | 2,087,275  |   | $ | 1,455,928 |   | $ | 1,395,039 |   | $ | 1,337,740 |   | $ | 1,438,776 |   |
| Long-term  debt, net of current maturities            |       | 754,129                                  |       | 417,220 |   | 497,756 |   | 518,231 |   | 668,908 |   |
| Shareholders’  equity                            |       | 1,116,278                                |       | 839,590 |   | 729,021 |   | 674,662 |   | 637,081 |   |
| Number  of shares outstanding, net of treasury shares |       | 35,900                                   |       | 30,284 |   | 28,125 |   | 27,318 |   | 26,786 |   |
|                                                       |            |                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(a)          We consolidated Palmilla JV, LLC effectiveJanuary 1, 2004 in accordance with Interpretation No. 46R, “Consolidation of VariableInterest Entities” (“FIN 46R”), which increased revenues, cost and expenses,assets and liabilities.  During 2004, werecognized an impairment of the Atlantic City land of $7.3 million, $4.6million of expenses related to Hurricane Frances and operating losses fromPalmilla JV, LLC, which reflect $3.3 million of pre-opening expenses.

(b)         In 2003, we recognized $2.8 million ofinsurance recovery and a $2.5 million gain on damaged assets related toHurricane Michelle.  The operations ofour online gaming subsidiary, Kerzner Interactive Limited, were discontinuedduring the first quarter of 2003.  Inconnection with the discontinuance of Kerzner Interactive Limited, werecognized $4.5 million of income related to an option agreement with StationCasinos, Inc., which was terminated during the first quarter of 2003.  This amount was partially offset by expensesand write-offs related to the termination of Kerzner Interactive Limited’soperations.  

(c)          In 2002, we recognized a loss on the earlyextinguishment of debt of $20.5 million related to the redemption andrepurchase of our 9% Senior Subordinated Notes and our 85/8% Senior Subordinated Notes and a $14.5 million gain on settlement ofterritorial and other disputes in connection with a settlement with a majorshareholder.

(d)         In 2001, we recognized the results ofoperations of Resorts Atlantic City from January 1, 2001 to April 24, 2001.

(e)          In 2000, we recognized a $229.2 millionwrite-down of the carrying value of Resorts Atlantic City and a related optionto purchase certain real estate from us at its net realizable value, a$76.4 million gain on real estate related sales at the Ocean Club Estatesand $7.6 million of pre-opening expenses related to the expansion of theOne&Only Ocean Club and the Ocean Club Golf Course.  

 

We have reclassified “RelinquishmentFees – equity in earnings of TCA” from operating income to a separate line itemafter income from operations but before other income (expense) for each of thefour years ended December 31, 2003. For the years ended December 31, 2003, 2002 and 2001, we havereclassified insurance 

 

6

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recovery of $2.8million, $1.1 million and $2.0 million, respectively, from revenues to a lineitem credit within cost and expenses (there was no such recovery during 2000).

 

**(B)**  Capitalization and Indebtedness

** **

Not applicable.

 

**(C)**  Reasons for the Offer and Use of Proceeds

** **

Not applicable.

 

**(D)**  Risk Factors

** **

**Theresort and casino industries are highly competitive and increases incompetition could adversely affect our financial performance.**

** **

Our properties competewith other resorts, hotels and casinos, including land-based casinos,riverboat, dockside and cruise ship casinos and other forms of gaming, as wellas other forms of entertainment.  Ifother properties operate more successfully, if existing properties are enhancedor expanded or if additional hotels or casinos are established in and aroundthe markets in which we conduct business, we may lose market share.  In particular, the expansion, upgrade orconstruction of competing resort or casino properties in or near any marketfrom which we attract or expect to attract a significant number of customerscould have a significant adverse effect on our business, financial condition orresults of operations.

 

A number of ourcompetitors are larger and have greater financial and other resources than wedo.  In addition, a number ofjurisdictions have legalized gaming and other jurisdictions are considering thelegalization and/or expansion of gaming. This could open markets in which we currently compete to new entrantsand could create new markets that may compete as tourist destinations.  Our gaming operations compete, and will inthe future compete, with all forms of existing legalized gaming and with newforms of gaming that may be legalized in the future.  Our competitive position could be materiallyadversely affected by competing companies, new entrants, new markets and newforms of gaming, and our revenues could decline, harming our financialcondition.

 

A further discussion ofcompetition at our operations by geographic location is included in “Item 4.  Information on the Company, (B) BusinessOverview—Competition.”

 

**Newprojects and expansion and renovation efforts are inherently subject tosignificant development and construction risks.**

** **

We regularly evaluatepotential development opportunities and engage in expansion, development,upgrade and renovation projects at properties that we develop or operate.  Each of these projects, including the Phase IIIexpansion on Paradise Island (“Phase III”) discussed in “Item 4.  Information on the Company, (B) BusinessOverview—The Properties—Destination Resorts—Atlantis, Paradise Island,” thedevelopment of Atlantis, The Palm, Dubai (“Atlantis, The Palm”) discussed in “Item 4.  Information on the Company, (B) BusinessOverview—The Properties—Destination Resorts—Atlantis, The Palm,” the fourproposed development projects in the United Kingdom, the proposed developmentproject in Morocco and the completion of our projects in the Maldives and SouthAfrica will be subject to the many risks associated with expanding orrenovating an existing enterprise or developing new projects, includingunanticipated design, construction, regulatory, environmental and operatingproblems, and the significant risks commonly associated with implementing anexpansion strategy in new markets.  Inparticular, any such projects are subject to the risks associated with thefollowing:

 

•                  theavailability of financing and the terms and covenants in our Fifth Amended andRestated Credit Facility (the “Amended Credit Facility”) and other debt;

 

•                  shortagesin materials;

 

•                  insufficientpublic infrastructure improvements or maintenance;

 

•                  shortagesof skilled labor or work stoppages;

 

•                  unforeseenconstruction, scheduling, engineering, environmental or geological problems;

 

•                  weatherinterference, natural disasters, floods, fires or other casualty losses;

 

•                  thefailure to obtain required licenses, permits or approvals;

 

7

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•                  difficultiesand uncertainties associated with the regulatory environment in non-U.S.jurisdictions;

 

•                  regulatoryor private litigation arising out of projects; and

 

•                  unanticipatedcost increases and budget overruns.

 

For example, our projectsare subject to regulation at the national, state and local levels in theirrespective jurisdictions, which could adversely affect the progress of ourprojects.  In order to proceed with projects,we may need to, among other things, notify authorities of our proposals orsubmit environmental statements.  Wecould be sanctioned for any failure to follow any of these procedures,including fines or even temporary closure of our work sites.  We cannot guarantee that we will besuccessful in obtaining required permits and approvals.  Delays and compliance costs associated withour projects as a result of regulatory obstacles could have a material adverseeffect on our business, financial condition or results of operations.

 

The anticipated costs andconstruction periods for projects are based upon budgets, conceptual designdocuments and construction schedule estimates prepared by us in consultationwith architects and contractors.  Thecost of any project may vary from initial expectations, and we, or the ownersof the property, may have a limited amount of capital resources to fund costoverruns on any project.  If costoverruns cannot be financed on a timely basis, the completion of one or moreprojects may be delayed until adequate funding is available.  The completion dates of development projectscould also differ significantly from expectations for construction-related orother reasons.  We cannot ensure that anyproject will be completed, if at all, on time or within establishedbudgets.  Significant delays or costoverruns on projects could have a material adverse effect on our business,financial condition or results of operations.

 

Litigation may alsoimpede or delay our ability to complete construction or expansionprojects.  We have on occasion been namedas a defendant in lawsuits brought to delay, alter or enjoin projects in whichwe have been involved.  If litigation issuccessfully brought against us as a result of our expansion or renovationprojects around the world, it could have a material adverse effect on ourbusiness, financial condition or results of operations.

 

In addition, although wedesign our projects for existing facilities to minimize disruption of businessoperations, expansion and renovation projects require, from time to time,portions of the existing operations to be closed or disrupted.  Any extended disruptions in our operationscould have a material adverse effect on our business, financial condition orresults of operations.

 

**Ifwe are unable to finance our expansion, development and renovation projects aswell as other capital expenditures through cash on hand, cash flows orborrowings, our expansion, development and renovation efforts could bejeopardized.**

** **

If we are unable to finance existing or futureprojects with cash on hand, cash flows from operations or borrowings, we willhave to adopt one or more alternatives, such as reducing or delaying plannedexpansion, development and renovation projects and other capital expenditures,selling assets, restructuring indebtedness, obtaining equity financing or jointventure partners or modifying our Amended Credit Facility.  These sources of funds may not be sufficientto finance existing or future projects, and other financing may not beavailable on acceptable terms, in a timely manner or at all.  In addition, our Amended Credit Facility andthe indenture governing our 87/8% senior subordinated notesdue 2011 (the “87/8% Senior Subordinated Notes”) containcertain restrictions on our ability to incur additional indebtedness, and ourfuture indebtedness will likely contain similar restrictions.  If we are unable to secure additionalfinancing, we could be forced to limit or cancel expansion, development orrenovation projects, which may materially adversely affect our business,financial condition or results of operations.

 

**Severeweather conditions or natural disasters could adversely affect our business,financial condition or results of operations, or further increase our insurancepremiums and deductibles or make insurance unavailable at commerciallyreasonable rates.**

** **

The Bahamas, Mexico, theMaldives, Morocco and Mauritius are subject to tropical weather and naturaldisasters, which, if severe, could adversely affect our operations andtourism.  Similarly, inclement weathercan adversely affect the relinquishment fees that we earn from the Mohegan SunCasino (“Mohegan Sun”), as the principal access to this property is byroad.  In September 1999, HurricaneFloyd, a hurricane rated by the United States National Weather Service as acategory five, its highest rating, passed within 60 miles of ParadiseIsland.  Our Paradise Island propertiessuffered approximately $45.0 million of property damage.  In November 2001, Hurricane Michelleimpacted our Paradise Island properties. Although the storm caused minimal disruption to our operations, 

 

8

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our properties(other than Harborside at Atlantis, which was closed from August 2002through December 2002 due to water damage resulting primarily fromHurricane Michelle—see “Item 4. Information on the Company, (B) Business Overview—TheProperties—Destination Resorts—Atlantis, Paradise Island”) sufferedapproximately $28.3 million in damage. Our losses for Hurricane Floyd and Hurricane Michelle were predominatelycovered by insurance.

 

In September 2004,Hurricane Frances passed just to the north of Paradise Island.  Costs associated with Hurricane Frances were$4.6 million, which consisted of $3.4 million of clean up and repair costsand complimentary goods and services to guests and a $1.2 million loss ondamaged assets.

 

In December 2004, thetsunami caused by an earthquake off the coast of Indonesia in southern Asiaresulted in flooding damage at our two properties in the Maldives.  We estimate that the One&Only Kanuhuraand the One&Only Reethi Rah sustained aggregate property damages ofapproximately $24.0 million.  Inaddition, the One&Only Kanuhura sustained approximately $7.0 million inbusiness interruption losses.  We expectthe owners of the One&Only Kanuhura and the One&Only Reethi Rah tosubmit claims to their respective insurers, and that a significant portion oftheir damages will be covered.  In 2004,equity earnings from the One&Only Kanuhura were $0.4 million and wereceived $1.2 million in management fees. In 2005, we expect both equity earnings and management fees from theOne&Only Kanuhura to be adversely affected by the tsunami.

 

Hurricanes and othernatural disasters, in addition to causing property damage, lead to decreasedrevenues until business returns to normal operations and business interruptionexpenses, such as increased marketing expenses. We cannot assure you that our business and, consequently, our financialcondition or results of operations, will not be adversely affected by severeweather conditions or other natural disasters in the future, which could causesignificant damage and suspension of services provided to our patrons, furtherincreases in our insurance premiums and per occurrence deductibles orcancellations of, or decreases in, our coverage and harm to our business.

 

**Weare subject to extensive governmental gaming regulations, that may harm ourbusiness.**

** **

Our operation of gamingfacilities is subject to extensive governmental regulations.  Regulatory authorities typically requirevarious registrations, licenses, findings of suitability and approvals to beheld by operators of gaming facilities. The regulatory authorities in these jurisdictions generally have broaddiscretion in the granting, renewal, suspension and revocation of licenses andrequire that such registrations, licenses, findings and approvals be renewed orupdated periodically.  The Company andits key personnel are currently qualified to do business in all of thejurisdictions in which we operate gaming facilities.  We cannot assure you that any new orpermanent licenses, permits or approvals that may be required by us, our keyemployees and our partners, if applicable, in the future will be granted orthat our existing licenses, permits and approvals will be renewed or will notbe suspended or revoked in the future. The failure to receive or renew licenses and/or the suspension orrevocation of licenses could materially adversely affect our business,financial condition or results of operations.

 

**Ourgaming operations are subject to significant taxation and fees that, ifincreased, could harm our profitability.**

** **

Our gaming operations aresubject to significant taxation and fees. We pay substantial taxes and fees with respect to our gaming operationsin The Bahamas and Connecticut and will likely incur significant taxes and feesin other jurisdictions, including the United Kingdom and Morocco, in which weexpect to conduct gaming operations in the future.  Any material increase in existing taxes andfees, the adoption of new taxes or fees or the loss or reduction of anyexisting or future tax incentives could have a material adverse effect on ourprofitability.

 

**Ourbusiness is seasonal, which could increase our exposure to disruptions causedby weather and other factors.**

** **

Historically, ourrevenues and operating profits in The Bahamas and Mexico have been higherduring the first quarter, the prime tourist season, than in successivequarters.  Higher revenues and earningsare typically realized from the Mauritius properties during the fourth quarterof the year and from Mohegan Sun during the second and third quarters of theyear.  If any of these properties wereunable to accommodate guests during such periods for any reason, includingdisruptions caused by weather, our revenues and profits could be adverselyaffected.

 

**Workstoppages and other labor disputes could harm our financial condition andresults of operations.**

** **

In The Bahamas, a unionrepresents approximately 3,600 of our approximately 5,800 local employees.  We participate in an employer associationwhose existing contract with the union will expire on January 7,2008.  Labor 

 

9

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relations in TheBahamas have been unstable at times over the last few years and there have beenoccasional work stoppages.  As thecountry’s largest private employer, we are sometimes the target of labordisputes.  Any protracted labor disputesor work stoppages affecting any of the properties that we own or operate couldreduce our revenues.  In addition, manyof the public sector industries in The Bahamas, such as electricity,telecommunication and airport facilities, are unionized.  The Bahamian government’s labor relationswith these unions have been unstable at times and there have been workstoppages on occasion that have been disruptive to our business.

 

**Lackof sufficient air service could adversely affect our revenues and profits.**

** **

Most patrons of our propertiesarrive by air.  Although we consider thecurrent level of air service to our properties in The Bahamas, Mauritius,Mexico, Dubai and the Maldives to be adequate, any interruption or reduction ofair service to any such locations could restrict the growth of our businesses,negatively affect our competitive position and adversely affect our revenuesand profits.  As we continue to expand ordevelop additional properties, such future growth may require additional airservice to meet demand.

 

**Weare subject to environmental, health and safety laws and regulations, and ournoncompliance or a significant regulatory change could adversely affect ourbusiness, financial condition or results of operations.**

** **

Our operations areregulated under a number of federal, provincial, state and local laws andregulations that govern, among other things, the handling of waste materials,some of which are classified as hazardous materials, and the discharge ofhazardous materials into the environment. Our operations are subject to stringent regulations relating toprotection of the environment and waste handling.  In addition to liability for our ownnoncompliance, these laws and regulations may expose us to liability for thenoncompliance of other parties, without regard to whether we werenegligent.  Sanctions for noncompliancewith applicable environmental laws and regulations may include administrative,civil and criminal penalties, revocation of permits and corrective actionorders.  Furthermore, we may be liablefor costs for environmental cleanup at currently or previously owned oroperated properties or off-site locations. Our failure to comply with existing laws or regulations, the adoption ofnew laws or regulations with additional or more rigorous compliance standardsor the more vigorous enforcement of environmental laws or regulations couldsignificantly harm our business by increasing our expenses and limiting ourfuture opportunities.

 

**Wedo not own, manage or control Mohegan Sun and the revenues that we derive fromMohegan Sun are therefore outside of our control and are subordinated tocertain existing and future obligations of Mohegan Sun.**

** **

In 2004, we earnedapproximately $36.8 million from Trading Cove Associates (“TCA”), which isparty to a relinquishment agreement with the Mohegan Tribal Gaming Authority (“MTGA”).  Pursuant to the agreement, in exchange forrelinquishing its right to manage Mohegan Sun, TCA is entitled to receive 5% ofMohegan Sun’s gross revenues through December 2014.  As a result, decisions that affect MoheganSun’s business or operations, and therefore the revenues that TCA earns underthe agreement, are outside of our control. Revenues on which TCA’s fees are based exclude any revenues generated byany future expansion of Mohegan Sun.  Thesenior and junior relinquishment fees from the MTGA to TCA rank behind all ofthe MTGA’s obligations to pay certain minimum priority distributions to theMohegan Tribe of Indians of Connecticut (the “Mohegan Tribe”) and all of theMTGA’s existing and future senior secured indebtedness.  The junior fees also rank behind allunsecured indebtedness.  Should the MTGAnot be able to meet these obligations, it would not be able to pay TCA itsrelinquishment fees, which could have a material adverse effect on ourfinancial position and results of operations.

 

**Asmall number of our shareholders control a significant percentage of ourOrdinary Shares and are able to control decisions affecting our company.**

** **

As of February 28,2005, Caledonia Investments PLC (“Caledonia”), Cement Merchants SA (“CMS”),Baron Capital Group, Inc. (“Baron”), FMR Corp. (“FMR”), and Istithmar PJSC(“Istithmar”) had the right to vote approximately 11.2%, 7.6%, 16.2%, 11.9%, and12.4%, respectively, of our Ordinary Shares. As of February 28, 2005, the Kerzner Family Trust and itssubsidiary, World Leisure Group (“WLG”), both of which are controlled byMr. S. Kerzner, had the right to vote approximately 12.5% of our OrdinaryShares.  See “Item 7.  Major Shareholders and Related Party Transactions,(A) Major Shareholders” for more information as to how the foregoingownership percentages were determined. If any combination of our major shareholders act together, they may beable to effectively control the outcome of substantially all matters requiringshareholder approval, including the election of our directors, therebycontrolling our management, policies and business operations.  For example, our major shareholders couldcombine to use this voting power to block our ability to obtain certain typesof 

 

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financing fordevelopment plans, renovations or expansions, which could materially adverselyaffect our ability to develop our business and pursue our strategies.

 

**Wesignificantly rely on technology.**

** **

The resort and casino industriescontinue to demand the use of sophisticated technology, including technologyutilized for property management, casino-related technology, procurement,reservation systems and guest amenities. In 2005, we expect to introduce a real-time web-accessible reservationsystem.  We expect the technologiesutilized at our properties to require refinements.  There can be no assurance that, as certaintechnologies become outdated or as advanced technologies are introduced, wewill be able to replace or introduce such technologies as quickly as ourcompetition, within our established budgets or that we will be able tointegrate such technologies into our existing systems.  Further, there can be no assurance that wewill achieve any benefits from any new technology.

 

**Jointventures decrease our ability to manage risk.**

** **

We have from time to timeinvested, and expect to continue to invest, in joint ventures.  Joint venturers typically have shared controlover the joint venture assets.  As aresult, joint venture investments involve risks, such as the possibility thatthe co-venturer in an investment might become bankrupt or not have thefinancial resources to meet its obligations, have economic or businessinterests that are inconsistent with our business interests or take actioncontrary to our instructions or requests or contrary to our policies orobjectives.  Any of such actions maysubject the properties owned by the joint venture to additional risk.  In general, we seek to maintain sufficientcontrol of any joint venture, however, we may be unable to take action withoutthe approval of our joint venture partners. If a joint venture partner becomes bankrupt, we could become liable forsuch partner’s share of joint venture liabilities.  If we are unable to maintain sufficientcontrol of any joint venture, our business, financial condition or results ofoperations could be materially adversely affected.

 

**Wemay have disputes with the owners and joint venture partners of the propertiesthat we manage.**

** **

Our obligations under ourmanagement agreements to manage each property and enforce certain requiredstandards may, in some instances, be subject to interpretation and may giverise to disagreements.  While we will seekto resolve any disagreements in a manner that develops and maintains positiverelationships with current and potential owners and joint venture partners, ourfailure to resolve any such disagreements could result in litigation or couldinterrupt the services or operating quality of the affected property, whichcould materially adversely affect our business, financial condition and resultsof operations.

 

**Youmay have difficulty enforcing judgments against us or our directors ormanagement that reside outside the United States.**

** **

Kerzner is aninternational business company incorporated under the laws of the Commonwealthof The Bahamas.  Certain of our directorsand executive officers reside outside the United States.  In addition, a substantial portion of theassets of our directors and officers and of our assets are located outside theUnited States.  As a result, it may bedifficult or impossible to:

 

•                  effectservice of process within the United States upon us or these persons; or

 

•                  enforce,against us or these persons, court judgments obtained in U.S. courts, includingjudgments relating to U.S. federal securities laws.

 

It is unlikely thatBahamian courts would entertain original actions against Bahamian companies,their directors or officers predicated solely upon U.S. federal securitieslaws.  Furthermore, judgments based uponany civil liability provisions of the U.S. federal securities laws are notdirectly enforceable in The Bahamas.  Rather,a lawsuit must be brought in The Bahamas on any such judgment.  Subject to consideration of privateinternational law, in general, a judgment obtained after due trial by a courtof competent jurisdiction, which is final and conclusive as to the issues inconnection, is actionable in Bahamian courts and is impeachable only upon thegrounds of fraud, public policy and natural justice.

 

**Wemay have difficulty enforcing gaming debts in certain foreign jurisdictions orin certain jurisdictions within the United States, which could negativelyaffect our operating results.**

** **

Gaming debts may not belegally enforced in certain foreign jurisdictions or in certain jurisdictionswithin the United States.  A substantialportion of the customers at Atlantis, Paradise Island reside in the UnitedStates.  As a 

 

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result, we may beunable to collect gaming debts from our patrons who reside in suchjurisdictions, which could negatively affect our operating results.

 

**Reassessmentsof and changes to our business plans could hinder our development and result incharges or fees that could harm our financial condition or results ofoperations.**

** **

We are regularlyreviewing our business plans in light of a variety of factors, including theavailability of financing, regulatory and political considerations, competitionand other business and strategic concerns. As a result of such assessments, our management may choose to changesuch plans, which could result in failure to expand and could also cause us toincur fees or charges.  We cannot assureyou that we will carry forward and complete any proposed business plans.

 

**Energyprice increases may adversely affect our cost of operations and our revenues.**

** **

Resorts use significantamounts of electricity, natural gas and other forms of energy.  Although we have not experienced shortages ofenergy, substantial increases in the cost of electricity or natural gas maynegatively affect our operating results. The extent of any impact is subject to the magnitude and duration of theenergy price increases and could be material. In addition, energy price increases in locations that constitute asignificant source of customers for our properties could result in a decline indisposable income of potential customers and a decrease in visitation andspending at our properties, which could negatively impact revenues.

 

**Additionalincreases in our insurance premiums and deductibles may increase our costs andimpair our ability to obtain or maintain insurance on our properties.**

** **

Due to changes in the insurance market arising priorto the September 11th terrorist attacks and the effects of suchattacks, it has become more difficult and/or more expensive to obtaininsurance.  We may encounter difficultyin obtaining or renewing property or casualty insurance on certain of ourproperties which are subject to the potential negative impact ofhurricanes.  In addition, such insurancemay be more limited and may not cover catastrophic risks or terrorist acts atcurrent levels or at all.  The tsunami inDecember 2004 in southeast Asia will result in increases in localinsurance rates.  Even if we are able torenew our policies or to obtain new policies at levels and with limitationsconsistent with our current policies, we cannot be sure that we will be able toobtain such insurance at premium rates that are commercially reasonable.  In addition to the “all risk” coveragedescribed below, we have insured Atlantis, Paradise Island for up to$300.0 million per occurrence (and in an annual aggregate amount) fromdamages directly resulting from certain terrorist acts to cover property damageand related business interruption losses. If any such event were to affect all or part of one or more of ourproperties, it is possible that we would suffer a substantial loss beyond whatis covered by our insurance policies.

 

The amount of our “allrisk” property and business interruption insurance with regard to our ParadiseIsland business (inclusive of a per occurrence deductible) in the 2004 policyyear commencing June 1, 2004, was $300.0 million, as compared to$175.0 million in the 2003 policy year and $150.0 million in the 2002policy year.  (“Policy Years” are definedas June 1 of that year through May 31 of the following year.)  “All risk” insurance includes coverage forthe windstorm related effects of hurricanes among other casualty losses.

 

In 2002, with regard toour Paradise Island property insurance, our “all risk” premium increased fromapproximately $4.6 million in the 2001 Policy Year to a total ofapproximately $14.1 million in the 2002 Policy Year, and Kerzner’sdeductibles also increased from $4.0 million per occurrence in the 2001 PolicyYear to $15.0 million per occurrence in the 2002 Policy Year with anannual aggregate deductible of $30.0 million.  For the 2003 Policy Year, our premium forParadise Island property insurance decreased to $13.5 million with thedeductibles remaining the same as in the 2002 Policy Year.  For the 2004 Policy Year, our premium forParadise Island property insurance increased to $14.1 million with thedeductibles remaining the same as in the 2003 Policy Year.  In light of the significant hurricaneactivity in the Caribbean, our insurance premium and deductibles maysignificantly increase.

 

**Actsof terrorism and war could adversely affect the travel market and reduce ouroperating revenues.**

** **

The terrorist attacks ofSeptember 11th had a significant impact on the travel andtourism industries in which we operate. The considerable reduction in both business and leisure air travelfollowing that date significantly reduced visitation to all our properties,including our Paradise Island properties, during the fourth quarter of 2001,resulting in a significant decline in our operating results during thisperiod.  On March 19, 2003, the U.S.and coalition forces commenced a war with Iraq. Although the official combat in the war with Iraq ceased inMay 2003, the U.S. and coalition forces still maintain a presence in Iraqand terrorist activities in the country have continued.  These events, 

 

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the potential forfuture terrorist attacks (in the United States and in foreign locations), thenational and international responses to terrorist attacks and other acts of waror hostility have created many economic and political uncertainties, whichcould adversely affect our business and results of operations.  Future acts of terror, anti-terroristefforts, war or other armed conflicts involving the United States or othercountries may reduce our guests’ willingness to travel, which could have amaterial adverse effect on the U.S. and global economies and on our business,financial condition or results of operations.

 

**Additionalrisks may be associated with Atlantis, The Palm.**

** **

In September 2003, we entered into agreements toform a joint venture with Nakheel LLC, an entity owned by the Royal Family ofDubai, to develop Atlantis, The Palm.  InJune 2004, we entered into an agreement with Istithmar, an entity indirectlywholly owned by the Royal Family of Dubai, which has assumed all obligationsand rights of its affiliate, Nakheel LLC. Dubai is one of seven autonomous Sheikhdoms that form the federation ofthe United Arab Emirates.  The UnitedArab Emirates is located along the Persian Gulf, and bordered on the south and westby Saudi Arabia, on the west by Qatar and on the north and east by Oman.  These states and others in the region, morespecifically Bahrain and Kuwait, through an organization formed to strengthenrelations among the six states, the Gulf Cooperation Council, maintain peacefulrelations and cooperate on trade, regional defense and economic issues.  His Highness Sheikh Zayed bin Sultan Al Nahyanserved as President of the United Arab Emirates from 1971 until his death onNovember 2, 2004.  On November 3,2004, His Highness Sheikh Khalifa bin Zayed Al Nahyan was named President ofthe United Arab Emirates.  His Highness SheikhMaktoum bin Rashid Al Maktoum has ruled in Dubai since 1990.  Although the Sheikh-led government appears tobe stable and not subject to any significant local challenges, theSeptember 11th terrorist attacks on the United States and thewar and ongoing efforts in Iraq have both increased scrutiny and heightenedtensions throughout the Middle East, including the United Arab Emirates.  Al-Qaeda and other terrorist organizations,in their hostile campaign against supporters of the West, present a threat tostability in the Middle East.  The UnitedArab Emirates maintains friendly relations with the United States.  For example, it allowed U.S. troops to bestationed there in preparation for the invasion of Iraq in 2003 and it haspledged humanitarian assistance in the Iraqi reconstruction efforts andencouraged the United States to maintain security even after the handover ofpower to the Iraqis on July 1, 2004. This support for the United States may increase the likelihood ofattacks on the state by terrorist organizations.  As publicly reported on May 5, 2004,Pakistani intelligence uncovered a plot by a small group of terrorists tohijack and possibly bomb a plane bound for the United Arab Emirates.  The firm relationship between Saudi Arabiaand the United States has in recent years led to a number of significantterrorist activities in Saudi Arabia and similar events could occur in theUnited Arab Emirates.

 

The U.S. Department ofState is concerned that terrorists may be planning to carry out attacks againstWesterners and oil workers in the Gulf. Perceptions of the safety of the region could affect Atlantis, The Palm,as the viability of this undertaking is dependent on the continued growth oftourism in the region, primarily from Western Europe and Asia.  Future acts of terrorism, anti-terroristefforts, war or political and civil unrest in the region could have a materialadverse effect on global economies, the economies of the Gulf States and inparticular on the development of Atlantis, The Palm.  Dubai is generally viewed as the mostprogressive, open and pro-Western emirate. In addition, it is currently the only emirate that permits the sale ofland to foreigners.  With its relativelyhigh profile, Dubai could represent a potentially attractive target to terroristorganizations.

 

Atlantis, The Palm willbe located at the apex of the crescent, which forms the external border of ThePalm, Jumeirah, a $1.5 billion land reclamation project in Dubai, and isexpected to be connected to the rest of The Palm, Jumeirah by a roadway tunneland proposed monorail.  As with anyreclamation project, there are inherent subsidence and liquefaction risks.  The Company and Nakheel have been monitoringthe construction site for subsidence, which to date has been isolated and notin excess of three millimeters.  However,the Company has not monitored or had any opportunity to monitor other sites onThe Palm, Jumeirah for subsidence.  Inthe event of unforeseeable subsidence on the site or on other sites on ThePalm, Jumeirah, we would expect at a minimum for there to be a materialreduction in hotel bookings for Atlantis, The Palm and in day visitors to thewater attractions, which in turn could have a material adverse impact on theoperations and financial condition of Atlantis, The Palm.  In the event of an earthquake, there is therisk of liquefaction.  While there hasnot been recent significant seismic activity in the immediate vicinity ofDubai, earthquakes have recently occurred in Iran, Egypt, Syria and southernAsia, off the coast of Indonesia.  Inaddition, severe storms accompanied by high winds can develop over theGulf.  These storms could lead to surgesand high wave heights that could erode or top the breakwater that has beenerected on the Gulf-side of the site, thereby leading to flooding.  Aside from the property damage that couldoccur from such floods, any such flooding could also damage the roads on thecrescent or the proposed monorail, as well 

 

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as flood thetunnel, which would limit or curtail arrivals and departures to Atlantis, ThePalm.  Any of these structural, climaticor geological events would likely have a material adverse impact on the siteand operations of Atlantis, The Palm, including the extensive marineenvironment and animals that will be a key attraction of the resort.  Nakheel and other developers have alsoannounced other reclamation projects in Dubai of a similar scale to The Palm,Jumeirah.  Should any of thesereclamation projects suffer from any of these events, Atlantis, The Palm and,as a result, the Company could be materially adversely affected.

 

**Additionalrisks may be associated with our proposed destination resort casino in Morocco.**

** **

In July 2004, weannounced that Kerzner and two local Moroccan companies, Société Maroc EmiratesArabs Unis de Développement (“SOMED”) and Caisse de Dépôt et de Gestion (“CDG”),had entered into an agreement with the Government of the Kingdom of Morocco forthe ownership, development and management of a destination resort casino.  This agreement is subject to the fulfillmentof certain conditions.  Morocco islocated in Northern Africa and is bordered by Algeria, the North Atlantic Oceanand the Mediterranean Sea.  The Head ofState of Morocco is His Majesty King Mohammed IV and the Prime Minister ofMorocco is Mr. Driss Jettou.  AlthoughMorocco is largely stable, with limited security risks, the May 2003 suicidebomb attacks in Casablanca have raised concerns about terrorist activity in theregion.  The implication of severalMoroccans in the March 2004 Madrid train bombing has further heightenedconcerns about terrorism.  There areseveral loose-knit terrorist groups in Morocco that have connections toAl-Qaeda.  Morocco has been an ally ofthe United States, although it did express opposition to the war in Iraq.  Its historic support for the United Statesmay increase the likelihood of attacks on the state by terroristorganizations.  Establishments which arereadily identifiable with Western interests are potential targets for futureattacks.  Such targets may includeestablishments where activities occur that may offend religious sensitivities,such as casinos or places where alcoholic beverages are sold or consumed.  At present, there are five casinos located inMorocco, however, our proposed resort would be the largest casino in Moroccoand therefore, a potentially more high-profile target.  Future acts of terrorism, anti-terrorist efforts,war or political and civil unrest in the region could have a material adverseeffect on global economies, the economy of Morocco and in particular, on thedevelopment and success of our destination resort casino in Morocco.

 

**Oursuccess depends on certain key employees.**

** **

Our success depends uponthe continued services of certain key employees, in particular our seniormanagement.  Our senior management isresponsible for the implementation and development of our various projects, thedevelopment and maintenance of our relationships with current and potentialhotel and resort owners and joint venture partners and the marketing andrelated activities necessary to attract patrons to our properties.  Although we believe that we could replace ourkey employees within a reasonable amount of time should the need arise, theloss of key personnel could have a material adverse effect on our business.

 

**Deteriorationin general economic and market conditions could adversely affect our business.**

** **

Our business is affectedby general economic and market conditions, particularly in the United Statesand Europe.  A large portion of ourbusiness at Atlantis, Paradise Island is generated by group convention sales andindividual tour and travel.  A recessionor economic slowdown could cause a reduction in group sales bookings or thewillingness or ability of tourists to book vacations at our properties, whichcould materially adversely affect our operating results.

 

## **Item4**.           Information on the Company

## ** **

**(A)**       History and Development of the Company

** **

Kerzner was incorporatedin The Bahamas in 1993 under the name “Sun International Hotels Limited,” andis an international business company under the International Business CompaniesAct, 2000 of the Commonwealth of The Bahamas. The Company is registered under number 46,600B at the Companies Registryof The Bahamas.  Our executive officesare located at Executive Offices, Coral Towers, Paradise Island, The Bahamas,and the telephone number is 242-363-6018. Our agent for service of process in the United States is CorporationServices Company, 1013 Centre Road, Wilmington, Delaware 19805.  On March 1, 1996, we listed our OrdinaryShares for trading on The New York Stock Exchange (“NYSE”).  On July 1, 2002, we changed ourcorporate name from Sun International Hotels Limited to Kerzner InternationalLimited and our stock, which was trading on the NYSE under the symbol “SIH,”was listed under the new ticker symbol “KZL.” The name change was implementedin accordance with agreements related to the restructuring of Sun InternationalInvestments Limited (“SIIL”), which 

 

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was formerly ourmajority shareholder.  See “Item 7.  Major Shareholder and Related PartyTransactions.”  There was no change inour management or worldwide operations as a result of the name change.

 

The Company wasestablished in order to acquire the Paradise Island Resort and Casino andrelated operations from Resorts International, Inc.  The acquisition was completed inMay 1994.

 

In June 1994, weestablished Sun Cove Limited, which is now known as Kerzner InvestmentsConnecticut, Inc. (“Kerzner Connecticut”). Kerzner Connecticut owns a 50% interest in, and is a managing partnerof, TCA, a Connecticut general partnership. In September 1995, TCA entered into a Gaming Facility andConstruction Agreement with the MTGA, an instrumentality of the Mohegan Tribe,pursuant to which TCA assisted the Mohegan Tribe with the design, developmentand financing of Mohegan Sun, a resort and entertainment complex situated inthe town of Uncasville, Connecticut.  Inaddition, in August 1995, TCA entered into a gaming management agreement(the “Management Agreement”) with the Mohegan Tribe pursuant to which TCAprovided certain management, marketing and administrative services to theMohegan Tribe upon the opening of Mohegan Sun in October 1996.  In February 1998, TCA and the MoheganTribe entered into an agreement (the “Relinquishment Agreement”) pursuant towhich the Management Agreement was terminated effective January 1, 2000and the Mohegan Tribe assumed full management responsibility for MoheganSun.  Pursuant to the RelinquishmentAgreement, TCA receives payments of 5% of the gross revenues of Mohegan Sun forthe 15-year period that commenced January 1, 2000.  In addition to the Relinquishment Agreement,in February 1998, the Mohegan Tribe appointed TCA to develop its$1.0 billion expansion of Mohegan Sun, which was completed in June 2002.  See below “(B) Business Overview—TheProperties—Gaming—Mohegan Sun” for a further description of the RelinquishmentAgreement and the $1.0 billion expansion.

 

In December 1996, weacquired Sun International North America, Inc. (formerly GriffinGaming & Entertainment, Inc.), which is now known as KerznerInternational North America, Inc. (“KINA”).  KINA is a holding company, which, through anindirect wholly owned subsidiary, formerly owned and operated a 644-room casinohotel property in Atlantic City, New Jersey (“Resorts Atlantic City”).

 

In April 2001, wecompleted the sale of Resorts Atlantic City to an affiliate of Colony CapitalLLC (“Colony”) for a purchase price of approximately $144.0 million,including accrued interest (the “Resorts Atlantic City Sale”).  The proceeds received from Colony consistedof approximately $123.5 million in cash, net of costs incurred subsequentto closing, and an unsecured $17.5 million note which was paid in full inMarch 2002.  The net cash proceedsreceived from this transaction were used to reduce the amount of borrowingsoutstanding under our then-existing amended and restated revolving creditfacility.  In 2000, we recognized a$229.2 million write-down of the carrying value of Resorts Atlantic Cityand a related option to purchase certain real estate to its net realizablevalue.

 

Pursuant to the terms ofthe Resorts Atlantic City Sale, we granted Colony a two-year option (the “AtlanticCity Option”) to acquire certain undeveloped real estate adjacent to ResortsAtlantic City that we owned for a purchase price of $40.0 million in theform of a promissory note.  InFebruary 2004, we and Colony agreed to terminate the Atlantic City Optionand entered into a new agreement pursuant to which we sold the undeveloped realestate adjacent to Resorts Atlantic City to a wholly owned subsidiary (the “Purchaser”)of Colony RIH Holdings, Inc. for a purchase price of$40.0 million.  The sale wascompleted on March 18, 2004.  See “Item 4.  Information on the Company, (B) BusinessOverview—Atlantic City Option” below for more information on this sale.

 

In 1999, we formed ajoint venture with Starwood Vacation Ownership, Inc. (“SVO”) (formerlyVistana, Inc.), a subsidiary of Starwood Hotels and ResortsWorldwide, Inc. (“Starwood”), to develop Harborside at Atlantis, atimeshare project on Paradise Island.  Weand SVO each hold a 50% interest in Harborside at Atlantis.  As part of the joint venture, we contributedland and cash and SVO contributed cash.

 

In January 2000, wereceived a proposal from SIIL, at that time the majority shareholder ofKerzner, to acquire in a merger transaction all of our Ordinary Shares notalready owned by SIIL or its shareholders for $24 per share in cash.  To consider the proposal, we formed acommittee of independent members of the Board of Directors (the “SpecialCommittee”), which retained its own financial and legal advisers.  The proposed transaction was subject tovarious conditions, including approval by the Special Committee.  On June 16, 2000, we announced that SIILwas not able to negotiate a mutually satisfactory transaction with the SpecialCommittee and that SIIL advised us that its proposal had been withdrawn.

 

In order to allow ourshareholders to sell at least a portion of their Ordinary Shares at the priceformerly proposed by SIIL, our Board of Directors approved a self-tender offerfor up to 5,000,000 Ordinary Shares at a $24 

 

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per share cashprice.  In August 2000, we announcedthe completion of the self-tender, pursuant to which we purchased 5,000,000Ordinary Shares at $24 per share.

 

In August 2000, weestablished Kerzner Interactive Limited, our Internet gaming subsidiary.  In September 2001, we received a licenseto operate in the Isle of Man and commenced live gaming operations inJanuary 2002.  The Companydiscontinued the operations of Kerzner Interactive Limited during the firstquarter of 2003.  See below “(B) BusinessOverview—Internet Gaming” for more information.

 

On July 3, 2001, we announcedthe restructuring of our former majority shareholder, SIIL.  In connection with this restructuring, amongother things, the shareholders agreement governing SIIL was terminated and SIILwas dissolved.  In November 2002, wereached a further settlement with Sun International Limited (formerly known asKersaf Investments Limited, and referenced herein as “Kersaf”) related to therestructuring agreement and certain other matters.  See “Item 7.  Major Shareholders and Related PartyTransactions.”

 

EffectiveAugust 2001, we acquired a 25% interest in the Kanuhura SunResort & Spa Limited (“One&Only Kanuhura”) for approximately$3.8 million.  As of December 31,2004, we had provided debt financing to the One&Only Kanuhura of $2.4million, excluding accrued interest and we also have a contingent guaranteeobligation to provide up to approximately $10.7 million.  The One&Only Kanuhura is a 100-roomluxury resort located on Lhaviyani Atoll in the Maldives, which is locatedapproximately 600 miles southwest of the southern tip of India.  Our management contract with the One&OnlyKanuhura expires in 2026.  Our agreementwith Sun Resorts Limited (see below) also included the sale of 20% of our debtand equity interests in the One&Only Kanuhura to Sun Resorts Limited andthe transfer to One&Only Management (as defined below) of the One&Only Kanuhuramanagement agreement.  Effective January 1,2005, our ownership interest in the One&Only Kanuhura further decreased to18.75% and SRL’s interest increased to 6.25%, as SRL purchased an additional1.25% interest from us.

 

In June 2002, weentered into management and development agreements for the One&Only ReethiRah, a 130-room luxury resort on North Male Atoll in the Maldives that weexpect will open in the second quarter of 2005. This new five-star resort will occupy the site where a small resort hadpreviously been located.  The managementand development agreements related to this property are co-terminus with theowner’s lease, which expires in 2020.  Aspart of this development, we have committed to provide certain financingarrangements to the current owner of the resort.  See “Item 5. Operating and Financial Review and Prospects, (C) Liquidity andCapital Resources” below for more information.

 

On September 12, 2002,we purchased a 50% ownership interest in the 115-room Palmilla Resort (“One&OnlyPalmilla”), a deluxe five-star property located near Cabo San Lucas in Baja,Mexico for approximately $40.8 million, including transaction costs.  In connection with the purchase, we enteredinto long-term management and development agreements related to the propertythat will expire in 2022.  Theacquisition was funded through a combination of cash on hand and drawings underour then-existing amended and restated revolving credit facility.  The One&Only Palmilla re-opened inJanuary 2004 following a refurbishment that expanded the room count to 172rooms, all of which are oceanfront, and added a Charlie Trotter restaurant, a12-unit spa with open air villas, a meeting space, a pool and a poolsiderestaurant.  In addition, in February2004, the One&Only Palmilla had a grand re-opening event.  The expansion was financed by theOne&Only Palmilla through local project financing that was supported by a$46.5 million guarantee from Kerzner, and by approximately $14.5 millionin completion loans from Kerzner.  Thetotal cost of the One&Only Palmilla renovation was approximately$102.0 million.  On December 17,2004, the One&Only Palmilla entered into two promissory notes pursuant towhich it borrowed $110.0 million.  Theproceeds were used to, among other things, repay all of the One&OnlyPalmilla’s existing loans, including the completion loans provided by Kerzner,and fund the One&Only Palmilla’s working capital requirements.  In connection with the repayment of theOne&Only Palmilla’s existing loans, Kerzner’s $46.5 million guaranteewas extinguished.  The new indenturegoverning the promissory notes provides recourse to Kerzner in the eventcertain representations and warranties are violated.

 

In December 2002, webegan to operate and market certain of our managed and/or owned luxury resorthotels under the “One&Only” brand in connection with our corporate namechange.  We are now marketing six of ourproperties under our One&Only brand.

 

We currently have a 20.4%ownership interest in Sun Resorts Limited (“SRL”), a publicly traded company onthe Mauritian Stock Exchange, which owns the One&Only Le Saint Géran, theOne&Only Le Touessrok, Sugar Beach Resort, La Pirogue Hotel and Le CocoBeach Hotel, which are all located in Mauritius.  In December 2002, we entered into anagreement with SRL to form One&Only (Indian Ocean) Management Limited (“One&Only

 

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Management”), anew management company, for the purpose of, among other things, managing thefive properties owned by SRL in Mauritius and the One&Only Kanuhura in theMaldives, and, as consideration, securing an extension to our management agreementsin Mauritius from 2008 until 2023. Pursuant to an agreement among us, SRL and One&Only Management, SRL’sownership interest in One&Only Management will increase incrementally,subject to certain conditions, from 2005 through 2009, for no additionalconsideration, at which time it will own 50% of One&Only Management.  Effective January 1, 2005, SRL’s ownershipinterest increased from 20% to 25%, and our ownership interest correspondinglydecreased from 80% to 75%.  One&OnlyManagement serves as a joint venture growth vehicle for expansion in theislands of the Indian Ocean.  Inconnection with this transaction, we subcontracted to One&Only Managementall of our Mauritius management agreements and assigned to it the One&Only Kanuhuramanagement agreement, and SRL purchased 20% of our debt and equity interests inthe One&Only Kanuhura.  Effective January 1,2005, our ownership interest in the One&Only Kanuhura further decreased to18.75% and SRL’s interest increased to 6.25%, as SRL purchased an additional1.25% interest from us.  Pursuant to anadditional subcontract arrangement with One&Only Management, we providecomprehensive management services to the five Mauritius resorts and theOne&Only Kanuhura and receive a management fee.  We expect to transfer the managementagreement for the One&Only Reethi Rah to One&Only Management, and ifsuch transfer occurs, SRL will be obligated to acquire 25% of the subordinateddebt interest in the One&Only Reethi Rah (and this percentage will increaseto 50% as SRL’s interest in One&Only Management increases).

 

In April 2003, weagreed to acquire from London Clubs International (“LCI”) for $2.1 milliona property located in the town center of Northampton, England.  On March 30, 2004, we announced that theGaming Board of Great Britain had granted us a Certificate of Consent, whichhas enabled us to transfer a gaming license held by LCI into our name andproceed with our plans for a casino in Northampton.  We expect to develop and operate the newcasino facility on an approximate 30,000 square foot site, which is expected tocost approximately £10.0 million (approximately $18.7 million in U.S.dollars as of March 25, 2005).  Thedevelopment of this facility has been approved by the local planningauthorities.  We have commencedconstruction on this project and expect the casino facility to open in2006.  See “(B) BusinessOverview—Gaming—United Kingdom” for more information.

 

In May 2003, weentered into a “Heads of Agreement” with the Bahamian Government with respectto the Phase III expansion on Paradise Island. In May 2004 and December 2004, we entered into supplements tothe Heads of Agreement, pursuant to which we modified certain componentsinvolved in the Phase III expansion, which now includes a new luxury all-suitehotel, an expansion of our convention facilities, expanded water attractionsand an addition to Harborside at Atlantis. See “(B) The Properties—Atlantis, Paradise Island” for more information.

 

On September 22,2003, we announced that we had agreed to form a joint venture with Nakheel LLC,an entity owned by the Royal Family of Dubai, to develop Atlantis, ThePalm.  On June 23, 2004, weannounced that we had entered into an agreement with Istithmar, an entityindirectly wholly owned by the Royal Family of Dubai, which has assumed allobligations and rights of its affiliate, Nakheel LLC, pursuant to which weformed Kerzner Istithmar Limited (“Kerzner Istithmar”) and increased the scopeof Atlantis, The Palm.  Based on ourcurrent budget, the development costs of the expanded project are expected tobe approximately $1.1 billion and will include an approximately 2,000-roomresort and extensive water park situated on 1.25 miles of beachfrontproperty.  Atlantis, The Palm will belocated on The Palm, Jumeirah, a $1.5 billion land reclamation project inDubai, United Arab Emirates.  We andIstithmar have each agreed to invest $100.0 million in the form of Class Acommon stock in Kerzner Istithmar, and Istithmar has agreed to underwrite$200.0 million of Kerzner Istithmar’s limited voting Class B commonstock.  In addition, each of Istithmarand Kerzner will provide, on a joint and several basis, additional sponsorsupport of up to $55.0 million with respect to cost overruns and post-completiondebt service obligations.  The balance ofthe financing is expected to be obtained through a $700.0 millionsyndicated term loan facility that is limited recourse to Kerzner.  As part of the transactions, Kerzner hasentered into a development services agreement and a long-term managementagreement with a subsidiary of Kerzner Istithmar.  See below “(B) Business Overview—TheProperties—Destination Resorts—Atlantis, The Palm” for more information.

 

In October 2003, weentered into an agreement to acquire the assets of Club Méditerranée (Bahamas)Limited on Paradise Island for approximately $38.5 million.  The approximate 39-acre site is adjacent tothe proposed site of the new 600-room luxury all-suite hotel that is part ofthe Phase III expansion.  In the short term,it is expected that the existing hotel on the property will be used to houseconstruction workers during the construction of the planned all-suitehotel.  During the year ended December 31,2003, we paid $20.0 million in connection with the acquisition. Thebalance of $18.5 million, which included a $3.5 million stamp tax, waspaid in 2004.  In addition, Kerznerobtained an option to purchase certain adjacent land lots for an option priceof $5.0 million.  In September 2004,we 

 

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exercised ouroption and purchased the adjacent land lots at a price of $5.0 million, plus$0.5 million in related stamp taxes.

 

In November 2003, weentered into an agreement with Victoria & Alfred Waterfront (Pty)Limited to develop a new luxury hotel, subject to various conditions, at thehighest end of the market in Cape Town, South Africa.  We intend to form a joint venture inwhich we will own a minority interest to develop and operate a new 163-roomOne&Only luxury hotel on the waterfront.

 

On March 10, 2004, weannounced that we had entered into a joint venture, BLB Investors, L.L.C. (“BLB”),with an affiliate of Starwood Capital Group, L.L.C. (“Starwood Capital”) and anaffiliate of Waterford Group, L.L.C. (“Waterford”) for the purpose of acquiringan interest in Wembley plc (“Wembley”), which owns gaming and track operationsin the United States and race tracks in the United Kingdom.  BLB acquired and retains a 22.2% stake inWembley.  See “Recent Developments” and “(B)Business Overview—Gaming—United Kingdom” for more information.

 

On July 13, 2004, weannounced our appointment as the preferred developer and operator with respectto the development and management of gaming, hotel and entertainment facilitiesfor two sites in two key markets in the United Kingdom.  The sites for the projects are the ScottishExhibition + Conference Centre in Glasgow and Sportcity in EastManchester.  We are negotiating bindingagreements for both of these projects. In addition, on July 13, 2004, we announced that we had enteredinto a binding agreement with affiliates of Anschutz Entertainment Group forthe development and operation of a casino and hotel resort facility at theMillennium Dome in London.  Ourdevelopment and management of our sites in the United Kingdom is subject to anumber of contingencies.  First, theUnited Kingdom needs to pass gambling reform legislation.  Second, a special government committee thatis expected to be established upon the passage of such legislation then mustselect eight localities that will be entitled to have a “Resort” or “RegionalCasino,” as such criteria are defined by the Department of Culture, Media andSport and the Parliamentary Joint Committee, which reviewed the draft GamblingBill.  Our sites must be in the selectedlocalities and must further compete for and be awarded a regional casinolicense by the local authorities.  See “(B)Business Overview—Gaming—United Kingdom” below for more information on theseprojects.

 

On July 22, 2004, weannounced that Kerzner and two local Moroccan companies, SOMED and CDG, hadentered into an agreement with the Government of the Kingdom of Morocco thatcontemplates the creation of a joint venture that will own a destination resortcasino in Morocco that we will develop and manage.  In addition, Kerzner, SOMED and CDG enteredinto an Agreement in Principle with respect to the ownership, development andmanagement of this resort.  The cost ofthe project is estimated at $230.0 million. We will initially own 50% of the joint venture, requiring Kerzner tocommit up to approximately $47.0 million. See “(B) Business Overview—Destination Resorts—Morocco” below for moreinformation on this project.

 

**CapitalStructure**

** **

**BahamianDepositary Receipts**

** **

Pursuant to the Heads ofAgreement, we completed an equity offering in July 2004 in The Bahamas ofapproximately 4.3 million Bahamian Depositary Receipts (“BDRs”), which are theequivalent of approximately 0.4 million Ordinary Shares.  The BDRs are listed and trade on The BahamasInternational Securities Exchange.  Netproceeds received from the offering were $19.1 million.

 

**StrategicInvestment by Istithmar PJSC**

** **

On July 16, 2004, weannounced a strategic investment in our Ordinary Shares by Istithmar, ourpartner in the development of Atlantis, The Palm.  This transaction closed on August 10,2004.  As part of this arrangement,Istithmar purchased 4.5 million of our Ordinary Shares for an aggregateprice of $225.0 million.  As of February 28,2005, Istithmar held approximately 12.4% of our Ordinary Shares.

 

Istithmar purchased3.0 million newly issued Ordinary Shares directly from Kerzner, resultingin net proceeds of $153.4 million ($51.25 per share).  We intend to use proceeds from the issuanceto fund capital expenditures and investments and for general corporate purposes.  Of the remaining 1.5 million OrdinaryShares, Istithmar purchased 1.3 million shares from Caledonia and0.2 million shares from CMS at a price of $47.50 per share, the marketprice at the time the purchase agreements were executed.  Therefore, Istithmar paid an average pershare price of $50 for its aggregate acquisition of 4.5 million OrdinaryShares.  Following receipt of thenecessary regulatory approval on December 8, 2004, Mr. Hamed Kazim, arepresentative of Istithmar, took a seat on our Board of Directors.

 

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**AmendedCredit Facility**

** **

On July 7, 2004,Kerzner, KINA and Kerzner International Bahamas Limited (“KIB”), asco-borrowers, entered into the Amended Credit Facility with a syndicate ofbanks (the “Lenders”).  Under the AmendedCredit Facility, the maximum amount of borrowings that may be outstanding is$500.0 million, subject to certain conditions. On February 15, 2005, we amended the Amended Credit Facility tomake certain changes to reflect our current business plans.

 

Loans under the AmendedCredit Facility bear interest at (i) the higher of (a) a base rate or(b) the Federal Funds Rate plus one-half of one percent, in either caseplus an additional 0.125% to 2.00% based on a debt to EBITDA ratio during theperiod, as defined (the “Leverage Ratio”), (ii) the London InterbankOffered Rate (“LIBOR”) rate plus 1.125% to 3.00% based on the Leverage Ratio or(iii) the Federal Funds Rate plus 1.125% to 3.00% based on the LeverageRatio.  For loans based on the AlternateBase Rate (as defined therein), interest is payable monthly.  For loans based on the LIBOR rate, interestis payable on the last day of each applicable interest period.  Loans under the Amended Credit Facilitymay be prepaid and re-borrowed at any time and are due in full inJuly 2009.  Commitment fees arecalculated at per annum rates ranging from 0.25% to 0.60% based on the LeverageRatio, applied to the undrawn amount of the Amended Credit Facility and arepayable quarterly.

 

The Amended CreditFacility contains affirmative and restrictive covenants with which Kerzner mustcomply, which, among other things: (a) require periodic financialreporting, (b) require meeting certain financial amounts and ratio tests,(c) restrict the payment of dividends, (d) limit the incurrence ofindebtedness and (e) limit asset expenditures and dispositions outside theordinary course of business.  As of December 31,2004, we believe that we were in compliance with all such covenants.

 

As of December 31,2004, we had no borrowings outstanding under the Amended Credit Facility.  Our availability as of December 31, 2004was $494.0 million after giving effect to the $6.0 million in outstandingletters of credit.  All amountsoutstanding are unconditionally guaranteed by all significant subsidiaries thatare a party to the Amended Credit Facility.

 

**Issuanceof 2.375% Convertible Senior Subordinated Notes**

** **

In April 2004, Kerznerissued $230.0 million principal amount of 2.375% convertible seniorsubordinated notes due 2024 (the “2.375% Convertible Senior Subordinated Notes”)which, after related issuance costs, resulted in net proceeds of approximately$223.7 million.  In connection withthe issuance of the 2.375% Convertible Senior Subordinated Notes, we filed ashelf registration statement, pursuant to which holders of such notes mayengage in resales.  All of the proceedsreceived from the issuance of the 2.375% Convertible Senior Subordinated Noteswill be used to fund future capital expenditures and for general corporatepurposes.

 

The 2.375% ConvertibleSenior Subordinated Notes may be converted into cash and Ordinary Shares at aninitial conversion rate of 17.1703 shares per $1,000 principal amount inaccordance with the terms of the indenture. This conversion rate is equal to a conversion price of approximately$58.24 per Ordinary Share.  Uponconversion, all of the principal amount of the converted notes must be paid incash.

 

The 2.375% Convertible Senior Subordinated Notes,which are unsecured obligations, are not guaranteed by any of Kerzner’ssubsidiaries and therefore are effectively subordinated to the subsidiaryguarantees of the 87/8% Senior SubordinatedNotes.  Interest on the 2.375%Convertible Senior Subordinated Notes is payable semi-annually and commenced onOctober 15, 2004.  We believe thatwe were in compliance with all covenants contained in the indenture governingthe 2.375% Convertible Senior Subordinated Notes as of December 31,2004.  All of our outstanding 2.375%Convertible Senior Subordinated Notes are subordinated to the borrowings underour Amended Credit Facility.

 

**Issuancesof 8**7/8% Senior SubordinatedNotes

** **

In August 2001,Kerzner along with KINA (together, the “Companies”) issued $200.0 millionprincipal amount of 87/8% Senior Subordinated Noteswhich, after costs, resulted in net proceeds of approximately$194.0 million.  The proceedsreceived from the issuance of the 87/8% Senior Subordinated Noteswere advanced to one of our wholly owned subsidiaries to repay amounts outstandingunder our then-existing amended and restated revolving credit facility.

 

In May 2002, theCompanies issued an additional $200.0 million principal amount of 87/8% Senior SubordinatedNotes, which after costs, resulted in net proceeds of approximately $201.5 million.  The proceeds were used to repay 

 

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the Company’sthen-outstanding 9% senior subordinated notes (the “9% Senior SubordinatedNotes”) pursuant to the Tender Offer, Consent Solicitation and Redemptiondescribed below.

 

The 87/8% Senior SubordinatedNotes, which are unsecured obligations, are unconditionally guaranteed bysubstantially all of the wholly owned subsidiaries of Kerzner and KINA.  Interest on the 87/8% Senior Subordinated Notesis payable semi-annually and commenced on February 15, 2002.  The indenture governing the 87/8% Senior Subordinated Notescontains various restrictive covenants, including limitations on the ability ofthe Companies and the guarantors to, among other things:  (a) incur additional indebtedness,(b) incur certain liens, (c) engage in certain transactions withaffiliates and (d) pay dividends and make certain other payments.  We believe that we were in compliance withall such covenants as of December 31, 2004.  All of our outstanding 87/8% Senior Subordinated Notesare subordinated to the borrowings under our Amended Credit Facility.

 

**DerivativeFinancial Instruments**

** **

In August and December 2001,we entered into fixed-to-variable rate interest rate swap agreements (the “SwapAgreements”) designated as fair value hedges on $200.0 million principalamount of our 87/8% Senior Subordinated Notes.  In each of September 2003 and July 2004,we canceled $25.0 million of our $200.0 million Swap Agreements,resulting in $150.0 million of fair value hedges on our 87/8% Senior Subordinated Notesas of December 31, 2004.  The SwapAgreements have rates of 6-month LIBOR plus 291 to 302 basis points.

 

In December 2004,the One&Only Palmilla entered into an interest rate cap agreement inconnection with its issuance of two promissory notes for an aggregate principalamount of $110.0 million.  The purpose ofthe interest rate cap agreement is to cap the LIBOR component of the intereston the promissory notes at 5%.  Theinterest rate cap agreement is designated as a cash flow hedge and is used tohedge the variable cash flows associated with the promissory notes.

 

**TenderOffer, Consent Solicitation and Redemption of 9% Senior Subordinated Notes**

** **

On May 8, 2002, wecommenced a cash tender offer to purchase any and all of our outstanding 9%Senior Subordinated Notes.  Inconjunction with the tender offer, we solicited consents to proposed amendmentsto the indenture governing the 9% Senior Subordinated Notes.  The tender offer expired on June 5,2002.  At the expiration, a total of$177.5 million of the outstanding $200.0 million aggregate principalamount of the notes were tendered and accepted for purchase in the tenderoffer.  On June 21, 2002, weredeemed, in accordance with the terms of the indenture governing the notes,all of the 9% Senior Subordinated Notes that remained outstanding at the time,at the applicable redemption price of $1,045 per $1,000 of principal amountthereof, plus interest accrued to the redemption date.  We used the net proceeds from the issuance of$200.0 million of our 87/8% Senior Subordinated Noteson May 20, 2002 to retire our outstanding 9% Senior Subordinated Notespursuant to the tender offer and redemption.

 

**ShelfRegistration**

** **

In May 2002, Kerznerand KINA filed a universal shelf registration statement on Form F-3 (the “UniversalShelf”) with the SEC relating to the sale of up to $500.0 million insecurities.  The Universal Shelf allowsus flexibility as to the type of security we could choose to sell in thefuture, including various types of debt securities, Ordinary Shares, preferenceshares and warrants, and replaces the 1997 Shelf Registration.  We may also utilize the Universal Shelfto register secondary sales of Ordinary Shares by selling shareholders.  In connection with a settlement agreementwith Kersaf, a major shareholder of Kerzner, on December 18, 2002, anindirect subsidiary of Kersaf sold 2.3 million Ordinary Shares of Kerzner(the “Kersaf Offering”) in a registered public offering, using securitiesregistered under the Universal Shelf. Securities registered under the Universal Shelf may be offered from timeto time directly by us or through underwriters at amounts, prices, interestrates and other terms to be determined at the time of the offering.

 

In November 2003,pursuant to Rule 12h-3 of the Exchange Act, KINA suspended its obligationto file periodic reports under the Exchange Act.  Accordingly, KINA is no longer able to issueor co-issue any securities registered pursuant to the Universal Shelf.

 

**Redemptionof 8**5/8% SeniorSubordinated Notes

** **

On November 27,2002, we called for the redemption of the entire outstanding principal amountof our 85/8% senior subordinated notes due 2007(the “85/8%Senior Subordinated Notes”) pursuant to the terms of the indenture governingthese notes.  We purchased$25.8 million of the 85/8% Senior Subordinated Notes throughtransactions on 

 

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the openmarket.  On December 27, 2002, weredeemed the remaining $74.2 million aggregate principal amountoutstanding at the redemption price of 104.313%, or $1,043.13 for each$1,000.00 of principal amount outstanding, plus accrued interest.

 

**KersafOffering**

** **

On December 18,2002, Royale Resorts International Limited, an indirect subsidiary of Kersaf, completedthe Kersaf Offering.  We receivedapproximately $32.1 million of the proceeds from the sale of2.3 million Ordinary Shares pursuant to the terms of the settlementagreement entered into by Kerzner, Kersaf and certain of its affiliates andcertain other parties.  See “Item 7.  Major Shareholders and Related PartyTransactions, (B) Related Party Transactions—Global Settlement” for moreinformation.

 

**RecentDevelopments**

** **

*Sentosa Island, Singapore*

* *

On January 20, 2005,we announced that we and CapitaLand, one of the largest listed propertycompanies in Asia, intended to submit a joint concept proposal to the SingaporeGovernment for the development of an integrated entertainment resort complex onSentosa Island in Singapore.  The jointproposal was submitted on February 28, 2005 and was in response to theSingapore Tourism Board’s invitation to interested parties to submit conceptproposals for the first integrated resort with gaming in Singapore.

 

*Wembley*

* *

On February 8, 2005,Wembley and BLB announced that they had entered into a conditional saleagreement providing for the purchase by BLB of a holding company that ownsWembley’s operations in Rhode Island and Colorado, consisting primarily of theLincoln Park facility in Rhode Island. The purchase price is expected to be approximately $455.0 million.  Additionally, in connection with thetransaction, Wembley is expected to repurchase BLB’s existing shareholding inWembley for approximately $116.0 million. In addition, BLB anticipates making certain infrastructure improvementsat Lincoln Park.  BLB has receivedbinding commitments from institutional lenders to provide up to $495.0 millionin financing to cover the cash costs of the acquisition and the infrastructureimprovements.  Substantially all of theoperating profits of Wembley’s U.S. operations are based on video lotteryterminals (“VLTs”) in operation at Lincoln Park.  Among other things, BLB’s purchase offer is conditionedon an increase in the number of authorized VLTs at Lincoln Park toapproximately 4,750, the execution of a long-term revenue-sharing arrangementfor the Lincoln Park facility with the State of Rhode Island (any suchagreement would require the approval of the Rhode Island Senate, the RhodeIsland House of Representatives and the Governor) and a tax parity arrangementwith the State of Rhode Island to ensure that the tax rate imposed on LincolnPark’s gaming operations will not exceed the tax rate imposed on any othergaming operations within the State.  Theconditional sale agreement may be terminated by either party if the transactionhas not been completed by May 30, 2005.

 

**(B)**       Business Overview

** **

We are the developer,owner and operator of Atlantis, Paradise Island, a 2,317-room island destinationresort in The Bahamas, and a leading developer and operator of gamingentertainment properties and luxury resort hotels worldwide.  Atlantis, Paradise Island, our flagshipproperty, is a premier destination resort property that we believe has strongbrand recognition.  We have entered intoa joint venture agreement to develop and manage a second Atlantis resort,Atlantis, The Palm, in the United Arab Emirates.

 

Our gaming business isfocused on owning, developing and/or managing casino properties in attractivemarkets where we can capitalize on our development and operatingexpertise.  We developed and receiveincome from Mohegan Sun in Uncasville, Connecticut, which is owned and operatedby the MTGA.

 

Our luxury resort hotelbusiness consists of a collection of managed and/or owned/partially ownedpremier properties that primarily operate in the five-star, deluxe-end of theresort market in The Bahamas, Mauritius, Dubai, the Maldives and Mexico underthe One&Only brand.  We aredeveloping additional One&Only Resorts properties in Cape Town, SouthAfrica and the Maldives.

 

Each of our segmentsoperates in various geographic areas. For a table of net revenues, contribution to net income and total assetsby segment, see Note 24—Segment Information in the accompanying notes to theconsolidated financial statements.

 

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**TheProperties**

** **

**DestinationResorts**

** **

*Atlantis, Paradise Island*

* *

Our flagship property is Atlantis, Paradise Island, a2,317-room ocean-themed resort and casino located on Paradise Island, TheBahamas.  Since acquiring the property in1994, we have invested approximately $1.0 billion to create a uniquedestination resort that caters to multiple segments of the resort and casinogaming markets.  The property features a100,000 square foot entertainment complex that includes the largest casino inthe Caribbean market, an 88,000 square foot convention facility and 30,000square feet of retail space.  Atlantis,Paradise Island celebrates the wonders of the sea and is inspired by the mythof the lost continent of Atlantis.  Theocean-themed environment of Atlantis, Paradise Island includes:

 

•                  threeinterconnected hotel towers, the Beach, Coral and Royal Towers, built around aseven-acre lagoon;

 

•                  a34-acre marine environment, which features the world’s largest open air marinehabitat, showcasing over 200 species of marine life, waterfalls, lagoons andadventure walks;

 

•                  “TheDig,” an area through which visitors can walk surrounded by sharks, numerousspecies of tropical fish, sea turtles, stingrays and other marine life;

 

•                  severalwaterslides, including the Mayan Temple slide, which propels guests through anacrylic tube in a shark-infested tank;

 

•                  thelargest casino in the Caribbean market;

 

•                  the63-slip, full-service Marina at Atlantis, which enjoys some of the highestdocking rates in the Caribbean market and can accommodate yachts up to 200 feetin length; and

 

•                  Harborsideat Atlantis, a timeshare project located adjacent to Atlantis, Paradise Island,developed through a joint venture with an affiliate of Starwood.

 

We acquired the property in May 1994 for$125.0 million and redeveloped the property into an ocean-themeddestination resort through an initial $140.0 million capital expenditureprogram.  In 1995, the property achievedan average occupancy and average daily room rate of 85% and $122, respectively,a substantial increase from the 62% and $95, respectively, achieved in 1993under previous management.  Seeking tocapitalize on the early success of Atlantis, Paradise Island, we beganconstruction of an approximate $640.0 million expansion of the property in1997.  This major expansion was completedin December 1998 and effectively doubled the size of Atlantis, ParadiseIsland.  The 1998 expansion included a1,200-room hotel, a 100,000 square foot entertainment complex that included acasino containing approximately 900 slot machines and 80 table games, a marinaand an expansion of the ocean-themed environment.  During 1999, we completed several additionaldevelopment projects at Atlantis, Paradise Island, including the addition of30,000 square feet of retail and restaurant space, the conversion of apreviously existing 30,000 square foot casino space into a convention centerand the construction of a sports center, including an 18-hole Tom Fazio-designedputting course and a tennis center.

 

During the second half of 2000, we completed anextensive capital expenditure program of approximately $20.0 million atAtlantis, Paradise Island’s Beach Tower. This program included the renovation of all of the Beach Tower’s 425rooms and improvements to certain public spaces.  During 2001, we completed a major capitalexpenditure program of approximately $20.0 million to complete renovationsat the Ocean Wing of Atlantis, Paradise Island’s Coral Towers.  This included the renovation of approximately400 rooms, including improvements to certain public spaces.

 

To add to our product mix at Atlantis, ParadiseIsland, we developed Harborside at Atlantis, a timeshare project adjacent toAtlantis, Paradise Island, through a joint venture with SVO.  As part of the joint venture agreement, wecontributed land and cash and SVO contributed cash.  Subsequently, both partners have loaned fundsto finance construction costs.  The firstphase of the project was completed in February 2001 and consists of 82two-bedroom units.  We began selling theunits in May 2000 and had sold approximately 98% of the units through December 31,2004. In August 2002, Harborside at Atlantis was closed to repair waterdamage primarily resulting from 2001’s Hurricane Michelle.  During the fourth quarter of 2002, theserepairs were completed and the resort re-opened in December 2002.  During the temporary closure, Harborside atAtlantis’ guests were moved to Atlantis, Paradise Island.  Our share of construction remediation costsfrom Harborside at Atlantis was $6.9 million and $1.8 million in 

 

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2002 and 2003, respectively.  For 2003 and 2004, we recognized a total of$5.7 million of insurance recoveries related to Hurricane Michelle.

 

In order to capitalize on the demand for rooms and toleverage our investment in The Bahamas, in May 2003, we entered into aHeads of Agreement with the Government of the Commonwealth of The Bahamas,which set forth an expansion plan for Atlantis, Paradise Island and theOne&Only Ocean Club.  InMay 2004 and December 2004, we entered into supplements to the Headsof Agreement, pursuant to which we modified certain components involved inPhase III.  Phase III, as modified,consists of the following components:

 

•                  a600-room luxury all-suite hotel;

 

•                  theright to develop an approximately 500-unit condo-hotel;

 

•                  threeluxury villas at the One&Only Ocean Club (the “Ocean Club Villas”);

 

•                  fournew company-operated restaurants and additional food and beverage and retailspace, comprising approximately 65,000 square feet on a four-acre site adjacentto the Marina at Atlantis, the Marina Village at Atlantis (the “Marina Village”);

 

•                  anexpansion of the convention facilities at Atlantis, Paradise Island byapproximately 100,000 square feet;

 

•                  asignificant expansion to the existing water-based attractions of Atlantis,Paradise Island;

 

•                  theconstruction and initial equipping of a fire and ambulance station on landowned by us, to be operated and maintained by the Bahamian Government under along-term lease (the “Fire and Ambulance Station”);

 

•                  theright to develop, upon environmental approval, a new 18-hole golf course onAthol Island, which lies just east of Paradise Island, in partnership with anagency to be nominated by the Bahamian Government (the “Athol Golf Course”);

 

•                  expansionof the existing water production and treatment plant and any other privateinfrastructure upgrades or expansions necessary to accommodate the otherelements of the Phase III expansion (the “Utilities and InfrastructureExpansion”); and

 

•                  anexpansion of Harborside at Atlantis by the addition of 316 timeshare unitsalong the harbor, the next phase of such expansion (the second phase) will add116 two- and three-bedroom timeshare units.

 

Construction of certain elements of the Phase IIIexpansion commenced in August 2003, including the Marina Village, the Fire andAmbulance Station, the next phase of the Harborside at Atlantis timeshareexpansions and the completed Ocean Club Villas. We anticipate the Marina Village will open as early as the third quarterof 2005.  In addition, we expect thesecond phase of Harborside at Atlantis to be complete by the third quarter of2005.  We began sales of the second phasein the third quarter of 2004, and as of December 31, 2004, we had sold 13.0%of the second phase units.  During theyear ended December 31, 2004, we funded $1.5 million to Harborside atAtlantis for the construction of the second phase.  The Phase III expansion also includes a thirdphase of timeshare development, consisting of approximately 200 additional units.  We plan to develop this third phase incollaboration with Starwood and expect to commence its development onceHarborside at Atlantis has sold 75% of the second phase.

 

We anticipate that development of the 600-room luxuryall-suite hotel will commence during the third quarter of 2005.  Pursuant to the Heads of Agreement, we havecommitted to substantially complete the all-suite hotel by December 2006.

 

We expect to commence pre-sales of the approximately 500-unitcondo-hotel in the second quarter of 2005. We expect to commence construction of the condo-hotel in the second halfof 2005 with completion scheduled for 2007, as contemplated by the Heads ofAgreement.  We expect to develop thisproject through a 50-50 joint venture with Turnberry Associates, one of thepremier real estate development and property management companies in the UnitedStates.  The development cost associatedwith this project is expected to be approximately $250.0 million.  We anticipate that this project will primarilybe funded on a non-recourse basis to Kerzner based on pre-sales.

 

It is anticipated that the Phase III expansioninvestment in The Bahamas will exceed $1.0 billion.  Exclusive of the Harborside at Atlantis timeshareprojects, the condo-hotel, the Athol Golf Course and Ocean Club Residences& Marina, our recently announced ultra-luxury condominium project, weexpect our investment to be approximately $650.0 million.  If we do not proceed with the condo-hotel and theAthol Golf Course, casino tax concessions and a 

 

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joint marketing contribution from the Bahamian Governmentwill be reduced beginning in 2009 in accordance with a schedule contained in theHeads of Agreement.

 

A complete description of the Heads of Agreement canbe found in “Item 4.  Information onthe Company, (B) Business Overview—Certain Matters Affecting Our BahamianOperations—Heads of Agreement.”

 

Through certain Bahamian subsidiaries (the “BahamianOperations”), we now own approximately 553 acres (including the ClubMéditerranée property we purchased) on Paradise Island (or almost 67% ofParadise Island), including approximately 134 acres of undeveloped land.  The Phase III expansion will useapproximately 68 acres of currently undeveloped land (excluding the nextphase of Harborside at Atlantis, the Athol Golf Course and Ocean ClubResidences & Marina).

 

We also own and operate the One&Only Ocean Club, ahigh-end luxury resort hotel, as well as the Ocean Club Golf Course.  Through our Bahamian Operations, we alsooperate roads and other land improvements on Paradise Island and a water andsewage system which serves, at stated charges, substantially all facilities onParadise Island, including non-affiliated customers.

 

We recently announced the development of Ocean ClubResidences & Marina, an 88-unit ultra-luxury condominium project at OceanClub Estates.  We expect to form a jointventure with a Bahamian partner for this project.  We expect Ocean Club Residences & Marinato cater to the highest end of the luxury residential market.  We commenced pre-sales in the first quarterof 2005, and anticipate breaking ground on this project in the second quarterof 2005.  We expect that this projectwill be primarily funded based on pre-sales. We expect Ocean Club Residences & Marina to have construction costsof approximately $130.0 million.  Inaddition, we plan to contribute approximately 9 acres to the project.

 

Paradise Island is easily accessible by air from theeastern United States and London and has an extensive infrastructure.  The majority of patrons at our resorts onParadise Island arrive through Nassau International Airport located on NewProvidence Island.  This airport is servicedby several major carriers that offer jet service from most major cities on theeast coast of the United States and other international destinations.  Ground transportation is facilitated by twobridges linking Paradise Island and New Providence Island.

 

*Atlantis, The Palm*

* *

In September 2003, we announced that we hadagreed to form a joint venture with Nakheel LLC, an entity owned by the RoyalFamily of Dubai, to develop Atlantis, The Palm. On June 23, 2004, we announced that we had entered into an agreementwith Istithmar, an entity indirectly wholly owned by the Royal Family of Dubai,that has assumed all obligations and rights of its affiliate, Nakheel LLC,pursuant to which we formed Kerzner Istithmar and increased the scope ofAtlantis, The Palm.  Based on our currentbudget, the development costs of the expanded project are expected to beapproximately $1.1 billion and will include an approximately 1,200-roomfive-star hotel, an approximately 800-room four-star hotel and an extensivewater theme park situated on 1.25 miles of beachfront property.  Atlantis, The Palm will be located on ThePalm, Jumeirah, a $1.5 billion land reclamation project in Dubai, UnitedArab Emirates.  We and Istithmar haveeach agreed to invest $100.0 million in the form of Class A common stockin Kerzner Istithmar, and Istithmar has agreed to underwrite$200.0 million of Kerzner Istithmar’s limited voting Class B commonstock.  Each of Istithmar and Kerznerwill provide, on a joint and several basis, additional sponsor support of up to$55.0 million with respect to cost overruns and post-completion debtservice obligations.  In addition to thejoint and several sponsor support, Istithmar has agreed to provide a$100.0 million guarantee to cover any post-completion debt service obligationsover $55.0 million.  Further, Istithmarhas agreed to provide an additional guarantee for cost overruns over$55.0 million.  The balance of thefinancing is expected to be obtained through a $700.0 million syndicatedterm loan facility that is limited recourse to Kerzner.  The closing of the term loan facility isexpected to occur in the second quarter of 2005.

 

We commenced construction on Atlantis, The Palm in thefirst quarter of 2005 and anticipate that the project will be completed in 2008. As part of this transaction, we haveentered into a long-term management agreement with the joint venture thatentitles us to receive a base management fee based on the gross revenues generatedby Atlantis, The Palm, and an incentive management fee based on operatingincome.  We have also entered into adevelopment agreement with the joint venture that entitles us to receive $20.0million and reimbursement of certain expenses over the development period.  This project is subject to various closingconditions, including obtaining financing and all requisite governmentalconsents.  In August 2004, Istithmarpurchased 4.5 million of our Ordinary Shares for an aggregate purchase price of$225.0 million.  See “Item 4.  Information on the Company, (A) History andDevelopment of the Company—Reorganization of Capital Structure” for moreinformation.

 

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*Morocco*

* *

On July 22, 2004, we announced that Kerzner andtwo local Moroccan companies, SOMED and CDG, had entered into an agreement withthe Government of the Kingdom of Morocco (for this section, the “Government”) thatcontemplates the creation of a joint venture that will own a destination resortcasino in Morocco that we will develop and manage.  In addition, Kerzner, SOMED and CDG enteredinto an Agreement in Principle with respect to the ownership, development andmanagement of this resort.  The agreementwith the Government and the Agreement in Principle are both subject toobtaining third-party financing and the satisfactory negotiation of definitivedocuments with our prospective Moroccan partners.

 

The greenfield site is located near El Jadida, whichlies approximately 50 miles southwest of Casablanca.  This site includes three miles of beachfrontalong Morocco’s Atlantic coast. Approximately an hour’s drive from Casablanca, Morocco’s largest citywith a population of approximately 3.5 million, the site provides for easyaccess to-and-from Casablanca International Airport, which currently receivesdaily flights from 22 European cities. Access to the area is supported by a rail network as well.

 

The cost of the project is estimated at $230.0 millionand is expected to consist of a 600-room hotel, an 18-hole golf course,convention space, restaurants and a casino.  As part of its agreement with the Government,the joint venture has negotiated exclusive rights to conduct gaming operationswithin a territory that includes the cities of Casablanca and Rabat, an areawith a combined population of nearly four million.  This agreement provides for a 15-year periodof exclusivity, which commences once construction of the project is complete.

 

We will initially own 50% of the joint venture,requiring Kerzner to commit up to approximately $47.0 million.  SOMED and CDG will provide the majority ofthe remaining equity requirement.  Whilewe will have the ability to reduce our initial equity interest in the projectafter the commencement of operations, we have undertaken to hold at least a 34%equity interest in the project.  Thebalance of the required financing is expected to be raised by a consortium ofMoroccan banks.  We expect to commenceconstruction of the project in the fourth quarter of 2005 and to complete theproject during the fourth quarter of 2007.

 

SOMED is an investor with interests in variousindustries, including the hospitality industry. SOMED is 50% owned by Abu Dhabi Development Fund and 30% owned by theGovernment, with the remaining interests being institutionally owned.  CDG is the governmental entity that investsMorocco’s pension funds and is one of the country’s leading institutionalinvestors.

 

We expect the joint venture agreement to be executedin the second quarter of 2005.  We also expectto enter into long-term management and development agreements with the jointventure and obtain non-recourse financing to Kerzner for the project in thesecond quarter of 2005.  The developmentof this project is subject to obtaining financing as well as certain otherconditions, including the receipt of all applicable regulatory, municipal,regional and other approvals.

 

**Gaming**

** **

*Mohegan Sun*

* *

Our gaming business is focused on owning, developingor managing casino properties in attractive markets where we believe we cancapitalize on our development and operating expertise.  We own a 50% interest in, and are a managingpartner of, TCA, a Connecticut general partnership that developed and initiallymanaged Mohegan Sun, a casino and entertainment complex in Uncasville,Connecticut.  TCA managed Mohegan Sunfrom its opening in October 1996 to December 31, 1999 pursuant to aManagement Agreement from which TCA earned management fees based on apercentage of Mohegan Sun’s earnings after depreciation and interest.

 

In 1998, the MTGA appointed TCA to develop the$1.0 billion “Project Sunburst” expansion of Mohegan Sun pursuant to adevelopment services agreement (the “TCA Development Agreement”) for adevelopment fee of $14.0 million. In turn, TCA subcontracted with an affiliate of the Company pursuant toa subcontract development services agreement, which was later assigned to theCompany.  In consideration for theservices provided under the subcontract, TCA paid a fee to the Company.  The expansion project was completed in June2002.

 

In addition, TCA and the Mohegan Tribe entered intothe Relinquishment Agreement whereby it was agreed that effectiveJanuary 1, 2000, TCA would turn over management of Mohegan Sun to theMohegan Tribe.  Pursuant to theRelinquishment Agreement, the Management Agreement was terminated and TCA receivespayments of 5% of the gross revenues of Mohegan Sun for the 15-year period thatcommenced January 1, 2000.  Therelinquishment 

 

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fees pursuant to the Relinquishment Agreement (“RelinquishmentFees”) are divided into senior and junior relinquishment payments, which equal5.0% of revenues.  Revenues are generallydefined as gross gaming revenues (other than Class II gaming revenue, i.e.bingo) and all other facility revenues, including hotel revenues, food andbeverage sales, parking, ticket revenues and other fees or receipts from theconvention/events center generated by Mohegan Sun.  Revenues will exclude any revenues generatedby any other future expansion of Mohegan Sun. TCA’s right to receive the Relinquishment Fees is junior to certainpayments by the MTGA to the Mohegan Tribe and holders of its indebtedness.  The senior and junior Relinquishment Feesfrom the MTGA to TCA rank behind all of the MTGA’s obligations to pay certainminimum priority distributions to the Mohegan Tribe and all of the MTGA’sexisting and future senior secured indebtedness.  The junior fees also rank behind allunsecured indebtedness.

 

For seven years beginning January 1, 2000, TCApays us the first $5.0 million of the Relinquishment Fees it receives eachyear (after the return of certain expenses and capital contributions) pursuantto the Relinquishment Agreement as a priority payment prior to making pro ratadistributions to its partners.

 

We are one of two managing partners of TCA.  All decisions of the managing partnersrequire the concurrence of us and the other managing partner, Waterford Gaming,L.L.C.  In the event of a deadlock, thereare mutual buy-out provisions.  TCA’spartnership agreement will terminate on December 31, 2040, or earlier incertain circumstances, in accordance with its terms.

 

Mohegan Sun incorporates its historical NativeAmerican theme through unique architectural features and the use of naturaldesign elements such as timber, stone and water.  Mohegan Sun is located on 240 acres andcurrently features the 179,500 square foot Casino of the Earth and the 119,000square foot Casino of the Sky, which combined have approximately 6,250 slotmachines, 290 table games and various other amenities, and a 34-story,1,200-room luxury hotel.

 

Mohegan Sun is located approximately one mile from theinterchange of Interstate 395 and Connecticut Route 2A in Uncasville,Connecticut and is within 150 miles of approximately 22 millionadults.  Mohegan Sun spent $40.0 millionfor infrastructure improvements providing direct highway access to the propertyfrom Boston, Providence and New York.

 

We oversaw the $1.0 billion “Project Sunburst”expansion of Mohegan Sun through TCA, which was completed inJune 2002.  This expansion includedthe Casino of the Sky, a 10,000-seat arena, a 350-seat cabaret and specialtyretail areas and restaurants that opened in September 2001.  The expansion also included a 100,000 squarefoot convention center and a 34-story, 1,200-room luxury hotel that opened with734 rooms in April 2002.  MoheganSun opened the remaining rooms in phases through June 2002 and also addedan additional 2,700 parking spaces in June 2002.

 

We believe the northeast gaming market has been strongand that Mohegan Sun’s unique design and superior location have helped it tobecome a popular and profitable casino.  Sinceopening, gross revenues at the property have grown to $1.4 billion for thetwelve months ended September 30, 2004, a 6.8% increase over the twelve monthperiod ended September 30, 2003.

 

*Trading Cove New York*

* *

Through a wholly owned subsidiary, we own a 50%interest in, and are a managing member of, Trading Cove New York, LLC (“TCNY”).  In March 2001, TCNY entered into adevelopment services agreement (the “TCNY Development Agreement”) with theStockbridge-Munsee Band of Mohican Indians (the “Stockbridge-Munsee Tribe”) forthe development of a casino project (the “Catskills Project”) in the Catskillsregion of the State of New York (for purposes of this section, the “State”).  The TCNY Development Agreement was amendedand restated in February 2002 and subsequently amended in October and December 2004.

 

Pursuant to the TCNY Development Agreement, asamended, TCNY would provide preliminary funding, certain financing andexclusive development services to the Stockbridge-Munsee Tribe in conjunctionwith the Catskills Project.  If the CatskillsProject is approved and ultimately developed, TCNY will earn a development feein an amount equal to 5% of gross revenues as compensation for these services(subject to certain priorities), as defined in the TCNY Development Agreement,beginning with the opening of the Catskills Project and continuing for a periodof 20 years.  TCNY has secured landand/or options on approximately 400 acres of property in the Town of Thompson,County of Sullivan (the “County”), of which approximately 333 acres arecurrently designated for the Catskills Project.

 

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The Stockbridge-Munsee Tribe does not currently havereservation land in the State, but is federally recognized and operates acasino on its reservation in Wisconsin. In February 2002, the Tribe filed a Land to Trust Application with the U.S.Department of Interior, Bureau of Indian Affairs (the “BIA”), for the CatskillsProject site properties.  Should the BIAapprove the Land to Trust Application and the Stockbridge-Munsee Tribe obtainother required approvals, the land could be taken into trust by the FederalGovernment on behalf of the Stockbridge-Munsee Tribe for the purpose ofconducting Class III Gaming.  The Land toTrust Application and accompanying Environmental Impact Statement (“EIS”) arepending.

 

In October 2001, the State enacted legislation(Chapter 383 of the Laws of 2001) (the “State Gaming Law”) authorizing up to threeClass III Native American casinos in the counties of Sullivan and Ulster and threeNative American casinos in western New York pursuant to Tribal State GamingCompacts to be entered into by the State and applicable Native American tribesas well as video lottery terminals at State racetracks.  In January 2002, a lawsuit was filed in theSupreme Court of the State of New York (the “Supreme Court”) (Index No. 719-02)by various plaintiffs against New York Governor George Pataki, the State of NewYork and various other defendants alleging that the State Gaming Law violatedthe New York State Constitution.  Motionsto dismiss the litigation were filed in April 2002.  In July 2003, the Supreme Court issued aruling upholding the validity of the State Gaming Law, which decision as it pertainsto the legality of conducting slot machine gaming at State approved NativeAmerican casinos was subsequently upheld by the Appellate Division of the NewYork Supreme Court.  The decision wasappealed to the New York Court of Appeals. Arguments were heard on March 21, 2005 and the appeal is pending.

 

In January 2002, the Stockbridge-Munsee Tribe enteredinto an agreement with the County pursuant to which the Stockbridge-MunseeTribe will make certain payments to the County to mitigate any potentialimpacts the Catskills Project may have on the County and other localgovernment subdivisions within the County. The payments will not commence until after the opening of the CatskillsProject.  In addition, theStockbridge-Munsee Tribe has entered into sewer and water agreements with localagencies to service the Catskills Project site.

 

The Stockbridge-Munsee Tribe has land claim litigationpending in the U.S. District Court for the Northern District of New York (the “Court”)against the State, the counties of Madison and Oneida and severalmunicipalities to recover lands within the state that it alleges werewrongfully taken from the tribe.  In December 2004,the Stockbridge-Munsee Tribe and the State entered into the “Agreement ofSettlement and Compromise to Resolve the Stockbridge-Munsee Land Claims in theState of New York” (the “NY Settlement Agreement”).  The NY Settlement Agreement provides, *inter alia*, that in consideration for settling its landclaim litigation, the Stockbridge-Munsee Tribe will receive, among otherthings, a transfer of the Catskills Project site into trust and a gamingcompact (the “Compact”) with the State authorizing the Stockbridge-Munsee Tribeto engage in Class III gaming on the Catskills Project site for a period of 14years (and renewable for an additional seven years under certainconditions).  Under the Compact, theStockbridge-Munsee Tribe will, in exchange for certain exclusivity rights relatedto the operation of slot machines in a geographically determined areaencompassing a number of southern counties within the State, pay the State 20%of the net drop from the slot machines during the first four years of operationand 25% thereafter.

 

The NY Settlement Agreement is subject to numerousconditions, including the enactment of State legislation approving thesettlement and increasing the number of Native American casinos authorized forSullivan and Ulster counties under the State gaming law from three to five,enactment of Federal legislation approving the settlement and directing thatthe Catskills Project site be taken into trust and execution of theCompact.  In February 2005, Statelegislation was introduced to approve the NY Settlement Agreement.  We can make no representation as to whetherany of the required approvals will be obtained by the Stockbridge-Munsee Tribeor whether the Catskills Project will be completed.

 

We are one of two managing members of TCNY.  All decisions of the managing members requirethe concurrence of us and Waterford Development New York, LLC, the othermanaging member.  In the event ofdeadlock, there are mutual buy-out provisions.

 

The Company’s investment in TCNY is reflected withininvestments in associated companies in the accompanying consolidated balancesheets.  As of December 31, 2004, wehad invested $6.0 million in TCNY.  Ifthe project proceeds, we will be required to provide developer assistance of upto $15.0 million, of which $7.0 million is reimbursable, and up to$100.0 million in subordinated debt or completion guarantees.

 

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*United Kingdom*

* *

*Development of ResortCasinos in London, East Manchester and Glasgow*

* *

On July 13, 2004, we announced our appointment asthe preferred developer and operator with respect to the development andmanagement of gaming, hotel and entertainment facilities for two sites in twokey markets in the United Kingdom.  Thesites for the projects are the Scottish Exhibition + Conference Centre (“SECC”)in Glasgow and Sportcity in East Manchester. We are negotiating binding agreements for both of these projects.  These developments are part of major regionalregeneration projects supported by the respective council for each city.  Each of these projects was the subject of acompetitive bidding process.

 

In addition, on July 13, 2004, we also announcedthat we had entered into a binding agreement with affiliates of AnschutzEntertainment Group for the development and operation of a casino and hotelresort facility at the Millennium Dome in London (the “Dome”).

 

Our development and management of our sites in theUnited Kingdom is subject to a number of contingencies.  First, the United Kingdom needs to passgambling reform legislation.  Second, aspecial government committee that is expected to be established upon thepassage of such legislation then must select eight localities that will beentitled to have a “Resort” or “Regional Casino,” as such criteria are definedby the Department of Culture, Media and Sport and the Parliamentary JointCommittee, which reviewed the draft Gambling Bill.  Our sites must be in the selected localitiesand must further compete for and be awarded a regional casino license by thelocal authorities.

 

The three developments are subject to certainconditions, including the receipt of applicable regulatory, municipal, regionaland other approvals, and a maximum effective tax on gaming revenue of not morethan 25%.  If these projects do notproceed, we will be required to write-off certain costs that have been incurred(as of December 31, 2004, we had approximately $10.4 million on ourbalance sheet with respect to these projects). As noted above, the SECC and Sportcity developments are also subject tothe negotiation and execution of binding agreements.  If all of the necessary conditions withrespect to any of these projects are satisfied, we expect the project to becompleted within two years from the date of issuance of a license.  In connection with each project, we will beresponsible for the financing, development and operation of a casino and hotel.

 

*Scottish Exhibition +Conference Centre, Glasgow*

* *

In October 2003, SEC Limited announced a master planoutlining the future of the SECC in the form of a major development.  This project, named “QD2” because it marksthe second redevelopment of Queen’s Dock in Glasgow (the first being theconstruction of the SECC in 1985), plans to transform the SECC’s 64-acre siteinto a complete exhibition, conference and entertainment complex.  The SECC is currently the largest integratedconference and exhibition center in the United Kingdom.

 

The QD2 project is planned to involve over$1.0 billion of new investment.  SECLimited has appointed us as preferred developer and operator to build, operate andown the destination resort casino as part of the overall redevelopment of Queen’sDock.  The proposed resort casino andhotel complex is expected to cost approximately $300.0 million.

 

*Sportcity, EastManchester*

* *

A consortium led by us and Manchester-based AskDevelopments (and including several other partners) has been selected by theManchester City Council to develop an approximately $500.0 million projectincorporating casino, hotel, family entertainment, sports and residentialcomponents at Sportcity, East Manchester. Already the home of the Manchester City Football Club and other sportsfacilities built for the last Commonwealth Games, Sportcity would gainsignificant additions, including a casino, hotel, 4,000-seat multi-purposearena and ice rink, together with other indoor sporting facilities, as well asa residential development.  We estimatethe casino and hotel to be an approximately $350.0 million project.

 

*Millennium Dome, London*

* *

In June 2004, the Office of the Deputy Prime Ministerannounced the successful completion of all commercial contracts and planningnegotiations among the national regeneration agency, English Partnerships,Peninsula Meridian Delta Ltd., Anschutz Entertainment Group and the Greenwich Council.  These arrangements are expected to lead tothe regeneration of the Greenwich Peninsula, which will include extensive newcommercial facilities as well as homes, schools, nursery and health provision,transportation infrastructure and the development of a world-classentertainment and sports arena within the Dome.

 

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Anschutz Entertainment Group expects to develop a20,000-seat entertainment and sports arena within the Dome, known as the “DomeArena.” The Dome Arena will also operate as a fully flexible exhibitionspace.  In addition to the Dome Arena,the Dome project will include entertainment, leisure and retailfacilities.  We previously announced inSeptember 2003 an agreement to participate in a development of thistype.  On July 13, 2004, weidentified the project as the Dome. Pursuant to our agreement with Anschutz Entertainment Group, we plan todevelop and operate an approximately $350.0 million resort casino andhotel.

 

*Wembley*

* *

On March 10, 2004, we announced that we hadentered into a joint venture, BLB, with an affiliate of Starwood Capital and anaffiliate of Waterford for the purpose of acquiring an interest in Wembley,which owns gaming and track operations in the United States and race tracks inthe United Kingdom.  Wembley’s U.S.operations include its flagship property, Lincoln Park in Rhode Island, whereit owns a greyhound racetrack with approximately 2,500 VLTs.  Wembley has recently announced that itexpects to increase the number of VLTs up to its statutorily permitted numberof 3,002.  BLB is owned 37.5% by each ofus and Starwood Capital, with Waterford owning the balance of 25%.  As of December 31, 2004, we had invested$47.4 million in BLB.

 

On April 20, 2004, after a series of offers andcounteroffers by MGM Mirage and BLB, BLB submitted a cash tender offer toacquire all of the outstanding shares of Wembley at 860 pence per share.  This tender offer received the recommendationof the Wembley board of directors.  OnJuly 5, 2004, BLB announced that its offer to acquire all of Wembley’soutstanding shares had lapsed due to failure of the condition that it receivevalid acceptances from at least 90% of Wembley’s outstanding shares.  BLB retains a 22.2% stake in Wembley.

 

On February 8, 2005, Wembley and BLB announced thatthey had entered into a conditional sale agreement providing for the purchaseby BLB of a holding company that owns Wembley’s operations in Rhode Island andColorado, consisting primarily of the Lincoln Park facility in RhodeIsland.  The purchase price is expectedto be approximately $455.0 million. Additionally, in connection with the transaction, Wembley is expected torepurchase BLB’s existing shareholding in Wembley for approximately$116.0 million.  In addition, BLBanticipates making certain infrastructure improvements at Lincoln Park.  BLB has received binding commitments frominstitutional lenders to provide up to $495.0 million in financing tocover the cash costs of the acquisition and the infrastructureimprovements.  Substantially all of theoperating profits of Wembley’s U.S. operations are based on VLTs in operationat Lincoln Park.  Among other things, BLB’spurchase offer is conditioned on an increase in the number of authorized VLTsat Lincoln Park to approximately 4,750, the execution of a long-termrevenue-sharing arrangement for the Lincoln Park facility with the State ofRhode Island (any such agreement would require the approval of the Rhode IslandSenate, the Rhode Island House of Representatives and the Governor) and a taxparity arrangement with the State of Rhode Island to ensure that the tax rateimposed on Lincoln Park’s gaming operations will not exceed the tax rateimposed on any other gaming operations within the State.  The conditional sale agreement may beterminated by either party if the transaction has not been completed by May 30,2005.

 

*U.K. Gaming License*

* *

In April 2003, we agreed to acquire from LCI for$2.1 million a property located in the city of Northampton, England.  The city of Northampton is approximately 70miles north of London and approximately 1.3 million people live within 25miles of the city.  On March 30, 2004, weannounced that the Gaming Board of Great Britain had granted us a Certificateof Consent, which has enabled us to transfer a gaming license held by LCI intoour name and proceed with our plans for a casino in Northampton.  In February 2005, the Northampton project wasapproved by the local planning authorities. We expect to develop and operate the new casino facility on anapproximate 30,000 square foot site, which is expected to cost approximately£10.0 million (approximately $18.7 million in U.S. dollars as ofMarch 25, 2005).  We have commencedconstruction on this project and expect the casino facility to open in 2006.

 

**One&OnlyResorts**

** **

Our One&Only Resorts business consists of a collectionof managed and/or owned/partially owned premier luxury resort properties thatprimarily operate in the five-star, deluxe-end of the market.  In December 2002, we introduced ourOne&Only brand for certain of our luxury resort properties.  We are now marketing six of our propertiesunder our One&Only brand.  We expectthat our new managed property under development on North Male Atoll in theMaldives, the One&Only Reethi Rah, a 130-room luxury resort, will open inthe second quarter of 2005.  In addition,we have agreed to acquire a minority interest in a joint venture that expectsto develop and manage a new One&Only property in Cape Town, SouthAfrica.  We do not currently plan onusing the brand for 

 

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Sugar Beach Resort, La Pirogue Hotel or Le Coco BeachHotel.  We value outstanding design,unusual locations and genuine hospitality at our resorts and do not believe inapplying simple “formulas.” We believe that all of our One&Only properties,most of which have been constructed or renovated within the last five years,offer guests a singularly distinctive experience.

 

Located on what we believe to be some of the leadingbeach locations in the world, these resorts are architecturally unique and havebeen developed to blend into their natural environment.  Our One&Only Resort business currentlyconsists of five properties in Mauritius (two of which, Le Saint Géran and LeTouessrok, are One&Only Resort properties), the One&Only Royal Miragein Dubai, the One&Only Kanuhura in the Maldives, the One&Only OceanClub on Paradise Island, The Bahamas and the One&Only Palmilla near CaboSan Lucas, Mexico.  We expect to leverageour existing management expertise and business infrastructure and continue toimprove the results of the One&Only Palmilla and to open the One&OnlyReethi Rah, while sustaining the levels of earnings at the other properties.

 

As of December 31, 2004, we were managingapproximately 2,000 rooms.  As part ofour strategy, we often take ownership positions in the properties that weoperate.  As of December 31, 2004,the properties we operated were as follows:

 
| **Property**                         | ** ** | **Location** | ** ** | **Percentage   Ownership** | ** ** | **Number of   Rooms, Suites   and Villas** | ** ** |
|--------------------------------------|------------|--------------|------------|----------------------------|------------|--------------------------------------------|------------|
| One&Only  Ocean Club             |       | The Bahamas  |       | 100.0                      | %          |                                       | 108        |   |
| One&Only  Palmilla(1)            |       | Mexico       |       | 50.0                       | %          |                                       | 172        |   |
| One&Only Le  Saint Géran(2) |       | Mauritius    |       | 20.4                       | %          |                                       | 163        |   |
| One&Only Le  Touessrok(2)        |       | Mauritius    |       | 20.4                       | %          |                                       | 200        |   |
| One&Only  Kanuhura               |       | Maldives     |       | 20.0                       | %          |                                       | 100        |   |
| One&Only  Royal Mirage           |       | Dubai        |       | —                     |       |                                       | 466        |   |
| Sugar Beach  Resort(2)               |       | Mauritius    |       | 20.4                       | %          |                                       | 238        |   |
| La Pirogue Hotel  (2)                |       | Mauritius    |       | 20.4                       | %          |                                       | 248        |   |
| Le Coco Beach  Hotel(2)              |       | Mauritius    |       | 20.4                       | %          |                                       | 333        |   |

 

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(1)          As of January 1, 2004,pursuant to our adoption of FIN 46R, issued by the Financial AccountingStandards Board, we determined that Palmilla JV, LLC, a previouslyunconsolidated 50% owned equity method investment, must be consolidated as theoperating agreement contains a provision which gives Kerzner’s 50% jointventure partner the right to cause us to acquire its 50% interest.  This resulted in an increase in revenues andexpenses in 2004, however, it had no impact on consolidated net income orearnings per share.

 

(2)          Interest owned throughSun Resorts Limited.

 

The following properties are currently underdevelopment and will be marketed under the One&Only brand:

 
| **Property** | ** ** | **Location** | ** ** | **Percentage   Ownership** | ** ** | **Number of   Rooms** | ** ** |
|--------------|------------|--------------|------------|----------------------------|------------|-----------------------|------------|
| Cape Town    |       | South Africa |       | (1)                        |       |                  | 163        |   |
| Reethi Rah   |       | Maldives     |       | —                     |       |                  | 130        |   |

 

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(1)          Minority ownershipinterest to be determined.

 

*The Bahamas*

* *

We own and operate the One&Only Ocean Club, ahigh-end luxury resort hotel with 108 rooms, suites and villas located onParadise Island, The Bahamas.  InOctober 2000, we completed an addition to the One&Only Ocean Club thatcomprised 50 rooms, including 10 deluxe suites, a gourmet beachfrontrestaurant, Dune, operated by Jean-Georges Vongerichten and significantenhancements to the existing pool and garden areas.  The One&Only Ocean Club also features theOcean Club Golf Course, a 7,159-yard championship golf course designed byTom Weiskopf and a clubhouse with 121 luxury oceanfront home sitessituated around the golf course.  The OceanClub Golf Course is included in the destination resorts segment withinAtlantis, Paradise Island.  TheOne&Only Ocean Club was named to *Condé Nast Traveler’s*2005Gold List and it received *Condé Nast Traveler*magazine’s 2004 Readers’ Choice Award for the best Atlantic Resort.  During May 2003, the One&Only OceanClub was also named best luxury resort in the Atlantic/Caribbean region by *Departures*, the luxury lifestyle magazinepublished 

 

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exclusively for American Express Platinum andCenturion card members.  The propertyachieved an average occupancy of 79% and an average daily room rate of $762during 2004, compared to 79% and $722 in 2003.

 

As part of the Phase III expansion discussed above, wedeveloped three high-end luxury rental villas adjacent to the One&OnlyOcean Club, as well as a high-end boardroom meeting facility and a children’spool.  These facilities were completed in2004.

 

As of December 31, 2004, we had closed on 112 ofthe 121 home sites available at Ocean Club Estates, a residential developmentadjacent to the Ocean Club Golf Course, and received approximately$118.4 million in gross proceeds from such sales.  Of the nine remaining properties, three arebeing used by the Company and we have received deposits for three of the six additionalremaining properties.

 

*Mexico*

* *

In September 2002, we purchased a 50% ownershipinterest in the One&Only Palmilla, a deluxe five-star property located nearCabo San Lucas in Baja, Mexico for approximately $40.8 million, includingtransaction costs.  The One&OnlyPalmilla is located on what we believe is an outstanding site with the mostextensive beach coverage of any of the leading hotels in Cabo San Lucas.  The One&Only Palmilla also features a27-hole Jack Nicklaus-designed championship golf course.  In connection with the purchase, we enteredinto long-term management and development agreements related to the propertythat will expire in 2022.  Theacquisition was funded through a combination of cash on hand and drawings underour then-existing amended and restated revolving credit facility.  The One&Only Palmilla re-opened inJanuary 2004 following a refurbishment that expanded the room count to 172rooms and significantly upgraded the amenities and public areas offered by theresort.  The expansion was financed bythe One&Only Palmilla through local project financing that was supported bya $46.5 million guarantee from Kerzner, and by approximately $14.5 millionin completion loans from Kerzner.  Thetotal cost of the One&Only Palmilla renovation was approximately$102.0 million.  On December 17,2004, the One&Only Palmilla entered into two promissory notes pursuant towhich it borrowed $110.0 million.  Theproceeds were used to, among other things, repay all of the One&OnlyPalmilla’s existing loans, including the completion loans provided by Kerzner,and fund the One&Only Palmilla’s working capital requirements.  In connection with the repayment of theOne&Only Palmilla’s existing loans, Kerzner’s $46.5 million guaranteewas extinguished.  The indenturegoverning the promissory notes provides recourse to Kerzner in the eventcertain representations and warranties are violated.  The One&Only Palmilla was named to *Condé Nast Traveler’s* 2005 Gold List.  The One&Only Palmilla was rated as one ofthe “Top 25 International Golf Resorts” in 2002 by *Condé NastTraveler* magazine and it received *Condé NastTraveler*magazine’s 2004 Readers’ Choice Award for the best LatinAmerican Resort.

 

*Indian Ocean*

* *

In Mauritius, we manage and own interests in five beachresorts:

 

•                  the163-room One&Only Le Saint Géran (renovated in 2000);

 

•                  the200-room One&Only Le Touessrok (renovated in 2002);

 

•                  the238-room Sugar Beach Resort;

 

•                  the248-room La Pirogue Hotel (renovated in 2003); and

 

•                  the333-room Le Coco Beach Hotel.

 

The Mauritius properties cater primarily to luxury andmiddle-market tourists from Europe and southern Africa. The One&Only LeSaint Géran and the One&Only Le Touessrok offer deluxe five-staraccommodations and we believe that such properties are among the finest beachresorts in the world.  The One&OnlyLe Saint Géran and the One&Only Le Touessrok have been rated among theworld’s finest leisure hotels by *Condé NastTraveler* magazine. The One&Only Le Saint Géran, which isclassical in style, also was voted “Hotel of the Year 2002” by *Tatler* magazine in the UnitedKingdom.  In December 2002, wecompleted a major redevelopment of the One&Only Le Touessrok.  The resort includes new restaurants, a newspa, a new championship golf course (which opened in November 2003) andother amenities to enhance its position in the luxury resort market.

 

Mauritius’ tourist industry is mainly comprised ofvisitors from Great Britain, Germany, France, Italy and South Africa.  Scheduled air service to-and-from Mauritius isprovided through scheduled flights on numerous airlines, including Air France,British Airways, Cathay Pacific, Singapore Airlines, Air India, Air Mauritius,Condor and South African Airlines.

 

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In the Maldives, located 600 miles southwest of thesouthern tip of India, we manage and own an interest in the One&OnlyKanuhura, a 100-room luxury resort located on Lhaviyani Atoll.  In August 2001, we acquired 25% of theequity of the One&Only Kanuhura for approximately $3.8 million.  Effective January 1, 2003, we sold 20%of this equity interest to SRL.  As of December 31,2004, we had provided debt financing to the One&Only Kanuhura of$2.4 million, excluding accrued interest and we also have a contingent guaranteeobligation to provide up to approximately $10.7 million.  See “Item 5. Operating and Financial Reviewand Prospects, (F) Off-Balance Sheet Arrangements” for more information.  The One&Only Kanuhura was selected as “Hideawayof the Year 2001” by readers of *Hideaway*magazine.  See Note 16—Related PartyTransactions to the consolidated financial statements.

 

We have also entered into management and developmentagreements for the One&Only Reethi Rah, a 130-room luxury resort on NorthMale Atoll in the Maldives that we expect to open in the second quarter of2005.  The management and developmentagreements related to this property are co-terminus with the owner’s lease,which expires in 2020.  This newfive-star resort will occupy the site where a small resort was previouslylocated.  As part of this development, wehave committed to provide certain financing arrangements to the current ownerof the resort.  See “Item 5.Operating and Financial Review and Prospects, (F) Off-Balance SheetArrangements” for more information on the financing arrangements.

 

We manage these resorts under long-term management agreementsand receive management fees based upon a percentage of the revenues and grossoperating profits of these properties. In December 2002, we entered into an agreement with SRL to formOne&Only Management for the purpose of, among other things, managing thefive properties owned by SRL in Mauritius and the One&Only Kanuhura in theMaldives, and, as consideration, securing an extension to our management agreementsin Mauritius from 2008 until 2023.  Inconnection with this transaction, we subcontracted to One&Only Managementall of our Mauritius management agreements and assigned to it the One&Only Kanuhuramanagement agreement, and SRL purchased 20% of our debt and equity interests inthe One&Only Kanuhura.  EffectiveJanuary 1, 2005, our ownership interest in the One&Only Kanuhurafurther decreased to 18.75% and SRL’s interest increased to 6.25%, as SRLpurchased an additional 1.25% interest from us. Pursuant to an additional subcontract arrangement with One&OnlyManagement, we provide comprehensive management services to the five Mauritiusresorts and the One&Only Kanuhura and receive a management fee.  Pursuant to an agreement among us, SRL andOne&Only Management, SRL’s ownership interest in One&Only Managementwill increase incrementally, subject to certain conditions, from 2005 through2009, for no additional consideration, at which time it will own 50% ofOne&Only Management.  EffectiveJanuary 1, 2005, SRL’s ownership interest increased from 20% to 25%, andour ownership interest correspondingly decreased from 80% to 75%.  Subject to certain conditions, SRL has aright of first refusal to participate equally with us in any new hotelsdeveloped by us in specified Indian Ocean territories.  If SRL elects to participate in the equity orother funding of any such project, then the management agreement for thatproperty will be held by One&Only Management.  SRL’s board of directors has approved theexercise of its right to participate on a proportionate basis (effectiveJanuary 1, 2005 the participation of SRL increased to 25%) with us inconnection with the One&Only Reethi Rah. We expect to transfer the management agreement for the One&OnlyReethi Rah to One&Only Management and expect SRL to be obligated to provide25% of the total subordinated debt financing, with its commitment increasing to50% of such financing as SRL’s ownership interest in One&Only Managementincreases to 50%.  It is likely we will providebridge financing to SRL to enable it to meet its financing commitment.

 

*Middle East*

* *

In the Middle East, we manage the One&Only RoyalMirage in Dubai, a luxury 466-room hotel, the first phase of which opened inAugust 1999.  Under the terms of themanagement agreement, which expires in 2019, we receive management fees basedon a percentage of the revenues and gross operating profits of theproperty.  We assisted in the expansionof the One&Only Royal Mirage, which opened at the end of 2002.  The expansion of the property featured 225new luxury rooms, including a new 50-room ultra high-end boutique hotel.

 

*Cuba*

* *

In the first quarter of 2005, we mutually agreed withthe owner that we would terminate our involvement with the proposed One&Onlyproject in Havana, Cuba.

 

*South Africa*

* *

In November 2003, we announced that we hadentered into an agreement with Victoria & Alfred Waterfront (Pty)Limited (“V&A Waterfront”) to develop and manage a new luxury hotel at thehighest end of the market in Cape Town, South Africa.  We intend to form a joint venture with alocal entity with limited financial resources in 

 

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which we will own a minority interest to develop andoperate a new 163-room One&Only luxury hotel, which we refer to as theOne&Only Cape Town, to be located in The Victoria & AlbertWaterfront, which is part of Cape Town’s waterfront and harbor.  In addition to an equity investment, weexpect to provide financing assistance in the form of loans and/orguarantees.  We expect the joint ventureto enter into a long-term land lease agreement with the V&A Waterfront forwhich we will provide a guarantee, which will permit the development, inconjunction with our local partner, to proceed. Architectural design work for the new hotel has commenced andconstruction is expected to start in 2005 and be completed by the end of2006.  To date we have funded $5.8 million,and if the project proceeds, we expect our investment in this project to totalapproximately $11.3 million.  In thefirst quarter of 2005, litigation was commenced against the V&A Waterfront,alleging certain zoning violations and that the V&A Waterfront had exceededits authority with regard to the overall waterfront development.  This litigation was heard on March 8,2005 in the High Court of South Africa (Cape Provincial Division) and we expecta ruling to be issued in the second quarter of 2005.  However, if the court delays its ruling orrules in favor of the V&A Waterfront and that judgment is appealed by theplaintiffs, this litigation could significantly delay this project.  If the court finds in favor of theplaintiffs, such a ruling could significantly delay or even terminate thisdevelopment.  If the One&Only CapeTown does not proceed, we will be required to recognize a write-off of theamount funded.

 

In October 2003, we funded $1.7 million for thepurchase of land for the potential development of an additional One&Onlyproperty in South Africa.

 

***Internet Gaming***

*** ***

We previously owned and operated Kerzner InteractiveLimited, an online Internet gaming site. During 2002, several countries made it increasingly difficult for theircitizens to gamble on-line.  Further, asa licensed operator in the Isle of Man, we imposed numerous restrictions andcontrols on how we operated this business, which made it difficult for us tocompete against companies operating in a less rigorous manner.  As a result, we concluded that this businesswould not be economically viable in the short to medium term.  We therefore discontinued the operations ofKerzner Interactive Limited during the first quarter of 2003.

 

In February 2002, we agreed to sell 50% ofKerzner Interactive Limited to Station Casinos, Inc. (“Station”), who paidus a non-refundable deposit of $4.5 million in July 2002.  Subsequently, this agreement was restructuredand Station received an option through early January 2003 to purchase 50%of the operation in consideration for the $4.5 million previouslyreceived.  During the first quarter of2003, the Company and Station mutually agreed to terminate this transaction.

 

***Atlantic City Option***

*** ***

In February 2004, we and Colony agreed to terminatethe Atlantic City Option and entered into a new agreement pursuant to which weagreed to sell the undeveloped real estate adjacent to Resorts Atlantic City toa wholly owned subsidiary of Colony RIH Holdings, Inc. (the “Purchaser”) for asale price of $40.0 million.  Thesale was completed on March 18, 2004. The sale price was paid in the form of a promissory note which matureson March 16, 2009 (the “NJ Note”). The NJ Note began accruing interest on September 30, 2004 at a rateof 4%, which rate increases at various intervals from the closing date of thetransaction.  All principal and interestdue under the NJ Note is due on March 16, 2009, which date may beaccelerated by us in certain circumstances. The NJ Note is secured by a first mortgage on the property sold and isguaranteed by Colony RIH Holdings, Inc. (the direct parent company of thePurchaser) initially in an amount limited to $20.0 million, which willgenerally increase in increments of $5.0 million annually.  The NJ Note will also be guaranteed byResorts International Hotel and Casino, Inc. This guarantee will go into effect when that company’s outstandingpublic indebtedness, which is due on March 9, 2009, has been paid.

 

***Florida***

*** ***

Our indirect wholly owned subsidiary, KerznerInternational Resorts, Inc., a Florida corporation, together with itssubsidiaries based in Florida, provides general and administrative supportservices, marketing services, travel reservations and wholesale tour servicesfor our Atlantis, Paradise Island and certain One&Only operations.  To a much lesser extent, they also provide travelreservation services for Harborside and other unaffiliated resort properties inThe Bahamas.

 

***France***

*** ***

Through an indirect wholly owned subsidiary, we own atour operator company in France, Solea Vacances SA.  Solea Vacances SA primarily services patronsin France, and, among other things, offers reservations services for 

 

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travel to the five resorts in Mauritius, theOne&Only Royal Mirage Hotel in Dubai and the One&Only Kanuhura in theMaldives.

 

***South Africa***

*** ***

Through our wholly owned subsidiaries, we own a touroperator company in South Africa, World Leisure Holidays (Pty.) Limited (“WLH”).  WLH handles reservations from the Europeanand Asian markets for our One&Only properties primarily in Mauritius, theMaldives and Dubai.

 

**Seasonalityand Weather**

** **

Our business has historically been seasonal, with thelargest number of patrons visiting The Bahamas during late December andthe first three months of the calendar year. Accordingly, our revenues and operating profits have historically beenhigher during the first quarter than in successive quarters.  In addition, The Bahamas, Mauritius, theMaldives and Mexico are subject to tropical weather and storms, which, ifsevere, can interrupt the normal operations and affect tourism.  Similarly, inclement weather can adverselyaffect the revenues that we derive from Mohegan Sun as the principal access tothis property is by road.  Higherrevenues and earnings are typically realized from the Connecticut operationsduring the second and third quarters of the year.

 

In September 1999, Paradise Island was affectedby Hurricane Floyd, a hurricane rated by the United States National WeatherService as a category five, its highest rating. The Paradise Island properties suffered approximately $45.0 millionof property damage, for which remedial work was completed by year end 1999, andwe received a number of customer cancellations. At Atlantis, Paradise Island, 230 rooms were taken out of service forthree months and the One&Only Ocean Club was closed for approximately threeand one half months.  We were fullyinsured for property loss and business interruption.  Hurricane Floyd was the first significanthurricane to negatively impact Paradise Island in over thirty years.

 

In November 2001, Hurricane Michelle movedthrough The Bahamas.  Although the stormcaused minimal disruption to our operations, our properties (other thanHarborside at Atlantis, Paradise Island, which was closed from August 2002through December 2002 due to water damage resulting primarily fromHurricane Michelle, see “Item 4. Information on the Company, (B) Business Overview”) sufferedapproximately $28.3 million in damage that was substantially covered byour insurance policies.  See “Item 3.  Key Information, (D) Risk Factors—Severeweather conditions or natural disasters could adversely affect our business,financial condition or results of operations, or further increase our insurancepremiums and deductibles or make insurance unavailable at commerciallyreasonable rates.”

 

In September 2004, Hurricane Frances passed justto the north of Paradise Island.  Costsassociated with Hurricane Frances were $4.6 million, which primarilyconsisted of $3.4 million of clean up and repair costs and complimentarygoods and services to guests and a $1.2 million loss on damaged assets.  While we have an “all risk” insurance policythat covers these types of losses, we were not reimbursed for these costs asthe total amount of loss was less than the deductible under our policy whenaggregated with the related business interruption losses.

 

In December 2004, the tsunami caused by anearthquake off the coast of Indonesia in southern Asia resulted in floodingdamage at our two properties in the Maldives. See “Item 3.  KeyInformation, (D) Risk Factors—Severe weather conditions or natural disasters couldadversely affect our business, financial condition or results of operations, orfurther increase our insurance premiums and deductibles or make insuranceunavailable at commercially reasonable rates.”

 

As a result of a more difficult insurance market, thefact that we have a concentration of assets in one location and that ourproperties are subject to the impact of hurricanes, we have experiencedsubstantial increases in our insurance premiums and deductibles.  See “Item 3.  Key Information, (D) Risk Factors—Additionalincreases in our insurance premiums and deductibles may increase our costs andimpair our ability to obtain or maintain insurance on our properties.”

 

**InsuranceArrangements**

** **

In May 2003, we formed Aberdeen Insurance(Bermuda) Ltd. (“Aberdeen”), a wholly owned captive insurance companylocated in Bermuda.  Aberdeen has beenregistered by the Bermuda Monetary Authority under The Insurance Act of 1978 asa Class 1 Insurer, and is utilized by the Company as a vehicle throughwhich the Company places its “all risk” property and business interruptioninsurance policy, including windstorm, for Atlantis, Paradise Island and the One&OnlyOcean Club.  Harborside at Atlantis iscovered under a Starwood insurance policy. 

 

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Although Aberdeen provides the Company with access tothe reinsurance market at reduced administrative costs, all risk in excess ofthe Company’s $15.0 million per occurrence/$30.0 million annualaggregate deductible (which is in turn in excess of an underlying operatingcompany deductible of $50,000 for each and every loss) will continue to be 100%reinsured through the reinsurance market, thereby leaving Aberdeen with zeroretained risk.

 

We believe our current insurance coverage representsoptimum market availability at commercially available pricing.

 

**Competition**

** **

*General*

* *

The resort and casino industries are highlycompetitive.  Our destination casinoresorts compete with other resorts, hotels and casinos, including land-basedcasinos, riverboat, dockside and cruise ship on-board casinos and other formsof gaming as well as with other forms of entertainment.  Our luxury resort hotels compete with otherresorts and hotels in markets in which we conduct business.  We believe the ability to compete effectivelyin these industries is based on a number of factors, including the scope,quality, location and accessibility of facilities, the effectiveness of marketingefforts, customer service, the relative convenience and costs of availabletransportation, service and the quality and price of rooms, food and beverages,convention facilities and entertainment.

 

*Paradise Island*

* *

Our Paradise Island operations primarily compete withwarm weather resort destinations, including Walt Disney World and other Orlandoarea attractions, as well as cruise ships and other hotels and resorts onParadise Island, New Providence Island, Grand Bahama Island and the neighboringCaribbean islands.  We estimate that thereare approximately 7,800 hotel rooms on Paradise Island and New Providence Islandcombined, of which approximately 3,400 are located on Paradise Island,including 2,425 in hotels owned and operated by us.  The Wyndham Nassau Resort, our primarycompetitor in The Bahamas, is an 850-room resort and casino.  The One&Only Ocean Club also competeswith a Four Seasons property which opened on Great Exuma Island in The Bahamasin November 2003.

 

We also compete with Our Lucaya, located on GrandBahama Island, approximately 40 minutes by air from Paradise Island.  Our Lucaya consists of a 749-room Westin Hotel,a 511-room Sheraton Hotel and a 30,000 square foot casino with 19,000 squarefeet of gaming space.

 

*Mohegan Sun*

* *

The Connecticut market is the fourth largest gamingmarket in the United States, with approximately 22 million adults within150 miles of Mohegan Sun.  Mohegan Sunand Foxwoods Resort and Casino at present are the only two casinos in theConnecticut market.  Foxwoods now hasapproximately 6,400 slot machines and, for the twelve months endedSeptember 30, 2004, reported gross revenues of approximately $1.37 billion.  On February 1, 2005, Foxwoods Resort andCasino announced a $700.0 million development project, which consists of a newhotel tower, expanded convention facilities, new restaurants and retail stores,as well as an expanded casino that can accommodate 1,500 additional slotmachines.  The Oneida Nation operates acasino near Syracuse, New York and other Native American tribes in the statesof New York, Rhode Island, Massachusetts and Connecticut are seeking approvalsto establish gaming operations which would further increase competition,particularly for day-trip patrons. Mohegan Sun also competes with Atlantic City and several small NativeAmerican gaming facilities throughout the northeastern United States.

 

In Connecticut, under the tribal-state compactsbetween the State of Connecticut (for purposes of this section, the “State”)and the Mohegan Tribe and Foxwoods Resort and Casino, Mohegan Sun is subject toa 25% gaming fee on slot revenues payable to the State so long as the Statedoes not issue any further licenses for gaming operations with slot machines orother commercial casino games (other than to a Native American tribe on NativeAmerican land).  In June 2002, the BIAissued a determination approving the federal recognition of the Eastern PequotTribe.  The State and a number ofConnecticut municipalities have filed an appeal of the BIA determination to theDepartment of the Interior, Board of Indian Appeals (“IBIA”), which appeal ispending.  The ultimate decision of theIBIA may be appealed to the Federal courts. In addition, on January 29, 2004, the BIA issued a determination(subject to appeal before the IBIA) that a second group in Kent, Connecticut,the Schaghticoke Tribal Nation, met the requirements for federal recognition asan Indian Tribe.  The State appealed thatdecision to the IBIA, which appeal is pending. In June, 2004, the BIA denied the petitions for federal recognition asIndian tribes of three other Indian groups in the Connecticut gamingmarket:  the Golden Hill Paugusett ofTrumbull, two bands of Nipmuc Indians of Massachusetts that border Connecticut the Hassanamisco Band of Sutton and the Chaubunagungamaug 

 

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Band of Dudley/Webster.  The two Nipmuc bands have appealed the BIA’sdecision to the IBIA, which appeals are pending.  The Sutton group has indicated an interest ingaming in Connecticut as have the Paugusett group, the Historic Eastern Pequotand the Schaghticoke.  Each of thesegroups has expressed interest in obtaining trust lands for the purpose ofconducting gaming in Connecticut.

 

*Indian Ocean*

* *

In the Indian Ocean market, we primarily compete withother resorts on the islands in which we operate as well as other locationsoffering vacations to tourists from Europe, southern Africa and parts ofAsia.  SRL owns five major hotels inMauritius.  In the luxury end of theMauritian hotels market, SRL owns two of the seven luxury hotels and offers atotal of 363 of the approximately 1,000 luxury rooms in Mauritius.  Competition in the middle-market hasincreased following the introduction of 550 new mid-market rooms at the end of2004.  These additional rooms will competewith Sugar Beach Resort, La Pirogue Hotel and Le Coco Beach Hotel.

 

*Maldives*

* *

The One&Only Kanuhura, a five-star resort,competes with other resorts in the Maldives as well as other locations offeringvacations to tourists from Europe, southern Africa and parts of Asia.  The One&Only Kanuhura primarily competeswith the five other five-star resorts in the Maldives.  In this high-end market, the One&Only Kanuhuraoffers about 17% of the 577 available rooms. The One&Only Reethi Rah will also compete in this high-end market.

 

*Dubai*

* *

In Dubai, we primarily compete with other resorts andhotels on the Jumeirah Beach “golden mile.” We manage the One&Only Royal Mirage in Dubai, a luxury 466-roomhotel with distinctive Arabian architecture. The One&Only Royal Mirage focuses on the high-end travelmarket.  Certain of our competitors onJumeirah Beach include the 620-room Jumeirah Beach Hotel, which focuses on thefamily and group incentive markets and the 500-room Royal Meridien, whichfocuses on the middle-spending leisure holiday market.  The Madinat Jumeirah, a recently opened,867-room five-star hotel, is also a competitor in the market.

 

The Jumeirah Beach coastline is rapidly beingdeveloped.  Residential development onThe Palm, Jumeirah is underway and the main access bridge to the island isclose to completion.  The Dubai Marina,located in the vicinity of Jumeirah Beach, is a waterfront development thatincludes apartments in high-rise towers and luxury villas.

 

There are two other man-made islands in Dubai: ThePalm, Jebel Ali and The Palm, Deira, both of which are designed to attractresort and residential development. These islands will be located adjacent to the Dubai coastline and willbe connected to the mainland by bridges. It is expected that these islands will substantially increase Dubai’stourism industry.

 

In addition to hotel rooms and residential projects,Dubai is also focused on increasing its number of attractions.  Dubailand, a four-phase major theme parkattraction, is currently under development and is within close proximity toDubai International Airport.  Dubailandwill feature six themed zones that will include various entertainment, leisure,sports, retail and other attractions. The first phase of this government-sponsored project is expected to becompleted in 2007.  Dubailand is expectedto compete with Atlantis, The Palm as one of the premier visitation sites inDubai.

 

*Mexico*

* *

In Mexico, we entered the luxury end of the marketwith our ownership interest in and management of the One&Only Palmilla, adeluxe five-star resort located near Cabo San Lucas in Baja, Mexico.  The upscale four- and five-star resorts inLos Cabos, the tourism corridor between San Jose Del Cabo and Cabo San Lucas,account for approximately 2,500 rooms out of the total inventory ofapproximately 8,500 rooms.  The market ismainly composed of incentive group travelers, golfers, family and high-endvacationers.  Three resorts cater to thefive-star market, the One&Only Palmilla, Las Ventanas al Paraíso andEsperanza.  Of these, only theOne&Only Palmilla offers its own golf course, which we believe gives us acompetitive advantage.  The One&OnlyPalmilla re-opened in January 2004 following a refurbishment that expandedthe room count to 172 rooms and significantly upgraded the amenities and publicareas offered by the resort.  Currently,Las Ventanas al Paraíso, with 61 rooms, leads the market with an averageoccupancy in the 85% range and average daily room rates in excess of $800.

 

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Outside of Los Cabos, domestic competition comes fromthe Four Seasons Punta Mita Resort in the Puerto Vallarta area of Mexico, whichoffers a similar resort and golf experience. Internationally, the Los Cabos resort area competes with Hawaii,California and Arizona.

 

**Salesand Marketing**

** **

Our marketing goal is to drive demand direct from theconsumer through high profile public relations, publications and special eventspromotions and advertising.  To supportour operations in The Bahamas, we maintain an inventory of rooms fordistribution through our tour operator, PIV, Inc. (“PIV”), an indirect whollyowned subsidiary.  For the year ended December 31,2004, PIV generated tour operations revenues of approximately $26.6 millionas compared to $28.9 million in 2003. Similarly, our operations in Mauritius, the Maldives and Dubai aresupported primarily through our own European marketing offices.  In addition, we channel distribution for allof our operations through primary wholesalers in the travel agent communitywith a favorable commission structure.

 

We spent approximately $24.4 million in 2004 onsales and marketing for our operations in The Bahamas.  Pursuant to the Heads of Agreement described belowunder “Certain Matters Affecting Our Bahamian Operations—Heads of Agreement,”we receive $4.0 million per year from the Bahamian Government toward thedirect costs related to certain marketing events, public relations activitiesand the production and placement of advertisement in media through December 2007.

 

**CertainMatters Affecting Our Bahamian Operations**

** **

*Airline Arrangements*

* *

The majority of patrons at our resorts on ParadiseIsland arrive through Nassau International Airport located on New ProvidenceIsland.  This airport is serviced byseveral major carriers that offer jet service from most major cities on theeast coast of the United States and other international destinations.  There are approximately 70 flight arrivalseach day at Nassau International Airport, depending on the time of year.  Ground transportation is facilitated by twobridges linking Paradise Island and New Providence Island.

 

*Union ContractArrangements*

* *

In The Bahamas, as of December 31, 2004,approximately 3,600 of our employees were represented by The Bahamas Hotel,Catering and Allied Workers Union. Kerzner International Bahamas Limited participates in The Bahamas HotelEmployers Association, which represents resort operators in the ParadiseIsland-New Providence Island area.  Theassociation and the union are parties to a contract that expires onJanuary 7, 2008.  Labor relations inThe Bahamas have been unstable at times with occasional work slowdownsoccurring, not only at Atlantis, but also at publicly run entities such as theBahamian Electric Corporation and Bahamas Telephone Company.  As the country’s largest private employer, weare sometimes the target of labor disputes. See “Item 3.  KeyInformation, (D) Risk Factors—Work stoppages and other labor disputescould harm our financial condition and results of operations.”

 

*Casino License*

* *

Paradise Enterprises Limited (“PEL”), a subsidiarythat is part of our Bahamian operations, is currently licensed to operate theAtlantis Casino under the Bahamian Gaming Act (the “Gaming Act”).  In accordance with Bahamian casino licensingrequirements, PEL is obligated to have its casino license renewed annually bythe Gaming Board.  In addition, otherthan an existing contingent obligation to grant two casino licenses, theBahamian Government has agreed that it will grant no new casino licenses withrespect to gaming operations on Paradise Island or New Providence Island until theearlier of December 31, 2027 or 20 years after the substantialcompletion of the Phase III expansion. See “Item 4.  Information onthe Company, (B) Business Overview—The Properties—DestinationResorts—Atlantis, Paradise Island.”

 

*Basic License Fee*

* *

Currently, the Gaming Act provides for taxes on casinorevenues consisting of an annual basic license fee of $200,000.

 

*Taxes and Fees*

* *

The following table summarizes for the periods shownthe taxes and fees paid or accrued by our Bahamian operations under the GamingAct and certain agreements with the Bahamian Government, as described belowunder “Heads of Agreement” (in thousands of U.S. dollars):

 

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| ** **                         | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------|------------|----------------------------------|------------|
| ** **                         | ** ** | **2004**                         | ** ** | **2003** | ** ** | **2002** | ** ** |
| Casino license  fees and win taxes |       | $                                | 9,644      |   | $ | 11,295 |   | $ | 12,040 |   |
| Basic license  fees                |       | 200                              |       | 200 |   | 200 |   |
| Total                              |       | $                                | 9,844      |   | $ | 11,495 |   | $ | 12,240 |   |

 

*Heads of Agreement*

* *

We have an agreement with the Bahamian Government,which is titled Heads of Agreement.  Thisagreement provides us with certain tax incentives in exchange for the Companyinvesting in the expansion of Atlantis, Paradise Island.  The most significant of these incentives arethe casino fee and tax incentives.

 

We restated our agreement with the Bahamian Governmenton May 26, 2003, in anticipation of the Phase III expansion on ParadiseIsland.  Such agreement was supplementedin both May and December 2004. The restated Heads of Agreement, as supplemented, maintains the currentbasic casino tax and fee structure which calls for an annual license fee of$100,000 per thousand square feet of casino space, a minimum annual casino taxof $4.3 million on all gaming win up to $20.0 million, a 12.5% wintax on gaming win between $20.0 million and $120.0 million and a 10%win tax on gaming win in excess of $120.0 million.  Against this, the Company is entitled to acredit of $5.0 million in relation to the annual license fee and a 45%credit against all win tax on gaming win between $20.0 million and$120.0 million.  With thecommencement of construction of Phase III described in “Item 4.  Information on the Company, (B) BusinessOverview—The Properties—Destination Resorts—Atlantis, Paradise Island,” thebasic tax and fee structure was amended so that all gaming win in excess of$20.0 million is subject to a win tax of 10%, and is effective for aperiod of 20 years after the earlier of the date of the substantialcompletion of the Phase III expansion and December 31, 2007 (such date,the “Relevant Date”).  In addition, the$5.0 million credit against the annual license fee shall remain, and thecredit against win tax shall become 50% against all win tax on gaming win over$20.0 million.  These credits shallapply from the commencement of construction of Phase III and shall expire atthe end of 2024.

 

In order to secure the tax incentives described in thepreceding paragraph, we agreed to commence construction on certain aspects ofPhase III by December 31, 2003 and, pursuant to the December 2004supplement, we agreed to commence construction on certain other aspects ofPhase III by December 31, 2005.  Wenotified the Bahamian Government on August 11, 2003 that we had commencedconstruction on aspects of Phase III and were therefore entitled to the accrualof the tax incentives described above. If we do not proceed with the condo-hotel and the Athol Golf Course,casino tax concessions and the joint marketing contribution from the Governmentwill be reduced beginning in 2009 in accordance with a schedule contained inthe Heads of Agreement.

 

The Company has agreed to create a minimum of 3,000new permanent jobs for Bahamians assuming completion of all elements of thePhase III expansion.  The BahamianGovernment has also agreed to extend the expiration of the Company’s casinolicense to the date that is 20 years after the Relevant Date.  In addition, other than an existingcontingent obligation to grant two casino licenses, the Bahamian Government hasagreed that it will grant no new casino licenses with respect to gamingoperations on Paradise Island or New Providence Island until 20 yearsafter the Relevant Date.  Finally, theCompany has also provided certain undertakings that include skills training andcommunity development programs.

 

The Heads of Agreement also provides for an extensionof the Company’s joint marketing agreement with the Bahamian Governmentpursuant to which the Bahamian Government will match the Company’scontribution, up to $4.0 million annually, toward the direct costs relatedto staging certain marketing events, public relations activities and theproduction and placement of advertisements in all media to promote the destinationand the Company’s Paradise Island properties, including the Phase IIIexpansion.  This joint marketingagreement will expire on December 31, 2010.

 

This summary is qualified in its entirety by referenceto the particular provisions of the Heads of Agreement, which can be found asfollows:  (i) Exhibit 99(2) toour Form 6-K filed on May 28, 2003, (ii) Exhibit 99(1) toour Form 6-K filed on May 5, 2004 and (iii) Exhibit 99(2)to our Form 6-K filed on December 9, 2004.

 

38

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*The Commonwealth of TheBahamas*

* *

The Commonwealth of The Bahamas had a population ofapproximately 300,000 in 2004.  TheBahamas includes approximately 700 islands, 29 of which are inhabited, andextends from east of the Florida coast to just north of Cuba andHispañola.  Over 60% of the populationlives on New Providence Island, where Nassau, the capital of The Bahamas, islocated.  The Bahamas first obtained internalself-government in 1964 and became an independent nation within the BritishCommonwealth in 1973.  The firstelections under universal adult suffrage were held in November 1962.  The former government was first elected in1992 and re-elected in March 1997, having succeeded a government that wasin power for over 20 years.  OnMay 2, 2002, general elections were held and a new government elected,including a new Prime Minister and Deputy Prime Minister.  The official language is English.

 

The currency of The Bahamas has been tied to the U.S.dollar since 1970 with an official exchange rate of U.S. $1.00 equal to 1.00Bahamian dollar.

 

The Ministry of Tourism has historically spent over$60.0 million annually to promote The Bahamas.

 

**CertainMatters Affecting Our Connecticut Operations**

** **

*Regulation*

* *

The Mohegan Tribe is a federally recognized NativeAmerican tribe whose federal authority’s recognition became effectiveMay 15, 1994.  In May 1994, theMohegan Tribe and the State of Connecticut entered into a gaming compact toauthorize and regulate Class III gaming operations (slot machines andtable games).  Under this tribal-statecompact, Mohegan Sun is subject to a 25% gaming fee on slot revenues payable tothe State of Connecticut so long as the State does not issue any furtherlicenses for gaming operations with slot machines or other commercial casinogames (other than to a Native American tribe on Native American land).

 

Each of the partners of TCA must be licensed byrelevant tribal and state authorities. Each of the partners of TCA has received a gaming registration from theCommissioner of Revenue Services of the State of Connecticut that is renewedannually.

 

*Priority Payments*

* *

For seven years beginning January 1, 2000, TCApays us the first $5.0 million of the Relinquishment Fees it receives eachyear (after the return of certain expenses and capital contributions) pursuantto the Relinquishment Agreement as a priority payment prior to making pro ratadistributions to its partners.

 

*Waiver of SovereignImmunity*

* *

Pursuant to the Relinquishment Agreement, the MoheganTribe has waived sovereign immunity for the purpose of permitting, compellingor enforcing arbitration and has agreed to be sued by TCA in any court ofcompetent jurisdiction for the purpose of compelling arbitration or enforcingany arbitration or judicial award arising out of TCA’s agreement with theMohegan Tribe.  The parties have agreedthat all disputes and claims arising out of TCA’s agreement with the MoheganTribe or the Mohegan Tribe’s gaming ordinance will be submitted to bindingarbitration, which shall be the sole remedy of the parties, and that punitivedamages may not be awarded to either party by any arbitrator.  The Mohegan Tribe’s waiver of sovereignimmunity is limited to enforcement of monetary damages from undistributed orfuture net revenues of Mohegan Sun (or, under certain conditions, net revenuesof other gaming operations of the Mohegan Tribe).  Funds earned and paid to the Mohegan Tribe asthe Mohegan Tribe’s share of net revenues prior to any judgment or award arenot subject to the waiver and would not be available for levy pursuant to anyjudgment or award.

 

**NewJersey Gaming Regulation**

** **

As a result of the Resorts Atlantic City Sale,effective April 25, 2001, we no longer operate a casino in AtlanticCity.  However, as the lessor of real estatein Atlantic City to Colony, KINA was required to maintain a casino serviceindustry license.  As a result of theexercise by Colony of its option to purchase the real estate which we owned,KINA was qualified by the New Jersey Casino Control Commission as a financialsource of Colony due to its financing of the transaction with Colony, and KINA isrequired to maintain its casino service industry license.  The sale was completed on March 18,2004.  See “Item 4.  Information on the Company, (B) BusinessOverview—Atlantic City Option.”

 

39

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**U.K.Gaming Regulation**

** **

Our development and management of our sites in theUnited Kingdom is subject to a number of contingencies.  First, the United Kingdom needs to passgambling reform legislation.  Second, aspecial government committee that is expected to be established upon thepassage of such legislation then must select eight localities that will beentitled to have a “Resort” or “Regional Casino,” as such criteria are definedby the Department of Culture, Media and Sport and the Parliamentary JointCommittee, which reviewed the draft Gambling Bill.  Our sites must be in the selected localitiesand must further compete for and be awarded a regional casino license by thelocal authorities.

 

**EnvironmentalMatters**

** **

We are subject to federal, state and local laws andregulations that:

 

•                  governactivities or operations that may have adverse environmental effects, suchas discharges to air and water as well as handling and disposal practices forsolid and hazardous wastes, and

 

•                  imposeliability for the costs of cleaning up, and certain damages resulting from,past spills, disposals or other releases of hazardous substances.

 

From time to time, our operations have resulted or may resultin noncompliance with applicable environmental laws.  However, past noncompliance has not had, andwe believe that future noncompliance, if any, would not have, a materialadverse effect on our financial conditions or results of operations.

 

The Mohegan Sun site was formerly occupied by UnitedNuclear Corporation (“UNC”), a naval products manufacturer of, among otherthings, nuclear reactor fuel components. UNC’s facility was officially decommissioned on June 8, 1994, whenthe Nuclear Regulatory Commission confirmed that all licensable quantities ofspecial nuclear material had been removed from the Mohegan Sun site and thatany residual special nuclear material contamination was remediated inaccordance with the Nuclear Regulatory Commission-approved decommissioningplan.

 

From 1991 through 1993, UNC commissioned anenvironmental consultant to perform a series of environmental assessments onthe Mohegan Sun site, including extensive soil investigations and groundwatermonitoring.  The environmentalassessments detected, among other things, volatile organic chemicals, heavymetals and fuel hydrocarbons in the soil and groundwater.  Extensive remediation of contaminated soilsand additional investigations were then completed.  Although the Mohegan Sun site currently meetsapplicable remediation requirements, no assurance can be given that the variousenvironmental assessments with respect to the Mohegan Sun site revealed allexisting environmental conditions, that any prior owners or tenants of theMohegan Sun site did not create any material environmental condition not knownto the MTGA, that future laws, ordinances or regulations will not impose anymaterial environmental liability or that a material environmental conditiondoes not otherwise exist on Mohegan Sun. Future remediation may be necessary if excavation and constructionexposes contaminated soil, which has otherwise been deemed isolated and notsubject to cleanup requirements.  Suchremediation could adversely impact the financial condition and results ofoperations of Mohegan Sun and therefore our financial condition and results ofoperations.

 

In addition, the Environmental Protection Agency hasnamed a predecessor to KINA as a potentially responsible party, or a PRP, underthe Comprehensive Environmental Response, Compensation and Liability Act of1980, or CERCLA, for the cleanup of contamination resulting from past disposalsof hazardous waste at the Bay Drum site in Florida, to which the predecessor,among others, sent waste in the past. CERCLA requires PRPs to pay for cleanup of sites at which there has beena release or threatened release of hazardous substances.  Courts have interpreted CERCLA to imposestrict, joint and several liability upon all persons liable for cleanup costs.  As a practical matter, however, at siteswhere there are multiple PRPs, the costs of cleanup typically are allocatedamong the parties according to a volumetric or other standard.  Because we have only limited information atthis time regarding this site and the wastes sent to it by the predecessor, weare unable to determine the extent of our potential liability, if any, at thissite.

 

40

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**(C)**       OrganizationalStructure

** **

Set forth below is a table listing our significantsubsidiaries:

 
| **Name of Company**                           | ** ** | **Country of Incorporation** | ** ** |
|-----------------------------------------------|------------|------------------------------|------------|
| Kerzner  International Bahamas Limited(1)     |       | The Bahamas                  |       |
| Kerzner  International North America, Inc.(2) |       | United States                |       |
| Kerzner  Investments Palmilla, Inc.(3)        |       | The Bahamas                  |       |
| One&Only  Management(4)                   |       | British Virgin Islands       |       |
| Kerzner  International Management Limited(5)  |       | British Virgin Islands       |       |

 

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(1)          Owner of substantiallyall of the Bahamian subsidiaries. Directly or indirectly wholly owns ten subsidiaries, all of which areorganized in the Commonwealth of The Bahamas.

 

(2)          Owner of all of the U.S.subsidiaries.  Directly or indirectlywholly owns 19 subsidiaries, 16 of which are organized in the United States andthree of which are organized in Mexico and relate to the management anddevelopment of the One&Only Palmilla.

 

(3)          Owner of the 50%interest in the One&Only Palmilla.

 

(4)          Operator of the fiveMauritius management agreements and the One&Only Kanuhura managementagreement.  Through the year endedDecember 31, 2004, Kerzner held an 80% ownership interest in One&OnlyManagement, which decreased to 75% effective January 1, 2005.

 

(5)          Owner of the managementagreement for the One&Only Royal Mirage in Dubai.  Also receives marketing and administrativefees from One&Only Management related to the Mauritius and the One&OnlyKanuhura management agreements.

 

See Exhibit 8, filedherewith, for a list of our significant subsidiaries.

 

**(D)**       Property,Plant and Equipment

** **

Our headquarters and registered office are located atExecutive Offices, Coral Towers, Paradise Island, The Bahamas.

 

We own or lease properties in The Bahamas, the UnitedStates and the United Kingdom.  Set forthbelow is a table listing our principal properties as of December 31, 2004:

 
| **Name and Location**                                                  | ** ** | **Owned or   Leased** | ** ** | **Principal Use**    | ** ** | **Size**  | ** ** | **Capacity** | ** ** |
|------------------------------------------------------------------------|------------|-----------------------|------------|----------------------|------------|-----------|------------|--------------|------------|
| Atlantis    Paradise Island,   The Bahamas(1)                          |       | Owned                 |       | Hotel/Casino         |       | 123 acres |       | 2,317 Rooms  |       |
| One&Only  Ocean Club   Paradise Island,   The Bahamas(1)           |       | Owned                 |       | Hotel                |       | 35 acres  |       | 108 Rooms    |       |
| Ocean  Club Golf Course and Clubhouse   Paradise Island,   The Bahamas |       | Owned                 |       | Golf Course          |       | 209 acres |       | N/A          |       |
| Roads  and Utility Sites   Paradise Island,   The Bahamas(1)           |       | Owned                 |       | Infrastructure       |       | 52 acres  |       | N/A          |       |
| Phase  III Expansion   Paradise Island,   The Bahamas                  |       | Owned                 |       | Current  Development |       | 68 acres  |       | N/A          |       |
| Undeveloped  Land   Paradise Island,   The Bahamas(1)                  |       | Owned                 |       | Future  Development  |       | 66 acres  |       | N/A          |       |

 

41

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| **Name and Location**                                              | ** ** | **Owned or   Leased** | ** ** | **Principal Use**                    | ** ** | **Size**            | ** ** | **Capacity**  | ** ** |
|--------------------------------------------------------------------|------------|-----------------------|------------|--------------------------------------|------------|---------------------|------------|---------------|------------|
| Undeveloped  Land   Atlantic City,  New Jersey                     |       | Owned                 |       | (2)                                  |       | 23 acres            |       | N/A           |       |
| Land  Holding   Northampton, UK                                    |       | Owned                 |       | Current  Development                 |       | 1.32 acres          |       | N/A           |       |
| Kerzner  International   North America, Inc.   Plantation, Florida |       | Leased                |       | Administrative  and Marketing Office |       | 65,000 square  feet |       | 425 Employees |       |
|                                                                    |            |                       |            |                                      |            |                     |            |               |            |  |

 

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(1)          Please see “Item 4.  Information on the Company, (B) BusinessOverview—The Properties—Destination Resorts—Atlantis, Paradise Island,” whichdescribes in detail our plans to construct, expand upon and improve theseproperties.

 

(2)          We sold an additional 13acres of undeveloped land to Colony in March 2004.  See “Item 4.  Information on the Company, (B) BusinessOverview—Atlantic City Option,” for more information on the property that wesold to Colony.  All other land that weown in Atlantic City is available for sale.

 

In addition to the properties listed above, we leaseseveral small administrative offices in various locations throughout the UnitedStates that we use for marketing purposes. We lease two small administrative offices in Buckinghamshire, UnitedKingdom, as well as two offices in Paris, France, one of which Solea VacancesSA, our wholly owned European tour operator subsidiary, uses as a travelagency, while the other is a marketing office. We also lease an office outside of Frankfurt, Germany, which we use as amarketing office.

 

The majority of the property we own serves ascollateral for our Amended Credit Facility.

 

## **Item 5**.           Operatingand Financial Review and Prospects

## ** **

**(A)**       Overview

** **

**Businessof Kerzner International**

** **

We develop and operate premier resort casinos andother properties throughout the world and manage our business in threesegments: Destination Resorts, Gaming and One&Only Resorts. Our DestinationResorts segment is currently our largest and most important segment from both agross revenue and net income perspective.

 

The Destination Resorts segment is comprised of ourlarger destination resorts, including our flagship property, Atlantis, ParadiseIsland, our wholly owned tour operator, PIV, and both marketing and developmentfee income and equity in earnings (losses) from our jointly owned timeshare,Harborside at Atlantis.  During 2004,Atlantis, Paradise Island generated approximately 81% of our net revenues.  Net revenues from Atlantis, Paradise Islandprimarily consist of room, food and beverage, gaming, other hotel and touroperations revenues.

 

During 2005, we expect to have several projects in thedevelopment phase in our Destination Resorts segment, namely, the Phase IIIexpansion, Atlantis, The Palm and a destination resort casino in Morocco.  The Phase III expansion on ParadiseIsland will allow us to capitalize on the demand for the property and leverageour investment in The Bahamas.  In thethird quarter of 2005, we expect to open the Marina Village, which will provideadditional food and beverage and rental revenue from third-party retailoperators and will contribute to the overall guest experience.  We expect to commence pre-sales of anapproximately 500-unit condo-hotel, which we expect to be a 50-50 joint venturewith Turnberry Associates, one of the premier real estate development andproperty management companies in the United States, in the second quarter of2005.  We commenced pre-sales of luxurycondo units at the Ocean Club Residences & Marina, which will be a 50-50joint venture with a Bahamian partner, in the first quarter of 2005.  We expect to commence construction of the approximately500-unit condo-hotel and Ocean Club Residences & Marina in the second halfof 2005 with completion scheduled for 2007. This timing is dependent on sufficient pre-sales to arrange non-recoursefinancing.  See “Item 4.  Information on the Company, (B) BusinessOverview—The Properties—Destination Resorts — Atlantis, Paradise Island” forfurther discussion of the Phase III expansion.

 

During 2004, we completed a significant portion of theplanning for a 2,000-room resort at Atlantis, The Palm, and we expect to commenceconstruction in 2005.  During theconstruction period, with completion scheduled in 2008, we will receive a $20.0 milliondevelopment fee, and upon commencement of operations, we expect to receive 

 

42

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management fees and equity earnings from our ownershipinterest.  In Morocco, planning for a600-room destination resort casino is underway and construction is expected tocommence in 2005.  We expect to receivedevelopment and management fees and equity earnings from our 50% ownershipinterest in this project.

 

Our Gaming segment is comprised of our interests inproperties that are primarily casinos, such as our indirect interest in MoheganSun in Uncasville, Connecticut. We receive fees pursuant to a RelinquishmentAgreement with the Mohegan Tribe through our investment in TCA.  The Gaming segment also includes equity inlosses from our 50% investments in TCNY, our indirect investment in Wembleythrough our 37.5% ownership interest in BLB and costs associated with thedevelopment of casino and resort facilities in the United Kingdom, such as theDome, SECC, Sportcity and Northampton.

 

Our development and management of our sites in theUnited Kingdom is subject to a number of contingencies.  First, the United Kingdom needs to passgambling reform legislation.  Second, aspecial government committee that is expected to be established upon thepassage of such legislation then must select eight localities that will beentitled to have a “Resort” or “Regional Casino,” as such criteria are definedby the Department of Culture, Media and Sport and the Parliamentary JointCommittee, which reviewed the draft Gambling Bill.  Our sites must be in the selected localitiesand must further compete for and be awarded a regional casino license by thelocal authorities.  See “Item 4.Information on the Company, (A) History and Development of the Company—RecentDevelopments” for further discussion of Wembley and “Item 4. Informationof the Company, (B) Business Overview—Gaming—United Kingdom.”

 

Our One&Only Resorts segment is comprised of ourownership and/or management interests in a portfolio of smaller (when comparedto our destination resorts) luxury resorts and hotels. We currently operatenine resort properties in Mauritius, the Maldives, Dubai, Mexico and TheBahamas, six of which are operated under the One&Only brand. We have alsoentered into agreements to develop, manage and own a minority interest in theOne&Only Cape Town on the Victoria & Alfred Waterfront in Cape Town,South Africa and we expect to open the One&Only Reethi Rah in the Maldivesin the second quarter of 2005. The earnings contribution from our One&OnlyResorts segment includes earnings before interest and taxes from theOne&Only Ocean Club, earnings before interest and taxes, net of minorityinterest, from the One&Only Palmilla and management and development feesand equity in earnings (losses) of unconsolidated investments, and alsoreflects direct expenses associated with these properties. In order to acquiremanagement agreements, we often participate in the equity of managedproperties, usually in a supplementary role, or we may provide projectfinancing or guarantees in order to complete the development of a newproperty.  In connection with the PhaseIII expansion, in June 2004, we opened three new luxury villas at theOne&Only Ocean Club.

 

We believe that the results of operations in theDestination Resorts and the One&Only Resorts segments are best explained bythree key industry specific performance measures: occupancy, average daily rate(“ADR”) and revenue per available room (“RevPAR”).  Occupancy is the total percentage of roomsoccupied and is computed by dividing the number of room nights occupied by thetotal number of room nights available. ADR is the average amount of room revenue per occupied room. RevPARrepresents room revenue divided by the total number of room nightsavailable.  These measures are influencedby a variety of factors, including national, regional and local economic conditions,changes in travel patterns and the degree of competition with other destinationresorts, luxury hotels and product offerings within the travel and leisureindustry.  The demand for accommodations mayalso be affected by seasonal factors. For example, at Atlantis, Paradise Island and the One&Only OceanClub there are lower occupancy levels in September, following Labor Day,through mid-December, resulting in lower revenue, net income and cash flowsfrom operations during these periods. Similarly, the One&Only Palmilla experiences reduced occupancylevels in July and August.

 

Our operations are exposed to various risks, the mostsignificant of which are increased competition, development and constructionrisks, ability to obtain financing, severe weather conditions and futuresecurity alerts or terrorist attacks. The resort and casino industries are highly competitive, and theexpansion, upgrade or construction of competing resort or casino properties inor near any market from which we attract or expect to attract a significantnumber of customers could have a significant adverse effect on our business,financial condition or results of operations. As we are heavily involved in new projects and expansion effortsthroughout the world, there are inherent risks associated with development andconstruction, such as unanticipated design, construction, regulatory andoperating problems.  In addition, if weare unable to finance our expansion and development projects, as well as other capitalexpenditures, through cash flow and borrowings, our expansion and developmentefforts could be jeopardized.  Asdiscussed in “Operating and Financial Review and Prospects—Liquidity andCapital 

 

43

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Resources,” we expect to have the resources necessaryto finance our current expansion and development plans.  However, if in the future we are unable tosecure additional financing, we could be forced to limit or cancel expansion ordevelopment plans, which may adversely affect our business, financial conditionor results of operations.  The Bahamas,Mexico, the Maldives and Mauritius are subject to tropical weather and storms,which, if severe, could adversely affect our operations and tourism.  During the past seven years, Paradise Islandhas been affected by three major hurricanes which have caused property damage,business interruption and lost revenues. In December 2004, the Maldives were affected by the tsunami causedby an earthquake off the coast of Indonesia in southern Asia, which resulted inflooding at the One&Only Kanuhura and the One&Only Reethi Rah.  We cannot predict if future severe weatherconditions will cause significant damage and suspension of services provided toour patrons, further increases to our insurance premiums and per occurrencedeductibles or cancellations of our insurance coverage.  Acts of terrorism and war could adverselyaffect the travel market and reduce our operating revenues.  The terrorist attacks on September 11thadversely affected operations in 2001.  Inaddition, there is heightened concern about terrorist activity in Dubai andMorocco.  Future acts of terror,anti-terrorist efforts, war or other armed conflicts involving the United Statesor other countries may again reduce our guests’ willingness to travel.

 

The Company evaluates the performance of its segmentsbased primarily on their contribution to net income, which is their respectiverevenues generated after direct operating costs, and depreciation andamortization attributable to each segment. Corporate expenses, interest income and expense, income taxes and otherincome and expenses are not allocated to the segments but are separatelyevaluated.  The following tables are ananalysis of net revenues and contribution to net income by segment:

 

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**NetRevenues**

** **
| ** **                    | ** ** | **For The Year Ended December 31,** | ** ** |
|-------------------------------|------------|------------------------------------------|------------|
| ** **                    | ** ** | **2004**                                 | ** ** | **2003** | ** ** | **2002** | ** ** |
|                          |       |                                     |       |   |   |   |   |
| Destination  Resorts:         |       |                                     |       |   |   |   |   |
| Atlantis,  Paradise Island(1) |       |                                     |       |   |   |   |   |
| Rooms                         |       | $                                        | 174,093    |   | $ | 167,989 |   | $ | 166,410 |   |
| Casino                        |       | 130,879                                  |       | 138,592 |   | 129,916 |   |
| Food and  beverage            |       | 127,633                                  |       | 118,414 |   | 118,802 |   |
| Other resort                  |       | 65,040                                   |       | 61,860 |   | 60,916 |   |
|                          |       | 497,645                                  |       | 486,855 |   | 476,044 |   |
| Less:  promotional allowances |       | (23,034                                  | )          | (23,579 | ) | (22,210 | ) |
|                          |       | 474,611                                  |       | 463,276 |   | 453,834 |   |
| Tour operations               |       | 26,564                                   |       | 28,875 |   | 29,026 |   |
| Harborside at  Atlantis fees  |       | 2,826                                    |       | 1,847 |   | 1,579 |   |
|                          |       | 504,001                                  |       | 493,998 |   | 484,439 |   |
| Atlantis, The  Palm fees      |       | 380                                      |       | — |   | — |   |
|                          |       | 504,381                                  |       | 493,998 |   | 484,439 |   |
| Gaming:                       |       |                                     |       |   |   |   |   |
| Connecticut(2)                |       | 935                                      |       | 1,755 |   | 1,326 |   |
|                          |       |                                     |       |   |   |   |   |
| One&Only  Resorts:        |       |                                     |       |   |   |   |   |
| Ocean Club                    |       | 37,731                                   |       | 34,186 |   | 31,200 |   |
| Palmilla(3)                   |       | 37,875                                   |       | 1,481 |   | 128 |   |
| Other resorts(4)              |       | 15,753                                   |       | 10,094 |   | 8,689 |   |
| Tour operations               |       | 20,551                                   |       | 11,915 |   | 12,037 |   |
|                          |       | 111,910                                  |       | 57,676 |   | 52,054 |   |
|                          |       |                                     |       |   |   |   |   |
| Other(5)                      |       | 3,859                                    |       | 5,084 |   | 4,443 |   |
| Net revenues                  |       | $                                        | 621,085    |   | $ | 558,513 |   | $ | 542,262 |   |

 

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(1)                  Consists ofrevenue from Atlantis, Paradise Island, the Ocean Club Golf Course, the Company’swholly owned tour operator, PIV, and marketing and development fee income fromour interest in Harborside at Atlantis.

 

(2)                  Consists ofdevelopment and other fees related to Mohegan Sun.  Relinquishment fees — equity in earnings ofTCA related to our Gaming segment are included as a separate component outsideof income from operations in the accompanying consolidated statements ofoperations.

 

(3)                  Consists ofrevenue from the One&Only Palmilla in connection with the consolidation ofPalmilla JV, LLC for the year ended December 31, 2004 in accordance with FIN46R.  Revenues for the years ended December 31,2003 and 2002 represent management and development fees related to theOne&Only Palmilla.

 

(4)                  Includesmanagement, marketing and development fees from the One&Only Resortsproperties located in Mauritius, Dubai and the Maldives.

 

(5)                  Includes revenuenot directly attributable to Destination Resorts, Gaming or One&OnlyResorts.

 

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**Contributionto Net Income**

** **
| ** **                                                   | ** ** | **For The Year Ended December 31,** | ** ** |
|--------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                   | ** ** | **2004**                                 | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                                         |       |                                     |       |   |   |   |   |
| Destination  Resorts:                                        |       |                                     |       |   |   |   |   |
| Atlantis,  Paradise Island                                   |       | $                                        | 86,951     |   | $ | 83,523 |   | $ | 76,909 |   |
| Tour operations                                              |       | 5,885                                    |       | 5,089 |   | 4,239 |   |
| Harborside at  Atlantis(1)                                   |       | 9,477                                    |       | 5,176 |   | (3,634 | ) |
|                                                         |       | 102,313                                  |       | 93,788 |   | 77,514 |   |
| Atlantis, The  Palm                                          |       | 346                                      |       | — |   | — |   |
|                                                         |       | 102,659                                  |       | 93,788 |   | 77,514 |   |
| Gaming:                                                      |       |                                     |       |   |   |   |   |
| Connecticut(2)                                               |       | 36,843                                   |       | 35,715 |   | 31,367 |   |
| United Kingdom                                               |       | (2,182                                   | )          | (329 | ) | — |   |
| Other(3)                                                     |       | (4,357                                   | )          | (1,086 | ) | (931 | ) |
|                                                         |       | 30,304                                   |       | 34,300 |   | 30,436 |   |
| One&Only  Resorts:                                       |       |                                     |       |   |   |   |   |
| Ocean Club                                                   |       | 3,644                                    |       | 4,720 |   | 3,999 |   |
| Palmilla(4)                                                  |       | (1,831                                   | )          | (3,013 | ) | (17 | ) |
| Other resorts(5)                                             |       | 14,236                                   |       | 8,498 |   | 8,689 |   |
| Direct  expenses(5)                                          |       | (15,919                                  | )          | (12,187 | ) | (8,061 | ) |
| Other(6)                                                     |       | 4,737                                    |       | 2,242 |   | 1,079 |   |
|                                                         |       | 4,867                                    |       | 260 |   | 5,689 |   |
|                                                         |       |                                     |       |   |   |   |   |
| General  corporate                                           |       | (34,489                                  | )          | (32,842 | ) | (25,188 | ) |
| Impairment of  Atlantic City land                            |       | (7,303                                   | )          | — |   | — |   |
| Restructuring  reversal                                      |       | —                                   |       | — |   | 1,000 |   |
| Interest income                                              |       | 4,722                                    |       | 3,394 |   | 3,419 |   |
| Interest  expense, net of capitalization                     |       | (36,814                                  | )          | (29,264 | ) | (39,104 | ) |
| Gain on  settlement of territorial and other disputes        |       | —                                   |       | 1,479 |   | 14,459 |   |
| Early  extinguishment of debt, net of income tax effect      |       | (1,655                                   | )          | — |   | (20,525 | ) |
| Other, net                                                   |       | 1,358                                    |       | (686 | ) | 60 |   |
| Provision for  income taxes                                  |       | (424                                     | )          | (162 | ) | (96 | ) |
| Palmilla  minority interest(7)                               |       | 4,907                                    |       | — |   | — |   |
| Income (loss)  from discounted operations, net of income tax |       | —                                   |       | 1,305 |   | (8,061 | ) |
| Net income                                                   |       | $                                        | 68,132     |   | $ | 71,572 |   | $ | 39,603 |   |

 

----

(1)          Consists of equity inearnings, marketing, development and other fees related to Harborside atAtlantis.

 

(2)          Consists of relinquishmentfees – equity in earnings of TCA and development and other fees related to MoheganSun.

 

(3)          Consists of equity inlosses of BLB and TCNY and direct expenses for the Gaming segment.

 

(4)          Consists of earningsbefore interest and taxes, net of minority interest related to the One&OnlyPalmilla for the year ended December 31, 2004.  Results for the years ended December 31,2003 and 2002 include management, development and other fees and the Company’sshare of net loss from the One&Only Palmilla prior to the Company’sadoption of FIN 46R.

 

(5)          Consists of management,marketing, development and other fees, net of minority interest and directexpenses related to the One&Only Resorts businesses located in Mauritius,Dubai and the Maldives.

 

(6)          Consists of equity inearnings of SRL and the One&Only Kanuhura.

 

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(7)          Consists of minorityinterest related to the portion of the One&Only Palmilla’s loss on earlyextinguishment of debt interest expense and taxes, which is not allocated tothe One&Only Resorts segment.

 

During 2004, 2003 and 2002, after direct operatingexpenses and depreciation and amortization attributable to each segment, eachof our businesses contributed the following to income (dollars in millions).  For a reconciliation of the segmentcontribution to U.S. GAAP net income, see the table above.

 
| ** **            | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-----------------------|------------|----------|------------|----------|------------|----------|------------|
| ** **            | ** ** | **$**    | ** ** | **%**    | ** ** | **$**    | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** |
|                  |       |     |       |     |       |     |       |   |   |   |   |   |   |
| Destination  Resorts  |       | $        | 102.7      |     |       | 75%      |       | $ | 93.8 |   |   | 73% |   | $ | 77.5 |   |   | 68% |   |
| Gaming                |       | $        | 30.3       |     |       | 22%      |       | $ | 34.3 |   |   | 27% |   | $ | 30.4 |   |   | 27% |   |
| One&Only  Resorts |       | $        | 4.9        |     |       | 3%       |       | $ | 0.3 |   |   | — |   | $ | 5.7 |   |   | 5% |   |

 

For the purposes of thetable above, income, as defined, does not include corporate expenses, interestincome and expense, income taxes and other income and expenses. The amountspresented below with respect to each of our segments also do not include any ofthese items.

 

**(B)**       OperatingResults

** **

**ConsolidatedResults**

** **

**2004 vs. 2003.**  During 2004, our goal was to expand thebusiness while continuing to grow the overall contribution to net income fromour operations.  Income and dilutedearnings per share from continuing operations in 2004 were $68.1 millionand $2.01, respectively, which included a $7.3 million impairment ofAtlantic City land, as compared to $70.3 million and $2.39, respectively,in 2003. (See “Other Factors Affecting Earnings and Earnings Per Share” for acomparison and explanation of certain items affecting 2004 and 2003 results.)  Despite a severe hurricane season in 2004,Atlantis, Paradise Island achieved record gross revenue of $527.0 million,its third consecutive year of growth and its highest ever contribution toincome of $102.3 million as compared to $93.8 million in 2003. Equityearnings and fees earned from Mohegan Sun of $36.8 million represented thefourth consecutive year of growth and a 3.2% increase over 2003, as Mohegan Suncontinues to increase its share of the growing Connecticut slots market.

 

**2003 vs. 2002.**  Even though the overall travel industry wasstruggling during 2002 and 2003, we continued to improve ourprofitability.  In 2003, Atlantis,Paradise Island achieved gross revenue of $517.6 million and contributionto income of $93.8 million as compared to $77.5 million in 2002.Equity earnings and fees earned from Mohegan Sun of $35.7 millionrepresented the third consecutive year of growth and a 13.9% increase over2002. These strong results allowed us to strengthen our balance sheet byreducing interest bearing debt by $72.3 million, resulting in a reductionof interest expense of $9.8 million in 2003. During the year, thesefactors contributed to income and diluted earnings per share from continuingoperations in 2003 of $70.3 million and $2.39, respectively, as comparedto $47.7 million and $1.67, respectively, in 2002. (See “Other FactorsAffecting Earnings and Earnings Per Share” for a comparison and explanation ofcertain items affecting 2003 and 2002 results.)

 

**DestinationResorts**

** **

**Atlantis,Paradise Island**

** **

**2004 vs. 2003.**  During 2004, strong business trends andcontinued margin improvement led Atlantis, Paradise Island to achieve itsstrongest results ever. The property contributed $102.3 million to income, ascompared to $93.8 million in 2003. This increase was primarily the resultof the strong performance of the Atlantis hotel despite the lost business and$4.6 million of costs from Hurricane Frances, which passed just to thenorth of Paradise Island.  Marginalincreases in occupancy and ADR generated $6.1 million of additional roomrevenue, of which $4.8 million went to gross profit.  Strong food and beverage results wererealized by price increases and improved margins (1.4 percentage points over2003), which led to a $4.9 million improvement in gross profit over2003.  In the Atlantis Casino, lower holdpercentage at the tables compared to an unusually high hold percentage in 2003,led to a decrease over last year’s strong results.  It should be kept in mind that the 2003overall performance of Atlantis, Paradise Island produced record results atthat time, so these improvements do not reflect weak results in a prior period.

 

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Atlantis, Paradise Island offers a variety ofamenities resulting in a diverse stream of revenue. This limits our dependenceon any particular operation and helps maximize revenue per occupied room night.Gross revenues for Atlantis, Paradise Island of $527.0 million in 2004 exceeded2003 by $9.5 million (1.8%). These revenues were composed of 33.0% from rooms,24.8% from gaming, 24.2% from food and beverage and 18.0% from other sources.

 

Room revenues and gross profit from rooms were $174.1million and $146.2 million, respectively, in 2004 compared to $168.0 millionand $141.5 million, respectively, in 2003. The $6.1 million and $4.8 million increase in room revenues and grossprofit over 2003, respectively, was due to a 3.0% increase in RevPAR from $201to $207 and improved margins from containment of costs.  Group revenues sustained a $3.2 million(8.3%) increase in 2004 as compared to 2003, as group room nights occupiedincreased by 3.1% in 2004.  The ADR atAtlantis, Paradise Island in 2004 and 2003 was $257 and $251, respectively, andoccupancy was 81% and 80% for 2004 and 2003, respectively.

 

Gross profit from gaming was $71.4 million in 2004 ascompared to $75.3 million in 2003. The $3.9 million (5.2%) decrease in grossprofit from gaming resulted primarily from a decrease in table game revenues of11.4% as compared to 2003, partially offset by a 6.0% reduction in casinoexpenses.  The decrease in table gamerevenues resulted from a lower table hold percentage (which represents theratio of table game win to dollar amount of chips purchased) and lower tabledrop (the dollar amounts of chips purchased). During 2004, there was a 0.5% decrease in the table game drop from$521.7 million to $519.0 million and a decrease in the table hold percentage(from 16.3% to 14.5%) as compared to the unusually high hold percentage in2003, resulting in table game win of $75.2 million in 2004 compared to $84.9million in 2003.  The challenginghurricane season and the fact that the former Sheraton Grand, which is locatedjust next to Atlantis, Paradise Island, was closed for a significant part ofthe year were among the factors that led to the lower table drop percentages.  Slot coin in was $662.0 million in 2004 ascompared to $593.8 million in 2003.  Slotwin in 2004 was $54.1 million, as compared to $53.5 million in 2003.  The 11.5% increase in slot coin in was theresult of changes to the casino floor that included the majority of the floorbeing converted to ticket-in-ticket-out machines and the installation of moreupdated, popular games.

 

Food and beverage revenue was $127.6 million and$118.4 million in 2004 and 2003, respectively, representing a 7.8%increase over 2003.  Going into 2004, weslightly increased food and beverage prices, as we had not increased theseprices in several years.  As a result,food and beverage spent per occupied room night increased from $178 in 2003 to$189 in 2004 due to increases in beverage prices and in meal plan rates.  Also contributing to the increase in food andbeverage revenue was a $4.4 million increase in banquet revenue whichcorresponds with the increase in group room revenue.  Food and beverage gross profit was $44.1 millionand $39.2 million in 2004 and 2003, respectively.  Contributing to the improved gross profit wasa 2.8% decrease in costs resulting from strategic sourcing of purchases andimproved efficiencies in warehousing and requisitioning.

 

Selling, general and administrative expenses decreasedslightly from $84.5 million in 2003 to $84.3 million in 2004.Depreciation and amortization for Atlantis, Paradise Island was $48.2 millionin 2004 and $51.0 million in 2003. The $2.8 million decrease isprimarily attributable to assets still in service during 2004 that had beenfully depreciated as they met their estimated useful lives.

 

Harborside at Atlantis, our 50% owned timeshare jointventure on Paradise Island, recognized $6.7 million in equity earnings(including our share of the insurance recovery discussed below) and $2.8 millionin marketing and development fees in 2004. Harborside at Atlantis was closedfrom August through December of 2002 to repair water damage primarilyresulting from Hurricane Michelle in 2001. During the year ended December 31,2004, we recognized $4.0 million of our share of an insurance recoveryrealized by Harborside at Atlantis related to the final settlement of theremediation claim, which was recorded net of remediation costs incurred.  During the year ended December 31, 2003,we recognized $3.3 million and $1.8 million of equity earnings andmarketing fees, respectively.  Includedwithin equity earnings for the year ended December 31, 2003 was $0.3 millionof expense related to the remediation, attributable to $1.8 million ofremediation costs, offset by insurance recovery of $1.5 million.

 

Hurricane Frances, as well as the effects of thesubsequent major hurricanes and tropical storms that impacted the State ofFlorida, negatively impacted business in the week preceding Labor Day and inthe weeks thereafter.  Costs associatedwith Hurricane Frances were $4.6 million, consisting of $3.4 millionclean up and repair costs and complimentary goods and services and a $1.2 millionloss on damaged assets.

 

48

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**2003 vs. 2002.**  During 2003, despite the war in Iraq andterrorist threats in the United States, Atlantis, Paradise Island had itsstrongest year to date. The property contributed $93.8 million to income,as compared to $77.5 million in 2002. This increase was primarily theresult of the strong performance of the Atlantis Casino and was achieveddespite a $6.0 million increase in the cost of our “all risk” insurance in2003. In 2002, we recorded a $6.9 million charge to our equity earnings relatedto our share of remediation work at Harborside at Atlantis.

 

Gross revenues for Atlantis, Paradise Island of $517.6million in 2003 exceeded 2002 by $10.9 million (2.2%). These revenues werecomposed of 32.3% from rooms, 26.6% from gaming, 22.8% from food and beverageand 18.3% from other sources.

 

Room revenues in 2003 were $168.0 million as comparedto $166.4 million in 2002. Gross profit from rooms of $141.5 million increasedover 2002 by $2.0 million, or 1.5%, due primarily to an increase in RevPAR anda slight reduction in expenses. Atlantis, Paradise Island achieved RevPAR of$201 in 2003, which was a 1.0% increase over 2002. The ADR at Atlantis,Paradise Island in 2003 and 2002 was $251 and $245, respectively, and occupancywas 80% and 81%, respectively.

 

Gross profit from gaming was $75.3 million in 2003 ascompared to $66.2 million in 2002. The $9.1 million increase in gross profitfrom gaming over 2002 resulted from a more favorable table hold percentage andincreases in both table game drop and slot coin in. During 2003, there was a6.4% increase in the table game drop from $490.2 million to $521.7 million andan increase in the table hold percentage (from 15.6% to 16.3%) as compared to2002, resulting in table game win of $84.9 million in 2003 compared to $76.5million in 2002. In addition, slot win slightly increased in 2003 to $53.5million, as compared to $53.3 million in 2002.

 

Food and beverage gross profit was $39.2 million in2003 as compared to $40.3 million in 2002. Food and beverage gross profit wasdown slightly (2.5%) as the $2.04 increase in food and beverage revenue peroccupied room did not completely offset the slight decrease in occupancy in2003.

 

Selling, general and administrative expenses were$84.5 million in 2003 as compared to $80.8 million in 2002. Contributing tothis increase was a $6.0 million increase in the cost of our “all risk”insurance premiums, along with various increases in other insurance policies,as 2002 included five months of favorable pre-September 11 rates (ourpolicy year runs from June 1 to May 31). Additionally, in 2003 there wereincreases of $1.8 million in information technology and human resources costs,$1.3 million in our provision for legal settlements and various other costs,none of which are individually significant. Sales and marketing costs decreasedin 2003 by $2.1 million, as part of our strategy during 2002 was to expandmarketing efforts following September 11th rather than reducingroom rates. We also reduced our provision for doubtful receivables by $1.8million, specifically, the allowance for doubtful accounts related to gamingdecreased by $1.2 million, or from 36% to 29%, due to the implementation of amore stringent policy relating to the granting of reductions to casino patron’spast due balances. In 2003, we increased our efforts to collect outstandingaged gaming receivables through more aggressive collection efforts, includingthe increased use of collection attorneys in jurisdictions where appropriate.In addition, we experienced a $1.7 million reduction related to property taxes.Also in 2002, we incurred $1.2 million of lease termination costs related tothe relocation of one of our offices from Fort Lauderdale, Florida to Plantation,Florida. Depreciation and amortization for Atlantis, Paradise Island was $51.0million in 2003 and $50.7 million in 2002.

 

Harborside at Atlantis performed well during 2003,resulting in the recognition of $3.3 million in equity earnings and $1.8 millionin marketing fees. Harborside at Atlantis was closed from August through December 2002to repair water damage primarily resulting from Hurricane Michelle in 2001.  During 2003 and 2002, our share ofremediation costs were $1.8 million and $6.9 million, respectively, whichexcluded any insurance recovery.  Duringthe fourth quarter of 2003, our portion of insurance recovery related to theremediation costs was $1.5 million. During 2002, we recorded equity losses of $5.2 million resulting fromthe $6.9 million remediation charge offset by $1.7 million in equity earningsfrom Harborside at Atlantis’ operations. In 2002, we recognized $1.6 million inmarketing fees.

 

**Atlantis,The Palm**

** **

In September 2003, we announced that we had agreed toform a joint venture with Nakheel LLC, an entity owned by the Royal Family ofDubai, to develop Atlantis, The Palm.  OnJune 23, 2004, we announced that we had entered into an agreement withIstithmar, an entity indirectly wholly owned by the Royal Family of Dubai, thathas assumed all obligations and rights of its affiliate, Nakheel LLC, pursuantto which we formed Kerzner Istithmar and increased the scope of Atlantis, ThePalm.  We have agreed to invest $100.0million in the form of Class A common stock in Kerzner Istithmar.  In addition, each of Istithmar and Kerznerwill provide, on a joint and several basis, 

 

49

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additional sponsor support of up to $55.0 million withrespect to cost overruns and post-completion debt service obligations.  In addition to the joint and several sponsorsupport, Istithmar has agreed to provide a $100.0 million guarantee tocover any post completion debt service obligations over $55.0 million.  Further, Istithmar has agreed to provide an additionalguarantee for cost overruns over $55.0 million.  As of December 31, 2004, we had investedapproximately $21.8 million in Kerzner Istithmar in connection with thedevelopment of Atlantis, The Palm.

 

As part of this transaction, we have also entered intoa development agreement with Kerzner Istithmar that entitles us to receive$20.0 million and reimbursement of certain expenses over the development periodof Atlantis, The Palm.  Based on ourcurrent budget, the development costs of the project are estimated at$1.1 billion.  Kerzner currently hasa 50% voting interest in Kerzner Istithmar, and as such, we expect to recognize$10.0 million in development fees over the development period.  During the year ended December 31, 2004,we recognized $0.4 million of development fees related to Atlantis, The Palm.In addition, we have entered into a long-term management agreement with asubsidiary of Kerzner Istithmar that entitles us to receive a base managementfee based on the gross revenues generated by Atlantis, The Palm, and anincentive management fee based on operating income.  As of December 31, 2004, KerznerIstithmar had incurred $41.8 million of development and design relatedcosts for Atlantis, The Palm.

 

**Gaming**

** **

**MoheganSun**

** **

**2004 vs. 2003.**  We recognized $36.8 million in 2004 ascompared to $35.7 million in 2003 from TCA.  Mohegan Sun continued to increase its shareof the growing Connecticut slots market resulting in a 51% slot market shareand a 6.0% increase in gross revenues, which were approximately $1.4 billionduring calendar year 2004 as compared to approximately $1.3 billion duringcalendar year 2003.

 

**2003 vs. 2002.**  We recognized $35.7 million in 2003 ascompared to $31.4 million in 2002 from TCA.  Mohegan Sun continued to increase its share ofthe growing Connecticut slots market resulting in an increase in grossrevenues, which were $1.3 billion during calendar year 2003 as compared to$1.2 billion during calendar year 2002. In addition, during 2002, TCAincurred costs of approximately $1.8 million related to the grand opening ofthe Mohegan Sun “Project Sunburst” expansion, which reduced TCA’s income andour share of such income during this period.

 

**UnitedKingdom**

** **

During 2004, we made significant progress in securingagreements for several development opportunities in the United Kingdom.  In 2004, we were appointed as the preferreddeveloper and operator with respect to the development and management ofgaming, hotel and entertainment facilities for two sites in two key markets inthe United Kingdom.  The sites for theprojects are the SECC in Glasgow and Sportcity in East Manchester.  The SECC and Sportcity developments aresubject to the negotiation and execution of binding agreements.  We also have entered into a binding agreementfor the development and operation of a casino and hotel resort facility at theDome in London.  Our development andmanagement of our sites in the United Kingdom is subject to a number ofcontingencies.  First, the United Kingdomneeds to pass gambling reform legislation. Second, a special government committee that is expected to beestablished upon the passage of such legislation then must select eightlocalities that will be entitled to have a “Resort” or “Regional Casino,” assuch criteria are defined by the Department of Culture, Media and Sport and theParliamentary Joint Committee, which reviewed the draft Gambling Bill.  Our sites must be in the selected localitiesand must further compete for and be awarded a regional casino license by thelocal authorities.  (See “Item 4.Information on the Company, (B) Business OverviewThe PropertiesGamingUnitedKingdom” for further discussion).

 

During 2004, the Gaming Board of Great Britain grantedus a Certificate of Consent, which has enabled us to transfer a gaming license heldby LCI into our name and proceed with our plans for a casino inNorthampton.  We are currently in theplanning and development phase of the new casino facility and have commencedconstruction on this project. In December 2004, we submitted plans to theplanning counsel and received approval in February 2005. We expect the casino facilityto be completed in 2006. As of December 31, 2004, we had incurred $1.1million of construction in progress costs related to the planning anddevelopment of the casino facility in Northampton.  The total cost of the project (excluding theoriginal purchase price of $2.1 million) is expected to be approximately £10.0 million(approximately $18.7 million U.S. dollars as of March 24, 2005).

 

50

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During the year ended December 31, 2004, we recognized$2.2 million in expenses related to gaming projects (other thanNorthampton) in the United Kingdom as compared to $0.3 million in 2003.  The expenses primarily related to overheadexpenses and legal and professional fees incurred in connection with thepursuit of development opportunities.

 

**BLBInvestors, L.L.C.**

** **

On March 10, 2004, Kerzner announced that it hadentered into a joint venture, BLB, with an affiliate of Starwood and anaffiliate of Waterford for the purpose of acquiring an interest in Wembley,which owns gaming and track operations in the United States and race tracks inthe United Kingdom.  Wembley’s U.S. operationsinclude its flagship property, Lincoln Park in Rhode Island, where it owns agreyhound racetrack with video lottery terminals.  BLB is owned 37.5% by each of Kerzner andStarwood, with Waterford owning the balance of 25%.

 

In a series of private transactions, BLB acquired a22.2% interest in Wembley at 800 pence per share.  On April 20, 2004, BLB announced a cashtender offer at 860 pence share for all of Wembley’s outstanding shares.  On July 5, 2004, BLB announced that itsoffer to acquire all of Wembley’s outstanding shares had lapsed due to the failureof the condition that it receive valid acceptances from at least 90% of Wembley’soutstanding shares.  BLB remains a 22.2%shareholder of Wembley.

 

For the year ended December 31, 2004, we recorded$3.0 million in equity losses from our investment in BLB, which included our$3.0 million share of a loss related to transaction costs incurred inconnection with BLB’s intended cash tender offer to acquire all of Wembley’soutstanding shares and our $1.0 million share of a hedge loss, offset by$1.0 million of our share of dividend income received by BLB from Wembley.

 

See “Item 4. Information on the Company, (A) History and Development of theCompanyRecent Developments” for further information on this project.

 

**TCNY**

** **

We recognized $0.9 million, $1.1 million and $1.0million in equity losses related to our 50% investment in TCNY during the yearsended December 31, 2004, 2003 and 2002, respectively.  TCNY has a development agreement with theStockbridge-Munsee Tribe for the development of a casino project in the Catskills.  The Catskills Project is contingent upon thereceipt of numerous federal, state and local approvals and we make norepresentation as to whether any of the required approvals will be obtained orwhether the Catskills Project will be completed.

 

**One&OnlyResorts**

** **

During 2004, we continued to build the management teamand sales and marketing structure for our One&Only Resorts business, whichhas enabled One&Only Resorts to improve upon 2003’s results with increasesin management fees and equity earnings at our resorts in Mauritius, theMaldives and Dubai.  The One&OnlyOcean Club also sustained increased revenue, RevPAR and ADR during 2004.

 

In 2005, our focus will be to improve the results ofthe One&Only Palmilla and to commence operations at the One&Only ReethiRah, while sustaining the 2004 levels of earnings at the other properties.  We expect to selectively pursue opportunities,particularly assets that allow us to leverage our management team and brandwithout requiring substantial capital commitments.  We also are in the planning phase of anadditional One&Only property in Cape Town, South Africa.

 

**2004 vs. 2003.**  The One&Only Resorts segment contributed$4.9 million to income in 2004 compared to $0.3 million in 2003.  Contributing to this improvement werestronger results from SRL (a $2.8 million increase in equity earnings andmanagement fees) and Dubai (a $2.1 million increase in management fees).  In addition, net revenues from tour operatorsincreased by $8.6 million from $11.9 million in 2003 to$20.6 million in 2004, primarily due to a more favorable travel market in2004 as compared to 2003 and to exchange rate movements related to the Euro andSterling.

 

The One&Only Ocean Club contributed $3.6 millionto income in 2004 as compared to $4.7 million in 2003, a 23% decrease primarilyfrom $0.8 million of clean up and repair costs and complimentary goods andservices provided due to Hurricane Frances. As a result of Hurricane Frances, the property was closed for elevendays before reopening on a fully operational basis.  Revenues were $37.7 million and $34.2 millionin 2004 and 2003, respectively.  This10.2% increase in revenues is partially attributed to the fact that theOne&Only Ocean Club opened three new luxury villas in June 2004.  The increase in revenues was offset by a $3.5million increase in 

 

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operating expenses as compared to 2003, which resultedfrom a $1.4 million increase in depreciation and amortization due to the newvillas, along with increased room expense and selling, general andadministrative expenses.  Occupancyremained flat in 2004 as compared to 2003 at 79%.  ADR and RevPAR were up during 2004 comparedto 2003, $762 versus $722, respectively, and $600 versus $568,respectively.  Eleven days have beenexcluded from the number of available room nights used in the calculation ofoccupancy and RevPAR for the year ended December 31, 2004 in connectionwith the temporary closure of the One&Only Ocean Club due to HurricaneFrances.

 

In February 2004, One&Only held the grand re-openingof the One&Only Palmilla.  Afteralmost a year, the One&Only Palmilla’s occupancy levels have increased andwe look forward to the benefits of a full winter season.  During 2004, the One&Only Palmillacontributed a loss before interest and taxes, net of minority interest of $1.8 million,which includes $1.4 million of our share of re-opening expenses.  During 2003, the One&Only Palmillacontributed an equity loss of $4.8 million, management, development andaccounting fees of $1.8 million. The equity loss was primarily due to our shareof pre-opening expenses of $4.8 million as the resort was closed for themajority of 2003 during its redevelopment. For the year ended December 31,2004, occupancy and RevPAR at the One&Only Palmilla were 61% and $304,respectively.  The One&Only Palmillahas recently received positive attention as it won the *Condé NastTraveler* magazine’s 2004 Readers’ Choice Award for the best LatinAmerican Resort and was also named to *Condé Nast Traveler’s*2005 Gold List.

 

In Mauritius, we earned management fees, net ofminority interest, and equity earnings of $6.7 million and $4.3 million in2004, compared to $5.9 million and $2.3 million, respectively, in 2003 withrespect to our five properties. From the One&Only Kanuhura we earnedmanagement fees, net of minority interest, and equity earnings (losses) of $0.9million and $0.4 million in 2004 and $0.6 million and ($0.1) million in 2003,respectively. In 2004, we earned management fees from the One&Only RoyalMirage of $3.4 million, compared to $1.3 million in 2003, as business at theOne&Only Royal Mirage recovered following the war in Iraq in 2003.  Additionally, we earned $1.3 million and $0.4million in development fees in 2004 and 2003, respectively, related to thedevelopment of the One&Only Reethi Rah located in the Maldives.

 

In December 2004, the tsunami caused by an earthquakeoff the coast of Indonesia in southern Asia resulted in flooding damage at ourtwo properties in the Maldives.  Weestimate that the One&Only Kanuhura and the One&Only Reethi Rahsustained aggregate property damages of approximately $24.0 million.  In addition, the One&Only Kanuhurasustained approximately $7.0 million in business interruption losses.  We expect the owners of the One&OnlyKanuhura and the One&Only Reethi Rah to submit claims to their respectiveinsurers, and that a significant portion of their damages will be covered.  In 2004, equity earnings from theOne&Only Kanuhura were $0.4 million and we received $1.2 millionin management fees.  In 2005, we expectboth equity earnings and management fees from the One&Only Kanuhura to beadversely affected by the tsunami.  TheOne&Only Kanuhura sustained flooding damage and we plan to close the resortmid-year to repair the damaged villas.

 

**2003 vs. 2002.**  The One&Only Resorts segment contributed$0.3 million to income in 2003 compared to $5.7 million in 2002, due primarilyto our $4.8 million share of the equity losses of the One&Only Palmillarelated to pre-opening expenses as the resort was closed for the majority of2003 during its redevelopment. In addition, the marketing brand launch ofOne&Only to the European market resulted in increased advertising costsover 2002 of $3.0 million.

 

The One&Only Ocean Club contributed $4.7 millionto income in 2003 compared to $4.0 million in 2002, which resulted primarilyfrom a $1.4 million, or 9.9%, increase in gross profit from rooms offset by an$0.9 million increase in selling, general and administrative expenses.  Occupancy and ADR were up during 2003compared to 2002, 79% versus 68% and $722 versus $695, respectively.Depreciation and amortization for the One&Only Ocean Club was $3.7 millionin 2003 compared to $4.0 million in 2002.

 

In Mauritius, we earned management fees and equityearnings, net of minority interest in 2003, of $5.9 million and $2.3 million,compared to $5.6 million and $1.7 million in 2003 and 2002, respectively, withrespect to our five properties. During 2002, the One&Only Le Touessrok wentthrough a major renovation for which we earned $1.5 million in developmentfees. From the One&Only Kanuhura we earned management fees, net of minorityinterest and equity losses, of $0.6 million and $0.1 million in 2003, and $0.4million and $0.7 million in 2002, respectively. In 2003, we earned managementfees from the One&Only Royal Mirage of $1.3 million, compared to $1.2million in 2002. Additionally, we earned $0.4 million in development fees in2003 related to the One&Only Reethi Rah and we earned $1.3 million indevelopment fees for the redevelopment of the One&Only Palmilla.

 

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**CorporateExpense**

** **

**2004 vs. 2003.**  Corporate expenses increased by $1.7 millionin 2004 compared with 2003 (from $32.8 million to $34.5 million) due primarilyto an increase of $1.8 million incurred in 2004 related to the expensing ofrestricted shares granted during the year and an increase in payroll andrelated costs of $1.4 million. These increases were offset by a $2.3 millionreduction in costs related to new business development projects, which in 2003,included a $1.5 million charitable contribution to a new hotel school in SouthAfrica.

 

**2003 vs. 2002.**  Corporate expenses increased by $7.6 millionin 2003 compared with 2002 (from $25.2 million to $32.8 million) due primarilyto an incremental increase of $3.0 million incurred for new businessdevelopment projects related to all of our three segments, which included a$1.5 million charitable contribution made to a South African hotel school in2003, increased payroll and related costs of $1.9 million, increased legal,audit and other professional fees of $1.9 million and an increase of $0.6million in insurance premiums for directors and officers policies.

 

**InterestIncome**

** **

**2004 vs. 2003.**  Interest income in 2004 and 2003 was $4.7million and $3.4 million, respectively. The $1.3 million increase in 2004 isprimarily attributable to $2.9 million of interest income earned on theproceeds received from the issuance of the 2.375% Convertible SeniorSubordinated Notes in April 2004 and the issuance of 3.0 million OrdinaryShares to Istithmar in August 2004 (See “Liquidity and Capital Resources” forfurther discussion) offset by $1.2 million of interest income earned in 2003 on$15.0 million principal amount of debt securities of LCI that we purchasedin 2002 and sold during 2003.

 

**2003 vs. 2002.**  Interest income in 2003 and 2002 was $3.4million. For both 2003 and 2002, interest income consisted primarily of interestearned from advances to affiliates for development projects, bank interest andinterest earned on the $15.0 million face amount of debt securities of LCI thatwe purchased in 2002 and sold during 2003.

 

**InterestExpense**

** **

**2004 vs. 2003.**  Interest expense increased by$7.6 million, or 25.8%, due to $6.3 million of interest expenseincurred in 2004 related to the consolidation of Palmilla JV, LLC.  Our portion of minority interest incomerelated to the One&Only Palmilla’s interest expense is $3.2 million.  Also included in interest expense is$4.4 million related to the 2.375% Convertible Senior Subordinated Notesissued in April 2004, along with a decreased benefit to interest expenseattributable to our interest rate swaps on our 8 7/8% Senior Subordinated Notesof $2.6 million, due to higher LIBOR rates in 2004 and the cancellation inJuly 2004 of $25.0 million notional amount of our then $175.0 millionof such interest rate swaps.  Capitalizedinterest increased by $5.4 million to a total of $5.8 million in 2004primarily related to the Phase III expansion.

 

At December 31, 2004 and 2003, our variable ratedebt, including the effect of interest rate swaps, and fixed rate debt were 35%and 65% (24% and 76% excluding the One&Only Palmilla) and 44% and 56%,respectively. The average cost of debt, including the effect of interest rateswaps, during both 2004 and 2003 was 6.4%.

 

**2003 vs. 2002.**  Interest expense decreased by $9.8 million,or 25.2%, due to our interest bearing debt decreasing $72.3 million during 2003compared with 2002 and paying lower LIBOR rates on our interest rate swaps.  We reduced our interest bearing debt in 2003primarily from excess cash generated from operations. For all of 2002 andthrough September 2003, we swapped $200.0 million of our 87/8%Senior Subordinated Notes for variable debt at LIBOR plus approximately 300basis points. The LIBOR average was lower during 2003 compared to 2002resulting in an additional reduction to interest expense.

 

In September 2003, we cancelled $25.0 millionnotional amount of our then $200.0 million of interest rate swaps in order tomanage the amount of variable to fixed rate debt. After payment of interest dueto us, we received $1.4 million from this cancellation and will accretethis amount to interest expense over the term of the underlying debt. At December 31,2003 and 2002, our variable rate debt, including the effect of interest rateswaps, and fixed rate debt were 44% and 56% and 58% and 42%, respectively. Theaverage cost of debt, including the effect of interest rate swaps, during 2003was 6.4% compared to 7.4% in 2002.

 

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**OtherFactors Affecting Earnings and Earnings Per Share**

** **

***2004 vs. 2003***

 

*Impairment of AtlanticCity Land*

* *

In July 2004, the Company obtained an appraisalon undeveloped real estate that we own in Atlantic City, which indicated thatthe carrying amount of this real estate was not fully recoverable.  The appraisal was commissioned after theCompany had received an unsolicited offer to acquire some of the undevelopedland for a price substantially less than the Company’s book value and certainother information related to third party sales of nearby comparable propertiesat prices substantially less than what the Company’s book value was for itsundeveloped property.  As a result,during the year ended December 31, 2004, we recognized a $7.3 millionimpairment loss as these assets were written down to fair value less estimatedcosts to sell of $5.4 million.  We haveentered into an agreement to sell this real estate and expect to close the salein the second quarter of 2005.

 

*Higher Diluted WeightedAverage Number of Shares Outstanding*

* *

As of December 31, 2004, the number of fully dilutedweighted average shares outstanding was 33,884,075 representing a 15% increaseover 2003, reflecting the effect of a 56% increase in the average stock priceduring the year used to calculate the dilutive effect, along with the issuanceof 3.0 million and 0.4 million shares related to the Istithmar stock purchaseand BDR offering, respectively, and the exercise of 1.9 million of stockoptions.

 

***2003vs. 2002***

 

*Insurance Recovery andReplacement of Damaged Assets*

* *

During 2003 and 2002, we received $2.8 million and$1.1 million, respectively, of insurance recovery, which represents a businessinterruption settlement related to Hurricane Michelle’s impact on Atlantis,Paradise Island. Also during 2003, we recognized a $2.5 million gain onreplacement of damaged assets due to the insurance proceeds received in excessof the net book value of assets damaged during Hurricane Michelle.

 

*Settlement of Territorialand Other Disputes*

* *

During the fourth quarter of 2003, we recognized afinal $1.5 million of income related to a net gain on settlement of territorialand other disputes with a major shareholder.

 

*Kerzner InteractiveLimited*

* *

On January 1, 2002, Kerzner Interactive Limited, ourInternet gaming subsidiary, commenced operations. In February 2002, we agreedto sell 50% of Kerzner Interactive Limited to Station Casinos, Inc., which paidus at that time a non-refundable deposit of $4.5 million. Subsequently, thisagreement was renegotiated and Station received an option through early January2003 to purchase 50% of the operation in consideration for the $4.5 millionpreviously received. During 2002, several countries made it increasinglydifficult for their citizens to gamble on-line. Further, as a licensed operatorin the Isle of Man, we were subject to numerous restrictions and controls onhow we operated this business, which made it difficult for us to competeagainst companies operating under less rigorous regulations. As a result, weconcluded that this business would not be economically viable in the short tomedium term. We therefore discontinued the operations of Kerzner InteractiveLimited during the first quarter of 2003 and the Company and Station mutuallyagreed to terminate their relationship in this regard. Losses and closure costsin 2003 were more than offset by the recognition of income of the $4.5 millionoption consideration, which resulted in $1.3 million in income fromdiscontinued operations, net of income tax effect for the year ended December 31,2003.

 

**OtherMatters**

** **

**ForeignCurrencies**

** **

We prepare our financial statements in U.S. dollars.Our most significant non-U.S. operations are in The Bahamas. Due to currentgovernmental policies in The Bahamas that equate one Bahamian dollar to oneU.S. dollar and due to the large portion of our cash and cash equivalents beingheld in U.S. dollars, we believe that we do not have material market riskexposures in this jurisdiction relative to changes in foreign exchange rates.Due to the stability of the other markets in which we operate and the fact thatwe do not operate in any highly inflationary economies, we also believe that wedo not have material market risk exposures in these jurisdictions relative tochanges in foreign exchange rates.

 

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**Consolidationof Variable Interest Entities**

** **

In December 2003, the FASB issued FIN 46R. Thisinterpretation of Accounting Research Bulletin 51, “Consolidated FinancialStatements,” addresses consolidation by business enterprises of variableinterest entities which have one or both of the following characteristics: (i) theequity investment at risk is not sufficient to permit the entity to finance itsactivities without additional subordinated financial support from other partieswhich is provided through other interests that will absorb some or all of theexpected losses of the entity or (ii) the equity investors lack one ormore of the following characteristics of a controlling financial interest:(a) the direct or indirect ability to make decisions about the entity’sactivities through voting rights or similar rights, (b) the obligation toabsorb the expected losses of the entity if they occur, which makes it possiblefor the entity to finance its activities or (c) the right to receive theexpected residual returns of the entity if they occur, which is the compensationof the risk of absorbing the expected losses. We adopted FIN 46R on January 1,2004.

 

We have determined that Palmilla JV, LLC, in which wehave a 50% equity interest, constitutes a variable interest entity that issubject to consolidation in accordance with the provisions of FIN 46R, as therelated operating agreement contains a put option that, if exercised, wouldobligate the Company to purchase the remaining 50% of the entity, resulting inour being the primary beneficiary of the entity. As such, effective January 1,2004, we consolidated the results of operations and financial position ofPalmilla JV, LLC, with the remaining 50% interest reflected as minorityinterest in the accompanying consolidated statement of operations andconsolidated balance sheets for the year ended and as of December 31,2004.

 

**(C)**       Liquidityand Capital Resources

** **

Going into 2005, we believe we are well positioned to fundour commitments related to our announced development projects that are nowmoving forward from the planning phase to actual development.  Our practice to date has been to invest ourexcess cash in U.S. Treasury Bills (“T-Bills”) and prime rated money markets.

 

This year we plan to break ground on the 600-room all-suitehotel component of the Phase III expansion, the approximately 2,000-roomAtlantis, The Palm, the destination resort casino in Morocco, the approximately500-unit condo-hotel on Paradise Island and the Ocean Club Residences &Marina.  We expect to finance thesedevelopment projects during 2005 with our current cash on hand, cash flow fromoperations and borrowings under our Amended Credit Facility.

 

During 2004, we made significant progress in preparingfor our upcoming development and capital needs. We began enhancing our funding capacity in anticipation of our futuredevelopment plans in April 2004 with the issuance of $230.0 million principalamount of 2.375% Convertible Senior Subordinated Notes due 2024.  In July 2004, we amended our revolvingcredit facility to increase the maximum amount of outstanding borrowings from$253.5 million to $500.0 million and to provide for increased totalleverage.  In July 2004, we alsocompleted an equity offering in The Bahamas of approximately 4.3 million BDRs,the equivalent of approximately 0.4 million Ordinary Shares, that resulted innet proceeds of approximately $19.1 million. In August 2004, we sold 3.0 million Ordinary Shares to Istithmar at aprice of $51.25 per share, resulting in net proceeds of $153.4 million.  These transactions allowed us to accumulate $203.9million of short-term investments and $180.3 million in cash and cashequivalents as of December 31, 2004. Also during the year, the One&Only Palmilla refinanced itsoutstanding debt which resulted in the extinguishment of a $46.5 millionKerzner guarantee.  The Amended Credit Facilitywas undrawn at December 31, 2004, and we have $494.0 million availableafter giving effect to $6.0 million in letters of credit outstanding.  The Amended Credit Facility containscustomary affirmative and restrictive covenants that, among other things:(a) require periodic financial reporting, (b) require meeting certainfinancial amounts and ratio tests, (c) restrict the payment of dividends,(d) limit the incurrence of indebtedness and (e) limit asset expendituresand dispositions outside the ordinary course of business.  See “(G) Tabular Disclosure of ContractualObligations” below for more information.

 

We believe our operating cash flows, as a percentageof operating income, were higher than many of our competitors due primarily tothe relinquishment (from Mohegan Sun) and management fee nature of a portion ofour income (which requires minimal investment), the lack of any corporateincome tax in The Bahamas and net operating loss carryforwards that offset ourU.S. sourced income. We believe that available cash on hand and short-terminvestments, combined with funds generated from operations and availabilityunder our Amended Credit Facility will be sufficient to finance our cashrequirements over the next twelve months.  In the longer term, we may require additionalfunding, particularly if any of our three U.K. projects or the TCNY project proceeds,or if we identify any significant new opportunities.  Accordingly, from time to time, we evaluateour need of capital for 

 

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major development projects and the various optionsavailable to us in the capital markets. With respect to our investment initiatives such as BLB, Morocco andKerzner Istithmar, along with certain other equity investments, we expect amajority of the financing will be raised at the project level, on anon-recourse or limited recourse basis to Kerzner.

 

**OperatingActivities**

** **

During 2004, we generated $136.5 million of cash flowfrom operating activities compared to $132.7 million in 2003 and $127.3 millionduring 2002.  The cash flow fromoperating activities in 2004 was primarily due to the contribution to netincome from our Atlantis, Paradise Island operations of $102.3 million, which isnet of $48.9 million of non-cash depreciation and amortization.  In addition, we earned $35.9 million ofrelinquishment fees from TCA, of which we received $35.4 million in cashreceipts during 2004.  There are no significantrelated expenses associated with our relinquishment fees from TCA, other thantaxes paid to the State of Connecticut. Other sources of cash flow from operating activities include thecontribution to net income of $4.9 million from our One&Only Resorts segment,which is net of $10.0 million of non-cash depreciation andamortization.  These cash flows wereoffset by cash outflows from operations, which included $31.9 million ofcash interest payments (excluding $5.8 million of capitalized cash interestpayments) and approximately $34.5 million of cash payments related to corporateexpenses.

 

**InvestingActivities**

** **

During 2004, net cash outflows used in investingactivities (acquisitions and capital expenditures) were $467.5 millioncompared to $72.6 million in 2003.

 

During 2004, we purchased $205.0 million principalamount of T-Bills with the proceeds received from the issuance of our 2.375%Convertible Senior Subordinated Notes and the proceeds received from theissuance of Ordinary Shares.  As of December 31,2004, the balance of the T-Bills was $203.9 million and they have maturitydates ranging from March 2005 to September 2005.

 

Our business requires capital to fund our jointventures, to develop new properties and maintain our existing properties, whichconsists of items such as information technology upgrades, new slot machinesand improvements to the resorts, including renovations, carpeting, banquet andrestaurant equipment upgrades.  During2004, we used $119.4 million for capital expenditures, which includes$59.5 million of capital expenditures incurred primarily for the development onParadise Island related to the Phase III expansion, including the MarinaVillage and the Ocean Club Villas, $3.3 million of other capital additions onParadise Island, $17.2 million of capital additions incurred related to thecompletion of the redevelopment of the One&Only Palmilla and $5.6 millionof capital additions related to the development of gaming projects in theUnited Kingdom.  The remaining balance of$33.8 million was primarily used for ongoing capital projects on ParadiseIsland.  We also paid $30.9 millionduring 2004 to complete the purchase of the assets of Club Méditerranée(Bahamas) Limited and certain adjacent land lots.  During 2004, capital expenditures were primarilyfunded through internally generated funds.

 

During 2005, we anticipate our capital expenditures willbe approximately $60.0 million for maintenance projects on Paradise Islandrelating to renovations of certain towers of Atlantis, Paradise Island andupgrades to the food and beverage outlets. By 2009, we plan to have renovated, refinished and updated the interiorof each tower within the property, including food and beverage outlets.

 

In connection with the Phase III expansion, we expect ourtotal investment (exclusive of the Harborside timeshare project, thecondo-hotel, the Athol Golf Course and Ocean Club Residences & Marina) tobe approximately $650.0 million.  During2004, we spent $59.5 million and we expect to spend $230.0 million, $340.0 millionand $20.5 million in 2005, 2006 and 2007, respectively.  In accordance with our amended Heads ofAgreement, we have committed to substantially complete the all-suite hotel andcertain other aspects of the Phase III expansion by December 2006.  We expect the second phase of the Harborsideat Atlantis expansion, the approximately 500-unit condo-hotel and Ocean ClubResidences & Marina to cost approximately $60.0 million, $240.0 million and$130.0 million, respectively.  Theseprojects will be joint ventures and will be primarily financed from proceedsreceived from pre-sales of units.

 

We invested $47.4 million in connection with BLB’sacquisition of a 22.2% ownership interest in Wembley during 2004.  In February 2005, Wembley and BLB announcedthat they had entered into a conditional sale agreement providing for thepurchase by BLB of a holding company that owns Wembley’s U.S. operations inexchange for BLB’s existing stake in Wembley plus additional cash that will beprovided in the form of debt financing from a consortium of banks.  The purchase price is expected to beapproximately $455.0 million.  

 

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Additionally, in connection with the transaction,Wembley is expected to repurchase BLB’s existing shareholding in Wembley forapproximately $116.0 million.  Inaddition, BLB anticipates making certain infrastructure improvements at LincolnPark.  BLB has received bindingcommitments from institutional lenders to provide up to $495.0 million infinancing (which would be non-recourse to the BLB owners) to cover the costs ofthe acquisition and the infrastructure improvements.  Based on these commitments, we do not expectto provide further funding to BLB in connection with the acquisition.  Among other things, BLB’s purchase offer isconditioned on an increase in the number of authorized VLTs at Lincoln Park toapproximately 4,750, the execution of a long-term revenue-sharing arrangementfor the Lincoln Park facility with the State of Rhode Island (any suchagreement would require the approval of the Rhode Island Senate, the RhodeIsland House of Representatives and the Governor) and a tax parity arrangementwith the State of Rhode Island to ensure that the tax rate imposed on LincolnPark’s gaming operations will not exceed the tax rate imposed on any othergaming operations within the State.  Theconditional sale agreement may be terminated by either party if the transactionhas not been completed by May 30, 2005.

 

During the year ended December 31, 2004, wefunded $67.0 million in subordinated completion loans to the developmentof the One&Only Reethi Rah, resulting in a total amount funded by Kerzner of$82.4 million since the inception of the project.  The One&Only Reethi Rah obtainedfinancing in December 2004 and repaid $28.0 million of the completion loans,resulting in $54.4 million due from the One&Only Reethi Rah as of December 31,2004.  See “Off Balance Sheet Arrangements”for further discussion of the One&Only Reethi Rah financing.  In addition, we loaned $1.5 million toHarborside at Atlantis during 2004 in connection with the second phase oftimeshare expansion.  Further, weadvanced amounts to certain affiliates in connection with various projects,including $5.8 million for the One&Only Cape Town and $1.7 millionfor the other proposed One&Only property in South Africa.

 

To date, we have invested $21.8 million inKerzner Istithmar related to the development of Atlantis, The Palm.  During 2005 and 2006, we expect to fund anadditional $60.0 million and $18.2 million, respectively, related toour $100.0 million total commitment.  Thedevelopment costs of the project are estimated at $1.1 billion and Kerznerand Istithmar are currently in the process of completing project financing on alimited recourse basis from a syndicate of banks for a $700.0 million term loanfacility.  The closing of the term loanfacility is expected to occur in the second quarter of 2005.  Istithmar has agreed to underwrite $200.0million of the joint venture’s limited voting Class B common stock.  In addition, each of Istithmar and Kerznerwill provide, on a joint and several basis, additional sponsor support of up to$55.0 million with respect to cost overruns and post-completion debt serviceobligations.  In addition to the jointand several sponsor support, Istithmar has agreed to provide a$100.0 million guarantee to cover any post-completion debt serviceobligations over $55.0 million. Further, Istithmar has agreed to provide an additional guarantee forcost overruns over $55.0 million.  Wecommenced construction on Atlantis, The Palm in the first quarter of 2005 and anticipatethat the project will be completed in 2008. This project is subject to various closing conditions, including obtainingall requisite governmental consents and binding commitments for the necessaryfinancing.

 

We have entered into an Agreement in Principle withtwo Moroccan companies that contemplates the creation of a joint venture thatwill own a destination resort casino in Morocco that we will develop andmanage.  We have agreed to commit up to approximately$47.0 million in equity to the joint venture, which we expect to fund in2005.  The project cost is estimated at$230.0 million.  Our Moroccan partnerswill fund the remaining equity requirement and the balance of the requiredfinancing is expected to be raised by a consortium of Moroccan banks.

 

In connection with the development of a casinofacility in Northampton, we have incurred $1.1 million in construction inprogress costs as of December 31, 2004 and expect to fund $7.0 million ineach of 2005 and 2006, respectively.

 

In connection with the operating agreement related tothe One&Only Palmilla, the owner of the other 50% interest has the right torequire us to acquire its 50% interest from the owner for a price of $36.3million, plus 50% of the One&Only Palmilla’s working capital, with theprice subject to adjustment, as defined in the purchase agreement, during thefirst year of the option period. The purchase price during the second year ofthe option period is based on a formula, as defined. The option period beginson September 12, 2005 and expires on September 12, 2007.

 

**FinancingActivities**

** **

Net cash provided from financing activities was $451.1million in 2004 as compared to net cash used in financing activities of $33.8million in 2003. Cash received during the year consisted of net proceedsreceived of 

 

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$223.7 million related to the issuance of the 2.375%Convertible Senior Subordinated Notes, $153.4 million related to the issuanceof 3.0 million Ordinary Shares to Istithmar, $40.5 million in proceeds receivedfrom the exercise of share options and $19.1 million in proceeds received fromthe issuance of 0.4 million Ordinary Shares in connection with the BDR offering.

 

In December 2004, the One&Only Palmillaentered into two promissory notes totaling a principal amount of$110.0 million (the “Palmilla Notes”). The $110.0 million of proceeds received from the Palmilla Noteswere used to pay down $88.1 million of amounts previously outstanding under thePalmilla senior credit facility (the “Palmilla Senior Credit Facility”).  In connection with the Palmilla Senior CreditFacility, we previously guaranteed $46.5 million.  This guarantee was extinguished when theOne&Only Palmilla repaid all amounts outstanding under the Palmilla SeniorCredit Facility.

 

As shown in Tabular Disclosure of ContractualObligations below, as of December 31, 2004, we do not have any significantscheduled debt repayments due until 2007, when the principal of the PalmillaNotes matures.  The issuers of thePalmilla Notes may exercise three successive one-year extensions, which, ifexercised, would extend the repayment of the principal of the Palmilla Notesuntil 2010.  Any drawings under ourAmended Credit Facility are not due until July 2009. We anticipate thatprior to maturity, interest payments will be provided from cash flows fromoperations. We believe we are in compliance with the debt covenants of ourAmended Credit Facility. If we were to take on additional financing in thefuture, our ability to meet our existing debt covenants is a factor indetermining whether we will be able to obtain future financing to fund ourcapital needs.  We monitor our debtcompliance on an ongoing basis and confirm compliance quarterly.  During 2004, our average cost of debt wasapproximately 6.4%.

 

**WorkingCapital**

** **

Working capital, which equals current assets lesscurrent liabilities, was $306.5 million at December 31, 2004, reflecting acurrent ratio, which equals current assets divided by current liabilities, of2.7:1. Working capital increased by $343.9 million from December 31,2003, principally due to the net proceeds of $223.7 million from theissuance of $230.0 million principal amount of our 2.375% Convertible SeniorSubordinated Notes in April 2004 and net proceeds from the issuance of OrdinaryShares of $153.4 million, offset by loans and advances to affiliates, net ofrepayments of $49.4 million.

 

**InterestRate Swap and Cap Agreements**

** **

We attempt to limit our exposure to interest rate riskby managing the mix of fixed and variable rate debt, and by entering intovariable interest rate swap agreements to hedge a portion of our fixed ratedebt. These interest rate swap agreements are entered into with a group offinancial institutions with investment grade credit ratings, thereby minimizingcounterparty credit risk.

 

In August and December 2001, we entered intofixed-to-variable rate swap agreements with respect to our 87/8% Senior Subordinated Notesdue 2011, which were issued in August 2001. As of December 31, 2004, theaggregate notional amount of the swap agreements was $150.0 million and theymature in August 2011 concurrent with our 87/8% Senior SubordinatedNotes. Under the terms of the swap agreements, we make payments based onspecific spreads over six-month LIBOR and receive payments equal to theinterest payments due on the notes. The spreads in excess of six-month LIBORare 3.02% for $100.0 million, 2.95% for $25.0 million and 2.91% for theremaining $25.0 million.  During theyears ended December 31, 2004 and 2003, the weighted average variable rateon the swap agreements was 4.9% and 4.2%, respectively.  Giving effect to these swap agreements, ourfixed and variable rate debt represented approximately 65% and 35% (76% and 24%excluding the Palmilla Notes) as of December 31, 2004 and 56% and 44% asof December 31, 2003, respectively.

 

In connection with our interest rate swap agreements,for every 100 basis points that LIBOR increases or decreases, interest expensecorrespondingly changes by $1.5 million per annum.

 

The Palmilla Notes bear interest at a floating rate ofone-month LIBOR plus 3.75%, however the One&Only Palmilla was required toenter into an interest rate cap agreement contemporaneously with its issuanceof the Palmilla Notes.  The interest ratecap has an effective date of December 17, 2004 and a maturity of January9, 2007.  If the one-month LIBOR rateexceeds 5.0% on a rate reset date during the period from December 17, 2004to January 9, 2007, the counterparty will pay the One&Only Palmilla theamount equal to $110.0 million multiplied by one-month LIBOR minus 5.0%multiplied by the number of days in the period divided by 360.

 

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**OtherMatters**

** **

**CriticalAccounting Policies**

** **

Our critical accounting policies include those whichrequire our most subjective or complex judgments as a result of the need tomake certain estimates and assumptions when there is uncertainty as to theirfinancial effects. Although all of the policies identified in the notesaccompanying the consolidated financial statements are important to anunderstanding of such financial statements, the policies discussed below areconsidered by management to be central to their understanding because of (i)the higher level of measurement uncertainties involved in their application and(ii) the effect that changes in these estimates and assumptions could have onthe consolidated financial statements.

 

We base our estimates on, among other things,currently available information, our historical experience and on variousassumptions, the results of which form the basis of making judgments about thecarrying values of assets and liabilities that are not readily apparent fromother sources.  Although we believe thatthat these assumptions are reasonable under the circumstances, estimates woulddiffer if different assumptions were utilized and these estimates may prove inthe future to have been inaccurate. There can be no assurance that actualresults will not differ from these estimates.

 

*Stock Based Compensation.*  We have elected to follow AccountingPrinciples Board Opinion No. 25, “Accounting for Stock Issued to Employees” andrelated Interpretations in accounting for our employee stock options as allowedpursuant to FASB Statement No. 123, as amended by FASB Statement No. 148 (“SFAS123”). Accordingly, no compensation expense related to stock options has beenrecognized for the years ended December 31, 2004, 2003 and 2002.

 

If the compensation cost for our stock option planshad been determined on the basis of the fair value at the grant date for awardsunder those plans, consistent with SFAS 123, and our existing valuation methodfor our employee stock options, the Black Scholes option pricing model, weestimate that our net income for the years ended December 31, 2004, 2003and 2002 would have been reduced by $7.4 million, $3.7 million and $6.4million or 11%, 5% and 16%, respectively.  However, SFAS 123 requires the use ofoption valuation models that require the input of highly subjectiveassumptions, including expected stock price volatility.  The Company anticipates applying thisstatement for its third quarter beginning July 1, 2005, which would result incompensation expenses of approximately $3.3 million (not including tax effects)for the second half of 2005, based on option grants outstanding at December 31,2004.  The foregoing amount does notinclude compensation expense for any stock options granted after January 1,2005.  The effect of applying the fairvalue method of accounting for stock options on reported net income for 2004,2003 and 2002 may not be representative of the effects for future years becauseoutstanding options vest over a period of several years and additional awardsare generally made each year.

 

See “Recent Accounting Pronouncements—Share BasedPayment” for further discussion on stock-based compensation.

 

*Income Taxes.*  We are subject to corporate income taxes incertain jurisdictions. Accordingly, the accompanying consolidated statements ofoperations include a provision for income taxes based on the prevailing taxlaws of those jurisdictions.

 

We account for income taxes in accordance with SFASNo. 109, “Accounting for Income Taxes.” Realization of future tax benefitsrelated to deferred tax assets is dependent on many factors, including ourability to generate future taxable income. We adjust the valuation allowance related to our deferred tax assets tothe amount that is more likely than not to be realized. As of December 31,2004, we had deferred tax assets, net of valuation allowance, totaling $11.2million. In determining our net realizable tax assets, we consider our abilityto carry back certain net operating losses, future taxable income and ongoingprudent and feasible tax planning strategies. We have determined that, as ofDecember 31, 2004, a valuation allowance of $148.4 million was necessary tooffset our deferred tax assets. This represents a reduction of $40.4 million fromour valuation of $188.8 million at December 31, 2003; $3.5 million representsamounts released as income tax benefit and the remaining amount relatesprimarily to tax effected expiration of net operating loss carryforwards.  In the event that we were to determine thatwe would not be able to realize all or part of our deferred tax assets in thefuture, or that the realization of additional deferred tax assets is morelikely than not, an adjustment to the valuation allowance would occur in theperiod such determination is made.

 

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From time to time, we may be subject to auditscovering a variety of tax matters by taxing authorities in any taxingjurisdiction where we conduct our business. While we believe that the tax returns we file and any tax positions wetake are supportable and accurate, some tax authorities may not agree with ourpositions.  This can give rise to taxuncertainties which, upon audit, may not be resolved in our favor.  We have established accruals for various taxuncertainties that we believe are probable and reasonably estimable.  These accruals are based on certainassumptions, estimates and judgments including estimates of probability,estimates of amounts for settlements, associated interest and penalties.  Changes to these assumptions, estimates andjudgments could have a material impact on our provision for income taxes.  For the year ended December 31, 2004, wereduced our tax accruals by $3.7 million as a result of the expiration of certainstatutes of limitation.

 

*Long-Lived Assets.*  We review our long-lived assets and certainidentifiable intangibles for impairment whenever events or changes incircumstances indicate that the carrying amount of an asset may not be fullyrecoverable. If changes in circumstances indicate that the carrying amount ofan asset that we expect to hold and use may not be recoverable, future cashflows expected to result from the use of the asset and its disposition areestimated. If the undiscounted value of the future cash flows is less than thecarrying value of the asset, the carrying value of the long-lived asset will bereduced by the amount by which the carrying value exceeds fair value. We do notbelieve that any such changes in circumstances have occurred which wouldrequire our long lived assets to be tested for recoverability, other than theportion of land in Atlantic City in which we recognized a $7.3 millionimpairment loss during 2004.

 

*Allowance for Doubtful Trade Receivables andAmounts Due from Affiliates.* We maintain allowances for doubtful trade receivables arising fromcasino, hotel and other services and amounts due from affiliates.  These allowances are based upon a specificreview of outstanding receivables for estimated losses resulting from ourinability to collect from customers or affiliates. As of December 31,2004, our trade receivables, net totaled $41.7 million, including an allowancefor doubtful trade receivables of $6.5 million. Bad debt expense related to gaming receivables was $1.0 million and $0.9million for the years ended December 31, 2004 and 2003, respectively.  The allowance for doubtful accounts relatedto gaming remained 29% of total gaming receivables for both 2004 and 2003.  During the year ended December 31, 2004,the Company recognized $1.8 million of bad debt expense associated with certainaffiliated receivables.

 

In extending credit, we attempt to assess our abilityto collect by, among other things, evaluating the customer’s financialcondition, both initially and on an ongoing basis. In evaluating the adequacyof our allowance for doubtful trade receivables, we primarily analyze tradereceivable balances, the percentage by aging category and historical bad debts,among other things.

 

If the likelihood of collection on accounts or ourability to collect were to deteriorate, an increase to the allowance may berequired. Also, should actual collections of trade receivables be differentthan our estimates included in the determination of our allowance, the allowancewould be increased or decreased through charges or credits to selling, generaland administrative expenses in the consolidated statements of operations in theperiod in which such changes in collection become known. If conditions changein future periods, additional allowances or reversals may be required. Suchadditional allowances could be significant.

 

*Guarantees.*  In connection with Interpretation No. 45, “Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others” (“FIN 45”), we recognize, at theinception of a guarantee, a liability at an estimate of the guarantee’s fairvalue for the obligations we have undertaken in issuing a guarantee, includingits ongoing obligation to stand ready to perform over the term of the guaranteein the event that the specified triggering events or conditions occur.  In recording the $2.8 million fair valueof the Palmilla JV, LLC guarantee in 2003, we estimated the premium thatwould be required by a third party to issue the same guarantee in a stand-alonearm’s length transaction with an unrelated party.  We estimated the fair value by calculatingthe net present value of the difference in cash flows of interest paymentsbetween the estimated interest amounts payable without the guarantee and thecash flows of those same interest payments with the guarantee.  The difference between these two amounts was $2.8 millionrepresenting the estimated fair value of the guarantee.  The components of the calculation include theamount guaranteed, the estimated interest rate of the credit facility withoutthe guarantee, the interest rate of the facility with the guarantee, thediscount rate for the net present value calculation and the estimated term ofthe guarantee to arrive at the approximate cash flows under each scenario.  Upon consolidation of the results of PalmillaJV, LLC in 2004, we have eliminated the fair value of the guarantee.  As of December 31, 2004, this guaranteeno longer exists, as the underlying debt that was guaranteed was repaid in December 2004.

 

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**RecentAccounting Pronouncements**

** **

*Other-Than-TemporaryImpairment of Investments*

* *

In March 2004, the EITF of the FASB reached aconsensus on Issue No. 03-01, “The Meaning of Other-Than-Temporary Impairmentand Its Application to Certain Investments” (“EITF 03-01”). EITF 03-01addresses the meaning of other-than-temporary impairment and its application todebt and equity securities within the scope of SFAS No. 115, “Accountingfor Certain Investments in Debt and Equity Securities” (“SFAS 115”) and equitysecurities that are not subject to the scope of SFAS 115 and not accountedfor under the equity method of accounting. As of December 31, 2004, the Company determined that EITF 03-01had no impact on its consolidated financial statements.

 

*Contingently ConvertibleInstruments*

* *

In September 2004, the EITF reached a consensuson Issue No. 04-08, “The Effect of Contingently Convertible Instruments onDiluted Earnings Per Share” (“EITF 04-08”), which is effective forreporting periods ending after December 15, 2004. EITF 04-08 requirescompanies to include shares issuable under convertible instruments in dilutedearnings per share computations (if dilutive) regardless of whether the marketprice trigger (or other contingent feature) has been met. In addition, priorperiod earnings per share amounts presented for comparative purposes must berestated. In April 2004, the Company issued contingent convertible notes. Inaccordance with EITF 04-08, there will be no impact on future diluted earningsper share related to these notes until the Company’s average Ordinary Share priceexceeds the conversion price of $58.24 even though the market price trigger of120% of the conversion price, or $69.89, has not been met. In that situation,the Company would reflect the additional Ordinary Shares in the calculation ofdiluted earnings per share using the treasury share method.  EITF 04-08 did not impact earnings per sharein 2004, as the average stock price for the year did not exceed $58.24.  However, EITF 04-08 may have an effect in2005.  On March 24, 2005, theclosing price for our Ordinary Shares on the NYSE was $60.60.  If $60.60 were the average price for 2005,our number of fully diluted outstanding shares would increase by 153,789.

 

*Share-Based Payment*

* *

In December 2004, the FASB issued a revision ofSFAS 123 (“SFAS 123(R)”) that will require compensation costs related toshare-based payment transactions to be recognized in the statement ofoperations. With limited exceptions, the amount of compensation cost will bemeasured based on the grant-date fair value of the equity or liabilityinstruments issued. In addition, liability awards will be remeasured eachreporting period. Compensation cost will be recognized over the period that anemployee provides service in exchange for the award. SFAS 123(R) replaces SFAS123 and is effective as of the first interim period beginning after June 15,2005.  Based on the number of shares andawards outstanding as of December 31, 2004 (and without giving effect toany awards which may be granted in 2005), we expect that the adoption of SFAS123(R) will impact earnings by approximately $3.3 million during 2005.

 

**(D)**       Research andDevelopment, Patents and Licenses

** **

Not applicable.

 

**(E)**         TrendInformation

** **

During the first two months of 2005, Atlantis,Paradise Island’s results were ahead of results for the same period lastyear.  Atlantis, Paradise Island achievedan average occupancy of 83% and an ADR of $284, which compares to an averageoccupancy of 80% and an ADR of $277 in 2004. Atlantis, Paradise, Island’s RevPAR of approximately $234 was $14 higherthan the same period last year.

 

For the first two months of 2005, Atlantis, Paradise Island’scasino contribution to net income was $12.1 million compared to$13.2 million for the first two months of 2004.  The decrease in casino contribution isprimarily due to a lower table hold of 14.6% for the first two months of 2005compared to 15.8% for the first two months of 2004.  In addition, Atlantis, Paradise Islandexperienced a 13.5% decrease in table drop over the same period in 2004 dueprimarily to a shift in the timing of visits by high end players.  For the first two months of 2005, slot winincreased by 18.4% over the same period in 2004.  Slot coin-in was 26.7% higher while slot winwas higher by $1.9 million.  Due tothe normal volatility patterns experienced in the casino industry, particularlyin the table game area, these results may not necessarily be indicative ofcontinuing trends.

 

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In December 2004, we announced the development ofthe Ocean Club Residences & Marina. As of February 28, 2005, we have received deposits on all of the 44currently available for sale units at this development.

 

In the third quarter of 2005, we expect to open theMarina Village, which we expect will provide additional food and beverage andrental income from third-party retail operators.

 

Relinquishment fees and other fees earned by us fromTCA were $36.8 million for the year ended December 31, 2004. We anticipatethat relinquishment fees will be slightly higher for the year ending December 31,2005 due to increases in Mohegan Sun revenues.

 

In connection with $150 million in principal amount ofour 87/8% Senior SubordinatedNotes, we have entered into interest rate swap agreements to hedge this portionof our fixed rate debt, in which the rates paid by us are at six-month LIBORplus 291 to 302 basis points. In connection with our interest rate swapagreements, for every 100 basis points that LIBOR increases or decreases, interestexpense correspondingly changes by $1.5 million per annum.

 

Corporate expenses were $34.5 million for the yearended December 31, 2004. We anticipate that these expenses will be higherin 2005 due to additional compensation costs and expense related to theadoption of SFAS 123(R).

 

**(F)**         Off-BalanceSheet Arrangements

 

At December 31, 2004, our off-balance sheetarrangements and other commitments were as follows:

 

(a)          ReethiRah Resort Pvt. Limited – Financings ($41.0 million)

Subject to certainconditions, SRL has a right of first refusal to participate equally with us inany new hotels we develop in specified Indian Ocean territories.  If SRL elects to participate in the equity orother funding of any such project, then the management agreement for thatproperty will be held by One&Only Management.  SRL’s board of directors has approved theexercise of its right to participate on a proportionate basis (effectiveJanuary 1, 2005 the participation of SRL increased to 25%) with us in connectionwith the One&Only Reethi Rah.  As aresult, we expect the management agreement for the One&Only Reethi Rah tobe transferred to One&Only Management and expect SRL to be obligated toprovide 25% of the total subordinated debt financing discussed below, with itscommitment increasing to 50% of such financing as SRL’s ownership interest inOne&Only Management increases to 50%. It is likely that we will provide bridge financing to SRL to enable itto meet its financing commitment.

 

At December 31,2004, Reethi Rah Resort Pvt. Limited, the owner of the development (“Reethi Pvt”),had outstanding indebtedness consisting of $55.0 million of senior securedloans provided by a group of banks, $54.4 million principal amount ofunsecured subordinated loans advanced by Kerzner and $12.0 million ofunsecured subordinated loans provided by SRL. The payment of principal and interest on our and SRL's advances toReethi Pvt is subordinate in right of payment, to the extent set forth incertain agreements, to the prior payment of the senior secured loans providedby the group of banks.  Reethi Pvt andthe shareholders, Sultans of the Seas (Pvt) Ltd. (60%) and Ali Ahmed (40%),have not provided and are not expected to provide any material equity fundingto this project, other than the land lease for the construction site.  We currently estimate the aggregate cost ofthe project to be approximately $162.0 million, which includes the costsof repairing tsunami damage and does not reflect any insurance recoveries.  Accordingly, we expect that approximately$41.0 million of subordinated debt financing will be required in the firsthalf of 2005 to complete the project, and that we will provide most or all ofthis amount, either directly to Reethi Pvt or in loans to SRL to allow SRL toadvance the funds to Reethi Pvt.  We willfund or arrange for funding for any additional development costs to completethe construction of the resort.

 

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Subsequent toDecember 31, 2004, we expect our financing commitment to also include a$5.0 million lease guarantee and an EBITDA guarantee.  Under the lease guarantee, we will guaranteeReethi Pvt’s obligations under leases of $5.0 million of property andequipment to be used at the resort.  Underthe EBITDA guarantee, during each of the first four years of the resort’soperations, we will be obligated to provide further loans to Reethi Pvt equalto the lesser of $6.0 million or the difference between $6.0 millionand the EBITDA achieved by the resort, on a non-cumulative basis, the maximumtotal commitment being up to $24.0 million.

 

The One&Only ReethiRah is currently a development stage enterprise.  We will be required to reevaluate theOne&Only Reethi Rah in connection with FIN 46R when the resortcommences operations.

 

 (b)      One&Only Kanuhura – Guarantee($10.7 million)

In connection withour purchase of a 25% equity interest in the One&Only Kanuhura (fromJanuary 1, 2003 to December 31, 2004 we held a 20% interest), we wererequired to guarantee certain of its obligations to its other shareholders.  Effective January 1, 2005, our ownershipinterest decreased to 18.75%.  We are notobligated under these guarantees unless the property does not have excess cash availableto repay certain shareholder loans.  Asof December 31, 2004, the amount of senior debt owed to us was $2.4 million,excluding accrued interest. Our obligations under these guarantees expire whenthe underlying obligations are repaid.

 

**(G)**       TabularDisclosure of Contractual Obligations

 

At December 31, 2004, we believe our contractualobligations, other than the guarantees and commitments described above, were asfollows (in thousands):

 
| **Contractual Cash Obligations**                 | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
|--------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------------|------------|-----------|------------|
| 87/8% Senior Subordinated Notes(a)               |       | $        | 35,500     |     | $          | 35,500   |       | $        | 35,500     |     | $          | 35,500         |       | $         | 35,500     |   | $ | 471,000 |   | $ | 648,500 |   |
| 2.375%  Convertible Senior Subordinated Notes(b) |       | 5,463    |       | 5,463    |       | 5,463    |       | 5,463    |       | 5,463    |       | 311,935        |       | 339,250   |       |
| Palmilla  Notes(c)                               |       | —   |       | —   |       | 110,000  |       | —   |       | —   |       | —         |       | 110,000   |       |
| Amended Credit  Facility(d)                      |       | —   |       | —   |       | —   |       | —   |       | —   |       | —         |       | —    |       |
| Operating  leases(e)                             |       | 3,090    |       | 2,707    |       | 2,297    |       | 1,875    |       | 1,953    |       | 16,834         |       | 28,756    |       |
| Capital  leases(f)                               |       | 659      |       | 451      |       | 238      |       | 13       |       | —   |       | —         |       | 1,361     |       |
| Purchase  obligations(g)                         |       | 8,856    |       | —   |       | —   |       | —   |       | —   |       | —         |       | 8,856     |       |
| Atlantis, The  Palm(h)                           |       | 60,000   |       | 18,200   |       | —   |       | —   |       | —   |       | —         |       | 78,200    |       |
| Morocco(h)                                       |       | 47,000   |       | —   |       | —   |       | —   |       | —   |       | —         |       | 47,000    |       |
| Total  contractual cash obligations              |       | $        | 160,568    |     | $          | 62,321   |       | $        | 153,498    |     | $          | 42,851         |       | $         | 42,916     |   | $ | 799,769 |   | $ | 1,261,923 |   |

 

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(a)          Balancerepresents amounts outstanding under our 87/8%Senior Subordinated Notes. In connection with these notes, interest paid to theholders on an annual basis is $35.5 million. However, in connection with ourinterest rate swap agreements related to the 87/8%Senior Subordinated Notes, the amount paid can vary based on LIBOR during anyperiod. For the year ended December 31, 2004, our interest rate swapagreements reduced interest expense by $6.5 million.

 

(b)         Balancerepresents amounts outstanding under our 2.375% Convertible Senior SubordinatedNotes issued in April 2004.  Inconnection with these notes, interest paid to the holders on an annual basis is$5.5 million.  For the year ended December 31,2004, interest expense related to these notes was $4.0 million.  The 2.375% Convertible Senior SubordinatedNotes are unsecured senior subordinated obligations and mature on April 15,2024 unless they are converted, redeemed or repurchased before the maturity date.The 2.375% Convertible Senior Subordinated Notes may be converted into cash andOrdinary Shares at an initial conversion rate of 17.1703 shares per $1,000principal amount in accordance with the terms of the indenture. This conversionrate is equal to a conversion price of approximately $58.24 per Ordinary Share.  Upon conversion, all of the principal amountof the notes converted must be paid in cash. The closing price of our Ordinary Shares was $60.05 on December 31,2004 and $63.94 on February 28, 2005.

 

These notes areconvertible, at the holder’s option, prior to the maturity date into cash andOrdinary Shares in the following circumstances:

 

•             During any fiscal quarter commencing afterthe date of original issuance of the notes, if the closing sale price of ourOrdinary Shares over a specified number of trading days during the previousquarter is more than 120% of the conversion price, or $69.89, of the notes;

 

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•             If the notes are called for redemption andthe redemption has not yet occurred;

 

•             During the five trading day periodimmediately after any five consecutive trading day period in which the tradingprice of the notes per $1,000 principal amount for each day of such period wasless than 95% of the product of the closing sale price of our Ordinary Shareson such day multiplied by the number of shares of our Ordinary Shares issuableupon conversion of $1,000 principal amount of the notes; or

 

•             Upon the occurrence of specified corporatetransactions.

 

(c)          InDecember 2004, the One&Only Palmilla entered into the Palmilla Notesfor $110.0 million.  Interest on thePalmilla Notes is paid monthly at LIBOR plus 3.75%.  In connection with the terms of the PalmillaNotes, the One&Only Palmilla entered into the Interest Rate Cap Agreement, whichcaps LIBOR at 5%.  The maximumcontractual interest rate on the Palmilla Notes is 8.75%.

 

(d)         Asof December 31, 2004, we had $494.0 million available under the AmendedCredit Facility, after giving effect to the $6.0 million in letters of creditoutstanding.  There were no amountsoutstanding under the Amended Credit Facility as of December 31, 2004.

 

(e)          Asof December 31, 2004, operating leases were primarily office leases, inparticular the lease related to the Company’s office in Plantation, Florida.

 

(f)            Asof December 31, 2004, capital leases primarily represented $0.9 millionand $0.5 million of leased equipment consisting primarily of golf carts andphone equipment at Atlantis, Paradise Island and the One&Only Palmilla,respectively.

 

(g)         Asof December 31, 2004, purchase obligations were primarily open purchaseorders for hotel related provisions such as food, beverage and nonperishablegoods. Purchase orders are primarily short-term in nature and generally do notexceed 90 days.

 

(h)         Forfurther discussion of the funding requirements for Atlantis, The Palm andMorocco, see “Liquidity and Capital Resources—Investing Activities.”

 

In addition, the following contingent contractualobligation, the amount of which can not accurately be estimated, is notincluded in the table above:

 

•                 The operating agreement for theOne&Only Palmilla joint venture between us and a subsidiary of GS EmergingMarket Real Estate Fund, L.P. (“GS”), our joint venture partner, provides for aput right available to GS commencing in September 2005 and ending inSeptember 2007 (subject to extension under certain conditions).  The exercise of this put right could requireus to make a substantial cash payment and, in any event, a cash payment of noless than $36.25 million to acquire our joint venture partner’s 50% interest inPalmilla JV, LLC.

 

It is anticipated that the Phase III expansioninvestment in The Bahamas will exceed $1.0 billion.  Exclusive of the Harborside at Atlantis timeshareprojects, the condo-hotel, the Athol Golf Course and Ocean Club Residences& Marina, our recently announced ultra-luxury condominium project, weexpect our investment to be approximately $650.0 million.

 

We will also be obligated to provide certain fundingif the Catskills Project proceeds.  See “Item 4.  Information on the Company, (B) BusinessOverview—Gaming—Trading Cover New York” for more information.

 

**(H)   Safe Harbor**

 

For the purposes of the safe harbor, see “Forward-LookingStatements.”

 

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## **Item 6**.                              Directors,Senior Management and Employees

## ** **

**(A)**       Directorsand Senior Management

 

The current directors of the Company are:

 
| **Name**             | ** ** | **Country  of  Citizenship** | ** ** | **Director  Since** |
|----------------------|------------|------------------------------|------------|---------------------|
| Solomon Kerzner      |       | South Africa                 |       | 1993                |
| Peter Buckley        |       | United Kingdom               |       | 1994                |
| Howard Marks         |       | United States                |       | 1994                |
| Eric Siegel          |       | United States                |       | 1994                |
| Heinrich von Rantzau |       | Germany                      |       | 2001                |
| Howard B. Kerzner    |       | South Africa                 |       | 2004                |
| Hamed Kazim          |       | United Arab  Emirates        |       | 2004                |

 

The current officers of the Company are:

 
| **Name**          | ** ** | **Title**                                              | ** ** | **Age** | ** ** | **Officer  Since** |
|-------------------|------------|--------------------------------------------------------|------------|---------|------------|--------------------|
| Solomon Kerzner   |       | Chairman of the Board  of Directors                    |       | 69      |       | 1993               |
| Howard B. Kerzner |       | Chief Executive Officer  and Director                  |       | 41      |       | 1995               |
| John R. Allison   |       | Executive Vice  President—Chief Financial Officer |       | 58      |       | 1994               |
| Richard M. Levine |       | Executive Vice  President—General Counsel         |       | 43      |       | 2004               |

 

The officers serve indefinitely at the pleasure of theBoard of Directors.

 

*Solomon Kerzner, Chairman of theBoard of Directors:* Mr. Kerzner has been our Chairman since October 1993.  From October 1993 to June 1996,Mr. Kerzner served as our President and from October 1993 until December 2003,he served as our Chief Executive Officer. Mr. Kerzner is the Chairman of WLG, which, together with itsaffiliates, as of December 31, 2004 owned approximately 12.5% of ouroutstanding Ordinary Shares. Mr. Kerzner is one of the visionary leaders of the resort andgaming industries.  Prior to foundingKerzner, Mr. Kerzner pioneered the concept of an entertainment and gamingdestination resort designed and managed to appeal to multiple market segmentsby developing Sun City, located near Johannesburg, South Africa.  Sun City features four hotels withapproximately 1,300 rooms, an entertainment center that includes a 6,000-seatindoor superbowl, a 46-acre man-made lake for water sports and approximately55,000 square feet of gaming space.  In1992, Sun City was expanded to include The Lost City, a themed resort thatfeatures a 350-room luxury hotel and a man-made jungle in which over onemillion trees were transplanted. Mr. Kerzner has been responsible for the development of 21 hotelsand founded both of southern Africa’s largest hotel groups, Southern Sun Hotelsand Sun International South Africa.  Wedo not have any interest in any of the southern African properties developed byMr. Kerzner.  Mr. Kerzner isthe father of Mr. H. B. Kerzner.

 

*Howard B. Kerzner (“Butch Kerzner”),Chief Executive Officer and Director:*  Mr. Kerzner has been our Chief ExecutiveOfficer since January 1, 2004 and a Director since December 8,2004.  Mr. Kerzner joined Kerzner inMay 1995 as Executive Vice President—Corporate Development and wasPresident from June 1996 until December 2003.  Prior to that time, he was Director—CorporateDevelopment of SIIL from September 1992. Previously, Mr. Kerzner was an Associate of LazardFrères & Co. LLC from September 1991.  Prior to that Mr. Kerzner worked for theFirst Boston Corporation.  Mr. Kerzneris the son of Mr. S. Kerzner.

 

*John R. Allison, Executive VicePresident*—*Chief FinancialOfficer:*  Mr. Allisonjoined Kerzner in May 1995 as Chief Financial Officer.  Mr. Allison joined SIIL inMarch 1994 as Group Financial Director. From December 1987 until February 1994, Mr. Allison wasFinancial Director of Sun International Inc., a resort and managementholding company with interests in approximately 27 hotels in southernAfrica.  Prior to that time, he was theGroup Financial Director of Kimberly-Clark (South Africa) Limited for fouryears.  He is a fellow of the Instituteof Chartered Accountants in England and Wales and a member of the South AfricanInstitute of Chartered Accountants.

 

*Richard M. Levine, Executive Vice President-GeneralCounsel: *Mr. Levinejoined the Company in April 2004 as our Executive Vice President & GeneralCounsel.  Mr. Levine began his legalcareer with the law firm of Cleary, Gottlieb, Steen & Hamilton and workedas an associate in both their New York and Tokyo offices.  Mr. Levine subsequently joined Credit SuisseFirst Boston as the General Counsel for its Private Equity Division and mostrecently was General Counsel for a private equity firm, Hellman & Friedman,LLC.

 

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*Peter N. Buckley, Director:*  Mr. Buckley has been a Director sinceApril 1994.  Mr. Buckley wasthe Chairman of Caledonia through 2002, which as of December 31, 2004 beneficiallyowned approximately 11.2 % of our Ordinary Shares.  In 1994 he was appointed Chairman ofCaledonia having been Deputy Chairman and Chief Executive since 1987.  He is also Chairman of Bristow AviationHoldings Limited.  He is a non-executiveDirector of Close Brothers Group PLC and Offshore Logistics, Inc. (a NYSElisted company).

 

*Hamed Kazim, Director*:  Mr. Kazim has been a Director sinceDecember 8, 2004.  Mr. Kazimserved as the Managing Partner of Ernst & Young-Dubai until May 31,2004 when he joined The Corporate Office as Group Chief Financial Officer and Headof The Corporate Office, which is owned by the Royal Family of Dubai.  Mr. Kazim joined Arthur Andersen LLP in1983 and remained until 2002 when its practice merged with Ernst & Young inthe Middle East.  Following the merger, Mr. Kazimserved as Managing Partner of the Ernst & Young-Dubai office.  During 1999 and 2000, Mr. Kazim wasseconded to Dubai Internet City as CEO to start the project.  Mr. Kazim also acted as advisor to someof the largest groups in Dubai on various organizational and businessissues.  Mr. Kazim is a graduate ofthe University of California, San Diego with a B.A. in Economics.  Mr. Kazim has been a certified publicaccountant since 1986 when he received his CPA with high distinction.

 

*Howard S. Marks, Director:*  Mr. Marks has been a Director sinceApril 1994.  Mr. Marks isChairman of Oaktree Capital Management, LLC, which manages funds in excess of$20.0 billion for institutional investors. Previously, Mr. Marks was employed by The TCW Group, Inc.where he became Chief Investment Officer for Domestic Fixed Income andPresident of its largest affiliate, TCW Asset Management Company.

 

*Eric B. Siegel, Director:*  Mr. Siegel has been a Director sinceApril 1994.  Mr. Siegel is aretired limited partner of Apollo Advisors, L.P.  Mr. Siegel is also a Director andChairman of the Executive Committee of El Paso Electric Company (a NYSE listedcompany) and is a Director of Ares Capital Corporation (a NASDAQ listedcompany).

 

*Heinrich von Rantzau, Director:*  Mr. von Rantzau has been a Directorsince July 2001.  Mr. vonRantzau is a principal of Cement Merchants SA, which as of December 31,2004 beneficially owned approximately 7.7% of our Ordinary Shares, and anexecutive of Deutsche Afrika-Linien GmbH, Reederei John T. Essberger and VORASchiffahrts-und Beteiligungsgesellschaft GmbH. Mr. von Rantzau is a boardmember of The United Kingdom Mutual Steam Ship Assurance Association (Bermuda)Limited and a member of the Trade Advisory Board of Germanischer Lloyd, Lloyd’sRegister of Shipping and German National Committee.

 

We agreed to include in the slate of directorssubmitted by us to our shareholders for election one individual designated byeach of WLG, Caledonia and CMS, subject to their retaining a minimum beneficialownership of our Ordinary Shares.  See “Item 7.  Major Shareholders and Related PartyTransactions, (B) Related Party Transactions—Registration Rights andGovernance Agreement.”  Further, inconnection with the strategic investment by Istithmar in our Ordinary Shares,we agreed to add a representative of Istithmar to our Board of Directors.  As a result, Mr. Kazim took a seat onour Board of Directors.  At such time,our Board of Directors also decided to add an additional seat on our Board ofDirectors, which was taken by our Chief Executive Officer, Mr. H. B. Kerzner.

 

**(B)**       Compensation

 

The aggregate cash compensation for our directors and officers,including salaries, bonuses and benefits in kind granted, for the year ended December 31,2004 was $6.1 million.  None of thedirectors or officers participates in a pension plan.  We do not set aside any amounts for pensionor retirement benefits for any of our directors or officers.

 

Effective from January 1, 2001, we have a bonusplan whereby our employees, including officers, will qualify for bonuses if weattain either certain levels of earnings or EPS, and such bonuses arecalculated as a percentage of each individual’s salary.  Such percentage is based on, among otherthings, each employee’s level of responsibility.  Bonuses paid to our officers under this bonusplan could reach a maximum of 100% of the respective employee’s base salary in2004.  Bonuses ranging from 37% to 61.5% weregranted in 2004.

 

We have adopted stock option plans for our employees,officers and directors in 1995 (the “1995 Plan”), in 1997 (the “1997 Plan”),and in 2000 (the “2000 Plan”) that provide for the issuance of options toacquire an aggregate of 7,500,000 Ordinary Shares.  As of December 31, 2003, all availableoptions under those plans had been granted. Accordingly, on December 11, 2003, we adopted a new stock incentiveplan (the “2003 Plan” and, together with the 1995 Plan, the 1997 Plan and the2000 Plan, the “Plans”) that provides for the issuance of an aggregate of

 

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3,000,000 Ordinary Shares in connection with awards of stock options,restricted stock and other stock-based awards.

 

The 1995 Plan provides for the options to becomeexercisable, unless otherwise specified by the Board of Directors and subjectto certain acceleration and termination provisions, after two years from thedate of grant in respect of 20% of such options and thereafter in installmentsof 20% per year over a four-year period. Options issued under the 1997 Plan become exercisable one year from thedate of grant with respect to 20% of such options and thereafter ininstallments of 20% per year over a four-year period.  The 2000 Plan provides for the vesting periodto begin one year after the grant date in respect of one third of such options,and thereafter in installments of one third per year over a two-yearperiod.  The 2003 Plan provides generallyfor options to become exercisable 25% per year on each of the first fouranniversaries of the date of grant, and for restricted stock to become vestedin three equal installments on each of the second, third and fourth anniversaryof the date of grant.  Options grantedunder the Plans have a term of 10 years from the date of grant (exceptthat options granted under the 2003 Plan generally have a term ofseven years from the date of grant) and, unless otherwise specificallyprovided by the Board of Directors, the option prices are equal to the marketvalues per share on the date of grant. Consultants may also be granted awards under the 2003 Plan.  Nonqualified stock options may be transferredto trusts with respect to which any such participants are beneficiaries andcorporations or to other entities controlled by such participants.

 

During 2004, we granted 56,000 stock options and 18,000 restrictedOrdinary Shares to our directors and officers pursuant to the 2003 Plan.  The options were granted at exercise pricesranging from $45.15 to $57.13, and the expiration date for these options rangesfrom April 1, 2011 through December 8, 2011.

 

As of March 1, 2005, total options to acquire 3,028,022 OrdinaryShares were outstanding, of which 679,392 were exercisable as of thatdate.  As of March 1, 2005, ourofficers and directors, as a group, held options to acquire approximately 121,677 OrdinaryShares (excluding exercisable and unexercisable options held by the KerznerFamily Trust and unexercisable options held by Mr. H. B. Kerzner), ofwhich approximately 50,000 are currently exercisable.  The exercisable and unexercisable optionsheld by the officers and directors as of March 1, 2005 (excluding exercisableand unexercisable options held by the Kerzner Family Trust and unexercisable optionsheld by Mr. H. B. Kerzner) were granted at exercise prices ranging from$20.07 to $57.31.  The expiration datesfor these options range from December 11, 2010 to December 26, 2012.

 

**(C)**       BoardPractices

 

In connection with the strategic investment in ourOrdinary Shares by Istithmar, we agreed to add a representative of Istithmar toour Board of Directors.  Followingreceipt of the necessary regulatory approval on December 8, 2004, Mr.Kazim, a representative of Istithmar, took a seat on our Board of Directors.  Mr. H. B. Kerzner, our CEO, simultaneouslyjoined our Board of Directors.  At ourJuly 27, 2004 annual meeting of shareholders, our existing directors,consisting of Mr. S. Kerzner, Mr. Buckley, Mr. Marks,Mr. Siegel and Mr. von Rantzau were elected to terms set to expire atour next annual general meeting.

 

Our Board of Directors has appointed an auditcommittee of the board consisting of Mr. Buckley, Mr. Marks, Mr. Siegeland Mr. Kazim. Deloitte & Touche LLP, the Company’s independentauditor, has full and free access to meet with the audit committee, withoutmanagement representatives present, to discuss the results of the audit, theadequacy of internal controls and the quality of financial reporting.  The primary function of the audit committeeis to assist our Board of Directors in fulfilling its oversightresponsibilities by reviewing the financial information that will be providedto the shareholders and others, the systems of internal controls that ourmanagement and Board of Directors have established and the audit process.  The audit committee of our Board of Directorsreviews the selection of our independent certified public accountants eachyear.  The audit committee convenes atleast eight times per year.  The AuditCommittee Charter can be found as Exhibit 11.1(a) to Form 20-F Annual Report ofKerzner for the year ended December 31, 2003, filed on March 30, 2004 andthe Amended and Restated Audit Committee Charter can be found asExhibit 11.1(b) filed herewith.

 

We also have a Compensation Committee consisting ofMr. Siegel, Mr. Buckley, Mr. Marks and Mr. vonRantzau.  The Compensation Committee ismandated to review and adopt our executive compensation plans and policies,including the adoption of stock incentive plans and the granting of options andrestricted stock to senior executives thereunder.

 

We do not have service contracts with any of ourdirectors.

 

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**CorporateGovernance Standards**

 

Pursuant to home country practices exemptions grantedto us by the New York Stock Exchange, we are permitted to follow certaincorporate governance practices complying with relevant Bahamian laws, which aredifferent from those required by U.S. domestic companies under the New YorkStock Exchange’s listing standards.  TheNew York Stock Exchange rules and our current practices relating to corporategovernance have the following significant differences:

 

***IndependentDirectors.***  The NewYork Stock Exchange requires that domestic listed companies have at least amajority of independent directors on their boards, make affirmativedeterminations of independence and have regularly-scheduled meetings ofnon-management directors without management participation.  As a foreign private issuer, we are notrequired to satisfy this listing standard. We have not made any determination as to whether a majority of ourdirectors meet the independence requirements set forth in the New York StockExchange listing standards and we do not have regularly-scheduled meetings ofnon-management directors.

 

***Audit Committee.***  The New York Stock Exchange requires that alisted company have an audit committee consisting of at least three independentdirectors, one of which must have accounting or related financial managementexpertise, and that the audit committee be charged with the responsibility ofselecting, monitoring and communicating with the outside auditor of the Company.  These requirements are currently effectivefor domestic companies, and will become applicable to foreign private issuerson July 1, 2005.  Mr. Buckley andMr. Kazim may not be considered independent for audit committee purposesbecause of the Ordinary Shares owned by their respective affiliates, and weexpect them to resign from the audit committee prior to July 1, 2005, whereupona new director who satisfies the independence requirements will join the Boardof Directors and be appointed to the audit committee.

 

***Nominating/CorporateGovernance and Compensation Committees.***  The New York Stock Exchange requires thatdomestic listed companies must have a board committee composed entirely of independentdirectors that perform certain nominating and corporate governancefunctions.  We do not have a nominatingand corporate governance committee, although we do convene an ad hocindependent committee to review and select new candidates for board positions.  The New York Stock Exchange also requiresthat domestic listed companies must have a board committee composed entirely ofindependent directors that perform certain compensation-related functions.  As a foreign private issuer, we are notrequired to satisfy these listing standards. We have a compensation committee, but have not made any determination asto whether the directors who constitute the committee meet the independencerequirements set forth in the New York Stock Exchange listing standards.

 

***Certifications.***  The New York Stock Exchange requires that alisted company’s chief executive officer must certify to the NYSE each yearthat he or she is not aware of any violation by the company of NYSE corporategovernance listing standards.  As aforeign private issuer, our chief executive officer is not required to makethis certification.

 

***CorporateGovernance Guidelines.*** The New York Stock Exchange requires that domestic listed companiesadopt detailed corporate governance guidelines. As a foreign private issuer, we are not required to adopt, and have notadopted, such guidelines.

 

***ShareholderApproval Policy.*** Pursuant to the amendment to the corporate governance standards that wasapproved by the Securities and Exchange Commission on June 30, 2003, theNew York Stock Exchange requires, with limited exceptions, that shareholderapproval be obtained with respect to any equity-compensation plan, which isgenerally defined as a plan or other arrangement that provides for the deliveryof equity securities (either newly issued or treasury shares) of the listedcompany to any employee, director or other service provider as compensation forservices.  We follow Bahamian laws thatdo not apply specific rules to equity compensation plans; they are consideredan issue of shares which does not require shareholder approval.

 

The New York Stock Exchange also requires that, withcertain exceptions specified in its rules, shareholder approval be obtainedprior to issuance of common stock or securities convertible into or exercisablefor common stock (1) to a director, an officer, a substantial securityholder or a party related to any of them if the number of shares of common stockwhich are to be issued or are issuable upon conversion exceeds either 1% of thenumber of shares of common stock or 1% voting power outstanding before theissuance, (2) in any transaction or series of related transactions, if thevoting power of the common stock is equal to or exceeds 20% of the voting poweroutstanding before the issuance or if the number of shares of the common stockis equal to or exceeds 20% of the number of shares outstanding before theissuance, and (3) that will result in a change of control of theissuer.  We

 

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follow Bahamian laws which do not require shareholder approval withrespect to the issuance of common stock or securities convertible into orexercisable for common stock.  UnderBahamian laws, these are considered an issuance of shares which does notrequire shareholder approval.

 

On June 6, 2002, the Corporate Accountability andListing Standards Committee of the New York Stock Exchange issued a reportrecommending that the Exchange adopt significant changes to its corporategovernance listing standards.  OnAugust 16, 2002, the New York Stock Exchange filed with the Securities andExchange Commission proposed changes to its corporate governance standardswhich reflect the findings of the Committee. The areas of corporate governance covered by the proposed changesinclude the definition and role of independent directors, committees under theboard of directors, corporate governance guidelines, codes of business conductand ethics, shareholder approval of equity-compensation plans and annualcertifications by chief executive officers. On June 30, 2003, the Securities and Exchange Commission approvedthe portion of the proposed corporate governance standards relating to shareholderapproval of equity-compensation plans, which is described under “ShareholderApproval Policy” above.  Also, in lightof the promulgation by the Securities and Exchange Commission ofRule 10A-3 pursuant to Section 301 of the Sarbanes-Oxley Act, on April 4,2003, the New York Stock Exchange filed with the Securities and ExchangeCommission an amendment to the remainder of its proposed rule changes in orderto reflect the requirements of Rule 10A-3. That portion of the proposed rule changes, as amended, became effectiveupon the Securities and Exchange Commission’s approval on November 4,2003.

 

The rules will generally continue to grant homecountry practices exemptions to foreign private issuers listed on the New YorkStock Exchange, including us, but, pursuant to the requirements ofRule 10A-3, those provisions of the amended corporate governance standardsthat implement the requirements of Rule 10A-3 will be applicable to listedforeign private issuers.  Among suchrequirements, a foreign private issuer listed on the New York Stock Exchangewill be required to have an audit committee consisting of at least threedirectors all of whom must be independent under the standards set forth inparagraph (b) of Rule 10A-3, and the audit committee will be requiredto be directly responsible for the appointment, compensation, retention andoversight of the work of the accounting firm engaged (including resolution ofdisagreements between management and the auditor regarding financial reporting)for the purpose of preparing or issuing an audit report or performing otheraudit, review or attest services for the issuer, unless one or more of theexemptions set forth in Rule 10A-3 apply. These new corporate governance standards of the New York Stock Exchangewill become applicable to foreign private issuers listed on the New York StockExchange on July 31, 2005.  TheCompany plans to take appropriate steps with respect to its corporategovernance system by July 31, 2005 so that its audit committee satisfiesthe requirements set forth in Rule 10A-3.

 

**(D)**       Employees

 

Set forth below is a table showing the approximatetotal number of employees at our properties worldwide by geographic locationfor the periods indicated.

 

 
| ** **    | ** ** | **At December 31,** | ** ** |
|---------------|------------|--------------------------|------------|
| ** **    | ** ** | **2004**                 | ** ** | **2003** | ** ** | **2002** | ** ** |
|          |       |                     |       |   |   |   |   |
| The Bahamas   |       | 5,803                    |       | 5,785 |   | 5,800 |   |
| United States |       | 420                      |       | 425 |   | 425 |   |
| Other         |       | 147                      |       | 75 |   | 70 |   |
|          |       |                     |       |   |   |   |   |
| Total:        |       | 6,370                    |       | 6,285 |   | 6,295 |   |

 

In addition to the above, as of December 31,2004, we had approximately 5,500 employees under management at ourOne&Only and other managed properties in Mauritius, Dubai, the Maldives andMexico.  We do not employ a significantnumber of temporary workers.

 

**UnionContract Arrangements—The Bahamas**

 

In The Bahamas, as of December 31, 2004,approximately 3,600 of our employees were represented by The Bahamas Hotel,Catering and Allied Workers Union. Kerzner International Bahamas Limited participates in The Bahamas HotelEmployers Association, which represents resort operators in the ParadiseIsland-New Providence Island area.  Theassociation has signed a new contract with the union that will expire onJanuary 7, 2008.  Labor relations inThe Bahamas have been unstable at times with occasional work stoppagesoccurring, not only at Atlantis, but also at publicly run entities such as theBahamian Electric Corporation and Bahamas Telephone Company.  As the country’s largest private employer, weare sometimes the target of labor disputes. See “Item 3.

 

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Key Information, (D) Risk Factors—Work stoppages and other labordisputes could harm our financial condition and results of operations.”

 

**(E)**         ShareOwnership

 

As of February 28, 2005, the Kerzner Family Trust,which is a trust controlled by Mr. S. Kerzner, held 853,870 options, all ofwhich were transferred to the trust by Mr. S. Kerzner.  Such options consist of (i) 103,870vested and exercisable options with an exercise price of $35.00 and anexpiration date of January 31, 2007 and (ii) 750,000 unexercisable andunvested options with an exercise price of $36.86 and an expiration date ofDecember 11, 2010.  As ofFebruary 28, 2005, Mr. H. B. Kerzner holds 750,000 unexercisable andunvested options with an exercise price of $36.86 and an expiration date ofDecember 11, 2010.  As ofFebruary 28, 2005, WLG, an entity controlled by the Kerzner Family Trust,had the right to vote approximately 12.5% of our Ordinary Shares (whichincludes 3,995,794 Ordinary Shares held by WLG, 429,030 Ordinary Shares overwhich WLG has the right to vote through certain proxy arrangements with Kersafand the 103,870 Ordinary Shares subject to currently exercisable options heldby the Kerzner Family Trust).  See tablein “Item 7.  Major Shareholders andRelated Party Transactions, (A) Major Shareholders—Restructuring ofRelationship with Majority Shareholder.”  Familienstiftung Von Rantzau-Essberger, afamily trust of Heinrich von Rantzau, is the sole shareholder of CMS whichbeneficially owns 2,758,493 Ordinary Shares. See table in “Item 7.  MajorShareholders and Related Party Transactions, (A) Major Shareholders.” Eachof our other directors and officers beneficially owns less than 1% ofoutstanding Ordinary Shares.

 

For a description of options granted to our directors,executive officers and other key employees, see “(B) Compensation” above.

 

## **Item 7**.                              MajorShareholders and Related Party Transactions

 

**(A)**       MajorShareholders

 

As of February 28, 2005, we had 36,204,771 OrdinaryShares outstanding.  The following tablesets forth certain information as of February 28, 2005 (or certain otherdates, to the extent indicated below), regarding the beneficial ownership ofour Ordinary Shares by:  (i) anyperson who is known to us to be the owner of more than 5% of any class of ourvoting securities and (ii) our directors and officers as a group.  Due to the arrangements described below,certain of our Ordinary Shares are beneficially owned by several parties.

 
| **Beneficial Owner**                                                                                      | ** ** | **Number of Shares** | ** ** | **Percent of Shares** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|----------------------|------------|-----------------------|------------|
| Caledonia  Investments plc (“Caledonia”)                                                        |       | 4,051,323            | (1)        |                  | 11.2       |   |
| Istithmar PJSC  (“Istithmar”)                                                                   |       | 4,500,000            | (2)        |                  | 12.4       |   |
| World Leisure  Group Limited (“WLG”)                                                            |       | 4,528,694            | (3)        |                  | 12.5       |   |
| Sun  International Limited (“Kersaf”)                                                           |       | 1,134,079            | (4), (6)   |                  | 3.1        |   |
| Baron Capital  Group, Inc. (“Baron”)                                                            |       | 5,847,532            | (5)        |                  | 16.2       |   |
| Cement Merchants  SA (“CMS”)                                                                    |       | 2,758,493            | (6), (7)   |                  | 7.6        |   |
| FMR Corp.                                                                                                 |       | 4,294,750            | (8)        |                  | 11.9       |   |
| Directors and  officers as a group (excluding shares beneficially owned by the Kerzner  Family Trust (9)) |       | *                    |       |                  | *          |   |

 

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* Less than 5% ofoutstanding voting securities.

 

(1)          Consistsof:  (i) 3,622,293 OrdinaryShares held by Caledonia and (ii) 429,030 Ordinary Shares over whichCaledonia has a proxy (see Note 4 below) (based upon information containedin the Schedule 13D/A filed by Caledonia on March 7, 2005.)

 

(2)          Basedupon information contained in the Schedule 13D/A filed by Istithmar on August10, 2004.  Istithmar is an entity indirectlywholly owned by the Royal Family of Dubai.

 

(3)          Consistsof:  (i) 3,995,794 Ordinary Sharesheld for the account of WLG, (ii) 429,030 Ordinary Shares over which WLGhas a proxy (see Note 4 below) and (iii) 103,870 Ordinary Shares subjectto currently exercisable options, all of which were transferred to the KerznerFamily Trust by Mr. S. Kerzner.  TheKerzner Family Trust is controlled by Mr. S. Kerzner.

 

(4)          Consistsof (i) 50,200 Ordinary Shares held by Royale Resorts InternationalLimited (“RRIL”) and 983,579 Ordinary Shares held by Royale ResortsHoldings Limited (“RRHL”), a wholly owned subsidiary of

 

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RRIL, each ofwhich companies are jointly owned by Kersaf and CMS (73.3% by Kersaf and 26.7%by CMS) and (ii) 100,300 Ordinary Shares owned by SunInternational Inc., a wholly owned subsidiary of Kersaf.

 

Kersaf does not have anyvoting rights with respect to its Ordinary Shares of the Company.  In connection with the July 2001restructuring of our majority shareholder, Kersaf and certain of its affiliatesgranted irrevocable proxies, in varying amounts, to vote all of its OrdinaryShares to Caledonia, WLG and CMS (the “Kersaf Proxy Shares”).  Therefore, the amounts presented in thistable for Caledonia and WLG each include 429,030 of the Kersaf ProxyShares.  The amounts presented in thistable for CMS include the remaining 276,019 of Kersaf Proxy Shares.

 

(5)          Basedupon information contained in the Schedule 13G/A filed by Baron onFebruary 15, 2005.

 

(6)          Amountspresented in this table reflect the beneficial ownership by each of Kersaf andCMS of the 1,033,779 Ordinary Shares held by RRIL and RRHL, 983,579 of whichare held by RRHL and 50,200 of which are held by RRIL; Kersaf and CMS sharedispositive power over the 1,033,779 Ordinary Shares held by RRHL and RRIL dueto their joint ownership of RRHL and RRIL.

 

In addition, pursuant toan agreement entered in July 2001, RRHL and RRIL granted to CMS an optionto purchase all or a portion of 1,150,000 of our Ordinary Shares then held byRRHL and RRIL.  The number of OrdinaryShares subject to this option is currently 276,019 Ordinary Shares.  This option expires on July 2,2006.  Amounts presented in this tabletreat all of the Ordinary Shares subject to this option as being beneficiallyowned by both Kersaf and CMS, both due to the shared rights of dispositiondescribed in the preceding paragraph and the option.

 

(7)          Consistsof:  (i) 1,724,714 Ordinary Shares heldby CMS and (ii) 983,579 Ordinary Shares held by RRHL and the 50,200 OrdinaryShares held by RRIL over which CMS and Kersaf share dispositive power asdiscussed in Note 6 above, which shares include 276,019 Kersaf Proxy Shares asdefined and discussed in Note 4 above.

 

(8)          Basedupon information contained in the Schedule 13G/A filed by FMR Corp. andcertain affiliates on February 14, 2005.

 

(9)          Ifthe directors and officers as a group were to exercise their vested options,they would own 0.2% of the Ordinary Shares outstanding as of February 28,2005 (excluding shares beneficially owned by the Kerzner Family Trust).

 

As of February 28, 2005, we had approximately 688 holdersof record of approximately 36.2 million Ordinary Shares, excluding 7.1 millionOrdinary Shares held as treasury stock. As of February 28, 2005, there were an estimated 654 U.S. holdersof record holding approximately 45.21% of our Ordinary Shares.

 

All of our Ordinary Shares have the same votingrights.

 

The amounts reflected in this “Major Shareholders”section are compiled and derived from SEC filings by each of Caledonia,Istithmar, Kersaf, Baron, CMS and FMR and other sources.

 

In April 2004, the Company issued $230.0 millionprincipal amount of 2.375% Convertible Senior Subordinated Notes due 2024which, after related issuance costs, resulted in net proceeds of approximately$223.7 million.  The 2.375%Convertible Senior Subordinated Notes are our unsecured senior subordinatedobligations and they mature on April 5, 2024, unless they are converted,redeemed or repurchased before the maturity date.  The 2.375% Convertible Senior SubordinatedNotes may be converted into cash and Ordinary Shares at an initial conversionrate of 17.1703 shares per $1,000 principal amount in accordance with the termsof the indenture.  This conversion rateis equal to a conversion price of approximately $58.24 per Ordinary Share.

 

**(B)**       RelatedParty Transactions

 

Set forth below is a summary of certain agreementsthat have been entered into or transactions that have occurred, since thebeginning of the Company’s preceding three financial years, involving us andany of our subsidiaries, affiliates or key management.

 

**Restructuringof Relationship with Majority Shareholder**

 

On July 3, 2001, we announced the restructuringof our majority shareholder, SIIL, and the resolution of certain matters withSIIL and certain of its shareholders. Pursuant to the restructuring, SIIL was dissolved and its shareholdersreceived interests in us directly proportionate to their interests in SIIL.  SIIL was owned in equal thirds

 

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by Kersaf, Caledonia and WLG, a company controlled by a Kerzner familytrust.  SIIL previously was governed by ashareholders agreement pursuant to which all major decisions of SIIL requiredthe unanimous consent of its shareholders. Kersaf operates a number of hotel, casino and resort properties insouthern Africa under the “Sun International” name and there had been someconfusion regarding the use of the “Sun International” name by both Kersaf andus.  In October 2001, we commenced alawsuit against Kersaf and certain of its subsidiaries.  See “Item 8.  Financial Information, (A) ConsolidatedStatements and Other Financial Information—Legal Proceedings—Kersaf Litigation.”  In November 2002, we reached a furthersettlement with SIIL’s former shareholders to resolve certain outstandingissues.  See below “Global Settlement.”As part of the July 2001 restructuring:

 

•                  TheSIIL shareholders agreement was terminated effective July 3, 2001, andSIIL was dissolved in May 2002. SIIL’s former shareholders now hold their shares in us directly.

 

•                  CMS,a partner in Kersaf’s hotel, casino and resort management activities insouthern Africa, obtained options to purchase a portion of our Ordinary Sharesowned by Kersaf.  As part of therestructuring agreements, Heinrich von Rantzau, a principal of CMS, joined ourBoard of Directors.

 

•                  Kersaf,Caledonia and WLG agreed to certain standstill provisions throughJune 2006 pursuant to which each of them would refrain from proposing orconsummating certain extraordinary corporate transactions involving us,including any merger or the sale of substantially all of our assets.  See below “Registration Rights and GovernanceAgreement.”

 

•                  Pursuantto a registration rights and governance agreement, we granted certainregistration rights to Kersaf, Caledonia, WLG, CMS and certain of theirrespective affiliates, and Kersaf agreed to sell not less than 2.0 millionof our Ordinary Shares in a registered public offering before June 30,2002 (which date was subsequently extended to February 28, 2003), subjectto certain extensions.  Kersaf satisfiedthis obligation by completing the Kersaf Offering on December 18,2002.  See below “Global Settlement.”

 

•                  Theduration of appointment of our directors, consisting of Mr. S. Kerzner,Mr. Buckley, Mr. Siegel, Mr. Marks and Mr. von Rantzau,were extended until our annual general shareholders meeting in 2004.

 

•                  Weagreed that, after a transition period not to exceed one year from July 3,2001, we would cease using the names “Sun” and “Sun International” and, asbetween the parties, Kersaf would have exclusive rights to use such names.  In July 2002, we changed our corporatename to Kerzner International Limited. We do not believe that we have experienced any change in our business oroperations as a result of the name change.

 

•                  Kersafwas granted the right to pursue a potential resort development project in PortGhalib, Egypt, and we would have received between 25% and 50% of Kersaf’s grossreceipts from this project when and if it was consummated.  However, as part of the November 2002settlement, we relinquished all of our rights to an interest in thisproject.  See below “Global Settlement.”

 

•                  InJuly 2001, Kersaf made a one-time payment of $3.5 million to us andissued a secured note to us with a principal amount of $12.0 million and amaturity date of June 30, 2003.  In December 2001,Kersaf repaid in full the principal amount of the note and accrued interest.

 

•                  Kersafagreed to continue to make an annual payment to us pursuant to a long-termcontract, which payment was approximately $3.3 million in 2003 and2002.  See below “—Long-Term ContractFees.” As part of the November 2002 settlement, Kersaf’s obligation tomake this payment was terminated effective December 2, 2002.

 

**GlobalSettlement**

 

In November 2002, we entered into a settlementagreement with Kersaf and certain of our other principal shareholders that,among other things, settled certain outstanding claims that we had with Kersafand amended certain provisions of the July 2001 restructuring agreementsrelating to our former majority shareholder described in “Restructuring ofRelationship with Majority Shareholder” above. As part of the July 2001 restructuring agreements, Kersaf agreedto, among other things, sell at least 2.0 million of our Ordinary Sharesin a registered public offering, adhere to a certain non-compete agreement,continue to make an annual payment to us pursuant to a long-term contract,which payment was approximately $3.3 million in 2003 and 2002, and grantus an interest in a proposed project in Port Ghalib, Egypt.  In October 2001, we filed a lawsuit inNew York against Kersaf and certain

 

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of its affiliates alleging, among other things, that Kersaf hadbreached its non-compete obligation under the July 2001 restructuringagreements.  As part of theNovember 2002 settlement agreement:

 

•                  Weagreed to terminate the outstanding lawsuit related to Kersaf and certain ofits affiliates, and each of the parties to the settlement agreement releasedall other parties to the settlement agreement from any and all claims, subjectto certain limited exceptions;

 

•                  Certaincontractual arrangements were terminated, including Kersaf’s non-competeagreement and Kerzner’s rights in Kersaf’s project in Port Ghalib, Egypt;

 

•                  Kersafpaid us $32.0 million, plus interest accruing at a rate of 7.0% per annumfrom December 2, 2002, out of the proceeds of the Kersaf Offering in fullsatisfaction of a note delivered to us in connection with the settlementagreement;

 

•                  Thedate by which Kersaf was obligated to sell at least 2.0 million of ourOrdinary Shares in a registered public offering was extended fromOctober 31, 2002 to February 28, 2003, which obligation was satisfiedby Kersaf by completing the Kersaf Offering on December 18, 2002; and

 

•                  Kersaf’sobligation to make the annual payment referred to above was terminatedeffective December 2, 2002.

 

**RegistrationRights and Governance Agreement**

 

As part of the SIIL reorganization, we entered into aregistration rights and governance agreement with Kersaf, WLG, Caledonia, CMSand certain of their respective affiliates, which was amended as part of theNovember 2002 settlement.  Thisagreement, and a related proxy, governs the voting of Kersaf’s Ordinary Sharesthat are subject to a proxy discussed above in “(A) Major Shareholders.” Amongother things, under this agreement, as amended:

 

•                  Kersaf,Caledonia, WLG and CMS agreed to certain transfer restrictions that generallylimit the ability of each party to purchase or sell our Ordinary Shares.  As part of the November 2002 settlement,this agreement was modified so that Kersaf will no longer have the right toenforce these transfer restrictions.

 

•                  Eachof Kersaf, Caledonia, CMS, WLG and certain of their respective affiliates weregranted certain demand registration rights that may require us to register allor part of their Ordinary Shares of Kerzner in one or more registered publicofferings from time to time as follows: (i) Kersaf agreed to sell not less than 2.0 million of our sharesin a registered public offering before June 30, 2002 (which date wassubsequently extended to February 28, 2003), subject to certain extensions(the “Minimum Year One Sale”), (ii) following such offering, Kersaf andcertain of its affiliates have one or more demand registration rights eachcovering no less than 1.0 million Ordinary Shares, (iii) followingMarch 31, 2002, Caledonia and certain of its affiliates have one or moredemand registration rights each covering no less than 1.0 million OrdinaryShares, (iv) following June 30, 2003, WLG and certain of itsaffiliates have one demand registration right covering no less than0.5 million Ordinary Shares and, following the earlier of June 30,2004, and the date Caledonia and certain of its affiliates have disposed of2.5 million of their Ordinary Shares, one or more demand registrationrights each covering no less than 1.0 million Ordinary Shares, and(v) following March 31, 2002, CMS and certain of its affiliates haveone or more demand registration rights each covering no less than 1.0 millionOrdinary Shares.  Kersaf satisfied theMinimum Year One Sale by completing a secondary offering of 2.3 million ofour Ordinary Shares on December 18, 2002.

 

•                  Eachof Kersaf, Caledonia, CMS and WLG were granted the right to sell certain oftheir Ordinary Shares through our brokers in open market transactions.

 

•                  Wesubmitted to our shareholders an amendment to our articles of association thatwas adopted in September 2001 and set the term of our existing directorsto expire at our annual general meeting in 2004.

 

•                  Weagreed to include in the slate of directors submitted by us to our shareholdersfor election one individual designated by each of WLG, Caledonia and CMS,subject to their retaining a minimum beneficial ownership of our OrdinaryShares.

 

•                  Kersafhas agreed until June 30, 2006 not to acquire any of our shares.  In addition, subject to certain rights offirst refusal as between themselves, each of Caledonia, WLG and CMS has agreednot to acquire any

 

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additional shares ofKerzner in excess of 0.9 million, in the case of Caledonia and WLG, and4.0 million, in the case of CMS, prior to June 30, 2006, in each casesubject to certain exceptions.

 

•                  Kersaf,Caledonia, CMS and WLG agreed to refrain from proposing or consummating certainextraordinary corporate transactions involving us, including any merger or thesale of substantially all of our assets, unless an independent third partyproposes such an extraordinary corporate transaction and our Board of Directorsdetermines to enter into discussions or negotiations with that third party.

 

This summary is qualified in its entirety by referenceto the particular provisions of the registration rights and governanceagreement, which can be found as Exhibit 10.8 to our registrationstatement on Form F-4 filed on September 21, 2001, and the settlementagreement, which can be found as Exhibit 99.2 to our Form 6-K filedon November 8, 2002, both of which you should review carefully.

 

**Harborsideat Atlantis**

 

In 2000, we entered into a series of promissory noteswith Harborside at Atlantis to fund 50% of the construction cost of thetimeshare units on Paradise Island in The Bahamas.  These notes amounted to $16.5 million atDecember 31, 2004.  The largest amountof loans outstanding at any one time to Harborside at Atlantis was $25.0 millionduring 2001.  We earn interest on theseadvances at a rate equal to one-month LIBOR plus 250 basis points, which was4.9% at December 31, 2004.  Theloans were made simultaneously with loans from Starwood, which mirror theamounts, terms and conditions of our loans. Our loans and the Starwood loans are *paripassu* with respect to payments of principal and accrued interest andsuch payments will be made in cash, as it is available from the sale oftimeshare units.  Of the amount advancedto Harborside at Atlantis, the Company does not anticipate repayment within thenext twelve months.

 

We provide marketing, administrative and developmentservices to Harborside at Atlantis from which we earned fees of $2.8 million,$1.8 million and $1.6 million for the years ended December 31,2004, 2003 and 2002, respectively.

 

**ManagementServices and Fees**

 

We provide development, management and marketingservices to SRL, a Mauritius company in which we own a 20.4% equity interest,and to all resorts owned by SRL, through 2023. The management services we provide to SRL are subcontracted to Kerzner byOne&Only Management, a company owned 75% by us and 25% by SRL as of January1, 2005.  We provide all development andmarketing services to SRL and receive fees for providing such services.

 

We assigned to One&Only Management the managementagreement for the One&Only Kanuhura, a Maldives company, in which weinitially owned a 25% equity interest.  Asof January 1, 2005, our ownership interest in the One&Only Kanuhura furtherdecreased to 18.75% and SRL’s interest increased to 6.25%, as SRL purchased anadditional 1.25% interest from us.  Pursuantto a subcontract agreement with One&Only Management, we providecomprehensive management services to the One&Only Kanuhura.  The terms of the management agreement runconcurrent with the terms of a lease between the One&Only Kanuhura and thegovernment of the Maldives to lease the One&Only Kanuhura.  That lease expires in 2026 and is subject toextension.  Similar to our agreements inMauritius, we provide all development and marketing services to theOne&Only Kanuhura.

 

We provide management services to the One&OnlyPalmilla, a deluxe, five-star property located near Cabo San Lucas.  In connection with the purchase of our 50%ownership interest in the One&Only Palmilla, we entered into long-termmanagement and development agreements related to the property that will expirein 2022.

 

We provide management services to the One&OnlyRoyal Mirage, a luxury 466-room hotel in Dubai, pursuant to a long-termmanagement agreement with the Government of Dubai that will expire in 2019.

 

In June 2002, we entered into management anddevelopment agreements for the One&Only Reethi Rah, a 130-room luxuryresort on North Male Atoll in the Maldives that we expect to open in the secondquarter of 2005.  The management anddevelopment agreements related to this property are co-terminus with the owner’slease, which expires in 2020.  SRL’sboard of directors has approved the exercise of its right to participate on aproportionate basis (effective January 1, 2005 and the participation ofSRL increased to 25%) with us in connection with the One&Only Reethi Rah.  We expect to transfer the managementagreement for the One&Only Reethi Rah to One&Only Management.  See “Item 5. Operating and FinancialReview and Prospects, (F) Off-Balance Sheet Arrangements” for furtherinformation.

 

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We provide management services to Harborside atAtlantis, a joint venture in which we own a 50% equity interest.

 

We also have management, development and/or marketingagreements with respect to each of Atlantis, The Palm (see “Item 4.  Information on the Company, (B) BusinessOverview—The Properties—Destination Resorts—Atlantis, The Palm”) and theOne&Only Cape Town (see “Item 4. Information on the Company, (B) Business Overview—TheProperties—One&Only—South Africa”). As of December 31, 2004, we had not recognized any management,development or marketing fees associated with these projects, other than the$0.4 million in development fees related to Atlantis, The Palm.

 

**OfficeLease**

 

Effective February 2002, we entered into a leaseagreement with Tennyson Properties Limited, which we believe was an arm’slength transaction, whereby we are leasing office space in Buckinghamshire inthe United Kingdom for a period of 15 years.  The annual rent is approximately £205,000(which is the equivalent of approximately $395,000 at December 31, 2004)and is subject to increase every five years to the current fair marketvalue.  Tennyson Properties Limited isowned by a family trust established by Mr. S. Kerzner.

 

**Long-TermContract Fees**

 

As part of the restructuring of our then majorityshareholder, SIIL, Kersaf agreed to pay us $32.1 million in December 2002.  Of this amount, $14.7 million (whichrepresents the future payments that were to be received over the term of theunderlying agreements from 2005 to 2008) is classified as deferred revenue asof December 31, 2004.  Thislong-term contract fee payment was established at $2.4 million in 1994 andincreased at a rate of 3.3% per year and was paid annually.  We received our last payment on December 2,2002, and pursuant to the settlement agreement with Kersaf, described above in “GlobalSettlement,” Kersaf’s obligation to make payments was terminated effective asof that date.  See Note 20—Gain onSettlement of Territorial and Other Disputes in the accompanying consolidatedfinancial statements.

 

**(C)**       Interests ofExperts and Counsel

 

Not applicable.

 

## **Item 8**.                              FinancialInformation

 

**(A)**       ConsolidatedStatements and Other Financial Information

 

Please refer to Item 18 for our consolidatedfinancial statements and the report of the independent registered publicaccounting firm.

 

**LegalProceedings**

 

*Other Litigation*

* *

The Company is involved in certain litigation andclaims incidental to its business.  TheCompany does not believe, based on currently available information, that thesematters will have a material adverse effect on the accompanying consolidatedfinancial statements.

 

*Enforceability Of CivilLiabilities*

* *

We are a Bahamian international business companyincorporated under the International Business Companies Act, 2000 of theCommonwealth of The Bahamas.  Certain ofour directors and executive officers reside outside the United States.  A substantial portion of the assets of suchpersons and most of our assets are located outside the United States.  As a result, in the opinion of Harry B. Sandsand Company, our Bahamian counsel, it may be difficult or impossible to effectservice of process within the United States upon such persons, to bring suit inthe United States or to enforce, in U.S. courts, any judgment obtained there againstsuch persons predicated upon any civil liability provisions of U.S. federalsecurities laws.  It is unlikely thatBahamian courts would entertain original actions against Bahamian companies,their directors or officers predicated solely upon U.S. federal securitieslaws.  Furthermore, judgments predicatedupon any civil liability provisions of the U.S. federal securities laws are notdirectly enforceable in The Bahamas.  Rather,a lawsuit must be brought in The Bahamas on any such judgment.  Subject to consideration of privateinternational law, in general, a judgment obtained after due trial by a courtof competent jurisdiction, which is final and conclusive as to the issues inconnection, is actionable in Bahamian courts and is impeachable only upon thegrounds of (i) fraud, (ii) public policy and (iii) naturaljustice.

 

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Gaming debts may not be legally enforced incertain foreign jurisdictions or in certain jurisdictions within the UnitedStates.  As a result, we may be unable tocollect gaming debts from patrons of our casinos who reside in suchjurisdictions.

 

**DividendPolicy**

 

Pursuant to our Articles of Association, the Board ofDirectors may from time to time declare dividends.  We historically have not paid dividends andthere are currently no plans to declare any dividends.

 

**(B)**       SignificantChanges

 

Except as otherwise disclosed in this Annual Report,there has been no significant change in our financial position since December 31,2004.

 

## **Item 9**.                              The Offerand Listing

 

**(A)**       Offer andListing Details

 

The Ordinary Shares do not trade on any foreignexchange.  The Ordinary Shares have beenlisted and traded on the NYSE since March 1, 1996.  On March 24, 2005, the closing price ofour Ordinary Shares on the NYSE was $60.60.

 

The following tables set forth the range of high andlow closing sale prices of the Ordinary Shares as reported on the NYSE duringthe periods shown.

 

For the year:

 
| ** ** | ** ** | **High** | ** ** | **Low** | ** ** |
|------------|------------|----------|------------|---------|------------|
| 2004       |       | $        | 62.75      |    | $          | 38.47 |   |
| 2003       |       | 39.02    |       | 19.37   |       |
| 2002       |       | 31.20    |       | 18.80   |       |
| 2001       |       | 28.50    |       | 17.13   |       |
| 2000       |       | 23.75    |       | 15.88   |       |
|            |            |          |            |         |            |  |  |

 

For the quarter:

 
| ** ** | ** **   | **High** | ** ** | **Low** | ** ** |
|------------|--------------|----------|------------|---------|------------|
| 2004:      | 4th quarter  |     | $          | 62.75   |       | $ | 44.50 |   |
|       | 3rd  quarter |     | 48.04      |    | 42.00      |   |
|       | 2nd  quarter |     | 47.56      |    | 41.41      |   |
|       | 1st  quarter |     | 46.46      |    | 38.47      |   |
| 2003:      | 4th quarter  |     | 39.02      |    | 34.78      |   |
|       | 3rd  quarter |     | 37.60      |    | 30.11      |   |
|       | 2nd  quarter |     | 32.21      |    | 22.25      |   |
|       | 1st  quarter |     | 23.45      |    | 19.37      |   |
|            |              |          |            |         |            |  |  |  |

 

For the month:

 
| ** **     | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------|------------|----------|------------|---------|------------|
| 2005 February  |       | $        | 66.90      |    | $          | 61.60 |   |
| 2005 January   |       | 60.33    |       | 56.05   |       |
| 2004 December  |       | 62.75    |       | 56.84   |       |
| 2004 November  |       | 57.75    |       | 50.92   |       |
| 2004 October   |       | 51.03    |       | 44.50   |       |
| 2004 September |       | 44.58    |       | 42.00   |       |
|                |            |          |            |         |            |  |  |

 

**(B)**       Plan ofDistribution

 

Not applicable.

 

**(C)**       Markets

 

Since March 1, 1996, our Ordinary Shares havebeen listed and traded on the NYSE.  OurOrdinary Shares are not listed on and do not trade on any other exchange.

 

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In July 2004, we completed an equity offering in TheBahamas of approximately 4.3 million BDRs, which are the equivalent ofapproximately 0.4 million Ordinary Shares. The BDRs are listed and trade on The Bahamas International SecuritiesExchange.

 

**(D)**       SellingShareholders

 

Not applicable.

 

**(E)**         Dilution

 

Not applicable.

 

**(F)**         Expenses ofthe Issue

 

Not applicable.

 

## **Item 10**.                       AdditionalInformation

 

**(A)**       ShareCapital

 

Not applicable.

 

**(B)**       Memorandumand Articles of Association

 

On March 24, 2005, the Company amended andrestated its Articles of Association including, in part, the provisions ofArticle 93 related to circumstances and procedures pursuant to which theCompany may force a Company securities holder who has been found disqualifiedby a Gaming Authority with jurisdiction over the Company to dispose of itssecurities.  A copy of our Amended andRestated Articles of Association is filed herewith as Exhibit 1.1(b).

 

The Restated Articles of Association of Kerzner, datedas of June 26, 2001, were filed with the SEC as an exhibit to ourForm 20-F Annual Report for the year ended December 31, 2000 in filenumber 1-04226.  Subsequent amendments,dated as of September 24, 2001, to these Restated Articles of Associationwere filed with the SEC with our proxy statement for the annual general meetingheld on September 24, 2001.

 

The Amended and Restated Memorandum of Association ofKerzner was filed with the SEC as an exhibit to our Registration Statement onForm F-4, filed on November 1, 1996 in file number 333-15409.  A subsequent amendment, dated as ofMay 17, 2002, to this Amended and Restated Memorandum of Association wasfiled with the SEC as an exhibit to our Registration Statement onForm F-4/A, filed on August 12, 2002 in file number 333-96705.

 

A description of certain provisions of the Company’sAmended and Restated Memorandum of Association and Restated Articles ofAssociation is incorporated by reference to the “Description of Capital Stock”section of the Company’s Form F-3 filed with the SEC on May 23, 2002in file number 333-88854.

 

Kerzner is registered under number 46,600B at theCompanies Registry of The Bahamas. Kerzner’s purpose, as stated in the Memorandum, is “to engage in any actor activity that is not prohibited under any law for the time being in force inthe Commonwealth of The Bahamas.”

 

**(C)**       MaterialContracts

 

The following is a summary of each material contractin which we or any of our subsidiaries have been a party to for the past twoyears.

 

**Headsof Agreement**

 

On May 26, 2003, Kerzner entered into a new Headsof Agreement with the Government of The Bahamas.  In May 2004 and December 2004, weentered into supplements to the Heads of Agreement, pursuant to which wemodified certain components involved in the Phase III expansion, which nowincludes a new luxury all-suite hotel, an expansion of our conventionfacilities, expanded water attractions and an addition to Harborside atAtlantis.  A description of the Heads ofAgreement, as supplemented, and the Phase III expansion can be found at “Item 4.  Information on the Company, (B) BusinessOverview—Certain Matters Affecting Our Bahamian Operations—Heads of Agreement”and “Item 4.  Information on theCompany, (B) Business Overview—The Properties—DestinationResorts—Atlantis, Paradise Island.”

 

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**2.375%Convertible Senior Subordinated Notes Indenture**

 

In April 2004, Kerzner issued $230.0 millionprincipal amount of 2.375% Convertible Senior Subordinated Notes due 2024which, after related issuance costs, resulted in net proceeds of approximately$223.7 million.  All of the proceedsreceived from the issuance of the 2.375% Convertible Senior Subordinated Noteswill be used to fund future capital expenditures and for general corporatepurposes.

 

The 2.375% Convertible Senior Subordinated Notes maybe converted into cash and Ordinary Shares at an initial conversion rate of17.1703 shares per $1,000 principal amount in accordance with the terms of theindenture.  This conversion rate is equalto a conversion price of approximately $58.24 per Ordinary Share.

 

The 2.375% Convertible Senior Subordinated Notes,which are unsecured obligations, are not guaranteed by any of Kerzner’ssubsidiaries and therefore are effectively subordinated to the subsidiaryguarantees of the 87/8%Senior Subordinated Notes.  Interest onthe 2.375% Convertible Senior Subordinated Notes is payable semi-annually andcommenced on October 15, 2004.

 

**8**7/8% SeniorSubordinated Notes Indenture

 

On August 14, 2001, Kerzner and KINA (together,the “Companies”) issued $200.0 million principal amount of 87/8% Senior Subordinated Notes due 2011,which, after costs, resulted in net proceeds of approximately $194.0 million.  All of proceeds received from the issuance ofthe 87/8% Senior Subordinated Noteswere used to repay amounts outstanding under our then-existing amended andrestated revolving credit facility.

 

In May 2002, the Companies issued an additional$200.0 million principal amount of 87/8%Senior Subordinated Notes and used the proceeds to repay the Companiesoutstanding 9% Senior Subordinated Notes pursuant to the Tender Offer, ConsentSolicitation and Redemption of such notes described above.

 

The 87/8%Senior Subordinated Notes, which are unsecured obligations, are unconditionallyguaranteed by substantially all of the wholly owned subsidiaries of Kerzner andKINA.  Interest on the 87/8% Senior Subordinated Notes is payablesemi-annually and commenced on February 15, 2002.  The indenture for the 87/8% Senior Subordinated Notes containscertain covenants, including limitations on the ability of the Companies to,among other things:  (i) incuradditional indebtedness, (ii) incur certain liens and (iii) makecertain other restricted payments.

 

**AmendedCredit Facility**

 

On July 7, 2004, Kerzner, KINA and KIB, asco-borrowers, entered into an amended and restated revolving credit facilitywith a syndicate of lenders.  Thisfacility is described in “Item 4.  Informationon the Company, (A) History and Development of the Company—Amended CreditFacility.”  We had no borrowingsoutstanding as of December 31, 2004 under the Amended CreditFacility.  Our availability as of December 31,2004 was $494.0 million, due to the $6.0 million in outstandingletters of credit.  In February 2005, wefurther amended the Amended Credit Facility (i) to conform its descriptionof the Phase III expansion to that included in the Heads of Agreement, assupplemented in December 2004, (ii) to provide for the release fromthe liens granted to the holders of the property required for the proposedcondo-hotel and Ocean Club Residences & Marina and (iii) to allowa deposit of up to $74.0 million of our cash and cash equivalents tosecure our obligation to contribute equity capital to Atlantis, The Palm.

 

**MoheganSun Agreements**

 

In February 1998, TCA and the Mohegan Tribeentered into the Relinquishment Agreement pursuant to which TCA receives theRelinquishment Fees and a development services agreement pursuant to which TCAagreed to develop the Project Sunburst expansion for a $14.0 milliondevelopment fee.  These agreements aredescribed in “Item 4.  Informationon the Company, (A) History and Development of the Company.”

 

**Atlantis,The Palm**

 

On September 22, 2003, we entered into agreementsto form a joint venture with Nakheel LLC, an entity owned by the Royal Family ofDubai, to develop Atlantis, The Palm.  OnJune 23, 2004, we entered into an agreement with Istithmar, an entity indirectlywholly owned by the Royal Family of Dubai, which has assumed all obligationsand rights of its affiliate, Nakheel LLC. We and Istithmar have each agreed to invest $100.0 million in the formof Class A common stock in the joint venture, and Istithmar has agreed tounderwrite $200.0 million of the joint venture’s limited voting Class B commonstock.  In addition, each of Istithmarand Kerzner will provide, on a joint and several

 

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basis, additional sponsor support of up to $55.0 million with respectto cost overruns and post-completion debt service obligations.  In addition to the joint and several sponsorsupport, Istithmar has agreed to provide a $100.0 million guarantee tocover any post-completion debt service obligations over $55.0 million. Further,Istithmar has agreed to provide an additional guarantee for cost overruns over$55.0 million.  The balance of thefinancing is expected to be obtained through a $700.0 million syndicated termloan facility that is limited recourse to Kerzner.  The closing of the term loan facility isexpected to occur in the second quarter of 2005.  The transaction remains subject to variousclosing conditions, including obtaining all requisite governmental consents andbinding commitments for the necessary financing.  See “Item 4.  Information on the Company, (B) BusinessOverview—The Properties—Destination Resorts—Atlantis, The Palm” for furtherinformation.

 

**Managementand Development Agreements**

 

In November 2003, we entered into an agreementwith Victoria & Alfred Waterfront (Pty) Limited to develop theOne&Only Cape Town, a new luxury hotel at the highest end of the market inCape Town, South Africa.  We intend toform a joint venture in which we will own a minority interest to developand operate this 163-room One&Only luxury hotel.

 

In September 2003, we agreed to form a jointventure with Nakheel LLC to develop Atlantis, The Palm.  See “Item 4.  Information on the Company, (B) BusinessOverview—The Properties—Destination Resorts—Atlantis, The Palm.”  As part of the transaction, Kerzner hasagreed to enter into a long-term management agreement and has entered into adevelopment agreement with a subsidiary of Kerzner Istithmar that entitles usto receive $20.0 million and reimbursement of certain expenses over thedevelopment period of Atlantis, The Palm. We currently have a 50% ownership interest in Kerzner Istithmar, and assuch, we expect to recognize $10.0 million in development fees over thedevelopment period.

 

In September 2002, we purchased a 50% ownershipinterest in the 115-room the One&Only Palmilla, a deluxe, five-starproperty located near Cabo San Lucas in Baja, Mexico for approximately$40.8 million, including transaction costs.  In connection with the purchase, we enteredinto long-term management and development agreements related to the propertythat will expire in 2022.  In connectionwith the expansion of the resort, we guaranteed $46.5 million of thedebt-financing that the One&Only Palmilla obtained from third-parties.  In 2004, we also provided the One&OnlyPalmilla with approximately $14.5 million of completion loans.  On December 17, 2004, the One&OnlyPalmilla entered into two promissory notes pursuant to which it borrowed$110.0 million and all of the One&Only Palmilla’s existing loans wererepaid, including Kerzner’s completion loans, and Kerzner’s $46.5 millionguarantee was extinguished.  The new indenturegoverning the promissory notes provides recourse to Kerzner in the eventcertain representations and warranties are violated.  See “Item 5.  Operating and Financial Review and Prospects,(C) Operating Results—Off-Balance Sheet Arrangements.”  In connection with the operating agreementrelated to the One&Only Palmilla, the owner of the other 50% interest hasthe right to require us to acquire its 50% interest for a price of$36.3 million, plus 50% of the One&Only Palmilla’s working capital,with the price subject to adjustment, during the first year of the optionperiod.  See “Item 5.  Operating and Financial Review and Prospects,(F) Tabular Disclosure of Contractual Obligations.”

 

In June 2002, we entered into management anddevelopment agreements for the One&Only Reethi Rah, a 130-room luxuryresort on North Male Atoll in the Maldives, that we expect to open in thesecond quarter of 2005.  The managementand development agreements related to this property are co-terminus with theowner’s lease, which expires in 2020. SRL’s board of directors has approved the exercise of its right toparticipate on a proportionate basis (effective January 1, 2005, increasedto 25%) with us in connection with the One&Only Reethi Rah.  We expect to transfer the management agreementfor the One&Only Reethi Rah to One&Only Management.  As part of this development, we havecommitted to provide certain financing arrangements to the current owner.  See “Item 5.  Operating and Financial Review and Prospects,(B) Liquidity and Capital Resources—Off-Balance Sheet Arrangements.”

 

We have long-term management agreements with each offive hotels in Mauritius that are owned by SRL: the One&Only Le Saint Géran, the One&Only Le Touessrok, SugarBeach Resort, La Pirogue Hotel and Le Coco Beach Hotel.  The term of each of these managementagreements was extended from 2008 until 2023 in December 2002 when weentered into an agreement with SRL to form One&Only Management for thepurpose of, among other things, managing the five properties owned by SRL inMauritius and the One&Only Kanuhura in the Maldives.  As of January 1, 2005, One&OnlyManagement was owned 75% by us and 25% by SRL. Subject to certain conditions, SRL’s ownership interest will increaseincrementally through 2009, for no additional consideration, at which time itwill own 50% of One&Only Management. In connection with the formation of

 

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One&Only Management, we subcontracted to it all of our Mauritiusmanagement agreements and assigned to it the One&Only Kanuhura managementagreement, and SRL purchased 20% of our debt and equity interests in theOne&Only Kanuhura.  As ofJanuary 1, 2005, our ownership interest in the One&Only Kanuhura furtherdecreased to 18.75% and SRL’s interest increased to 6.25%, as SRL purchased anadditional 1.25% interest from us. Pursuant to an additional subcontract arrangement with One&OnlyManagement, we provide comprehensive management services to the five Mauritiusresorts and receive a management fee calculated as a percentage of revenues andadjusted EBITDA, as defined. One&Only Management also is entitled to a marketing fee calculatedas a percentage of revenues, although it has subcontracted to us all marketingservices and benefits thereof with respect to the five Mauritius resorts.

 

In July 2001, we entered into a managementagreement to provide comprehensive management services to the One&OnlyKanuhura in the Maldives.  In connectionwith the formation of One&Only Management, we assigned the One&OnlyKanuhura management agreement to One&Only Management, which subsequentlysubcontracted such agreement back to us. The management fee is calculated as percentages of revenue and adjustedEBITDA and it expires in 2026. One&Only Management also receives a marketing fee calculated as a percentageof revenues, although it has subcontracted to us all marketing services, andrelated benefits with respect to the One&Only Kanuhura.  See “Item 5.  Operating and Financial Review and Prospects,(F) Off-Balance Sheet Arrangements” for further information.

 

We have a management agreement to manage the expandedOne&Only Royal Mirage Hotel in Dubai, which originally opened inAugust 1999.  Pursuant to thisagreement, we receive a management fee calculated as a percentage of revenuesand gross operating profits, as defined. The management fee schedule may be renegotiated after10 years.  This management agreementexpires in 2019.

 

**Harborsideat Atlantis Joint Venture**

 

In 1999, we formed a joint venture with SVO (formerlyVistana, Inc.) a subsidiary of Starwood, to develop a timeshare project onParadise Island adjacent to Atlantis, Paradise Island called Harborside atAtlantis.  We and SVO each hold a 50%interest in Harborside at Atlantis.  Wehave a marketing agreement in connection with Harborside at Atlantis, pursuantto which we receive marketing fees based on a percentage of timesharesales.  We also receive development feesin connection with a development agreement with Harborside at Atlantis,pursuant to which we receive fees based on a percentage of the total constructioncosts.

 

**PurchaseAgreement between the Company and Colony**

 

The Purchase Agreement among KINA, as parent,GGRI, Inc., as Seller and Colony as Buyer (the “Purchase Agreement”) wasdated October 30, 2000.  Thecontract was entered into between the parties to effect the Resorts Atlantic CitySale described in “Item 4. Information on the Company, (A) History and Development of theCompany.”  The Resorts Atlantic City Salewas completed on April 25, 2001, for a purchase price of approximately$144.5 million, including accrued interest (the “Resorts Atlantic CitySale”).  The proceeds received fromColony consisted of approximately $127.0 million in cash and an unsecured$17.5 million note which was paid in full in March 2002.

 

Pursuant to the terms of the Resorts Atlantic CitySale, we granted Colony a two-year option (the “Atlantic City Option”) toacquire certain undeveloped real estate adjacent to Resorts Atlantic City thatwe previously owned for a purchase price of $40.0 million.  In February 2004, we and Colony agreedto terminate the Atlantic City Option and entered into a new agreement pursuantto which we sold the undeveloped real estate adjacent to Resorts Atlantic Cityto a wholly owned subsidiary (the “Purchaser”) of Colony RIHHoldings, Inc. for a purchase price of $40.0 million.  The sale was completed on March 18,2004.  The purchase price was paid in theform of a promissory note which matures on March 10, 2009 (the “NJ Note”).  The NJ Note began accruing interest onSeptember 30, 2004 at a rate of 4.0%, which rate steps up at variousintervals from the closing date of the transaction.  All principal and interest due under the NJNote is due on March 10, 2009, which date may be accelerated by us uponcertain events.  The NJ Note is securedby a first mortgage on the property sold and is guaranteed by Colony RIHHoldings, Inc. (the direct parent company of the Purchaser) initially inan amount limited to $20.0 million, which will generally increase inincrements of $5.0 million annually. The NJ Note will also be guaranteed by Resorts International Hotel andCasino, Inc.  This guarantee will gointo effect when that company’s outstanding public indebtedness, which is dueon March 9, 2009, has been paid.

 

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**NYProject Development Services Agreement**

 

In March 2001, TCNY entered into a DevelopmentServices Agreement with the Stockbridge-Munsee Tribe for the development of acasino project in the Catskills region of the State of New York.  The Development Agreement was amended andrestated in February 2002 and subsequently amended in both October and December 2004.  Pursuant to the Development Agreement, asamended, TCNY will provide preliminary funding, certain financing and exclusivedevelopment services to the Stockbridge-Munsee Tribe in conjunction with the CatskillsProject.  If the Catskills Project isapproved and ultimately developed, TCNY will earn a development fee of 5% of grossrevenues (as defined in the Development Agreement) as compensation for itsservices (subject to certain priorities), beginning with the opening of the CatskillsProject and continuing for a period of twenty years.  See “Item 4. Information on the Company,(B) Business Overview—Gaming—Trading Cove New York” for more information.

 

**InternetGaming Agreement**

 

In February 2002, we agreed to sell 50% ofKerzner Interactive Limited to Station, who paid us a non-refundable deposit of$4.5 million in July 2002. Subsequently, this agreement was restructured and Station received anoption through early January 2003 to purchase 50% of the operation inconsideration for the $4.5 million previously received.  Since that time, we concluded that thisbusiness would not be economically viable in the short to medium term.  We discontinued the operations of KerznerInteractive Limited during the first quarter of 2003 and the Company andStation mutually agreed to terminate this transaction.  See “Item 4.  Information on the Company, (B) BusinessOverview—Internet Gaming” for more information.

 

**Northampton,England-Gaming License**

 

On April 9, 2003 we announced that we had agreedto acquire from LCI for $2.1 million a property located in the city centerof Northampton, England.  On March 30,2004, we announced that the Gaming Board of Great Britain had granted us aCertificate of Consent, which has enabled us to transfer a gaming license heldby LCI into our name and proceed with our plans for a casino inNorthampton.  In February 2005, theNorthampton project was approved by the local planning authorities and we havecommenced construction on this project. We expect to develop and operate the new casino facility on anapproximate 30,000 square foot site.  See“Item 4.  Information on theCompany, (B) Business Overview—Gaming—United Kingdom” for more information.

 

**Developmentof Resort Casinos in London, East Manchester and Glasgow**

 

On July 13, 2004, we announced our appointment asthe preferred developer and/or operator with respect to the development andmanagement of gaming, hotel and entertainment facilities for two sites in twokey markets in the United Kingdom.  Thesites for the projects are the Scottish Exhibition + Conference Centre inGlasgow and Sportcity in East Manchester. We are negotiating binding agreements for both of these projects.  If these projects do not proceed, we will berequired to write-off certain costs that have been incurred (as ofDecember 31, 2004, we had approximately $10.4 million on our balancesheet with respect to these projects).

 

In addition, on July 13, 2004, we also announcedthat we had entered into a binding agreement with affiliates of AnschutzEntertainment Group for the development and operation of a casino and hotelresort facility at the Millennium Dome in London.  Pursuant to our agreement with AnschutzEntertainment Group, we plan to develop and operate an approximately $350.0million resort casino and hotel.  See “Item 4.  Information on the Company, (B) BusinessOverview—Gaming—United Kingdom” for more information on these projects.

 

**Morocco,Destination Resort**

 

On July 22, 2004, we announced that Kerzner andtwo local Moroccan companies, SOMED and CDG, had entered into an agreement withthe Government of the Kingdom of Morocco that contemplates the creation of ajoint venture that will own a destination resort casino in Morocco that we willdevelop and manage.  In addition,Kerzner, SOMED and CDG entered into an Agreement in Principle with respect tothe ownership, development and management of this resort.  The agreement with the Government and the Agreementin Principle are both subject to obtaining third-party financing and thesatisfactory negotiation of definitive documents with our prospective Moroccanpartners.  The cost of the project isestimated at $230.0 million.  We will initiallyown 50% of the joint venture, requiring Kerzner to commit up to approximately $47.0million.  See “Item 4.  Information on the Company, (B) BusinessOverview—Destination Resorts—Morocco” for more information on this project.

 

81

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**BahamasUnion Contract Arrangements**

 

In The Bahamas, as of December 31, 2004,approximately 3,600 of our employees were represented by The Bahamas Hotel,Catering and Allied Workers Union. Kerzner International Bahamas Limited participates in The Bahamas HotelEmployers Association, which represents resort operators in the ParadiseIsland-New Providence Island area.  Theassociation and the union are parties to a contract that expires onJanuary 7, 2008.

 

**(D)**  Exchange Controls

 

The Central Bank of The Bahamas (the “Central Bank”)must approve any payments made to companies, including us, which arenon-resident companies for exchange control purposes.  The Central Bank has granted approvedinvestment status in respect of our holding of the capital stock of ourBahamian subsidiaries.  The granting ofsuch status will mean that all payments of a current nature, including therepatriation of dividends or other distributions to us out of the revenues ofour Bahamian subsidiaries and any proceeds received on the sale of suchsubsidiaries will be routinely approved by the Central Bank following properapplication.  Any other payments to us byour Bahamian subsidiaries will require standard approval by the Central Bank.

 

There currently are no limitations on the right ofnonresident or foreign owners to hold or vote the Ordinary Shares imposed byforeign law or by our Articles of Association.

 

**(E)**   Taxation

 

**CertainU.S. Federal Income Tax Considerations**

 

The following is a general discussion of certain U.S.federal income tax consequences to the acquisition, ownership and dispositionof Ordinary Shares.  For purposes of thisdiscussion, a “U.S. Holder” means an individual citizen or resident of the UnitedStates, a corporation or entity treated as a corporation organized under thelaws of the United States or of any state or political subdivision thereof, oran estate or trust the income of which is includible in gross income for U.S.federal income tax purposes regardless of its source.

 

Rules regarding partnerships are complex.  Partners in partnerships should consult theirtax advisers regarding the implications of owning Ordinary Shares.

 

This discussion is not intended to be exhaustive andis based on statutes, regulations, rulings and judicial decisions currently ineffect.  This discussion does notconsider any specific circumstances of any particular U.S. Holder and appliesonly to U.S. Holders that hold Ordinary Shares as a capital asset.  Investors are urged to consult their taxadvisers regarding the U.S. federal tax consequences of acquiring, holding anddisposing of Ordinary Shares, as well as any tax consequences that may ariseunder the laws of any foreign, state, local or other taxing jurisdiction.

 

**Ownershipof Ordinary Shares**

 

Dividends on Ordinary Shares paid to U.S. Holders willbe treated as dividend income for U.S. federal income tax purposes to theextent of our undistributed current or accumulated earnings and profits ascomputed for U.S. federal income tax purposes. In the case of an individual U.S. Holder, such dividend income will beeligible for a maximum tax rate of 15% for dividends received beforeJanuary 1, 2009, provided that such holder holds the Ordinary Shares forat least 60 days of the 121-day period beginning 60 days before thedate on which Ordinary Shares become ex-dividend with respect to such dividend andcertain other conditions are satisfied. Furthermore, such dividends will generally not be eligible for thedividends received deduction available to certain U.S. corporations underSection 243 of the Internal Revenue Code of 1986, as amended.

 

We are not a “passive foreign investment company” (a “PFIC”),a “foreign personal holding company” (an “FPHC”) or a “controlled foreigncorporation” (a “CFC”) for U.S. federal income tax purposes.  We are not a CFC, since U.S. persons eachowning (directly, indirectly or by attribution) 10% or more of the voting poweror of our stock (“10% Shareholders”) do not collectively own more than 50% ofthe voting power or value of our stock, or an FPHC, since it is not the casethat five or fewer individuals who are U.S. citizens or residents own(directly, indirectly, or by attribution) more than 50% of the voting power orvalue of our stock.  If more than 50% ofthe voting power or value of our stock were owned (directly, indirectly or byattribution) by 10% Shareholders, we would become a CFC and each such 10%Shareholder would be required to include in its taxable income as aconstructive dividend an amount equal to its share of a portion of our undistributedincome.  If more than 50% of the votingpower or value of our stock were owned (directly, indirectly or by attribution)by five or fewer individuals who are citizens or residents of the United Statesand if at least 60% of our income consisted of certain interest,

 

82

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dividend or other enumerated types of income, we would be an FPHC.  If we were an FPHC, each U.S. Holder(regardless of the amount of stock owned by such U.S. Holder) would be requiredto include in its taxable income as a constructive dividend its share of ourundistributed income of specified types. If our foreign ownership interests were to decrease, or if U.S. personswere to acquire a greater ownership interest in our foreign stock holders, thenit is possible that we could become a CFC or FPHC if we otherwise satisfied thetests set forth above.

 

We are not a PFIC because we do not anticipate thatmore than 75% of our annual gross income will consist of certain “passive” incomeor more than 50% of the average value of our assets in any year will consist ofassets that produce, or are held for the production of, such passiveincome.  If such income and asset testswere not met and we were to become a PFIC, U.S. Holders would, in certaincircumstances, be required to pay an interest charge together with taxcalculated at maximum rates on certain “excess distributions” (defined toinclude any gain on the sale of stock).

 

If we were a FPHC or a PFIC, an individual U.S. Holderwould not be eligible for the 15% tax rate on dividends discussed in the firstparagraph of this section.  The FPHCrules were repealed by the American Jobs Creation Act of 2004, and cease toapply after December 31, 2004.

 

Any gain or loss on the sale or exchange of OrdinaryShares by a U.S. Holder will be a capital gain or loss.  If the U.S. Holder has held such OrdinaryShares for more than one year, such gain or loss will be a long-term capitalgain or loss.

 

Annual filings of Form 5471 may be required fromcertain U.S. persons owning 10% or more of our stock.

 

**CertainBahamian Tax Considerations**

 

The following is a brief and general summary ofcertain Bahamian tax matters as they may relate to the Company and the holdersof the Ordinary Shares of the Company. The discussion is not exhaustive and is based on Bahamian law currentlyin effect.

 

The Bahamas does not impose any income, capital gainsor withholding taxes.  Therefore, theCompany will not be subject to income tax in The Bahamas on an ongoing basisand if we were to pay dividends on Ordinary Shares to holders thereof, theywould not be subject to a Bahamian withholding tax.  The Company, however, is subject to gamingtaxes and other governmental fees and charges. There are no reciprocal tax treaties with The Bahamas.

 

**(F)**   Dividends and Paying Agents

 

Not applicable.

 

**(G)**  Statement by Experts

 

Not applicable.

 

**(H)**  Documents on Display

 

Kerzner is subject to the informational requirementsof the Exchange Act and files reports and other information with the SEC.  You may read and copy all or any portion ofthe Annual Report and its exhibits at the public reference facilitiesmaintained by the SEC, 450 Fifth Street, N.W., Judiciary Plaza, Room 1024,Washington, D.C. 20549, and at its regional office at Citicorp Center, 500 WestMadison Street, Suite 1400, Chicago, Illinois 60661-2511.  You may request copies of all or any portionof these documents, upon payment of a duplication fee, by writing to the publicreference section of the SEC at 450 Fifth Street, N.W., Washington, D.C.20549.  You may obtain more informationabout the public reference room by calling the SEC at 1-800-SEC-0330.  Our reports and other information filed withthe SEC are also available to the public from commercial document retrievalservices and the website maintained by the SEC at www.sec.gov.

 

**(I)**    Subsidiary Information

 

Please refer to “Item 4.  Information on the Company,(C) Organizational Structure” for a list of our significantsubsidiaries.  A list of our significantsubsidiaries is filed with this Annual Report as Exhibit 8.  See “Item 19.  Exhibits.”

 

## **Item 11**.        Quantitativeand Qualitative Disclosures About Market Risk

 

Our major market risk exposure is interest rate riskdirectly related to our bank debt and interest rate swaps on our fixed ratedebt.  As of December 31, 2004, wehad interest rate swaps on $150.0 million of our fixed rate debt.

 

83

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We attempt to limit our exposure to interest rate risk by managing themix of fixed and variable rate debt, and by entering into variable interestrate swap agreements to hedge a portion of our fixed rate debt.  See “Item 5.  Operating and Financial Review and Prospects,(B) Liquidity and Capital Resources—Interest Rate Swap Agreements” forfurther discussion.  These interest rateswap agreements are entered into with a number of financial institutions withinvestment grade credit ratings, thereby minimizing the risk of credit loss.

 

We prepare our financial statements in U.S. dollars.  Our most significant non-U.S. operations arein The Bahamas.  Due to currentgovernmental policies in The Bahamas that equate one Bahamian dollar to oneU.S. dollar, we believe that we do not have material market risk exposures inthis jurisdiction relative to changes in foreign exchange rates.  Due to the stability of the other markets inwhich we operate, we also believe that we do not have material market riskexposures in these jurisdictions relative to changes in foreign exchange rates.

 

Fair value estimates are made at a specific point intime, based on relevant market information about the financial instrument.  These estimates are subjective in nature andinvolve uncertainties and matters of significant judgment.  The fair value of fixed rate debt is based onthe market value on the balance sheet date plus accrued interest to the lastpayment date.  The fair value of interestrate swaps is determined from representations of financial institutions andrepresents the discounted future cash flows through maturity or expirationusing current rates, and is effectively the amount we would pay or receive toterminate the agreements.  We estimatedthe fair value of our $2.8 million Palmilla guarantee by calculating thenet present value of the difference in cash flows of interest payments betweenthe estimated interest amounts payable without the guarantee and the cash flowsof those same interest payments with the guarantee, the difference representingthe estimated fair value of the guarantee.

 

**InterestRate Sensitivity**

 

The table below provides information about the Company’sderivative instruments that are sensitive to changes in interest rates,including interest rate swaps and debt obligations.  For debt obligations, the table presentsprincipal cash flows and related weighted average interest rates by expectedmaturity dates.  For interest rate swaps,the table presents notional amounts and weighted average interest rates byexpected (contractual) maturity dates. Notional amounts are used to calculate the contractual payments to beexchanged under the contract.  Weightedaverage variable rates are based on implied forward rates in the yield curve atthe reporting date.  The information ispresented in U.S. dollar equivalents, which is the Company’s reportingcurrency.

 
| **December 31, 2004  (In Thousands of Dollars)  Asset (Liability)** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | ** ** | ** ** | ** ** | **Fair Value  December 31,  2004** | ** ** |
|--------------------------------------------------------------------------|----------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|------------|------------|------------|-----------------------------------------|------------|
| ** **                                                               | **Expected Maturity Date** | ** ** | ** ** |
| ** **                                                               | **2005**                   | ** ** | **2006**   | ** ** | **2007**   | ** ** | **2008**   | ** ** | **2009**   | ** ** | **Thereafter** | ** ** | **Total**  | ** ** | ** ** |
|                                                                     |                       |       |       |       |       |       |       |       |       |       |           |       |       |       |       |                                    |       |
| Fixed rate debt:                                                         |                       |       |       |       |       |       |       |       |       |       |           |       |       |       |       |                                    |       |
| 87/8% Notes                                                              |                       | $          | —     |       | $          | —     |       | $          | —     |       | $              | —     |       | $          | —     |                                    | $          | (400,000 | ) | $ | (400,000 | ) | $ | (443,915 | ) |
| Interest rate  swaps:                                                    |                       |       |       |       |       |       |       |       |       |       |           |       |       |       |       |                                    |       |
| Notional amount                                                          |                       | $          | —     |       | $          | —     |       | $          | —     |       | $              | —     |       | $          | —     |                                    | $          | 150,000 |   | $ | 150,000 |   | $ | 11,839 |   |
| Average pay rate  (a)                                                    |                       |       |       |       |       |       |       |       |       |       |           |       |       |       |       | 4.93                                    | %          |
| Average receive  rate                                                    |                       | 8.875      | %          | 8.875      | %          | 8.875      | %          | 8.875      | %          | 8.875      | %              | 8.875      | %          |       |       | 8.875                                   | %          |

 

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(a)   Based on averagespreads ranging from 2.95-3.02% plus six-month LIBOR.

 

In connection with our interest rate swap agreements,for every 100 basis points that LIBOR increases or decreases, interest expensecorrespondingly changes by $1.5 million per annum.

 

## **Item 12**.        Descriptionof Securities Other than Equity Securities

 

Not applicable.

 

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**PART II**

 

## **Item 13**.        Defaults,Dividend Arrearages and Delinquencies

 

Not applicable.

 

## **Item 14**.        MaterialModifications to the Rights of Security Holders and Use of Proceeds

 

Not applicable.

 

## **Item 15**.        Controls andProcedures

 

As of the end of the period covered by this report,the Company’s management (with the participation of its chief executive officerand chief financial officer) conducted an evaluation pursuant toRule 13a-15 promulgated under the Exchange Act, of the effectiveness ofthe design and operation of the Company’s disclosure controls andprocedures.  Based on this evaluation,the Company’s chief executive officer and chief financial officer concludedthat as of the end of the period covered by this report such disclosurecontrols and procedures were reasonably designed to ensure that informationrequired to be disclosed by the Company in reports it files or submits underthe Exchange Act is recorded, processed, summarized and reported within thetime periods specified in the rules and forms of the SEC.

 

No change in the Company’s internal control overfinancial reporting (as defined in Rule 13a-15(f) under the Exchange Act)occurred during the year ended December 31, 2004 that has materiallyaffected, or is reasonably likely to materially affect, the Company’s internalcontrol over financial reporting.

 

In the last two years, we have significantly enhancedour controls over financial reporting. We added additional accounting professionals to our staff and improvedthe level of review of the application of accounting literature with respect tosignificant transactions.

 

## **Item 16A**.     Audit Committee Financial Expert

 

Our audit committee consists of Messrs. Buckley,Marks, Siegel and Kazim.  The Board ofDirectors has determined that our audit committee does not have an “auditcommittee financial expert,” as defined in new rules promulgated by theSEC.  Although a person with suchqualifications does not serve on the audit committee, the Board of Directorsbelieves that the members of the audit committee collectively possess theknowledge and experience to oversee and assess the performance of ourmanagement and auditors, the quality of our disclosure controls, thepreparation and evaluation of our financial statements and our financialreporting.  Our Board of Directors alsobelieves that the members of the audit committee collectively possess theunderstanding of audit committee functions necessary to diligently executetheir responsibilities.  Biographicalinformation for each member of the audit committee is available in Item 6.  Directors, Senior Management and Employees ofthis Annual Report.

 

## **Item 16B**.     Code of Ethics

 

We have a Code of Business Conduct and Ethicsapplicable to all of our employees, officers and directors (including ourprincipal executive officer and our principal financial and accountingofficer).  A copy of our Code of BusinessConduct and Ethics is available in print on request and can be found as Exhibit11.2 to our Annual Report on Form 20-F for the year ended December 31,2003, filed on March 30, 2004.  Since itsadoption in 2003, there have been no amendments or waivers to this Code ofBusiness Conduct and Ethics.

 

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## **Item 16C**.    PrincipalAccountant Fees and Services

 

The following table sets forth the aggregate feesbilled or to be billed to us by Deloitte & Touche LLP or itsaffiliates, our principal accountants, for the following categories of feesfrom each of the last two years:

 
| ** **              | ** ** | **2004**            | ** ** | **2003** | ** ** |
|-------------------------|------------|---------------------|------------|----------|------------|
| ** **              | ** ** | **(in  thousands)** | ** ** |
| Audit fees              |       | $                   | 1,533      |     | $          | 1,633 |   |
| Audit-related  fees (1) |       | 499                 |       | 374      |       |
| Tax fees (2)            |       | 780                 |       | 125      |       |
|                    |       |                |       |     |       |
| Total fees              |       | $                   | 2,812      |     | $          | 2,132 |   |

 

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(1)   Audit-related feesconsist of fees related to the performance of audits and attest services notrequired by statute or regulations, audits of the Company’s benefit plans, duediligence services, advisory services related to Section 404 of theSarbanes-Oxley Act of 2002, and financial accounting and reporting consultations.

 

(2)   Tax fees consistof tax compliance, tax advice and tax planning services.

 

The audit committee has concluded that the provisionof the non-audit services listed above is compatible with maintaining theindependence of our principal accountants.

 

The audit committee is responsible for making arecommendation to shareholders for appointing and removing the independentauditor, setting their compensation and overseeing their work.  The audit committee has a policy for thepre-approval of all audit and permissible non-audit services provided by theindependent auditor.  The audit committeepre-approved 100% of the fees for 2004.

 

## **Item 16D**.     Exemptions from the Listing Standards forAudit Committees

 

Not applicable.

 

## **Item 16E**.     Purchases of Equity Securities by theIssuer and Affiliated Purchasers

 

During 2004, neither the Company nor any affiliatedpurchaser made any purchase of any class of equity securities that the Companyhas registered pursuant to Section 12 of the Securities Exchange Act of1934.

 

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**PART III**

 

## **Item 17**.        FinancialStatements

 

Not applicable.

 

## **Item 18**.        FinancialStatements

 

**(A)**          List ofFinancial Statements and Financial Statement Schedules

 
| Report  of Independent Registered Public Accounting Firm         |   | F-2 |
|------------------------------------------------------------------|--------|-----|
| Consolidated Balance Sheets                                      |   | F-3 |
| Consolidated Statements of  Income                               |   | F-4 |
| Consolidated Statements  of Changes in Shareholders’ Equity |   | F-6 |
| Consolidated Statements of  Cash Flows                           |   | F-7 |
| Notes to  Consolidated Financial Statements                      |   | F-9 |

 

87

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## **Item 19**.        Exhibits

 

**EXHIBITS**

 
| **Exhibit  Numbers** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                      | ** ** | **Incorporation  by Reference to**                                                                                                                    |
|----------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **           | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                           | ** ** | ** **                                                                                                                                            |
| 1.1(a)               |       | Restated Articles of  Association of Kerzner dated as of June 26, 2001                                                                                                                                                                                                                                                                                               |       | Exhibit 1 to Form 20-F  Annual Report of Kerzner for the year ended December 31, 2000, filed on  July 2, 2001, File No. 001-04226           |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                 |       |                                                                                                                                                  |
| 1.1(b)               |       | Amended and Restated  Articles of Association of Kerzner dated as of March 24, 2005                                                                                                                                                                                                                                                                             |       | Filed herewith as  Exhibit 1.1(b)                                                                                                                |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                 |       |                                                                                                                                                  |
| 1.2                  |       | Amendment to Restated  Articles of Association of Kerzner dated as of September 24, 2001                                                                                                                                                                                                                                                                        |       | Exhibit 3.3 to  Registration Statement on Form F-4, filed on July 18, 2002, File No. 333-96705-36                                                |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                 |       |                                                                                                                                                  |
| 1.3                  |       | Amended and Restated  Memorandum of Association of Kerzner                                                                                                                                                                                                                                                                                                           |       | Exhibit 3.1 to  Registration Statement on Form F-4, filed on November 7, 1996, File No. 333-  15409                                                   |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                 |       |                                                                                                                                                  |
| 1.4                  |       | Amendment to Memorandum  of Association of Kerzner                                                                                                                                                                                                                                                                                                                   |       | Exhibit 3.6 to  Registration Statement on Form F-4/A, filed on August 12, 2002, File No. 333-96705-36                                                 |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                 |       |                                                                                                                                                  |
| 1.5                  |       | Restated Certificate of  Incorporation, as amended, of Kerzner International North America, Inc.                                                                                                                                                                                                                                                                     |       | Exhibit 3.3 to  Registration Statement on Form F-4, filed on March 20, 1997, File No. 333-23665-01                                                    |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                 |       |                                                                                                                                                  |
| 1.6                  |       | Certificate of  Amendment of Restated Certificate of Incorporation of Kerzner International  North America, Inc.                                                                                                                                                                                                                                                     |       | Exhibit 3(a)(2) to Form  10-K405 Annual Report of KINA for the fiscal year ended December 31,  1996, filed on March 20, 1997, File No. 001-04748 |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                 |       |                                                                                                                                                  |
| 1.7                  |       | Certificate of  Amendment of Restated Certificate of Incorporation of Kerzner International  North America, Inc.                                                                                                                                                                                                                                                     |       | Exhibit 3.7 to  Registration Statement on Form F-4/A dated August 12, 2002, in File No. 333-96705-36                                                  |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                 |       |                                                                                                                                                  |
| 1.8                  |       | Amended and Restated By-Laws  of Kerzner International North America, Inc.                                                                                                                                                                                                                                                                                           |       | Exhibit 3(b) to Form 10-Q  Quarterly Report of KINA for the quarter ended June 30, 1996, filed on August  7, 1996, File No. 001-04748                 |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                 |       |                                                                                                                                                  |
| 2.1                  |       | Form of Inter-Borrower  Agreement dated as of March 10, 1997, between Kerzner and KINA                                                                                                                                                                                                                                                                               |       | Exhibit 4(e)(4) to Form  10-K405 Annual Report of KINA for the fiscal year ended December 31,  1996, filed on March 20, 1997, File No. 001-04748 |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                 |       |                                                                                                                                                  |
| 2.2(a)               |       | Purchase Agreement  dated August 9, 2001, among Kerzner and KINA, as issuers, the subsidiary  guarantors party thereto, and Deutsche Banc Alex. Brown Inc., Bear Stearns  & Co. Inc., CIBC World Markets Corp., Banc of America Securities LLC,  Wells Fargo Brokerage Services, LLC, Fleet Securities, Inc., and The Royal  Bank of Scotland PLC, as purchasers |       | Exhibit 2.3(a) to Form  20-F Annual Report of Kerzner for the year ended December 31, 2001,  filed on May 30, 2002, File No. 001-04226      |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                 |       |                                                                                                                                                  |
| 2.2(b)               |       | Purchase Agreement  dated May 9, 2002, among Kerzner and KINA, as issuers, the subsidiary  guarantors party thereto, and Bear Stearns & Co. Inc., Deutsche Bank  Securities Inc., CIBC World Markets Corp., Banc of America Securities LLC,  Wells Fargo Brokerage Services, LLC, J.P. Morgan Securities Inc., as initial  purchasers                       |       | Exhibit 2.3(b) to Form  20-F Annual Report of Kerzner for the year ended December 31, 2001,  filed on May 30, 2002, File No. 001-04226 |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                 |       |                                                                                                                                                  |
| 2.2(c)               |       | Indenture dated as of  August 14, 2001, among Kerzner and KINA, as issuers, the Guarantors party  thereto, and The Bank of New York, as trustee                                                                                                                                                                                                                      |       | Exhibit 2(c) to Form 6-K  of Kerzner, filed on August 24, 2001, File No. 001-04226                                                                    |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                 |       |                                                                                                                                                  |
| 2.2(d)               |       | Supplemental Indenture  dated as of September 19, 2001 to Indenture dated as of August 14, 2001                                                                                                                                                                                                                                                                 |       | Exhibit 99(a) to Form 6-K  of Kerzner, filed on September 20, 2001, File No. 001-04226                                                           |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                 |       |                                                                                                                                                  |
| 2.2(e)               |       | Second Supplemental  Indenture dated as of May 20, 2002 to Indenture dated as of August 14,  2001                                                                                                                                                                                                                                                               |       | Exhibit 4.3 to  Registration Statement on Form F-4, filed on July 18, 2002, File No. 333-96705-36                                                |

 

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| **Exhibit  Numbers** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                     | ** ** | **Incorporation  by Reference to**                                                                                                               |
|----------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                |       |                                                                                                                                             |
| 2.2(f)               |       | Third Supplemental  Indenture dated as of November 18, 2002 to Indenture dated as of August 14,  2001                                                                                                                                                                                                                                                                               |       | Exhibit 99.2 to Form 6-K  of Kerzner, filed on November 21, 2002, File No. 001-04226                                                             |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                |       |                                                                                                                                             |
| 2.2(g)               |       | Fourth Supplemental  Indenture dated as of May 7, 2003 to Indenture dated as of August 14,  2001                                                                                                                                                                                                                                                                               |       | Exhibit 99(1) to Form 6-K  of Kerzner, filed on June 4, 2003, File No. 001-04226                                                                 |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                |       |                                                                                                                                             |
| 2.2(h)               |       | Fifth Supplemental  Indenture dated as of September 10, 2004 to Indenture dated as of August  14, 2001                                                                                                                                                                                                                                                                         |       | Filed herewith as  Exhibit 2.2(h)                                                                                                           |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                |       |                                                                                                                                             |
| 2.2(i)               |       | Sixth Supplemental  Indenture dated as of March 24, 2005 to Indenture dated as of  August 14, 2001                                                                                                                                                                                                                                                                        |       | Filed herewith as Exhibit 2.2(i)                                                                                                            |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                |       |                                                                                                                                             |
| 2.2(j)               |       | Form of 87/8%  Senior Subordinated Note due 2011                                                                                                                                                                                                                                                                                                                                    |       | Exhibit 2(c) to Form 6-K  of Kerzner, filed on August 24, 2001, File No. 001-04226                                                               |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                |       |                                                                                                                                             |
| 2.2(k)               |       | Form of Guarantee with  respect to 87/8% Senior Subordinated Note due 2011                                                                                                                                                                                                                                                                                                          |       | Exhibit 2(c) to Form 6-K  of Kerzner, filed on August 24, 2001, File No. 001-04226                                                               |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                |       |                                                                                                                                             |
| 2.2(l)               |       | Registration Rights  Agreement dated as of August 14, 2001, among Kerzner and KINA, as issuers,  the Guarantors party thereto, and Deutsche Banc Alex. Brown Inc., Bear Stearns  & Co. Inc., CIBC World Markets Corp., Banc of America Securities LLC,  Wells Fargo Brokerage Services, LLC, Fleet Securities, Inc., and The Royal  Bank of Scotland PLC, as initial purchasers |       | Exhibit 2(b) to Form 6-K  of Kerzner, filed on August 24, 2001, File No. 001-04226                                                               |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                |       |                                                                                                                                             |
| 2.2(m)               |       | Registration Rights  Agreement dated as of May 20, 2002, among Kerzner and KINA, as issuers,  the Guarantors party thereto, and Bear Stearns & Co. Inc., Deutsche Bank  Securities Inc., CIBC World Markets Corp., Banc of America Securities LLC,  Wells Fargo Brokerage Services, LLC, J.P. Morgan Securities Inc., as initial  purchasers                               |       | Exhibit 2.3(f) to Form  20-F Annual Report of Kerzner for the year ended December 31, 2001,  filed on May 30, 2002, File No. 001-04226 |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                |       |                                                                                                                                             |
| 2.3(a)               |       | Purchase Agreement  dated March 30, 2004, between Kerzner International Limited and Deutsche Bank  Securities Inc., as Representative of the Initial Purchasers                                                                                                                                                                                                                     |       | Exhibit 1.1 to  Registration Statement on Form F-3, filed on July 2, 2004, File No.  333-117110                                             |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                |       |                                                                                                                                             |
| 2.3(b)               |       | Indenture dated as of  April 5, 2004, between Kerzner International Limited, as Issuer, and The Bank  of New York Trust Company, N.A., as Trustee                                                                                                                                                                                                                                   |       | Exhibit 4.1 to  Registration Statement on Form F-3, filed on July 2, 2004, File No.  333-117110                                             |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                |       |                                                                                                                                             |
| 2.3(c)               |       | Form of 2.375%  Convertible Senior Subordinated Note due 2024                                                                                                                                                                                                                                                                                                                       |       | Exhibit 4.2 to  Registration Statement on Form F-3, filed on July 2, 2004, File No.  333-117110                                             |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                |       |                                                                                                                                             |
| 2.3(d)               |       | Registration Rights  Agreement dated as of April 5, 2004, by and between Kerzner International  Limited and Deutsche Bank Securities Inc., as Representative of the Initial  Purchasers                                                                                                                                                                                             |       | Exhibit 4.3 to  Registration Statement on Form F-3, filed on July 2, 2004, File No.  333-117110                                             |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                |       |                                                                                                                                             |
| 4.1                  |       | Purchase Agreement  among KINA, as Parent, GGRI, as Seller and Colony as Buyer dated as of  October 30, 2000                                                                                                                                                                                                                                                                        |       | Exhibit 10 to Form 10-Q  Quarterly Report of KINA for the quarter ended September 30, 2000, filed  on November 14, 2000, File No. 001-04748 |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                |       |                                                                                                                                             |
| 4.2                  |       | Promissory Note between  Colony and KINA dated as of April 25, 2001                                                                                                                                                                                                                                                                                                                 |       | Exhibit 2 to Form 6-K  of Kerzner, filed on May 8, 2001, File No. 001-04226                                                                 |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                |       |                                                                                                                                             |
| 4.3(a)               |       | Fourth Amended and  Restated Revolving Credit Facility dated as of November 13, 2001 among  Kerzner, KINA and Kerzner International Bahamas Limited, various financial  institutions as Lenders, and Canadian Imperial Bank of Commerce, as  administrative agent                                                                                                                   |       | Exhibit 10 to Form 10-Q  Quarterly Report of KINA for the quarter ended September 30, 2001, filed  on November 14, 2001, File No. 001-04748 |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                |       |                                                                                                                                             |
| 4.3(b)               |       | Letter Amendment to the  Fourth Amended and Restated Revolving Credit Agreement dated as of  December 14, 2001                                                                                                                                                                                                                                                                 |       | Exhibit 4.3(b) to Form  20-F Annual Report of Kerzner for the year ended December 31, 2002,  filed on June 30, 2003, File No. 001-04226     |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                |       |                                                                                                                                             |
| 4.3(c)               |       | First Amendment to the  Fourth Amended and Restated Revolving Credit Agreement dated as of  May 8, 2002                                                                                                                                                                                                                                                                        |       | Exhibit 4.21 to  Registration Statement on Form F-4, filed on July 18, 2002, File No. 333-96705-36                                          |

 

89

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| **Exhibit  Numbers** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | ** ** | **Incorporation  by Reference to**                                                                                                           |
|----------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       |                                                                                                                                         |
| 4.3(d)               |       | Letter Amendment to the  Fourth Amended and Restated Revolving Credit Agreement dated as of  May 22, 2002                                                                                                                                                                                                                                                                                                                                                                                                                          |       | Exhibit 4.3(d) to Form  20-F Annual Report of Kerzner for the year ended December 31, 2002,  filed on June 30, 2003, File No. 001-04226 |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       |                                                                                                                                         |
| 4.3(e)               |       | Letter Amendment to the  Fourth Amended and Restated Revolving Credit Agreement dated as of August 30,  2002                                                                                                                                                                                                                                                                                                                                                                                                                            |       | Exhibit 99.1 to Form 6-K  of Kerzner, filed on December 6, 2002, File No. 001-04226                                                     |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       |                                                                                                                                         |
| 4.3(f)               |       | Second Amendment to the  Fourth Amended and Restated Revolving Credit Agreement dated as of November  20, 2002                                                                                                                                                                                                                                                                                                                                                                                                                          |       | Exhibit 99.2 to Form 6-K  of Kerzner, filed on December 6, 2002, File No. 001-04226                                                     |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       |                                                                                                                                         |
| 4.3(g)               |       | Third Amendment to the  Fourth Amended and Restated Revolving Credit Agreement dated as of  May 15, 2003                                                                                                                                                                                                                                                                                                                                                                                                                           |       | Exhibit 4.3(g) to Form  20-F Annual Report of Kerzner for the year ended December 31, 2002,  filed on June 30, 2003, File No. 001-04226 |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       |                                                                                                                                         |
| 4.3(h)               |       | Fifth Amended and  Restated Credit Agreement dated as of July 7, 2004, among Kerzner  International Limited, Kerzner International North America, Inc. and Kerzner  International Bahamas Limited, as the Borrowers and the Guarantors, various  financial institutions, as the Lenders, JPMorgan Chase Bank, as the  Administrative Agent, Deutsche Bank Securities Inc. and Wells Fargo Bank  N.A., as the Co-Syndication Agents, Bank of America, N.A. and Bear Stearns  Corporate Lending Inc., as the Co-Documentation Agents |       | Exhibit 99.1 to  Registration Statement on Form F-3/A, filed on August 3, 2004, File No.  333-117110                                         |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       |                                                                                                                                         |
| 4.3(i)               |       | First Amendment to  Credit Agreement dated as of February 15, 2005, among Kerzner  International Limited, Kerzner International Bahamas Limited and Kerzner International  North America, Inc., as the Borrowers, and certain Lenders party thereto                                                                                                                                                                                                                                                                                |       | Filed herewith as  Exhibit 4.3(i)                                                                                                       |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       |                                                                                                                                         |
| 4.4(a)               |       | Heads of Agreement  dated May 26, 2003, between Kerzner and the Government of the  Commonwealth of The Bahamas                                                                                                                                                                                                                                                                                                                                                                                                                     |       | Exhibit 99(2) to Form 6-K  of Kerzner, filed on May 28, 2003, File No. 001-04226                                                        |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       |                                                                                                                                         |
| 4.4(b)               |       | Supplement dated May 3,  2004 to Heads of Agreement dated as of May 26, 2003                                                                                                                                                                                                                                                                                                                                                                                                                                                            |       | Exhibit 99.1 to  Form 6-K of Kerzner, filed on May 5, 2004, File No. 001-04226                                                |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       |                                                                                                                                         |
| 4.4(c)               |       | Second Supplement dated  December 7, 2004 to Heads of Agreement dated as of May 26, 2003                                                                                                                                                                                                                                                                                                                                                                                                                                                |       | Exhibit 99.2 to  Form 6-K of Kerzner, filed on December 9, 2004, File No. 001-04226                                           |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       |                                                                                                                                         |
| 4.5(a)               |       | Second Amended and  Restated Development Services Agreement dated as of February 6, 2002 among  the Stockbridge-Munsee Tribe, the Stockbridge-Munsee Tribal Gaming Authority,  Trading Cove New York, LLC, KINA and Waterford Gaming Group, LLC                                                                                                                                                                                                                                                                                         |       | Exhibit 10 to Form 10-Q  Quarterly Report of KINA for the quarter ended March 31, 2002, filed on  May 15, 2002, File No. 001-04748      |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       |                                                                                                                                         |
| 4.5(b)               |       | Amendment to Second  Amended and Restated Development Services Agreement dated as of  October 19, 2004, among the Stockbridge-Munsee Band of Mohican Indians  of Wisconsin, the Stockbridge-Munsee Tribal Gaming Authority, Trading Cove  New York, LLC, Kerzner International North America, Inc. and Waterford Gaming  Group, LLC                                                                                                                                                                                                |       | Filed herewith as  Exhibit 4.5(b)                                                                                                       |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       |                                                                                                                                         |
| 4.5(c)               |       | Second Amendment to  Second Amended and Restated Development Services Agreement dated as of  December 21, 2004, among the Stockbridge-Munsee Band of Mohican Indians  of Wisconsin, the Stockbridge-Munsee Tribal Gaming Authority, Trading Cove  New York LLC, Kerzner International North America, Inc. and Waterford Gaming  Group, LLC                                                                                                                                                                                         |       | Filed herewith as Exhibit 4.5(c)                                                                                                        |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       |                                                                                                                                         |
| 4.6                  |       | Development Services  Agreement dated February 7, 1998 between the Mohegan Tribal Gaming Authority  and Trading Cove Associates                                                                                                                                                                                                                                                                                                                                                                                                         |       | Exhibit 2.1 to Form 20-  F/A of Kerzner for the year ended December 31, 1997, filed on  September 3, 1998, File No. 001-04226      |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       |                                                                                                                                         |
| 4.7                  |       | Relinquishment  Agreement dated February 7, 1998, between the Mohegan Tribal Gaming Authority  and Trading Cove Associates                                                                                                                                                                                                                                                                                                                                                                                                              |       | Exhibit 2.2 to Form 20-F/A  of Kerzner for the year ended December 31, 1997, filed on  September 3, 1998, File No. 001-04226       |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       |                                                                                                                                         |
| 4.8(a)               |       | Agreement in Principle  between Kerzner International Limited and Nakheel LLC, dated  September 22, 2003                                                                                                                                                                                                                                                                                                                                                                                                                           |       | Exhibit 4.8 to Form  20-F Annual Report of Kerzner for the year ended December 31, 2003,  filed on March 30, 2004, File No. 001-04226   |

 

90

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| **Exhibit  Numbers** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | ** ** | **Incorporation  by Reference to**                                                                                                            |
|----------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |       |                                                                                                                                          |
| 4.8(b)               |       | Resort Management  Agreement Atlantis, Palm Island dated as of May 5, 2004, between Kerzner  Nakheel Limited and Kerzner International Management FZ-LLC                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |       | Filed herewith as  Exhibit 4.8(b)                                                                                                             |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |       |                                                                                                                                          |
| 4.8(c)               |       | Development Agreement  for the Atlantis, Palm Island dated as of May 5, 2004, between Kerzner  International Development FZ-LLC, as developer, and Kerzner Nakheel Limited,  as owner                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |       | Filed herewith as  Exhibit 4.8(c)                                                                                                        |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |       |                                                                                                                                          |
| 4.9                  |       | Stock Purchase  Agreement dated as of February 14, 2002, by and among Station Casinos, Inc.,  Station Online, Inc., Kerzner and Kerzner Interactive Limited                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |       | Exhibit 4.8 to Form 20-F  Annual Report of Kerzner for the year ended December 31, 2001, filed on  May 30, 2002, File No. 001-04226 |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |       |                                                                                                                                          |
| 4.10                 |       | Registration Rights and  Governance Agreement dated as of July 3, 2001, by and among Kerzner, Sun  International Investments Limited, World Leisure Group Limited, Kersaf  Investments Limited, Caledonia Investments PLC, Mangalitsa Limited, Cement  Merchants SA, Rosegrove Limited, Royale Resorts Holdings Limited and Sun  International Inc.                                                                                                                                                                                                                                                                                                                                                               |       | Exhibit C to Schedule  13-D of Mangalitsa Limited with respect to Kerzner, filed on July 13,  2001, File No. 005-48645                   |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |       |                                                                                                                                          |
| 4.11                 |       | Omnibus Agreement dated  as of July 3, 2001, by and among Kerzner, Sun International Investments  Limited, World Leisure Group Limited, Kersaf Investments Limited, Caledonia  Investments PLC, Rosegrove Limited, Royale Resorts Holdings Limited, Royale  Resorts International Limited, Sun International Inc., Sun Hotels  International, Sun Hotels Limited, World Leisure Investments Limited, Solomon  Kerzner, Peter Buckley, Derek Aubrey Hawton, Sun International Management  Limited (a British Virgin Islands company), Cement Merchants SA, Sun  International Management Limited (a Swiss company), Sun International  Management (UK) Limited, Hog Island Holdings Limited and Mangalitsa Limited |       | Exhibit 10.9 to  Registration Statement on Form F-4, filed on September 21, 2001, File  No. 333-69780                                    |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |       |                                                                                                                                          |
| 4.12                 |       | Supplemental Agreement  to the Original Shareholders’ Agreement and to the Rosegrove Shareholders  Agreement dated as of July 3, 2001, by and among Kersaf Investments  Limited, Sun International Inc., Kerzner, Royale Resorts Holdings Limited,  World Leisure Investments Limited, Sun Hotels Limited, World Leisure Group  Limited, Royale Resorts International Limited, Caledonia Investments PLC,  Solomon Kerzner, Sun International Management Limited (a British Virgin  Islands company), Rosegrove Limited, Sun International Management Limited (a  Swiss company), Mangalitsa Limited and Hog Island Holdings Limited                                                                         |       | Exhibit A to Schedule  13-D of Mangalitsa Limited with respect to Kerzner, filed on July 13,  2001, File No. 005-48645                   |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |       |                                                                                                                                          |
| 4.13                 |       | Irrevocable Proxy  Agreement dated as of July 3, 2001, by and among Kerzner, Sun  International Investments Limited, World Leisure Group Limited, Kersaf  Investments Limited, Caledonia Investments PLC, Mangalitsa Limited, Cement  Merchants SA, Rosegrove Limited, Royale Resorts Holdings Limited and Sun  International Inc.                                                                                                                                                                                                                                                                                                                                                                                |       | Exhibit B to Schedule  13-D of Mangalitsa Limited with respect to Kerzner, filed on July 13,  2001, File No. 005-48645                   |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |       |                                                                                                                                          |
| 4.14                 |       | Trade Name and  Trademark Agreement dated as of July 3, 2001, by and among Kerzner, Sun  International Investments Limited and World Leisure Group Limited, as  Assignors, and Sun International Management Limited, as Assignee                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |       | Exhibit 10.12 to  Registration Statement on Form F-4, filed on September 21, 2001, File  No. 333-69780                                   |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |       |                                                                                                                                          |
| 4.15                 |       | Promissory Note dated  July 3, 2001 between Royale Resorts Holdings Limited, as Maker, and  Kerzner, as Payee                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |       | Exhibit 10.13 to  Registration Statement on Form F-4, filed on September 21, 2001, File  No. 333-69780                                   |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |       |                                                                                                                                          |
| 4.16                 |       | Stock Pledge Agreement  dated as of July 3, 2001, between Royale Resorts Holdings Limited, as  Pledgor, and Kerzner                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |       | Exhibit 10.14 to  Registration Statement on Form F-4, filed on September 21, 2001, File  No. 333-69780                                   |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |       |                                                                                                                                          |
| 4.17                 |       | Settlement Agreement  dated as of November 1, 2002, by and among Kerzner, Kersaf Investments  Limited, Royale Resorts Holdings Limited, Sun International Management  Limited, World Leisure Group Limited, Caledonia Investments PLC, Mangalitsa  Limited and Cement Merchants SA                                                                                                                                                                                                                                                                                                                                                                                                                                     |       | Exhibit 99.2 to Form 6-K  of Kerzner, filed on November 8, 2002, File No. 001-04226                                                           |

 

91

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| **Exhibit  Numbers** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                    | ** ** | **Incorporation  by Reference to**                                                                                                               |
|----------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                               |       |                                                                                                                                             |
| 4.18                 |       | Kerzner Deferred Compensation  Plan                                                                                                                                                                                                                                                                                                                                                                |       | Exhibit 99.1 to  Registration Statement on Form S-8, filed on October 11, 2002, File No. 333-100522                                              |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                               |       |                                                                                                                                             |
| 4.19(a)              |       | KINA Retirement Savings  Plan, dated December 20, 2001                                                                                                                                                                                                                                                                                                                                             |       | Filed herewith as  Exhibit 4.19(a)                                                                                                          |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                               |       |                                                                                                                                             |
| 4.19(b)              |       | Amendment 2003-1, dated  December 15, 2003 to the KINA Retirement Savings Plan dated January 1,  2002                                                                                                                                                                                                                                                                                         |       | Filed herewith as  Exhibit 4.19(b)                                                                                                          |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                               |       |                                                                                                                                             |
| 4.20                 |       | Plantation, Florida  Lease Agreement                                                                                                                                                                                                                                                                                                                                                               |       | Exhibit 4.19 to Form 20-F  Annual Report of Kerzner for the year ended December 31, 2002, filed on  June 30, 2003, File No. 001-04226       |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                               |       |                                                                                                                                             |
| 4.21                 |       | Kerzner International  Limited 2003 Stock Incentive Plan                                                                                                                                                                                                                                                                                                                                           |       | Exhibit 4.21 to Form  20-F Annual Report of Kerzner for the year ended December 31, 2003,  filed on March 30, 2004, File No. 001-04226      |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                               |       |                                                                                                                                             |
| 4.22                 |       | Master Agreement among  Kerzner International North America, Inc., Colony RIH Holdings, Inc., Resorts  International Hotel and Casino, Inc., Resorts Real Estate Holdings, Inc.,  Resorts International Hotel, Inc. and New Pier Operating Company, Inc., dated  as of February 1, 2004.                                                                                                      |       | Exhibit 4.22 to  Form 20-F Annual Report of Kerzner for the year ended December 31, 2003,  filed on March 30, 2004, File No. 001-04226 |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                               |       |                                                                                                                                             |
| 4.23                 |       | Purchase and Sale  Agreement by and between Kerzner International North America, Inc., as  Seller, and Resorts Real Estate Holdings, Inc., as Purchaser, dated as of  February 1, 2004.                                                                                                                                                                                                       |       | Exhibit 4.23 to  Form 20-F Annual Report of Kerzner for the year ended December 31, 2003,  filed on March 30, 2004, File No. 001-04226 |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                               |       |                                                                                                                                             |
| 4.24(a)              |       | Note Indenture dated as  of December 17, 2004, between Kerzner Palmilla Beach Partners, S. de  R.L. de C.V., Kerzner Palmilla Hotel Partners, S. de R.L. de C.V., Kerzner  Servicios Hoteleros, S. de R.L. de C.V., Kerzner Compania de Servicios, S. de  R.L. de C.V. and Kerzner Palmilla Golf Partners, S. de R.L. de C.V., as  Issuers, and Lasalle Bank National Association, as Trustee |       | Filed herewith as  Exhibit 4.24(a)                                                                                                          |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                               |       |                                                                                                                                             |
| 4.24(b)              |       | Guarantee Agreement  dated as of December 17, 2004, between GS Emerging Market Real Estate  Fund, L.P. and Kerzner International Limited, in favor of Lasalle Bank  National Association                                                                                                                                                                                                      |       | Filed herewith as  Exhibit 4.24(b)                                                                                                          |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                               |       |                                                                                                                                             |
| 4.25                 |       | Stock Purchase  Agreement dated as of July 15, 2004, between Kerzner International Limited  and Istithmar PJSC                                                                                                                                                                                                                                                                                     |       | Exhibit 99.1 to Form  6-K of Kerzner, filed on July 16, 2004, File No. 001-04226                                                            |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                               |       |                                                                                                                                             |
| 6                    |       | Computation of earnings  per share                                                                                                                                                                                                                                                                                                                                                                 |       | Incorporated by  reference to Note 2 of the Notes to the Consolidated Financial Statements                                                       |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                               |       |                                                                                                                                             |
| 8                    |       | Subsidiaries of Kerzner                                                                                                                                                                                                                                                                                                                                                                            |       | Filed herewith as Exhibit  8                                                                                                                     |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                               |       |                                                                                                                                             |
| 11.1(a)              |       | Kerzner Audit Committee  Charter                                                                                                                                                                                                                                                                                                                                                                   |       | Exhibit 11.1 to Form  20-F Annual Report of Kerzner for the year ended December 31, 2003,  filed on March 30, 2004, File No. 001-04226      |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                               |       |                                                                                                                                             |
| 11.1(b)              |       | Amended and Restated  Kerzner Audit Committee Charter                                                                                                                                                                                                                                                                                                                                              |       | Filed herewith as  Exhibit 11.1(b)                                                                                                          |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                               |       |                                                                                                                                             |
| 11.2                 |       | Kerzner Code of  Business Conduct and Ethics                                                                                                                                                                                                                                                                                                                                                       |       | Exhibit 11.2 to Form  20-F Annual Report of Kerzner for the year ended December 31, 2003,  filed on March 30, 2004, File No. 001-04226      |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                               |       |                                                                                                                                             |
| 12.1                 |       | Certification of Chief  Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                |       | Filed herewith as  Exhibit 12.1                                                                                                                  |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                               |       |                                                                                                                                             |
| 12.2                 |       | Certification of Chief  Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                |       | Filed herewith as  Exhibit 12.2                                                                                                                  |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                               |       |                                                                                                                                             |
| 13.1                 |       | Certification Pursuant  to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002                                                                                                                                                                                                                                                                           |       | Filed herewith as  Exhibit 13.1                                                                                                                  |

 

92

----

 
| **Exhibit  Numbers** | ** ** | **Description**                                                                     | ** ** | **Incorporation  by Reference to** |
|----------------------|------------|-------------------------------------------------------------------------------------|------------|------------------------------------|
|                 |       |                                                                                |       |                               |
| 14.1                 |       | Consent of Deloitte  & Touche LLP                                               |       | Filed herewith as  Exhibit 14.1    |
|                 |       |                                                                                |       |                               |
| 14.2                 |       | Consent of  PricewaterhouseCoopers LLP                                              |       | Filed herewith as  Exhibit 14.2    |
|                 |       |                                                                                |       |                               |
| 14.3                 |       | Trading Cove Associates  financial statements December 31, 2004, 2003 and 2002 |       | Filed herewith as  Exhibit 14.3    |

 

93

----

 

**SIGNATURES**

 

The registrant hereby certifies that it meets all ofthe requirements for filing on Form 20-F and that it has duly caused andauthorized the undersigned to sign this Annual Report on its behalf.

 
|                       | Kerzner  International Limited |
|----------------------------|--------------------------------|
|                       |                           |
|                       |                           |
| Date: March 30,  2005 | By:                            | /s/John R. Allison |
|                       | Name:                          | John R. Allison |
|                       | Title:                         | Executive Vice  President and Chief Financial  Officer |

 

94

----

 

**KERZNER INTERNATIONAL LIMITED**

 

**Consolidated Financial Statementsas of December 31, 2004 and 2003 and for each of the Three Years in the Period Ended December 31, 2004**

 

F-1

----

 

**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

 

To the Board of Directors and Shareholders ofKerzner International Limited:

 

We have audited theaccompanying consolidated balance sheets of Kerzner International Limited andsubsidiaries (the “Company”), as of December 31, 2004 and 2003, and therelated consolidated statements of operations, changes in shareholders’ equityand cash flows for each of the three years in the period ended December 31,2004.  These consolidated financialstatements are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these consolidated financial statements based on our audits.  We did not audit the financial statements ofTrading Cove Associates (“TCA”), the Company’s investment in which is accountedfor by use of the equity method.  TheCompany’s equity of $14.9 million and $14.4 million in TCA’s net assets atDecember 31, 2004 and 2003, respectively, and of $35.9 million,$34.0 million and $30.0 million in TCA’s net income for the years ended December 31,2004, 2003 and 2002, respectively, are included in the accompanyingconsolidated financial statements.  Thefinancial statements of TCA were audited by other auditors whose report hasbeen furnished to us, and our opinion, insofar as it relates to the amountsincluded for such company, is based solely on the report of such otherauditors.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States).  Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement.  The Company isnot required to have, nor were we engaged to perform, an audit of its internalcontrol over financial reporting.  Ouraudits included consideration of internal control over financial reporting as abasis for designing audit procedures that are appropriate in the circumstances,but not for the purpose of expressing an opinion on the effectiveness of theCompany’s internal control over financial reporting.  Accordingly, weexpress no such opinion.  An audit also includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation.  We believe that our audits and the report of other auditorsprovide a reasonable basis for our opinion.

 

In our opinion, based onour audits and the report of other auditors, such consolidated financialstatements present fairly, in all material respects, the financial position ofKerzner International Limited and subsidiaries, as of December 31, 2004and 2003, and the results of their operations and their cash flows for each ofthe three years in the period ended December 31, 2004, in conformity withaccounting principles generally accepted in the United States of America.

 

 
| /s/ DELOITTE &  TOUCHE LLP |   |
|--------------------------------|--------|
| Certified Public Accountants   |
|                           |
| Miami, Florida                 |
| March 30, 2005                 |

 

F-2

----

 

**KERZNER INTERNATIONAL LIMITED**

**CONSOLIDATED BALANCE SHEETS**

**(Inthousands of U.S. dollars, except share data)**

 
| ** **                                                                                                                                                                                        | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                        | ** ** | **2004**              | ** ** | **2003** | ** ** |
| **ASSETS**                                                                                                                                                                                        |       |                  |       |   |   |
| Current assets:                                                                                                                                                                                   |       |                  |       |   |   |
| Cash and cash  equivalents                                                                                                                                                                        |       | $                     | 180,341    |   | $ | 60,232 |   |
| Restricted cash                                                                                                                                                                                   |       | 2,768                 |       | 1,445 |   |
| Short-term  investments                                                                                                                                                                           |       | 203,940               |       | — |   |
| Trade  receivables, net                                                                                                                                                                           |       | 41,743                |       | 38,397 |   |
| Due from  affiliates                                                                                                                                                                              |       | 15,682                |       | 13,949 |   |
| Inventories                                                                                                                                                                                       |       | 13,453                |       | 10,418 |   |
| Assets held for  sale                                                                                                                                                                             |       | 12,289                |       | — |   |
| Prepaid expenses  and other assets                                                                                                                                                                |       | 21,685                |       | 15,360 |   |
| Total current  assets                                                                                                                                                                             |       | 491,901               |       | 139,801 |   |
|                                                                                                                                                                                              |       |                  |       |   |   |
| Property and  equipment, net                                                                                                                                                                      |       | 1,347,640             |       | 1,154,004 |   |
| Due from  affiliates – non-current                                                                                                                                                           |       | 81,737                |       | 34,842 |   |
| Deferred tax  asset, net                                                                                                                                                                          |       | 11,181                |       | 10,473 |   |
| Deferred charges  and other assets, net                                                                                                                                                           |       | 40,678                |       | 33,656 |   |
| Investments in  associated companies                                                                                                                                                              |       | 114,138               |       | 83,152 |   |
| Total assets                                                                                                                                                                                      |       | $                     | 2,087,275  |   | $ | 1,455,928 |   |
|                                                                                                                                                                                              |       |                  |       |   |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                                                                     |       |                  |       |   |   |
| Current  liabilities:                                                                                                                                                                             |       |                  |       |   |   |
| Current  maturities of long-term debt                                                                                                                                                             |       | $                     | 659        |   | $ | 304 |   |
| Accounts payable  and accrued liabilities                                                                                                                                                         |       | 168,725               |       | 172,233 |   |
| Capital  creditors                                                                                                                                                                                |       | 16,032                |       | 4,639 |   |
| Total current  liabilities                                                                                                                                                                        |       | 185,416               |       | 177,176 |   |
|                                                                                                                                                                                              |       |                  |       |   |   |
| Deferred revenue                                                                                                                                                                                  |       | 20,419                |       | 14,652 |   |
| Other long-term  liabilities                                                                                                                                                                      |       | 7,099                 |       | 7,290 |   |
| Long-term debt,  net of current maturities                                                                                                                                                        |       | 754,129               |       | 417,220 |   |
| Total  liabilities                                                                                                                                                                                |       | 967,063               |       | 616,338 |   |
|                                                                                                                                                                                              |       |                  |       |   |   |
| Minority  interest                                                                                                                                                                                |       | 3,934                 |       | — |   |
| Commitments and  contingencies (Note 23)                                                                                                                                                          |       |                  |       |   |   |
| Shareholders’  equity:                                                                                                                                                                       |       |                  |       |   |   |
| Preference  shares, $.001 par value, 100,000,000 authorized at December 31, 2004 and  2003; zero issued and outstanding at December 31, 2004 and 2003                                   |       | —                |       | — |   |
| Ordinary shares,  $.001 par value, 250,000,000 authorized at December 31, 2004 and 2003;  42,971,878 and 37,355,718 issued and outstanding at December 31, 2004  and 2003, respectively |       | 43                    |       | 37 |   |
| Capital in  excess of par                                                                                                                                                                         |       | 971,952               |       | 744,246 |   |
| Retained  earnings                                                                                                                                                                                |       | 336,543               |       | 268,411 |   |
| Accumulated  other comprehensive loss                                                                                                                                                             |       | (13,898               | )          | (7,736 | ) |
| Deferred  compensation                                                                                                                                                                            |       | (15,593               | )          | (2,599 | ) |
|                                                                                                                                                                                              |       | 1,279,047             |       | 1,002,359 |   |
| Treasury stock,  7,072,029 shares at December 31, 2004 and 2003                                                                                                                              |       | (162,769              | )          | (162,769 | ) |
| Total  shareholders’ equity                                                                                                                                                                  |       | 1,116,278             |       | 839,590 |   |
|                                                                                                                                                                                              |       |                  |       |   |   |
| Total  liabilities and shareholders’ equity                                                                                                                                                  |       | $                     | 2,087,275  |   | $ | 1,455,928 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

F-3

----

 

**KERZNERINTERNATIONAL LIMITED**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(In thousands of U.S.dollars, except per share data)**

 
| ** **                                                                   | ** ** | **For the Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                   | ** ** | **2004**                                 | ** ** | **2003** | ** ** | **2002** | ** ** |
| Revenues:                                                                    |       |                                     |       |   |   |   |   |
| Gaming                                                                       |       | $                                        | 130,879    |   | $ | 138,587 |   | $ | 129,916 |   |
| Rooms                                                                        |       | 215,868                                  |       | 188,235 |   | 184,776 |   |
| Food and  beverage                                                           |       | 151,827                                  |       | 130,879 |   | 131,377 |   |
| Tour operations                                                              |       | 47,115                                   |       | 40,790 |   | 41,063 |   |
| Management,  development and other fees                                      |       | 19,894                                   |       | 15,177 |   | 11,722 |   |
| Other revenues                                                               |       | 78,536                                   |       | 68,424 |   | 65,618 |   |
| Gross revenues                                                               |       | 644,119                                  |       | 582,092 |   | 564,472 |   |
| Less:  promotional allowances                                                |       | (23,034                                  | )          | (23,579 | ) | (22,210 | ) |
| Net revenues                                                                 |       | 621,085                                  |       | 558,513 |   | 542,262 |   |
|                                                                         |       |                                     |       |   |   |   |   |
| Cost and  expenses:                                                          |       |                                     |       |   |   |   |   |
| Gaming                                                                       |       | 59,504                                   |       | 63,283 |   | 63,746 |   |
| Rooms                                                                        |       | 39,949                                   |       | 33,395 |   | 33,381 |   |
| Food and  beverage                                                           |       | 104,078                                  |       | 89,502 |   | 88,560 |   |
| Tour operations                                                              |       | 39,994                                   |       | 35,406 |   | 36,767 |   |
| Other operating  expenses                                                    |       | 96,149                                   |       | 85,257 |   | 81,116 |   |
| Selling, general  and administrative                                         |       | 118,334                                  |       | 101,584 |   | 91,738 |   |
| Corporate  expenses                                                          |       | 38,601                                   |       | 36,431 |   | 28, 949 |   |
| Depreciation and  amortization                                               |       | 58,948                                   |       | 55,782 |   | 55,486 |   |
| Hurricane  related expenses                                                  |       | 3,426                                    |       | — |   | — |   |
| Insurance  recovery                                                          |       | —                                   |       | (2,819 | ) | (1,100 | ) |
| Pre-opening  expenses                                                        |       | 3,258                                    |       | — |   | — |   |
| Loss (gain) on  damaged assets                                               |       | 1,194                                    |       | (2,514 | ) | — |   |
| Impairment of  Atlantic City land                                            |       | 7,303                                    |       | — |   | — |   |
| Restructuring  costs reversal                                                |       | —                                   |       | — |   | (1,000 | ) |
| Cost and  expenses                                                           |       | 570,738                                  |       | 495,307 |   | 477,643 |   |
|                                                                         |       |                                     |       |   |   |   |   |
| Income from  operations                                                      |       | 50,347                                   |       | 63,206 |   | 64,619 |   |
|                                                                         |       |                                     |       |   |   |   |   |
| Relinquishment  fees – equity in earnings of TCA                        |       | 35,909                                   |       | 33,960 |   | 30,041 |   |
|                                                                         |       |                                     |       |   |   |   |   |
| Other income  (expense):                                                     |       |                                     |       |   |   |   |   |
| Interest income                                                              |       | 4,722                                    |       | 3,394 |   | 3,419 |   |
| Interest  expense, net of capitalization                                     |       | (36,814                                  | )          | (29,264 | ) | (39,104 | ) |
| Equity in  earnings (losses) of associated companies                         |       | 7,455                                    |       | (320 | ) | (5,209 | ) |
| Gain on  settlement of territorial and other disputes                        |       | —                                   |       | 1,479 |   | 14,459 |   |
| Loss on early  extinguishment of debt                                        |       | (1,655                                   | )          | — |   | (20,525 | ) |
| Other, net                                                                   |       | 1,358                                    |       | (686 | ) | 60 |   |
| Other expense,  net                                                          |       | (24,934                                  | )          | (25,397 | ) | (46,900 | ) |
|                                                                         |       |                                     |       |   |   |   |   |
| Income from  continuing operations before income taxes and minority interest |       | 61,322                                   |       | 71,769 |   | 47,760 |   |
| Provision for  income taxes                                                  |       | (424                                     | )          | (162 | ) | (96 | ) |
| Minority  interest                                                           |       | 7,234                                    |       | (1,340 | ) | — |   |
|                                                                         |       |                                     |       |   |   |   |   |
| Income from  continuing operations                                           |       | 68,132                                   |       | 70,267 |   | 47,664 |   |
| Income (loss)  from discontinued operations, net of income tax effect        |       | —                                   |       | 1,305 |   | (8,061 | ) |
|                                                                         |       |                                     |       |   |   |   |   |
| Net income                                                                   |       | $                                        | 68,132     |   | $ | 71,572 |   | $ | 39,603 |   |

 

F-4

----

 
| ** **                                                            | ** ** | **For the Year Ended December 31,** | ** ** |
|-----------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                            | ** ** | **2004**                                 | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                                                  |       |                                     |       |   |   |   |   |
| Basic earnings  per share:                                            |       |                                     |       |   |   |   |   |
| Income from  continuing operations                                    |       | $                                        | 2.09       |   | $ | 2.46 |   | $ | 1.71 |   |
| Income (loss)  from discontinued operations, net of income tax effect |       | —                                   |       | 0.04 |   | (0.29 | ) |
| Earnings per  share-basic                                             |       | $                                        | 2.09       |   | $ | 2.50 |   | $ | 1.42 |   |
|                                                                  |       |                                     |       |   |   |   |   |
| Weighted average  number of shares outstanding-basic                  |       | 32,550                                   |       | 28,575 |   | 27,891 |   |
|                                                                  |       |                                     |       |   |   |   |   |
| Diluted earnings  per share:                                          |       |                                     |       |   |   |   |   |
| Income from  continuing operations                                    |       | $                                        | 2.01       |   | $ | 2.39 |   | $ | 1.67 |   |
| Income (loss)  from discontinued operations, net of income tax effect |       | —                                   |       | 0.05 |   | (0.28 | ) |
| Earnings per share-diluted                                            |       | $                                        | 2.01       |   | $ | 2.44 |   | $ | 1.39 |   |
|                                                                  |       |                                     |       |   |   |   |   |
| Weighted average  number of shares outstanding-diluted                |       | 33,884                                   |       | 29,377 |   | 28,544 |   |

 

The accompanying notesare an integral part of these consolidated financial statements.

 

F-5

----

 

**KERZNERINTERNATIONAL LIMITED**

**CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY**

**For theYears Ended December 31, 2004, 2003 and 2002**

**(In thousands)**

 
| ** **                                                | ** ** | ** **           | ** ** | ** **      | ** ** | ** **         | ** ** | ** **        | ** ** | **Accumulated  Other** | ** ** | ** **   | ** ** | ** **             | ** ** | **Total**          | ** ** | **Comprehensive**   | ** ** |
|-----------------------------------------------------------|------------|----------------------|------------|-----------------|------------|--------------------|------------|-------------------|------------|------------------------|------------|--------------|------------|------------------------|------------|--------------------|------------|---------------------|------------|
| ** **                                                | ** ** | **Ordinary  Shares** | ** ** | **Capital  in** | ** ** | **Retained**       | ** ** | **Comprehensive** | ** ** | **Treasury**           | ** ** | **Deferred** | ** ** | **Shareholders’** | ** ** | **Income  (Loss)** | ** ** |
| ** **                                                | ** ** | **Shares**           | ** ** | **Amount**      | ** ** | **Excess  of Par** | ** ** | **Earnings**      | ** ** | **Income  (Loss)**     | ** ** | **Stock**    | ** ** | **Compensation**       | ** ** | **Equity**         | ** ** | **for the  Period** | ** ** |
|                                                      |       |                 |       |            |       |               |       |              |       |                   |       |         |       |                   |       |               |       |                |       |
| Balance at  January 1, 2002                               |       | 34,430               |       | $               | 34         |               | $          | 688,714           |       | $                      | 157,236    |         | $          | (8,553                 | )          | $                  | (162,769   | )                   | $          | — |   | $ | 674,662 |   |   |   |
|                                                      |       |                 |       |            |       |               |       |              |       |                   |       |         |       |                   |       |               |       |                |       |
| Translation  reserves                                     |       | —               |       | —          |       | —             |       | —            |       | 419                    |       | —       |       | —                 |       | 419                |       | $                   | 419        |   |
| Exercise of share  options                                |       | 808                  |       | 1               |       | 14,701             |       | —            |       | —                 |       | —       |       | —                 |       | 14,702             |       | —              |       |
| Repurchase of  ordinary shares                            |       | (16                  | )          | —          |       | (365               | )          | —            |       | —                 |       | —       |       | —                 |       | (365               | )          | —              |       |
| Net income                                                |       | —               |       | —          |       | —             |       | 39,603            |       | —                 |       | —       |       | —                 |       | 39,603             |       | 39,603              |       |
| Balance at  December 31, 2002                        |       | 35,222               |       | 35              |       | 703,050            |       | 196,839           |       | (8,134                 | )          | (162,769     | )          | —                 |       | 729,021            |       | 40,022              |       |
|                                                      |       |                 |       |            |       |               |       |              |       |                   |       |         |       |                   |       |               |       |                |       |
| Translation  reserves                                     |       | —               |       | —          |       | —             |       | —            |       | 398                    |       | —       |       | —                 |       | 398                |       | 398                 |       |
| Exercise of share  options                                |       | 2,074                |       | 2               |       | 39,005             |       | —            |       | —                 |       | —       |       | —                 |       | 39,007             |       | —              |       |
| Repurchase of  ordinary shares                            |       | (13                  | )          | —          |       | (408               | )          | —            |       | —                 |       | —       |       | —                 |       | (408               | )          | —              |       |
| Issuance of restricted  share awards                      |       | 73                   |       | —          |       | 2,599              |       | —            |       | —                 |       | —       |       | (2,599                 | )          | —             |       | —              |       |
| Net income                                                |       | —               |       | —          |       | —             |       | 71,572            |       | —                 |       | —       |       | —                 |       | 71,572             |       | 71,572              |       |
| Balance at  December 31, 2003                        |       | 37,356               |       | 37              |       | 744,246            |       | 268,411           |       | (7,736                 | )          | (162,769     | )          | (2,599                 | )          | 839,590            |       | 71,970              |       |
|                                                      |       |                 |       |            |       |               |       |              |       |                   |       |         |       |                   |       |               |       |                |       |
| Translation  reserves                                     |       | —               |       | —          |       | —             |       | —            |       | 606                    |       | —       |       | —                 |       | 606                |       | 606                 |       |
| Unrealized losses  on available-for-sale securities       |       | —               |       | —          |       | —             |       | —            |       | (639                   | )          | —       |       | —                 |       | (639               | )          | (639                | )          |
| Unrealized losses  on investments in associated companies |       | —               |       | —          |       | —             |       | —            |       | (6,129                 | )          | —       |       | —                 |       | (6,129             | )          | (6,129              | )          |
| Exercise of share  options                                |       | 1,858                |       | 2               |       | 40,501             |       | —            |       | —                 |       | —       |       | —                 |       | 40,503             |       | —              |       |
| Issuance of  restricted share awards                      |       | 331                  |       | —          |       | 14,815             |       | —            |       | —                 |       | —       |       | (14,815                | )          | —             |       | —              |       |
| Cancellation of  restricted share awards                  |       | (1                   | )          | —          |       | (25                | )          | —            |       | —                 |       | —       |       | 25                     |       | —             |       | —              |       |
| Issuance of  ordinary shares                              |       | 3,428                |       | 4               |       | 172,415            |       | —            |       | —                 |       | —       |       | —                 |       | 172,419            |       | —              |       |
| Amortization of  deferred compensation expense            |       | —               |       | —          |       | —             |       | —            |       | —                 |       | —       |       | 1,796                  |       | 1,796              |       | —              |       |
| Net income                                                |       | —               |       | —          |       | —             |       | 68,132            |       | —                 |       | —       |       | —                 |       | 68,132             |       | 68,132              |       |
| Balance at  December 31, 2004                        |       | 42,972               |       | $               | 43         |               | $          | 971,952           |       | $                      | 336,543    |         | $          | (13,898                | )          | $                  | (162,769   | )                   | $          | (15,593 | ) | $ | 1,116,278 |   | $ | 61,970 |   |

 

The accompanying notesare an integral part of these consolidated financial statements.

 

F-6

----

 

**KERZNER INTERNATIONAL LIMITED**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(In thousands of U.S.dollars)**

 
| ** **                                                                                  | ** ** | **For the Year Ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                  | ** ** | **2004**                                 | ** ** | **2003** | ** ** | **2002** | ** ** |
| Cash flows from  operating activities:                                                      |       |                                     |       |   |   |   |   |
| Net income                                                                                  |       | $                                        | 68,132     |   | $ | 71,572 |   | $ | 39,603 |   |
| Depreciation and  amortization                                                              |       | 58,948                                   |       | 55,782 |   | 55,486 |   |
| Amortization of  debt issuance costs and premiums                                           |       | 2,904                                    |       | 1,217 |   | 1,868 |   |
| Impairment of  Atlantic City land                                                           |       | 7,303                                    |       | — |   | — |   |
| Loss on early  extinguishment of debt                                                       |       | 1,655                                    |       | — |   | 20,525 |   |
| Recognition of  deferred compensation expense                                               |       | 1,796                                    |       | — |   | — |   |
| Loss on  disposition of fixed assets                                                        |       | 544                                      |       | 451 |   | 227 |   |
| Equity in  (earnings) losses from associated companies, net of dividends received           |       | (6,163                                   | )          | (3,646 | ) | 5,980 |   |
| Minority interest  – Palmilla JV, LLC                                                  |       | (7,750                                   | )          | — |   | — |   |
| (Income) loss  from discontinued operations, net of income tax effect                       |       | —                                   |       | (1,305 | ) | 8,061 |   |
| Provision for  doubtful receivables                                                         |       | 3,017                                    |       | 1,326 |   | 3,204 |   |
| Deferred income  tax benefit                                                                |       | (3,499                                   | )          | (11,732 | ) | (8,184 | ) |
| Net change in  working capital accounts:                                                    |       |                                     |       |   |   |   |   |
| Restricted cash                                                                             |       | (1,323                                   | )          | 75 |   | 101 |   |
| Trade  receivables                                                                          |       | (1,977                                   | )          | (619 | ) | (8,754 | ) |
| Due from  affiliates                                                                        |       | (3,461                                   | )          | 7,362 |   | (4,891 | ) |
| Inventories and  prepaid expenses and other assets                                          |       | (5,537                                   | )          | (2,506 | ) | (9,086 | ) |
| Accounts payable  and accrued liabilities                                                   |       | 12,954                                   |       | 16,996 |   | 13,753 |   |
| Net change in  other balance sheet accounts:                                                |       |                                     |       |   |   |   |   |
| Due from  affiliates – non-current                                                     |       | (57                                      | )          | (598 | ) | (275 | ) |
| Deferred charges  and other assets                                                          |       | 741                                      |       | 785 |   | (3,781 | ) |
| Deferred revenue                                                                            |       | 6,451                                    |       | (3,376 | ) | 18,028 |   |
| Other long-term  liabilities                                                                |       | 980                                      |       | 1,674 |   | 2,866 |   |
| Loss (gain) on  damaged assets                                                              |       | 1,194                                    |       | (2,514 | ) | — |   |
| Other                                                                                       |       | (338                                     | )          | 1,199 |   | 158 |   |
| Net cash  provided by continuing operations                                                 |       | 136,514                                  |       | 132,143 |   | 134,889 |   |
| Cash provided by  (used in) discontinued operations                                         |       | —                                   |       | 523 |   | (7,619 | ) |
| Net cash  provided by operating activities                                                  |       | 136,514                                  |       | 132,666 |   | 127,270 |   |
|                                                                                        |       |                                     |       |   |   |   |   |
| Cash flows from  investing activities:                                                      |       |                                     |       |   |   |   |   |
| Payments for  property and equipment, net of insurance proceeds received                    |       | (119,398                                 | )          | (50,849 | ) | (39,524 | ) |
| Purchase of  short-term investments and notes receivable                                    |       | (204,309                                 | )          | — |   | (13,704 | ) |
| Loans to  affiliates                                                                        |       | (68,500                                  | )          | (15,350 | ) | (1,250 | ) |
| Advances to  affiliates                                                                     |       | (10,126                                  | )          | (1,653 | ) | (1,100 | ) |
| Repayments from  affiliates                                                                 |       | 29,200                                   |       | 4,950 |   | 2,092 |   |
| Acquisition of  equity interest in associated companies                                     |       | (69,191                                  | )          | — |   | (40,812 | ) |
| Cash resulting  from the initial consolidation of Palmilla JV, LLC                          |       | 7,047                                    |       | — |   | — |   |
| Deferred  contract acquisition costs                                                        |       | (1,631                                   | )          | (2,115 | ) | (214 | ) |
| Deposit and  purchase of land and casino license                                            |       | —                                   |       | (6,147 | ) | — |   |
| Acquisition of  assets from Club Méditerranée (Bahamas) Limited and adjacent land |       | (30,877                                  | )          | (20,049 | ) | — |   |
| Net proceeds  from the sale of fixed assets                                                 |       | 238                                      |       | 1,099 |   | 126 |   |
| Acquisition of  tour operator, net of cash acquired                                         |       | —                                   |       | 1,384 |   | — |   |
| Repayment of  notes receivable                                                              |       | —                                   |       | 13,409 |   | 18,018 |   |
| Deposits  received                                                                          |       | —                                   |       | 1,250 |   | 4,500 |   |
| Sale of debt and  equity interest in the One&Only Kanuhura                              |       | —                                   |       | 1,464 |   | — |   |
| Other                                                                                       |       | —                                   |       | — |   | (278 | ) |
| Net cash used in  investing activities                                                      |       | (467,547                                 | )          | (72,607 | ) | (72,146 | ) |
|                                                                                             |            |                                          |            |  |  |  |  |  |  |  |

 

F-7

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| ** **                                                                                                                  | ** ** | **For the Year Ended  December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                                                  | ** ** | **2004**                                  | ** ** | **2003** | ** ** | **2002** | ** ** |
| Cash flows from financing activities:                                                                                       |       |                                      |       |   |   |   |   |
| Proceeds from issuance of debt                                                                                              |       | 230,000                                   |       | — |   | 206,000 |   |
| Borrowings                                                                                                                  |       | 117,068                                   |       | 29,600 |   | 111,000 |   |
| Repayment of debt                                                                                                           |       | (94,079                                   | )          | (101,898 | ) | (63,283 | ) |
| Early redemption of debt                                                                                                    |       | —                                    |       | — |   | (313,135 | ) |
| Debt issuance and modification costs                                                                                        |       | (14,769                                   | )          | (140 | ) | (4,665 | ) |
| Proceeds from exercise of share options                                                                                     |       | 40,503                                    |       | 39,007 |   | 14,702 |   |
| Net proceeds from the issuance of ordinary shares                                                                           |       | 153,366                                   |       | — |   | — |   |
| Net proceeds from the issuance of Bahamian  Depository Receipts                                                             |       | 19,053                                    |       | — |   | — |   |
| Repurchase of ordinary shares                                                                                               |       | —                                    |       | (408 | ) | (365 | ) |
| Net cash provided by (used in) financing activities                                                                         |       | 451,142                                   |       | (33,839 | ) | (49,746 | ) |
|                                                                                                                        |       |                                      |       |   |   |   |   |
| Increase in cash and cash equivalents                                                                                       |       | 120,109                                   |       | 26,220 |   | 5,378 |   |
| Cash and cash equivalents at beginning of period                                                                            |       | 60,232                                    |       | 34,012 |   | 28,634 |   |
| Cash and cash equivalents at end of period                                                                                  |       | $                                         | 180,341    |   | $ | 60,232 |   | $ | 34,012 |   |
|                                                                                                                        |       |                                      |       |   |   |   |   |
| Supplemental disclosure of cash flow and non-cash  investing and financing activities:                                      |       |                                      |       |   |   |   |   |
|                                                                                                                        |       |                                      |       |   |   |   |   |
| Interest paid                                                                                                               |       | $                                         | 31,887     |   | $ | 27,914 |   | $ | 37,586 |   |
|                                                                                                                        |       |                                      |       |   |   |   |   |
| Income taxes paid                                                                                                           |       | 4,776                                     |       | 4,166 |   | 1,871 |   |
|                                                                                                                        |       |                                      |       |   |   |   |   |
| Change in fair value of interest rate swap  agreements                                                                      |       | 3,557                                     |       | 7,735 |   | 25,077 |   |
|                                                                                                                        |       |                                      |       |   |   |   |   |
| Equipment acquired under capital lease obligations                                                                          |       | 1,395                                     |       | — |   | 438 |   |
|                                                                                                                        |       |                                      |       |   |   |   |   |
| Note payable and taxes related to Club Méditerranée  (Bahamas) Limited in connection with asset acquisition       |       | —                                    |       | 18,500 |   | — |   |
|                                                                                                                        |       |                                      |       |   |   |   |   |
| Assets acquired and liabilities assumed, net,  excluding cash, in connection with initial consolidation of Palmilla JV, LLC |       | 62,029                                    |       | — |   | — |   |

 

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

 

F-8

----

 

**KERZNER INTERNATIONAL LIMITED**

** **

**NOTES****TOCONSOLIDATED FINANCIAL STATEMENTS**

**(Amounts in tables are inthousands of U.S. dollars, except share data)**

 

**Note1—Organization and Basis of Presentation**

** **

***Organization***

*** ***

Kerzner InternationalLimited (“Kerzner”), an international resort and gaming company, wasincorporated in 1993 under the laws of the Commonwealth of The Bahamas.  In these notes to our consolidated financialstatements, the words “Company,” “we,” “our” and “us” refer to Kerzner togetherwith its subsidiaries as the context may require.

 

We are a leadingdeveloper and operator of premier destination resorts, luxury resort hotels andgaming properties worldwide.  In our destinationresorts segment (“Destination Resorts”), we own and operate the Atlantis,Paradise Island resort and casino complex (“Atlantis, Paradise Island”) locatedin The Bahamas.  We also own a 50% equityinterest in Kerzner Istithmar Limited (“Kerzner Istithmar”), which is currentlyplanning the development of Atlantis, The Palm, Dubai, United Arab Emirates (“Atlantis,The Palm”), and we have entered into an agreement in principle with twopartners that contemplates the creation of a joint venture that will own adestination resort casino in Morocco that we will develop and manage.  In our gaming segment (“Gaming”), wedeveloped and earn income from the Mohegan Sun Casino (“Mohegan Sun”) locatedin Uncasville, Connecticut.  Our Gamingsegment also includes the costs associated with the planning and development ofseveral casino and hotel facilities in the United Kingdom, equity earnings(losses) from our 37.5% investment in BLB Investors, L.L.C. (“BLB”) and our 50%investment in Trading Cove New York (“TCNY”). In our One&Only resorts segment (“One&Only Resorts”), we operatenine beach resorts at locations in The Bahamas, Mauritius, Dubai, the Maldivesand Mexico and have two resorts that are under development in the Maldives andSouth Africa (collectively “One&Only Resorts”).

 

During 2002, we operatedan Internet gaming venture through a subsidiary, Kerzner Interactive Limited (“KerznerInteractive”).  The operations of KerznerInteractive were discontinued during the first quarter of 2003.  As a result, the operating results of KerznerInteractive for the years ended December 31, 2003 and 2002 are presentedas income (loss) from discontinued operations, net of income tax effect in theaccompanying consolidated statements of operations. 

 

As of January 1,2004, pursuant to our adoption of Interpretation No. 46R, “Consolidationof Variable Interest Entities” (“FIN 46R”) issued by the Financial AccountingStandards Board (“FASB”), we have determined that Palmilla JV, LLC (“Palmilla”),a previously unconsolidated 50% owned equity method investment, must beconsolidated as the operating agreement contains a provision which gives our50% joint venture partner the right to cause us to acquire its 50% interest.  For further discussion, see Note 2—Summary ofSignificant Accounting Policies and Note 3—Business Acquisitions andDispositions.  

 

***Destination Resorts***

*** ***

*Atlantis, Paradise Island*

* *

Through certain of ourBahamian subsidiaries, Kerzner owns and operates Atlantis, Paradise Island, ourflagship property.  Atlantis, ParadiseIsland is an ocean-themed destination resort located on Paradise Island, TheBahamas.  Atlantis, Paradise Islandfeatures three interconnected hotel towers built around a lagoon and anextensive marine environment that includes what we believe to be the world’slargest open-air marine habitat.  

 

In 1999, Kerzner formed ajoint venture with Starwood Vacation Ownership (“Starwood Vacation”) (formerlyVistana, Inc.), a subsidiary of Starwood Hotels and ResortsWorldwide Inc., to develop a timeshare project on Paradise Island adjacentto Atlantis, Paradise Island (“Harborside at Atlantis”).  Starwood Vacation and the Company each own a50% interest in Harborside at Atlantis.  In2004, we announced an expansion of Harborside at Atlantis, which included theaddition of timeshare units between the Nassau harbor and the Marina at Atlantis.  The Company’s share of earnings (losses) fromHarborside at Atlantis are included in equity in earnings (losses) ofassociated companies in the accompanying consolidated statements of operations.  In addition, the Company earns fees formarketing and for administrative and development services provided toHarborside at

 

F-9

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Atlantis,which are included in management, development and other fees in theaccompanying consolidated statements of operations. 

 

In May 2003, the Companyentered into a “Heads of Agreement” with the Bahamian Government with respectto the Phase III expansion (“Phase III”) on Paradise Island.  In May 2004 and December 2004, weentered into supplements to the Heads of Agreement, pursuant to which wemodified certain components involved in the Phase III expansion, which includesa luxury all-suite hotel and a condo-hotel. Certain elements of the Phase III expansion commenced in 2003, includingconstruction of four new restaurants and additional retail space (“MarinaVillage”) and the completion of three luxury villas (“Ocean Club Villas”) atthe One&Only Ocean Club (“Ocean Club”). The Ocean Club Villas were completed in June 2004 and the MarinaVillage is expected to be completed in the third quarter of 2005.  Under the Heads of Agreement, the Company hascommitted to substantially complete the all-suite hotel by December 2006.  The Heads of Agreement also contemplates thecompletion of the condo-hotel during 2007. See Note 23—Commitments and Contingencies—Heads of Agreement for furtherdiscussion. 

 

In December 2004,the Company announced the development of the Ocean Club Residences & Marina,an ultra-luxury condominium project at the Ocean Club Estates, a residentialdevelopment adjacent to the Ocean Club Golf Course.  We expect to form a joint venture with aBahamian partner for this project.  Wecommenced pre-sales of the Ocean Club Residences & Marina in 2005 andanticipate breaking ground on the project in the second quarter of 2005.

 

*Atlantis, The Palm*

* *

In September 2003,we announced that we had agreed to form a joint venture with Nakheel LLC (“Nakheel”),an entity owned by the Royal Family of Dubai, to develop Atlantis, The Palm.  In June 2004, we announced that we hadentered into an agreement with Istithmar PJSC (“Istithmar”), an entityindirectly wholly owned by the Royal Family of Dubai, that has assumed allobligations and rights of its affiliate, Nahkeel, to form Kerzner Istithmar.  The purpose of Kerzner Istithmar is todevelop Atlantis, The Palm located on The Palm, Jumeirah, a land reclamationproject in Dubai.  Atlantis, The Palmwill include an ocean-themed destination resort and an extensive water parksituated on beachfront property. 

 

The planning and designphase of Atlantis, The Palm commenced in 2004 and we began construction in thefirst quarter of 2005.  The Company anticipatesthat the project will be completed in 2008. As part of this transaction, the Company entered into a long-termmanagement agreement with the joint venture that entitles the Company toreceive a base management fee based on the gross revenues generated byAtlantis, The Palm, and an incentive management fee based on operating income.  The Company also entered into a developmentagreement with the joint venture that entitles it to receive $20.0 millionand reimbursement of certain expenses over the development period.  The Company currently has a 50% ownershipinterest in Kerzner Istithmar and as such, we expect to recognize $10.0 millionin development fees over the development period.

 

*Morocco*

* *

In July 2004, weannounced that we and two local Moroccan companies, Société Maroc EmiratesArabs Unis de Développement (“SOMED”) and Caisse de Dépôt et de Gestion (“CDG”),had entered into an agreement with the Government of the Kingdom of Morocco forthe development and management of a destination resort casino in Moroccothrough the formation of a joint venture of which we will initially own 50%.  In addition, we, SOMED and CDG have enteredinto an agreement in principle with respect to the ownership, development andmanagement of this resort. We expect to commence construction of the project inthe fourth quarter of 2005 and to complete the project during the fourthquarter of 2007.

 

F-10

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***Gaming***

*** ***

*Mohegan Sun*

* *

We own a 50% interest in,and are a managing partner of, Trading Cove Associates (“TCA”), a Connecticutgeneral partnership that developed and, until January 1, 2000, managedMohegan Sun, a casino and entertainment complex in Uncasville, Connecticut.  TCA managed Mohegan Sun from its opening in October 1996to December 31, 1999 pursuant to a management agreement (the “ManagementAgreement”).  In 1998, the Mohegan TribalGaming Authority, an instrumentality of the Mohegan Tribe of Indians ofConnecticut (the “Mohegan Tribe”) appointed TCA to develop a $1.0 billionexpansion of Mohegan Sun for a development fee of $14.0 million.  In addition, TCA and the Mohegan Tribeentered into an agreement (the “Relinquishment Agreement”) whereby it wasagreed that effective January 1, 2000, TCA would turn over management ofMohegan Sun to the Mohegan Tribe.  Pursuantto the Relinquishment Agreement, the Management Agreement was terminated and,commencing January 1, 2000, TCA receives payments of 5% of the grossrevenues of Mohegan Sun for a 15-year period. For seven years beginning January 1, 2000, TCA pays us the first$5.0 million of the profits it receives each year (after the payment of certainexpenses and the return of certain capital contributions) pursuant to theRelinquishment Agreement as a priority payment prior to making pro ratadistributions to its partners. 

 

As noted above, in 1998,the Mohegan Tribe appointed TCA to develop its expansion of the Mohegan SunCasino pursuant to a development services agreement (the “TCA DevelopmentAgreement”).  In turn, TCA subcontractedwith an affiliate of the Company pursuant to a subcontract development servicesagreement (the “Subcontract Agreement”), which was later assigned to theCompany.  In consideration for theservices provided under the Subcontract Agreement, TCA paid a fee to theCompany.  These fees are included withinmanagement, development and other fees in the accompanying consolidatedstatements of operations for the years ended December 31, 2003 and 2002. 

 

We are one of twomanaging partners of TCA.  All decisionsof the managing partners require the concurrence of us and the other managingpartner, Waterford Gaming, L.L.C.  In theevent of a deadlock, there are mutual buy-out provisions. 

 

The Company’s investmentin TCA is reflected within investments in associated companies in theaccompanying consolidated balance sheets. Equity earnings from TCA are reflected within relinquishment fees—equityin earnings of TCA in the accompanying consolidated statements of operations.

 

*Trading Cove New York*

 

Through Kerzner NewYork, Inc. (“KNY”), a wholly owned subsidiary, we own 50% of TCNY.  TCNY is managed by KNY and WaterfordDevelopment New York, LLC.  In March 2001,TCNY entered into a development services agreement (the “TCNY DevelopmentAgreement”) with the Stockbridge-Munsee band of Mohican Indians (“Stockbridge-MunseeTribe”) for the development of a casino (the “Catskills Project”) in the Catskillsregion of the State of New York (for purposes of this section, the “State”).  The TCNY Development Agreement was amendedand restated in February 2002 and subsequently amended in October andDecember 2004.  The Stockbridge-MunseeTribe does not currently have reservation land in the State but is federallyrecognized and operates a casino on its reservation in Wisconsin.  The Stockbridge-Munsee Tribe has land claimlitigation pending in the U.S. District Court for the Northern District of NewYork (the “Court”) against the State, the counties of Madison and Oneida andseveral municipalities to recover lands within the state that it alleges werewrongfully taken from the tribe. 

 

In December 2004,the Stockbridge-Munsee Tribe and the State entered into the “Agreement ofSettlement and Compromise to Resolve the Stockbridge-Munsee Land Claims in theState of New York” (the “NY Settlement Agreement”).  The NY Settlement Agreement provides, *inter alia*, that, in consideration for settling its landclaim litigation, the Stockbridge-Munsee Tribe will receive, among otherthings, a transfer of the Catskills Project site into trust and a gamingcompact (the “Compact”) with the State authorizing the Stockbridge-Munsee Tribeto engage in Class III gaming on the Catskills Project site for a period of 14years (and renewable for an addition 7 years under

 

F-11

----

 

certainconditions).  Under the Compact, theStockbridge-Munsee Tribe will, in exchange for certain exclusivity rightsrelated to the operation of slot machines in a geographically determined areaencompassing a number of southern counties within the State, pay to the State20% of the net win from the slot machines during the first four years ofoperation and 25% thereafter.

 

The NY SettlementAgreement is subject to numerous terms and conditions, including the enactmentof State legislation approving the settlement and increasing the number ofNative American casinos authorized for Sullivan and Ulster counties under the Stategaming law from three to five, enactment of Federal legislation approving thesettlement and directing that the Catskills Project site be taken into trustand execution of the Compact.  In February 2005,State legislation was introduced to approve the NY Settlement Agreement.  We can make no representation as to whetherany of the required approvals will be obtained by the Stockbridge-Munsee Tribeor whether the Catskills Project will be completed. 

 

Pursuant to the TCNYDevelopment Agreement, as amended, TCNY would provide preliminary funding,certain financing and exclusive development services to the Stockbridge-MunseeTribe in conjunction with the Catskills Project.  If the Catskills Project is approved andultimately developed, TCNY will earn a development fee in an amount equal to 5%of gross revenues as compensation for these services (subject to certainpriorities), as defined in the TCNY Development Agreement, beginning with theopening of the Catskills Project and continuing for a period of 20 years.  TCNY has secured land and/or options onapproximately 400 acres of property in the Town of Thompson, County of Sullivan(the “County”), of which approximately 333 acres are currently designated forthe Catskills Project.  In February 2002,the Tribe filed a Land to Trust Application with the U.S. Department of theInterior, Bureau of Indian Affairs (the “BIA”), for the Catskills Project siteproperties.  Should the BIA approve theLand to Trust Application and the Stockbridge-Munsee Tribe obtain otherrequired approvals, the land could be taken into trust by the FederalGovernment on behalf of the Stockbridge-Munsee Tribe for the purpose ofconducting Class III Gaming. 

 

The Company’s investmentin TCNY is reflected within investments in associated companies in theaccompanying consolidated balance sheets. Equity losses from TCNY are reflected within equity in earnings (losses)of associated companies in the accompanying consolidated statements ofoperations.

 

*Investment in BLB*

* *

In March 2004, we announcedthat we entered into a joint venture, BLB, with an affiliate of StarwoodCapital Group, L.L.C. (“Starwood Capital”) and an affiliate of Waterford Group,L.L.C. (“Waterford”) for the purpose of acquiring an interest in Wembley plc (“Wembley”),which owns gaming and track operations in the United States and race tracks inthe United Kingdom.  Wembley’s U.S.operations include its flagship property, Lincoln Park in Rhode Island, whereit owns a greyhound racetrack with video lottery terminals.  BLB is owned 37.5% by each of us andStarwood, with Waterford owning the balance of 25%.  BLB has a 22.2% ownership interest in Wembley.  

 

On February 8, 2005,Wembley and BLB announced that they had entered into a conditional saleagreement providing for the purchase by BLB of a holding company that ownsWembley’s operations in Rhode Island and Colorado, consisting primarily of theLincoln Park facility in Rhode Island. The purchase price is expected to be approximately $455.0 million.  Additionally, in connection with thetransaction, Wembley is expected to repurchase BLB’s existing shareholding inWembley for approximately $116.0 million. In addition, BLB anticipates making certain infrastructure improvementsat Lincoln Park.  BLB has receivedbinding commitments from institutional lenders to provide up to $495.0 millionin financing to cover the cash costs of the acquisition and the infrastructureimprovements.  Substantially all of theoperating profits of Wembley’s U.S. operations are based on the video lotteryterminals currently in operation at Lincoln Park.  Among other things, BLB’s purchase offer is conditionedon an increase in the number of authorized video lottery terminals at LincolnPark.

 

F-12

----

 

The acquisition and thefinancing arranged by BLB are subject to a number of conditions, includingapproval by Wembley shareholders other than BLB, necessary regulatoryapprovals, and the execution of a long-term revenue-sharing arrangement for theLincoln Park facility with the State of Rhode Island (any such agreement wouldrequire the approval of the Rhode Island Senate, the Rhode Island House ofRepresentatives and the Governor) and a tax parity arrangement with the Stateof Rhode Island to ensure that the tax rate imposed on Lincoln Park’s gamingoperations will not exceed the tax rate imposed on any other gaming operationswithin the State of Rhode Island.  Theconditional sale agreement may be terminated by either party if the transactionhas not been completed by May 30, 2005.

 

***One&Only Resorts***

*** ***

Our One&Only Resortsbusiness consists of a collection of managed and/or owned/partially ownedpremier luxury resort properties that primarily operate in the five-star,deluxe-end of the market.  In December 2002,we introduced our One&Only brand for certain of our luxury resortproperties.  These One&Only managedproperties are located in The Bahamas, Mauritius, Dubai, Mexico and theMaldives.  We also have two propertiesunder development which we intend to manage as One&Only properties: theOne&Only Cape Town (“Cape Town”) located in the Victoria & AlfredWaterfront in Cape Town, South Africa and the One&Only Reethi Rah (“ReethiRah”) located on North Male Atoll in the Maldives.  We intend to acquire an equity ownershipinterest and enter into management and development agreements in connectionwith Cape Town.  We currently havedevelopment and management agreements for Reethi Rah.

 

We manage the resorts inMauritius, Dubai, the Maldives and Mexico under long-term management andmarketing agreements and receive management and marketing fees based uponpercentages of the revenues and adjusted gross operating profits of theseproperties.  Such amounts related tomanagement and marketing fees from resorts in Mauritius, Dubai and the Maldivesare included in management, development and other fees in the accompanyingconsolidated statements of operations.  Ourshare of earnings or losses resulting from our ownership interests in Mauritiusand the Maldives are included in equity in earnings (losses) of associatedcompanies in the accompanying consolidated statements of operations.

 

*The Bahamas*

* *

In Paradise Island, TheBahamas, we own and operate the Ocean Club, a high-end luxury resort hotel.  The Ocean Club features Dune, a beachfrontrestaurant operated by well-known restaurateur Jean-Georges Vongerichten, achampionship golf course designed by Tom Weiskopf and a clubhouse with luxury, oceanfronthome sites situated around the golf course. As part of the Phase III expansion, we completed the development ofthree luxury villas during 2004.

 

*Mauritius*

* *

In Mauritius, we manageand own interests in five beach resorts (“Mauritius Resorts”) including theOne&Only Le Saint Géran Hotel, the One&Only Le Touessrok Hotel, LaPirogue Hotel, Le Coco Beach Hotel and Sugar Beach Resort.  As of December 31, 2004, we owned a20.4% interest in Sun Resorts Limited (“SRL”), the company that owns theMauritius Resorts.

 

*The Maldives*

* *

In the Maldives, locatedapproximately 600 miles southwest of the southern tip of India, we manage andown an interest in the One&Only Kanuhura (“Kanuhura”), a luxury resortlocated on Lhaviyani Atoll.  Effective August 1,2001, we acquired a 25% ownership interest in Kanuhura for approximately$3.8 million.  Effective January 1,2003, we reduced our ownership interest to 20%, and as of January 1, 2005,this interest was further reduced to 18.75%. During 2002, we entered into management and development agreements for aluxury resort, Reethi Rah, which is currently being constructed on North MaleAtoll in the Maldives, and is expected to open in the second quarter of 2005.

 

F-13

----

 

See Note 16—Related PartyTransactions—Mauritius Resorts for discussion of an agreement with SRL enteredinto in connection with the management of the resorts in Mauritius and theMaldives.

 

*Dubai*

* *

In the Middle East, wemanage the One&Only Royal Mirage (“Royal Mirage”) in Dubai.  Under the terms of the management agreement,we receive management fees based on a percentage of the revenues and grossoperating profits of the Royal Mirage.

 

*Mexico*

* *

In Mexico, we manage andown a 50% interest in Palmilla, a deluxe five-star One&Only propertylocated near Cabo San Lucas in Baja, Mexico. We entered into long-term management and development agreements relatedto the property that will expire in 2022. In April 2003, Palmilla commenced an expansion project thatincreased the room count and significantly upgraded the amenities and publicareas offered by the resort.  Theexpansion was completed in early 2004 and was financed by Palmilla through localproject financing, which was supported by a $46.5 million guarantee fromKerzner, and by $14.5 million in completion loans, excluding accruedinterest, from Kerzner.  This guaranteeno longer exists as the underlying indebtedness that was guaranteed, togetherwith our completion loans, were repaid in connection with Palmilla’srefinancing in December 2004.  SeeNote 13—Long-Term Debt and Note 23—Commitments and Contingencies forfurther discussion.

 

**Note 2—Summaryof Significant Accounting Policies**

** **

*Principles ofConsolidation*

* *

The accompanyingconsolidated financial statements include the accounts of Kerzner, itssubsidiaries and variable interest entities subject to consolidation pursuantto FIN 46R.  All significant intercompanytransactions and balances have been eliminated in consolidation. 

 

*Use of Estimates*

* *

The preparation ofconsolidated financial statements in conformity with accounting principlesgenerally accepted in the United States requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the consolidatedfinancial statements.  These estimatesand assumptions also affect the reported amounts of revenues and costs andexpenses during the reporting period.  Ona regular basis, management evaluates its estimates.  Actual results could differ from thoseestimates. 

 

We provide allowances fordoubtful accounts arising from casino, hotel and other services and amounts duefrom affiliates, which are based upon a specific review of outstandingreceivables.  In determining the amountsof the allowances, we are required to make certain estimates and assumptions.  Accruals for potential liabilities related toany lawsuits or claims brought against us, calculation of inventory provisions,determination of fair value of employee stock options to determine compensationexpense for disclosure purposes, fair values of financial instruments andguarantees, purchase price allocations, calculation of income tax liabilitiesand contingencies, valuation allowance on deferred tax assets, percentage-of-completioncalculations, recoverability of goodwill and realizability of notes receivableand other liabilities require that we apply significant judgment in determiningthe appropriate assumptions for use in the calculation of financial estimates.  We also must estimate the useful livesassigned to our assets.  Actual resultsmay differ from these estimates and assumptions. 

 

*Cash Equivalents andRestricted Cash*

* *

We consider all of ourshort-term money market securities, purchased with original maturities of threemonths or less, to be cash equivalents.  Asof December 31, 2004, restricted cash primarily relates to restricted cashheld in relation to Palmilla’s long-term debt and letters of credit for one ofour tour operators.  As of December 31,

 

F-14

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2003,restricted cash primarily related to letters of credit for one of our touroperators and a certificate of deposit associated with a revolving creditfacility. 

 

*Short-Term Investments*

* *

Short-term investmentsconsist of U.S. Treasury Bills (“T-Bills”) with readily determinable fairvalues.  The Company’s T-Bills areclassified and accounted for as available-for-sale securities and are reportedat fair market value with the resulting net unrealized holding gains or lossesreported as a separate component of comprehensive income (loss) in shareholders’equity.  

 

*Trade Receivables, NotesReceivable and Credit Risk*

* *

Financial instrumentsthat potentially subject the Company to credit risk consist principally ofgaming accounts receivable and notes receivable from affiliates.  The Company issues markers to approved casinocustomers following background checks and investigations ofcreditworthiness.  At December 31,2004, a substantial portion of the Company’s receivables were due fromcustomers residing in the United States. We also had receivables due from customers residing in other foreigncountries.  Business or economicconditions or other significant events in these countries could affect thecollectibility of these receivables.  Notes receivable consist of amounts due fromaffiliates that primarily arise from construction funding made by the Companyto assist in the financing of development projects.

 

Trade receivables,including gaming and hotel receivables, are typically non-interest bearing andare initially recorded at cost.  Accountsare written off when management deems the account to be uncollectible.  Recoveries of accounts previously written offare recorded when received.  An estimatedallowance for doubtful accounts is maintained to reduce the Company’sreceivables to the amount management estimates to be collectible, whichapproximates fair value.  The allowanceis estimated based on specific review of customer accounts as well ashistorical collection experience and current economic and business conditions.

 

*Inventories*

 

Inventories are carriedat the lower of cost (on a first-in, first-out basis) or market value.  Inventories consist primarily of food andbeverages, operating supplies, retail and other items.  Provisions are made, as necessary, to reduceexcess or obsolete inventories to their estimated net realizable value. 

 

*Assets Held for Sale*

* *

Assets held for sale asof December 31, 2004 consist of $5.4 million of undeveloped real estatewhich we own in Atlantic City and $6.9 million of real estate at the OceanClub Estates.

 

*Property and Equipmentand Depreciation*

* *

Property and equipment isstated at cost and its components (other than land) are depreciated over theestimated useful lives reported below using the straight-line method.  Leasehold improvements are amortized over theshorter of the lease term or the estimated useful lives of the improvements.

 
| Buildings                           |   | 40 years   |
|-------------------------------------|--------|------------|
| Land  improvements and utilities    |   | 14 years   |
| Furniture,  machinery and equipment |   | 3-10 years |

 

Expenditures for renewalsand betterments, which increase the estimated useful life or capacity of theassets, are capitalized; expenditures for repairs and maintenance are expensedwhen incurred.  Gains or losses on

 

F-15

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dispositionsof property and equipment are included in selling, general and administrativeexpenses in the accompanying consolidated statements of operations. 

 

Construction in progressrelates to assets not yet placed in service and are not currently beingdepreciated. 

 

*Capitalized Interest*

* *

The Company capitalizesinterest costs associated with debt incurred in connection with majorconstruction projects and capital contributions to equity method investees whoutilize such funds for construction-related activities.  When debt is not specifically identified asbeing incurred in connection with a construction project, the Companycapitalizes interest on amounts expended on the project at the Company’saverage cost of borrowed capital.  Capitalizationof interest ceases when a project is substantially complete or constructionactivities have ceased.  The amountscapitalized during the years ended December 31, 2004, 2003 and 2002 were$5.8 million, $0.4 million and $0.2 million, respectively. 

 

*Software and DevelopmentCosts*

* *

The Company capitalizespurchased software that is ready for service and development costs for softwareincurred from the time the preliminary project stage is completed until thesoftware is ready for use.  Under theprovisions of Statement of Position 98-1, “Accounting for the Costs ofComputer Software Developed or Obtained for Internal Use,” the Companycapitalizes costs associated with software developed or obtained for internaluse when the preliminary project stage is completed.  Capitalized costs include only:  (i) external direct costs of materialsand services consumed in developing or obtaining internal-use software, and(ii) payroll and payroll-related costs for employees who are directlyassociated with and who devote time to the internal-use software project.  Capitalization of such costs ceases no laterthan the point at which the project is substantially complete and ready for itsintended purpose.  As of December 31,2004 and 2003, approximately $8.3 million and $5.6 million,respectively, of these costs were capitalized and primarily related to upgradesto our Bahamian tour operator’s reservation system.

 

*Impairment of Long-LivedAssets*

* *

The Company reviews itslong-lived assets other than goodwill for impairment whenever events or changesin circumstances indicate that the carrying amount of an asset may not berecoverable.  If such review indicatesthat an asset may not be recoverable, an impairment loss is recognized for theexcess of the carrying amount over the fair value of an asset to be held andused or over the fair value less cost to sell of an asset to be disposed orsold.  The Company has determined thatfor the year ended December 31, 2004, none of its long-lived assets wereimpaired, except for a portion of land in Atlantic City, as further discussedin Note 8—Property and Equipment, net.

 

*Debt Issuance Costs*

* *

The Company incursdiscounts, structuring fees and other costs in connection with its issuance ofdebt and with its amended credit facilities. Debt issuance costs are deferred when incurred and amortized to interestexpense based on the anticipated debt maturities using the straight-linemethod, which approximates the effective interest method.

 

*Investments in AssociatedCompanies*

* *

Investments in associatedcompanies represent investments in which the Company maintains an interest inexcess of 20% but less than or equal to 50% and has significant influence overthe investee.  These investments areaccounted for in accordance with the equity method of accounting, under whicheach such investment is reported at cost plus the Company’s proportionate shareof the income or loss, including other comprehensive income or loss, lessdividends received, of such investee since its acquisition.  In certain instances, the Company’s investmentbalance also includes interest capitalized during construction, as appropriate.

 

F-16

----

 

*Goodwill*

* *

Goodwill consists of amountsassociated with certain investments in associated companies accounted for underthe equity method of accounting.  Thisequity method goodwill is included in investments in associated companies andwas $7.9 million as of December 31, 2004 and 2003.  The Company assesses such goodwill forimpairment on an annual basis and has determined that there was no impairmentof goodwill as of December 31, 2004 and 2003. 

 

*Capital Creditors*

* *

Capital creditorsrepresents amounts due to vendors for capital improvement and constructionrelated projects. 

 

*Fair Value of Guarantees*

* *

In accordance with FASBInterpretation No. 45, “Guarantor’s Accounting and Disclosure Requirementsfor Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN45”), we recognize, at the inception of a guarantee, a liability equal to anestimate of the guarantee’s fair value for the obligations we have undertakenin issuing the guarantee, including its ongoing obligation to stand ready toperform over the term of the guarantee in the event that the specifiedtriggering events or conditions occur. See Note 23—Commitments andContingencies—Guarantees for the fair value of guarantees recorded. 

 

*Accumulated OtherComprehensive Income (Loss)*

* *

Financial statements offoreign entities in which the Company maintains an investment are prepared intheir respective local currencies and translated into U.S. dollars at thecurrent exchange rates for assets and liabilities and an average rate for theyear for revenues and expenses.  Netgains or losses resulting from the translation of foreign financial statementsare charged or credited to the currency translation adjustment component ofaccumulated other comprehensive income (loss). Other comprehensive income (loss) have no tax impact as they relate totranslation reserves on investments owned by foreign entities that are notsubject to taxation. 

 

*Treasury Stock*

* *

Ordinary shares (the “OrdinaryShares”), which were repurchased and held in treasury, are stated at cost inthe accompanying consolidated balance sheets. 

 

*Revenue Recognition*

* *

We recognize the net winfrom casino gaming activities (the difference between gaming wins and losses)as gaming revenues. 

 

Hotel, food and beverage,and other operating revenues are recognized as services are performed.  Advance deposits on rooms are deferred andincluded in customer deposits and unearned revenues within accounts payable andaccrued liabilities until services are provided to the customer.  Golf initiation fees are deferred uponreceipt and then amortized into revenue on straight-line basis over theiraverage estimated useful life.  Theretail value of accommodations, food and beverage, and other services furnishedto hotel/casino guests without charge is included in gross revenue and thendeducted as promotional allowances.  (See“Promotional Allowances” below for further discussion.) 

 

Revenues and expensesfrom tour operations include the sale of travel and leisure packages and arerecognized at the time of departure.  Amountscollected in advance from guests are deferred and included in customer depositsand unearned revenues within accounts payable and accrued liabilities untilsuch amounts are earned. 

 

F-17

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Revenue generated fromconstruction services performed pursuant to the terms of the TCA DevelopmentAgreement and other development agreements related to Atlantis, The Palm,Harborside at Atlantis and Reethi Rah are recognized on thepercentage-of-completion basis in accordance with SOP 81-1, “Accounting forPerformance of Construction-Type and Certain Production-Type Contracts.”  The percent complete and the amount earned atthe end of each accounting period is determined by the percentage of costsincurred on the project at the end of each period as a percentage of the totalestimated costs of the project.  Developmentfees earned are included in management, development and other fees in theaccompanying consolidated statements of operations.

 

Management, developmentand other fees include amounts charged to unconsolidated affiliates for hotelmanagement, executive management and project consulting and are recorded whenthe appropriate revenue recognition criteria have been met. 

 

Other revenues primarilyrepresent incidental revenues generated from hotel and golf operations at ourproperties, including retail shops, telephone, rental income from retailestablishments located at the properties, utilities, the Marina at Atlantis,guest activities and cancellations.  Forthe year ended December 31, 2004, other revenues also included incidentalrevenues from hotel and golf operations at Palmilla.  Other revenues also include the annualcontribution payment related to a settlement with a significant shareholder.  For additional information, seeNote 20—Gain on Settlement of Territorial and Other Disputes.  The detail of other revenues is as follows:

 

| ** **                                         | ** ** | **For the Year Ended December 31,** | ** ** |
|----------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                         | ** ** | **2004**                                 | ** ** | **2003** | ** ** | **2002** | ** ** |
| Retail shops                                       |       | $                                        | 14,997     |   | $ | 12,347 |   | $ | 11,271 |   |
| Telephone                                          |       | 10,464                                   |       | 10,543 |   | 12,286 |   |
| Golf revenue                                       |       | 11,806                                   |       | 7,608 |   | 7,326 |   |
| Rental income                                      |       | 6,341                                    |       | 6,946 |   | 6,155 |   |
| Utilities                                          |       | 6,933                                    |       | 6,689 |   | 6,704 |   |
| Marina at  Atlantis                                |       | 4,805                                    |       | 4,549 |   | 4,586 |   |
| Guest activities                                   |       | 8,726                                    |       | 8,701 |   | 7,620 |   |
| Annual  contribution payment related to settlement |       | 3,375                                    |       | 3,268 |   | 3,163 |   |
| Cancellations                                      |       | 4,744                                    |       | 3,257 |   | 3,143 |   |
| Other hotel revenue                                |       | 6,345                                    |       | 4,516 |   | 3,364 |   |
|                                               |       | $                                        | 78,536     |   | $ | 68,424 |   | $ | 65,618 |   |

 

F-18

----

 

*Promotional Allowances*

* *

The retail value ofaccommodations, food, beverage and other services provided to customers withoutcharge is included in gross revenues and deducted as promotional allowances.  The estimated departmental costs of providingsuch promotional allowances are included in gaming cost and expenses asfollows: 

 
| ** **         | ** **   | **For the Year Ended December 31,** | ** **   |
|--------------------|--------------|------------------------------------------|--------------|
| ** **         | ** **   | **2004**                                 | ** **   | **2003** | ** ** | **2002** | ** ** |
| *** ***       | *** *** | *** ***                             | *** *** | *** *** | *** *** | *** *** | *** *** |
| Rooms              |         | $                                        | 2,285        |   | $ | 2,363 |   | $ | 2,373 |   |
| Food and  beverage |         | 6,340                                    |         | 6,727 |   | 6,428 |   |
| Other              |         | 367                                      |         | 441 |   | 426 |   |
|               |         | $                                        | 8,992        |   | $ | 9,531 |   | $ | 9,227 | *** *** |

 

*Advertising Expense*

* *

We expense advertisingcosts as incurred.  Advertising expensewas $15.1 million, $16.1 million, and $15.8 million for theyears ended December 31, 2004, 2003 and 2002, respectively, and isincluded in selling, general and administrative expenses in the accompanyingconsolidated statements of operations. 

 

*Foreign Currency*

* *

Transactions denominatedin foreign currencies are recorded in local currency at actual exchange ratesat the date of the transaction.  Monetaryassets and liabilities denominated in foreign currencies at the balance sheetdates are reported at the rates of exchange prevailing at those dates.  Any gains or losses arising on monetaryassets and liabilities from a change in exchange rates subsequent to the dateof the transaction have been included in corporate expenses in the accompanyingconsolidated statements of operations.  Theseamounts were not significant for the years ended December 31, 2004, 2003and 2002.

 

The financial statementsof our equity method investees and certain foreign subsidiaries are translatedfrom their respective local currencies into U.S. dollars using current andhistorical exchange rates.  Translationadjustments resulting from this process are reported separately and accumulatedas a component of accumulated other comprehensive income (loss) in shareholders’equity in the accompanying consolidated balance sheets.  Upon sale or liquidation of our investments,the translation adjustment would be reported as part of the gain or loss onsale or liquidation.

 

We do not have operationslocated in countries with highly inflationary economies.

 

*Hurricane RelatedExpenses*

* *

Hurricane relatedexpenses primarily consist of clean up and repair costs and complimentary goodsand services to guests associated with Hurricane Frances at the Company’sParadise Island properties.

 

*Insurance Recovery*

* *

Insurance recoveryrepresents proceeds received for business interruption amounts relating toHurricane Michelle, which were recorded when realized.

 

*Pre-Opening Expenses*

* *

Pre-opening expenses arecharged to expense as incurred.  Pre-openingexpenses of $3.3 million in the accompanying consolidated statement ofoperations for the year ended December 31, 2004 represent costs incurred

 

F-19

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priorto the opening of the Ocean Club Villas in June 2004 and Palmilla’s grand re-openingevent in February 2004.  During theyears ended December 31, 2003 and 2002, we did not incur any pre-openingexpenses.

 

*Loss (Gain) on DamagedAssets*

* *

Loss on damaged assetsrepresents the write-off of assets damaged during Hurricane Frances.  Gain on damaged assets represents insuranceproceeds received in excess of the net book value of assets damaged duringHurricane Michelle. 

 

*Costs of Management andDevelopment Agreements*

* *

The Company expenses anycosts incurred relating to the pursuit of business acquisitions while thepotential acquisition process is ongoing. When the Company enters into a definitive agreement in connection with amanagement or development agreement, certain direct incremental costs relatedto the acquisition of the agreement and paid to third parties are deferred andamortized to expense or recorded as a reduction to the related revenue, asappropriate, over the period of the underlying agreements.  Such costs are deferred only when the incomeon such contracts is expected to exceed the related costs incurred and therelated project is considered probable.  Deferredcontract acquisition costs are included in deferred charges and other assets, netin the accompanying consolidated balance sheets. 

 

*Income Taxes*

* *

We are subject to incometaxes in certain jurisdictions in which we conduct business.  Accordingly, the accompanying consolidatedstatements of operations include a provision for income taxes based onprevailing tax laws of those jurisdictions. 

 

We account for incometaxes in accordance with SFAS No. 109, “Accounting for Income Taxes.”  Realization of future tax benefits related todeferred tax assets is dependent on many factors, including our ability togenerate future taxable income.  Thevaluation allowance is adjusted in the period we determine it is more likelythan not that deferred tax assets will or will not be realized. 

 

*Minority Interest*

* *

As of January 1,2004, pursuant to our adoption of FIN 46R, we determined that Palmilla, a 50%owned equity method investment, must be consolidated.  As of and for the year ended December 31,2004, we have consolidated Palmilla, with the remaining 50% interest reflectedas minority interest in the accompanying consolidated statement of operationsfor the year ended December 31, 2004, and a minority interest liabilityreflected within the accompanying consolidated balance sheet as of December 31,2004.

 

Effective January 1,2003, we entered into an agreement with SRL to form One&Only (Indian Ocean)Management Limited (“One&Only Management”) for the purpose of, among otherthings, managing Kanuhura and the Mauritius Resorts.  As of December 31, 2004, SRL owned 20%of One&Only Management and we owned the remaining 80%.  Subject to certain conditions, SRL’sownership interest will increase incrementally through 2009, for no additionalconsideration, at which time SRL will own 50% of One&Only Management.  As of and for the years ended December 31,2004 and 2003, we have consolidated One&Only Management, with SRL’s 20%interest in the operations of One&Only Management reflected as a minorityinterest in the accompanying consolidated statements of operations and aminority interest liability reflected within accounts payable and accruedliabilities in the accompanying consolidated balance sheets.  Effective January 1, 2005, SRL’sownership interest in One&Only Management increased to 25% and the Company’sownership interest correspondingly decreased to 75%.  See Note 16—Related Party Transactions forfurther discussion.

 

F-20

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*Earnings Per Share Data*

* *

The following is a reconciliation of the shares used in our earningsper share computations (shares in thousands):

 
| ** **                                                | ** ** | **For the Year Ended December 31,** | ** ** |
|-----------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                | ** ** | **2004**                                 | ** ** | **2003** | ** ** | **2002** | ** ** |
| Weighted average  shares used in basic computations       |       | 32,550                                   |       | 28,575 |   | 27,891 |   |
| Dilutive stock  options and restricted shares outstanding |       | 1,334                                    |       | 802 |   | 653 |   |
| Weighted average  shares used in diluted computations     |       | 33,884                                   |       | 29,377 |   | 28,544 |   |

 

The net income amountused as the numerator in calculating basic and diluted earnings per share isthe net income in the accompanying consolidated statements of operations.  Certain options were not included in thecomputation of diluted earnings per share in 2004, 2003 and 2002 because theireffect would have been anti-dilutive. The number of options not included in thecomputation for the years ended 2004, 2003 and 2002 were 0.1 million,2.2 million and 1.3 million, respectively.

 

*Stock-Based Compensation*

* *

We have elected to applyAccounting Principles Board Opinion No. 25, “Accounting for Stock Issuedto Employees” as interpreted in FASB Interpretation No. 44, “Accountingfor Certain Transactions Involving Stock Compensation” in accounting forcompensation under our stock option plans in lieu of the alternative fair valueaccounting provided for under Statement of Financial Accounting Standards (“SFAS”)No. 123, “Accounting for Stock-Based Compensation” as amended by SFASNo. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure– An Amendment of FASB Statement No. 123” (“SFAS 123”). Accordingly,no compensation expense has been recorded for those stock options granted atoption prices equal to the fair market value of the common stock at the date ofgrant.

 

SFAS 123 requires the useof option valuation models that require the input of highly subjectiveassumptions, including expected stock price volatility.  The effect of applying the fair value methodof accounting for stock options on reported net income and earnings per sharefor 2004, 2003 and 2002 may not be representative of the effects for futureyears because outstanding options vest over a period of several years andadditional awards are generally made each year.

 

The fair value of optionsgranted during 2004, 2003 and 2002 was estimated as of the respective dates ofgrant using the Black-Scholes option-pricing model with the followingassumptions.  The weighted average fairvalue of options granted in 2004, 2003 and 2002 was $15.40, $12.44 and $7.53,respectively.

 

| ** **                         | ** ** | **For the Year Ended December 31,** | ** ** |
|------------------------------------|------------|------------------------------------------|------------|
| ** **                         | ** ** | **2004**                                 | ** ** | **2003** | ** ** | **2002** | ** ** |
| Risk-free  interest rate           |       | 3.2                                      | %          | 3.2 | % | 4.7 | % |
| Expected  volatility               |       | 32.9                                     | %          | 37.2 | % | 37.3 | % |
| Expected life of  options in years |       | 4                                        |       | 4-5 |   | 4-5 |   |
| Expected  dividend yield           |       | —                                   |       | — |   | — |   |

 

F-21

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The following tableillustrates the effect on net income and earnings per share if Kerzner hadapplied the fair value recognition provisions of SFAS 123 to stock-basedemployee compensation. 

 

| ** **                                                                                                                                    | ** ** | **For the Year Ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                                                                    | ** ** | **2004**                                 | ** ** | **2003** | ** ** | **2002** | ** ** |
| Net income, as  reported                                                                                                                      |       | $                                        | 68,132     |   | $ | 71,572 |   | $ | 39,603 |   |
|                                                                                                                                          |       |                                     |       |   |   |   |   |
| Deduct: Total  stock-based employee compensation expense determined under fair value based  method for all awards, net of related tax effects |       | 7,357                                    |       | 3,699 |   | 6,448 |   |
|                                                                                                                                          |       |                                     |       |   |   |   |   |
| Pro forma net  income                                                                                                                         |       | $                                        | 60,775     |   | $ | 67,873 |   | $ | 33,155 |   |
|                                                                                                                                          |       |                                     |       |   |   |   |   |
| Earnings per  share:                                                                                                                          |       |                                     |       |   |   |   |   |
| Basic – as  reported                                                                                                                     |       | $                                        | 2.09       |   | $ | 2.50 |   | $ | 1.42 |   |
| Basic – pro  forma                                                                                                                       |       | $                                        | 1.87       |   | $ | 2.38 |   | $ | 1.19 |   |
| Diluted – as  reported                                                                                                                   |       | $                                        | 2.01       |   | $ | 2.44 |   | $ | 1.39 |   |
| Diluted – pro  forma                                                                                                                     |       | $                                        | 1.79       |   | $ | 2.31 |   | $ | 1.16 |   |

 

During the years ended December 31,2004 and 2003, the Company issued 0.3 million****and0.1 million****restricted shares, respectively,under the 2003 stock option plan to certain employees and officers.  The vesting period ranges from four to fiveyears on either a graduated or cliff vesting basis provided that the recipientis still with the Company.  The aggregatemarket value of the restricted shares in 2004 and 2003 at the date of issuanceof $14.8 million and $2.6 million, respectively, has been recorded asdeferred compensation, as a separate component of shareholders’ equity, and isbeing amortized over the applicable vesting period.

 

*Derivative FinancialInstruments*

* *

The Company’s derivativesconsist of interest rate swap agreements and an interest rate cap agreementused to manage the impact of interest rate changes on our long-term debtobligations and have been accounted for as fair value hedges and a cash flowhedge, respectively, in accordance with SFAS No. 133, “Accounting forDerivative Instruments and Hedging Activities.”

 

*Reclassifications*

* *

Certain amounts includedin the prior years’ consolidated financial statements have been reclassified toconform to the current year’s presentation. 

 

**RecentAccounting Pronouncements**

** **

*Other-Than-TemporaryImpairment of Investments*

* *

In March 2004, theEmerging Issues Task Force (“EITF”) of the FASB reached a consensus on IssueNo. 03-01, “The Meaning of Other-Than-Temporary Impairment and ItsApplication to Certain Investments” (“EITF 03-01”).  EITF 03-01 addresses the meaning ofother-than-temporary impairment and its application to debt and equitysecurities within the scope of SFAS No. 115, “Accounting for CertainInvestments in Debt and Equity Securities” (“SFAS 115”) and equity securitiesthat are not subject to the scope of SFAS 115 and not accounted for under theequity method of accounting.  As of December 31,2004, the Company determined that EITF 03-01 had no impact on its consolidatedfinancial statements.

 

F-22

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*Contingently ConvertibleInstruments*

* *

In September 2004,the EITF reached a consensus on Issue No. 04-08, “The Effect of ContingentlyConvertible Instruments on Diluted Earnings Per Share” (“EITF 04-08”), which iseffective for reporting periods ending after December 15, 2004.  EITF 04-08 requires companies to includeshares issuable under convertible instruments in diluted earnings per sharecomputations (if dilutive) regardless of whether the market price trigger (orother contingent feature) has been met.  Inaddition, prior period earnings per share amounts presented for comparativepurposes must be restated.  In April 2004,the Company issued contingent convertible notes with terms as described in Note13—Long-Term Debt.  In accordance withEITF 04-08, there will be an impact on the future diluted earnings per sharerelated to these notes when the Company’s average common stock price exceedsthe conversion price of $58.24 even though the market price trigger of 120% ofthe conversion price, or $69.89, has not been met.  In that situation, the Company would reflectthe additional common shares in the calculation of diluted earnings per shareusing the treasury stock method.  EITF04-08 did not impact earnings per share in 2004, as the average stock price forthe year did not exceed $58.24.  However,EITF 04-08 may have an effect in 2005.  OnMarch 24, 2005, the closing price of our Ordinary Shares on the New YorkStock Exchange was $60.60.  If $60.60were the average price for 2005, our number of fully diluted outstanding OrdinaryShares would increase by 153,789.

 

*Share-Based Payment*

* *

In December 2004,the FASB issued a revision of SFAS 123 (“SFAS 123(R)”) that will requirecompensation costs related to share-based payment transactions to be recognizedin the statement of operations.  Withlimited exceptions, the amount of compensation cost will be measured based onthe grant-date fair value of the equity or liability instruments issued.  In addition, liability awards will beremeasured each reporting period.  Compensationcost will be recognized over the period that an employee provides service inexchange for the award.  SFAS 123(R)replaces SFAS 123 and is effective for the Company as of the first interimreporting period beginning after June 15, 2005.  The Company expects that the adoption of SFAS123(R) will have a material impact on its consolidated financial statements.

 

The Company anticipatesapplying SFAS 123(R) for its third quarter beginning July 1, 2005,which would result in compensation expense of approximately $3.3 million(not including tax effects) for the second half of 2005, based on option grantsoutstanding at December 31, 2004. The foregoing amount does not include compensation expense for any stockoptions that may be granted after December 31, 2004.

 

**Note3—Business Acquisitions and Dispositions**

** **

*Wembley*

* *

On March 10, 2004,Kerzner announced that it entered into a joint venture, BLB, with an affiliateof Starwood Capital and an affiliate of Waterford for the purpose of acquiringan interest in Wembley, which owns gaming and track operations in the UnitedStates and race tracks in the United Kingdom. Wembley’s U.S. operations include its flagship property, Lincoln Park inRhode Island, where it owns a greyhound racetrack with video lottery terminals.  BLB is owned 37.5% by each of us and StarwoodCapital, with Waterford owning the balance of 25%.  We account for our investment in BLB pursuantto the equity method of accounting.

 

In a series of privatetransactions which commenced on March 10, 2004 and ended on April 16,2004, BLB acquired a 22.2% interest in Wembley at 800 pence per share (approximatelyUS$14.38 per share).  The Companyinvested $47.4 million in BLB during the first half of 2004 for itsproportionate share of BLB’s interest in Wembley.  On April 20, 2004, BLB announced a cashtender offer at 860 pence per share for all of Wembley’s outstandingshares.  On July 5, 2004, BLBannounced that its offer to acquire all of Wembley’s outstanding shares hadlapsed due to the failure of the condition that it receive valid acceptancesfrom at least 90% of Wembley’s outstanding shares.  BLB remains a 22.2% shareholder of Wembley.

 

F-23

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*Kerzner Istithmar*

* *

The Company has agreed toinvest $100.0 million in the form of Class A common stock in KerznerIstithmar.  As of December 31, 2004,the Company had invested $21.8 million in Kerzner Istithmar.  See Note 19—Investments in and EquityEarnings (Losses) of Associated Companies for further discussion.

 

*U.K. Development Projectsand Acquisition of Casino License*

* *

In July 2004, we made a $2.9 millionpayment as consideration for our exclusive appointment as the preferreddeveloper and operator of a proposed resort casino and hotel at the ScottishExhibition + Conference Centre in Glasgow that we will own.  The Scottish Exhibition + ConferenceCentre is operated by SEC Ltd., which is 90% owned by the Glasgow City Council.  This amount is included within property andequipment, net in the accompanying consolidated balance sheets.

 

In April 2003, wemade a $4.0 million initial payment as consideration for the developmentof a casino and hotel at the Millennium Dome in London, which is subject tonumerous conditions, including the enactment of appropriate gamblinglegislation in the United Kingdom and the granting of applicable gaming board,licensing, planning and council permissions. This amount was included in deferred charges and other assets, net inthe accompanying consolidated balance sheet as of December 31, 2003, asthe initial payment had been refundable if the above conditions were not met.  However, this provision expired on December 31,2004, and as such, the $4.0 million payment was reclassified to construction inprogress as of December 31, 2004.  In2003, we also made a $1.3 million and $0.8 million payment for theacquisition of a casino license and land, respectively, in Northampton,England. 

 

*Palmilla*

* *

On September 12, 2002,we acquired a 50% ownership interest in Palmilla, a deluxe five-starOne&Only property located near Cabo San Lucas in Baja, Mexico, forapproximately $40.8 million, including direct acquisition costs.  This acquisition was funded through acombination of cash on hand and borrowings under our revolving credit facilityas part of our strategy to expand our luxury resort business.  In connection with the purchase, we enteredinto long-term management and development agreements related to the propertythat will expire in 2022.  As part of theoperating agreement, the other 50% owner has the right to require us to acquireits 50% interest for a price of $36.3 million, plus 50% of Palmilla’sworking capital, with the price subject to adjustment, as defined in thepurchase agreement, during the first year of the option period.  The purchase price during the second year ofthe option period is based on a formula, as defined.  The option period begins on September 12,2005 and expires on September 12, 2007. As previously described, as a result of this put option, Palmilla hasbeen consolidated effective January 1, 2004, pursuant to FIN 46R.

 

In February 2004,Palmilla completed an expansion project that began in April 2003, which increasedthe room count and significantly upgraded the amenities and public areasoffered by the resort.  The expansion wasinitially financed primarily through local project financing, which wassupported by a Kerzner guarantee of $46.5 million and $14.5 million incompletion loans from Kerzner.  Thisinitial financing was replaced by new financing in December 2004 that isnon-recourse to Kerzner, subject to certain exceptions.  For a further discussion of this guarantee,see Note 23—Commitments and Contingencies.

 

*World Leisure HolidaysAcquisition*

* *

Effective January 1,2003, we acquired 100% of the voting equity interests of World LeisureHolidays, Inc. (“WLH”), a tour operator located in South Africa.  WLH handles reservations from the Europeanand Asian markets for our One&Only properties primarily in Mauritius, theMaldives and Dubai.  We paid $0.6 millionto SRL to acquire WLH, which amount approximated both its fair value and netbook value at the date of acquisition, resulting in the recognition of nogoodwill.  WLH results for the yearsended December 31, 2004 and 2003 are included in the accompanyingconsolidated statements of operations. The pro forma effect of this acquisition to the results of

 

F-24

----

 

operationsfor the year ended December 31, 2002 was insignificant.  There were no contingent payments, options orcommitments and there was no purchased research and development assetsassociated with this acquisition.

 

As of January 1,2003, the assets and liabilities of WLH were as follows:

 

| Cash and cash  equivalents |   | $      | 1,990  |   |
|----------------------------|--------|--------|--------|--------|
| Other current  assets      |   | 416    |   |
| Non-current  assets        |   | 55     |   |
| Current  liabilities       |   | 1,813  |   |
| Non-current  liabilities   |   | — |   |

 

*Kanuhura*

* *

On January 1, 2003,we sold 20% of our equity interest in Kanuhura to SRL at our net book value of$1.5 million, resulting in no gain or loss on the transaction.  As a result, we had a 20% ownership interestin Kanuhura.  Effective January 1,2005, our ownership interest in Kanuhura decreased to 18.75% and SRL’s interestincreased to 6.25%.  SeeNote 16—Related Party Transactions - Mauritius Resorts for furtherdiscussion.

 

*Kerzner Interactive*

* *

Through a wholly ownedsubsidiary, the Company previously owned and operated Kerzner Interactive, anonline Internet gaming site.  KerznerInteractive allowed play only in jurisdictions that permitted online gamingand, as these jurisdictions became more restrictive in their acceptance ofplay, the market size was reduced and competition intensified.  Without the potential for expansion intoother markets, including the United States, the outlook for new businesssubstantially decreased.  As a result,during the first quarter of 2003, the Company discontinued the operations ofKerzner Interactive.

 

On February 15,2002, the Company entered into an agreement with Station Casinos, Inc. (“Station”),pursuant to which Station agreed to purchase a 50% interest in KerznerInteractive.  The companies laterrenegotiated the original agreement such that Station purchased an option fromus in July 2002 for $4.5 million to buy a 50% interest in KerznerInteractive.  The Company and Stationmutually agreed to terminate this transaction. As a result, the $4.5 million non-refundable deposit was recognizedas income during the first quarter of 2003 and was offset by net lossesincurred while winding down the operations of the business, including thewrite-down of net assets and other associated costs.

 

The operating results ofKerzner Interactive for the years ended December 31, 2003 and 2002 are asfollows and are presented as income (loss) from discontinued operations, net ofincome tax effect in the accompanying consolidated statements of operations:

 
| ** **         | ** ** | **For the Years  Ended December 31,** | ** ** |
|--------------------|------------|--------------------------------------------|------------|
| ** **         | ** ** | **2003**                                   | ** ** | **2002** | ** ** |
|               |       |                                       |       |   |   |
| Revenues           |       | $                                          | —     |   | $ | 753 |   |
| Expenses           |       | (3,195                                     | )          | (8,921 | ) |
| Other income       |       | 4,500                                      |       | 107 |   |
| Net income  (loss) |       | $                                          | 1,305      |   | $ | (8,061 | ) |

 

As of December 31,2003, Kerzner Interactive had cash and cash equivalents of $0.3 millionand current liabilities of $0.1 million. 

 

F-25

----

 

*Club Méditerranée(Bahamas) Limited*

* *

On October 29, 2003,the Company entered into an agreement to acquire the assets of ClubMéditerranée (Bahamas) Limited (“Club Med”) on Paradise Island for $38.5 million.  During the year ended December 31, 2003,the Company paid $20.0 million in connection with the acquisition.  During the year ended December 31, 2004,the Company paid $3.5 million in related stamp taxes, as well as theremaining balance of $15.0 million, which was paid in September 2004when the Company took possession of the property.  Effective with the Company’s possession ofthe property, we exercised an option to purchase certain adjacent land lots ata price of $5.0 million, plus $0.5 million in related stamptaxes.  The purchase price of the ClubMed assets acquired was allocated to the fair value of assets acquired asindicated below.  The Company did notacquire the operations of Club Med.

 

| Land                                  |   | $     | 42,875 |   |
|---------------------------------------|--------|-------|--------|--------|
| Buildings and  leasehold improvements |   | 1,146 |   |
| Furniture,  machinery and equipment   |   | 230   |   |
| Deferred lease  income                |   | (250  | )      |
| Total Club Med  acquisition           |   | $     | 44,001 |   |

 

In addition to theacquisition of the land lots referred to above, during the year ended December 31,2004, the Company acquired from land owners certain land lots in proximity ofthe Club Med property for $6.9 million.

 

*Sale of Resorts AtlanticCity*

* *

Through a wholly ownedsubsidiary we previously owned and operated a resort and casino property inAtlantic City, New Jersey (“Resorts Atlantic City”).  On April 25, 2001, we completed the saleof Resorts Atlantic City (the “Sale of Resorts Atlantic City”) to an affiliateof Colony Capital LLC (“Colony”).

 

Pursuant to the terms ofthe Resorts Atlantic City Sale, we granted Colony a two-year option (the “AtlanticCity Option”) to acquire certain undeveloped real estate which we own, adjacentto Resorts Atlantic City, for a sale price of $40.0 million, which optioncould be extended by Colony for two additional one-year periods upon45 days notice to us prior to the expiration of the then-current optionperiod and payment to us of a $2.5 million extension payment for eachrenewal period.  In July 2003, andthrough various extensions thereafter, we and Colony agreed to extend theinitial option period in exchange for an option extension payment of$1.3 million which was paid on July 9, 2003 and was accounted for asa deposit in accounts payable and accrued liabilities in the accompanyingconsolidated balance sheet as of December 31, 2003.  The Atlantic City Option has sincecontractually expired and in February 2004, we and Colony agreed toterminate the Atlantic City Option and entered into a new agreement pursuant towhich we agreed to sell the undeveloped real estate adjacent to ResortsAtlantic City to a wholly owned subsidiary of Colony for a sale price of$40.0 million, effectively honoring the original option price.  The sale price was paid in the form of apromissory note which will mature in March 2009.  Although this transaction qualifies as alegal sale, it does not qualify as an accounting sale pursuant to SFASNo. 66, “Accounting for Sales of Real Estate.”  In accounting for the sale transaction, theoption extension payment has been reflected in other deposits and unearnedrevenue within the accompanying consolidated balance sheet as of December 31,2004.  The $40.0 million balance ofthe note is not expected to be received until March 2009.  As sufficient cumulative payments toward thepurchase price were not received as of December 31, 2004, collectibilityof the sales price cannot be reasonably assured.  As such, the sale has not been recognized asof December 31, 2004.  The netcarrying value of the related undeveloped real estate is $40.0 million andis included in land within property and equipment, net in the accompanying consolidatedbalance sheets.

 

Effective April 25,2001, the closing date of the Resorts Atlantic City Sale, Colony leased from uscertain of the property included in the Atlantic City Option for $100,000 permonth.  At that time, the lease could beterminated by either Colony or us with thirty days notice, subject to certainconditions.  The rental income resultingfrom this lease

 

F-26

----

 

was$1.2 million for both of the years ended December 31, 2003 and 2002,and is included in other revenues in the accompanying consolidated statement ofoperations.  This lease terminated uponthe sale of the related real estate.

 

*Atlantic City Land*

* *

In July 2004, theCompany obtained an appraisal on undeveloped real estate which we own inAtlantic City, which indicated that the carrying amount of this real estate wasnot fully recoverable.  The appraisal wascommissioned after the Company had received an unsolicited offer to acquiresome of the undeveloped land for a price substantially less than the Company’sbook value and certain other information related to third party sales of nearbycomparable properties at prices substantially less than what the Company’s bookvalue was for its undeveloped property.  Asa result, during the year ended December 31, 2004, we recognized a$7.3 million impairment loss as these assets were written down to fairvalue less estimated costs to sell of $5.4 million.  This amount was reclassified to assets heldfor sale in the accompanying balance sheet as of December 31, 2004, as wehave entered into an agreement to sell this real estate and expect to close thesale in the second quarter of 2005.

 

**Note4—Cash Equivalents and Restricted Cash**

** **

Cash equivalents at December 31,2004 and 2003 included reverse repurchase agreements (federal governmentsecurities purchased under agreements to resell those securities) under whichwe had not taken delivery of the underlying securities and investments in amoney market fund that invests exclusively in U.S. Treasury obligations.  At December 31, 2004 and 2003, we heldreverse repurchase agreements of $33.4 million and $17.2 million,respectively, all of which matured in the first week of the following month.  Also, at December 31, 2004, we held$117.0 million of money market funds.

 

At December 31,2004, restricted cash included $2.3 million as a result of certain provisionsrelated to Palmilla’s long-term debt.  AtDecember 31, 2004 and 2003, restricted cash included $0.4 million ofcustomer deposits related to the sale of home sites at the Ocean Club Estates.  At December 31, 2003, restricted cashincluded $1.0 million of a certificate of deposit held as security on abank credit facility. 

 

**Note5—Short-Term Investments**

** **

During 2004, the Companypurchased approximately $205.0 million principal amount of T-Bills.  At December 31, 2004, the adjusted carryingvalue and fair value of these securities was $203.9 million with maturitydates ranging from March 2005 to September 2005.  The Company’s T-Bills are classified andaccounted for as available-for-sale securities and are reported at fair marketvalue with the resulting net unrealized holding gains or losses, net of incometaxes, reported as a separate component of comprehensive income (loss).  For the year ended December 31, 2004,the Company recorded $0.6 million of unrealized holding losses inconnection with its T-Bills.

 

**Note6—Trade Receivables, net**

** **

The Company extendscredit to approved casino customers. These receivables potentially subject the Company to concentration ofcredit risk.  The Company maintains anallowance for doubtful accounts to reduce the receivables to their estimatedcollectible amount, which approximates fair value.  The collectibility of foreign and domesticreceivables could be affected by future business or economic conditions orother significant events in the United States or in the countries in whichforeign customers reside.  

 

F-27

----

 

Componentsof trade receivables, net were as follows:

 
| ** **                             | ** ** | **December 31,** | ** ** |
|----------------------------------------|------------|-----------------------|------------|
| ** **                             | ** ** | **2004**              | ** ** | **2003** | ** ** |
|                                   |       |                  |       |   |   |
| Gaming                                 |       | $                     | 16,740     |   | $ | 19,224 |   |
| Less: allowance  for doubtful accounts |       | (4,853                | )          | (5,586 | ) |
|                                   |       | 11,887                |       | 13,638 |   |
|                                   |       |                  |       |   |   |
| Hotel and  related                     |       | 22,088                |       | 17,806 |   |
| Other                                  |       | 9,389                 |       | 9,006 |   |
|                                   |       | 31,477                |       | 26,812 |   |
| Less: allowance  for doubtful accounts |       | (1,621                | )          | (2,053 | ) |
|                                   |       | 29,856                |       | 24,759 |   |
|                                   |       |                  |       |   |   |
|                                   |       | $                     | 41,743     |   | $ | 38,397 |   |

 

Bad debt expense relatedto trade receivables was $1.2 million, $1.3 million and $3.2 millionfor the years ended December 31, 2004, 2003 and 2002, respectively, and is included in selling,general and administrative expenses in the accompanying statements ofoperations.

 

**Note7—Prepaid Expenses and Other Current Assets**

** **

Components of prepaidexpenses and other current assets were as follows:

 
| ** **                                           | ** ** | **December 31,** | ** ** |
|------------------------------------------------------|------------|-----------------------|------------|
| ** **                                           | ** ** | **2004**              | ** ** | **2003** | ** ** |
|                                                 |       |                  |       |   |   |
| Prepaid  windstorm, construction and other insurance |       | $                     | 12,253     |   | $ | 8,577 |   |
| Prepaid tour  operator-related costs                 |       | 1,804                 |       | 1,808 |   |
| Prepaid  rent-current                                |       | 1,422                 |       | 1,551 |   |
| Prepaid taxes                                        |       | 823                   |       | — |   |
| Other                                                |       | 5,383                 |       | 3,424 |   |
|                                                 |       | $                     | 21,685     |   | $ | 15,360 |   |

 

Windstorm, constructionand other insurance as of December 31, 2004 included $5.8 million forall risk insurance related to our Paradise Island properties and $4.8 millionof prepaid construction insurance in connection with the Phase IIIexpansion.  The policy year for thewindstorm insurance began on June 1, 2004 and expires May 31, 2005.  The policy term for the construction policybegan on September 30, 2004 and expires on May 31, 2007.

 

Prepaid taxes of $0.8 millionas of December 31, 2004, consists of payments made by Palmilla to theMexican taxing authority for income and asset taxes.  At December 31, 2003, included in other prepaidexpenses and other current assets is a note receivable of $0.6 millionrelating to a compensation advance made to an employee which was satisfied asof December 2004.

 

F-28

----

 

**Note8—Property and Equipment, net**

** **

Components of propertyand equipment, net were as follows: 

 
| ** **                            | ** ** | **December 31,** | ** ** |
|---------------------------------------|------------|-----------------------|------------|
| ** **                            | ** ** | **2004**              | ** ** | **2003** | ** ** |
|                                  |       |                  |       |   |   |
| Land                                  |       | $                     | 289,125    |   | $ | 259,845 |   |
| Land  improvements and utilities      |       | 239,153               |       | 228,460 |   |
| Buildings and  leasehold improvements |       | 764,828               |       | 654,933 |   |
| Furniture,  machinery and equipment   |       | 284,754               |       | 234,798 |   |
| Construction in  progress             |       | 106,566               |       | 53,422 |   |
|                                  |       | 1,684,426             |       | 1,431,458 |   |
| Less:  accumulated depreciation       |       | (336,786              | )          | (277,454 | ) |
|                                  |       | $                     | 1,347,640  |   | $ | 1,154,004 |   |

 

Property and equipment,net increased by $193.6 million from December 31, 2003 primarily as aresult of $142.4 million from the consolidation of Palmilla as of January 1,2004 pursuant to FIN 46R.

 

Construction in progressas of December 31, 2004 consisted of $86.9 million of costsassociated with development projects and $19.7 million related to other capitalprojects including $8.3 million of software related costs.  Development project costs as of December 31,2004 primarily included $47.6 million of Phase III expansion costs,$26.4 million of costs related to the Marina Village construction onParadise Island and $4.3 million of costs associated with the developmentof the Ocean Club Residences & Marina. Also included in construction in progress as of December 31, 2004is a $2.9 million payment made by the Company as consideration for ourexclusive appointment as the preferred developer and operator of a proposedresort casino and hotel at the Scottish Exhibition + Conference Centre inGlasgow that we will own and $8.6 million related to the planning anddevelopment of several casino and hotel facilities in the United Kingdom, thatwe will own, as the development of such casino and hotel facilities are deemedprobable.  Construction in progress as ofDecember 31, 2003 primarily included $53.4 million of major capitaland other projects in development, including $5.6 million of software relatedcosts.

 

Depreciation expense was$58.9 million, $55.8 million and $55.5 million for the yearsended December 31, 2004, 2003 and 2002, respectively.

 

**Note9—Deferred Charges and Other Assets, net**

** **

Components of deferredcharges and other assets, net were as follows:

 

| ** **                                              | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------|------------|-----------------------|------------|
| ** **                                              | ** ** | **2004**              | ** ** | **2003** | ** ** |
| ** **                                              | ** ** | ** **            | ** ** | ** ** | ** ** |
| Debt issuance  costs, net                               |       | $                     | 21,419     |   | $ | 9,561 |   |
| Interest rate  swap asset, net                          |       | 6,833                 |       | 10,505 |   |
| Deposit and  casino license for UK development projects |       | 1,306                 |       | 5,346 |   |
| Deferred  compensation plan investments                 |       | 3,981                 |       | 1,744 |   |
| Deferred  contract acquisition costs                    |       | 2,906                 |       | 2,115 |   |
| Employee notes  receivable                              |       | 1,225                 |       | 1,270 |   |
| Interest rate  cap asset                                |       | 114                   |       | — |   |
| Prepaid rent                                            |       | —                |       | 1,324 |   |
| Other                                                   |       | 2,894                 |       | 1,791 |   |
|                                                    |       | $                     | 40,678     |   | $ | 33,656 |   |

 

F-29

----

 

Debt issuance costs, net of amortization, relates to costs incurred inconnection with the issuance of our $400.0 million principal amount of our87/8% senior subordinatednotes, $230.0 million principal amount of our 2.375% convertible seniorsubordinated notes, our amended credit facility and the issuance of Palmilla’snotes.  The amortization of debt issuancecosts included in interest expense was $3.4 million, $1.2 million and$1.9 million for the years ended December 31, 2004, 2003 and 2002,respectively.

 

Interest rate swap assetis the fair value of our swap agreements as of December 31, 2004 and2003.  This asset represents the amountthat would have been received had the $150.0 million of swap agreementsbeen terminated on those dates.  Theinterest rate swap asset is $8.7 million and $11.8 million as of December 31,2004 and 2003.  In connection with thetermination of $25.0 million notional amount of two of our interest rate swapagreements in September 2003 and July 2004, we received $1.4 millionand $1.1 million, respectively, which was classified as a contra asset indeferred charges and other assets, net as of December 31, 2004 and 2003,and is being accreted to interest expense over the term of the underlyingdebt.  The balance of the contra asset asof December 31, 2004 and 2003 is $1.9 million and $1.3 million,respectively.  Interest rate cap asset isthe fair value of an interest rate cap agreement for Palmilla’s notes.  For further discussion of swap terminations,the interest rate cap and debt issuance costs, see Note 13—Long-Term Debt.

 

In April 2003, theCompany made a $4.0 million initial payment as consideration for thedevelopment of a casino and hotel at the Millennium Dome in London, which issubject to numerous conditions, including the enactment of appropriate gamblinglegislation in the United Kingdom and the granting of applicable gaming board,licensing, planning and council permissions. This amount was included in deferred charges and other assets, net as ofDecember 31, 2003, as the initial payment was refundable if the aboveconditions were not met.  However, thisprovision expired on December 31, 2004, and as such, the $4.0 millionpayment was reclassified to construction in progress as of December 31,2004 as it relates to the development of a casino and hotel that we will own.  In addition, during 2003, the Company made a$1.3 million payment related to the acquisition of a casino license inNorthampton, England.

 

Deferred contractacquisition costs primarily relate to direct incremental costs incurred inconnection with the acquisition of development and management contracts inconnection with Atlantis, The Palm and projects in Morocco and South Africa.

 

Deferred compensationplan investments relate to assets held in a rabbi trust for our deferredcompensation plan.  See Note 17—EmployeeBenefit Plans for further discussion.

 

Prepaid rent relates tothe long-term portion of prepaid rent for our leased offices in Plantation,Florida.  The current portion is includedin prepaid expenses and other assets.

 

Employee notes receivableas of December 31, 2004 and 2003 includes $0.8 million related to asecured housing loan which was issued in December 2002.  Additionally, $0.4 million as of December 31,2004 and 2003 relates to funds advanced to an employee for a secured housingloan, which is being amortized through July 2012.

 

F-30

----

 

**Note10—Accounts Payable and Accrued Liabilities**

** **

Components of accountspayable and accrued liabilities were as follows:

 
| ** **                                                                               | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                               | ** ** | **2004**              | ** ** | **2003** | ** ** |
|                                                                                     |       |                  |       |   |   |
| Accrued payroll  and related benefits                                                    |       | $                     | 30,511     |   | $ | 29,136 |   |
| Hotel advance  deposits                                                                  |       | 22,270                |       | 16,399 |   |
| Other deposits  and unearned revenue                                                     |       | 18,044                |       | 12,227 |   |
| Accrued  hotel-related costs and expenses                                                |       | 16,651                |       | 17,252 |   |
| Trade payables                                                                           |       | 15,869                |       | 14,842 |   |
| Accrued interest                                                                         |       | 13,330                |       | 10,850 |   |
| Accrued  gaming-related costs and expenses                                               |       | 12,212                |       | 11,321 |   |
| Accrued tour  operator-related costs and expenses                                        |       | 6,882                 |       | 5,769 |   |
| Tour operator  advanced deposits                                                         |       | 6,642                 |       | 6,556 |   |
| Accrued taxes                                                                            |       | 5,310                 |       | 9,251 |   |
| Majority  shareholder settlement – deferred revenue - current                       |       | 3,487                 |       | 3,375 |   |
| Note payable and  accrued taxes related to Club Méditerranée (Bahamas) Limited |       | —                |       | 18,500 |   |
| Other                                                                                    |       | 17,517                |       | 16,755 |   |
|                                                                                     |       | $                     | 168,725    |   | $ | 172,233 |   |

 

**Note11—Deferred Revenue**

** **

Componentsof deferred revenue were as follows:

 
| ** **                             | ** ** | **December 31,** | ** ** |
|----------------------------------------|------------|-----------------------|------------|
| ** **                             | ** ** | **2004**              | ** ** | **2003** | ** ** |
|                                   |       |                  |       |   |   |
| Kersaf  Investments Limited settlement |       | $                     | 11,166     |   | $ | 14,652 |   |
| Kerzner  Istithmar development fee     |       | 5,215                 |       | — |   |
| Lessee  prepayment                     |       | 2,521                 |       | — |   |
| Other                                  |       | 1,517                 |       | — |   |
|                                   |       | $                     | 20,419     |   | $ | 14,652 |   |

 

Kersaf InvestmentsLimited settlement represents the non-current portion of a settlement paymentas further discussed in Note 20—Gain on Settlement of Territorial andOther Disputes.  Kerzner Istithmardevelopment fee represents the deferred portion of payments received fromKerzner Istithmar related to the $20.0 million development fee asdiscussed in Note 16—Related Party Transactions.  Lessee prepayment consists of the long-termportion of an amount paid to the Company by an entity which is operatingPalmilla’s spa facility, which is amortized to other revenues over the term ofthe underlying lease.  The current portionof the lessee prepayment is included in the other deposits and unearned revenuecomponent of accounts payable and accrued liabilities.

 

F-31

----

 

**Note12—Other Long-Term Liabilities**

** **

Componentsof other long-term liabilities were as follows:

 
| ** **                        | ** ** | **December 31,** | ** ** |
|-----------------------------------|------------|-----------------------|------------|
| ** **                        | ** ** | **2004**              | ** ** | **2003** | ** ** |
|                              |       |                  |       |   |   |
| Deferred  compensation obligation |       | $                     | 3,973      |   | $ | 1,800 |   |
| Deferred rent  credit             |       | 2,437                 |       | 2,269 |   |
| Fair value of  Palmilla guarantee |       | —                |       | 2,761 |   |
| Other                             |       | 689                   |       | 460 |   |
|                              |       | $                     | 7,099      |   | $ | 7,290 |   |

 

For more information onthe deferred compensation obligation, see Note 17—Employee Benefit Plans.  The deferred rent credit relates to abuilding lease entered into during 2002 for our office in Plantation,Florida.  For more information on thetermination and fair value of the Palmilla guarantee, see Note 23—Commitmentsand Contingencies.

 

**Note13—Long-Term Debt**

** **

Long-term debt consistedof the following:

 
| ** **                                                              | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                              | ** ** | **2004**              | ** ** | **2003** | ** ** |
| ** **                                                              | ** ** | ** **            | ** ** | ** ** | ** ** |
| Fifth Amended  Credit Facility (a)                                      |       | $                     | —     |   | $ | — |   |
| $400 million 87/8%  Senior Subordinated Notes due 2011 (b)              |       | 413,427               |       | 417,090 |   |
| $230 million  2.375% Convertible Senior Subordinated Notes due 2024 (c) |       | 230,000               |       | — |   |
| Palmilla Notes  (d)                                                     |       | 110,000               |       | — |   |
| Other (e)                                                               |       | 1,361                 |       | 434 |   |
|                                                                    |       | 754,788               |       | 417,524 | ** ** |
| Less: amounts  due within one year                                      |       | (659                  | )          | (304 | ) |
|                                                                    |       | $                     | 754,129    |   | $ | 417,220 |   |

 

***(a) Fifth Amended Credit Facility***

*** ***

On July 7, 2004,Kerzner entered into an amendment to our credit facility (the “Fifth AmendedCredit Facility”) with a syndicate of banks (the “Lenders”).  Under the Fifth Amended Credit Facility, themaximum amount of borrowings that may be outstanding is $500.0 million(the “Commitment Amount”).  TheCommitment Amount under the Fifth Amended Credit Facility may be voluntarilyreduced from time to time in multiples of $1.0 million.  The Commitment Amount also shall beautomatically and permanently reduced in connection with certain assetsales.  In February 2005, we furtheramended the Fifth Amended Credit Facility to, among other things, (i) conformits description of the Phase III expansion to that included in the Heads ofAgreement, as supplemented in December 2004, and (ii) provide for therelease of the liens granted to the holders of the property required for theproposed condo-hotel and Ocean Club Residences & Marina, and(iii) to allow a deposit of up to $74.0 million of our cash and cashequivalents to secure our obligation to contribute equity capital to Atlantis,The Palm.

 

Loans under the FifthAmended Credit Facility bear interest at (i) the higher of (a) a baserate or (b) the Federal Funds Rate plus one-half of one percent, in eithercase plus an additional 0.125% to 2.00% based on a debt to EBITDA ratio duringthe period, as defined (the “Leverage Ratio”), (ii) the London InterbankOffered Rate

 

F-32

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(“LIBOR”)rate plus 1.125% to 3.00% based on the Leverage Ratio or (iii) the FederalFunds Rate plus 1.125% to 3.00% based on the Leverage Ratio.  For loans based on the Alternate Base Rate(as defined), interest is payable monthly. For loans based on the LIBOR rate, interest is payable on the last dayof each applicable interest period.  Loansunder the Fifth Amended Credit Facility may be prepaid and re-borrowed at anytime and are due in full in July 2009. Commitment fees are calculated at per annum rates ranging from 0.25% to0.60% based on the Leverage Ratio, applied to the undrawn amount of the FifthAmended Credit Facility and are payable quarterly.

 

The Fifth Amended CreditFacility contains affirmative and restrictive covenants which, among otherthings: (a) require periodic financial reporting, (b) require meetingcertain financial amounts and ratio tests, (c) restrict the payment ofdividends, (d) limit the incurrence of indebtedness and (e) limitasset expenditures and dispositions outside the ordinary course of business.  As of December 31, 2004, managementbelieves the Company was in compliance with all such covenants.

 

The Fifth Amended CreditFacility is secured by a pledge of substantially all of our assets.

 

As of December 31,2004, the Company had $494.0 million of borrowings available on the FifthAmended Credit Facility after giving effect to $6.0 million in letters ofcredit outstanding.  In connection withthis facility, the Company incurred $4.4 million of debt issuance costsduring the year ended December 31, 2004. These costs are being amortized to interest expense over the expectedlife of the facility of 5 years. These costs, net of accumulated amortization, are included in deferredcharges and other assets, net in the Company’s consolidated balance sheet as ofDecember 31, 2004.

 

***(b) 8***7/8% SeniorSubordinated Notes 

*** ***

In August 2001, weissued $200.0 million principal amount of 87/8% senior subordinated notes due 2011(the “87/8% Senior Subordinated Notes”)which, after costs of $6.0 million, resulted in net proceeds of approximately$194.0 million.  All of the proceedsreceived from the issuance of the 87/8%Senior Subordinated Notes were used to repay amounts outstanding under aprevious revolving credit facility.  InMay 2002, we issued, at 103%, an additional $200.0 million of 87/8% Senior Subordinated Notes and used theproceeds of approximately $201.5 million, net of related costs of $4.5 million,to repay our 9% Senior Subordinated Notes. 

 

The 87/8% Senior Subordinated Notes areunconditionally guaranteed by substantially all of our wholly ownedsubsidiaries. Interest on these notes is paid semi-annually on February 15and August 15.  The indenture forthe 87/8% Senior Subordinated Notescontains various restrictive covenants, including limitations on the ability ofthe issuers and the guarantors to, among other things: (a) incuradditional indebtedness, (b) incur certain liens, (c) engage incertain transactions with affiliates and (d) pay dividends and makecertain other payments.  We believe weare in compliance with all such covenants as of December 31, 2004.

 

All of our outstanding 87/8% Senior Subordinated Notes rank *pari passu* with each other and are allsubordinated to the Fifth Amended Credit Facility.

 

In connection with theissuance of the $200.0 million 87/8%Senior Subordinated Notes issued in May 2002 and August 2001 andmodifications of an amended revolving credit facility, the Company paid $0.1million and $4.7 million, respectively, of debt issuance and modificationcosts during the years ended December 31, 2003 and 2002.  These costs, net of accumulated amortization,are included in deferred charges and other assets, net in the accompanyingconsolidated balance sheets.

 

***(c) 2.375% Convertible Senior Subordinated Notes***

*** ***

In April 2004, theCompany issued $230.0 million principal amount of 2.375% convertible seniorsubordinated notes due 2024 (the “2.375% Convertible Senior Subordinated Notes”)which, after debt issuance costs of $6.3 million, resulted in net proceedsof approximately $223.7 million.  Theproceeds from the issuance of the 2.375% Convertible Senior Subordinated Notes willbe used to fund future capital expenditures which may include, among other things,development costs for the Phase III expansion on Paradise Island, theCompany’s equity

 

F-33

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investmentin Kerzner Istithmar and general corporate purposes.  During the year ended December 31, 2004,a portion of these proceeds were utilized to purchase T-Bills.  The debt issuance costs are being amortizedto interest expense over ten years, as there is an option to put such debt tenyears from the issuance date.  Thesecosts, net of accumulated amortization, are included in deferred charges andother assets, net in the Company’s consolidated balance sheet as of December 31,2004.

 

The 2.375% ConvertibleSenior Subordinated Notes are unsecured senior subordinated obligations andmature on April 15, 2024 unless they are converted, redeemed orrepurchased before the maturity date.  The2.375% Convertible Senior Subordinated Notes may be converted into cash and OrdinaryShares at an initial conversion rate of 17.1703 shares per $1,000 principalamount in accordance with the terms of the indenture.  This conversion rate is equal to a conversionprice of approximately $58.24 per ordinary share.  Upon conversion, all of the principal amountof the notes converted must be paid in cash.

 

These notes areconvertible, at the holder’s option, prior to the maturity date into cash and OrdinaryShares in the following circumstances: 

 

•                  During any fiscal quarter commencingafter the date of original issuance of the notes, if the closing sale price ofour Ordinary Shares over a specified number of trading days during the previousquarter is more than 120% of the conversion price, or $69.89, of the notes;

•                  If the notes are called forredemption and the redemption has not yet occurred;

•                  During the five trading day period immediatelyafter any five consecutive trading day period in which the trading price of thenotes per $1,000 principal amount for each day of such period was less than 95%of the product of the closing sale price of our Ordinary Shares on such daymultiplied by the number of shares of our Ordinary Shares issuable uponconversion of $1,000 principal amount of the notes; or

•                  Upon the occurrence of specifiedcorporate transactions.

 

The 2.375% ConvertibleSenior Subordinated Notes are subordinated to the Fifth Amended Credit Facilityand rank *pari passu* with our 87/8% Senior Subordinated Notes, however,they are not guaranteed by our wholly owned subsidiaries, they are effectivelysubordinated to our subsidiaries’ existing and future liabilities.  Interest on the 2.375% Convertible SeniorSubordinated Notes is paid semi-annually in arrears on April 15 and October 15,beginning October 15, 2004.

 

***(d) Palmilla Notes***

*** ***

In August 2003,Palmilla secured a senior credit facility (the “Palmilla Senior Credit Facility”)in order the finance the renovation and expansion of Palmilla.  The Palmilla Senior Credit Facility wascomprised of two tranches, tranche A (“Tranche A Loan”) of $46.5 millionand tranche B (“Tranche B Loan”) of $42.0 million, for a total of$88.5 million.  Of the totalborrowings outstanding, $46.5 million of such amount, representing theTranche A Loan, was guaranteed by Kerzner. 

 

On December 17, 2004,Palmilla entered into two promissory notes totaling a principal amount of$110.0 million (the “Palmilla Notes”). The Palmilla Notes mature on January 9, 2007 and are governed bythe terms of the Palmilla Notes and the note indenture dated December 17,2004 (the “Palmilla Note Indenture”). The proceeds from the Palmilla Notes were used to pay down the Tranche ALoan and Tranche B Loan related to the Palmilla Senior Credit Facility of$88.1 million, including accrued interest. In connection with the early retirement of the Palmilla Senior CreditFacility, Palmilla wrote off $1.7 million in debt issuance costsassociated with this facility.  Theseamounts are included in loss on early extinguishment of debt in theaccompanying consolidated statements of operations.  The proceeds were also used to repay Kerzner$14.5 million in completion loans, excluding accrued interest.  In connection with the repayment in full ofamounts outstanding under the Palmilla Senior Credit Facility, our $46.5 millionguarantee was extinguished.

 

In connection with thePalmilla Notes, Palmilla paid $4.0 million in debt issuance costs duringthe year ended December 31, 2004, which are being amortized to interestexpense over two years, the term of the Palmilla

 

F-34

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Notes.  These costs, net of accumulated amortization,are included in deferred charges and other assets, net in the accompanyingconsolidated balance sheets.  

 

Interest on the PalmillaNotes is paid monthly on the ninth day of each month.  The Palmilla Notes bear interest at theLondon Interbank Offered Rate (“LIBOR”) plus 3.75%.  The average interest rate for the period thatthe notes were outstanding during 2004 was 6.15%.  The Palmilla Notes contain affirmative andrestrictive covenants which, among other things, require periodic financialreporting and include limitations on Palmilla to incur certain liens.

 

***(e) Other***

*** ***

Other long-term debtconsists of capital leases for machinery and equipment.

 

**DerivativeFinancial Instruments**

** **

*Interest Rate RiskManagement*

* *

We attempt to limit ourexposure to interest rate risk by managing our long-term fixed and variablerate borrowings.  In August and December 2001,we entered into interest rate swap agreements (the “Swap Agreements”)designated as fair value hedges of $200.0  million principal amount of our87/8% Senior Subordinated Noteswhereby we receive fixed interest rate payments in exchange for making variableinterest rate payments on our 87/8% Senior SubordinatedNotes.

 

These Swap Agreementsqualify for the “shortcut” method of accounting provided under SFAS 133,which allows for the assumption of no ineffectiveness in our hedgingrelationship.  Accordingly, there is noincome statement impact from changes in the fair value of the Swap Agreements.  Instead, the changes in the fair value of theSwap Agreements are recorded as an asset or liability on the accompanyingconsolidated balance sheet with an offsetting adjustment to the carrying valueof the related debt.

 

In September 2003,we cancelled $25.0 million notional amount of our then $200.0 millionof interest rate swaps on our 87/8%Senior Subordinated Notes.  We received$1.4 million from this cancellation, which is being accreted to interestexpense over the term of the underlying debt.

 

In July 2004, wecancelled $25.0 million notional amount of our then $175.0 million ofinterest rate swaps on our 87/8%Senior Subordinated Notes.  We received$1.1 million from this cancellation, of which $0.4 million wasapplied to our outstanding interest receivable, and $0.7 million is beingaccreted to reduce interest expense over the term of the underlying debt.

 

Included in deferredcharges and other assets, net in the Company’s balance sheets at December 31,2004 and 2003 is $8.7 million and $11.8 million, respectively,representing the fair value of the Swap Agreements as of that date.  This represents the amount we would havereceived had the Swap Agreements been terminated on each respective date.  This resulted in a corresponding increase tothe carrying value of our 87/8%Senior Subordinated Notes. 

 

As of December 31,2004 and 2003, the aggregate notional principal amount of the Swap Agreementswas $150.0 million and $175.0 million, respectively, and theseagreements mature concurrently with the 87/8%Senior Subordinated Notes in August 2011. For the years ended December 31, 2004, 2003 and 2002 the weightedaverage variable rate on the Swap Agreements was 4.93%, 4.18% and 5.49%,respectively. 

 

As of December 31,2004 and 2003, after giving effect to the Swap Agreements, our fixed rateborrowings represented approximately 65% and 56% and our variable rateborrowings represented 35% and 44%, respectively, of total borrowings.

 

F-35

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*Interest Rate CapAgreement*

* *

Pursuant to the terms ofthe Palmilla Notes, Palmilla was required to enter into an interest rate capagreement contemporaneously with the issuance of the Palmilla Notes.  On December 17, 2004, Palmilla enteredinto an interest rate cap agreement in order to cap the LIBOR component of theinterest on the Palmilla Notes at 5% (“Interest Rate Cap Agreement”).  The Interest Rate Cap Agreement is designatedas a cash flow hedge as it involves the receipt of variable-rate amounts inexchange for one up-front fixed-rate payment over the life of the agreementwithout exchange of the underlying principal amount.  During 2004, the Interest Rate Cap Agreementwas used to hedge the variable cash flows associated with the Palmilla Notes. 

 

At December 31,2004, the fair value of the Interest Rate Cap Agreement was $0.1 millionand was included in prepaid expenses and other assets in the accompanyingconsolidated balance sheet.  Theunrealized loss of $38,000 in 2004 for the Interest Rate Cap Agreement isincluded as a component of accumulated other comprehensive loss in theaccompanying statement of changes in shareholders’ equity.  No hedge ineffectiveness on cash flow hedgeswas recognized during 2004.

 

*Credit Exposure*

* *

We are exposed tocredit-related losses in the event of non-performance by counterparties to ourSwap Agreements.  We monitor thecreditworthiness of the counterparties and presently do not expect default byany of the counterparties.  We do notobtain collateral in connection with our derivative financial instruments.

 

*Guarantees*

* *

For a description of theCompany’s guarantees of certain debt of affiliated entities, see Note 23—Commitmentsand Contingencies.

 

*Overdraft Loan Facility*

* *

We have an unusedrevolving overdraft loan facility with The Bank of Nova Scotia in the amount ofBahamian $5.0 million, which is equal to U.S. $5.0 million.  The overdraft facility would bear interest atThe Bank of Nova Scotia’s base rate for Bahamian dollar loans plus 1.5% withrepayment, subject to annual review.  Theoverdraft facility is secured by substantially all of our Bahamian assets andranks *pari passu* with our FifthAmended Credit Facility. 

 

F-36

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*Debt Maturity*

* *

Aggregate annualmaturities of long-term debt as of December 31, 2004, for each of the nextfive years and thereafter are as follows:

 

| **Year Ending December 31,**         |   |    |    |
|-------------------------------------------|--------|---------|---------|
| 2005                                      |   | $       | 659     |   |
| 2006                                      |   | 451     |    |
| 2007                                      |   | 110,238 |    |
| 2008                                      |   | 13      |    |
| 2009                                      |   | —  |    |
| Thereafter                                |   | 630,000 |    |
|                                      |   | 741,361 |    |
| Debt premium                              |   | 4,734   |    |
| Interest rate  swap fair value adjustment |   | 8,693   |    |
|                                      |   | $       | 754,788 |   |

 

**Note14—Shareholders’ Equity**

** **

In July 2004, theCompany completed an equity offering in The Bahamas of approximately 4.3 millionBahamian Depositary Receipts, the equivalent of approximately 0.4 million OrdinaryShares, that resulted in net proceeds of approximately $19.1 million.

 

In August 2004, theCompany sold 3.0 million newly issued Ordinary Shares at a price of $51.25per share to Istithmar, resulting in net proceeds of $153.4 million.  As a part of Istithmar’s overall investmentin the Company, Istithmar also entered into purchase agreements with two of theCompany’s shareholders to purchase an additional 1.5 million OrdinaryShares at $47.50 per share, the market price at the time the purchaseagreements were executed.  Thesesecondary sales closed simultaneously with Istithmar’s purchase of primaryshares from the Company.  In connectionwith this transaction, we added a designee of Istithmar to our Board ofDirectors.

 

**Note15—Stock-Based Compensation**

** **

*Stock Options*

* *

Our shareholders approvedstock option plans in 1995 (the “1995 Plan”), 1997 (the “1997 Plan”) and in2000 (the “2000 Plan,” and collectively the “Plans”) that provide for theissuance of options to acquire an aggregate of 7,500,000 Ordinary Shares.  Pursuant to the Plans, the option prices areequal to the market value per share of the Ordinary Shares on the date of thegrant.  The 1995 Plan provided for theoptions to become exercisable, unless otherwise specified by the Board ofDirectors and subject to certain acceleration and termination provisions, aftertwo years from the date of grant in respect of 20% of such options, andthereafter in installments of 20% per year over a four-year period.  The 1997 Plan provides for the same vesting schedule exceptthat the vesting period begins one year after the grant date.  The 2000 Plan provides for the vesting periodto begin one year after the grant date in respect of one third of such options,and thereafter in installments of one third per year over the remainingtwo-year period.  Options granted underthe Plans have a term of 10 years from the date of grant.  The Plans provide for options with respect toOrdinary Shares to be granted to our directors, officers and employees.

 

Our Board of Directorsapproved a stock option plan in December 2003 (the “2003 Plan”) thatprovides for the issuance of options and restricted share awards to acquire anaggregate of 3,000,000 Ordinary Shares. Pursuant to the 2003 Plan, the prices are equal to the market values pershare of the Ordinary Shares on the date of grant, unless otherwisespecifically provided by the compensation committee.  Unless otherwise specified by thecompensation committee, options and restricted shares shall become vested andexercisable in installments of 25%

 

F-37

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over afour-year period.  Options and restrictedshares granted under the 2003 Plan have a term of seven years from the date ofgrant.  The 2003 Plan provides foroptions with respect to Ordinary Shares to be granted to our directors,officers, employees and consultants of the Company.  During the years ended December 31, 2004and 2003, the Company issued 0.3 million and 0.1 million,respectively, of restricted shares under the 2003 Plan to certain employees andofficers.  The restricted shares’ vestingperiod ranges from three to five years on either a graduated or cliff vestingbasis provided that the recipient is still with the Company upon vesting.  The aggregate market value of the restrictedshares at the date of issuance of $14.8 million has been recorded asdeferred compensation, as a separate component of shareholders’ equity, and isbeing amortized over the applicable vesting period.  During the year ended December 31, 2004,700 restricted shares that were issued during 2003 were cancelled.

 

Our stock option plansprovide for the issuance of options to acquire an aggregate of 10,500,000 ofour Ordinary Shares.  As of December 31,2004, options pursuant to these plans had been granted at exercise pricesranging from $18.13 to $57.31.  As of December 31,2004, options to acquire 3,332,944 Ordinary Shares were outstanding, of which935,398 were exercisable as of that date. Nearly all of the options under the 1995 Plan, the 1997 Plan and the2000 Plan have been granted as of December 31, 2004.

 

A summary of our stockoption activity for 2004, 2003 and 2002 is as follows (in thousands, except pershare data):

 
| ** **                        | ** ** | **December 31,** | ** ** |
|-----------------------------------|------------|-----------------------|------------|
| ** **                        | ** ** | **2004**              | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                        | ** ** | **Shares**            | ** ** | **Weighted  Average  Exercise  Price Per  Share** | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price Per  Share** | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price Per  Share** | ** ** |
| ** **                        | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Outstanding at  beginning of year |       | 5,059                 |       | $ | 27.91 |   | 5,347 |   | $ | 21.54 |   | 5,742 |   | $ | 25.14 |   |
| Granted                           |       | 255                   |       | 49.56 |   | 1,796 |   | 36.40 |   | 1,659 |   | 21.17 |   |
| Exercised                         |       | (1,858                | )          | 21.78 |   | (2,074 | ) | 18.81 |   | (776 | ) | 17.95 |   |
| Forfeited and  expired            |       | (123                  | )          | 25.57 |   | (10 | ) | — |   | (1,278 | ) | 38.14 |   |
|                              |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| Outstanding at  end of year       |       | 3,333                 |       | 32.70 |   | 5,059 |   | 27.91 |   | 5,347 |   | 21.54 |   |
| Exercisable at  end of year       |       | 935                   |       | 25.58 |   | 2,266 |   | 22.95 |   | 3,160 |   | 21.49 |   |
| Available for  grant              |       | 713                   |       |   |   | 1,179 |   |   |   | 35 |   |   |   |
|                                   |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The weighted averageexercise price and weighted average contractual life of stock optionsoutstanding and exercisable at December 31, 2004 is as follows (inthousands, except per share data):

 
| ** **                    | ** ** | **Outstanding** | ** ** | **Exercisable**                                   | ** ** |
|-------------------------------|------------|-----------------|------------|---------------------------------------------------|------------|
| **Range of Exercise  Prices** | ** ** | **Shares**      | ** ** | **Weighted  Average  Exercise  Price Per  Share** | ** ** | **Weighted  Average  Remaining  Contractual  Life** | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price Per  Share** | ** ** | **Weighted  Average  Remaining  Contractual  Life** | ** ** |
| $18.13 - $19.99               |       | 65              |       | $                                                 | 18.65      |   | 6.3 |   | 44 |   | $ | 18.13 |   | 5.6 |   |
| $20.00 - $24.99               |       | 492             |       | 20.76                                             |       | 7.5 |   | 319 |   | 20.72 |   | 7.4 |   |
| $25.00 - $29.99               |       | 552             |       | 25.94                                             |       | 6.5 |   | 298 |   | 26.05 |   | 6.5 |   |
| $30.00 - $34.99               |       | 76              |       | 32.44                                             |       | 3.1 |   | 73 |   | 32.57 |   | 2.9 |   |
| $35.00 - $39.99               |       | 1,883           |       | 36.61                                             |       | 5.7 |   | 191 |   | 35.42 |   | 3.5 |   |
| $40.00 - $49.99               |       | 143             |       | 42.39                                             |       | 6.0 |   | 10 |   | 41.63 |   | 3.9 |   |
| $50.00 - $57.31               |       | 122             |       | 57.31                                             |       | 6.9 |   | — |   | — |   | — |   |
|                          |       | 3,333           |       | $                                                 | 32.70      |   | 6.0 |   | 935 |   | $ | 25.58 |   | 5.6 |   |

 

F-38

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*Stock Option Tender Offer*

* *

On May 7, 2002, ourBoard of Directors resolved, under certain conditions, to make available toemployees and directors holding options with an exercise price higher than$32.00 per share, an offer to surrender all or some of the options granted tothem under the Plans.  In exchange, suchemployees and directors would have the possibility, under certain conditions,to be granted new options giving the right to subscribe for 75% of the numberof shares as the surrendered options.  Theexercise price for the new options would be the fair market value of the OrdinaryShares on the new grant date, which would be no sooner than six months and oneday after the cancellation date of the old options, subject to the conditionsset forth in the tender offer documents filed with the Securities and ExchangeCommission on May 27, 2002, the commencement date of the offer period.  The offer to option holders under theexchange program expired on June 25, 2002. The 1,227,600 eligible options that were properly submitted for exchangewere accepted and cancelled effective June 26, 2002.  Such options represent substantially allthose that were eligible for exchange.  Wegranted 920,700 new options, which have similar terms to the cancelled options,in exchange for the cancelled options on December 26, 2002 at a price of$20.07.

 

**Note16—Related Party Transactions**

** **

In the normal course ofbusiness, the Company undertakes transactions with a number of unconsolidatedaffiliated companies.  Certain of theCompany’s subsidiaries provide construction funding, project consulting,operating advances and management and development services to such affiliates.  Due from affiliates and management,development and other fees from affiliates consisted of the following:

 
| ** **                         | ** ** | ** **              | ** ** | **Management, Development and  Other Fees** | ** ** |
|------------------------------------|------------|-------------------------|------------|---------------------------------------------|------------|
| ** **                         | ** ** | **Due From Affiliates** | ** ** | **For the Year  Ended December 31,**   | ** ** |
| **December 31,**              |
| ** **                         | ** ** | **2004**                | ** ** | **2003**                                    | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| Reethi Rah                         |       | $                       | 56,543     |                                        | $          | 16,360 |   | $ | 1,270 |   | $ | 394 |   | $ | — |   |
| Harborside at  Atlantis            |       | 18,414                  |       | 17,391                                      |       | 2,826 |   | 1,847 |   | 1,579 |   |
| Mauritius  Resorts                 |       | 6,707                   |       | 6,394                                       |       | 9,614 |   | 7,619 |   | 7,074 |   |
| Cape Town                          |       | 5,790                   |       | —                                      |       | — |   | — |   | — |   |
| Kanuhura                           |       | 4,022                   |       | 4,807                                       |       | 1,466 |   | 787 |   | 383 |   |
| Atlantis, The  Palm                |       | 2,520                   |       | —                                      |       | 380 |   | — |   | — |   |
| South Africa                       |       | 1,743                   |       | —                                      |       | — |   | — |   | — |   |
| Royal Mirage                       |       | 1,378                   |       | 958                                         |       | 3,403 |   | 1,293 |   | 1,232 |   |
| Trading Cove  Associates           |       | 233                     |       | 227                                         |       | 935 |   | 1,755 |   | 1,326 |   |
| BLB                                |       | 69                      |       | —                                      |       | — |   | — |   | — |   |
| Palmilla                           |       | —                  |       | 2,654                                       |       | — |   | 1,482 |   | 128 |   |
|                               |       | 97,419                  |       | 48,791                                      |       | 19,894 |   | 15,177 |   | 11,722 |   |
| Less: Amounts  due within one year |       | (15,682                 | )          | (13,949                                     | )          | — |   | — |   | — |   |
|                               |       | $                       | 81,737     |                                        | $          | 34,842 |   | $ | 19,894 |   | $ | 15,177 |   | $ | 11,722 |   |

 

During the year ended December 31,2004, the Company recognized $1.8 million of bad debt expense associatedwith certain affiliated receivables.

 

*Reethi Rah*

* *

On December 4, 2002,the Company entered into a senior subordinated credit agreement with Reethi RahResort Pvt. Ltd. and various other financial institutions (the “Senior Lenders”).  The purpose of the completion loans is toprovide subordinated financing for the building and developing of Reethi Rah, anew resort on North Male Atoll in the Maldives. The loans will be subordinated to all other loans made to Reethi RahResort Pvt. Ltd. by the Senior Lenders and will become immediately due andpayable upon termination or cancellation of our management

 

F-39

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agreementrelated to the property.  As of December 31,2004, the Company had entered into a series of completion loans in the principalamount of $54.4 million, which is included in due fromaffiliates-non-current, net in the accompanying consolidated balance sheet.

 

As of December 31,2004 and 2003, other amounts incurred in connection with Reethi Rah of $1.6 millionand $1.0 million, respectively, primarily represent development costs thatKerzner has incurred on behalf of the resort, which will be reimbursed afterthe opening of the resort.

 

*Harborside at Atlantis*

* *

In 2000, the Companyentered into a series of promissory notes with Harborside at Atlantis to fund50% of the construction cost of the timeshare units on Paradise Island in TheBahamas.  In December 2004, theCompany loaned an additional $1.5 million to Harborside at Atlantisrelated to the development of additional timeshare units in connection with thePhase III expansion pursuant to the existing series of promissory notes.  The balance of these notes was $16.5 millionand $15.0 million as of December 31, 2004 and 2003, respectively.  These promissory notes are due on December 31,2005, however, such notes are classified as non-current in the accompanyingconsolidated balance sheet as of December 31, 2004 as the Company does notanticipate payment by December 31, 2005 and expects to extend thismaturity date.  The Company earnsinterest on these advances at a rate equal to one-month LIBOR plus 250 basispoints.  The average interest rate forthe year ended December 31, 2004 was 4.0%. Interest due from Harborside on these notes was $0.1 million as of December 31,2004 and 2003.  The loans were madesimultaneously with loans from Starwood Vacation, which mirror the amounts,terms and conditions of the Company’s loans. The Company’s loans and Starwood Vacation’s loans are *pari passu* with respect to payments ofprincipal and accrued interest and such payments will be made in cash, as it isavailable from the sale of timeshare units. 

 

The Company providesmarketing and administrative services to Harborside at Atlantis from which itearned fees of $2.5 million, $1.8 million and $1.6 million forthe years ended December 31, 2004, 2003 and 2002, respectively.  Development fees earned during the year endedDecember 31, 2004 amounted to $0.3 million.  These amounts are included within management,development and other fees in the accompanying consolidated statements ofoperations.  The amount due fromHarborside at Atlantis related to these services was $1.9 million and $1.8 millionas of December 31, 2004 and 2003, respectively.  

 

*Mauritius Resorts*

* *

The Company has long-termmanagement contracts through 2023 with each of the five hotels in Mauritiusthat are owned by SRL: the One&Only Le Saint Géran, the One&Only LeTouessrok, La Pirogue Hotel, Sugar Beach Resort and Le Coco Beach Hotel.  Effective January 1, 2003, the Companyentered into an agreement with SRL to form One&Only Management for thepurpose of, among other things, managing Kanuhura and the Mauritius Resorts.  Effective January 1, 2003, SRL owned 20%of One&Only Management and the Company owned the remaining 80%.  Subject to certain conditions, SRL’sownership interest will increase incrementally through 2009, for no additionalconsideration, at which time it will own 50% of One&Only Management.  Effective January 1, 2005, SRL’sownership interest increased to 25% and our ownership interest decreased to75%.  Pursuant to a subcontractarrangement with One&Only Management, the Company provides comprehensivemanagement services to Kanuhura and the Mauritius Resorts and receives amanagement fee, which is calculated as a percentage of revenues and adjustedEBITDA, as defined.  One&OnlyManagement is also entitled to a marketing fee as calculated as a percentage ofrevenues, although it has subcontracted to the Company all marketing servicesand benefits thereof with respect to Kanuhura and the Mauritius Resorts.  For the years ended December 31, 2004,2003 and 2002, the Company has recognized $8.4 million, $7.4 millionand $5.6 million, respectively, related to these management agreements inMauritius.  Additionally, during 2002,the Company completed a major redevelopment of the One&Only Le Touessrokfor which it earned project fees of $0.2 million and $1.5 million forthe years ended December 31, 2003 and 2002, respectively.

 

F-40

----

 

As of and for the yearsended December 31, 2004 and 2003, the Company has consolidatedOne&Only Management, with SRL’s 20% interest reflected as a minorityinterest in the accompanying consolidated statements of operations and aminority interest liability reflected within accounts payable and accruedliabilities in the accompanying consolidated balance sheets.  The Company signed an agreement with SRL thatprovides for, among other things, the sale of 20% of its debt and equityinterests in Kanuhura to SRL for which it received $1.5 million.  Following this sale, which was effective January 1,2003, as of December 31, 2004 and 2003, the Company had a 20% equityinterest in Kanuhura.  In connection withthe incremental ownership interest increases in One&Only Management,effective January 1, 2005, the Company sold an additional 5% of its debtand equity interests in Kanuhura to SRL. Accordingly, the Company’s equity interest in Kanuhura is now 18.75%.

 

*Cape Town*

* *

In November 2003, weentered into an agreement with Victoria & Alfred Waterfront (Pty) Limitedto develop a new luxury hotel in Cape Town, South Africa, subject to variousconditions.  We intend to form a jointventure in which we will own a minority interest to develop and operate the One&OnlyCape Town, a new luxury hotel on the waterfront.  As of December 31, 2004, the Company advanced$5.8 million of reimbursable costs related to the development of thisluxury hotel.

 

*Kanuhura*

* *

As described above, weassigned to One&Only Management the management agreement of Kanuhura, inwhich we owned a 20% interest as of December 31, 2004.  The terms of the management agreement runconcurrently with the terms of a lease between Kanuhura and the government ofthe Republic of Maldives.  That leaseexpires in 2026 and is subject to extension. 

 

During 2002, we advancedfunds to Kanuhura in the amount of $3.6 million, which represented ourshare of funding for operations.  Thisadvance is payable after satisfaction of certain Kanuhura financial obligationswhich mature no earlier than December 2007.** **However, during 2004, Kanuhurarepaid $1.2 million, including principal and accrued interest.  These loans accrue interest at a rate ofLIBOR plus 600 basis points.  The averageinterest rate for the year ended December 31, 2004 was 7.24%.  As of December 31, 2004, the balance ofthe Kanuhura advances was $2.4 million.

 

Fees for managementservices during the years ended December 31, 2004, 2003 and 2002 were $1.2 million,$0.8 million and $0.4 million, respectively, and are included inmanagement, development and other fees in the accompanying consolidatedstatements of operations.

 

*Atlantis, The Palm*

* *

The Company has enteredinto a development agreement with Kerzner Istithmar that entitles us to receive$20.0 million and reimbursement of certain expenses over the developmentperiod of Atlantis, The Palm.  Wecurrently have a 50% ownership interest in Kerzner Istithmar, and as such, we expectto recognize $10.0 million in development fees over the development period.  For the year ended December 31, 2004, werecognized $0.4 million of development fees related to Atlantis, The Palm.  This amount is included within management,development and other fees in the accompanying consolidated statement ofoperations for the year ended December 31, 2004.  The $2.5 million due from Atlantis, ThePalm as of December 31, 2004 primarily consists of development relatedcosts that have been advanced to Kerzner Istithmar by the Company.

 

*South Africa*

* *

In October 2003, we advanced$1.7 million for the purchase of land for the potential development of anadditional One&Only property in South Africa.

 

F-41

----

 

*Royal Mirage*

* *

Fees for managementservices to the Royal Mirage during the year ended December 31, 2004, 2003and 2002 were $3.4 million, $1.3 million and $1.2 million,respectively, and are included in management, development and other fees in theaccompanying consolidated statements of operations.

 

*Trading Cove Associates*

* *

The Company earneddevelopment fees from TCA pursuant to the TCA Development Agreement in2002 and 2003.  In addition, the Companyrecorded other fees from TCA during all years presented.

 

*Palmilla*

* *

Prior to ourconsolidation of Palmilla JV, LLC on January 1, 2004, fees for managementservices from Palmilla for both the year ended December 31, 2003 andduring the period from September 12, 2002 (the date of acquisition)through December 31, 2002 were $0.1 million and are included inmanagement, development and other fees in the accompanying consolidatedstatements of operations.

 

In April 2003,Palmilla commenced its expansion and redevelopment.  In connection with the redevelopment, theCompany earned $1.3 million and $0.2 million of development and managementfees, respectively, for the year ended December 31, 2003 which areincluded in management, development and other fees in the accompanyingconsolidated statements of operations.

 

In December 2004,Palmilla paid $0.8 million to Goldman, Sachs & Co., a relatedparty of our 50% joint venture partner, for debt issuance costs associated withthe Palmilla Notes.  This amount isincluded in deferred charges and other assets, net, in the accompanyingconsolidated balance sheet.

 

As of December 31,2003, $2.7 million was due from Palmilla for management services,development fees and other advances.

 

*Office Lease*

* *

Effective February 2002,we entered into a lease agreement with Tennyson Properties Limited, whereby weare leasing office space in Buckinghamshire in the United Kingdom for a periodof 15 years.  The annual rent isapproximately £205,000 (which is the equivalent of approximately $0.4 millionat December 31, 2004) and is subject to increase every five years to thecurrent fair market value.  TennysonProperties Limited is owned by a family trust established by Mr. S. Kerzner,Chairman of the Company. 

 

**Note17—Employee Benefit Plans**

** **

Certain of the Company’ssubsidiaries participate in a defined contribution plan covering substantiallyall of their full-time employees.  TheCompany makes contributions to this plan based on a percentage of eligibleemployee contributions.  Total expensesfor this plan were $0.4 million, $0.3 million and $0.2 millionfor the years ended December 31, 2004, 2003 and 2002, respectively.  

 

In addition to the plandescribed above, union and certain other employees of Kerzner’s subsidiaries inThe Bahamas are covered by multi-employer defined benefit pension plans towhich employers make contributions.  Inconnection with these plans, the Company expensed contributions of $7.3 million,$7.0 million and $6.7 million for the years ended December 31,2004, 2003 and 2002, respectively.

 

In October 2002, theCompany established a deferred compensation plan (the “Deferred CompensationPlan”) for the purpose of allowing certain management of the Company to deferportions of their compensation and accumulate earnings on a tax-deferred basis.  The amount that is elected to be deferred iswithheld from the

 

F-42

----

 

employee’scompensation and remitted to the trustee of the Deferred CompensationPlan.  The trustee is responsible forutilizing such funds to purchase certain investments, which are held in a rabbitrust.

 

The compensation withheldfrom management, together with investment income on the Deferred CompensationPlan, is reflected as a deferred compensation obligation to participants and isclassified within other long-term liabilities in the accompanying consolidatedbalance sheet.  The related assets whichare held in the rabbi trust are classified within deferred charges and otherassets in the accompanying consolidated balance sheets and are reported at cashsurrender value with the resulting change in cash surrender value included inthe accompanying consolidated statements of operations.  At December 31, 2004 and 2003, thebalance of the liability and the corresponding asset totaled $4.0 millionand $1.8 million, respectively. During the years ended December 31, 2004 and 2003, the net changein the fair value of plan assets resulted in a charge to corporate expense of$0.1 million and $0.2 million, respectively.  During the years ended December 31, 2004and 2003, the Deferred Compensation Plan did not have a significant impact onour operating results.

 

**Note18—Restructuring Reversal**

** **

In 2001, the Company incurredrestructuring costs for severance payments made to employees who wereterminated due to lower occupancy levels at Atlantis, Paradise Islandsubsequent to the terrorist attacks on September 11th.  By the end of 2002, all amounts related tothe restructuring had been paid.  Theremaining balance of $1.0 million was reversed in 2002 as fewer employeeswere released and the amounts were settled for less than originally planned.

 

**Note 19—Investmentsin and Equity in Earnings (Losses) of Associated Companies**

** **

Components of investmentsin associated companies and equity in earnings (losses) of associated companieswere as follows:

 
| ** **                               | ** ** | **December 31,** | ** ** | **Ownership** | ** ** |
|------------------------------------------|------------|-----------------------|------------|---------------|------------|
| ** **                               | ** ** | **2004**              | ** ** | **2003**      | ** ** | **Interest** | ** ** |
|                                     |       |                  |       |          |       |   |   |
| BLB                                      |       | $                     | 38,273     |          | $          | — |   | 37.5 | % |
| Palmilla                                 |       | —                |       | 38,757        |       | 50.0 | % |
| Sun Resorts  Limited (Mauritius Resorts) |       | 26,323                |       | 23,598        |       | 20.4 | % |
| Kerzner  Istithmar                       |       | 21,440                |       | —        |       | 50.0 | % |
| Trading Cove  Associates                 |       | 14,908                |       | 14,427        |       | 50.0 | % |
| Harborside at  Atlantis                  |       | 9,044                 |       | 2,697         |       | 50.0 | % |
| Kanuhura                                 |       | 2,303                 |       | 1,864         |       | 20.0 | % |
| Trading Cove New  York                   |       | 1,809                 |       | 1,758         |       | 50.0 | % |
| Other                                    |       | 38                    |       | 51            |       | 50.0 | % |
|                                     |       | $                     | 114,138    |          | $          | 83,152 |   |   |   |

 

| ** **                                           | ** ** | **For the Year Ended December 31,** | ** ** |
|------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                           | ** ** | **2004**                                 | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                                 |       |                                     |       |   |   |   |   |
| Equity in  earnings (losses) of associated companies |       | $                                        | 7,455      |   | $ | (320 | ) | $ | (5,209 | ) |
| Relinquishment  fees-equity in earnings of TCA       |       | 35,909                                   |       | 33,960 |   | 30,041 |   |
|                                                      |            |                                          |            |  |  |  |  |  |  |  |

 

The Company’sproportionate share of earnings or losses from these entities is reflected inequity in earnings (losses) of associated companies in the accompanyingconsolidated statements of operations, except for equity earnings related toits investment in TCA, which are included in relinquishment fees – equity inearnings of TCA, after income from operations but before other income (expense),in the accompanying consolidated statements of operations.

 

F-43

----

 

In the normal course ofbusiness, the Company undertakes transactions with a number of unconsolidatedaffiliated companies.  See Note 16—RelatedParty Transactions for further discussion.

 

The following representssummarized financial information of Kerzner’s equity method investees(converted to U.S. dollars at the applicable exchange rate, where appropriate):

 

| ** **                                             | ** ** | **For the Year Ended December 31,** | ** ** |
|--------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                             | ** ** | **2004**                                 | ** ** | **2003** | ** ** | **2002** | ** ** |
| Revenues                                               |       | $                                        | 260,092    |   | $ | 240,198 |   | $ | 190,608 |   |
| Income from  operations                                |       | 117,789                                  |       | 89,485 |   | 62,643 |   |
| Income from  continuing operations before income taxes |       | 104,737                                  |       | 78,464 |   | 55,915 |   |
| Net income                                             |       | 101,254                                  |       | 71,590 |   | 50,250 |   |
|                                                        |            |                                          |            |  |  |  |  |  |  |  |

 

| ** **                 | ** ** | **As of December 31,** | ** ** |
|----------------------------|------------|-----------------------------|------------|
| ** **                 | ** ** | **2004**                    | ** ** | **2003** | ** ** |
| ** **                 | ** ** | ** **                  | ** ** | ** ** | ** ** |
| Current assets             |       | $                           | 81,625     |   | $ | 137,379 |   |
| Non-current  assets        |       | 568,917                     |       | 519,306 |   |
| Total assets               |       | 650,542                     |       | 656,685 |   |
| Current  liabilities       |       | 78,007                      |       | 117,042 |   |
| Non-current  liabilities   |       | 188,520                     |       | 281,312 |   |
| Shareholders’  equity |       | 384,015                     |       | 258,331 |   |
|                            |            |                             |            |  |  |  |  |

 

*BLB*

* *

Kerzner invested $47.4 millionin BLB during the first half of 2004 for its proportionate share of BLB’s 22.2%interest in Wembley and to fund BLB’s intended acquisition of all of Wembley’soutstanding shares.  We recognized a $3.0 millionequity loss in BLB, which included our share of failed transaction costs of $3.0 millionrelated to the intended acquisition of all of Wembley’s outstanding shares, our$1.0 million share of a hedge loss, offset by $1.0 million of ourshare of dividend income received by BLB from Wembley.  Also included in the investment in BLB is$8.9 million in unrealized loss related to a decline in the fair value ofWembley’s shares and $2.8 million in foreign currency translation gain.

 

*Palmilla*

* *

In connection with theconsolidation of Palmilla JV, LLC in accordance with FIN 46R, the relatedinvestment in associated company was eliminated effective January 1,2004.  During the year ended December 31,2003 and for the period from September 12, 2002 through December 31,2002, the Company recognized $4.8 million and $0.1 million,respectively, in equity losses.  Theequity loss for the year ended December 31, 2003 includes$4.3 million of Kerzner’s 50% share of the pre-opening expenses associatedwith the redevelopment of Palmilla. 

 

*Mauritius Resorts*

* *

The Company recognized$4.3 million, $2.3 million and $1.7 million of equity earningsfrom SRL during the years ended December 31, 2004, 2003 and 2002,respectively.  During the years ended December 31,2004, 2003 and 2002, the Company received dividends from SRL of $1.8 million,$1.5 million and $2.3 million, respectively. 

 

F-44

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*Kerzner Istithmar*

* *

As of December 31,2004, the Company had invested $21.8 million in Kerzner Istithmar.  As these funds were utilized by KerznerIstithmar during the construction of Atlantis, The Palm, $0.5 million of relatedcapitalized interest is included in the investment.  The investment has been reduced by $0.4 million,representing the portion of the development fee pertaining to our 50% ownershipinterest in Kerzner Istithmar.

 

*Trading Cove Associates*

* *

Through a wholly ownedsubsidiary, we own a 50% interest in TCA and are a managing partner along withWaterford.  TCA and the Mohegan Tribehave entered into the TCA Development Agreement and the RelinquishmentAgreement in connection with the Mohegan Sun. 

 

Relinquishment feesrepresent the Company’s share of the net earnings from TCA pursuant to theRelinquishment Agreement.  In accordancewith such agreement, TCA earns a fee equal to 5% of gross revenues, as definedin the Relinquishment Agreement, generated by Mohegan Sun during the 15-yearperiod commencing on January 1, 2000, including revenue generated byMohegan Sun’s 1998 expansion that was completed in 2002.  Revenues are defined in the RelinquishmentAgreement as gross gaming revenues (other than Class II gaming revenue,i.e., bingo) and all other facility revenues. Such revenue includes hotel revenues, food and beverage sales, parkingrevenues, ticket revenues and other fees or receipts from the convention/eventscenter in the Mohegan Sun expansion and all rental or other receipts fromlessees, licensees and concessionaires operating in the facility, but not thegross receipts of such lessees, licensees and concessionaires.  Such revenues exclude revenues generated byany future expansion of the Mohegan Sun. 

 

The Company’s equity inearnings from TCA totaled $35.9 million, $34.0 million and$30.0 million for the years ended December 31, 2004, 2003 and 2002,respectively.  Such amounts do not equal50% of the reported net income of TCA, primarily as a result of a prioritydistribution.  For seven years beginning January 1,2000, TCA pays us the first $5.0 million of the profits it receives eachyear (after the payment of certain expenses and the return of certain capitalcontributions) pursuant to the Relinquishment Agreement as a priority paymentprior to making pro rata distributions to its partners.  The Company received cash distributions of$35.4 million, $29.0 million and $29.3 million for the yearsended December 31, 2004, 2003, and 2002, respectively.

 

*Harborside at Atlantis*

* *

Harborside at Atlantisconstructs, sells and manages timeshare units on Paradise Island, The Bahamas.  Construction of the first phase of the timeshareunits was completed in February 2001 and sales of timeshare units began inMay 2000.  As of December 31, 2004,2003 and 2002, 98%, 89% and 64%, respectively, of the first phase of thetimeshare units were sold.  In 2004,sales of timeshare units began on the second phase of the Harborside atAtlantis development in connection with the Phase III expansion.  As of December 31, 2004, 13% of thesecond phase of timeshare units were sold. 

 

For the years ended December 31,2004, 2003 and 2002, the Company recognized $6.7 million, $3.3 million and$(5.2) million, respectively in equity earnings (losses) from Harborsideat Atlantis which includes $0.2 million, $1.8 million and$6.9 million, respectively, of charges which represent our share ofconstruction remediation costs that arose primarily from Hurricane Michellerelated damages incurred in November 2001. Included in equity in earnings (losses) are insurance recoveriesrealized by Harborside at Atlantis related to the settlement of the remediationclaims, our portion of which was $4.2 million and $1.5 million forthe years ended December 31, 2004 and 2003, respectively. 

 

*Kanuhura*

* *

For the years ended December 31,2004, 2003 and 2002, the Company recognized $0.4 million, ($0.1) millionand $0.7 million, respectively, in equity earnings (losses) from Kanuhura.

 

F-45

----

 

*Trading Cove New York*

* *

Through a wholly ownedsubsidiary, the Company owns a 50% interest in, and is a managing member of,TCNY, along with Waterford Development New York, LLC.  The Company increased its equity in losses ofTCNY by expensing certain costs that TCNY capitalized due to the Company’sevaluation of the uncertainty of the recoverability of such costs.

 

During the years ended December 31,2004, 2003 and 2002, the Company recognized $0.9 million, $1.1 million and$1.0 million, respectively, of equity losses in TCNY. 

 

**Note 20—Gainon Settlement of Territorial and Other Disputes**

** **

*Majority ShareholderReorganization*

* *

In July 2001, theCompany announced the restructuring of its then majority shareholder, SunInternational Investments Limited (“SIIL”), and the resolution of certainmatters, including a territorial dispute, with SIIL and certain of itsshareholders (collectively the “Reorganization”).  At the time of the Reorganization, SIIL andits shareholders beneficially owned approximately 67% of our issued andoutstanding Ordinary Shares.  SIIL wasitself owned in equal thirds by Sun International Limited (formerly KersafInvestments Limited) (“Kersaf”), Caledonia Investments PLC and World LeisureGroup Limited, a company controlled by a Kerzner family trust.  SIIL previously was governed by ashareholders’ agreement pursuant to which all major decisions of SIIL requiredthe unanimous consent of its shareholders. In connection with the Reorganization, among other things, SIIL wasdissolved and the shareholders’ agreement governing SIIL was terminated.  Accordingly, SIIL’s shareholders obtaineddirect ownership of their Ordinary Shares. In addition, SIIL’s shareholders agreed to certain standstill provisionsin effect through June 2006, pursuant to which each of them would refrainfrom proposing or consummating certain extraordinary corporate transactionsinvolving the Company, including any merger or the sale of substantially all ofour assets. 

 

Pursuant to aregistration rights and governance agreement executed in connection with theReorganization, Kerzner granted certain registration rights to SIIL’sshareholders in respect of the Ordinary Shares held by them, in part in orderto facilitate the required sale of at least 2,000,000 of Kersaf’s OrdinaryShares in a registered public offering, which requirement was satisfied on December 12,2002.  Kerzner agreed that, after atransition period not to exceed one year from June 30, 2001, it wouldcease, and it has ceased, using the names “Sun” and “Sun International.”  In connection with the Reorganization, Kersafagreed to pay Kerzner $15.5 million which was paid in full in 2001.  Of this amount, we recognized a$1.5 million net gain on the settlement of this territorial dispute duringthe year ended December 31, 2003. 

 

*Subsequent Disputes andSettlement with Kersaf Investments Limited*

* *

As part of theReorganization, the Company and Kersaf agreed to restructure certain agreementswhich included, among other things, an obligation for Kersaf to sell at least2,000,000 shares of the Company’s shares in a registered public offering,certain non-compete agreements, the continuation of an obligation of Kersaf topay Kerzner an annual payment of approximately $3.3 million (the “ContributionPayment”), and an agreement pursuant to which Kerzner was granted an interestin a proposed project in Port Ghalib, Egypt (the “Egypt Project”). In October 2001,the Company filed a lawsuit against Kersaf and certain related entities in NewYork alleging, among other things, that Kersaf had breached its non-competeobligation.  Kersaf and the Companyexecuted a settlement agreement that resolved all of these outstanding matterson November 1, 2002. 

 

According to thesettlement agreement, among other things, (i) Kersaf was obligated, and onDecember 18, 2002 satisfied this obligation, to sell at least 2,000,000shares in a registered public offering; (ii) Kersaf’s obligation to makethe Contribution Payment was terminated effective December 1, 2002 and;(iii) Kersaf paid us $32.1 million in December 2002.  Of this amount, $14.7 million and$18.0 million (which represents the future payments that were to bereceived over the original term of the underlying Mauritius managementcontracts) is classified as deferred revenue as of December 31, 2004 and2003, respectively.  The long-termportion of $11.2 million and $14.6 million as of December 31,2004 and 2003, respectively, is included within deferred revenue and thecurrent portion of $3.5 million

 

F-46

----

 

and$3.4 million is included in accounts payable and accrued liabilities inthe accompanying consolidated balance sheets. These amounts are being recognized as other revenues over the term ofthe original underlying Mauritius management contracts, which extended through December 2008.  The remaining amount of $9.4 million,net of $1.4 million of direct legal expenses, was recognized in the fourthquarter of 2002 as an additional gain on settlement of territorial and otherdisputes.  In exchange for thissettlement, we agreed to terminate all existing lawsuits related to Kersaf andhave released all parties from any related claims and we shall no longer haveany interest in the Egypt Project. 

 

**Note 21—Losson Early Extinguishment of Debt**

** **

During the year ended December 31,2004, the Company recognized a $1.7 million loss on early extinguishmentof debt related to the write-off of debt issuance costs associated with thePalmilla Senior Credit Facility, which was retired in December 2004 asdiscussed in Note 13 – Long-Term Debt.

 

The Company recognized a $20.5 millionloss on early extinguishment of debt during the year ended December 31,2002 in connection with the Company’s refinancing of its long-term debt.  Of this amount, $14.6 million related toour repurchase and redemption of the entire outstanding balance of$200 million principal amount of our 9% Senior Subordinated Notes during2002.  The remaining $5.9 millionrelated to the repurchase and redemption of our $100 million principalamount of 85/8% Senior Subordinated Notesduring 2002.  This loss consisted of thepremium paid on the repurchase and redemption of the notes, the non-cash chargeto write-off the balance of the related debt issuance costs, the remainingunamortized discount on the notes and other direct costs.  The applicable net income tax effect wasinsignificant. 

 

**Note22—Income Taxes**

** **

A significant portion of ouroperations are located in The Bahamas where there are no income taxes.  In 2004, 2003 and 2002, the income taxprovisions relating to U.S. and other non-Bahamian operations were as follows: 

 
| ** ** | ** ** | **For the Year Ended December 31,** | ** ** |
|------------|------------|------------------------------------------|------------|
| ** ** | ** ** | **2004**                                 | ** ** | **2003** | ** ** | **2002** | ** ** |
| Current:   |       |                                     |       |   |   |   |   |
| Federal    |       | $                                        | (854       | ) | $ | 7,917 |   | $ | 5,939 |   |
| State      |       | 3,424                                    |       | 3,393 |   | 2,341 |   |
| Foreign    |       | 1,353                                    |       | 584 |   | — |   |
|       |       | 3,923                                    |       | 11,894 |   | 8,280 |   |
| Deferred:  |       |                                     |       |   |   |   |   |
| Federal    |       | (3,499                                   | )          | (11,732 | ) | (8,184 | ) |
|       |       |                                     |       |   |   |   |   |
|       |       | $                                        | 424        |   | $ | 162 |   | $ | 96 |   |

 

F-47

----

 

The effective tax rate onincome varies from the statutory U.S. federal tax rate as a result of thefollowing factors: 

 
| ** **                                                                                         | ** ** | **For the Year Ended  December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                         | ** ** | **2004**                                  | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                                         | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Statutory U.S.  federal income tax rate                                                            |       | 35.0                                      | %          | 35.0 | % | 35.0 | % |
| Non-U.S.-source  income                                                                            |       | (28.4                                     | )          | (25.4 | ) | (37.0 | ) |
| State tax cost                                                                                     |       | 5.0                                       |       | 4.7 |   | 5.8 |   |
| NOLs,  extraordinary item and temporary differences which a valuation allowance has  been provided |       |                                      |       | — |   | 12.8 |   |
| Reduction of  valuation allowance relating to prior years’ operating loss utilized            |       | (5.1                                      | )          | (16.4 | ) | (20.4 | ) |
| Release of  accruals for tax uncertainties                                                         |       | (5.4                                      | )          | — |   | — |   |
| Other                                                                                              |       | (0.5                                      | )          | 2.3 |   | 4.0 |   |
|                                                                                               |       | 0.6%                                      |       | 0.2 | % | 0.2 | % |

 

Deferred income taxesreflect the net tax effects of temporary differences between the carryingamounts of assets and liabilities for financial reporting purposes and theamounts used for income tax purposes. 

 

The components of thedeferred tax assets and liabilities were as follows:

 

| ** **                                                            | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                            | ** ** | **2004**              | ** ** | **2003** | ** ** |
|                                                                  |       |                  |       |   |   |
| Non-current  deferred tax liabilities:                                |       |                  |       |   |   |
| Basis  difference-land held for sale                                  |       | $                     | 960        |   | $ | — |   |
| Basis  differences on property and equipment                          |       | 153                   |       | — |   |
| Total deferred  tax liabilities                                       |       | 1,113                 |       | — |   |
|                                                                  |       |                  |       |   |   |
| Non-current  deferred tax assets:                                     |       |                  |       |   |   |
| NOL  carryforwards                                                    |       | 140,694               |       | 183,629 |   |
| Basis  differences on property and equipment                          |       | —                |       | 527 |   |
| Basis  differences on land held for investment, development or resale |       | 8,169                 |       | 3,961 |   |
| Book accruals  not yet deductible for tax return purposes             |       | 3,041                 |       | 2,954 |   |
| Tax credit  carryforwards                                             |       | 3,240                 |       | 3,216 |   |
| Other                                                                 |       | 5,591                 |       | 4,998 |   |
| Total deferred  tax assets                                            |       | 160,735               |       | 199,285 |   |
| Valuation  allowance for deferred tax assets                          |       | (148,441              | )          | (188,812 | ) |
| Deferred tax  assets, net of valuation allowance                      |       | 12,294                |       | 10,473 |   |
| Non-current net  deferred tax assets:                                 |       | $                     | 11,181     |   | $ | 10,473 |   |

 

Realization of future taxbenefits related to deferred tax assets is dependent on many factors, includingour ability to generate future taxable income. The valuation allowance is adjusted in the period we determine it ismore likely than not that deferred tax assets will or will not be realized.  We considered these factors in reaching ourconclusion to reduce the valuation allowance by $40.4 million, $40.6 millionand $2.6 million during 2004, 2003 and 2002, respectively.  Of this reduction, $3.5 million,$11.7 million and $8.2 million represent amounts released as incometax benefit, and accordingly, reduced our provision for income taxes for theyears ended December 31,

 

F-48

----

 

2004,2003 and 2002, respectively.  Theremaining reduction to the valuation allowance resulted primarily from the taxeffected expiration of net operating loss (“NOL”) carryforwards.

 

For federal income taxpurposes, Kerzner International North America, Inc. (“KINA”), one of ourwholly owned subsidiaries, had NOL carryforwards of approximately $402.0 millionat December 31, 2004, of which $255.1 million are unrestricted as touse.  However, due to the change ofownership of KINA in 1996, $146.9 million of these NOL carryforwards (the “Pre-ChangeNOLs”) are limited in their availability to offset our future taxable income.  As a result of these limitations,approximately $11.3 million of Pre-Change NOLs will become available foruse each year through the year 2008, with an additional $7.6 millionbecoming available in 2009.  Theremaining Pre-Change NOLs are expected to expire unutilized, including the $93.3 millionof Pre-Change NOLs that expired in 2004. 

 

Our restricted NOLcarryforwards expire as follows: $33.3 million in 2005 and $19.4 millionin 2006.  Our unrestricted NOLs expire asfollows: $4.1 million in 2006, $30.6 million in 2007, $56.5 millionin 2008, $8.0 million in 2011, $57.0 million in 2012, $32.3 millionin 2019, $17.7 million in 2020 and $48.9 million in 2021. 

 

From time to time, we maybe subject to audits covering a variety of tax matters by taxing authorities inany taxing jurisdiction where we conduct our business.  While we believe that the tax returns we fileand any tax positions we take are supportable and accurate, some taxauthorities may not agree with our positions. This can give rise to tax uncertainties which, upon audit, may not beresolved in our favor.  We haveestablished accruals for various tax uncertainties that we believe are probableand reasonably estimable.  These accrualsare based on certain assumptions, estimates and judgments, including estimatesof probability, estimates of amounts for settlements, associated interest andpenalties.  Changes to these assumptions,estimates and judgments could have a material impact on our provision forincome taxes.  For the year ended December 31,2004, we reduced our tax accruals by $3.7 million as a result of theexpiration of certain statutes of limitation. This resulted in a reduction to our provision for income taxes by thesame amount.  As of December 31,2004, we have an income tax accrual of $4.8 million related to certain taxpositions which might be challenged by tax authorities.  If challenged, the amount of taxes, penaltiesand interest which could be assessed by taxing authorities may differ from theamount that has been accrued.

 

**Note23—Commitments and Contingencies**

** **

*Lease Obligations*

* *

We lease office space innumerous locations throughout the United States and Europe for sales andmarketing, public relations, tour operations and travel reservation servicesand other administrative services.  Theseoffices support our operations throughout the world.  In addition, we have obligations undercertain operating leases related to equipment acquired for our operations.

 

Future minimum leaseobligations under various non-cancelable operating leases with terms in excessof one year at December 31, 2004 are as follows: 

 

| **Year Ending December 31,** |   |   |   |   |
|-----------------------------------|--------|--------|--------|--------|
| 2005                              |   | $      | 3,090  |   |
| 2006                              |   | 2,707  |   |
| 2007                              |   | 2,297  |   |
| 2008                              |   | 1,875  |   |
| 2009                              |   | 1,953  |   |
| Thereafter                        |   | 16,834 |   |
|                              |   |   |   |
|                              |   | $      | 28,756 |   |

 

F-49

----

 

*Casino License*

* *

The operations of casinosin The Bahamas are subject to regulatory controls.  The operator must obtain a casino license andthe license must be periodically renewed and is subject to revocation at anytime. 

 

*Heads of Agreement*

* *

We have an agreement withthe Bahamian Government, which is titled Heads of Agreement.  This agreement provides us with certain taxincentives in exchange for the Company investing in the expansion of Atlantis,Paradise Island.  The most significant ofthese incentives are the casino fee and tax incentives.

 

We restated our agreementwith the Bahamian Government on May 26, 2003, in anticipation of the Phase IIIexpansion on Paradise Island.  Suchagreement was supplemented in both May and December 2004.  The restated Heads of Agreement, assupplemented, maintains the current basic casino tax and fee structure whichcalls for an annual license fee of $100,000 per thousand square feet of casinospace, a minimum annual casino tax of $4.3 million on all gaming win up to$20.0 million, a 12.5% win tax on gaming win between $20.0 million and $120.0million and a 10% win tax on gaming win in excess of $120.0 million.  The Company is entitled to a credit of $5.0million in relation to the annual license fee and a 45% credit against all wintax on gaming win between $20.0 million and $120.0 million. 

 

With the commencement ofconstruction of the Phase III expansion as discussed in Note 1—Organizationand Basis of Presentation, the basic tax and fee structure was amended so thatall gaming win in excess of $20.0 million is subject to a win tax of 10%,and is effective for a period of 20 years after the earlier of the date ofthe substantial completion of the Phase III expansion and December 31,2007.  In addition, the $5.0 millioncredit against the annual license fee shall remain, and the credit against wintax shall become 50% against all win tax on gaming win over $20.0 million.  These credits shall also apply from thecommencement of construction of the Phase III expansion and shall expireat the end of 2024.

 

In order to secure thetax incentives described in the preceding paragraph, we were obligated tocommence construction on certain aspects of the Phase III expansion by December 31,2003, commence construction on certain other aspects of the Phase III expansionby June 30, 2004, and notify the Bahamian Government.  If we do not proceed with the condo-hotel andthe Athol Golf Course, casino tax concessions and the joint marketingcontribution from the Government will be reduced beginning in 2009 in accordancewith a schedule contained in the Heads of Agreement.

 

The Heads of Agreementalso provides for an extension of our joint marketing agreement with theBahamian Government pursuant to which the Bahamian Government agreed to matchour contribution, up to $4.0 million annually, toward the direct costs relatedto staging certain marketing events, public relations activities and theproduction and placement of advertisements in all media to promote thedestination and our Paradise Island properties, including the Phase IIIexpansion.  This joint marketingagreement will expire on December 31, 2010.

 

Pursuant to the Heads ofAgreement, the Company is obligated to contribute $5.0 million to benefitcommunity programs in The Bahamas as designated by the Bahamian Government.  This obligation is included in capitalcreditors in the accompanying consolidated balance sheet as of December 31,2004.

 

*Guarantees*

* *

In connection with thePalmilla operating agreement, the Company agreed that in the event thatPalmilla obtained third-party debt financing for its planned redevelopment, theCompany would guarantee certain amounts of such financing.  The purpose ofthese guarantees was to assist Palmilla in obtaining financing for itsredevelopment on commercially reasonable terms.  As discussed in Note13—Long-Term Debt, in August 2003, Palmilla secured the Palmilla SeniorCredit Facility in the amount of $88.5 million, of which Kerznerguaranteed $46.5 million.  In 2003, the Company recorded the fairvalue of these guarantees in accordance with the provisions of FIN 45.  As

 

F-50

----

 

previouslydescribed, the Company was released from these guarantees in 2004 as a resultof the Palmilla refinancing.

 

In recording the $2.8 millionfair value of the Palmilla guarantee in 2003, we estimated the premium thatwould be required by a third party to issue the same guarantee in a stand-alonearm’s length transaction with an unrelated party.  We estimated the fair value by calculatingthe net present value of the difference in cash flows of interest paymentsbetween the estimated interest amounts payable without the guarantee and thecash flows of those same interest payments with the guarantee.  The difference between these two amountsequaled $2.8 million representing the estimated fair value of theguarantee.  The components of thecalculation include the amount guaranteed, the estimated interest rate of thecredit facility without the guarantee, the interest rate of the facility withthe guarantee, the discount rate for the net present value calculation and theestimated term of the guarantee to arrive at the approximate cash flows undereach scenario.  Upon consolidation of theresults of Palmilla JV, LLC in 2004, we have eliminated the fair value of theguarantee.

 

In connection with theCompany’s purchase of a 25% initial equity interest in Kanuhura, the Companywas required to guarantee certain obligations, totaling $10.7 million toits other shareholders.  The Company is not obligated under theseguarantees unless the property’s senior bank debt agreement prevents availablecash flow from being distributed to the shareholders, nor until Kanuhura repayscertain senior debt owed.  As of December 31,2004, the amount of senior debt owed was $2.4 million, excluding accruedinterest.  The Company’s obligationsunder these guarantees expire when the underlying obligations are repaid. Upon having to satisfy these guarantees, the Company would be deemed to havemade a loan to the Kanuhura on the same terms of the underlying note that wassatisfied.  As these guarantees wereissued in July 2001 and we did not modify these guarantees after December 31,2002, no amount has been recorded for the fair value of these guarantees.

 

*Commitment with ReethiRah*

* *

At December 31,2004, Reethi Rah Resort Pvt. Limited, the owner of Reethi Rah, had outstandingindebtedness which included $54.4 million principal amount of unsecuredsubordinated loans advanced by Kerzner. The Company will fund or arrange for funding for any additionaldevelopment costs to complete the construction of the resort.

 

*Atlantis, The PalmCommitment*

* *

In September 2003,the Company entered into agreements to form a joint venture with Nakheel inDubai to develop Atlantis, The Palm.  The first phase of the project willinclude a resort and an extensive water theme park situated on beachfrontproperty.  Atlantis, The Palm will be located on The Palm, Jumeirah, aland reclamation project in Dubai.  On June 23, 2004, the Companyannounced that it had entered into an agreement with Istithmar which assumedall obligations and rights of its affiliate, Nakheel, pursuant to which thescope of Atlantis, The Palm was increased.  The Company and Istithmar haveeach agreed to invest $100.0 million in the form of Class A common stock in thejoint venture and Istithmar has agreed to underwrite $200.0 million of thejoint venture’s limited voting Class B common stock.  As part of thetransaction, Kerzner has entered into a development services agreement and along-term management agreement with the joint venture company.  In addition, each of Istithmar and Kerznerwill provide, on a joint and several basis, additional sponsor support of up to$55.0 million with respect to cost overruns and post-completion debt serviceobligations.

 

*Executive and EmployeeBonus Plans*

* *

We have a bonus planwhereby our employees, including officers, will qualify for bonuses if weattain certain levels of earnings and such bonuses are calculated as apercentage of each individual’s salary.  Suchpercentage is based on, among other things, each employee’s level of responsibility.  Bonuses paid to our officers under this bonusplan could reach a maximum of 100% of the respective employee’s base salary.  Bonuses ranging from 4% to 62% were grantedin 2004 to our officers and employees.  Thecompensation expense related to this bonus plan amounted to $13.5 million,$13.8 million and $17.0 million for the years ended December 31,2004, 2003 and 2002, respectively. 

 

F-51

----

 

*Litigation, Claims andAssessments*

* *

The Company is involvedin certain litigation and claims incidental to its business.  Managementdoes not believe, based on currently available information, that these matterswill have a material adverse effect on the accompanying consolidated financialstatements.

 

**Note 24—SegmentInformation**

** **

The Company develops andoperates premier resort casinos and other properties throughout the world andmanages its business in three segments: Destination Resorts, Gaming andOne&Only Resorts.  Management expectsthat the Company’s future growth will further define and reinforce thesesegments.

 

The Destination Resortssegment, our largest segment from a revenue, net income and total assets basis,includes the Company’s flagship property, Atlantis, Paradise Island, its touroperator which supports Atlantis, Paradise Island, PIV, Inc., and its 50%investment in Harborside at Atlantis.  For2004, the Destination Resorts segment also includes Atlantis, The Palm andcosts associated with the development of a destination resort casino located inMorocco.  The Gaming segment consists ofthe relinquishment and development fee income from Mohegan Sun in Uncasville,Connecticut, costs associated with the potential development of casino andresort facilities in the United Kingdom at the Millennium Dome, Northampton,Glasgow and Manchester, our equity investment, through BLB, in Wembley and ourequity investment in TCNY.  TheOne&Only Resorts segment is comprised of Kerzner’s luxury resort hotelbusinesses which consist of premier properties that primarily operate in thefive-star deluxe end of the resort market. The One&Only Resorts segment includes resorts located in TheBahamas, Mexico, Mauritius, the Maldives and Dubai.  We have also entered into agreements todevelop and manage a second property in the Maldives and a property on theVictoria & Alfred Waterfront in Cape Town, South Africa, both of which weexpect will be operated under the One&Only brand.  As each segment operates in variousgeographic areas, they are delineated within the tables that follow.

 

The Company evaluates theperformance of its segments based primarily on their contribution to netincome, which is their respective revenues generated after direct operatingcosts, and depreciation and amortization attributable to each segment.  Corporate expenses, interest income andexpense, income taxes and other income and expenses are not allocated to thesegments but are separately evaluated.  Theaccounting policies of these reportable segments are the same as thosedisclosed in Note 2-Summary of Significant Accounting Policies.  The following tables are an analysis of netrevenues, contribution to net income and total assets, depreciation andamortization and capital additions by segment:

 

F-52

----

 

**NetRevenues**

 
| ** **                   | ** ** | **For The Year Ended December 31,** | ** ** |
|------------------------------|------------|------------------------------------------|------------|
| ** **                   | ** ** | **2004**                                 | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                   | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Destination  Resorts:        | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Atlantis,  Paradise Island   |       | $                                        | 474,611    |   | $ | 463,276 |   | $ | 453,834 |   |
| Tour operations              |       | 26,564                                   |       | 28,875 |   | 29,026 |   |
| Harborside at  Atlantis fees |       | 2,826                                    |       | 1,847 |   | 1,579 |   |
|                         |       | 504,001                                  |       | 493,998 |   | 484,439 |   |
| Atlantis, The  Palm fees     |       | 380                                      |       | — |   | — |   |
|                         |       | 504,381                                  |       | 493,998 |   | 484,439 |   |
| Gaming:                      |       |                                     |       |   |   |   |   |
| Connecticut (2)              |       | 935                                      |       | 1,755 |   | 1,326 |   |
|                         |       |                                     |       |   |   |   |   |
| One&Only  Resorts:       |       |                                     |       |   |   |   |   |
| Ocean Club                   |       | 37,731                                   |       | 34,186 |   | 31,200 |   |
| Palmilla (3)                 |       | 37,875                                   |       | 1,481 |   | 128 |   |
| Other resorts (4)            |       | 15,753                                   |       | 10,094 |   | 8,689 |   |
| Tour operations              |       | 20,551                                   |       | 11,915 |   | 12,037 |   |
|                         |       | 111,910                                  |       | 57,676 |   | 52,054 | ** ** |
|                         |       |                                     |       |   |   |   |   |
| Other (5)                    |       | 3,859                                    |       | 5,084 |   | 4,443 |   |
| Net revenues                 |       | $                                        | 621,085    |   | $ | 558,513 |   | $ | 542,262 |   |

 

----

(1)          Consists of revenue from Atlantis, Paradise Island, the Ocean Club GolfCourse, the Company’s wholly owned tour operator, PIV, Inc., and marketing anddevelopment fee income from our interest in Harborside at Atlantis.

 

(2)          Consists of development and other fees related to Mohegan Sun.Relinquishment fees – equity in earnings of TCA related to our Gaming segmentare included as a separate component outside of income from operations in theaccompanying consolidated statements of operations.

 

(3)          Consists of revenue from Palmilla in connection with the consolidationof Palmilla JV, LLC for the year ended December 31, 2004 as a result ofFIN 46R.  Revenues for the years ended December 31,2003 and 2002 represent management and development fees related to Palmilla.

 

(4)          Includes management, marketing and development fees from theOne&Only Resorts properties located in Mauritius, Dubai and the Maldives.

 

(5)          Includes revenue not directly attributable to Destination Resorts, Gamingor One&Only Resorts.

 

F-53

----

 

**Contribution to Net Income**

 
| ** **                                                     | ** ** | **For The Year Ended December 31,** | ** ** |
|----------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                     | ** ** | **2004**                                 | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                     | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Destination  Resorts:                                          | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Atlantis,  Paradise Island                                     |       | $                                        | 86,951     |   | $ | 83,523 |   | $ | 76,909 |   |
| Tour operations                                                |       | 5,885                                    |       | 5.089 |   | 4,239 |   |
| Harborside at  Atlantis (1)                                    |       | 9,477                                    |       | 5,176 |   | (3,634 | ) |
|                                                           |       | 102,313                                  |       | 93,788 |   | 77,514 | ** ** |
| Atlantis, The  Palm                                            |       | 346                                      |       | — |   | — |   |
|                                                           |       | 102,659                                  |       | 93,788 |   | 77,514 | ** ** |
| ** **                                                     | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Gaming:                                                        |       |                                     |       |   |   |   |   |
| Connecticut (2)                                                |       | 36,843                                   |       | 35,715 |   | 31,367 |   |
| United Kingdom                                                 |       | (2,182                                   | )          | (329 | ) | — |   |
| Other (3)                                                      |       | (4,357                                   | )          | (1,086 | ) | (931 | ) |
|                                                           |       | 30,304                                   |       | 34,300 |   | 30,436 |   |
| One&Only  Resorts:                                         |       |                                     |       |   |   |   |   |
| Ocean Club                                                     |       | 3,644                                    |       | 4,720 |   | 3,999 |   |
| Palmilla (4)                                                   |       | (1,831                                   | )          | (3,013 | ) | (17 | ) |
| Other resorts  (5)                                             |       | 14,236                                   |       | 8,498 |   | 8,689 |   |
| Direct expenses  (5)                                           |       | (15,919                                  | )          | (12,187 | ) | (8,061 | ) |
| Other (6)                                                      |       | 4,737                                    |       | 2,242 |   | 1,079 |   |
|                                                           |       | 4,867                                    |       | 260 |   | 5,689 | ** ** |
| ** **                                                     | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| General  corporate                                             |       | (34,489                                  | )          | (32,842 | ) | (25,188 | ) |
| Impairment of  Atlantic City land                              |       | (7,303                                   | )          | — |   | — |   |
| Restructuring  reversal                                        |       | —                                   |       | — |   | 1,000 |   |
| Interest income                                                |       | 4,722                                    |       | 3,394 |   | 3,419 |   |
| Interest  expense, net of capitalization                       |       | (36,814                                  | )          | (29,264 | ) | (39,104 | ) |
| Gain on  settlement of territorial and other disputes          |       | —                                   |       | 1,479 |   | 14,459 |   |
| Early  extinguishment of debt, net of income tax effect        |       | (1,655                                   | )          | — |   | (20,525 | ) |
| Other, net                                                     |       | 1,358                                    |       | (686 | ) | 60 |   |
| Provision for  income taxes                                    |       | (424                                     | )          | (162 | ) | (96 | ) |
| Palmilla  minority interest (7)                                |       | 4,907                                    |       | — |   | — |   |
| Income (loss)  from discontinued operations, net of income tax |       | —                                   |       | 1,305 |   | (8,061 | ) |
| Net income                                                     |       | $                                        | 68,132     |   | $ | 71,572 |   | $ | 39,603 |   |

 

----

(1)          Consists of equity in earnings, marketing, development and other feesrelated to Harborside at Atlantis.

 

(2)          Consists of relinquishment fees – equity in earnings of TCA anddevelopment and other fees related to Mohegan Sun.

 

(3)          Consists of equity in losses of BLB and TCNY and direct expenses forthe gaming segment.

 

(4)          Consists of earnings before interest and taxes, net of minorityinterest related to Palmilla for the year ended December 31, 2004.  Results for the years ended December 31,2003 and 2002 include management, development and other fees and the Company’sshare of net loss from Palmilla prior to the Company’s adoption of FIN 46R.

 

(5)          Consists of management, marketing, development and other fees, net ofminority interest and direct expenses related to the One&Only Resortsbusinesses located in Mauritius,  Dubaiand the Maldives. 

 

F-54

----

 

(6)          Consists of equity in earnings of SRL and Kanuhura.  

 

(7)          Consists of minority interest related to the portion of Palmilla’s losson early extinguishment of debt, interest expense and taxes, which is notallocated to the One&Only Resorts segment.

 

**Total Assets, Depreciation andAmortization and Capital Additions**

 
| ** **                    | ** ** | **As of December 31, 2004** | ** ** | **Year Ended December 31, 2004** | ** ** |
|-------------------------------|------------|----------------------------------|------------|---------------------------------------|------------|
| ** **                    | ** ** | **Total  Assets**                | ** ** | **Depreciation and  Amortization**    | ** ** | **Capital  Additions(4)** | ** ** |
| Destination  Resorts:         |       |                             |       |                                  |       |   |   |
| Atlantis,  Paradise Island(1) |       | $                                | 1,176,264  |                                  | $          | 48,242 |   | $ | 104,081 |   |
| Atlantis, The  Palm           |       | 21,440                           |       | —                                |       | — |   |
|                          |       | 1,197,704                        |       | 48,242                                |       | 104,081 |   |
| Gaming:                       |       |                             |       |                                  |       |   |   |
| Connecticut(2)                |       | 15,141                           |       | —                                |       | — |   |
| United Kingdom                |       | 12,069                           |       | —                                |       | 5,689 |   |
| Other(2)                      |       | 38,274                           |       | —                                |       | — |   |
|                          |       | 65,484                           |       | —                                |       | 5,689 |   |
| One&Only                  |       |                             |       |                                  |       |   |   |
| Ocean Club                    |       | 79,675                           |       | 5,051                                 |       | 21,957 |   |
| Palmilla                      |       | 156,848                          |       | 4,385                                 |       | 17,909 |   |
| Other Resorts(3)              |       | 52,715                           |       | 361                                   |       | 374 |   |
|                          |       | 289,238                          |       | 9,797                                 |       | 40,240 |   |
|                          |       |                             |       |                                  |       |   |   |
| General  corporate(5)         |       | 534,849                          |       | 909                                   |       | 265 |   |
|                          |       | $                                | 2,087,275  |                                  | $          | 58,948 |   | $ | 150,275 |   |

 

----

(1)          Includes assets from Atlantis, Paradise Island, the Company’s whollyowned tour operator, PIV, Inc., the Ocean Club Golf Course and our investmentin Harborside at Atlantis.

 

(2)          Connecticut includes our investment in TCA and other includes ourinvestments in BLB and TCNY.

 

(3)          Includes the Company’s investments in SRL and Kanuhura.

 

(4)          Capital additions for the year ended December 31, 2004 includepayments for property and equipment of $119.4 million and acquisition ofassets from Club Méditerranée (Bahamas) Limited of $30.9 million.

 

(5)          General corporate includes $203.9 million of short-term investments and$180.3 million of cash and cash equivalents.

 

F-55

----

 
| ** **                     | ** ** | **As of December 31, 2003** | ** ** | **Year Ended December 31, 2003** | ** ** |
|--------------------------------|------------|----------------------------------|------------|---------------------------------------|------------|
| ** **                     | ** ** | **Total  Assets**                | ** ** | **Depreciation and  Amortization**    | ** ** | **Capital  Additions(4)** | ** ** |
| Destination  Resorts:          |       |                             |       |                                  |       |   |   |
| Atlantis,  Paradise Island(1)  |       | $                                | 1,129,988  |                                  | $          | 50,996 |   | $ | 66,756 |   |
|                           |       |                             |       |                                  |       |   |   |
| Gaming:                        |       |                             |       |                                  |       |   |   |
| Connecticut(2)                 |       | 14,654                           |       | —                                |       | — |   |
| United Kingdom                 |       | 1,748                            |       | 1                                     |       | 2,276 |   |
|                           |       | 16,402                           |       | 1                                     |       | 2,276 |   |
| One&Only                   |       |                             |       |                                  |       |   |   |
| One&Only  Ocean Club       |       | 63,009                           |       | 3,678                                 |       | 802 |   |
| One&Only  Other Resorts(3) |       | 81,077                           |       | 247                                   |       | 476 |   |
|                           |       | 144,086                          |       | 3,925                                 |       | 1,278 |   |
|                           |       |                             |       |                                  |       |   |   |
| General  corporate             |       | 165,452                          |       | 860                                   |       | 588 |   |
|                           |       | $                                | 1,455,928  |                                  | $          | 55,782 |   | $ | 70,898 |   |

 

----

(1)          Includes assets from Atlantis, Paradise Island, the Company’s whollyowned tour operator, PIV, Inc., the Ocean Club Golf Course and the Company’sinvestment in Harborside at Atlantis.

 

(2)          Connecticut includes our investment in TCA.

 

(3)          Includes the Company’s investments in associated companies related tothe One&Only Resort businesses located in Mexico, Mauritius and theMaldives. 

 

(4)          Capital additions for the year ended December 31, 2003 are net of$6.9 million of insurance proceeds received for damaged assets Atlantis,Paradise Island related to Hurricane Michelle.

 
| ** **                      | ** ** | **Year Ended December 31, 2002** | ** ** |
|---------------------------------|------------|---------------------------------------|------------|
| ** **                      | ** ** | **Depreciation  and  Amortization**   | ** ** | **Capital  Additions** | ** ** |
| Destination  Resorts:           |       |                                  |       |   |   |
| Atlantis,  Paradise Island (1)  |       | $                                     | 50,709     |   | $ | 37,729 |   |
|                            |       |                                  |       |   |   |
| Gaming:                         |       |                                  |       |   |   |
| Connecticut (2)                 |       | —                                |       | — |   |
| United Kingdom                  |       | —                                |       | — |   |
|                            |       | —                                |       | — |   |
| One&Only  Resorts           |       |                                  |       |   |   |
| One&Only  Ocean Club        |       | 3,951                                 |       | 596 |   |
| One&Only  Other Resorts (3) |       | 69                                    |       | 721 |   |
|                            |       | 4,020                                 |       | 1,317 |   |
|                            |       |                                  |       |   |   |
| General  Corporate              |       | 757                                   |       | 478 |   |
|                            |       | $                                     | 55,486     |   | $ | 39,524 |   |

 

----

(1)          Includes assets from Atlantis, Paradise Island, the Company’s whollyowned tour operator, PIV, Inc., the Ocean Club Golf Course and the Company’sinvestment in Harborside at Atlantis.

 

F-56

----

 

(2)          Connecticut includes our investment in TCA.

 

(3)          Includes the Company’s investments in associated companies related tothe One&Only Resort businesses located in Mexico, Mauritius and theMaldives.

 

**Note 25—FairValue of Financial Instruments**

** **

The fair value of afinancial instrument represents the amount at which the instrument could beexchanged in a current transaction between willing parties, other than in aforced sale or liquidation.  Fair valueestimates are made at a specific point in time, based on relevant marketinformation about the financial instrument. These estimates are subjective in nature and involve uncertainties andmatters of significant judgment and therefore cannot be determined withprecision.  The assumptions used have asignificant effect on the estimated amounts reported. 

 

The Company used thefollowing methods and assumptions in estimating fair value disclosures forfinancial instruments: (a) cash and cash equivalents, restricted cash,short-term investments, trade receivables, other current assets, accountspayable, accrued liabilities and variable rate debt: the amounts reported inthe accompanying consolidated balance sheets approximate fair value due to thenature and short-term maturities of such assets and liabilities;(b) fixed-rate debt: fixed rate debt is valued based upon published marketquotations, as applicable (the fair value of our fixed rate debt at December 31,2004 was approximately $731.8 million as compared to its carrying value of$643.4 million and the fair value of our fixed rate debt at December 31,2003 was approximately $443.9 million as compared to its carrying value of$417.1 million); and (c) swap and cap agreements: the fair value ofits swap and cap agreements was determined from the representations offinancial institutions. The fair value of the Company’s swap agreements at December 31,2004 and 2003 equal their carrying value of $8.7 million and$11.8 million, respectively, and the fair value of Palmilla’s capagreement at December 31, 2004 was $0.1 million.  These amounts are included in deferredcharges and other assets in the accompanying consolidated balance sheets. 

 

**Note26—Supplemental Condensed Consolidating Financial Information**

** **

Our 87/8% Senior Subordinated Notes wereco-issued by the Company and one of its wholly owned subsidiaries, KINA.  The 87/8%Senior Subordinated Notes are guaranteed by substantially all of our whollyowned subsidiaries (the “Subsidiary Guarantors”) and are jointly and severallyirrevocably and unconditionally guaranteed. The following supplemental financial information sets forth condensedconsolidated balance sheets, statements of operations and statements of cashflows for each of the co-issuers of the 87/8%Senior Subordinated Notes, Kerzner and KINA, and, on a combined basis, for theSubsidiary Guarantors and non-guarantor subsidiaries.

 

F-57

----

 

**Condensed Consolidating BalanceSheet at December 31, 2004**

 
| ** **                                      | ** ** | **Kerzner** | ** ** | **KINA** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------|------------|-------------|------------|----------|------------|-----------------------------|------------|----------------------------------|------------|------------------|------------|------------------|------------|
| **ASSETS**                                      |       |        |       |     |       |                        |       |                             |       |             |       |             |       |
| Current assets:                                 |       |        |       |     |       |                        |       |                             |       |             |       |             |       |
| Cash and cash equivalents                       |       | $           | 840        |     | $          | 3,836                       |       | $                                | 172,555    |             | $          | 3,110            |       | $ | — |   | $ | 180,341 |   |
| Restricted cash                                 |       | —      |       | —   |       | 445                         |       | 2,323                            |       | —           |       | 2,768            |       |
| Short-term investments                          |       | —      |       | —   |       | 203,940                     |       | —                           |       | —           |       | 203,940          |       |
| Trade receivables, net                          |       | 43          |       | 622      |       | 42,225                      |       | 1,796                            |       | (2,943           | )          | 41,743           |       |
| Due from affiliates                             |       | 659,668     |       | 20,553   |       | (665,026                    | )          | 7,268                            |       | (6,781           | )          | 15,682           |       |
| Inventories                                     |       | —      |       | —   |       | 10,867                      |       | 2,586                            |       | —           |       | 13,453           |       |
| Assets held for sale                            |       | —      |       | 5,416    |       | 6,873                       |       | —                           |       | —           |       | 12,289           |       |
| Prepaid expenses and other assets               |       | 173         |       | 66       |       | 25,229                      |       | 1,791                            |       | (5,574           | )          | 21,685           |       |
| Total current assets                            |       | 660,724     |       | 30,493   |       | (202,892                    | )          | 18,874                           |       | (15,298          | )          | 491,901          |       |
|                                            |       |        |       |     |       |                        |       |                             |       |             |       |             |       |
| Property and equipment, net                     |       | —      |       | 40,064   |       | 1,140,840                   |       | 142,198                          |       | 24,538           |       | 1,347,640        |       |
| Due from affiliates - non-current               |       | 58,035      |       | 200,000  |       | (176,235                    | )          | —                           |       | (63              | )          | 81,737           |       |
| Deferred tax asset, net                         |       | —      |       | 11,181   |       | —                      |       | —                           |       | —           |       | 11,181           |       |
| Deferred charges and other assets, net          |       | 13,050      |       | 10,549   |       | 11,624                      |       | 4,032                            |       | 1,423            |       | 40,678           |       |
| Investment in subsidiaries                      |       | 631,933     |       | 10       |       | —                      |       | —                           |       | (631,943         | )          | —           |       |
| Investments in associated companies             |       | 2,302       |       | —   |       | 112,519                     |       | —                           |       | (683             | )          | 114,138          |       |
| Total assets                                    |       | $           | 1,366,044  |     | $          | 292,297                     |       | $                                | 885,856    |             | $          | 165,104          |       | $ | (622,026 | ) | $ | 2,087,275 |   |
|                                            |       |        |       |     |       |                        |       |                             |       |             |       |             |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**  |       |        |       |     |       |                        |       |                             |       |             |       |             |       |
|                                            |       |        |       |     |       |                        |       |                             |       |             |       |             |       |
| Current liabilities:                            |       |        |       |     |       |                        |       |                             |       |             |       |             |       |
| Current maturities of long-term debt            |       | $           | —     |     | $          | —                      |       | $                                | 495        |             | $          | 164              |       | $ | — |   | $ | 659 |   |
| Accounts payable and accrued liabilities        |       | 7,139       |       | 20,634   |       | 139,704                     |       | 12,795                           |       | (11,547          | )          | 168,725          |       |
| Due to affiliates - current                     |       | —      |       | —   |       | 2,252                       |       | 1,021                            |       | (3,273           | )          | —           |       |
| Capital creditors                               |       | —      |       | —   |       | 15,536                      |       | 496                              |       | —           |       | 16,032           |       |
| Total current liabilities                       |       | 7,139       |       | 20,634   |       | 157,987                     |       | 14,476                           |       | (14,820          | )          | 185,416          |       |
|                                            |       |        |       |     |       |                        |       |                             |       |             |       |             |       |
| Deferred revenue                                |       | —      |       | 412      |       | 16,381                      |       | 3,626                            |       | —           |       | 20,419           |       |
| Other long-term liabilities                     |       | —      |       | 3,973    |       | 3,178                       |       | 52                               |       | (104             | )          | 7,099            |       |
| Long-term debt, net of current maturities       |       | 238,693     |       | 404,734  |       | 361                         |       | 110,341                          |       | —           |       | 754,129          |       |
| Total liabilities                               |       | 245,832     |       | 429,753  |       | 177,907                     |       | 128,495                          |       | (14,924          | )          | 967,063          |       |
|                                            |       |        |       |     |       |                        |       |                             |       |             |       |             |       |
| Minority interest                               |       | 3,934       |       | —   |       | —                      |       | —                           |       | —           |       | 3,934            |       |
|                                            |       |        |       |     |       |                        |       |                             |       |             |       |             |       |
| Shareholders’ equity                       |       | 1,116,278   |       | (137,456 | )          | 707,949                     |       | 36,609                           |       | (607,102         | )          | 1,116,278        |       |
| Total liabilities and shareholders’ equity |       | $           | 1,366,044  |     | $          | 292,297                     |       | $                                | 885,856    |             | $          | 165,104          |       | $ | (622,026 | ) | $ | 2,087,275 |   |

 

F-58

----

 

**Condensed Consolidating BalanceSheet at December 31, 2003**

 
| ** **                                      | ** ** | **Kerzner** | ** ** | **KINA**   | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------|------------|-------------|------------|------------|------------|-----------------------------|------------|----------------------------------|------------|------------------|------------|------------------|------------|
| **ASSETS**                                      | ** ** | ** **  | ** ** | ** ** | ** ** | ** **                  | ** ** | ** **                       | ** ** | ** **       | ** ** | ** **       | ** ** |
| Current assets:                                 |       |        |       |       |       |                        |       |                             |       |             |       |             |       |
| Cash and cash equivalents                       |       | $           | 143        |       | $          | 17,026                      |       | $                                | 39,207     |             | $          | —           |       | $ | 3,856 |   | $ | 60,232 |   |
| Restricted cash                                 |       | —      |       | —     |       | 1,445                       |       | —                           |       | —           |       | 1,445            |       |
| Trade receivables, net                          |       | 61          |       | 69         |       | 38,084                      |       | —                           |       | 183              |       | 38,397           |       |
| Due from affiliates                             |       | 259,366     |       | 21,923     |       | (272,489                    | )          | 6,699                            |       | (1,550           | )          | 13,949           |       |
| Inventories                                     |       | —      |       | —     |       | 10,418                      |       | —                           |       | —           |       | 10,418           |       |
| Prepaid expenses and other assets               |       | 125         |       | 657        |       | 20,881                      |       | —                           |       | (6,303           | )          | 15,360           |       |
| Total current assets                            |       | 259,695     |       | 39,675     |       | (162,454                    | )          | 6,699                            |       | (3,814           | )          | 139,801          |       |
|                                            |       |        |       |       |       |                        |       |                             |       |             |       |             |       |
| Property and equipment, net                     |       | —      |       | 52,862     |       | 1,077,231                   |       | —                           |       | 23,911           |       | 1,154,004        |       |
| Due from affiliates - non-current               |       | 19,889      |       | 200,000    |       | (185,047                    | )          | —                           |       | —           |       | 34,842           |       |
| Deferred tax asset, net                         |       | —      |       | 10,473     |       | —                      |       | —                           |       | —           |       | 10,473           |       |
| Deferred charges and other assets, net          |       | 10,971      |       | 9,643      |       | 13,042                      |       | —                           |       | —           |       | 33,656           |       |
| Investment in subsidiaries                      |       | 566,984     |       | 10         |       | —                      |       | —                           |       | (566,994         | )          | —           |       |
| Investments in associated companies             |       | 1,864       |       | —     |       | 87,534                      |       | —                           |       | (6,246           | )          | 83,152           |       |
| Total assets                                    |       | $           | 859,403    |       | $          | 312,663                     |       | $                                | 830,306    |             | $          | 6,699            |       | $ | (553,143 | ) | $ | 1,455,928 |   |
|                                            |       |        |       |       |       |                        |       |                             |       |             |       |             |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**  |       |        |       |       |       |                        |       |                             |       |             |       |             |       |
|                                            |       |        |       |       |       |                        |       |                             |       |             |       |             |       |
| Current liabilities:                            |       |        |       |       |       |                        |       |                             |       |             |       |             |       |
| Current maturities of long-term debt            |       | $           | —     |       | $          | —                      |       | $                                | 304        |             | $          | —           |       | $ | — |   | $ | 304 |   |
| Accounts payable and accrued liabilities        |       | 7,974       |       | 22,603     |       | 144,130                     |       | 1,340                            |       | (3,814           | )          | 172,233          |       |
| Capital creditors                               |       | —      |       | —     |       | 4,639                       |       | —                           |       | —           |       | 4,639            |       |
| Total current liabilities                       |       | 7,974       |       | 22,603     |       | 149,073                     |       | 1,340                            |       | (3,814           | )          | 177,176          |       |
|                                            |       |        |       |       |       |                        |       |                             |       |             |       |             |       |
| Deferred revenue                                |       | —      |       | —     |       | 14,652                      |       | —                           |       | —           |       | 14,652           |       |
| Other long-term liabilities                     |       | —      |       | 4,561      |       | 2,729                       |       | —                           |       | —           |       | 7,290            |       |
| Long-term debt, net of current maturities       |       | 11,839      |       | 405,251    |       | 130                         |       | —                           |       | —           |       | 417,220          |       |
| Total liabilities                               |       | 19,813      |       | 432,415    |       | 166,584                     |       | 1,340                            |       | (3,814           | )          | 616,338          |       |
|                                            |       |        |       |       |       |                        |       |                             |       |             |       |             |       |
| Shareholders’ equity                       |       | 839,590     |       | (119,752   | )          | 663,722                     |       | 5,359                            |       | (549,329         | )          | 839,590          |       |
| Total liabilities and shareholders’ equity |       | $           | 859,403    |       | $          | 312,663                     |       | $                                | 830,306    |             | $          | 6,699            |       | $ | (553,143 | ) | $ | 1,455,928 |   |

 

F-59

----

 

**Condensed Consolidating Statementof Operations for the Year Ended December 31, 2004**

 
| ** **                                                                          | ** ** | **Kerzner** | ** ** | **KINA** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------------------------------|------------|-------------|------------|----------|------------|-----------------------------|------------|----------------------------------|------------|------------------|------------|------------------|------------|
| Revenues:                                                                           |       |        |       |     |       |                        |       |                             |       |             |       |             |       |
| Casino and resort revenues                                                          |       | $           | —     |     | $          | —                      |       | $                                | 540,415    |             | $          | 37,945           |       | $ | (5,109 | ) | $ | 573,251 |   |
| Less: promotional allowances                                                        |       | —      |       | —   |       | (23,034                     | )          | —                           |       | —           |       | (23,034          | )          |
|                                                                                |       | —      |       | —   |       | 517,381                     |       | 37,945                           |       | (5,109           | )          | 550,217          |       |
| Tour operations                                                                     |       | —      |       | —   |       | 47,115                      |       | —                           |       | —           |       | 47,115           |       |
| Management, development and other fees                                              |       | —      |       | 17,928   |       | 11,361                      |       | 9,546                            |       | (18,941          | )          | 19,894           |       |
| Other revenues                                                                      |       | —      |       | 255      |       | 3,375                       |       | 229                              |       | —           |       | 3,859            |       |
| Affiliated sales                                                                    |       | —      |       | —   |       | 10,790                      |       | —                           |       | (10,790          | )          | —           |       |
|                                                                                |       | —      |       | 18,183   |       | 590,022                     |       | 47,720                           |       | (34,840          | )          | 621,085          |       |
|                                                                                |       |        |       |     |       |                        |       |                             |       |             |       |             |       |
| Equity in subsidiaries’ earnings                                               |       | 65,042      |       | —   |       | —                      |       | —                           |       | (65,042          | )          | —           |       |
|                                                                                |       |        |       |     |       |                        |       |                             |       |             |       |             |       |
| Cost and Expenses:                                                                  |       |        |       |     |       |                        |       |                             |       |             |       |             |       |
| Casino and resort expenses                                                          |       | —      |       | —   |       | 288,949                     |       | 25,060                           |       | (14,329          | )          | 299,680          |       |
| Tour operations                                                                     |       | —      |       | —   |       | 40,003                      |       | —                           |       | (9               | )          | 39,994           |       |
| Selling, general and administrative                                                 |       | —      |       | 648      |       | 107,252                     |       | 12,801                           |       | (2,367           | )          | 118,334          |       |
| Management fee                                                                      |       | 1,380       |       | —   |       | 14,983                      |       | 1,565                            |       | (17,928          | )          | —           |       |
| Corporate expenses                                                                  |       | 8,906       |       | 12,274   |       | 17,264                      |       | —                           |       | 157              |       | 38,601           |       |
| Depreciation and amortization                                                       |       | —      |       | 19       |       | 54,544                      |       | 4,385                            |       | —           |       | 58,948           |       |
| Hurricane related expenses                                                          |       | —      |       | —   |       | 3,426                       |       | —                           |       | —           |       | 3,426            |       |
| Pre-opening expenses                                                                |       | —      |       | —   |       | 541                         |       | 3,090                            |       | (373             | )          | 3,258            |       |
| Loss on damaged assets                                                              |       | —      |       | —   |       | 1,194                       |       | —                           |       | —           |       | 1,194            |       |
| Impairment of Atlantic City land                                                    |       | —      |       | 7,303    |       | —                      |       | —                           |       | —           |       | 7,303            |       |
|                                                                                |       | 10,286      |       | 20,244   |       | 528,156                     |       | 46,901                           |       | (34,849          | )          | 570,738          |       |
|                                                                                |       |        |       |     |       |                        |       |                             |       |             |       |             |       |
| Income (loss) from operations                                                       |       | 54,756      |       | (2,061   | )          | 61,866                      |       | 819                              |       | (65,033          | )          | 50,347           |       |
|                                                                                |       |        |       |     |       |                        |       |                             |       |             |       |             |       |
| Relinquishment fees - equity in earnings of  TCA                                    |       | —      |       | —   |       | 35,909                      |       | —                           |       | —           |       | 35,909           |       |
|                                                                                |       |        |       |     |       |                        |       |                             |       |             |       |             |       |
| Other income (expense):                                                             |       |        |       |     |       |                        |       |                             |       |             |       |             |       |
| Interest income                                                                     |       | 511         |       | 1,605    |       | 4,096                       |       | 62                               |       | (1,552           | )          | 4,722            |       |
| Affiliated interest income                                                          |       | (2,076      | )          | 18,278   |       | —                      |       | —                           |       | (16,202          | )          | —           |       |
| Affiliated interest expense                                                         |       | —      |       | —   |       | (16,202                     | )          | —                           |       | 16,202           |       | —           |       |
| Interest expense, net of capitalization                                             |       | 2,076       |       | (35,966  | )          | 3,347                       |       | (7,823                           | )          | 1,552            |       | (36,814          | )          |
| Equity in earnings of associated companies                                          |       | 439         |       | —   |       | 7,016                       |       | —                           |       | —           |       | 7,455            |       |
| Loss on early extinguishment of debt                                                |       | —      |       | —   |       | —                      |       | (1,655                           | )          | —           |       | (1,655           | )          |
| Other, net                                                                          |       | —      |       | —   |       | 1,344                       |       | 14                               |       | —           |       | 1,358            |       |
| Other expense, net                                                                  |       | 950         |       | (16,083  | )          | (399                        | )          | (9,402                           | )          | —           |       | (24,934          | )          |
|                                                                                |       |        |       |     |       |                        |       |                             |       |             |       |             |       |
| Income (loss) from continuing operations  before income taxes and minority interest |       | 55,706      |       | (18,144  | )          | 97,376                      |       | (8,583                           | )          | (65,033          | )          | 61,322           |       |
|                                                                                |       |        |       |     |       |                        |       |                             |       |             |       |             |       |
| Benefit (provision) for income taxes                                                |       | 3,675       |       | 440      |       | (3,949                      | )          | (581                             | )          | (9               | )          | (424             | )          |
| Minority interest                                                                   |       | 8,751       |       | —   |       | —                      |       | (1,517                           | )          | —           |       | 7,234            |       |
| Net income (loss)                                                                   |       | $           | 68,132     |     | $          | (17,704                     | )          | $                                | 93,427     |             | $          | (10,681          | )          | $ | (65,042 | ) | $ | 68,132 |   |

 

F-60

----

 

**Condensed Consolidating Statementof Operations for the Year Ended December 31, 2003**

 
| ** **                                                                          | ** ** | **Kerzner** | ** ** | **KINA** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------------------------------|------------|-------------|------------|----------|------------|-----------------------------|------------|----------------------------------|------------|------------------|------------|------------------|------------|
| Revenues:                                                                           |       |        |       |     |       |                        |       |                             |       |             |       |             |       |
| Casino and resort revenues                                                          |       | $           | —     |     | $          | —                      |       | $                                | 525,773    |             | $          | —           |       | $ | (4,732 | ) | $ | 521,041 |   |
| Less: promotional allowances                                                        |       | —      |       | —   |       | (23,579                     | )          | —                           |       | —           |       | (23,579          | )          |
|                                                                                |       | —      |       | —   |       | 502,194                     |       | —                           |       | (4,732           | )          | 497,462          |       |
| Tour operations                                                                     |       | —      |       | —   |       | 40,790                      |       | —                           |       | —           |       | 40,790           |       |
| Management, development and other fees                                              |       | —      |       | 17,558   |       | 7,034                       |       | 8,143                            |       | (17,558          | )          | 15,177           |       |
| Other revenues                                                                      |       | —      |       | 1,816    |       | 3,268                       |       | —                           |       | —           |       | 5,084            |       |
| Affiliated sales                                                                    |       | —      |       | —   |       | 10,143                      |       | —                           |       | (10,143          | )          | —           |       |
|                                                                                |       | —      |       | 19,374   |       | 563,429                     |       | 8,143                            |       | (32,433          | )          | 558,513          |       |
|                                                                                |       |        |       |     |       |                        |       |                             |       |             |       |             |       |
| Equity in subsidiaries’ earnings                                               |       | 71,362      |       | —   |       | —                      |       | —                           |       | (71,362          | )          | —           |       |
|                                                                                |       |        |       |     |       |                        |       |                             |       |             |       |             |       |
| Cost and Expenses:                                                                  |       |        |       |     |       |                        |       |                             |       |             |       |             |       |
| Casino and resort expenses                                                          |       | —      |       | (6       | )          | 284,704                     |       | —                           |       | (13,261          | )          | 271,437          |       |
| Tour operations                                                                     |       | —      |       | —   |       | 35,420                      |       | —                           |       | (14              | )          | 35,406           |       |
| Selling, general and administrative                                                 |       | (275        | )          | 1,184    |       | 103,436                     |       | (218                             | )          | (2,543           | )          | 101,584          |       |
| Management fee                                                                      |       | 1,400       |       | —   |       | 14,658                      |       | 1,500                            |       | (17,558          | )          | —           |       |
| Corporate expenses                                                                  |       | 5,401       |       | 11,034   |       | 19,053                      |       | —                           |       | 943              |       | 36,431           |       |
| Depreciation and amortization                                                       |       | —      |       | 49       |       | 55,733                      |       | —                           |       | —           |       | 55,782           |       |
| Insurance recovery                                                                  |       | —      |       | —   |       | (2,819                      | )          | —                           |       | —           |       | (2,819           | )          |
| Gain on damaged assets                                                              |       | —      |       | —   |       | (2,514                      | )          | —                           |       | —           |       | (2,514           | )          |
|                                                                                |       | 6,526       |       | 12,261   |       | 507,671                     |       | 1,282                            |       | (32,433          | )          | 495,307          |       |
|                                                                                |       |        |       |     |       |                        |       |                             |       |             |       |             |       |
| Income (loss) from operations                                                       |       | 64,836      |       | 7,113    |       | 55,758                      |       | 6,861                            |       | (71,362          | )          | 63,206           |       |
|                                                                                |       |        |       |     |       |                        |       |                             |       |             |       |             |       |
| Relinquishment fees – equity in earnings of  TCA                               |       | —      |       | —   |       | 33,960                      |       | —                           |       | —           |       | 33,960           |       |
|                                                                                |       |        |       |     |       |                        |       |                             |       |             |       |             |       |
| Other income (expense):                                                             |       |        |       |     |       |                        |       |                             |       |             |       |             |       |
| Interest income                                                                     |       | 1,793       |       | 175      |       | 1,426                       |       | —                           |       | —           |       | 3,394            |       |
| Affiliated interest income                                                          |       | (9,103      | )          | 18,278   |       | (1                          | )          | —                           |       | (9,174           | )          | —           |       |
| Affiliated interest expense                                                         |       | —      |       | —   |       | (9,174                      | )          | —                           |       | 9,174            |       | —           |       |
| Interest expense, net of capitalization                                             |       | 9,103       |       | (36,009  | )          | (2,358                      | )          | —                           |       | —           |       | (29,264          | )          |
| Equity in losses of associated companies                                            |       | (51         | )          | —   |       | (269                        | )          | —                           |       | —           |       | (320             | )          |
| Gain on settlement of territorial and other  disputes                               |       | 1,479       |       | —   |       | —                      |       | —                           |       | —           |       | 1,479            |       |
| Other, net                                                                          |       | (775        | )          | 104      |       | (15                         | )          | —                           |       | —           |       | (686             | )          |
| Other expense, net                                                                  |       | 2,446       |       | (17,452  | )          | (10,391                     | )          | —                           |       | —           |       | (25,397          | )          |
|                                                                                |       |        |       |     |       |                        |       |                             |       |             |       |             |       |
| Income (loss) from continuing operations before  income taxes and minority interest |       | 67,282      |       | (10,339  | )          | 79,327                      |       | 6,861                            |       | (71,362          | )          | 71,769           |       |
|                                                                                |       |        |       |     |       |                        |       |                             |       |             |       |             |       |
| Benefit (provision) for income taxes                                                |       | —      |       | 3,732    |       | (3,732                      | )          | (162                             | )          | —           |       | (162             | )          |
| Minority interest                                                                   |       | —      |       | —   |       | —                      |       | (1,340                           | )          | —           |       | (1,340           | )          |
| Income (loss) from continuing operations                                            |       | 67,282      |       | (6,607   | )          | 75,595                      |       | 5,359                            |       | (71,362          | )          | 70,267           |       |
|                                                                                |       |        |       |     |       |                        |       |                             |       |             |       |             |       |
| Income (loss) from discontinued operations,  net of income tax effect               |       | 4,290       |       | —   |       | (2,985                      | )          | —                           |       | —           |       | 1,305            |       |
|                                                                                |       |        |       |     |       |                        |       |                             |       |             |       |             |       |
| Net income (loss)                                                                   |       | $           | 71,572     |     | $          | (6,607                      | )          | $                                | 72,610     |             | $          | 5,359            |       | $ | (71,362 | ) | $ | 71,572 |   |

 

F-61

----

 

**Condensed Consolidating Statementof Operations for the Year Ended December 31, 2002**

 
| ** **                                                    | ** ** | **Kerzner** | ** ** | **KINA** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------|------------|-------------|------------|----------|------------|-----------------------------|------------|------------------|------------|------------------|------------|
| Revenues:                                                     |       |        |       |     |       |                        |       |             |       |             |       |
| Casino and resort revenues                                    |       | $           | —     |     | $          | —                      |       | $                | 512,025    |             | $          | (4,781 | ) | $ | 507,244 |   |
| Less: promotional allowances                                  |       | —      |       | —   |       | (22,210                     | )          | —           |       | (22,210          | )          |
|                                                          |       | —      |       | —   |       | 489,815                     |       | (4,781           | )          | 485,034          |       |
| Tour operations                                               |       | —      |       | —   |       | 41,063                      |       | —           |       | 41,063           |       |
| Management, development and other fees                        |       | —      |       | 16,801   |       | 11,722                      |       | (16,801          | )          | 11,722           |       |
| Other revenues                                                |       | —      |       | 1,280    |       | 3,163                       |       | —           |       | 4,443            |       |
| Affiliated sales                                              |       | —      |       | —   |       | 10,339                      |       | (10,339          | )          | —           |       |
|                                                          |       | —      |       | 18,081   |       | 556,102                     |       | (31,921          | )          | 542,262          |       |
|                                                          |       |        |       |     |       |                        |       |             |       |             |       |
| Equity in subsidiaries’ earnings                         |       | 39,262      |       | —   |       | —                      |       | (39,262          | )          | —           |       |
|                                                          |       |        |       |     |       |                        |       |             |       |             |       |
| Cost and Expenses:                                            |       |        |       |     |       |                        |       |             |       |             |       |
| Casino and resort expenses                                    |       | —      |       | —   |       | 279,646                     |       | (12,843          | )          | 266,803          |       |
| Tour operations                                               |       | —      |       | —   |       | 36,772                      |       | (5               | )          | 36,767           |       |
| Selling, general and administrative                           |       | 2,361       |       | 1,297    |       | 90,352                      |       | (2,272           | )          | 91,738           |       |
| Management fee                                                |       | 1,100       |       | —   |       | 15,701                      |       | (16,801          | )          | —           |       |
| Corporate expenses                                            |       | 5,771       |       | 9,095    |       | 14,083                      |       | —           |       | 28,949           |       |
| Depreciation and amortization                                 |       | —      |       | 75       |       | 55,411                      |       | —           |       | 55,486           |       |
| Insurance recovery                                            |       | —      |       | —   |       | (1,100                      | )          | —           |       | (1,100           | )          |
| Restructuring costs reversal                                  |       | —      |       | —   |       | (1,000                      | )          | —           |       | (1,000           | )          |
|                                                          |       | 9,232       |       | 10,467   |       | 489,865                     |       | (31,921          | )          | 477,643          |       |
|                                                          |       |        |       |     |       |                        |       |             |       |             |       |
| Income from operations                                        |       | 30,030      |       | 7,614    |       | 66,237                      |       | (39,262          | )          | 64,619           |       |
|                                                          |       |        |       |     |       |                        |       |             |       |             |       |
| Relinquishment fees – equity in earnings of  TCA         |       | —      |       | —   |       | 30,041                      |       | —           |       | 30,041           |       |
|                                                          |       |        |       |     |       |                        |       |             |       |             |       |
| Other income (expense):                                       |       |        |       |     |       |                        |       |             |       |             |       |
| Interest income                                               |       | 1,474       |       | 704      |       | 1,241                       |       | —           |       | 3,419            |       |
| Affiliated interest income                                    |       | 1,046       |       | 18,249   |       | —                      |       | (19,295          | )          | —           |       |
| Affiliated interest expense                                   |       | —      |       | —   |       | (19,295                     | )          | 19,295           |       | —           |       |
| Interest expense, net of capitalization                       |       | (846        | )          | (36,638  | )          | (1,620                      | )          | —           |       | (39,104          | )          |
| Equity in earnings (losses) of associated  companies          |       | (658        | )          | —   |       | (4,551                      | )          | —           |       | (5,209           | )          |
| Gain on settlement of territorial and other  disputes         |       | 14,459      |       | —   |       | —                      |       | —           |       | 14,459           |       |
| Loss on early extinguishment of debt                          |       | (5,901      | )          | (14,624  | )          | —                      |       | —           |       | (20,525          | )          |
| Other, net                                                    |       | —      |       | (158     | )          | 218                         |       | —           |       | 60               |       |
| Other expense, net                                            |       | 9,574       |       | (32,467  | )          | (24,007                     | )          | —           |       | (46,900          | )          |
|                                                          |       |        |       |     |       |                        |       |             |       |             |       |
| Income (loss) from continuing operations  before income taxes |       | 39,604      |       | (24,853  | )          | 72,271                      |       | (39,262          | )          | 47,760           |       |
|                                                          |       |        |       |     |       |                        |       |             |       |             |       |
| Benefit (provision) for income taxes                          |       | (1          | )          | 2,238    |       | (2,333                      | )          | —           |       | (96              | )          |
| Income (loss) from continuing operations                      |       | 39,603      |       | (22,615  | )          | 69,938                      |       | (39,262          | )          | 47,664           |       |
|                                                          |       |        |       |     |       |                        |       |             |       |             |       |
| Loss from discontinued operations, net of  income tax effect  |       | —      |       | —   |       | (8,061                      | )          | —           |       | (8,061           | )          |
|                                                          |       |        |       |     |       |                        |       |             |       |             |       |
| Net income (loss)                                             |       | $           | 39,603     |     | $          | (22,615                     | )          | $                | 61,877     |             | $          | (39,262 | ) | $ | 39,603 |   |

 

F-62

----

 

**Condensed Consolidating Statement of Cash Flows for the Year Ended December 31,2004**

 
| ** **                                                                | ** ** | **Kerzner** | ** ** | **KINA** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------------------|------------|-------------|------------|----------|------------|-----------------------------|------------|----------------------------------|------------|------------------|------------|------------------|------------|
|                                                                      |       |        |       |     |       |                        |       |                             |       |             |       |             |       |
| Net cash provided by (used in) operating  activities                      |       | $           | (398,528   | )        | $          | (13,174                     | )          | $                                | 557,237    |             | $          | (5,165           | )          | $ | (3,856 | ) | $ | 136,514 |   |
|                                                                      |       |        |       |     |       |                        |       |                             |       |             |       |             |       |
| Cash flows from investing activities:                                     |       |        |       |     |       |                        |       |                             |       |             |       |             |       |
| Payments for property and equipment, net of  insurance proceeds received  |       | —      |       | (16      | )          | (101,465                    | )          | (17,917                          | )          | —           |       | (119,398         | )          |
| Purchase of short-term investments and notes  receivable                  |       | —      |       | —   |       | (204,309                    | )          | —                           |       | —           |       | (204,309         | )          |
| Loans to affiliates                                                       |       | (67,000     | )          | —   |       | (1,500                      | )          | —                           |       | —           |       | (68,500          | )          |
| Advances to affiliates                                                    |       | —      |       | —   |       | (10,126                     | )          | —                           |       | —           |       | (10,126          | )          |
| Repayments from affiliates                                                |       | 29,200      |       | —   |       | —                      |       | —                           |       | —           |       | 29,200           |       |
| Acquisition of equity interest in associated  companies                   |       | —      |       | —   |       | (69,191                     | )          | —                           |       | —           |       | (69,191          | )          |
| Cash resulting from the initial consolidation  of Palmilla JV, LLC        |       | —      |       | —   |       | —                      |       | 7,047                            |       | —           |       | 7,047            |       |
| Deferred contract acquisition costs                                       |       | —      |       | —   |       | (1,631                      | )          | —                           |       | —           |       | (1,631           | )          |
| Acquisition of assets from Club Méditerranée  (Bahamas) Limited |       | —      |       | —   |       | (30,877                     | )          | —                           |       | —           |       | (30,877          | )          |
| Net proceeds from the sale of fixed assets                                |       | —      |       | —   |       | 233                         |       | 5                                |       | —           |       | 238              |       |
| Net cash used in investing activities                                     |       | (37,800     | )          | (16      | )          | (418,866                    | )          | (10,865                          | )          | —           |       | (467,547         | )          |
|                                                                      |       |        |       |     |       |                        |       |                             |       |             |       |             |       |
| Cash flows from financing activities:                                     |       |        |       |     |       |                        |       |                             |       |             |       |             |       |
| Proceeds from issuance of debt                                            |       | 230,000     |       | —   |       | —                      |       | —                           |       | —           |       | 230,000          |       |
| Borrowings                                                                |       | —      |       | —   |       | 5,000                       |       | 112,068                          |       | —           |       | 117,068          |       |
| Repayment of debt                                                         |       | —      |       | —   |       | (5,544                      | )          | (88,535                          | )          | —           |       | (94,079          | )          |
| Debt issuance and modification costs                                      |       | (5,897      | )          | —   |       | (4,479                      | )          | (4,393                           | )          | —           |       | (14,769          | )          |
| Proceeds from exercise of share options                                   |       | 40,503      |       | —   |       | —                      |       | —                           |       | —           |       | 40,503           |       |
| Net proceeds from the issuance of ordinary  shares                        |       | 153,366     |       | —   |       | —                      |       | —                           |       | —           |       | 153,366          |       |
| Net proceeds from the issuance of Bahamian  Depository Receipts           |       | 19,053      |       | —   |       | —                      |       | —                           |       | —           |       | 19,053           |       |
| Net cash provided by (used in) financing  activities                      |       | 437,025     |       | —   |       | (5,023                      | )          | 19,140                           |       | —           |       | 451,142          |       |
|                                                                      |       |        |       |     |       |                        |       |                             |       |             |       |             |       |
| Increase (decrease) in cash and cash  equivalents                         |       | 697         |       | (13,190  | )          | 133,348                     |       | 3,110                            |       | (3,856           | )          | 120,109          |       |
| Cash and cash equivalents at beginning of  period                         |       | 143         |       | 17,026   |       | 39,207                      |       | —                           |       | 3,856            |       | 60,232           |       |
| Cash and cash equivalents at end of period                                |       | $           | 840        |     | $          | 3,836                       |       | $                                | 172,555    |             | $          | 3,110            |       | $ | — |   | $ | 180,341 |   |

 

F-63

----

 

**Condensed Consolidating Statement of Cash Flows for the Year Ended December 31,2003**

 
| ** **                                                                | ** ** | **Kerzner** | ** ** | **KINA** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------------------|------------|-------------|------------|----------|------------|-----------------------------|------------|------------------|------------|------------------|------------|
| Net cash provided by (used in) operating  activities                      |       | $           | (17,874    | )        | $          | (8,776                      | )          | $                | 158,080    |             | $          | 713 |   | $ | 132,143 |   |
| Cash provided by discontinued operations                                  |       | —      |       | —   |       | 523                         |       | —           |       | 523              |       |
| Net cash provided by (used in) operating  activities                      |       | (17,874     | )          | (8,776   | )          | 158,603                     |       | 713              |       | 132,666          |       |
|                                                                      |       |        |       |     |       |                        |       |             |       |             |       |
| Cash flows from investing activities:                                     |       |        |       |     |       |                        |       |             |       |             |       |
| Payments for property and equipment, net of  insurance proceeds received  |       | —      |       | (14      | )          | (50,835                     | )          | —           |       | (50,849          | )          |
| Loans to affiliates                                                       |       | (15,350     | )          | —   |       | —                      |       | —           |       | (15,350          | )          |
| Advances to affiliates                                                    |       | (21,433     | )          | 21,991   |       | (2,211                      | )          | —           |       | (1,653           | )          |
| Repayments from affiliates                                                |       | —      |       | —   |       | 4,950                       |       | —           |       | 4,950            |       |
| Deferred contract acquisition costs                                       |       | —      |       | —   |       | (2,115                      | )          | —           |       | (2,115           | )          |
| Deposit and purchase of land and casino  license                          |       | —      |       | —   |       | (6,147                      | )          | —           |       | (6,147           | )          |
| Acquisition of assets from Club Méditerranée  (Bahamas) Limited |       | —      |       | —   |       | (20,049                     | )          | —           |       | (20,049          | )          |
| Net proceeds from the sale of fixed assets                                |       | —      |       | 848      |       | 251                         |       | —           |       | 1,099            |       |
| Acquisition of tour operator, net of cash  acquired                       |       | —      |       | —   |       | 1,384                       |       | —           |       | 1,384            |       |
| Repayment of notes receivable                                             |       | 13,339      |       | —   |       | 70                          |       | —           |       | 13,409           |       |
| Deposits received                                                         |       | —      |       | —   |       | 1,250                       |       | —           |       | 1,250            |       |
| Sale of debt and equity interest in One &  Only Kanuhura              |       | 1,464       |       | —   |       | —                      |       | —           |       | 1,464            |       |
| Net cash provided by (used in) investing  activities                      |       | (21,980     | )          | 22,825   |       | (73,452                     | )          | —           |       | (72,607          | )          |
|                                                                      |       |        |       |     |       |                        |       |             |       |             |       |
| Cash flows from financing activities:                                     |       |        |       |     |       |                        |       |             |       |             |       |
| Borrowings                                                                |       | —      |       | —   |       | 29,600                      |       | —           |       | 29,600           |       |
| Repayment of debt                                                         |       | —      |       | (19      | )          | (101,879                    | )          | —           |       | (101,898         | )          |
| Debt issuance and modification costs                                      |       | —      |       | —   |       | (140                        | )          | —           |       | (140             | )          |
| Proceeds from exercise of share options                                   |       | 39,007      |       | —   |       | —                      |       | —           |       | 39,007           |       |
| Repurchase of ordinary shares                                             |       | (408        | )          | —   |       | —                      |       | —           |       | (408             | )          |
| Net cash provided by (used in) financing  activities                      |       | 38,599      |       | (19      | )          | (72,419                     | )          | —           |       | (33,839          | )          |
|                                                                      |       |        |       |     |       |                        |       |             |       |             |       |
| Increase (decrease) in cash and cash  equivalents                         |       | (1,255      | )          | 14,030   |       | 12,732                      |       | 713              |       | 26,220           |       |
| Cash and cash equivalents at beginning of  period                         |       | 1,398       |       | 2,996    |       | 26,475                      |       | 3,143            |       | 34,012           |       |
| Cash and cash equivalents at end of period                                |       | $           | 143        |     | $          | 17,026                      |       | $                | 39,207     |             | $          | 3,856 |   | $ | 60,232 |   |

 

F-64

----

 

**Condensed Consolidating Statement of Cash Flows for the Year Ended December 31,2002**

 
| ** **                                                               | ** ** | **Kerzner** | ** ** | **KINA** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------------|------------|-------------|------------|----------|------------|-----------------------------|------------|------------------|------------|------------------|------------|
| Net cash provided by (used in) operating  activities                     |       | $           | 9,314      |     | $          | (7,332                      | )          | $                | 135,088    |             | $          | (2,181 | ) | $ | 134,889 |   |
| Cash used in discontinued operations                                     |       | —      |       | —   |       | (7,619                      | )          | —           |       | (7,619           | )          |
| Net cash provided by (used in) operating  activities                     |       | 9,314       |       | (7,332   | )          | 127,469                     |       | (2,181           | )          | 127,270          |       |
|                                                                     |       |        |       |     |       |                        |       |             |       |             |       |
| Cash flows from investing activities:                                    |       |        |       |     |       |                        |       |             |       |             |       |
| Payments for property and equipment, net of  insurance proceeds received |       | —      |       | (14      | )          | (39,510                     | )          | —           |       | (39,524          | )          |
| Purchase of short-term investments and notes  receivable                 |       | (13,704     | )          | —   |       | —                      |       | —           |       | (13,704          | )          |
| Loans to affiliates                                                      |       | (1,250      | )          | —   |       | —                      |       | —           |       | (1,250           | )          |
| Advances to affiliates                                                   |       | 88,271      |       | (1,389   | )          | (87,982                     | )          | —           |       | (1,100           | )          |
| Repayments from affiliates                                               |       | —      |       | —   |       | 2,092                       |       | —           |       | 2,092            |       |
| Acquisition of equity interest in associated  companies                  |       | —      |       | —   |       | (40,812                     | )          | —           |       | (40,812          | )          |
| Deferred contract acquisition costs                                      |       | —      |       | —   |       | (214                        | )          | —           |       | (214             | )          |
| Net proceeds from the sale of fixed assets                               |       | —      |       | —   |       | 126                         |       | —           |       | 126              |       |
| Repayment of notes receivable                                            |       | —      |       | 18,018   |       | —                      |       | —           |       | 18,018           |       |
| Deposits received                                                        |       | 4,500       |       | —   |       | —                      |       | —           |       | 4,500            |       |
| Other                                                                    |       | —      |       | (158     | )          | (120                        | )          | —           |       | (278             | )          |
| Net cash provided by (used in) investing  activities                     |       | 77,817      |       | 16,457   |       | (166,420                    | )          | —           |       | (72,146          | )          |
|                                                                     |       |        |       |     |       |                        |       |             |       |             |       |
| Cash flows from financing activities:                                    |       |        |       |     |       |                        |       |             |       |             |       |
| Proceeds from issuance of debt                                           |       | —      |       | 206,000  |       | —                      |       | —           |       | 206,000          |       |
| Borrowings                                                               |       | —      |       | —   |       | 111,000                     |       | —           |       | 111,000          |       |
| Repayment of debt                                                        |       | —      |       | (70      | )          | (63,213                     | )          | —           |       | (63,283          | )          |
| Debt issuance and modification costs                                     |       | —      |       | (4,301   | )          | (364                        | )          | —           |       | (4,665           | )          |
| Proceeds from exercise of share options                                  |       | 14,702      |       | —   |       | —                      |       | —           |       | 14,702           |       |
| Repurchase of ordinary shares                                            |       | (365        | )          | —   |       | —                      |       | —           |       | (365             | )          |
| Early redemption of debt                                                 |       | (104,135    | )          | (209,000 | )          | —                      |       | —           |       | (313,135         | )          |
| Net cash provided by (used in) financing  activities                     |       | (89,798     | )          | (7,371   | )          | 47,423                      |       | —           |       | (49,746          | )          |
|                                                                     |       |        |       |     |       |                        |       |             |       |             |       |
| Increase (decrease) in cash and cash  equivalents                        |       | (2,667      | )          | 1,754    |       | 8,472                       |       | (2,181           | )          | 5,378            |       |
| Cash and cash equivalents at beginning of  period                        |       | 4,065       |       | 1,242    |       | 18,003                      |       | 5,324            |       | 28,634           |       |
| Cash and cash equivalents at end of period                               |       | $           | 1,398      |     | $          | 2,996                       |       | $                | 26,475     |             | $          | 3,143 |   | $ | 34,012 |   |

 

F-65

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