**As filed with the Securities and Exchange Commission on March 31, 2006**

 

**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, 2005**

 

**OR**

 

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

 

**For the transition periodfrom                 to                 **

 

**Commission file number 001-04226**

** **

**KERZNERINTERNATIONAL LIMITED**

**(Exact name of Registrant asspecified in its charter)**

** **

**Commonwealth of The Bahamas**

**(Jurisdictionof incorporation or organization)**

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

**(Address and telephone numberof principal executive offices)**

** **

Securities registered or tobe 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 or tobe registered pursuant to Section 12(g) of the Act. None.

 

Securities for which there isa reporting obligation pursuant to Section 15(d) of the Act:  63⁄4% Senior Subordinated Notes due 2015.

 

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 treasury shares:  36,501,465

 

Indicate by check mark if theregistrant is a well-known seasoned issuer, as defined in Rule 405 of theSecurities Act.

 

Yes ý No o

 

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 markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer, as defined in Rule 12b-2 of the Exchange Act.  Large Accelerated Filer ý     AcceleratedFilero     Non-acceleratedfiler o

 

Indicate by check mark which financial statementItem the Registranthas elected to follow.

 

Item 17 o  Item 18 ý

 

If this is an annual report,indicate by check mark whether the registrant is a shell company under ExchangeAct Rule 12b-2.

 

Yes o  No ý

 

 

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**KERZNER INTERNATIONAL LIMITED**

** **

**FORM20-FANNUAL REPORT FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005**

** **

**TABLEOF CONTENTS**

 
| PRESENTATION OF FINANCIAL  AND OTHER INFORMATION |                                                                          |
|--------------------------------------------------|-------------------------------------------------------------------------------|
| FORWARD-LOOKING STATEMENTS                       |                                                                          |
|                                             |                                                                          |
| **PART I**                                       |
| ** **                                       | ** **                                                                    | ** ** |
| Item 1.                                     | Identity  of Directors, Senior Management and Advisers                        |   |
| Item 2.                                     | Offer  Statistics and Expected Timetable                                      |   |
| Item 3.                                     | Key  Information                                                              |   |
| Item  4.                                         | Information  on the Company                                                   |   |
| Item 4A.                                    | Unresolved  Staff Comments                                                    |   |
| Item 5.                                     | Operating  and Financial Review and Prospects                                 |   |
| Item 6.                                     | Directors,  Senior Management and Employees                                   |   |
| Item 7.                                     | Major  Shareholders and Related Party Transactions                            |   |
| Item 8.                                     | Financial  Information                                                        |   |
| Item 9.                                     | The Offer and Listing                                                         |   |
| Item 10.                                    | Additional  Information                                                       |   |
| Item 11.                                    | Quantitative  and Qualitative Disclosures About Market Risk                   |   |
| Item 12.                                    | Description  of Securities Other Than Equity Securities                       |   |
|                                             |                                                                          |   |
| **PART II**                                      |
| ** **                                       | ** **                                                                    | ** ** |
| Item 13.                                    | Defaults,  Dividend Arrearages and Delinquencies                              |   |
| Item 14.                                    | Material  Modifications to the Rights of Security Holders and Use of Proceeds |   |
| Item 15.                                    | Controls and  Procedures                                                      |   |
| Item 16A.                                   | Audit  Committee Financial Expert                                             |   |
| Item 16B.                                   | Code of Ethics                                                                |   |
| Item 16C.                                   | Principal  Accountant Fees and Services                                       |   |
| Item 16D.                                   | Exemptions  from the Listing Standards for Audit Committees                   |   |
| Item 16E.                                   | Purchases of  Equity Securities by the Issuer and Affiliated Purchasers       |   |
|                                             |                                                                          |   |
| **PART III**                                     |
| ** **                                       | ** **                                                                    | ** ** |
| Item 17.                                    | Financial Statements                                                          |   |
| Item 18.                                    | Financial  Statements                                                         |   |
| Item 19.                                    | Exhibits                                                                      |   |

 

2

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# **PRESENTATIONOF FINANCIAL AND OTHER INFORMATION**

# ** **

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

 

Our fiscal year is the calendar year.

 

The financial statements contained in this Annual Reporthave been prepared in accordance with accounting principles generally acceptedin 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” refers to both our owned and/ormanaged resorts, or properties under development, as the context requires.

 

3

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# **FORWARD-LOOKINGSTATEMENTS**

# ** **

This Annual Report contains certain “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Actof 1995, with respect to financial condition, results of operations, businessstrategies, operating efficiencies or synergies, plans for future expansion andother business development activities, as well as other capital spending,financing sources and the effects of regulation (including gaming and taxregulation) and competition, markets for Kerzner’s issued and outstandingordinary shares (“Ordinary Shares”) and other matters. Statements in thisAnnual Report that are not historical facts are “forward-looking statements”for the purpose of the safe harbor provided by Section 21E of theSecurities Exchange Act of 1934, as amended (the “Exchange Act”) and Section 27Aof the Securities Act of 1933, as amended (the “Securities Act”). Forward-lookingstatements, including, without limitation, those relating to our futurebusiness prospects, revenues and income, wherever they occur in this AnnualReport, are necessarily estimates reflecting the best judgment of our managementand involve a number of risks and uncertainties that could cause actual resultsto differ materially from those suggested by forward-looking statements. Youshould consider forward-looking statements, therefore, in light of variousimportant factors, including those set forth in this Annual Report. These risksand 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 are intended to identify forward-lookingstatements. You will find these forward-looking statements at various placesthroughout this Annual Report. You are cautioned not to place undue reliance onthese forward-looking statements, which speak only as of the date they weremade. We do not undertake any obligation to publicly update or release anyrevisions to these forward-looking statements to reflect events orcircumstances after the date of this Annual Report or to reflect the occurrenceof unanticipated events.

 

In compiling the information in this Annual Report, wehave also used industry data and projections obtained from industry surveys,market research, publicly available information and industry publications. Industrypublications generally state that the information they contain has beenobtained from sources believed to be reliable but that the accuracy andcompleteness of such information is not guaranteed and that the projectionsthey contain are based on a number of significant assumptions. We have notindependently verified this data or determined the reasonableness of suchassumptions. We have indicated where information has come from internal sources.Such information reflects our management’s best estimates based uponinformation obtained from our customers and from trade and businessorganizations and other contacts within 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 sets forth certain historical consolidatedfinancial information of the Company for each of the five years ended December 31,2005. The historical financial information as of December 31, 2005 and 2004and for each of the three years in the period ended December 31, 2005, asset forth below, has been derived from our audited consolidated financialstatements, prepared in accordance with U.S. GAAP, included in this AnnualReport. The information set forth below is not necessarily indicative of futureresults and should be read in conjunction with “Item 5. Operating andFinancial 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 inaccordance with U.S. GAAP. We have not paid dividends for the five years ended December 31,2005.

 

5

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

 
| ** **                                       | ** ** | **For the Year Ended December 31,** | ** ** |
|--------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                       | ** ** | **2005(a)**                                                  | ** ** | **2004(b)** | ** ** | **2003(c)** | ** ** | **2002(d)** | ** ** | **2001(e)** | ** ** |
| **CONSOLIDATED  STATEMENTS OF OPERATIONS DATA:** |       |                                                         |       |   |   |   |   |   |   |   |   |
|                                             |       |                                                         |       |   |   |   |   |   |   |   |   |
| Gross revenue                                    |       | $                                                            | 745,763    |   | $ | 644,119 |   | $ | 582,092 |   | $ | 564,472 |   | $ | 614,209 |   |
| Net revenue                                      |       | 721,524                                                      |       | 621,085 |   | 558,513 |   | 542,262 |   | 573,436 |   |
| Income from  operations                          |       | 32,181                                                       |       | 50,347 |   | 63,206 |   | 64,619 |   | 66,960 |   |
| Relinquishment  fees - equity in earnings of TCA |       | 37,882                                                       |       | 35,909 |   | 33,960 |   | 30,041 |   | 24,263 |   |
| Income from  continuing operations               |       | 52,217                                                       |       | 68,132 |   | 70,267 |   | 47,664 |   | 37,269 |   |
| Net income                                       |       | 52,217                                                       |       | 68,132 |   | 71,572 |   | 39,603 |   | 32,661 |   |
| Basic earnings  per share:                       |       |                                                         |       |   |   |   |   |   |   |   |   |
| Income from  continuing operations               |       | $                                                            | 1.46       |   | $ | 2.09 |   | $ | 2.46 |   | $ | 1.71 |   | $ | 1.39 |   |
| Income (loss)  from discontinued operations      |       | —                                                       |       | — |   | 0.04 |   | (0.29 | ) | (0.18 | ) |
| Net income per  share                            |       | $                                                            | 1.46       |   | $ | 2.09 |   | $ | 2.50 |   | $ | 1.42 |   | $ | 1.21 |   |
| Diluted earnings  per share:                     |       |                                                         |       |   |   |   |   |   |   |   |   |
| Income from  continuing operations               |       | $                                                            | 1.39       |   | $ | 2.01 |   | $ | 2.39 |   | $ | 1.67 |   | $ | 1.34 |   |
| Income (loss)  from discontinued operations      |       | —                                                       |       | — |   | 0.05 |   | (0.28 | ) | (0.17 | ) |
| Net income per  share                            |       | $                                                            | 1.39       |   | $ | 2.01 |   | $ | 2.44 |   | $ | 1.39 |   | $ | 1.17 |   |

 
| ** **                                            | ** ** | **For the Year Ended December 31,** | ** ** |
|-------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                            | ** ** | **2005**                                                     | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| **CONSOLIDATED  BALANCE SHEET DATA:**                 |       |                                                         |       |   |   |   |   |   |   |   |   |
|                                                  |       |                                                         |       |   |   |   |   |   |   |   |   |
| Total assets                                          |       | $                                                            | 2,276,622  |   | $ | 2,087,275 |   | $ | 1,455,928 |   | $ | 1,395,039 |   | $ | 1,337,740 |   |
| Long-term debt,  net of current maturities            |       | 789,617                                                      |       | 754,129 |   | 417,220 |   | 497,756 |   | 518,231 |   |
| Shareholders’  equity                            |       | 1,161,762                                                    |       | 1,116,278 |   | 839,590 |   | 729,021 |   | 674,662 |   |
| Number of shares  outstanding, net of treasury shares |       | 36,501                                                       |       | 35,900 |   | 30,284 |   | 28,125 |   | 27,318 |   |
|                                                       |            |                                                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(a)           Weconsolidated Reethi Rah Resort Pvt Ltd (“Reethi Rah”) effective May 1, 2005,and Residences at Atlantis Development Limited (“Residences at Atlantis”)effective August 30, 2005, in accordance with the provisions of FinancialAccounting Standards Board (“FASB”) Interpretation No. 46R (“FIN 46R”),“Consolidation of Variable Interest Entities”, which increased revenue, costsand expenses, assets and liabilities. During 2005, we recognized an impairmentof notes receivable of $27.8 million related to Reethi Rah and a $11.2 millionwrite off of UK gaming costs. We also recognized a loss on early extinguishmentof debt of $27.9 million, representing costs associated with the September 2005tender for our 87/8% Senior Subordinated Notes and realized a taxbenefit of $15.7 million related to this refinancing.

(b)           Weconsolidated Palmilla JV, LLC effective January 1, 2004, in accordance with FIN46R, which increased revenues, cost and expenses, assets and liabilities.During 2004, we recognized a $7.3 million impairment with respect to ourAtlantic City land, $4.6 million of expenses related to Hurricane Frances aswell as operating losses from Palmilla JV, LLC, which reflect $3.3 millionof pre-opening expenses.

(c)           In2003, we recognized $2.8 million of insurance recovery and a $2.5 milliongain on damaged assets related to Hurricane Michelle. The operations of ouronline gaming subsidiary, Kerzner Interactive Limited, were discontinued duringthe first quarter of 2003. In connection with the discontinuance of KerznerInteractive Limited, we recognized $4.5 million of income related to an optionagreement with Station Casinos, Inc., which was terminated during the firstquarter of 2003. This amount was partially offset by expenses and write offsrelated to the termination of Kerzner Interactive Limited’s operations.

(d)           In2002, we recognized a loss on the early extinguishment of debt of $20.5 millionrelated to the redemption and repurchase of our 9% Senior Subordinated Notesand our 85/8% Senior Subordinated Notes and a $14.5 milliongain on settlement of territorial and other disputes in connection with asettlement with a major shareholder.

(e)           In2001, we recognized the results of operations of Resorts Atlantic City fromJanuary 1, 2001 to April 24, 2001.

 

6

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**(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 compete with other resorts, hotels andcasinos, including land-based casinos, racinos, riverboat, dockside and cruiseship casinos and other forms of gaming, as well as other forms of entertainment.If other properties operate more successfully, if existing properties areenhanced or expanded or if additional hotels or casinos are established in andaround the markets in which we conduct business, we may lose market share. Inparticular, the expansion, upgrade or construction of competing resort orcasino properties in or near any market from which we attract or expect toattract a significant number of customers could have a significant adverseeffect on our business, financial condition, results of operations or cashflows.

 

A number of our competitors are larger and havegreater financial and other resources than we do. In addition, a number ofjurisdictions have legalized gaming, and other jurisdictions are consideringthe legalization and/or expansion of gaming. This could open markets in whichwe currently compete to new entrants and could create new markets that maycompete as tourist destinations. Our gaming operations compete, and will in thefuture compete, with all forms of existing legalized gaming and with new formsof gaming that may be legalized in the future. Our competitive position couldbe materially adversely affected by competing companies, new entrants, newmarkets and new forms of gaming, and our revenues could decline, harming ourfinancial condition. For example, a joint venture consisting of Baha MarResorts Ltd., Harrah’s Entertainment, Inc. and Starwood Hotels & ResortsWorldwide, Inc. announced plans to develop a $1.6 billion destinationresort casino in Nassau, The Bahamas. The first phase of this project, whichproject is being developed in stages, is expected to be completed by 2010 andinclude six hotels, an expanded casino space managed under the Caesars brand,time share and condominium developments and a new golf course. In addition, TheRitz-Carlton Hotel Company, L.L.C. recently announced the proposed developmentof a Ritz-Carlton resort on Rose Island, which is four miles from NewProvidence Island and Paradise Island. The resort is scheduled to open in 2009and include a hotel, condominiums, townhouses, estate homes and a shelter foryachts. According to recent press reports, the Stillman Organization, aNew-York based real estate developer, plans to buy a resort on the south coastof New Providence Island, and invest approximately $500 million to build a1,000 room hotel/casino, together with residential units, an expanded marinawith restaurants and retail facilties, and a golf course. If completed, thesedevelopments would compete with our Paradise Island properties and couldmaterially adversely affect our business and results of operations.

 

A further discussion of competition at our operationsby geographic location is included in “Item 4. Information on the Company,(B) Business Overview—Competition.”

 

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

** **

We regularly evaluate potential developmentopportunities and engage in expansion, development, upgrade and renovationprojects at properties that we develop or operate. Each of these projects,including the Phase III expansion on Paradise Island (“Phase III”) discussedin “Item 4. Information on the Company, (B) Business Overview—TheProperties—Destination Resorts—Atlantis, Paradise Island,” the development ofAtlantis, The Palm, Dubai (“Atlantis, The Palm”) discussed in “Item 4. Informationon the Company, (B) Business Overview—The Properties—DestinationResorts—Atlantis, The Palm,” the proposed development project in Morocco, the redevelopmentof the Lincoln Park racino in Rhode Island (“Lincoln Park”), the project inNorthampton and the proposed development of our project in South Africa, willbe subject to the many risks associated with expanding or renovating anexisting enterprise or developing new projects, including unanticipated design,construction, regulatory, environmental and operating problems, and thesignificant risks commonly associated with implementing an expansion strategyin new markets. In particular, any such projects are subject to the risksassociated with the following:

 

7

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•      theavailability of financing and compliance with the terms and covenants in our SixthAmended and Restated Credit Facility (the “Amended Credit Facility”) and otherdebt;

 

•      shortages inmaterials;

 

•      insufficientpublic infrastructure improvements or maintenance;

 

•      shortages ofskilled labor or work stoppages;

 

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

 

•      weatherinterference, floods, fires or other casualty losses;

 

•      failure toobtain required licenses, permits or approvals;

 

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

 

•      rising energyprices, which can increase construction costs;

 

•      regulatory orprivate litigation arising out of projects; and

 

•      unanticipatedcost increases and budget overruns.

 

For example, many of our projects are subject toregulation at the national, state and local levels in their respectivejurisdictions, which could adversely affect the progress of our projects. Inorder to proceed with projects, we may need to, among other things, notifyauthorities of our proposals or submit environmental statements. We could besanctioned for any failure to follow any of these procedures, including finesor even temporary closure of our work sites. We cannot guarantee that we willbe successful in obtaining required permits and approvals. Delays andcompliance costs associated with our projects as a result of regulatoryobstacles could have a material adverse effect on our business, financialcondition, results of operations or cash flows.

 

The anticipated costs and construction period forprojects are based upon budgets, conceptual design documents and constructionschedule estimates prepared by us in consultation with architects andcontractors. The cost of any project may vary from initial expectations, andwe, or the owners of the property, may have a limited amount of capitalresources to fund cost overruns on any project. If cost overruns cannot befinanced on a timely basis, the completion of one or more projects may bedelayed until adequate funding is available. The completion dates ofdevelopment projects could also differ significantly from expectations forconstruction-related or other reasons. We cannot ensure that any project willbe completed, if at all, on time or within established budgets. Significantdelays or cost overruns on projects could have a material adverse effect on ourbusiness, financial condition, results of operations or cash flows.

 

Litigation may also impede or delay our ability tocomplete construction or expansion projects. We have on occasion been named asa defendant in lawsuits brought to delay, alter or enjoin projects in which wehave been involved. If litigation is successfully brought against us as aresult of our development, expansion or renovation projects around the world,it could have a material adverse effect on our business, financial condition,results of operations or cash flows.

 

In addition, expansion and renovation projectsrequire, from time to time, portions of the existing operations to be closed ordisrupted. Any extended disruptions in our operations could have a materialadverse effect on our business, financial condition, results of operations orcash flows.

 

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

** **

Our business is affected by general economic andmarket conditions, particularly in the United States and Europe. A recession oreconomic slowdown could cause a reduction in bookings or the willingness orability of tourists to book vacations at Atlantis, Paradise Island and ourother properties, which could materially adversely affect our operating results.Additionally, a tightening of the labor market or a change in labor-relatedregulations in one or more geographic regions may result in fewer and/or lessqualified applicants for job openings at our properties. Higher wages, relatedlabor costs and the increasing cost trends in insurance markets may negativelyimpact our results.

 

8

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**Severeweather conditions or natural disasters could adversely affect our business,financial condition, results of operations or cash flows, or further increaseour insurance premiums and deductibles or make insurance unavailable atcommercially reasonable rates.**

** **

The Bahamas, Mexico, Mauritius, the Maldives, Morocco andDubai are subject to tropical weather and natural disasters, which, if severe,could adversely affect tourism and our operations. Similarly, inclement weathercan adversely affect the relinquishment fees—equity in earnings of TCA that we earnfrom the Mohegan Sun casino (“Mohegan Sun”) and the equity earnings we receiveindirectly from Lincoln Park, as the principal access to these properties is byroad.

 

The 2005 hurricane season in the Atlantic Ocean,Caribbean Sea and Gulf of Mexico (collectively, the “Atlantic”) was the mostactive on record. The hurricane season had the most named storms (27 versus 21in 1993, the previous record), the most hurricanes (14 versus 12 in 1969, theprevious record) and the most category five storms (3). The Atlantic is in itseleventh year of heightened activity and is expected to remain active for thenext decade or longer according to the National Oceanic and AtmosphericAdministation’s National Weather Service (the “National Weather Service”).

 

In September 1999, Hurricane Floyd, a hurricanerated by the National Weather Service as a category five, its highest rating,passed within 60 miles of Paradise Island. Our Paradise Island propertiessuffered approximately $45.0 million of property damage. InNovember 2001, Hurricane Michelle impacted our Paradise Island properties.Although the storm caused minimal disruption to our operations, 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—The Properties—Destination Resorts—Atlantis,Paradise Island”) suffered approximately $28.3 million in property damageand cleanup costs. Our losses resulting from Hurricane Floyd and HurricaneMichelle were predominantly covered by insurance.

 

In September 2004, Hurricane Frances passed justto 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 costs and complimentarygoods and services to guests and a $1.2 million loss on damaged assets.

 

In December 2004, the tsunami caused by an earthquakeoff the coast of Indonesia in southern Asia resulted in flooding damage at ourtwo managed properties in the Maldives. An insurance claim in respect of theselosses was settled, with One&Only Kanuhura receiving $5.0 million forbusiness interruption losses. In addition, One&Only Kanuhura sufferedproperty damages, and the related insurance claim was settled for$3.5 million. Reethi Rah, the entity that owns and operates One&OnlyMaldives at Reethi Rah, submitted a claim to its insurer for $15.5 million inproperty damages. The claim was denied, but Reethi Rah is contesting suchdenial. In 2005, equity earnings and management fees from One&Only Kanuhurawere adversely affected by the tsunami. In June 2005, One&Only Kanuhura wasclosed for an extensive four-month renovation and planned refurbishment. One&OnlyKanuhura reopened on October 15, 2005.

 

Hurricanes and other natural disasters, in addition tocausing property damage, lead to decreased revenues and business interruptionexpenses, including increased marketing expenses until business returns tonormal. We cannot assure you that our business and, consequently, our resultsof operations or financial condition, will not be adversely affected by severeweather conditions or other natural disasters in the future. Such weatherconditions or natural disasters could cause significant damage to andsuspension of the services provided to our patrons, further increases in ourinsurance premiums and per occurrence deductibles or cancellations of, ordecreases in, our coverage and general harm to our business.

 

**Additionalincreases in our insurance premiums and deductibles would increase our costsand may impair our ability to obtain or maintain insurance on our properties.**

** **

We may encounter difficulty in obtaining or renewingproperty or casualty insurance on certain of our properties that are subject tothe potential negative impact of natural disasters. In addition, such insurancemay be more limited and may not cover catastrophic risks or terrorist acts atcurrent levels or at all. Even if we are able to renew our policies or obtainnew policies at levels and with limitations consistent with our currentpolicies, we cannot be sure that we will be able to obtain such insurance atpremium rates that are commercially reasonable. The tsunami in December 2004 insoutheast Asia resulted in increases in local insurance rates. In addition tothe “all risk” coverage described below, we have insured Atlantis, ParadiseIsland for up to $300.0 million per occurrence (and in an annual aggregateamount) from damages directly resulting from certain terrorist acts to coverproperty

 

9

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damage and related business interruption losses. If any such event wereto affect all or part of one or more of our properties, it is possible that wewould suffer a substantial loss beyond what is covered by our insurancepolicies.

 

The amount of our “all risk” property and businessinterruption insurance with respect to our Paradise Island business (inclusiveof per occurrence deductibles) in the 2005 policy year is $300.0 million peroccurrence. The amount of such “all risk” property and business interruptioninsurance was $300.0 million per occurrence in the 2004 policy year and $175.0million in the 2003 policy year. (“Policy Year” is defined as June 1st of thatyear through May 31st of the following year.)  “All risk” insurance includes coverage for thewindstorm related effects (excluding those associated with landscaping) ofhurricanes among other casualty losses.

 

In 2002, with regard to our Paradise Island propertyinsurance, our “all risk” premiums increased from approximately $4.6 million inthe 2001 Policy Year to a total of approximately $14.1 million in the 2002Policy Year. Kerzner’s deductibles also increased from $4.0 million peroccurrence in the 2001 Policy Year to $15.0 million per occurrence in the 2002Policy Year, with an annual aggregate deductible of $30.0 million. For the 2003Policy Year, our premium for Paradise Island property insurance decreased to$13.5 million, with the deductibles remaining the same as in the 2002 PolicyYear. For the 2004 Policy Year, our premium for Paradise Island propertyinsurance increased to $14.1 million, with the deductibles remaining the sameas in the 2003 Policy Year. For the 2005 Policy Year, our premium for theParadise Island property insurance decreased to $12.1 million, with thedeductibles remaining the same as in the 2004 Policy Year. In light of thesignificant hurricane activity in the Atlantic, the tsunami in December 2004and Hurricane Katrina in August 2005, our insurance premiums and deductibles arelikely to significantly increase.

 

**Lossof our gaming license or failure to comply with extensive governmental gamingregulations that govern our operations could harm our business.**

** **

Our operation of gaming facilities is subject toextensive governmental regulations. Regulatory authorities typically requirevarious registrations, licenses, findings of suitability and approvals to beheld by operators of gaming facilities. The regulatory authorities in thesejurisdictions generally have broad discretion in the granting, renewal,suspension and revocation of licenses and require that such registrations,licenses, findings and approvals be renewed or updated periodically. TheCompany and its key personnel are currently qualified to do business in all of thejurisdictions in which we operate gaming facilities. We cannot assure you thatany new or permanent licenses, permits or approvals that may be required by us,our key employees and our partners, if applicable, in the future will begranted or that our existing licenses, permits and approvals will be renewed orwill not be suspended or revoked in the future. The failure to receive or renewlicenses and/or the suspension or revocation of licenses could materiallyadversely affect our business, financial condition, results of operations orcash flows. For example, any failure by us to comply with the terms andconditions of our Heads of Agreement with the Bahamian Government could resultin the loss of certain tax incentives or have other adverse consequences.

 

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

** **

Our gaming operations are subject to significanttaxation and fees. We pay substantial taxes and fees with respect to our gamingoperations in The Bahamas and our interests in gaming operations in Connecticutand Rhode Island and will likely incur significant taxes and fees in otherjurisdictions, including the United Kingdom and Morocco, in which we expect toconduct gaming operations in the future. Any material increase in existingtaxes and fees, the adoption of new taxes or fees or the loss or reduction ofany existing or future tax incentives could have a material adverse effect onour profitability.

 

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

** **

Historically, our revenue and operating profits in TheBahamas and Mexico have been higher during the first quarter, the prime touristseason, than in successive quarters. Higher revenue and earnings are typicallyrealized from the Mauritius and Maldives properties during the fourth quarterof the year and from Mohegan Sun and Lincoln Park during the second and thirdquarters of the year. If any of these properties were unable to accommodateguests during such periods for any reason, including disruptions caused byweather, our revenue and profits could be adversely affected.

 

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**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 offunds may not be sufficient to finance existing or future projects, and otherfinancing may not be available on acceptable terms, in a timely manner or atall. In addition, our Amended Credit Facility and the indenture governing our63⁄4% Senior Subordinated Notes contain certain restrictions on our ability toincur additional indebtedness, and our future indebtedness will likely containsimilar restrictions. If we are unable to secure additional financing, we couldbe forced to limit or cancel expansion, development or renovation projects,which may materially adversely affect our business, financial condition,results of operations or cash flows.

 

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

** **

In The Bahamas, a union represents approximately 4,200of our approximately 6,400 local employees. We participate in an employerassociation whose existing contract with the union will expire onJanuary 7, 2008. In light of our Phase III expansion, we expect tohire approximately 3,000 additional employees, a substantial portion of whichwill be represented by such union. Labor relations in The Bahamas have beenunstable at times over the last few years and there have been occasional workstoppages. As the country’s largest private employer, we are sometimes thetarget of labor disputes. Any protracted labor disputes or work stoppagesaffecting any of the properties that we own or operate could reduce ourrevenues. In addition, many of the public sector industries in The Bahamas,such as electricity, telecommunication and airport facilities, are unionized. TheBahamian government’s labor relations with these unions have been unstable attimes and there have been work stoppages on occasion that have been disruptiveto our business.

 

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

** **

Most patrons of our properties arrive by air. Anyinterruption or reduction of air service to our properties in The Bahamas,Mexico, Mauritius, the Maldives and Dubai could restrict the growth of ourbusinesses, negatively affect our competitive position and adversely affect ourrevenues and profits. As we continue to expand or develop additionalproperties, such future growth may require additional air service to meetdemand.

 

**Wedo not own, manage or control Mohegan Sun and the revenue that we derive fromMohegan Sun is therefore outside of our control and are subordinated to certainexisting and future obligations of Mohegan Sun.**

** **

In 2005, we earned approximately $38.8 millionfrom Trading Cove Associates (“TCA”), which is party to a relinquishmentagreement with the Mohegan Tribal Gaming Authority (“MTGA”). Pursuant to theagreement, in exchange for relinquishing its right to manage Mohegan Sun, TCAis entitled to receive 5% of Mohegan Sun’s gross revenues through December 2014.As a result, decisions that affect Mohegan Sun’s business or operations, andtherefore the revenue that TCA earns under the agreement, are outside of ourcontrol. Revenues on which TCA’s fees are based exclude any revenues generatedby any future expansion of Mohegan Sun. 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 of Indians of Connecticut(the “Mohegan Tribe”) and all of the MTGA’s existing and future senior securedindebtedness. The junior fees also rank behind all unsecured indebtedness. Shouldthe MTGA not be able to meet these obligations, it would not be able to pay TCAits relinquishment fees, which could have a material adverse effect on ourfinancial position, results of operations and cash flows.

 

**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, 2006, Caledonia Investments plc(“Caledonia”), Cement Merchants SA (“CMS”), Baron Capital Group, Inc. (“Baron”),FMR Corp. (“FMR”) and Istithmar PJSC (“Istithmar”) had the right to voteapproximately 8.3%, 5.9%, 15.8%, 13.4% and 12.3%, respectively, of our OrdinaryShares. As of February 28, 2006, the Kerzner Family Trust and itssubsidiary, World Leisure Group (“WLG”), both of which are controlled byMr. S. Kerzner, had the right to vote approximately 10.7% of our OrdinaryShares. See “Item 7. Major

 

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Shareholders and Related Party Transactions, (A) MajorShareholders” for more information as to how the foregoing ownershippercentages were determined. If any combination of our major shareholders acttogether, they may be able to effectively control the outcome of substantiallyall matters requiring shareholder approval, including the election of ourdirectors, thereby controlling our management, policies and business operations.For example, our major shareholders could combine to use this voting power toblock our ability to obtain certain types of financing for development plans,renovations or expansions, which could materially adversely affect our abilityto develop our business and pursue our strategies. In addition, Istithmar,Caledonia, CMS and WLG are parties to certain shareholder agreements thatgovern, among other things, their transfer of, and voting rights associatedwith, their shares. Substantially all of the provisions of such shareholderagreements terminate in June 2006 (excluding the agreement with Istithmar,which does not terminate until July 2009). See “Item 7. Major Shareholdersand Related Party Transactions, (B) Related PartyTransactions—Restructuring of Relationship with Majority Shareholder.”

 

**Wesignificantly rely on technology.**

** **

The resort and casino industries continue to demandthe use of sophisticated technology, including technology utilized for propertymanagement, casino-related technology, procurement, reservation systems andguest amenities. In 2005, we introduced a real-time, web-accessible reservationsystem. We expect the technologies utilized at our properties to requirerefinements. There can be no assurance that, as certain technologies becomeoutdated or as advanced technologies are introduced, we will be able to replaceor introduce such technologies as quickly as our competition, within ourestablished budgets or that we will be able to integrate such technologies intoour existing systems. Further, there can be no assurance that we will receiveany benefits from any new technology.

 

We also rely on the Internet and our website for aportion of our hotel reservations for Atlantis, Paradise Island andOne&Only Ocean Club. In the third quarter of 2005, we integrated ourweb-based reservation system with our call center to allow online bookings ofcertain restaurants and activities on Paradise Island. The Internet and ourwebsite could experience material disruptions, slowdowns and security breaches,and upgrade and maintenance to our website could result in significant downtime.If we were to experience such a disruption, slowdown or security breach, itcould harm our business and reputation. In late 2005, we determined that therehad been a theft from a customer database of personal information relating tocertain of our Paradise Island customers and thereafter notified approximately55,000 customers whose personal information could have been compromised as aresult of the theft. Similar incidents in the future could adversely affect theAtlantis brand and our business. See “Item 4. Recent Developments” for moreinformation.

 

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

** **

We have invested, and expect to continue to invest, injoint ventures. Joint venturers typically have shared control over the jointventure assets. As a result, joint venture investments involve risks, such asthe possibility that the co-venturer in an investment might become bankrupt ornot have the financial resources to meet its obligations, have economic orbusiness interests that are inconsistent with our business interests or takeaction contrary to our instructions or requests or contrary to our policies orobjectives. Any of such actions may subject the properties owned by the jointventure to additional risk. In general, we seek to maintain sufficient controlof any joint venture; however, we may be unable to take action without theapproval of our joint venture partners. If a joint venture partner becomesbankrupt, we could become liable for such partner’s share of joint ventureliabilities. If we are unable to maintain sufficient control of any jointventure, our business, financial condition, results of operations or cash flowscould be materially adversely affected.

 

In addition, we often participate in the equity ofjoint ventures and/or managed properties and provide financing or guarantees tocomplete the development of a property. These fundings may become unrealizableor we may become obligated to perform under the guarantees, which couldadversely affect our financial performance. For example, during 2005, we recognizeda $27.8 million impairment of our notes receivable due from Reethi Rah asdiscussed in “Item 5. Operating and Financial Review and Prospects.”

 

**Wemay have disputes with the owners and/or joint venture partners of theproperties that we manage.**

** **

Our obligations under our management agreements tomanage each property and enforce certain required standards may, in someinstances, be subject to interpretation and may give rise to disagreements. Whilewe will seek to resolve any disagreements in a manner that develops andmaintains positive relationships with current and potential owners and jointventure partners, our failure to resolve any such disagreements could result inlitigation or could interrupt the services or operating quality of the affectedproperty, which could materially adversely affect our

 

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business, financial condition, results of operations or cash flows. Forexample, in February 2006 we received correspondence on behalf of Reethi Rahthat raised concerns with respect to certain aspects of management activity andthe amount of certain associated fees. We expect to discuss these matters withReethi Rah, but we can make no assurances as to the outcome of suchdiscussions.

 

**Weare subject to environmental regulations, and any cleanup liabilities or noncompliancewith applicable laws or a significant regulatory change could adversely affectour business, financial condition or results of operations.**

** **

As the owner, operator and developer of real propertywe have to address, and may be liable for, hazardous materials or contaminationon these sites. We have in the past, and may in the future, become liable forcontamination on our properties that was caused by former owners or operators. Forsites that we acquire for development, we conduct environmental assessments toidentify adverse impacts from former activities, including the improper storageor disposal of hazardous substances and the existence of asbestos containingmaterials. We may not always identify environmental problems through thisprocess and may become liable for historical contamination not previouslydiscovered. For sites that we have sold, we retain all or a portion of anyresidual environmental liability. In order to receive governmental approvalsprior to site development, we must conduct extensive assessments of theenvironmental impact of our proposed operations. Our ongoing operations aresubject to stringent regulations relating to protection of the environment andwaste handling, particularly with respect to the management of wastewater fromour facilities. Any failure to comply with existing laws or regulations, theadoption of new laws or regulations with additional or more rigorous compliancestandards or the more vigorous enforcement of environmental laws or regulationscould significantly harm our business by increasing our expenses and limitingour future opportunities.

 

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

** **

Kerzner is an international business companyincorporated under the laws of the Commonwealth of The Bahamas. Certain of ourdirectors and executive officers reside outside the United States. In addition,a substantial portion of the assets of our directors and officers and of ourassets are located outside the United States. As a result, it may be difficultor impossible to:

 

•      effect serviceof 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 that Bahamian courts would entertainoriginal actions against Bahamian companies, their directors or officerspredicated solely upon U.S. federal securities laws. Furthermore, judgmentsbased upon any civil liability provisions of the U.S. federal securities lawsare not directly enforceable in The Bahamas. Rather, a lawsuit must be broughtin 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 be legally enforceable in certainforeign jurisdictions or in certain jurisdictions within the United States. Asubstantial percentage of the customers at Atlantis, Paradise Island reside inthe United States. As a result, we may be unable to collect gaming debts fromour patrons who reside in such jurisdictions, which could negatively affect ouroperating results.

 

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

** **

We regularly review our business plans in light of avariety of factors, including the availability of financing, regulatory andpolitical considerations, competition and other business and strategic concerns.As a result of such assessments, our management may choose to change suchplans, which could result in failure to expand and could also cause us to incurfees or charges. We may not be able to carry forward and complete any proposedbusiness plans.

 

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

** **

Resorts use significant amounts of electricity,natural gas and other forms of energy. Although we have not experiencedshortages of energy, there have been significant price increases over the pastyear, and further substantial increases in the cost of electricity or natural gasmay negatively affect our operating results. The extent of any impact issubject to the magnitude and duration of the energy price increases and couldbe 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 revenue. This riskhas been heightened by the substantial increase in oil and natural gas prices overthe past year.

 

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

** **

The terrorist attacks of September 11thhad a significant impact on the travel and tourism industries in which weoperate. 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 this period.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 in May 2003, theU.S. and coalition forces still maintain a presence in Iraq and terroristactivities in the country have continued. These events, 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 that couldadversely affect our business and results of operations. Future acts of terror,anti-terrorist efforts, war or other armed conflicts involving the UnitedStates or other countries may reduce our guests’ willingness to travel, whichcould have a material adverse effect on the U.S. and global economies and onour business, financial condition, results of operations or cash flows.

 

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

** **

In September 2003, we entered into agreements toform a joint venture with Nakheel Co. LLC (“Nakheel”), an entity owned by the RoyalFamily of Dubai, to develop Atlantis, The Palm. In June 2004, we enteredinto an agreement with Istithmar, an entity indirectly wholly-owned by the RoyalFamily of Dubai, which assumed all obligations and rights of its affiliate,Nakheel. Dubai is one of seven autonomous Sheikhdoms that form the federationof the United Arab Emirates. The United Arab Emirates is located along thePersian Gulf, and bordered on the south and west by Saudi Arabia, on the west byQatar and on the north and east by Oman. These states and others in the region,more specifically Bahrain and Kuwait, through an organization formed tostrengthen relations among the six states, the Gulf Cooperation Council,maintain peaceful relations and cooperate on trade, regional defense andeconomic issues. The United Arab Emirates and Dubai are ruled by Sheikhs. Althoughthe Sheikh-led government appears to be stable and not subject to anysignificant local challenges, the September 11th terroristattacks on the United States and the war and ongoing efforts in Iraq have bothincreased scrutiny and heightened tensions 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 United Arab Emirates maintains friendlyrelations 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 Statesmay increase the likelihood of attacks on the state by terrorist organizations.As publicly reported on May 5, 2004, Pakistani intelligence uncovered aplot by a small group of terrorists to hijack and possibly bomb a plane boundfor the United Arab Emirates. The firm relationship between Saudi Arabia andthe United States has in recent years led to a number of significant terroristactivities in Saudi Arabia and similar events could occur in the United ArabEmirates.

 

The U.S. Department of State is concerned thatterrorists may be planning to carry out further attacks against Westerners andoil workers in the Persian Gulf. Perceptions of the safety of the region couldaffect Atlantis, The Palm, as the viability of this undertaking is dependent onthe continued growth of tourism in the region, primarily from Western Europeand Asia. Future acts of terrorism, anti-terrorist efforts, war or politicaland civil unrest in the region could have a material adverse effect on globaleconomies, the economies of the Gulf States and in particular on thedevelopment of Atlantis, The Palm. Dubai is generally viewed as the mostprogressive, open and pro-Western emirate. In addition, it is currently theonly emirate that permits the sale of land to foreigners. With its relativelyhigh profile, Dubai could represent a potentially attractive target to terroristorganizations.

 

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Atlantis, The Palm will be located at the apex of thecrescent, which forms the external border of The Palm, Jumeirah, a major landreclamation project in Dubai, and is expected to be connected to the rest ofThe Palm, Jumeirah by a roadway tunnel and proposed monorail. As with anyreclamation project, there are inherent subsidence and liquefaction risks. TheCompany and Istithmar have been monitoring the construction site forsubsidence, which to date has been isolated and not in excess of threemillimeters. However, the Company has not monitored or had any opportunity tomonitor other sites on The Palm, Jumeirah for subsidence. In the event ofunforeseeable subsidence on the site or on other sites on The Palm, Jumeirah, wewould expect at a minimum for there to be a material reduction in hotelbookings for Atlantis, The Palm and in day visitors to the water attractions,which in turn could have a material adverse impact on the operations andfinancial condition of Atlantis, The Palm. In the event of an earthquake, thereis a risk of liquefaction. While there has not been recent significant seismicactivity in the immediate vicinity of Dubai, earthquakes have occurred in Iran,Egypt, Syria and southern Asia, off the coast of Indonesia. In addition, moderatelystrong storms accompanied by high winds can develop over the Gulf. These stormstypically occur annually from December through the end of March. These stormscould lead to surges and high wave heights that could erode or top thebreakwater that has been erected on the Gulf-side of the site, thereby leadingto flooding. We and Nakheel have agreed to regularly monitor the status of thebreakwaters. Aside from the property damage that could occur from such floods,any such flooding could also damage the roads on the crescent or the proposedmonorail, as well as flood the tunnel, which would limit or curtail arrivalsand departures to Atlantis, The Palm. Any of these structural, climatic orgeological events would likely have a material adverse impact on the site andoperations of Atlantis, The Palm, including the extensive marine environmentand animals that will be a key attraction of the resort. Nakheel and otherdevelopers have also announced other reclamation projects in Dubai of a similarscale to The Palm, Jumeirah. In addition, we are dependent on Nakheel tocomplete the infrastructure of The Palm, Jumeirah, including roads, theproposed monorail and the roadway tunnel, on a timely basis. Should any ofthese reclamation projects suffer from any of these events, Atlantis, The Palmand, as a result, we could be materially adversely affected.

 

In addition to the political and other risks notedabove, there are risks associated with the very high level of developmentactivity currently underway in Dubai. In particular, due to the very highdemand for construction laborers, much of the construction work force consistsof foreigners, principally from Southeast Asia, who have left their families totake temporary jobs in Dubai. There have recently been demonstrations and otherincidents of labor unrest at constructions sites in Dubai,  in which foreign workers have protestedallegedly unfairly low pay and substandard living conditions. If theseincidents become more widespread, or if the contractors constructing Atlantis, ThePalm, are not able to retain a sufficient number of construction workers forthe project, the construction budget and schedule for Atlantis, The Palm, couldbe materially adversely affected.

 

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

** **

In the second quarter of 2005, we announced thatKerzner and two local Moroccan companies, Société Maroc Emirates Arabs Unis deDéveloppement (“SOMED”) and Caisse de Dépôt et de Gestion (“CDG”), had enteredinto a joint venture agreement for the development and operation of adestination resort casino. This agreement is subject to the fulfillment ofcertain conditions. Morocco is located in Northern Africa and is bordered byAlgeria, the North Atlantic Ocean and the Mediterranean Sea. Although Moroccois largely stable, with limited security risks, the May 2003 suicide bombattacks in Casablanca have raised concerns about terrorist activity in theregion. The implication of several Moroccans in the March 2004 Madrid trainbombing has further heightened concerns about terrorism. There are severalloose-knit terrorist groups in Morocco that have connections to Al-Qaeda. Moroccohas historically been an ally of the United States, although it did expressopposition to the war in Iraq. Its historic support for the United States mayincrease the likelihood of attacks on the state by terrorist organizations. Establishmentsthat are readily identifiable with Western interests are potential targets forfuture attacks. Such targets may include establishments where activities occurthat may offend religious sensitivities, such as casinos or places wherealcoholic beverages are sold or consumed. At present, there are five casinoslocated in Morocco; however, our proposed resort would be the largest casino inMorocco and therefore, a potentially more high-profile target. Future acts ofterrorism, anti-terrorist efforts, war or political and civil unrest in theregion could have a material adverse effect on global economies, the economy ofMorocco and in particular, the development and success of our destinationresort casino in Morocco.

 

**Oursuccess depends on certain key employees.**

** **

Our success depends upon the continued services ofcertain key employees, in particular our senior management. Our seniormanagement is responsible for the implementation and development of our various

 

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projects, the development and maintenance of our relationships withcurrent and potential hotel and resort owners and joint venture partners andthe marketing and related activities necessary to attract patrons to ourproperties. Although we believe that we could replace our key employees withina reasonable amount of time should the need arise, the loss of key personnelcould have a material adverse effect on our business.

 

The foregoing does not address any additional risksthat may be associated with the proposed acquisition announced on March 20,2006. See “Item 4. Recent Developments” for more information.

 

## **Item4.**            Informationon the Company

## ** **

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

** **

Kerzner was incorporated in The Bahamas in 1993 underthe name “Sun International Hotels Limited,” and is an international businesscompany under the International Business Companies Act, 2000 of theCommonwealth of The Bahamas. The Company is registered under number 46,600B atthe Companies Registry of The Bahamas. Our executive offices are located atExecutive Offices, Coral Towers, Paradise Island, The Bahamas, and the telephonenumber is 242-363-6018. Our agent for service of process in the United Statesis Corporation Services Company, 1013 Centre Road, Wilmington, Delaware 19805. OnMarch 1, 1996, we listed our Ordinary Shares for trading on The New YorkStock Exchange (the “NYSE”). On July 1, 2002, we changed our corporatename from Sun International Hotels Limited to Kerzner International Limited andour stock, which was trading on the NYSE under the symbol “SIH,” was listedunder the new ticker symbol “KZL.” The name change was implemented inaccordance with agreements related to the restructuring of Sun InternationalInvestments Limited (“SIIL”), which was formerly our majority shareholder. See “Item 7.Major Shareholder and Related Party Transactions.”  There was no change in our management orworldwide operations as a result of the name change.

 

The Company was established in order to acquire theParadise Island Resort and Casino and related operations from ResortsInternational, Inc. The acquisition was completed in May 1994.

 

In June 1994, we established Sun Cove Limited,which is now known as Kerzner Investments Connecticut, Inc. (“KerznerConnecticut”). Kerzner Connecticut owns a 50% interest in, and is a managingpartner of, TCA, a Connecticut general partnership. In September 1995, TCAentered into a Gaming Facility and Construction Agreement with the MTGA, aninstrumentality of the Mohegan Tribe, pursuant to which TCA assisted theMohegan Tribe with the design, development and financing of Mohegan Sun, aresort and entertainment complex situated in the town of Uncasville,Connecticut. In addition, in August 1995, TCA entered into a gamingmanagement agreement (the “Management Agreement”) with the Mohegan Tribepursuant to which TCA provided certain management, marketing and administrativeservices to the Mohegan Tribe upon the opening of Mohegan Sun inOctober 1996. In February 1998, TCA and the Mohegan Tribe enteredinto an agreement (the “Relinquishment Agreement”) pursuant to which theManagement Agreement was terminated effective January 1, 2000, and theMohegan Tribe assumed full management responsibility for Mohegan Sun. Pursuantto the Relinquishment Agreement, TCA receives payments of 5% of the grossrevenues of Mohegan Sun for the 15-year period that commenced January 1,2000. In addition to the Relinquishment Agreement, in February 1998, theMohegan Tribe appointed TCA to develop its $1.0 billion expansion ofMohegan Sun, which was completed in June 2002. See below “(B) BusinessOverview—The Properties—Gaming—Mohegan Sun” for a further description of theRelinquishment Agreement and the $1.0 billion expansion.

 

In December 1996, we acquired Sun InternationalNorth America, Inc. (formerly Griffin Gaming &Entertainment, Inc.), which is now known as Kerzner International NorthAmerica, 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, we completed the sale of ResortsAtlantic City to an affiliate of Colony Capital LLC (“Colony”) for a purchaseprice of approximately $144.0 million, including accrued interest (the “ResortsAtlantic City Sale”). The proceeds received from Colony consisted ofapproximately $123.5 million in cash, net of costs incurred subsequent toclosing, and an unsecured $17.5 million note which was paid in full inMarch 2002. The net cash proceeds received from this transaction were usedto reduce the amount of borrowings outstanding under our then-existing amendedand restated revolving credit facility. 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. On March 14, 2004, we sold undeveloped real estate adjacent to ResortsAtlantic City to a wholly-owned subsidiary of Colony for a sale price of$40.0 million. See “(B) Business Overview—Colony Note” below for moreinformation on this sale.

 

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In 1999, we formed a joint venture with StarwoodVacation Ownership, Inc. (“SVO”) (formerly Vistana, Inc.), a subsidiary ofStarwood Hotels and Resorts Worldwide, Inc. (“Starwood”), to developHarborside at Atlantis, a timeshare project on Paradise Island. We and SVO eachhold a 50% interest in Harborside at Atlantis. As part of the joint venture, wecontributed land and cash and SVO contributed cash.

 

In January 2000, we received a proposal fromSIIL, at that time the majority shareholder of Kerzner, to acquire in a mergertransaction all of our Ordinary Shares not already owned by SIIL or itsshareholders 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 proposedtransaction was subject to various conditions, including approval by theSpecial Committee. On June 16, 2000, we announced that SIIL was not able tonegotiate a mutually satisfactory transaction with the Special Committee andthat SIIL advised us that its proposal had been withdrawn.

 

In order to allow our shareholders to sell at least aportion of their Ordinary Shares at the price formerly proposed by SIIL, ourBoard of Directors approved a self-tender offer for up to 5,000,000 OrdinaryShares at a $24 per share cash price. In August 2000, we announced thecompletion of the self-tender, pursuant to which we purchased 5,000,000Ordinary Shares at $24 per share.

 

In August 2000, we established KerznerInteractive Limited, our Internet gaming subsidiary. In September 2001, wereceived a license to operate in the Isle of Man and commenced live gamingoperations in January 2002. The Company discontinued the operations ofKerzner Interactive Limited during the first quarter of 2003. See below “(B)Business Overview—Internet Gaming” for more information.

 

On July 3, 2001, we announced the restructuringof our former majority shareholder, SIIL. In connection with thisrestructuring, among other things, the shareholders agreement governing SIILwas terminated and SIIL was dissolved. In November 2002, we reached afurther settlement with Sun International Limited (formerly known as KersafInvestments Limited, and referenced herein as “Kersaf”) related to therestructuring agreement and certain other matters. See “Item 7. MajorShareholders and Related Party Transactions.”

 

Effective August 2001, we acquired a 25% interestin the Kanuhura Sun Resort & Spa Limited (“One&Only Kanuhura”) forapproximately $3.8 million. As of December 31, 2005, the balance ofthe debt financing we have provided to One&Only Kanuhura was $2.3 million,excluding accrued interest, and we also have a contingent guarantee obligationto provide up to approximately $10.7 million. One&Only Kanuhura is a100-room luxury resort located on Lhaviyani Atoll in the Maldives, which islocated approximately 600 miles southwest of the southern tip of India. Ourmanagement contract with One&Only Kanuhura expires in 2026. Our agreementwith Sun Resorts Limited (see below) also included the sale of 20% of our debtand equity interests in One&Only Kanuhura to Sun Resorts Limited and thetransfer to One&Only Management (as defined below) of the One&Only Kanuhuramanagement agreement. This agreement reduced our ownership interest inOne&Only Kanuhura to 20%. Effective January 1, 2005, our ownership interestin One&Only Kanuhura further decreased to 18.75% and SRL’s interestincreased to 6.25%, as SRL purchased an additional 1.25% interest from us.

 

In June 2002, we entered into management anddevelopment agreements for One&Only Maldives at Reethi Rah, a 130-roomluxury resort on North Male Atoll in the Maldives that we opened on May 1,2005. This new five-star resort occupies the site where a small resort hadpreviously been located. The management and development agreements related tothis property are co-terminus with the owner’s lease, which expires in 2030. Aspart of this development, we have committed to provide certain financingarrangements to the current owner of the resort. See “Item 5. Operating andFinancial Review and Prospects, (C) Liquidity and Capital Resources” belowfor more information.

 

On September 12, 2002, we purchased a 50%ownership interest in the 115-room Palmilla Resort (“One&Only Palmilla”), adeluxe five-star property located near Cabo San Lucas in Baja, Mexico forapproximately $40.8 million, including transaction costs. In connectionwith the purchase, we entered into long-term management and developmentagreements related to the property that will expire in 2022. The acquisitionwas funded through a combination of cash on hand and drawings under ourthen-existing amended and restated revolving credit facility. One&OnlyPalmilla re-opened in January 2004 following a refurbishment that expandedthe room count to 172 rooms, all of which are oceanfront, and added a CharlieTrotter restaurant, a 12-unit spa with open-air villas, a meeting space, a pooland a poolside restaurant. In addition, in February 2004, One&Only Palmillahad a grand re-opening event. The expansion was financed by One&OnlyPalmilla through local project financing that was supported by a$46.5 million guarantee from Kerzner, and by approximately $14.5 millionin completion loans from

 

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Kerzner. The total cost of the One&Only Palmilla renovation wasapproximately $102.0 million. On December 17, 2004, One&OnlyPalmilla entered into two promissory notes pursuant to which it borrowed $110.0million. The proceeds were used to, among other things, repay all of One&OnlyPalmilla’s existing loans, including the completion loans provided by Kerzner,and fund One&Only Palmilla’s working capital requirements. In connectionwith the repayment of One&Only Palmilla’s existing loans, Kerzner’s$46.5 million guarantee was extinguished. The new indenture governing thepromissory notes provides recourse to Kerzner solely in the event certainrepresentations and warranties are violated.

 

In December 2002, we began to operate and marketcertain of our managed and/or owned luxury resort hotels under the “One&Only”brand in connection with our corporate name change. We are now marketing sevenof our properties under our One&Only brand.

 

We currently have a 20.4% ownership interest in SunResorts Limited (“SRL”), a publicly-traded company on the Mauritian StockExchange, which owns One&Only Le Saint Géran, One&Only Le Touessrok,Sugar Beach Resort, La Pirogue Hotel and Le Coco Beach Hotel, which are alllocated in Mauritius. In December 2002, we entered into an agreement withSRL to form One&Only (Indian Ocean) Management Limited (“One&OnlyManagement”), a new management company, for the purpose of, among other things,managing the five properties owned by SRL in Mauritius and One&OnlyKanuhura in the Maldives, and, as consideration, securing an extension to ourmanagement agreements in Mauritius from 2008 until 2023. Pursuant to anagreement among us, SRL and One&Only Management, SRL’s ownership interestin One&Only Management is increasing incrementally, subject to certainconditions, from 2005 through 2009, at which time it will own 50% ofOne&Only Management.

 

The table below shows the dates on which SRL’sownership interest in One&Only Management increases and the correspondingdecreases in our ownership interest in One&Only Management.

 
| **Effective Date**   | ** ** | **Kerzner Ownership Percentage** | ** ** | **SRL Ownership Percentage** | ** ** |
|---------------------------|------------|--------------------------------------------|------------|----------------------------------------|------------|
| January 1, 2003 |       | 80.0                                       | %          | 20.0                                   | %          |
| January 1, 2005           |       | 75.0                                       | %          | 25.0                                   | %          |
| January 1, 2007           |       | 72.5                                       | %          | 27.5                                   | %          |
| January 1, 2008           |       | 67.5                                       | %          | 32.5                                   | %          |
| January 1, 2009           |       | 50.0                                       | %          | 50.0                                   | %          |

 

SRL’s ownership of the debt and equity interests inOne&Only Kanuhura is also increasing incrementally, subject to certainconditions, from 2003 to 2009, in accordance with the ownership percentage inthe above table, at which time it will own 12.5% of the debt and equityinterests in One&Only Kanuhura (or 50% of our initial ownership of suchdebt and equity interests).

 

One&Only Management serves as a joint venturevehicle for expansion in the islands of the Indian Ocean. In connection withthis transaction, we subcontracted to One&Only Management all of ourMauritius management agreements and assigned to it the One&Only Kanuhuramanagement agreement, and SRL purchased 20% of our debt and equity interests inOne&Only Kanuhura. Effective January 1, 2005, our ownership interestin One&Only Kanuhura further decreased to 18.75% and SRL’s interestincreased to 6.25%, as SRL purchased an additional 1.25% interest from us. Pursuantto an additional subcontract arrangement with One&Only Management, weprovide comprehensive management services to the five Mauritius resorts and One&OnlyKanuhura and One&Only Maldives at Reethi Rah and receive a management fee. Pursuantto our agreement to transfer the management agreement for One&Only Maldivesat Reethi Rah to One&Only Management, SRL acquired 25% of the subordinateddebt interest in One&Only Maldives at Reethi Rah, which percentage was toincrease to 50% as SRL’s interest in One&Only Management increased. It isanticipated that we will amend our agreement with SRL to waive the requirementthat SRL purchase up to 50% of the subordinated debt and to provide that SRLwill only be entitled to 25% of the management fees paid to One&OnlyManagement under the One&Only Maldives at Reethi Rah management agreement. Itis further anticipated that we will acquire a short-term option to purchase SRL’sexisting subordinated debt (and corresponding management fees) in One&OnlyMaldives at Reethi Rah as consideration for granting such waiver.

 

In April 2003, we agreed to acquire from LondonClubs International (“LCI”) for $2.1 million a property located in thetown center of Northampton, England. On March 30, 2004, we announced thatthe Gaming Board of Great Britain had granted us a Certificate of Consent,which has enabled us to transfer a gaming license held by LCI

 

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into our name and proceed with our plans for a casino in Northampton. Weexpect to develop and operate the new casino facility on an approximate 30,000square foot site, which facility is expected to cost approximately £10.8million (approximately $18.9 million in U.S. dollars as of February 28,2006). The development of this facility has been approved by the local planningauthorities. We have commenced construction on this project, and we expect thefacility to be open by the first quarter of 2007. See “(B) BusinessOverview—Gaming—United Kingdom” for more information.

 

In May 2003, we entered into a “Heads ofAgreement” with the Bahamian Government with respect to the Phase III expansionon Paradise Island. In May 2004 and December 2004, we entered intosupplements to the Heads of Agreement, pursuant to which we modified certaincomponents involved in the Phase III expansion, which now includes a new luxuryall-suite hotel, a new condominium-hotel, an expansion of our conventionfacilities, expanded water attractions, an addition to Harborside at Atlantis anda new 18-hole golf course (the “Athol Golf Course”) on Athol Island, which liesjust east of Paradise Island, in partnership with an agency to be nominated bythe Bahamian Government. See “(B) The Properties—Atlantis, Paradise Island” formore information.

 

On September 22, 2003, we announced that we hadagreed to form a joint venture with Nakheel, an entity owned by the RoyalFamily of Dubai, to develop Atlantis, The Palm. 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 assumed allobligations and rights of its affiliate, Nakheel, pursuant to which we formedKerzner Istithmar Limited (“Kerzner Istithmar”) and increased the scope ofAtlantis, The Palm. Based on our current budget, the development costs of theexpanded project are expected to be approximately $1.5 billion (inclusiveof land acquisition costs) and the project will include an approximately 1,500-roomresort and extensive water park situated on 1.25 miles of beachfrontproperty. The joint venture has decided to postpone development of apreviously-announced condominium project. Atlantis, The Palm will be located onThe Palm, Jumeirah, a multi-billion dollar land reclamation project in Dubai,United Arab Emirates. The joint venture’s capital structure includes an equityinvestment of $200.0 million by each partner. The remaining project financing isexpected to consist of a $700.0 million senior first-lien term loan facility,which is subject to various conditions, and an additional $275.0 million of seniorsecond-lien debt. Istithmar has committed to provide $75.0 million of the seniorsecond-lien debt. The joint venture has received a commitment, subject tovarious conditions, from third party underwriters for the remaining $200.0million. The joint venture expects to enter into binding definitivedocumentation for the senior first-lien term loan facility and the senior second-liendebt during the second quarter of 2006. In addition, we and Istithmar will eachprovide, on a joint and several basis, additional sponsor support of up to$55.0 million with respect to cost overruns and post-completion debt servicesobligations. Further, Istithmar has agreed to provide an additional guaranteefor cost overruns in excess of this amount and as necessary to achievecompletion.

 

Nakheel has agreed to provide the joint venture with aright to reclaim and develop an additional 125 acres of land off the crescentof The Palm, Jumeirah, so as to expand the overall Atlantis, The Palm site andpermit additional phases of development. The joint venture has also agreed withNakheel to acquire all of the land on which Atlantis, The Palm is situated fora $125 million payment-in-kind note.

 

We commenced construction on Atlantis, The Palm in November2005. We anticipate that the project will be completed in late 2008. As part ofthis transaction, we have entered into a long-term management agreement withthe joint venture that entitles us to receive a base management fee based onthe gross revenue generated by Atlantis, The Palm, and an incentive managementfee based on operating income. The base management fee is likely to besubordinated to both the senior and subordinated debt facilities. We have alsoentered into a development agreement with the joint venture that entitles us toreceive $20.0 million and reimbursement of certain expenses over thedevelopment period. This project is subject to various closing conditions,including obtaining all requisite governmental consents and construction ofsupporting infrastructure by Nakheel. See below “(B) Business Overview—TheProperties—Destination Resorts—Atlantis, The Palm” for more information.

 

In October 2003, we entered into an agreement toacquire the assets of Club Méditerranée (Bahamas) Limited on Paradise Islandfor approximately $38.5 million. The approximate 39-acre site is adjacentto the proposed site of the new 22-story, 600-room, luxury all-suite hotel thatis part of the Phase III expansion. In the short term, it is expected that theexisting hotel on the property will be used to house construction workersduring the construction of the planned all-suite hotel. During the year ended December 31,2003, we paid $20.0 million in connection with the acquisition. Thebalance of $18.5 million was paid in 2004. In addition, Kerzner obtainedan option to purchase certain adjacent land lots for an option price of$5.0 million. In September 2004, we exercised our option andpurchased the adjacent land lots at a price of $5.5 million.

 

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In November 2003, we entered into an agreementwith Victoria & Alfred Waterfront (Pty) Limited (“V&A Waterfront”)to develop a new luxury hotel, subject to various conditions, at the highestend of the market in Cape Town, South Africa. Under this agreement, wecommitted to enter into a land lease and relevant development agreementsrelated to the property. Consequently, in 2004, we entered into a 50-year landlease with V&A Waterfront and formed a joint venture, in which our localpartners own 80% and we own the remaining 20%, to develop hotel properties insouthern Africa. In March 2006, we formed a project company under the jointventure to focus specifically on the Cape Town property. This project company enteredinto development and management agreements with wholly-owned subsidiaries ofKerzner. Kerzner assigned the land lease to the project company. Along with ourequity investment, we will be providing financing assistance in the form ofloans and guarantees in an aggregate amount of approximately $24.4 million. See“(B) Business Overview – One&Only Resorts – South Africa” for moreinformation.

 

On March 10, 2004, we entered into a joint venture,BLB Investors, L.L.C. (“BLB”), with an affiliate of Starwood Capital GroupGlobal, 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 owned gaming and track operations in the United States and race tracks inthe United Kingdom. BLB acquired a 22.2% stake in Wembley in 2004. In July2005, BLB completed its approximately $464.0 million acquisition ofWembley’s U.S. operations, which included the Lincoln Park racino in RhodeIsland and three greyhound tracks and one horse racing track in Colorado. BLBexchanged its 22.2% interest in Wembley, valued at $116.0 million, as partialconsideration for the acquisition. The balance of the acquisition price wasfinanced on a non-recourse basis by a consortium of banks that underwrote a$495.0 million senior secured credit facility, which includes a $125.0 millionrevolving credit facility that will be used primarily to finance a portion ofthe proposed redevelopment of Lincoln Park.

 

Completion of the Lincoln Park redevelopment projectis expected in early 2007. Based on the most recent cost estimates, whichindicate a significant rise in the total development costs of this project, weexpect to make an additional equity investment in BLB of $10.0 million to $15.0million to finance our pro rata share of these additional costs. See “(B)Business Overview—Gaming—United Kingdom” for more information.

 

In April 2005, the United Kingdom passed gaming reformlegislation that was less favorable than we had previously anticipated relatedto our previously announced Scottish Exhibition + Conference Center, Sportcityand The O2 (“The O2”) (formerlythe Millennium Dome) projects. Specifically, this legislation reduced thenumber of regional casinos from eight to one in order to secure oppositionparty support for the legislation. The new law does however contain a provisionfor the government to increase the number of regional casinos; however, thisincrease would require the approval of both houses of Parliament.

 

During 2005, we wrote off $11.2 million related to allpreviously capitalized and deferred costs incurred for the planning anddevelopment of the aforementioned projects. Although the future of gaming inthe United Kingdom is unclear as a result of the passage of legislation inApril 2005, we continue to pursue potential opportunities on a selective basis.Costs related to these opportunities, other than the Northampton projectdiscussed above, are expensed as incurred. The Company is committed to making acontribution of not more than £10 million towards the construction of the raftand shell infrastructure to house our proposed regional casino at The O2. The Company expects to incur approximately £6.5million (approximately $11.3 million in U.S. dollars as of February 28, 2006)in 2006 related to this construction. If a regional casino license is notawarded at The O2, the Company is eligible torecover 80% of its approximately £6.5 million investment from AnschutzEntertainment Group, Inc., its joint venture partner. The balance of the costs isexpected to be expensed as incurred.

 

In connection with a planned destination resort casinoin Morocco, we have entered into a joint venture agreement with two localMoroccan companies, SOMED and CDG, and related development and long-termmanagement agreements. The joint venture has negotiated with the Government ofthe Kingdom of Morocco exclusive rights to conduct gaming operations within aterritory that includes the cities of Casablanca and Rabat. The greenfield siteis located near El Jaddida, which lies approximately 50 miles southwest ofCasablanca. This site includes three miles of beachfront along Morocco’sAtlantic coast. The destination resort casino is expected to consist of a500-room hotel, an 18-hole golf course, convention space, restaurants and a casino.

 

The agreements require each party to provide equitybased on the initial estimate of total project cost of $230.0 million. Basedon the current preliminary designs for the project, the budget is nowanticipated to be approximately $300.0 million, although a more definitivebudget figure will not be available until further detailed design work has beencompleted. As a result of the budget increase, the need to arrange additionaldebt and equity financing and the additional design work required for theproject, we expect that there will be material amendments

 

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of the project agreements, and we do not intend to proceed with thedevelopment of this project unless such amendments are obtained. As a result ofthe previously announced budget increase, the parties have worked together forseveral months to arrange debt and equity financing to fund the project. Althoughno assurances can be given at this time, we expect to reach agreement with ourMoroccan partners on amended project documents and proceed with the project,subject to obtaining third party debt financing. We expect to sell one-half ofour 50% interest in the joint venture to an affiliate of Istithmar and arediscussing the terms of the transaction with the other parties. Construction isanticipated to commence in 2007, with an expected completion date in 2009. Therequired debt financing is expected to be raised by a consortium of Moroccanbanks.

 

No assurances can be given at this time that eitherthe additional debt or equity financing will be obtained or the likely materialamendments to project documents will be agreed, both of which will be necessaryin order for this project to move forward to construction, as well as certainother conditions, including receipt of all applicable municipal, regional andother regulatory approvals. See below “(B)” Business Overview—theProperties—Destination Resorts—Morocco” for more information.

 

In January 2005, we announced that we and CapitaLand hadentered into a memorandum of understanding relating to the creation of a jointventure to be owned 60% by us and 40% by CapitaLand for the purpose ofsubmitting a joint concept proposal to the Singapore Government for thepotential development of an integrated entertainment resort complex on SentosaIsland in Singapore.

 

**CapitalStructure**

** **

**StrategicInvestment by Istithmar PJSC**

** **

On July 16, 2004, we announced a strategicinvestment in our Ordinary Shares by Istithmar, our partner in the developmentof Atlantis, The Palm. This transaction closed on August 10, 2004. As partof this arrangement, Istithmar purchased 4.5 million of our OrdinaryShares for an aggregate price of $225.0 million. As of February 28, 2006,Istithmar held approximately 12.3% of our Ordinary Shares.

 

Istithmar purchased 3.0 million newly issuedOrdinary Shares directly from Kerzner, resulting in net proceeds of $153.4million ($51.25 per share). We are using proceeds from the issuance to fundcapital expenditures and investments and for general corporate purposes. Of theremaining 1.5 million Ordinary Shares, Istithmar purchased1.3 million shares from Caledonia and 0.2 million shares from CMS ata price of $47.50 per share, the market price at the time the purchaseagreements were executed. Therefore, Istithmar paid an average per share priceof $50 for its aggregate acquisition of 4.5 million Ordinary Shares. Followingreceipt of the necessary regulatory approval on December 8, 2004, Mr. HamedKazim, a representative of Istithmar, took a seat on our Board of Directors.

 

**AmendedCredit Facility**

** **

On October 31, 2005, Kerzner, KINA and KerznerInternational Bahamas Limited (“KIB”), as co-borrowers, entered into the AmendedCredit Facility with a syndicate of banks. Under the Amended Credit Facility,the maximum amount of borrowings that may be outstanding is $650.0 million,subject to certain conditions. Should we obtain the requisite commitments fromexisting or new lenders, we have the right to increase the amount of our creditfacility by up to $250.0 million. The Amended Credit Facility contains newlynegotiated covenants.

 

Loans under the Amended Credit Facility bear interestat (i) the higher of (a) a base rate or (b) the Federal FundsRate plus one-half of one percent, in either case plus an additional 0.00% to 1.00%based on a debt to EBITDA ratio during the period, as defined (the “LeverageRatio”), (ii) the London Interbank Offered Rate (“LIBOR”) rate plus 0.750%to 2.00% based on the Leverage Ratio or (iii) the Federal Funds Rate plus 0.750%to 2.00% based on the Leverage Ratio. For loans based on the Alternate BaseRate (as defined therein), interest is payable quarterly. For loans based onthe LIBOR rate, interest is payable on the last day of each applicable interestperiod. Loans under the Amended Credit Facility may be prepaid andre-borrowed at any time and are due in full in December 2010. Commitment feesare calculated at per annum rates ranging from 0.25% to 0.60% based on theLeverage Ratio, applied to the unused amount of the Amended Credit Facility andare payable quarterly.

 

The Amended Credit Facility contains affirmative andrestrictive covenants with which Kerzner must comply, 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. Asof December 31, 2005, we believe that we were in compliance with all suchcovenants.

 

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As of December 31, 2005, we had no borrowingsoutstanding under the Amended Credit Facility. Our availability as of December 31,2005 was $644.6 million after giving effect to the $5.4 million inoutstanding letters of credit. All amounts outstanding are unconditionallyguaranteed by all significant subsidiaries that are a party to the AmendedCredit Facility.

 

**Issuanceof 2.375% Convertible Senior Subordinated Notes**

** **

In April 2004, Kerzner issued $230.0 millionprincipal amount of 2.375% convertible senior subordinated notes due 2024 (the “2.375%Notes”) which, after related issuance costs, resulted in net proceeds ofapproximately $223.7 million. In connection with the issuance of the2.375% Notes, we filed a shelf registration statement, pursuant to whichholders of such notes may engage in resales. All of the proceeds received fromthe issuance of the 2.375% Notes are being used to fund future capitalexpenditures and for general corporate purposes.

 

The 2.375% 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 amount of the converted notes must bepaid in cash.

 

The 2.375% Notes, which are unsecured obligations, arenot guaranteed by any of Kerzner’s subsidiaries and therefore are effectivelysubordinated to the subsidiary guarantees of the 63⁄4% Notes. Interest on the2.375% Notes is payable semi-annually and commenced on October 15, 2004. Webelieve that we were in compliance with all covenants contained in the indenturegoverning the 2.375% Notes as of December 31, 2005. All of our outstanding2.375% Notes are subordinated to the borrowings under our Amended CreditFacility.

 

**Issuancesof 63⁄4% Senior Subordinated Notes**

** **

In September 2005, Kerzner issued $400.0 millionprincipal amount of 63⁄4% senior subordinated notes due 2015, which after $7.3million of debt issuance costs, resulted in net proceeds of $392.7 million.

 

The proceeds were used to repay the Company’sthen-outstanding 87/8% senior subordinated notes (the “87/8% Notes”) pursuant tothe tender offer and consent solicitation described below.

 

The 63⁄4% senior subordinated notes were issued withoutregistration under the Securities Act,  in reliance on Rule 144A promulgated under theSecurities Act. In connection with the sale of those notes, we entered into aregistration rights agreement, under which we agreed to consummate an exchangeoffer for the 63⁄4% senior subordinated notes. We filed an exchange offerregistration statement on November 23, 2005, which was declared effectiveby the SEC on December 2, 2005. On December 2, 2005, we commenced anexchange offer to exchange any and all of our outstanding 63⁄4% seniorsubordinated notes for identical notes registered under the Securities Act. OnJanuary 6, 2006, we closed the exchange offer and, together with KINA,issued $400.0 million of 63⁄4% senior subordinated notes (the “63⁄4% Notes”) inexchange for our outstanding 63⁄4% senior subordinated notes.

 

The 63⁄4% Notes, which are unsecured obligations, were co-issuedby Kerzner and KINA and are unconditionally guaranteed by substantially all ofthe wholly-owned subsidiaries of Kerzner other than KINA. Interest on the 63⁄4%Notes is payable semi-annually on April 1 and October 1, commencing on April 1,2006. The indenture governing the 63⁄4% Notes contains various restrictivecovenants, including limitations on the ability of the co-issuers and theguarantors to, among other things: (a) incur additional indebtedness, (b) incur certain liens,(c) engage in certain transactions with affiliates and (d) paydividends and make certain other payments. We believe that we were incompliance with all such covenants as of December 31, 2005. All of ouroutstanding 63⁄4% Notes are subordinated to the borrowings under our AmendedCredit Facility.

 

**DerivativeFinancial Instruments**

** **

In August and December 2001, we entered intofixed-to-variable rate interest rate swap agreements (the “Swap Agreements”)designated as fair value hedges on $200.0 million principal amount of our87/8% 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% Notes as of December 31,2004. In 2005, we terminated the remaining $150.0 million of our Swap Agreements,which resulted in an increase in fixed rate debt, in advance of plannedvariable rate borrowings for growth initiatives under our Amended CreditFacility. The termination of the $150.0 million of Swap Agreements resulted inthe realization of a gain of $4.9 million, which reduced the loss on earlyextinguishment of our 87/8% Notes in the tender offer discussed below.

 

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In December 2004, One&Only Palmilla enteredinto an interest rate cap agreement in connection with its issuance of twopromissory notes for an aggregate principal amount of $110.0 million. Thepurpose of the interest rate cap agreement is to cap the LIBOR component of theinterest on the promissory notes at 5%. The interest rate cap agreement isdesignated as a cash flow hedge and is used to hedge the variable cash flowsassociated with the promissory notes.

 

**TenderOffer and Consent Solicitation for 8**7/8% SeniorSubordinated Notes

** **

On September 12, 2005, we commenced a cash tenderoffer to purchase any and all of our outstanding 87/8% Notes. In conjunctionwith the tender offer, we solicited consents to proposed amendments to theindenture governing the 87/8% Notes. The tender offer expired on October 8,2005. At the expiration, approximately 99.6% of the 87/8% Notes were tenderedand the requisite consents received. We used the net proceeds from the issuanceof $400.0 million of our 63⁄4% Notes on September 22, 2005, togetherwith cash on hand of $39.3 million, to retire the 87/8% Notes purchasedpursuant to the tender offer.

 

**ShelfRegistration**

** **

In May 2002, Kerzner and KINA filed a universalshelf registration statement on Form F-3 (the “Universal Shelf”) with theSEC relating to the sale of up to $500.0 million in securities. The UniversalShelf allows us flexibility as to the type of security we could choose to sellin the future, including various types of debt securities, Ordinary Shares,preference shares and warrants, and replaces the 1997 Shelf Registration. We may alsoutilize the Universal Shelf to register secondary sales of Ordinary Shares byselling shareholders. Securities registered under the Universal Shelf may beoffered from time to time directly by us or through underwriters at amounts,prices, interest rates and other terms to be determined at the time of theoffering.

 

In November 2003, pursuant to Rule 12h-3 ofthe Exchange Act, KINA suspended its obligation to file periodic reports underthe Exchange Act. Accordingly, KINA is no longer able to issue or co-issue anysecurities registered pursuant to the Universal Shelf.

 

**BahamianDepositary Receipts**

** **

Pursuant to the Heads of Agreement, we completed anequity offering in July 2004 in The Bahamas of approximately 4.3 millionBahamian Depositary Receipts (“BDRs”), which are the equivalent ofapproximately 0.4 million Ordinary Shares. The BDRs are listed and tradeon The Bahamas International Securities Exchange. Net proceeds received fromthe offering were $19.1 million.

 

**RecentDevelopments**

** **

*Atlantis*Reports Theft of Certain Customer Information

* *

On January 6, 2006, Kerzner announced that themanagement of Atlantis, Paradise Island had determined that there had been atheft from a customer database of personal information relating to certainAtlantis customers. The resort believes that approximately 55,000 customers maybe affected. The resort notified affected customers in writing so customers couldtake steps to protect themselves from possible identity fraud and provided, at thecustomer’s option and at no cost, a credit monitoring service for one year. Todate, the resort has not received any evidence that the information has beenused to commit identity fraud or in any other manner adverse to its customers. Theresort engaged outside counsel and a firm specializing in information securityto assist it in responding to this incident. The resort notified Bahamian andU.S. law enforcement authorities and is cooperating with them. The personalinformation that was compromised includes names, addresses and credit card,Social Security, driver’s license and/or bank account numbers.

 

*Kerzner Enters Into Agreement for Sale to InvestorGroup*

 

On March 20, 2006, Kerzner announced that an investorgroup led by its Chairman, Mr. S. Kerzner, and Chief Executive Officer, Mr. H.B. Kerzner, had entered into a definitive agreement under which the Companywill be acquired by the investor group for $76.00 in cash per outstandingordinary share. The investor group also includes Istithmar, a significantshareholder of the Company, Whitehall Street Global Real Estate LimitedPartnership 2005, Colony Capital LLC, Providence Equity Partners, Inc. and TheRelated Companies, L.P., which is affiliated with one of the Company’sDirectors. The aggregate transaction value, including the assumption of $599million of net debt as of December 31, 2005, is approximately $3.6 billion.

 

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The Board of Directors of the Company, upon theunanimous recommendation of a Special Committee of Directors formed to evaluatethe terms of the transaction, approved the merger agreement. The SpecialCommittee, which includes representatives of two significant shareholders thatare not affiliated with the investor group, negotiated the price and otherterms of the merger agreement with the assistance of its financial and legaladvisors.

 

In accordance with the merger agreement, the Companyand the Special Committee’s advisors, working under the supervision of theSpecial Committee will actively solicit superior proposals during the next 45days. The Kerzners and Istithmar have agreed to cooperate in this solicitationprocess.

 

In the event the merger agreement is terminated, inorder for the Company to enter into a superior transaction arising during the45-day solicitation period, the investor group will receive a break-up fee of1% of the equity value of the transaction (approximately $30 million). Inaddition, in the event of a superior transaction, Mr. S. Kerzner and Mr. H. B.Kerzner have agreed to provide certain transitional services to the acquiringparty for a period of six months and, in the event of certain all-cashacquisitions, to vote in favor of the superior transaction. The Company notedthat there can be no assurance that the solicitation of superior proposals willresult in an alternative transaction. The Company does not intend to disclosedevelopments with respect to the solicitation process unless and until itsBoard of Directors has made a decision.

 

The transaction is expected to close in mid-2006 andis subject to certain terms and conditions customary for transactions of thistype, including the receipt of financing and regulatory approvals. DeutscheBank Securities Inc. and Goldman Sachs Credit Partners have providedcommitments to the investor group for the debt portion of the financing for thetransaction.

 

The transaction also requires approval of the mergeragreement by the Company’s shareholders. The Kerzners and Istithmar, whichtogether own approximately 24% of the Company’s ordinary shares, have agreed tovote in favor of the transaction. Upon the completion of the transaction, Mr.S. Kerzner will remain Chairman and will continue to oversee the developmentand construction of the Company’s projects, and Mr. H. B. Kerzner will remainChief Executive Officer. The Company will schedule a special meeting of itsshareholders for the purpose of obtaining shareholder approval. Upon completionof the transaction, the Company will become a privately-held company and itscommon stock will no longer be traded on the NYSE.

 

J.P. Morgan Securities Inc. is serving as financialadvisor and Cravath, Swaine & Moore LLP and Paul, Weiss, Rifkind, Wharton& Garrison LLP are serving as legal advisors to the Special Committee ofthe Company’s Board of Directors. Deutsche Bank AG and Groton Partners LLC areserving as financial advisors and Simpson Thacher & Bartlett LLP is servingas legal advisor to the investor group.

 

Additional information is available on the Company’sForm 6-K, filed on March 20, 2006, File No. 001-04226.

 

**(B)**  Business Overview

** **

We are the developer, owner and operator of Atlantis,Paradise Island, a 2,317-room destination resort in The Bahamas, and a leadingdeveloper and operator of gaming entertainment properties and luxury resorthotels worldwide. Atlantis, Paradise Island, our flagship property, is apremier destination resort property that we believe has strong brandrecognition. We have entered into a joint venture agreement to develop andmanage a second Atlantis resort, Atlantis, The Palm, in the United ArabEmirates.

 

Our gaming business is focused on owning, developingand/or managing casino properties in attractive markets where we can capitalizeon our development and operating expertise. We developed and receive incomefrom Mohegan Sun in Uncasville, Connecticut, which is owned and operated by theMTGA. We also own a 37.5% interest in BLB Investors, L.L.C. (“BLB”), which ownsLincoln Park in Rhode Island and pari-mutuel racing facilities in Colorado.

 

Our luxury resort hotel business consists of acollection of managed and/or owned/partially-owned premier properties thatprimarily operate in the five-star, deluxe-end of the resort market in TheBahamas, Mauritius, Dubai, the Maldives and Mexico under the One&Onlybrand.

 

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Each of our segments operates in various geographicareas. 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.

 

**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. Atlantis, Paradise Island features an unusual architectural design anddécor, beaches, lagoons and a wide range of gaming, entertainment and otheramenities. Since acquiring the property in 1994, we have invested over $1.0 billionto create a unique destination resort and casino that caters to multiplesegments of the resort and casino gaming 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 high-end retail space. Atlantis, Paradise Island celebrates thewonders of the sea and is inspired by the myth of the lost continent ofAtlantis. The ocean-themed environment of Atlantis, Paradise Island includes:

 

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

 

•      a 34-acremarine environment, which features the world’s largest open-air marine habitat,showcasing over 200 species of marine life, waterfalls, lagoons and adventurewalks;

 

•      “The Dig,” an areathrough which visitors can walk surrounded by sharks, numerous species oftropical 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;

 

•      the largestcasino in the Caribbean market;

 

•      the 63-slip,full-service Marina at Atlantis, which enjoys some of the highest docking ratesin the Caribbean market and can accommodate yachts up to 200 feet in length;and

 

•      Harborside atAtlantis, 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-themed destinationresort through an initial $140.0 million capital expenditure program. In1995, the property achieved an average occupancy and average daily room rate of85% and $122, respectively, a substantial increase from the 62% and $95,respectively, achieved in 1993 under previous management. Seeking to capitalizeon the early success of Atlantis, Paradise Island, we began construction of anapproximate $640.0 million expansion of the property in 1997. This majorexpansion was completed in December 1998 and effectively doubled the sizeof Atlantis, Paradise Island. The 1998 expansion included a 1,200-room hotel, a100,000 square foot entertainment complex that included a casino containingapproximately 900 slot machines and 80 table games, a marina and an expansionof 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 renovationof all of the Beach Tower’s 425 rooms and improvements to certain public spaces.During 2001, we completed a major capital expenditure program of approximately$20.0 million to complete renovations at the Ocean Wing of Atlantis,Paradise Island’s Coral Towers. This project included the renovation ofapproximately 400 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 thejoint venture agreement, we contributed land and cash and SVO contributed cash.Subsequently, both partners have loaned funds to finance construction costs. Thefirst phase of the project was completed in February 2001 and consisted of82 two-bedroom

 

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units. We began selling the units in May 2000 and had soldapproximately 97% of the units through December 31, 2005. InAugust 2002, Harborside at Atlantis was closed to repair water damageprimarily resulting from 2001’s Hurricane Michelle. During the fourth quarterof 2002, these repairs were completed and the resort re-opened in December 2002.During the temporary closure, Harborside at Atlantis’ guests were moved toAtlantis, Paradise Island. Our share of construction remediation costs fromHarborside at Atlantis was $6.9 million and $1.8 million in 2002 and2003, respectively. For 2003 and 2004, we recognized a total of $5.7 millionof insurance recoveries related to Hurricane Michelle. The second phase ofHarborside at Atlantis, which is part of our Phase III expansion, consisted of 116two- and three-bedroom units and opened in August 2005.

 

In order to capitalize on the popularity of Atlantis,Paradise Island and One&Only Ocean Club, and to leverage our developablereal estate and our investment in Paradise Island, in May 2003 we enteredinto a Heads of Agreement with the Government of the Commonwealth of TheBahamas, which set forth an expansion plan for Atlantis, Paradise Island and One&OnlyOcean Club. In May 2004 and December 2004, we entered intosupplements to the Heads of Agreement, pursuant to which we modified certaincomponents involved in Phase III. Phase III, as modified, consists of thefollowing components:

 

•      a 22-story, 600-room,luxury all-suite hotel;

 

•      a 495-unit condominium-hotel,for which we had entered into binding contracts with customers for approximately119 units as of February 28, 2006;

 

•      the addition ofthree luxury villas to One&Only Ocean Club;

 

•      the addition ofthe Marina Village at Atlantis, a development consisting of five restaurantsand additional retail space comprising approximately 75,000 square feet on aseven-acre site adjacent to the Marina at Atlantis;

 

•      an expansion ofAtlantis, Paradise Island’s convention facilities by approximately 100,000square feet;

 

•      an expansion ofAtlantis, Paradise Island’s existing water-themed attractions (includingfacilities for a group of dolphins available for interactive experiences with visitors);

 

•      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”);

 

•      the right todevelop, upon environmental approval, the Athol Golf Course;

 

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

 

•      an 88-unitultra-luxury condominium and private marina project (“Ocean Club Residences& Marina”), for which we had received reservations on 59 of the 88 units asof February 28, 2006; and

 

•      an expansion ofHarborside at Atlantis by the addition of second and third phases along NassauHarbour.

 

Construction of the Phase III expansion at ParadiseIsland is proceeding. Development of the 600-room, all-suite hotel, expandedwater attractions and 100,000 square feet of additional group meeting space iswell underway. Completion of these elements of Phase III is expected byApril 2007. In July 2005, the Company completed the Marina Village atAtlantis, which includes five new restaurants and additional retail space. Thesecond phase of Harborside at Atlantis, which consisted of 116 two- andthree-bedroom units, was completed in August 2005. As of December 31,2005, 37% of these units were sold. With this phase, the total number of unitsat Harborside at Atlantis increased to 198.

 

The development of the 22-story, 600-room, luxuryall-suite hotel commenced in August 2005. Pursuant to the Heads of Agreement,we have committed to substantially complete the all-suite hotel by December 2006.

 

We commenced pre-sales of the 495-unit condominium-hotelin the second quarter of 2005, and have received approximately 119 unit salereservations, representing roughly 24% of the units available for sale. We arejoint venturing with Turnberry Associates, which is providing sales andmarketing experience. Construction costs, which exclude land costs, are expectedto be approximately $250.0 million. We expect to commence construction ofthe condominium-hotel if the joint venture receives a sufficient level ofreservations and secures financing for the

 

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development. If we elect not to proceed with the development of the condominium-hotel,we would not expect to proceed with the development of the Athol Golf Course.

 

Exclusive of the Harborside at Atlantis timeshareprojects, the condominium-hotel, the Athol Golf Course and Ocean ClubResidences & Marina, we expect our investment in the Phase III expansion tobe approximately $730.0 million.

 

A description of the Heads of Agreement can be foundin “Item 4. Information on the Company, (B) Business Overview—CertainMatters Affecting Our Bahamian Operations—Heads of Agreement.”

 

Through certain Bahamian subsidiaries (the “BahamianOperations”), we now own approximately 566 acres on Paradise Island (or approximately70% of Paradise Island), including approximately 175 acres of undeveloped land.The Phase III expansion will use approximately 73 acres (excluding Harborsideat Atlantis, the Athol Golf Course and Ocean Club Residences & Marina).

 

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

 

Construction of the 88-unit Ocean Club Residences& Marina project is proceeding well. The cost of this development, which isbeing financed primarily from pre-sales of units, is expected to beapproximately $130.0 million. The project, which is comprised of four22-unit buildings, is expected to be completed in stages between January andMay of 2007. We have formed a joint venture with a Bahamian partner for thisproject. We expect Ocean Club Residences & Marina to cater to the highestend of the luxury residential market.

 

In the third quarter of 2005, we acquired HurricaneHole Marina, which is in close proximity to the Marina Village at Atlantis andincludes frontage on Nassau Harbour, and some additional buildings andfacilities for approximately $28.0 million. We intend to utilize Hurricane HoleMarina to accommodate excess demand at the Atlantis Marina and anticipatesignificantly upgrading this marina and bringing it into Atlantis’ productoffering. This acquisition includes additional real estate, which we plan touse for new development.

 

In November 2005, we agreed to acquire an additionalseven and a half acres of beachfront property at the eastern edge of CabbageBeach, adjoining Ocean Club Estates, for $15.7 million. This property is one ofthe few remaining undeveloped beachfront parcels left on Paradise Island. Wecontributed the right to use this land into the Ocean Club Residences &Marina joint venture and intend to develop the site through the joint venture.

 

Paradise Island is easily accessible by air from theeastern United States and London and has an extensive infrastructure. Themajority of patrons at our resorts on Paradise Island arrive through NassauInternational Airport located on New Providence 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. Groundtransportation is facilitated by two bridges linking Paradise Island and NewProvidence Island.

 

*Atlantis, The Palm*

* *

In September 2003, we announced that we hadagreed to form a joint venture with Nakheel, an entity owned by the RoyalFamily of Dubai, to develop Atlantis, The Palm. On June 23, 2004, weannounced that we had 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, pursuant to which we formed KerznerIstithmar and increased the scope of Atlantis, The Palm. Having carefullyevaluated various aspects of the project, including cost, real estate usage andoperating efficiencies, the joint venture revised the scope of Atlantis, ThePalm. In lieu of developing an 800-room four-star hotel tower adjacent to thefive-star Royal Towers, the joint venture has decided to increase the number ofrooms at the five-star Royal Towers from 1,200 to approximately 1,500. Thisreconfiguration of the project program will better enable the resort to meetthe growing demand for five-star accommodation in Dubai and sets aside furtherdevelopable land for future expansion. Atlantis, The Palm will be located onThe Palm, Jumeirah, a multi-billion land reclamation project in Dubai, UnitedArab Emirates.

 

In addition, Nakheel has agreed to provide the jointventure with a right to reclaim and develop an additional 125 acres of land offthe crescent of The Palm, Jumeirah, so as to expand the overall Atlantis, ThePalm site and permit additional phases of development. The joint venture hasalso agreed with Nakheel to acquire all of the land

 

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on which Atlantis, The Palm is situated, including the two parcels thatare reserved for future development, for a $125.0 million payment-in-kind note.

 

The budget for this development was increased from$1.2 billion to approximately $1.5 billion (inclusive of land acquisitioncosts). The joint venture’s capital structure includes an equity investment of$200.0 million by each partner. The remaining project financing is expected toconsist of a $700.0 million senior first-lien term loan facility, which is subjectto various conditions, and an additional $275.0 million of senior second-liendebt. Istithmar has committed to provide $75.0 million of the seniorsecond-lien debt. The joint venture has received a commitment, subject tovarious conditions, from third party underwriters for the remaining $200.0million. The joint venture expects to enter into binding definitivedocumentation for the senior first-lien loan facility and the seniorsecond-lien debt during the second quarter of 2006. In addition, we andIstithmar will each provide, on a joint and several basis, additional sponsorsupport of up to $55.0 million with respect to cost overruns andpost-completion debt service obligations. Further, Istithmar has agreed toprovide an additional guarantee for cost overruns in excess of this amount andas necessary to achieve completion.

 

We commenced construction on Atlantis, The Palm inNovember 2005, with completion scheduled for late 2008.

 

*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”)that contemplates the creation of a joint venture that will own a destinationresort casino in Morocco that we will develop and manage. In 2005, we enteredinto a joint venture agreement with SOMED and CDG, and into related developmentand long-term management agreements for the development and operation of thedestination resort casino. Based on the current preliminary designs for theproject, the budget is anticipated to be approximately $300.0 million, althougha more definitive amount will not be available until further detailed designwork has been completed.

 

As a result of a previously announced budget increase,the parties have worked together for several months to arrange debt and equityfinancing to fund the project. Although no assurances can be given at thistime, the Company expects to reach agreement with its Moroccan partners onamended project documents and proceed with the project, subject to obtainingthird party debt financing.

 

The greenfield site for this project is located nearEl Jadida, which lies approximately 50 miles southwest of Casablanca. This siteincludes three miles of beachfront along Morocco’s Atlantic coast. Approximatelyan hour’s drive from Casablanca, Morocco’s largest city with a population ofapproximately 3.5 million, the site provides for easy access to-and-fromCasablanca International Airport, which currently receives daily flights from22 European cities. Access to the area is supported by a rail network as well.

 

As part of its agreement with the Government, thejoint 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 fora 15-year period of exclusivity, which commences once construction of theproject is complete.

 

We currently own 50% of the joint venture, requiringKerzner to commit up to approximately $46.0 million. SOMED and CDG will providethe majority of the remaining equity requirement. We expect to sell one-half ofour 50% interest in the joint venture to an affiliate of Istithmar. Constructionis expected to commence in 2007, with an expected completion date in 2009. Therequired debt financing is expected to be raised by a consortium of Moroccanbanks.

 

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

 

No assurances can be given at this time that eitherthe additional debt or equity financing will be obtained or the likely materialamendments to project documents will be agreed, both of which will be necessaryin order for this project to move forward to construction, as well as certainother conditions, including receipt of all applicable municipal, regional andother regulatory approvals.

 

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**Gaming**

** **

*Mohegan Sun*

* *

Our gaming business is focused on owning, developingand/or managing casino properties in attractive markets where we believe we cancapitalize on our development and operating expertise. We own a 50% interestin, and are a managing partner of, TCA, a Connecticut general partnership thatdeveloped and initially managed Mohegan Sun, a casino and entertainment complexin Uncasville, Connecticut. TCA managed Mohegan Sun from its opening inOctober 1996 to December 31, 1999 pursuant to a management agreementfrom which TCA earned management fees based on a percentage of Mohegan Sun’searnings 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 anaffiliate of the Company pursuant to a subcontract development servicesagreement, which was later assigned to the Company. In consideration for theservices provided under the subcontract, TCA paid a fee to the Company. Theexpansion project was completed in June 2002.

 

In addition, TCA and the Mohegan Tribe entered into arelinquishment agreement (the “Relinquishment Agreement”) whereby it was agreedthat effective January 1, 2000, TCA would turn over management of MoheganSun to the Mohegan Tribe. Pursuant to the Relinquishment Agreement, theManagement Agreement was terminated and TCA receives payments of 5% of thegross revenues of Mohegan Sun for the 15-year period that commencedJanuary 1, 2000. The relinquishment fees pursuant to the RelinquishmentAgreement (“Relinquishment Fees”) are divided into senior and juniorrelinquishment payments, which together equal 5.0% of revenues. Revenues aregenerally defined as gross gaming revenues (other than Class II gamingrevenue, i.e. bingo) and all other facility revenues, including hotel revenues,food and beverage sales, parking revenues, ticket revenues and other fees orreceipts from the convention/events center generated by Mohegan Sun. Revenueswill exclude any revenues generated by any other future expansion of MoheganSun. The senior and junior Relinquishment Fees from the MTGA to TCA rank behindall of the MTGA’s obligations to pay certain minimum priority distributions tothe Mohegan Tribe and all of the MTGA’s existing and future senior securedindebtedness. The junior fees also rank behind all unsecured 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. Alldecisions of the managing partners require the concurrence of us and the othermanaging partner, Waterford Gaming, L.L.C. In the event of a deadlock, thereare mutual buy-out provisions. TCA’s partnership agreement will terminate onDecember 31, 2040, or earlier in certain circumstances, in accordance withits 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 240acres and currently features the 179,500 square foot Casino of the Earth andthe 119,000 square foot Casino of the Sky, which combined have approximately6,200 slot machines, 305 table games and various other amenities, and a34-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 million adults. MoheganSun spent $40.0 million for infrastructure improvements providing directhighway access to the property from Boston, Providence and New York.

 

Through TCA, we oversaw the $1.0 billion “ProjectSunburst” expansion of Mohegan Sun, which was completed in June 2002. Thisexpansion included the Casino of the Sky, a 10,000-seat arena, a 350-seatcabaret and specialty retail areas and restaurants that opened inSeptember 2001. The expansion also included a 100,000 square footconvention center and a 34-story, 1,200-room luxury hotel that opened with 734rooms in April 2002. Mohegan Sun opened the remaining rooms in phasesthrough June 2002 and also added an additional 2,700 parking spaces inJune 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. Since opening, gross revenues at theproperty

 

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have grown to $1.5 billion for the twelve months endedDecember 31, 2005, an 8.1% increase over the twelve month period endedDecember 31, 2004.

 

*BLB*

* *

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 owned gaming and track operations in the United States and race tracks inthe United Kingdom. Wembley’s U.S. operations included its flagship property,Lincoln Park in Rhode Island, where it owned a greyhound racetrack with approximately3,602 video lottery terminals (“VLTs”). BLB is owned 37.5% by each of usand Starwood Capital, with Waterford owning the balance of 25%. As ofDecember 31, 2005, we had invested $47.4 million in BLB.

 

In July 2005, BLB completed its approximately $464.0million acquisition of Wembley’s U.S. operations, which included the LincolnPark racino and three greyhound tracks and one horse racing track in Colorado. LincolnPark generates approximately 85% of the U.S. operations’ revenue. BLB exchangedits 22.2% interest, acquired in 2004 and valued at $116.0 million, in Wembleyas partial consideration for the acquisition. The balance of the acquisitionprice was financed on a non-recourse basis by a consortium of banks thatunderwrote a $495.0 million senior secured credit facility, which included a$125.0 million revolving credit facility that will be used primarily to financea portion of the proposed redevelopment of Lincoln Park.

 

BLB operates Lincoln Park under a master video lotterycontract with the state of Rhode Island that was authorized by legislationpassed by the Rhode Island General Assembly. This contract allows an increasein the number of VLTs to 4,752. BLB completed Phase I-A of its plannedredevelopment of Lincoln Park in November 2005, which increased the number ofVLTs at the facility from 3,002 to 3,602. The contract provides for up to a15-year term during which Lincoln Park will be entitled to 28.85% of the netterminal income on the first 3,002 VLTs and 26% on any additional VLTs. The balanceof the expansion project includes the redevelopment of the existing grandstandarea and the construction of a new facility that is expected to house at least1,750 VLTs. The new facility will be located adjacent to the current facilityand will contain new restaurant and entertainment areas and VLTs, some of whichwill be repositioned from the current facility. Upon completion of theredevelopment, Lincoln Park is expected to have 4,752 VLTs in operation.

 

BLB had previously announced that the anticipatedredevelopment of Lincoln Park would have a total cost of approximately $125.0million. Based on the most recent cost estimates, which indicate a significantrise in the total development costs of this project, we expect to make anadditional equity investment in BLB of $10.0 to $15.0 million to finance ourpro rata share of these additional costs.

 

*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 a development services agreement with theStockbridge Munsee band of Mohican Indians (the “Stockbridge-Munsee Tribe”) forthe development of a casino (the “Catskills Project”) in the Catskills regionof the State of New York. 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 theStockbridge-Munsee Tribe alleges were wrongfully taken from the tribe. InDecember 2004, the Stockbridge-Munsee Tribe and the State entered into the “Agreementof Settlement and Compromise to Resolve the Stockbridge-Munsee Land Claims inthe State of New York” (the “New York Settlement Agreement”).

 

The New York Settlement Agreement provided that itwould automatically terminate on September 1, 2005 in the event key approvalsand authorizing legislation were not obtained, subject to extension by themutual written consent of the parties. As of September 1, 2005, many of the keyapprovals and authorizing legislation had not been obtained, and the New YorkSettlement Agreement was not extended by the parties. Two recent courtdecisions have impacted the effectuation of the settlement and the State’sgeneral strategy in dealing with Native American land claims, including theStockbridge-Munsee Tribe’s land claim. We can make no representation as towhether the Catskills Project will be completed.

 

We are one of two managing members of TCNY. Alldecisions of the managing members require the concurrence of us and WaterfordDevelopment New York, LLC, the other managing member. In the event of adeadlock, there are mutual buy-out provisions.

 

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The Company’s investment in TCNY is reflected withininvestments in associated companies in the accompanying consolidated balancesheets. As of December 31, 2005, we had invested $7.0 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.

 

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

* *

In April 2005, the United Kingdom passed gaming reformlegislation that was less favorable than we had previously anticipated relatedto our previously announced Scottish Exhibition + Conference Center, Sportcityand The O2 projects. In 2005, we wrote off $11.2 millionrelated to all previously capitalized and deferred costs incurred for theplanning and development of the aforementioned projects. Although the future ofgaming in the United Kingdom is unclear as a result of the passage oflegislation in April 2005, we continue to pursue potential opportunities on aselective basis. Costs related to these opportunities, other than theNorthampton project and certain costs relating to The O2,are expensed as incurred.

 

*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. Thecity of Northampton is approximately 70 miles north of London and approximately1.3 million people live within 25 miles 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 February2005, the Northampton project was approved by the local planning authorities. Weexpect to develop and operate the new casino facility, which is expected tocost approximately £10.8 million (approximately $18.9 million in U.S.dollars as of February 28, 2006), on an approximately 30,000 square foot site. Wehave commenced construction on this project and we expect the facility to beopen by the first quarter of 2007.

 

**One&OnlyResorts**

** **

Our One&Only Resorts business consists of acollection of managed and/or owned/partially-owned premier luxury resortproperties that primarily operate in the five-star, deluxe-end of the market. InDecember 2002, we introduced our One&Only brand for certain of ourluxury resort properties and now market seven of our ten properties under ourOne&Only brand. We do not currently plan on using the brand for Sugar BeachResort, La Pirogue Hotel or Le Coco Beach Hotel. 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 Resortbusiness currently consists of five properties in Mauritius (two of which, LeSaint Géran and Le Touessrok, are One&Only-branded properties),One&Only Royal Mirage in Dubai, One&Only Kanuhura and One&OnlyMaldives at Reethi Rah in the Maldives (which opened during the second quarterof 2005), One&Only Ocean Club on Paradise Island, The Bahamas and One&OnlyPalmilla near Cabo San Lucas, Mexico. In addition, we have agreed to acquire aminority interest in a joint venture that expects to develop and manage a newOne&Only property in Cape Town, South Africa.

 

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As of December 31, 2005, we were managing 2,159rooms. As part of our strategy of obtaining long-term management agreements, weleverage our existing management expertise and business infrastructure andoften take ownership positions in the properties that we operate. As ofDecember 31, 2005, 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                     | %          | 106                                                     |       |
| 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                      | %          | 203                                                     |       |
| One&Only Kanuhura                   |       | Maldives     |       | 18.75                     | %          | 100                                                     |       |
| One&Only Maldives at Reethi Rah (3) |       | Maldives     |       | —                    |       | 130                                                     |       |
| 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 ouradoption of FIN 46R, we determined that Palmilla JV, LLC, a previouslyunconsolidated 50%-owned equity method investment, must be consolidated, as theoperating agreement contains a provision which gives our 50% joint venturepartner the right to cause us to acquire its 50% interest. This resulted in anincrease in revenues and expenses in 2004, however, it had no impact onconsolidated net income or earnings per share.

 

(2)   Interest owned through Sun Resorts Limited.

 

(3)   As of May 1, 2005, when the resort commencedoperations, the Company became the primary beneficiary of Reethi Rah under FIN46R, resulting in consolidation of Reethi Rah’s financial statements in theconsolidated financial statements of the Company.

 

*South Africa*

* *

We arecurrently developing a property in Cape Town, South Africa that we anticipatemarketing under the One&Only brand. We expect to own a minority interest inthe joint venture developing the 132-room property. We anticipate approximatelyten of these rooms will be individually owned condominium units that may beused in the hotel’s guest room rental pool.

 

*The Bahamas*

* *

We own and operate One&Only Ocean Club, a high-endluxury resort hotel with 106 rooms, suites and villas located on ParadiseIsland, The Bahamas. In October 2000, we completed an addition toOne&Only Ocean Club that comprised 50 rooms, including 10 deluxe suites, agourmet beachfront restaurant (Dune, operated by Jean-Georges Vongerichten) andsignificant enhancements to the existing pool and garden areas. One&OnlyOcean Club also features the Ocean Club Golf Course, a 7,159-yard championshipgolf course designed by Tom Weiskopf, and a clubhouse with 121 luxuryoceanfront home sites situated around the golf course. One&Only Ocean Clubwas named to *Condé Nast Traveler* magazine’s**2006 Gold List and to *Travel + Leisure*magazine’s 2006 “T+L 500,” an annual list of the world’s best hotels as chosenby the magazine’s readers. One&Only Ocean Club also received *Condé Nast Traveler* magazine’s 2005 Readers’ Choice Awardfor the best Atlantic Resort (the second year in a row in which One&OnlyOcean Club was awarded this honor) and the spa at One&Only Ocean Club wasnamed best resort spa in *Condé Nast Traveler*magazine’s 2005 Spa Poll, a reader poll that compares spas in North America,the Caribbean and at sea. One&Only Ocean Club achieved an average occupancyof 82% and an average daily room rate of $869 during 2005, compared to 79% and$762 in 2004.

 

As part of the Phase III expansion discussed above, wedeveloped three high-end luxury rental villas adjacent to One&Only OceanClub, as well as a high-end boardroom meeting facility and a children’s pool. Thesefacilities were completed in 2004.

 

As of December 31, 2005, we had closed on 114 ofthe 121 home sites available at Ocean Club Estates, a residential developmentadjacent to the Ocean Club Golf Course, and received approximately$122.0 million in

 

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gross proceeds from such sales. Of the seven remaining properties, fourare being used by the Company and we have received deposits for the threeremaining properties.

 

*Mexico*

* *

In September 2002, we purchased a 50% ownershipinterest in One&Only Palmilla, a deluxe five-star property located nearCabo San Lucas in Baja, Mexico for approximately $40.8 million, includingtransaction costs. One&Only Palmilla is located on what we believe is anoutstanding site with the most extensive beach coverage of any of the leadinghotels in Cabo San Lucas. One&Only Palmilla also features a 27-hole JackNicklaus-designed championship golf course. In connection with the purchase, weentered into long-term management and development agreements related to theproperty that will expire in 2022. The acquisition was funded through acombination of cash on hand and drawings under our then-existing amended andrestated revolving credit facility. One&Only Palmilla re-opened inJanuary 2004 following a refurbishment that expanded the room count to 172and significantly upgraded the amenities and public areas offered by the resort.The expansion was financed by One&Only Palmilla through local projectfinancing that was supported by a $46.5 million guarantee from Kerzner,and by approximately $14.5 million in completion loans from Kerzner. Thetotal cost of the One&Only Palmilla renovation was approximately$102.0 million. On December 17, 2004, One&Only Palmilla enteredinto two promissory notes pursuant to which it borrowed $110.0 million. Theproceeds were used to, among other things, repay all of One&Only Palmilla’sexisting loans, including the completion loans provided by Kerzner, and fundOne&Only Palmilla’s working capital requirements. In connection with therepayment of One&Only Palmilla’s existing loans, Kerzner’s$46.5 million guarantee was extinguished. The indenture governing thepromissory notes provides recourse to Kerzner in the event certainrepresentations and warranties are violated. One&Only Palmilla was named to*Condé Nast Traveler*magazine’s 2006 GoldList, in which it also received the highest overall score and rooms score forresorts in Mexico, and was included in *Travel + Leisure*magazine’s 2006 “T+L 500.”  One&OnlyPalmilla also received *Condé Nast Traveler*magazine’s2005 Readers’ Choice Award for the best Latin American Resort (the second yearin a row in which One&Only Palmilla was awarded this honor) and was named by*Travel + Leisure Golf* magazine as Mexicoand Latin America’s second best golf resort and most underrated resort in themagazine’s 2005 “World’s Best Golf Resorts” issue.

 

*Mauritius*

* *

In Mauritius, we manage and own interests in fivebeach resorts:

 

•      the 163-roomOne&Only Le Saint Géran (renovated in 2000);

 

•      the 203-roomOne&Only Le Touessrok (renovated in 2002);

 

•      the 238-roomSugar Beach Resort;

 

•      the 248-room LaPirogue Hotel (renovated in 2003); and

 

•      the 333-room LeCoco Beach Hotel.

 

The Mauritius properties cater primarily to luxury andmiddle-market tourists from Europe and southern Africa. One&Only Le SaintGéran and One&Only Le Touessrok offer deluxe five-star accommodations, andwe believe that such properties are among the finest beach resorts in the world.In 2005, One&Only Le Touessrok was rated among the world’s best leisurehotels by *Condé Nast Traveller*magazine in the U.K. magazine’s Readers’ Travel Awards and was also named tothe magazine’s 2005 Gold List. One&Only Le Saint Géran, which is classicalin style, was also rated among the world’s best leisure hotels by *Condé Nast Traveller* magazine in the U.K.magazine’s Readers’ Travel Awards and was also named to the magazine’s 2005Gold List. In December 2002, we completed a major redevelopment ofOne&Only Le Touessrok. The resort includes restaurants, a spa, achampionship golf course (which opened in November 2003) and otheramenities 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. Scheduledair service to-and-from Mauritius is provided through scheduled flights onnumerous airlines, including Air France, British Airways, Cathay Pacific,Singapore Airlines, Air India, Air Mauritius, Condor and South AfricanAirlines.

 

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*Maldives*

* *

In the Maldives, located 600 miles southwest of thesouthern tip of India, we manage and own an interest in One&Only Kanuhura,a 100-room luxury resort located on Lhaviyani Atoll, and manage One&OnlyMaldives at Reethi Rah, a 130-room, all-villa luxury resort. InAugust 2001, we acquired 25% of the equity of One&Only Kanuhura forapproximately $3.8 million. Effective January 1, 2003, we sold 20% ofthis equity interest to SRL. As of December 31, 2005, we had provided debtfinancing to One&Only Kanuhura of $2.3 million, excluding accruedinterest, and we also have a contingent guarantee obligation to provide up toapproximately $10.7 million. See “Item 5. Operating and FinancialReview and Prospects, (F) Off-Balance Sheet Arrangements” for more information.See Note 17—Related Party Transactions to the consolidated financialstatements.

 

One&Only Kanuhura temporarily closed in June 2005to complete repairs necessitated by the December 2004 tsunami. The four-monthrenovation included the redevelopment of the resort’s 18 water villas and twogrand water villas and enhancements to its existing beach villas, bars,restaurants, public areas and spa. One&Only Kanuhura reopened on October15, 2005. One&Only Kanuhura was named one of the “101 Best Hotels” in *Tatler* magazine’s 2006 Travel Guide, the U.K. magazine’sannual listing of the world’s best hotels.

 

On May 1, 2005, One&Only Resorts opened a 130-key,all-villa resort, One&Only Maldives at Reethi Rah, in the Maldives. ReethiRah, which means “beautiful island” (in the national language, Dhivehi), islocated in the North Male Atoll and is easily accessible by a One&Onlyluxury yacht transfer or sea plane. Through land reclamation, the island onwhich One&Only Maldives at Reethi Rah is located was increased in size fromapproximately 20 acres to around 110 acres, incorporating 13 beaches and a fewexpansive bays. The result is that the spacious private villas and water villasall enjoy an unusual amount of privacy and exclusivity. One&Only Maldivesat Reethi Rah was named one of the “101 Best Hotels” in *Tatler*magazine’s 2006 Travel Guide.

 

Although the Company does not have any equityownership interest in the entity that owns and operates One&Only Maldivesat Reethi Rah, the Company has determined that Reethi Rah is a variableinterest entity that is subject to consolidation in accordance with theprovisions of FIN 46R. The Company has agreements with Reethi Rah that providefor construction financing and operating loans, as well as management anddevelopment agreements. As of May 1, 2005, when the resort commencedoperations, the Company became the primary beneficiary of Reethi Rah under FIN46R, resulting in the consolidation of Reethi Rah’s financial statements intothe consolidated financial statements of the Company. See “Item 5.Operating and Financial Review and Prospects, (F) Off-Balance SheetArrangements” for more information on the financing arrangements. In February2006, we received correspondence on behalf of Reethi Rah that raised concernswith respect to the level of management activity and certain fees associatedwith our management agreement. We expect to discuss the matters with ReethiRah, but we can make no assurances as to the outcome of such discussions.

 

We manage these resorts under long-term managementagreements and receive management fees based upon a percentage of the revenuesand gross operating profits of these properties. In December 2002, 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 One&Only Kanuhura in the Maldives, and, as consideration, securingan extension to our management agreements in 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&OnlyKanuhura management agreement, and SRL purchased 20% of our debt and equityinterests in One&Only Kanuhura. Effective January 1, 2005, ourownership interest in One&Only Kanuhura further decreased to 18.75% and SRL’sinterest increased to 6.25%, as SRL purchased an additional 1.25% interest fromus. Pursuant to an additional subcontract arrangement with One&OnlyManagement, we provide comprehensive management services to the five Mauritiusresorts and One&Only Kanuhura and One&Only Maldives at Reethi Rah andreceive 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, at which time it will own 50% of One&Only Management. See “Item 4.Information on the Company, (A) History and Development of the Company”for more information.

 

Subject to certain conditions, SRL has a right offirst refusal to participate equally with us in any new hotels developed by usin specified Indian Ocean territories. If SRL elects to participate in theequity or other funding of any such project, then the management agreement forthat property will be held by One&Only Management. SRL’s board of directorshas approved the exercise of its right to participate on a proportionate basis(SRL’s participation is currently 25%) with us in connection with One&OnlyMaldives at Reethi Rah. Pursuant to our agreement to transfer the managementagreement for One&Only Maldives at Reethi Rah to One&Only Management,SRL

 

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acquired 25% of the subordinated debt interest in One&Only Maldivesat Reethi Rah, which percentage was originally scheduled to increase to 50% asSRL’s interest in One&Only Management increased. It is anticipated that wewill amend our agreement with SRL to waive the requirement that SRL purchase upto 50% of the subordinated debt and to provide that SRL will only be entitledto 25% of the management fees paid to One&Only Management under theOne&Only Maldives at Reethi Rah management agreement. It is furtheranticipated that we will acquire a short-term option through December 31, 2006to purchase SRL’s existing subordinated debt (and corresponding managementfees) in One&Only Maldives at Reethi Rah as consideration for granting suchwaiver.

 

*Middle East*

* *

In the Middle East, we manage One&Only RoyalMirage in Dubai, a luxury 466-room hotel, the first phase of which opened inAugust 1999. Under the terms of the management agreement, which expires in2019, we receive management fees based on a percentage of the revenues andgross operating profits of the property. We assisted in the expansion ofOne&Only Royal Mirage, which opened at the end of 2002. The expansion ofthe property featured 225 new luxury rooms, including a new 50-room ultrahigh-end boutique hotel. In 2005, One&Only Royal Mirage was rated among theworld’s best leisure hotels by *Condé Nast Traveler*magazine in the U.K. magazine’s Readers’ Travel Awards.

 

*South Africa*

* *

In November 2003, we entered into an agreementwith V&A Waterfront to develop and manage a new luxury 132-room hotel,One&Only Cape Town, at the highest end of the market in Cape Town, SouthAfrica. Under this agreement, we committed to enter into a land lease andrelevant development agreements related to the property. Consequently, in 2004,we entered into a 50-year land lease with V&A Waterfront and formed ajoint venture, in which our local partners own 80% and we own the remaining20%, to develop hotel properties in southern Africa. In March 2006, we formed aproject company under the joint venture to focus specifically on the Cape Townproperty. This project company entered into development and managementagreements with wholly-owned subsidiaries of Kerzner. Kerzner assigned the landlease to the project company. Along with our equity investment, we areproviding financing assistance in the form of loans and guarantees, which arein an aggregate amount of approximately $24.4 million. We are currentlyevaluating whether the joint venture should be consolidated in 2006 inaccordance with the provisions of FIN 46R.

 

One&Only Cape Town will be located in theVictoria & Alfred Waterfront, a popular shopping and entertainmentdestination located on Cape Town’s harbor. In addition to guest rooms, the toptwo floors of the hotel will be residential in nature, with ten apartmentsselling on a sectional title basis. Owners will have the option to releasetheir units into the hotel’s guest room rental pool.

 

One&Only Cape Town has been in the design stagesfor the past few years, as the project was delayed for a year by litigationinvolving V&A Waterfront relating to alleged zoning violations. In late2005, V&A Waterfront received a favorable judgment, allowing us to proceedwith the project. Architectural design work for the new hotel is now nearcomplete, and subject to planning and environmental approval, construction isexpected to start in January 2007, with completion scheduled for September 2008.As of December 31, 2005, we had approximately $7.0 million on ourconsolidated balance sheet with respect to this project and we expect ourinvestment in this project to total approximately $18.0 million, exclusiveof loans and guarantees. If this project does not proceed, we will be requiredto write off the amounts that have been incurred. Also during 2005, we expensed$0.9 million of non-capitalizable costs associated with the Cape Town project. 

 

In October 2003, we advanced $1.7 million for thepurchase of land related to the potential development of an additionalOne&Only property in South Africa. This land is currently being developedas a private game reserve. Once the conservancy has been established, we havethe option to build a luxury lodge on an exclusive site of our choice. Weexpect to make a decision on the project by the end of 2007, and if we decidenot to proceed, we will be refunded $1.5 million plus interest.

 

***Internet Gaming***

*** ***

We previously owned and operated Kerzner InteractiveLimited, an online Internet gaming site. During 2002, several countries made itincreasingly difficult for their citizens to gamble on-line. Further, as alicensed 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, weconcluded that

 

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this business would not be economically viable in the short to mediumterm. We therefore discontinued the operations of Kerzner Interactive Limitedduring 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 restructured and Station received an option through earlyJanuary 2003 to purchase 50% of the operation in consideration for the$4.5 million previously received. During the first quarter of 2003, theCompany and Station mutually agreed to terminate this transaction.

 

***Colony Note***

*** ***

On March 18, 2004, we sold undeveloped real estateadjacent to Resorts Atlantic City to a wholly-owned subsidiary of Colony RIHHoldings, Inc. (the “Purchaser”) for a sale price of $40.0 million. Thesale price was paid in the form of a promissory note that matures onMarch 16, 2009 (the “Colony Note”). The Colony Note began accruinginterest on September 30, 2004 at a rate of 4%, which rate increases atvarious intervals from the closing date of the transaction. All principal andinterest due under the Colony Note is due on March 16, 2009, which datemay be accelerated by us in certain circumstances. The Colony 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 in anamount limited to $20.0 million, which will generally increase inincrements of $5.0 million annually. The Colony Note will also beguaranteed by Resorts International Hotel and Casino, Inc. This guarantee willgo into effect when that company’s outstanding public indebtedness, which isdue 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 amuch lesser extent, they also provide travel reservation services forHarborside and other unaffiliated resort properties in The Bahamas.

 

***France***

*** ***

Through an indirect wholly-owned subsidiary, we own atour operator company in France, Solea Vacances SA. Solea Vacances SA primarilyservices patrons in France, and, among other things, offers reservationsservices for travel to the five resorts in Mauritius, One&Only Royal Miragein Dubai and One&Only Kanuhura and One&Only Maldives at Reethi Rah inthe Maldives.

 

***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 European and Asian markets for ourOne&Only properties primarily in Mauritius, the Maldives 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 andoperating profits have historically been higher during the first quarter thanin successive quarters. In addition, The Bahamas, Mauritius, the Maldives andMexico are subject to tropical weather and storms, which, if severe, caninterrupt the normal operations and affect tourism. Similarly, inclementweather can adversely affect the Relinquishment Fees that we derive fromMohegan Sun and our equity earnings attributable to Lincoln Park, as theprincipal access to these properties is by road. Higher revenue and earningsare typically realized from the Connecticut and Rhode Island operations duringthe second and third quarters of the year.

 

In September 1999, Paradise Island was affectedby Hurricane Floyd, a hurricane rated by the National Weather Service as acategory five, its highest rating. The Paradise Island properties sufferedapproximately $45.0 million of property damage, for which remedial workwas completed by year end 1999, and we received a number of customercancellations. At Atlantis, Paradise Island, 230 rooms were taken out ofservice for three months and One&Only Ocean Club was closed forapproximately three and one half months. We were fully insured for propertyloss and business interruption. Hurricane Floyd was the first significanthurricane to negatively impact Paradise Island in over thirty years.

 

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In November 2001, Hurricane Michelle movedthrough The Bahamas. Although the storm caused minimal disruption to ouroperations, our properties (other than Harborside at Atlantis, which was closedfrom August 2002 through December 2002 due to water damage resultingprimarily from Hurricane Michelle, see “Item 4. Information on theCompany, (B) Business Overview”) suffered approximately $28.3 millionin damage that was substantially covered by our insurance policies. See “Item 3.Key Information, (D) Risk Factors—Severe weather conditions or naturaldisasters could adversely affect our business, financial condition or resultsof operations, or further increase our insurance premiums and deductibles ormake insurance unavailable at commercially reasonable rates.”

 

In September 2004, Hurricane Frances passed justto the north of Paradise Island. Costs associated with Hurricane Frances were$4.6 million, which primarily consisted of $3.4 million of clean upand repair costs and complimentary goods and services to guests and a$1.2 million loss on damaged assets. While we have an “all risk” insurancepolicy that covers these types of losses, we were not reimbursed for thesecosts as the total amount of loss was less than the deductible under our policywhen aggregated 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 disasterscould adversely affect our business, financial condition or results ofoperations, or further increase our insurance premiums and deductibles or makeinsurance unavailable at commercially reasonable rates.”

 

The 2005 Atlantic hurricane season was the most activeon record. The hurricane season had the most named storms (27 versus 21 in1993, the previous record), the most hurricanes (14 versus 12 in 1969, theprevious record) and the most category five storms (3). The Atlantic is in itseleventh year of heightened activity and is expected to remain active for thenext decade or longer according to the National Weather Service.

 

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—Additional increases in our insurancepremiums and deductibles may increase our costs and impair our ability toobtain 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 been registered by the Bermuda MonetaryAuthority under The Insurance Act of 1978 as a Class 1 Insurer, and isutilized by the Company as a vehicle through which the Company places its “allrisk” property and business interruption insurance policy, including windstorm,for Atlantis, Paradise Island and One&Only Ocean Club. Harborside atAtlantis is covered under a Starwood insurance policy. Although Aberdeenprovides the Company with access to the reinsurance market at reducedadministrative costs, all risk in excess of the Company’s $15.0 millionper occurrence/$30.0 million annual aggregate deductible will continue tobe 100% reinsured through the reinsurance market, thereby leaving Aberdeen withno retained risk.

 

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

 

**Competition**

** **

*General*

* *

The resort and casino industries are highlycompetitive. Our properties compete with other resorts, hotels and casinos,including land-based casinos, racinos, riverboat, dockside and cruise shipon-board casinos and other forms of gaming as well as with other forms ofentertainment and with other resorts and hotels in markets in which we conductbusiness. We believe the ability to compete effectively in these industries isbased on a number of factors, including the scope, quality, location andaccessibility of facilities, the effectiveness of marketing efforts, customerservice, the relative convenience and costs of available transportation,service and the quality and price of rooms, food and beverages, conventionfacilities 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,

 

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New Providence Island, Grand Bahama Island and the neighboringCaribbean islands. We estimate that there are approximately 7,000 hotel roomson Paradise Island and New Providence Island combined, of which approximately3,400 are located on Paradise Island, including 2,423 in hotels owned andoperated by us. The Wyndham Nassau Resort & Crystal Palace Casino, ourprimary competitor in The Bahamas, is an 850-room resort and casino that issituated in Nassau along Cable Beach. During 2005, Baha Mar Resorts Ltd.acquired this property along with two adjacent hotel properties. Later in 2005,Baha Mar Resorts Ltd. announced that it had formed a joint venture with Harrah’sEntertainment, Inc. and Starwood Hotels & Resorts Worldwide, Inc. toredevelop the existing properties into a $1.6 billion destination resort casino.The first phase of this project, which project is being developed in stages, isexpected to be completed by 2010 and include six hotels, an expanded casinospace managed under the Caesars brand, time share and condominium developmentsand a new golf course. According to recent press reports, the StillmanOrganization, a New-York based real estate developer, plans to buy a resort onthe south coast of New Providence Island, and invest approximately $500 millionto build a 1,000 room hotel/casino, together with residential units, anexpanded marina with restaurants and retail facilties, and a golf course. Ifcompleted, these developments would compete with our Paradise Island propertiesand could materially adversely affect our business and results of operations.

 

Our Paradise Island properties also compete with OurLucaya, located on Grand Bahama Island, approximately 40 minutes by air fromNew Providence Island. Our Lucaya consists of a 749-room Westin Hotel, a511-room Sheraton Hotel and a 30,000 square foot casino with 19,000 square feetof gaming space.

 

One&Only Ocean Club currently competes with a FourSeasons property that opened on Great Exuma Island in The Bahamas in November2003, as well as other five-star resorts in the Caribbean. In addition, TheRitz-Carlton Hotel Company, L.L.C. recently announced the proposed developmentof a Ritz-Carlton resort on Rose Island, which is four miles from NewProvidence Island and Paradise Island. The resort is scheduled to open in 2009and include a hotel, condominiums, townhouses, estate homes and a shelter foryachts. If completed, this development would also compete with One&OnlyOcean Club.

 

*Mohegan Sun and LincolnPark*

* *

The Connecticut market is the fourth largest gamingmarket in the United States, with approximately 22 million adults within150 miles of Mohegan Sun. Mohegan Sun and Foxwoods Resort and Casino at presentare the only two casinos in the Connecticut market. Foxwoods now has approximately7,400 slot machines and, for the twelve months ended December 31, 2005,reported slot win of approximately $815.0 million On February 1, 2005,Foxwoods Resort and Casino announced a $700.0 million development project,which consists of a new hotel tower, expanded convention facilities, newrestaurants and retail stores, as well as an expanded casino that canaccommodate 1,500 additional slot machines and 45 table games. The OneidaNation operates a casino near Syracuse, New York and other Native Americantribes in the states of New York, Rhode Island, Massachusetts and Connecticutare seeking approvals to establish gaming operations that would furtherincrease competition, particularly for day-trip patrons. Mohegan Sun alsocompetes with Atlantic City and several small Native American gaming facilitiesthroughout 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 October 2005, the U.S. Department of Interior, Bureau ofIndian Affairs (“BIA”) issued determinations that the Historic Eastern PequotTribe (formerly the Eastern Pequot Tribe and the Paucatuck Eastern PequotTribe) and the Schaghticoke Tribal Nation did not qualify for federalrecognition as Indian Tribes, which recognition would have allowed the twotribes to build casinos and conduct gaming operations. Both tribes had beengranted federal recognition in previous years, but their recognition wasrescinded in May 2005. The October 2005 ruling confirmed this rescission, withthe BIA ultimately determining that the two tribes did not meet all of thequalifications necessary for federal recognition. The Historic Eastern PequotTribe filed an appeal with the Interior Board of Indian Appeals (“IBIA”), butthe IBIA had no further jurisdiction. The Schaghticoke Tribal Nation hasappealed the BIA decision to federal court, but it is unknown whether theHistoric Eastern Pequot Tribe will do the same. The BIA also denied petitionsfor federal recognition of three other Indian groups in the Connecticut gamingmarket:  the Golden Hill Paugusett ofTrumbull and two bands of Nipmuc Indians of Massachusetts—the HassanamiscoBand of Sutton and the Chaubunagungamaug Band of Dudley/Webster. The two Nipmucbands have appealed the BIA’s

 

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decisions to the IBIA, and those appeals are pending.  Eachof the aforementioned groups has expressed interest in obtaining trustlands for the purpose of conducting gaming in Connecticut.

 

Lincoln Park competes with a greyhound track and 1,070VLT facility located in Newport, Rhode Island. This facility was recentlygranted the right to acquire 1,031 additional VLTs.

 

Legislation is pending in Massachusetts that wouldauthorize the use of VLTs and slot machines at race tracks statewide. Ifenacted, this legislation would increase competition in the region, which couldhave a material adverse effect on the operations of Lincoln Park.

 

*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 of Asia. SRLowns five major hotels in Mauritius. In the luxury end of the Mauritian hotelsmarket, SRL owns two of the seven luxury hotels and offers a total of 366 ofthe approximately 677 luxury rooms in Mauritius. Competition in themiddle-market has increased following the introduction of 440 new mid-marketrooms at the end of 2004. These additional rooms will compete with Sugar BeachResort, La Pirogue Hotel and Le Coco Beach Hotel.

 

*Maldives*

* *

One&Only Kanuhura and One&Only Maldives atReethi Rah, two five-star resorts, compete with other resorts in the Maldivesas well as other locations offering vacations to tourists from Europe, southernAfrica and parts of Asia. One&Only Kanuhura and One&Only Maldives atReethi Rah primarily compete with the five other five-star resorts in theMaldives. In this high-end market, One&Only Kanuhura and One&OnlyReethi Rah offer about 13% and 17%, respectively, of the approximately 750available rooms. Two resorts from this competitive set, representingapproximately 170 rooms, have been closed for renovation.

 

*Dubai*

* *

In Dubai, we primarily compete with other resorts andhotels on the Jumeirah Beach “golden mile.” We manage One&Only Royal Mirage, a luxury 466-room hotel withdistinctive Arabian architecture. One&Only Royal Mirage focuses on thehigh-end travel market. Certain of our competitors on Jumeirah Beach includethe 620-room Jumeirah Beach Hotel, which focuses on the family and groupincentive markets, and the 500-room Royal Meridien, which focuses on themiddle-spending leisure holiday market. Other competitors include The MadinatJumeirah, an 867-room five-star hotel and the recently opened 400-roomGrosvenor House, which is the first hotel to open in the Dubai Marina and ismanaged under the Meridien brand.

 

The Jumeirah Beach coastline is rapidly beingdeveloped. Residential development on The Palm, Jumeirah is underway and themain access bridge to the island is close 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. As of December 31,2005, there were approximately 12,000 rooms in the five-star competitive set inDubai.

 

When fully developed, The Palm, Jumeirah will supportapproximately 35 luxury hotels totaling approximately 13,625 rooms, up to 2,000exclusive residential villas and townhouses, 2,400 shoreline apartments, 860residential apartments, marinas, health spas, canals, shopping malls andrestaurants.

 

In addition to hotel rooms and residential projects,Dubai is also focused on increasing its number of attractions. Dubailand, afour-phase major theme park attraction, is currently under development and iswithin close proximity to Dubai International Airport. Dubailand will featuresix themed zones that will include various entertainment, leisure, sports,retail and other attractions. The first phase of this government-sponsoredproject is expected to be completed in 2007. Dubailand is expected to competewith Atlantis, The Palm as one of the premier visitation sites in Dubai.

 

*Mexico*

* *

In Mexico, we entered the luxury end of the marketwith our ownership interest in and management of One&Only Palmilla, adeluxe five-star resort located near Cabo San Lucas in Baja, Mexico. Theupscale four- and five-star resorts in Los Cabos, the tourism corridor betweenSan Jose Del Cabo and Cabo San Lucas, account for approximately 3,000 rooms outof the total inventory of approximately 8,200 rooms. The market is mainlycomposed of incentive group travelers, golfers, family and high-end vacationers.Three resorts cater to the five-star market: One&Only Palmilla, LasVentanas al Paraíso and Esperanza. One&Only Palmilla re-opened in

 

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January 2004 following a refurbishment that expanded the roomcount to 172 rooms and significantly upgraded the amenities and public areasoffered by the resort. Currently, Las Ventanas al Paraíso, with 61 rooms, leadsthe market with an average occupancy of approximately 89% and an average dailyroom rate of approximately $970.

 

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 Cabosresort 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 support our operations in The Bahamas, wemaintain an inventory of rooms for distribution through our tour operator, PIV,Inc. (“PIV”), an indirect wholly-owned subsidiary. For the year endedDecember 31, 2005, PIV generated tour operations revenue of approximately$35.0 million as compared to $26.6 million in 2004. Similarly, ouroperations in Mauritius, the Maldives and Dubai are supported primarily throughour own European marketing offices. In addition, we channel distribution forall of our operations through primary wholesalers in the travel agent communitywith a favorable commission structure.

 

We spent approximately $25.5 million in 2005 onsales and marketing for our operations in The Bahamas. Pursuant to the Heads ofAgreement described below under “Certain Matters Affecting Our BahamianOperations—Heads of Agreement,” we receive $4.0 million per year from theBahamian Government toward the direct costs related to certain marketingevents, public relations activities and the production and placement of advertisementin 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 by several major carriers that offer jetservice from most major cities on the east coast of the United States and otherinternational destinations. There are approximately 60 flight arrivals each dayat Nassau International Airport, depending on the time of year. Groundtransportation is facilitated by two bridges linking Paradise Island and NewProvidence Island.

 

*Union ContractArrangements*

* *

In The Bahamas, as of December 31, 2005,approximately 4,200 of our employees were represented by The Bahamas Hotel,Catering and Allied Workers Union. Kerzner International Bahamas Limitedparticipates in The Bahamas Hotel Employers Association, which representsresort operators in the Paradise Island-New Providence Island area. Theassociation and the union are parties to a contract that expires onJanuary 7, 2008. Labor relations in The Bahamas have been unstable attimes with occasional work slowdowns occurring, not only at Atlantis, ParadiseIsland, but also at publicly run entities such as the Bahamian ElectricCorporation and Bahamas Telephone Company. As the country’s largest privateemployer, we are 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 accordancewith Bahamian casino licensing requirements, PEL is obligated to have itscasino license renewed annually by the Gaming Board. In addition, other than anexisting contingent obligation to grant a casino license, the BahamianGovernment has agreed that it will grant no new casino licenses with respect togaming operations on Paradise Island or New Providence Island until the earlierof December 31, 2027, or 20 years after the substantial completion ofthe Phase III expansion. See “Item 4. Information on the Company,(B) Business Overview—The Properties—Destination Resorts—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.

 

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*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):

 
| ** **                        | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------|------------|--------------------------------------------|------------|
| ** **                        | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Casino license fees and win taxes |       | $                                          | 10,398     |   | $ | 9,644 |   | $ | 11,295 |   |
| Basic license fees                |       | 200                                        |       | 200 |   | 200 |   |
| Total                             |       | $                                          | 10,598     |   | $ | 9,844 |   | $ | 11,495 |   |

 

*Heads of Agreement*

* *

We have an agreement with the 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 of these incentives are the casino feeand 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 supplemented in both May and December 2004.The restated Heads of Agreement, as supplemented, maintains the current basiccasino tax and fee structure that calls for an annual license fee of $100,000per thousand square feet of casino space, a minimum annual casino tax of$4.3 million on all gaming win up to $20.0 million, a 12.5% win taxon gaming win between $20.0 million and $120.0 million and a 10% wintax on gaming win in excess of $120.0 million. Against this, the Companyis entitled to a credit of $5.0 million in relation to the annual licensefee and a 45% credit against all win tax on gaming win between$20.0 million and $120.0 million. With the commencement ofconstruction of Phase III described in “Item 4. Information on theCompany, (B) Business Overview—The Properties—DestinationResorts—Atlantis, Paradise Island,” the basic tax and fee structure was amendedso that all gaming win in excess of $20.0 million is subject to a win taxof 10% and is effective for a period of 20 years after the earlier of thedate of the substantial completion of the Phase III expansion andDecember 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 shall apply from the commencement ofconstruction of Phase III and shall expire at the 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. We notified the Bahamian Government onAugust 11, 2003 that we had commenced construction on aspects of Phase IIIand were therefore entitled to the accrual of the tax incentives describedabove. If we do not proceed with the condominium-hotel and the Athol GolfCourse, casino tax concessions and the joint marketing contribution from theGovernment will be reduced beginning in 2009 in accordance with a schedulecontained in the 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 Bahamian Government has also agreed to extend theexpiration of the Company’s casino license to the date that is 20 yearsafter the Relevant Date. In addition, other than an existing contingentobligation to grant a casino license, the Bahamian Government has agreed thatit will grant no new casino licenses with respect to gaming operations onParadise Island or New Providence Island until 20 years after the RelevantDate. Finally, the Company has also provided certain undertakings that includeskills training and community 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 thedestination and the Company’s Paradise Island properties, including the PhaseIII expansion. This joint marketing agreement will expire on December 31,2010. The Heads of Agreement contemplates completion of the all-suite hotel bythe end of 2006. We currently expect to complete this hotel in April 2007. 

 

41

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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.

 

*The Commonwealth of TheBahamas*

* *

The Commonwealth of The Bahamas had a population ofapproximately 300,000 in 2005. The Bahamas includes approximately 700 islands,29 of which are inhabited, and extends from east of the Florida coast to justnorth of Cuba and Hispañola. Over 60% of the population lives on New ProvidenceIsland, where Nassau, the capital of The Bahamas, is located. The Bahamas firstobtained internal self-government in 1964 and became an independent nationwithin the British Commonwealth in 1973. The first elections under universaladult suffrage were held in November 1962. The former government was firstelected in 1992 and re-elected in March 1997, having succeeded agovernment that was in power for over 20 years. On May 2, 2002,general elections were held and a new government elected, including a new PrimeMinister 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 Connecticut Operations**

** **

*Regulation*

* *

The Mohegan Tribe is a federally-recognized NativeAmerican tribe whose federal recognition became effective May 15, 1994. InMay 1994, the Mohegan Tribe and the State of Connecticut entered into agaming compact to authorize and regulate Class III gaming operations (slotmachines and table games). Under this tribal-state compact, Mohegan Sun issubject to a 25% gaming fee on slot revenues payable to the State ofConnecticut so long as the State does not issue any further licenses for gamingoperations with slot machines or other commercial casino games (other than to aNative 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 receiveda gaming registration from the Commissioner of Revenue Services of the State ofConnecticut that is renewed annually.

 

*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 agreed that all disputes and claims arising outof TCA’s agreement with the Mohegan Tribe or the Mohegan Tribe’s gamingordinance will be submitted to binding arbitration, which shall be the soleremedy of the parties, and that punitive damages may not be awarded toeither 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 theMohegan Tribe as the Mohegan Tribe’s share of net revenues prior to anyjudgment or award are not subject to the waiver and would not be available forlevy pursuant to any judgment or award.

 

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**NewJersey Gaming Regulation**

** **

As a result of the Colony Note, KINA was qualified bythe New Jersey Casino Control Commission as a financial source of Colony due toits financing of the transaction with Colony, and KINA is required to maintainits casino service industry license. See “Item 4. Information on theCompany, (B) Business Overview—Colony Note.”

 

**U.K.Gaming Regulation**

** **

In April 2005, the United Kingdom passed gaming reformlegislation that was less favorable than we had previously anticipated relatedto our previously announced Scottish Exhibition + Conference Center, Sportcityand The O2 projects. Specifically, this legislationreduced the number of regional casinos from eight to one in order to secureopposition party support for the legislation. The new law does however containa provision for the government to increase the number of regional casinos;however, this increase would require the approval of both houses of Parliament.

 

**EnvironmentalMatters**

** **

As the owner, operator and developer of real propertywe have to address, and may be liable for, hazardous materials or contaminationon these sites. We have in the past, and may in the future, become liable forcontamination on our properties that was caused by former owners or operators. Forsites that we acquire for development, we conduct environmental assessments toidentify adverse impacts from former activities, including the improper storageor disposal of hazardous substances and the existence of asbestos containingmaterials. We may not always identify environmental problems through thisprocess and may become liable for historical contamination not previouslydiscovered. 

 

In order to receive governmental approvals prior tosite development, we must conduct extensive assessments of the environmentalimpact of our proposed operations. Our ongoing operations are subject tostringent regulations relating to protection of the environment and wastehandling, particularly with respect to the management of wastewater from ourfacilities.

 

We participated in the development of and, through anaffiliate, previously managed the Mohegan Sun facility in Connecticut. Althoughwe currently receive a portion of the Mohegan Sun’s gross revenues, we do notown, manage or control the facility. The Mohegan Sun site was formerly occupiedby United Nuclear Corporation (“UNC”), a naval products manufacturer of, amongother things, nuclear reactor fuel components. UNC’s facility was officiallydecommissioned in June 1994, when the Nuclear Regulatory Commission confirmedthat nuclear material had been removed from the site and that any residualspecial nuclear material contamination was remediated in accordance with theNuclear Regulatory Commission-approved decommissioning plan. In addition, withthe oversight of the Connecticut Department of Environmental Protection, thesite was subject to extensive testing and cleanup of volatile organicchemicals, heavy metals and fuel hydrocarbons in the soil and groundwater. Althoughthe Mohegan Sun site currently meets applicable remediation requirements, theremay be residual contamination that requires cleanup in the future if excavationand construction exposes contaminated soil which has otherwise been deemedisolated and not subject to cleanup requirements. At this point, however,following the completion of the expansion in 2002, the site is almostcompletely developed. If extensive further cleanup is required, the costs couldadversely impact the financial condition and results of operations of MoheganSun and therefore our financial condition and results of operations.

 

In the early 1990’s, the Environmental ProtectionAgency named a predecessor to KINA as a potentially responsible party, or aPRP, under the Comprehensive Environmental Response, Compensation and LiabilityAct of 1980, or CERCLA, for the cleanup of contamination resulting from pastdisposals of hazardous waste at the Bay Drum site in Florida, to which thepredecessor, among hundreds of others, allegedly sent waste in the past. CERCLArequires PRPs to pay for cleanup of sites at which there has been a release ofhazardous substances. We have only limited information regarding this site andthe wastes allegedly sent to it and have not received any communication fromother PRPs or the EPA about this site for over ten years.

 

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**(C)**  Organizational Structure

** **

Set forth below is a table listing our significantsubsidiaries:

 
| **Name of Company**                      | ** ** | **Country of Incorporation** | ** ** | **Ownership Interests** | ** ** |
|----------------------------------------------------|------------|----------------------------------------|------------|------------------------------|------------|
| Kerzner International Bahamas Limited(1)           |       | The Bahamas                            |       | 100                          | %          |
| Kerzner International North America,  Inc.(2)      |       | United  States                         |       | 100                          | %          |
| One&Only (Indian Ocean) Management  Limited(3) |       | British  Virgin Islands                |       | 75                           | %          |
| Kerzner International Management Limited(4)        |       | British  Virgin Islands                |       | 100                          | %          |

 

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(1)   Ownerof substantially all of the Bahamian subsidiaries. Directly or indirectlywholly owns ten subsidiaries, all of which are organized in the Commonwealth ofThe Bahamas.

 

(2)   Ownerof all of the U.S. subsidiaries. Directly or indirectly wholly owns 19subsidiaries, 16 of which are organized in the United States and three of whichare organized in Mexico and relate to the management and development ofOne&Only Palmilla.

 

(3)   Operatorof the five Mauritius management agreements and One&Only Kanuhura andOne&Only Maldives at Reethi Rah management agreements.

 

(4)   Ownerof the management agreement for One&Only Royal Mirage. Also receivesmarketing and administrative fees from One&Only Management related to theMauritius and One&Only Kanuhura management agreements.

 

See Exhibit 8, filed herewith, for a list of our significantsubsidiaries.

 

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**(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 forth below is a table listing our principalproperties as of December 31, 2005:

 
| **Name and Location**                                     | ** ** | **Owned or  Leased** | ** ** | **Principal Use**              | ** ** | **Size**           | ** ** | **Capacity**  | ** ** |
|---------------------------------------------------------------------|------------|---------------------------|------------|-------------------------------------|------------|--------------------|------------|---------------|------------|
|                                                                |       |                      |       |                                |       |               |       |          |       |
| Atlantis  Paradise Island,  The Bahamas(1)                          |       | Owned                     |       | Hotel/Casino                        |       | 108 acres          |       | 2,317 Rooms   |       |
|                                                                |       |                      |       |                                |       |               |       |          |       |
| One&Only Ocean Club  Paradise Island,  The Bahamas(1)           |       | Owned                     |       | Hotel                               |       | 33 acres           |       | 106 Rooms     |       |
|                                                                |       |                      |       |                                |       |               |       |          |       |
| Ocean Club Golf Course and Clubhouse  Paradise Island,  The Bahamas |       | Owned                     |       | Golf Course                         |       | 172 acres          |       | N/A           |       |
|                                                                |       |                      |       |                                |       |               |       |          |       |
| Roads and Utility Sites  Paradise Island,  The Bahamas(1)           |       | Owned                     |       | Infrastructure                      |       | 73 acres           |       | N/A           |       |
|                                                                |       |                      |       |                                |       |               |       |          |       |
| Phase III Expansion  Paradise Island,  The Bahamas                  |       | Owned                     |       | Current Development                 |       | 73 acres           |       | N/A           |       |
|                                                                |       |                      |       |                                |       |               |       |          |       |
| Undeveloped Land  Paradise Island,  The Bahamas(1)                  |       | Owned                     |       | Future Development                  |       | 107 acres          |       | N/A           |       |
|                                                                |       |                      |       |                                |       |               |       |          |       |
| Land Holding  Northampton, UK                                       |       | Owned                     |       | Current Development                 |       | 0.32 acres         |       | N/A           |       |
|                                                                |       |                      |       |                                |       |               |       |          |       |
| Kerzner International  North America, Inc.  Plantation, Florida     |       | Leased                    |       | Administrative and Marketing Office |       | 72,742 square feet |       | 460 Employees |       |

 

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(1)   Pleasesee “Item 4. Information on the Company, (B) Business Overview—TheProperties—Destination Resorts—Atlantis, Paradise Island,” which describes indetail our plans to construct, expand upon and improve these properties.

 

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 administrativeoffices in Buckinghamshire, United Kingdom, as well as two offices in Paris,France, one of which Solea Vacances SA, our wholly-owned European tour operatorsubsidiary, uses as a travel agency, while the other is a marketing office. Wealso lease an office outside of Frankfurt, Germany, which we use as a marketingoffice. We also lease two offices in South Africa, one of which is leased byWLH.

 

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

 

**Item 4A.****                 UnresolvedStaff Comments**

 

None.

 

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

 

**(A)Overview**

** **

We develop andoperate premier resort casinos and other properties throughout the world andmanage our business in three segments: Destination Resorts, Gaming andOne&Only Resorts. Our Destination Resorts segment is currently our largestand most important segment from both a gross revenue and net incomeperspective. We expect that our future growth will further define and reinforcethese segments.

 

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OurDestination Resorts segment is comprised of our larger destination resorts,including our flagship property, Atlantis, Paradise Island, which includesHarborside at Atlantis and four active projects in the development stage:Atlantis, The Palm, the Phase III expansion on Paradise Island, The Residencesat Atlantis and Ocean Club Residences & Marina. During 2005, Atlantis,Paradise Island generated approximately 77% of our net revenue. Revenue fromAtlantis, Paradise Island primarily consists of room, food and beverage,gaming, other resort and tour operations.

 

We expect thatthe Phase III expansion will allow us to capitalize on the demand for the propertyand leverage our investment in The Bahamas. In July 2005, we opened the MarinaVillage at Atlantis, a restaurant and entertainment complex surrounding theMarina at Atlantis. In August 2005, we entered into an agreement with TurnberryAssociates, one of the premier real estate development and property managementcompanies in the United States, for the purpose of developing The Residences atAtlantis, a 495-unit condominium-hotel. Construction is now underway on our22-story, 600-room, luxury all-suite hotel, with an expected opening in April2007. In August 2005, we completed the second phase of timeshare development atHarborside at Atlantis. During the first quarter of 2005, we commencedpre-sales of our ultra-luxury condominium units at Ocean Club Residences &Marina, which is a 50-50 joint venture with a local partner, and commenceddevelopment in the second half of 2005, with completion scheduled in stagesbetween January and May 2007.

 

In November2005, construction commenced in Dubai on Atlantis, The Palm, an approximately1,500-room destination resort, with completion scheduled for late 2008. Duringthe construction period, we expect to receive a $20.0 million development feeand reimbursement of certain expenses, and upon commencement of operations, weexpect to receive management fees and equity earnings from this property.

 

Our Gamingsegment is comprised primarily of our interests in casino properties. Wereceive fees pursuant to our relinquishment agreement with the Mohegan Tribethrough our investment in TCA. The Gaming segment also includes equity inearnings and losses from our 37.5% ownership interest in BLB and our 50%investment in TCNY. BLB acquired the U.S. operations of Wembley in July 2005for approximately $464.0 million. The U.S. operations of BLB consist of theLincoln Park racino in Rhode Island and three greyhound tracks and one horseracing track in Colorado. Our Gaming segment also includes our Northamptonproject costs associated with gaming opportunities in the United Kingdom. InApril 2005, the United Kingdom passed gaming reform legislation that was lessfavorable than we had previously anticipated, resulting in a write off of $11.2million of all previously capitalized and deferred costs incurred for theplanning and development of our potential gaming projects in the United Kingdom(excluding Northampton).

 

OurOne&Only Resorts segment is comprised of our ownership and/or managementinterests in a portfolio of smaller (when compared to our destination resorts)luxury resorts. Each One&Only resort has a different design consistent withits natural environment and values genuine hospitality, offering guests adistinctive experience. We currently operate ten resort properties inMauritius, the Maldives, Dubai, Mexico and The Bahamas, seven of which areoperated under the One&Only brand. In 2006, we entered into agreements todevelop, manage and own an equity interest in One&Only Cape Town on theVictoria & Alfred Waterfront in Cape Town, South Africa. In order toacquire management 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 new property.We expect to pursue opportunities selectively, particularly assets that allowus to leverage our brand, management team and development expertise.

 

We believethat the results of operations in the Destination Resorts and One&OnlyResorts segments are best explained by three key industry specific performancemeasures: occupancy, average daily rate (“ADR”) and revenue per available room(“RevPAR”). Occupancy is the total percentage of rooms occupied and is computedby dividing the number of room nights occupied by the total number of roomnights available. ADR is the average amount of room revenue per occupied roomnight. RevPAR represents room revenue divided by the total number of roomnights available. One of our key objectives is to enhance RevPAR at all of ourproperties by offering a combination of unique property designs, theme andlocation. Gaming is another major component of our Destination Resortsoperating results at Atlantis, Paradise Island. The volume of casinoactivity is measured by “drop,” which refers to amounts wagered by our customers.The amount of drop that we keep and recognize as casino revenue is referred toas our “win” or “hold.”  Thesemeasures are influenced by a variety of factors, including national, regionaland local economic conditions, changes in travel patterns and the degree ofcompetition with other destination resorts, luxury hotels and product offeringswithin the resort and casino industries. The demand for accommodations may alsobe

 

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affected byseasonal factors. For example, at Atlantis, Paradise Island and One&OnlyOcean Club, 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, properties in the Los Cabosmarket typically experience reduced occupancy levels in July and August.

 

Our operationsare exposed to various risks, the most significant of which are increasedcompetition, development and construction risks, ability to obtain financing,severe weather conditions and future security alerts or terrorist attacks.

 

•      The resort andcasino industries are highly competitive, and 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.

 

•      As we areinvolved in new projects and expansion efforts throughout the world, there areinherent risks associated with development and construction, such asunanticipated design, construction, regulatory and operating problems. Inaddition, if we are unable to finance our expansion and development projects,as well as other capital expenditures, through cash flows and borrowings, ourexpansion and development efforts could be jeopardized. As discussed in “Liquidityand Capital Resources,” we expect to have the resources necessary to financeour current expansion and development plans. However, if in the future we are unableto secure additional financing, we could be forced to limit or cancel expansionor development plans, which may adversely affect our business, financialcondition, results of operations and cash flows.

 

•      Our business isaffected by general economic and market conditions, particularly in the UnitedStates and Europe. A recession or economic slowdown could cause a reduction inbookings or the willingness or ability of tourists to book vacations atAtlantis, Paradise Island and our other properties, which could materiallyadversely affect our operating results.

 

•      The Bahamas,Mexico, the Maldives, Mauritius, Morocco and Dubai are subject to tropicalweather and storms, which, if severe, could adversely affect tourism and ouroperations. During the past seven years, Paradise Island has been affected byseveral major hurricanes that have caused property damage, businessinterruption and lost revenues. In December 2004, the Maldives were affected bythe tsunami caused by an earthquake off the coast of Indonesia in southernAsia, which resulted in flooding at One&Only Kanuhura and One&OnlyMaldives at Reethi Rah. We cannot predict if future severe weather conditionswill cause significant damage and suspension of services provided to ourpatrons, further increases to our insurance premiums and per occurrencedeductibles or cancellations of our insurance coverage.

 

•      Acts ofterrorism and war could adversely affect the travel market and reduce ouroperating revenue. The terrorist attacks on September 11th adversely affectedoperations in 2001. In addition, there is heightened concern about terroristactivity in Dubai and Morocco. Future acts of terror, anti-terrorist efforts,war or other armed conflicts involving the United States or other countries mayagain reduce our guests’ willingness to travel.

 

The Companyevaluates the performance of its segments based primarily on their contributionto net income (“Contribution to Net Income”), which is their respective revenuegenerated after direct operating costs and depreciation and amortizationattributable to each segment. Corporate expenses, interest income and expense,income taxes and other income and expenses are not currently allocated to thesegments but are separately evaluated.

 

The followingtables include analyses of net revenue and Contribution to Net Income bysegment. The following tables are in thousands of U.S. dollars (except forshare data), unless otherwise noted:

 

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**Net Revenue**

 
| ** **                              | ** ** | **For The Year Ended December 31,** | ** ** |
|-----------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                              | ** ** | **2005**                                                     | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                              | ** ** | ** **                                                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Destination Resorts:                    | ** ** | ** **                                                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Atlantis, Paradise Island (1)           |       |                                                         |       |   |   |   |   |
| Gaming                                  |       | $                                                            | 146,010    |   | $ | 130,879 |   | $ | 138,587 |   |
| Rooms                                   |       | 185,268                                                      |       | 174,093 |   | 167,989 |   |
| Food and beverage                       |       | 141,890                                                      |       | 127,633 |   | 118,414 |   |
| Other resort                            |       | 68,669                                                       |       | 65,040 |   | 61,865 |   |
|                                    |       | 541,837                                                      |       | 497,645 |   | 486,855 |   |
| Less: promotional allowances            |       | (24,239                                                      | )          | (23,034 | ) | (23,579 | ) |
|                                    |       | 517,598                                                      |       | 474,611 |   | 463,276 |   |
| Tour operations                         |       | 35,025                                                       |       | 26,564 |   | 28,875 |   |
| Harborside at Atlantis fees             |       | 3,655                                                        |       | 2,826 |   | 1,847 |   |
|                                    |       | 556,278                                                      |       | 504,001 |   | 493,998 |   |
| Atlantis, The Palm development fees     |       | 496                                                          |       | 380 |   | — |   |
|                                    |       | 556,774                                                      |       | 504,381 |   | 493,998 |   |
| Gaming:                                 |       |                                                         |       |   |   |   |   |
| Connecticut fees (2)                    |       | 926                                                          |       | 935 |   | 1,755 |   |
|                                    |       |                                                         |       |   |   |   |   |
| One&Only Resorts:                   |       |                                                         |       |   |   |   |   |
| One&Only Ocean Club                 |       | 43,237                                                       |       | 37,731 |   | 34,186 |   |
| One&Only Palmilla (3)               |       | 63,565                                                       |       | 37,875 |   | 1,481 |   |
| One&Only Maldives at Reethi Rah (4) |       | 18,185                                                       |       | 1,270 |   | 394 |   |
| Other resorts (5)                       |       | 14,278                                                       |       | 14,483 |   | 9,700 |   |
| Tour operations                         |       | 19,499                                                       |       | 20,551 |   | 11,915 |   |
|                                    |       | 158,764                                                      |       | 111,910 |   | 57,676 | ** ** |
|                                    |       |                                                         |       |   |   |   |   |
| Other (6)                               |       | 5,060                                                        |       | 3,859 |   | 5,084 |   |
| Net revenue                             |       | $                                                            | 721,524    |   | $ | 621,085 |   | $ | 558,513 |   |

 

----

(1)   Consists of revenue from Atlantis, ParadiseIsland, the Ocean Club Golf Course, the Company’s wholly-owned tour operator,PIV Inc., and marketing and development fee income from Harborside at Atlantis.

 

(2)   Consists of development and other feesrelated to Mohegan Sun. Relinquishment fees – equity in earnings of TCA relatedto our Gaming segment are included as a separate component outside of incomefrom operations in the accompanying consolidated statements of operations.

 

(3)   Consists of revenue from Palmilla inconnection with the consolidation of Palmilla JV, LLC for the years endedDecember 31, 2005 and 2004 as a result of FIN 46R. Revenue for the yearended December 31, 2003 represents management and development fees relatedto Palmilla.

 

(4)   Consists of revenue from One&OnlyMaldives at Reethi Rah in connection with the consolidation of Reethi Rah forthe year ended December 31, 2005. Revenue for the years ended December 31, 2004and 2003 represents development fees.

 

(5)  Includes management, marketing anddevelopment fees from One&Only Resorts properties located in Mauritius,Dubai and the Maldives, excluding One&Only Maldives at Reethi Rah.

 

(6)   Includes revenue not directlyattributable to Destination Resorts, Gaming or One&Only Resorts.

 

48

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**Contribution to Net Income**

** **
| ** **                                              | ** ** | **For The Year Ended December 31,** | ** ** |
|---------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                              | ** ** | **2005**                                                     | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                              | ** ** | ** **                                                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Destination Resorts:                                    | ** ** | ** **                                                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Atlantis, Paradise Island                               |       | $                                                            | 95,532     |   | $ | 86,951 |   | $ | 83,523 |   |
| Tour operations                                         |       | 7,064                                                        |       | 5,885 |   | 5,089 |   |
| Harborside at Atlantis (1)                              |       | 19,761                                                       |       | 9,477 |   | 5,176 |   |
| Ocean Club Residences & Marina (2)                  |       | 1,817                                                        |       | — |   | — |   |
| Residences at Atlantis (3)                              |       | (1,693                                                       | )          | — |   | — |   |
|                                                    |       | 122,481                                                      |       | 102,313 |   | 93,788 | ** ** |
| Atlantis, The Palm (4)                                  |       | (224                                                         | )          | 346 |   | — |   |
|                                                    |       | 122,257                                                      |       | 102,659 |   | 93,788 | ** ** |
| ** **                                              | ** ** | ** **                                                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Gaming:                                                 |       |                                                         |       |   |   |   |   |
| Connecticut (5)                                         |       | 38,808                                                       |       | 36,843 |   | 35,715 |   |
| United Kingdom                                          |       | (15,339                                                      | )          | (2,182 | ) | (329 | ) |
| BLB (6)                                                 |       | 2,099                                                        |       | (2,970 | ) | — |   |
| Other (7)                                               |       | (983                                                         | )          | (1,387 | ) | (1,086 | ) |
|                                                    |       | 24,585                                                       |       | 30,304 |   | 34,300 |   |
| One&Only Resorts:                                   |       |                                                         |       |   |   |   |   |
| One&Only Ocean Club                                 |       | 6,392                                                        |       | 3,644 |   | 4,720 |   |
| One&Only Palmilla (8)                               |       | 9,032                                                        |       | (1,831 | ) | (3,013 | ) |
| One&Only Maldives at Reethi Rah (9)                 |       | (3,225                                                       | )          | 1,270 |   | 394 |   |
| Other resorts (10)                                      |       | 15,975                                                       |       | 17,703 |   | 10,346 |   |
| Tour operations                                         |       | 1,196                                                        |       | 1,155 |   | 160 |   |
| Direct expenses (11)                                    |       | (14,009                                                      | )          | (17,074 | ) | (12,347 | ) |
|                                                    |       | 15,361                                                       |       | 4,867 |   | 260 | ** ** |
| Impairment of notes receivable                          |       | (27,812                                                      | )          | — |   | — |   |
|                                                    |       | (12,451                                                      | )          | 4,867 |   | 260 | ** ** |
| ** **                                              | ** ** | ** **                                                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Corporate and other expenses                            |       | (43,825                                                      | )          | (34,489 | ) | (32,842 | ) |
| Gain on sale (impairment) of Atlantic City  land        |       | 1,433                                                        |       | (7,303 | ) | — |   |
| Interest income                                         |       | 9,130                                                        |       | 4,722 |   | 3,394 |   |
| Interest expense, net of capitalization                 |       | (44,087                                                      | )          | (36,814 | ) | (29,264 | ) |
| Gain on settlement of territorial and other  disputes   |       | —                                                       |       | — |   | 1,479 |   |
| Loss on early extinguishment of debt                    |       | (27,912                                                      | )          | (1,655 | ) | — |   |
| Other, net                                              |       | 13                                                           |       | 1,358 |   | (686 | ) |
| Benefit (provision) for income taxes                    |       | 16,104                                                       |       | (424 | ) | (162 | ) |
| Minority and noncontrolling interest (12)               |       | 6,970                                                        |       | 4,907 |   | — |   |
| Income from discontinued operations, net of  income tax |       | —                                                       |       | — |   | 1,305 |   |
| Net income                                              |       | $                                                            | 52,217     |   | $ | 68,132 |   | $ | 71,572 |   |

 

----

(1)   Consists of equity in earnings,marketing, development and other fees related to Harborside at Atlantis.

 

(2)   Consists of equity earnings from OceanClub Residences & Marina.

 

(3)   Consists of losses before interest andtaxes, net of minority interest related to The Residences at Atlantis.

 

(4)   Consists of equity in losses anddevelopment fees related to Atlantis, The Palm.

 

(5)   Consists of relinquishment fees – equityin earnings of TCA and development and other fees related to Mohegan Sun.

 

49

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(6)   Consists of equity in earnings (losses)related to BLB.

 

(7)   Consists of equity losses related to TCNYand other expenses related to the Gaming segment.

 

(8)   Consists of earnings before interest andtaxes, net of minority interest related to Palmilla for the years endedDecember 31, 2005 and 2004. Results for the year ended December 31,2003 includes management, development and other fees and the Company’s share ofnet loss from One&Only Palmilla prior to the Company’s adoption of FIN 46R.

 

(9)   Consists of losses before interest andtaxes, net of minority interest related to One&Only Maldives at Reethi Rahfor the period from May 1, 2005 to December 31, 2005. Results for theyears ended December 31, 2004 and 2003 represent development fees related toOne&Only Maldives at Reethi Rah prior to consolidation in accordance withFIN 46R.

 

(10)Consists of equity in earnings (losses)of SRL and One&Only Kanuhura and management, marketing, development andother fees, net of minority interests.

 

(11)Consists of direct expenses associatedwith the One&Only Resorts segment.

 

(12)Consists of minority and noncontrollinginterest related to Reethi Rah interest expense and our portion of Palmilla’sloss on early extinguishment of debt, interest expense and taxes, none of whichis allocated to the One&Only Resorts segment.

 

During theyears ended 2005, 2004 and 2003, after direct operating expenses anddepreciation and amortization attributable to each segment, each of ourbusinesses contributed the following to income (dollars in millions). For theyear ended December 31, 2005, impairment of notes receivable of $27.8 millionrelated to our One&Only Resorts segment is excluded from the table below.For a reconciliation of the segment contribution to U.S. GAAP net income, seethe table above.

 
| ** **           | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------------|------------|----------|------------|----------|------------|----------|------------|
| ** **           | ** ** | **$**    | ** ** | **%**    | ** ** | **$**    | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** |
| Destination Resorts  |       | $        | 122.3      |     | 75         | %        | $          | 102.7 |   | 75 | % | $ | 93.8 |   | 73 | % |
| Gaming               |       | $        | 24.6       |     | 15         | %        | $          | 30.3 |   | 22 | % | $ | 34.3 |   | 27 | % |
| One&Only Resorts |       | $        | 15.4       |     | 10         | %        | $          | 4.9 |   | 3 | % | $ | 0.3 |   | — |   |

 

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. Amounts included in parentheses below refer to the effect on ourdiluted earnings per share.

 

**(B)  Operating Results**

** **

**ConsolidatedResults**

** **

***2005 vs. 2004.***Our focus during 2005 was to move forward with our major developmentprojects on Paradise Island and in Dubai while improving the financialperformance of Atlantis, Paradise Island and our One&Only Resorts segment. Netincome and diluted earnings per share during 2005 were $52.2 million and $1.39,respectively, as compared to $68.1 million and $2.01, respectively, in 2004. In2005, we recognized a $27.8 million ($0.74) impairment of notes receivable,loss on early extinguishment of debt of $27.9 million ($0.74), a $15.7 million($0.42) income tax benefit related to debt refinancing and a $11.2 million ($0.30)write off of U.K. gaming costs. In 2004, we recognized a $7.3 million ($0.22)impairment of Atlantic City land.

 

For the fourthstraight year, Atlantis, Paradise Island achieved record gross revenue. In2005, gross revenue totaled $580.5 million and achieved a Contribution to NetIncome of $122.5 million versus $102.3 million in 2004. Equity earnings andmanagement and other fees from our investment in Harborside at Atlantiscontributed $10.3 million ($0.27) more to net income than last year as a resultof strong sales trends of the second phase of Harborside at Atlantis. Equityearnings and fees from Mohegan Sun of $38.8 million represented the fifthconsecutive year of growth. (See “Other Factors Affecting Earnings and EarningsPer Share” for a comparison and explanation of certain items affecting resultsfor the years ended December 31, 2005 and 2004.)

 

50

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***2004 vs. 2003.*****Income and diluted earnings per share from continuingoperations in 2004 were $68.1 million and $2.01, respectively, which included a$7.3 million ($0.22) impairment of Atlantic City land, as compared to $70.3million and $2.39, respectively, in 2003. (See “Other Factors AffectingEarnings and Earnings Per Share” for a comparison and explanation of certainitems affecting 2004 and 2003 results.) Despite a severe hurricane season in2004, Atlantis, Paradise Island achieved gross revenue of $527.0 million,representing its third consecutive year of growth, and a contribution to incomeof $102.3 million versus $93.8 million in 2003. Equity earnings and fees earnedfrom Mohegan Sun of $36.8 million represented the fourth consecutive year ofgrowth and a 3.2% increase over 2003, as Mohegan Sun continued to increase itsshare of the growing Connecticut slots market.

 

**DestinationResorts**

** **

***Atlantis, ParadiseIsland***

*** ***

***2005 vs. 2004****.*

 

**Overview.**Strong leisure demand combined withimproved hotel and casino margins for Atlantis, Paradise Island increased itsContribution to Net Income by 20% from its prior 2004 record of $102.3 millionto $122.5 million in 2005. Contributing to the $20.2 million increase wereincreases in the gross operating profits of rooms, gaming and food and beverageof $11.6 million, $10.5 million and $5.4 million, respectively, over 2004results. Additionally, equity earnings and management and other fees fromHarborside at Atlantis more than doubled (increasing by $10.3 million over2004) due to strong sales in the second phase. These increases were offset by$7.7 million of pre-opening expenses related to the Marina Village at Atlantisand the Phase III expansion, an $8.8 million increase in utility costs and a$4.8 million increase in depreciation and amortization.

 

Atlantis,Paradise Island offers a variety of amenities resulting in a diverse stream ofrevenue that limits our dependence on any particular operation and helpsmaximize revenue per occupied room night. The amenities that Atlantis, ParadiseIsland offers, including the largest casino in the Caribbean, the world’slargest open-air marine habitat and many restaurants, also attract day-visitorsfrom other hotels and cruise ships visiting New Providence Island. Grossrevenue for Atlantis, Paradise Island of $580.5 million during 2005 exceededgross revenue in 2004 by $53.5 million, or 10.1%. Of the total gross revenue,32% was derived from rooms, 25% from gaming, 24% from food and beverage and 19%from other sources.

 

51

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The followingtable presents details of certain revenue, direct expenses (which excludesdepreciation and amortization, selling, general and administrative expenses,corporate expenses and certain other expenses) and gross operating profits ofAtlantis, Paradise Island:

 
| ** **                             | ** ** | **For The Year Ended  December 31,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------------------------|------------|----------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                             | ** ** | **2005**                                                 | ** ** | **2004**   | ** ** | **Change** | ** ** | **%** | ** ** |
| ** **                             | ** ** | **(In millions)**                                   | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                   |       |                                                     |       |       |       |       |       |   |   |
| Gaming, net of promotional allowances: |       |                                                     |       |       |       |       |       |   |   |
| Revenue                                |       | $                                                        | 121.8      |       | $          | 107.8      |       | $ | 14.0 |   | 13 | % |
| Expenses                               |       | 63.0                                                     |       | 59.5       |       | 3.5        |       | 6 | % |
| Gross operating profit                 |       | $                                                        | 58.8       |       | $          | 48.3       |       | $ | 10.5 |   | 22 | % |
|                                   |       |                                                     |       |       |       |       |       |   |   |
| Rooms:                                 |       |                                                     |       |       |       |       |       |   |   |
| Revenue                                |       | $                                                        | 185.3      |       | $          | 174.1      |       | $ | 11.2 |   | 6 | % |
| Expenses                               |       | 27.5                                                     |       | 27.9       |       | (0.4       | )          | -1 | % |
| Gross operating profit                 |       | $                                                        | 157.8      |       | $          | 146.2      |       | $ | 11.6 |   | 8 | % |
|                                   |       |                                                     |       |       |       |       |       |   |   |
| Food and Beverage:                     |       |                                                     |       |       |       |       |       |   |   |
| Revenue                                |       | $                                                        | 141.9      |       | $          | 127.6      |       | $ | 14.3 |   | 11 | % |
| Expenses                               |       | 92.5                                                     |       | 83.6       |       | 8.9        |       | 11 | % |
| Gross operating profit                 |       | $                                                        | 49.4       |       | $          | 44.0       |       | $ | 5.4 |   | 12 | % |
|                                   |       |                                                     |       |       |       |       |       |   |   |
| Other Resort:                          |       |                                                     |       |       |       |       |       |   |   |
| Revenue                                |       | $                                                        | 68.7       |       | $          | 65.0       |       | $ | 3.7 |   | 6 | % |
| Expenses                               |       | 93.8                                                     |       | 80.2       |       | 13.6       |       | 17 | % |
| Gross operating profit                 |       | $                                                        | (25.1      | )          | $          | (15.2      | )          | $ | (9.9 | ) | 65 | % |
|                                   |       |                                                     |       |       |       |       |       |   |   |
| Tour Operations:                       |       |                                                     |       |       |       |       |       |   |   |
| Revenue                                |       | $                                                        | 35.0       |       | $          | 26.6       |       | $ | 8.4 |   | 32 | % |
| Expenses                               |       | 27.8                                                     |       | 20.6       |       | 7.2        |       | 35 | % |
| Gross operating profit                 |       | $                                                        | 7.2        |       | $          | 6.0        |       | $ | 1.2 |   | 20 | % |

 

**Gaming.**The$10.5 million increase in gross profit (which is calculated net of promotionalallowances) from the Atlantis Casino resulted primarily from increases in slotand table win of 19.3% and 7.5%, respectively. The reopening of Hotel RIUParadise Island, which is located next to Atlantis, Paradise Island, and doesnot have a casino, contributed to the improved results in 2005. Slot coin inwas $798.5 million and $662.0 million during 2005 and 2004, respectively. Slotwin during 2005 was $64.6 million, as compared to $54.1 million during 2004.The 19.3% increase in slot win was the result of changes to the casino floorthat included the entire floor being converted to ticket-in-ticket-out machinescombined with the purchase of new, lower-denomination video slot machines,which provide an improved entertainment value to the slot patron and encouragelonger play, along with the addition of multi-denomination machines that allowpatrons to trade up at the machine. In addition, E-bonus (a software programallowing for predefined bonuses or promotional incentives), installed towardsthe end of the second quarter, was marketed during the third quarter andcreated additional visits from our customers. Although table drop decreasedfrom $519.0 million in 2004 to $509.0 million in 2005, the table holdpercentage increased from 14.5% in 2004 to 15.9% in 2005. This resulted in a7.5% increase in table win from $75.2 million in 2004 to $80.9 million in 2005.

 

52

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**Rooms.**Roomrevenue and gross profit increases were primarily due to a 6.8% increase inRevPAR from $207 to $221. This increase was mainly driven by the leisuresegment, which was negatively impacted in 2004 by the four major hurricanesthat impacted either South Florida or Paradise Island. Gross operating profitwas also positively impacted by decreased group commission expense of $0.9million primarily resulting from a decrease in group revenue due to strongerdemand from the leisure segment during 2005 as compared to 2004. Travel demandfrom individual travelers resulted in a $9.8 million, or 8.6%, increase in roomrevenue in 2005 over 2004. The improved room pricing environment yieldedoverall ADR at Atlantis, Paradise Island of $272 and $257 in 2005 and 2004,respectively, while occupancy remained constant at 81% in 2005 and 2004.

 

**Food andBeverage.**The 11% increase in food and beveragerevenue was driven by $12.2 million of revenue from restaurants at the MarinaVillage at Atlantis, which was completed in July 2005, combined with lower thananticipated displacement of revenue from existing food and beverage outlets. Alsodriving this increase was the opening of the second phase of Harborside atAtlantis, which added 116 units, and the fact that the Marina Village atAtlantis attracts a significant amount of non-Atlantis, Paradise Island guestbusiness. Banquet revenue increased $1.3 million (5.8%) as compared to 2004 inspite of a decrease of 2.2% in group room nights. This is mainly due to theimplementation of a new menu with increased pricing, along with increases inboth local catering events and wedding business. Food and beverage spend peroccupied room night increased from $189 in 2004 to $208 in 2005. In addition,the Marina Village at Atlantis contributed a $3.9 million increase in food and beverage gross operating profit.

 

**OtherResort.**Other resort revenue primarily representsincidental revenue generated from hotel and golf operations, including retailshops, guest activities, telephone, the Marina at Atlantis, Hurricane Hole,rental income from retail establishments located at the properties, utilitiesand cancellations. The $3.7 million increase in other resort revenue atAtlantis, Paradise Island is primarily due to a $1.7 million increase in rentalincome from the new retail establishments located in the Marina Village atAtlantis and $2.0 million related to marina and fuel dock revenue fromHurricane Hole Marina, which was acquired in July 2005 (see “Liquidity andCapital Resources – Investing Activities” for further discussion on theHurricane Hole Acquisition).

 

Other resortexpenses represent direct costs associated with other resort revenue andnon-departmental expenses, such as utilities and property operations andmaintenance. The $13.6 million increase in other expenses is due primarily toan $8.8 million increase in utility costs with $5.9 million resulting fromincreased fuel surcharges applied to electricity rates and $3.3 million relatedto the settlement of vendor dispute related to prior year billings, along with$1.8 million associated with Hurricane Hole and with various othermiscellaneous increases.

 

**Tour Operations.**Revenueand gross operating profit increased by $8.4 million and $1.2 million,respectively, primarily due to an increase in the number of packages sold. Inaddition, 2004 package revenue was negatively impacted by the four major stormsthat impacted either Paradise Island or South Florida. Also contributing to theincreases were the launch of the web-based reservation system and betterconversion rates resulting from the implementation and training related to ournew reservation system.

 

**Selling,General and Administrative.**Selling, general andadministrative expenses were $85.0 million and $84.3 million during 2005 and2004, respectively, representing a 1% increase.

 

**Depreciationand Amortization.**Depreciation and amortization forAtlantis, Paradise Island was $53.0 million and $48.2 million during 2005 and2004, respectively. The $4.8 million increase in depreciation and amortizationprimarily relates to the Marina Village at Atlantis and the new reservationsystem placed in service during 2005.

 

**Harborsideat Atlantis.**Through our 50%-owned timeshare jointventure on Paradise Island, we recognized $16.1 million in equity earnings and$3.7 million in marketing and development fees during 2005, as compared to $6.7million and $2.8 million, respectively, during the same period in 2004. Theincreased equity earnings recognized during 2005 are primarily the result ofstrong sales trends and the completion of construction of the first two phasesof Harborside at Atlantis. As of December 31, 2005, Harborside at Atlantis hadsold 97% of its original units and 37% of the units developed in its secondphase. Included within equity earnings for 2004 is $4.0 million of our share ofan insurance recovery realized by Harborside at Atlantis related to the finalsettlement of the remediation claim resulting from damages incurred duringHurricane Michelle, which recovery was recorded net of remediation costsincurred.

 

53

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**Ocean Club Residences & Marina.**InSeptember 2005, the Company entered into a 50-50 joint venture with a Bahamianpartner to form Paradise Island Condominiums Joint Venture Limited for thepurpose of developing Ocean Club Residences & Marina. Constructioncommenced during 2005 and the project was approximately 20% complete as ofDecember 31, 2005. The cost of this development, which is being financedprimarily from pre-sales of units, is expected to be $130.0 million. Demand forthe units has been strong. As of February 28, 2006, deposits on 59 of the 88units had been received by the joint venture. The units went on the market inMay 2005. The project is expected to be completed in stages between January andMay 2007. During 2005, we recognized $1.8 million in equity earnings related toOcean Club Residences & Marina.

 

**TheResidences at Atlantis.**In August 2005, we entered into a jointventure with Turnberry to develop The Residences at Atlantis, a condominium-hotellocated adjacent to Atlantis, Paradise Island. Construction is expected tocommence if the joint venture receives a sufficient level of reservations andfinancing for the development has been secured by the joint venture. If weelect not to proceed with the development of the condominium-hotel, we wouldnot expect to proceed with the development of the Athol Golf Course. EffectiveAugust 30, 2005, we have consolidated the Residences at Atlantis in ourfinancial statements pursuant to FIN 46R. See “Other Matters, Consolidation ofVariable Interest Entities” for further explanation. During the period fromAugust 30, 2005 to December 31, 2005, we recognized a net loss, net of minorityinterest of $1.7 million, which is attributable to our share of sales andmarketing expenses.

 

***2004 vs. 2003.***

 

**Overview.**During 2004,strong business trends and continued margin improvement led Atlantis, ParadiseIsland to achieve its then strongest results. The property contributed $102.3million to income, as compared to $93.8 million in 2003. This increase wasprimarily the result of the strong performance of the Atlantis, Paradise Islandhotel despite the lost business and $4.6 million of costs related to HurricaneFrances, which passed just to the north of Paradise Island. Marginal increasesin occupancy and ADR generated $6.1 million of additional room revenue, ofwhich $4.7 million went to gross profit. Strong food and beverage results wererealized by price increases and improved margins (1.4% over 2003), which led toa $4.8 million improvement in gross profit over 2003. In the Atlantis Casino,lower hold percentage at the tables compared to an unusually high holdpercentage in 2003, led to a decrease over 2003’s strong results.

 

Gross revenue for Atlantis, Paradise Island of $527.0 million in 2004exceeded 2003 gross revenue by $9.5 million (1.8%). Of the total gross revenue,33% was derived from rooms, 24.8% from gaming, 24.2% from food and beverage and18.0% from other sources.

 

54

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The following table presents details of certain revenue, directexpenses (which excludes depreciation, amortization, selling, general andadministrative expenses, corporate expenses and certain other expenses) andgross operating profits of Atlantis, Paradise Island:

 
| ** **                              | ** ** | **For the Year Ended  December 31,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------|------------|----------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                              | ** ** | **2004**                                                 | ** ** | **2003**   | ** ** | **Change** | ** ** | **%** | ** ** |
| ** **                              | ** ** | **(In millions)**                                   | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                    |       |                                                     |       |       |       |       |       |   |   |
| Gaming, net of  promotional allowances: |       |                                                     |       |       |       |       |       |   |   |
| Revenue                                 |       | $                                                        | 107.8      |       | $          | 115.0      |       | $ | (7.2 | ) | -6 | % |
| Expenses                                |       | 59.5                                                     |       | 63.3       |       | (3.8       | )          | -6 | % |
| Gross operating  profit                 |       | $                                                        | 48.3       |       | $          | 51.7       |       | $ | (3.4 | ) | -7 | % |
|                                    |       |                                                     |       |       |       |       |       |   |   |
| Rooms:                                  |       |                                                     |       |       |       |       |       |   |   |
| Revenue                                 |       | $                                                        | 174.1      |       | $          | 168.0      |       | $ | 6.1 |   | 4 | % |
| Expenses                                |       | 27.9                                                     |       | 26.5       |       | 1.4        |       | 5 | % |
| Gross operating  profit                 |       | $                                                        | 146.2      |       | $          | 141.5      |       | $ | 4.7 |   | 3 | % |
|                                    |       |                                                     |       |       |       |       |       |   |   |
| Food and  Beverage:                     |       |                                                     |       |       |       |       |       |   |   |
| Revenue                                 |       | $                                                        | 127.6      |       | $          | 118.4      |       | $ | 9.2 |   | 8 | % |
| Expenses                                |       | 83.6                                                     |       | 79.2       |       | 4.4        |       | 6 | % |
| Gross operating  profit                 |       | $                                                        | 44.0       |       | $          | 39.2       |       | $ | 4.8 |   | 12 | % |
|                                    |       |                                                     |       |       |       |       |       |   |   |
| Other Resort:                           |       |                                                     |       |       |       |       |       |   |   |
| Revenue                                 |       | $                                                        | 65.0       |       | $          | 61.9       |       | $ | 3.1 |   | 5 | % |
| Expenses                                |       | 80.2                                                     |       | 80.8       |       | (0.6       | )          | -1 | % |
| Gross operating  profit                 |       | $                                                        | (15.2      | )          | $          | (18.9      | )          | $ | 3.7 |   | -20 | % |
|                                    |       |                                                     |       |       |       |       |       |   |   |
| Tour Operations:                        |       |                                                     |       |       |       |       |       |   |   |
| Revenue                                 |       | $                                                        | 26.6       |       | $          | 28.9       |       | $ | (2.3 | ) | -8 | % |
| Expenses                                |       | 20.6                                                     |       | 23.7       |       | (3.1       | )          | -13 | % |
| Gross operating  profit                 |       | $                                                        | 6.0        |       | $          | 5.2        |       | $ | 0.8 |   | 15 | % |

 

**Gaming.**Gross profitfrom the Atlantis Casino was $48.3 million in 2004 as compared to $51.7 millionin 2003. The $3.4 million (6.6%) decrease in gross profit from gaming resultedprimarily from a decrease in table win of 11.4% as compared to 2003, partiallyoffset by a 6.0% reduction in casino expenses. The decrease in table winresulted from a lower table hold percentage and lower table drop. During 2004,there was a slight decrease in table drop from $521.7 million to $519.0 millionand a decrease in the table hold percentage from a high hold percentage in 2003of 16.3% to 14.5%, resulting in table win of $75.2 million in 2004 compared to$84.9 million in 2003. The challenging hurricane season and the fact that theformer Sheraton Grand (now Hotel RIU Paradise Island), which is located next toAtlantis, Paradise Island, and does not have a casino, was closed for asignificant part of the year were among the factors that led to the lower tabledrop since guests of that hotel are frequently customers of the Atlantis Casino.Slot coin in was $662.0 million in 2004 as compared to $593.8 million in 2003.Slot win in 2004 was $54.1 million, as compared to $53.5 million in 2003. The11.5% increase in slot coin in was the result of changes to the casino floorthat included the majority of the floor being converted to ticket-in-ticket-outmachines and the installation of more updated popular games.

 

**Rooms.**The increasesin room revenue and gross profit over 2003 were due to a 3.0% increase inRevPAR from $201 to $207 and improved margins from containment of costs,respectively. Group revenue increased by $3.2 million (8.3%) in 2004 over 2003,as group room nights occupied increased by 3.1% in 2004. The ADR at Atlantis,

 

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Paradise Island in 2004 and 2003 was $257 and $251, respectively, andoccupancy was 81% and 80% for 2004 and 2003, respectively.

 

**Food and Beverage.**Goinginto 2004, we slightly increased food and beverage prices, as we had notincreased these prices in several years. As a result, food and beverage spendper occupied room night increased from $178 in 2003 to $189 in 2004 due toincreases in beverage prices and meal plan rates. Also contributing to theincrease in food and beverage revenue was a $4.4 million increase in banquetrevenue that corresponded with the increase in group room revenue.

 

**Other Resort.**Other resortrevenue increased by $3.1 million due primarily to a $1.3 million increase inrevenue from cancellations, and a $0.9 million increase in revenue from retailshops, combined with various other increases, none of which are individuallysignificant.

 

**Tour Operations.**Revenuedecreased by $2.3 million as package revenue in 2004 was negatively impacted bythe four major storms that affected either Paradise Island or South Florida. However,gross operating profit increased by $0.8 million as a result of reductions indirect expenses related to decreased travel agent commissions and credit cardfees resulting from the deceased revenue.

 

**Selling, General and Administrative.**Selling,general and administrative expenses decreased slightly from $84.5 million in2003 to $84.3 million in 2004.

 

**Depreciation and Amortization.**Depreciationand amortization for Atlantis, Paradise Island was $48.2 million in 2004 and$51.0 million in 2003. The $2.8 million decrease is primarily attributable toassets still in service during 2004 that had been fully depreciated as they mettheir estimated useful lives.

 

**Harborside at Atlantis.**Throughour 50%-owned timeshare joint venture on Paradise Island, we recognized $6.7million in equity earnings (including our share of the insurance recoverydiscussed below) and $2.8 million in marketing and development fees in 2004.Harborside at Atlantis was closed from August through December of 2002 torepair water damage primarily resulting from Hurricane Michelle in 2001. Duringthe year ended December 31, 2004, we recognized $4.0 million of our share of aninsurance recovery realized by Harborside at Atlantis related to the finalsettlement of the remediation claim, which recovery was recorded net ofremediation costs incurred. During the year ended December 31, 2003, werecognized $3.3 million and $1.8 million of equity earnings and marketing fees,respectively. Included within equity earnings for the year ended December 31,2003 was $0.3 million of net expense related to the remediation, as there were$1.8 million of remediation costs that were offset by the insurance recovery of$1.5 million.

 

**Other Factors.**HurricaneFrances, as well as the effects of the subsequent major hurricanes and tropicalstorms that impacted the State of Florida in 2004, negatively impacted businessin the week preceding Labor Day and in the weeks thereafter. Costs associatedwith Hurricane Frances were $4.6 million, consisting of $3.4 million clean upand repair costs and complimentary goods and services and a $1.2 million losson damaged assets.

 

***Atlantis, The Palm***

*** ***

We have entered into a development agreement with Kerzner Istithmarthat entitles us to receive $20.0 million and reimbursement of certain expensesover the development period of Atlantis, The Palm. As we own a 50% votinginterest in Kerzner Istithmar, we expect to recognize $10.0 million indevelopment fees over the development period. During 2005 and 2004, werecognized $0.5 million and $0.4 million, respectively, of development fees and$2.1 million of our share of equity loss from pre-opening expenses associatedwith Atlantis, The Palm incurred during the year ended December 31, 2005.  In addition, during 2005, we recorded $1.4million of our share of unrealized gains resulting from interest rate swapsentered into by Kerzner Istithmar.

 

**Gaming**

** **

***Mohegan Sun***

*** ***

***2005 vs. 2004****.*We recognized $38.8 million ofrelinquishment and other fees in 2005, as compared to $36.8 million in 2004,from TCA. Mohegan Sun achieved an 8.1% increase in gross revenue, which was$1.5 billion during calendar year 2005 as compared to $1.4 billion in calendaryear 2004. Mohegan Sun’s share of the Connecticut slots market was 52% and 51%during 2005 and 2004, respectively.

 

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***2004 vs. 2003****.*We recognized $36.8 million ofrelinquishment and other fees in 2004, as compared to $35.7 million in 2003,from TCA. Mohegan Sun achieved a 6.0% increase in gross revenue, which wasapproximately $1.4 billion during calendar year 2004 as compared toapproximately $1.3 billion during calendar year 2003. Mohegan Sun’s share ofthe Connecticut slots market was 51% and 50% during 2004 and 2003,respectively.

 

***United Kingdom***

*** ***

***2005 vs. 2004****.*In April 2005, the United Kingdom passedgaming reform legislation that was less favorable than we had previouslyanticipated related to our Scottish Exhibition + Conference Centre, Sportcityand The O2 projects, which resulted in a write off of $11.2million related to all previously capitalized and deferred costs incurred forthe planning and development of these projects. In addition, during the yearsended December 31, 2005 and 2004, we incurred $4.8 million and $2.2 million,respectively, in expenses related to gaming projects (other than Northampton)in the United Kingdom. These expenses primarily related to overhead expensesand legal and professional fees incurred in connection with the pursuit ofdevelopment opportunities.

 

Although the future of gaming in the United Kingdom is unclear as aresult of the passage of legislation in April 2005, we continue to pursuepotential opportunities on a selective basis. Costs related to theseopportunities, other than Northampton, were expensed as incurred.

 

***2004 vs. 2003****.*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. Theexpenses primarily related to overhead expenses and legal and professional feesincurred in connection with the pursuit of development opportunities.

 

***BLB***

*** ***

In 2005, we recognized $2.1 million in equity earnings from ourinvestment in BLB which includes our $0.9 million share of BLB’s gain associatedwith Wembley’s repurchase of BLB’s share ownership in Wembley effective on thedate of acquisition.

 

For the year ended December 31, 2004, we recorded $3.0 million inequity losses from our investment in BLB, which losses included our $3.0 millionshare of a loss related to transaction costs incurred in connection with BLB’sintended cash tender offer to acquire all of Wembley’s outstanding shares andour $1.0 million share of a hedge loss, offset by $1.0 million of our share ofdividend income received by BLB from Wembley.

 

***TCNY***

*** ***

We recognized $1.0 million, $0.9 million and $1.1 million in equitylosses related to our 50% investment in TCNY during the years ended December31, 2005, 2004 and 2003, respectively. As it has been our policy to expense certaincosts that TCNY capitalizes due to the uncertainty of the recoverability ofsuch costs, our investment as of December 31, 2005 was $1.8 million, whichconsisted almost entirely of our indirect interest in the land acquired for thepotential project. As such, we believe the book value of the land included inour investment is approximately equal to its fair value and, should TCNY notproceed with the Catskills Project, we would not anticipate a significant writeoff.

 

**One&OnlyResorts**

 

***2005 vs. 2004.***

 

**Overview.**In 2005,our focus was to improve the results of One&Only Palmilla and to commenceoperations at One&Only Maldives at Reethi Rah, as well as to sustain the2004 levels of earnings at our other properties. One&Only Palmilla recordedsignificantly higher results during 2005 as compared to 2004 and we openedOne&Only Maldives at Reethi Rah on May 1, 2005. We also are in the planningphase of an additional One&Only property in Cape Town, South Africa. Weexpect to pursue opportunities selectively, particularly assets that allow usto leverage our brand, management team and development expertise.

 

The One&Only Resorts segment recorded a loss of $12.5 million in2005, which included a $27.8 million impairment charge related to subordinatednotes receivable from One&Only Maldives at Reethi Rah. (See “Other

 

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Factors Affecting Earnings and Earnings Per Share” for furtherexplanation.) Excluding the $27.8 million impairment charge, One&OnlyResorts segment contributed income of $15.4 million in 2005 as compared to $4.9million in 2004. This increase was driven primarily by the strong results ofOne&Only Palmilla, where its contribution to the One&Only segmentimproved by $10.9 million as a result of a 72.0% increase in RevPAR over thesame period last year.

 

In December 2004, the tsunami caused by an earthquake off the coast ofIndonesia in southern Asia resulted in flooding damage at our two properties inthe Maldives. One&Only Kanuhura sustained approximately $5.0 million inbusiness interruption losses. An insurance claim in respect of these losses hasrecently been settled. During 2005, One&Only Kanuhura received $3.5 millionrelated to the business interruption claim and expects to receive the final$1.5 million payment by the end of the first quarter of 2006, which will berecorded by One&Only Kanuhura as income when received. In addition,One&Only Kanuhura suffered property damages, and the related insuranceclaim was settled for $3.5 million.

 

**One&Only Ocean Club.**Theresort contributed $6.4 million to income in 2005, as compared to $3.6 millionin 2004. Revenue at One&Only Ocean Club was $43.2 million and $37.7 millionin 2005 and 2004, respectively. The $5.5 million increase in revenue isprimarily the result of a full year of revenue associated with the three newluxury villas added in June 2004 combined with the strong demand for theproperty. Occupancy was 82% and 79% in 2005 and 2004, respectively. ADR andRevPAR were up in 2005 as compared to the same period in 2004, $869 versus$762, respectively, and $712 versus $600, respectively.

 

**One&Only Palmilla.**In2005, One&Only Palmilla’s Contribution to Net Income, net of minorityinterest was $9.0 million as compared to a loss reducing net income of $1.8million, net of minority interest in 2004. The increase can be attributed tothe fact that since One&Only Palmilla opened in February 2004, the property’sfirst full year of operations was 2005, combined with positive reactions fromthe travel market and media due to our advertising and marketing campaigns.Occupancy was 86% and 61% in 2005 and 2004, respectively. ADR and RevPAR wereup in 2005 as compared to the same period in 2004, $606 versus $500,respectively, and $523 versus $304, respectively.

 

**One&Only Maldives at Reethi Rah.**Theresort commenced operations on May 1, 2005 and is our newestOne&Only-managed property and our second property located in the Maldives.Effective May 1, 2005, we consolidated Reethi Rah, the entity that owns andoperates One&Only Maldives at Reethi Rah, into our consolidated financialstatements in accordance with FIN 46R. See “Other Factors Affecting Earningsand Earnings Per Share” for further discussion. The all-villa resort is locatedon an island in the Maldives. Unfortunately, due to the effects of the tsunamiin December 2004, construction was delayed and the property opened during thelow season. One&Only Maldives at Reethi Rah’s Contribution to Net Income(prior to interest expense) in 2005 was a loss of $3.2 million, net ofnoncontrolling interest. The net loss reflects $7.3 million of depreciationexpense for the period from May 1, 2005 to December 31, 2005. One&OnlyMaldives at Reethi Rah achieved occupancy, ADR and RevPAR for the period fromMay 1, 2005 to December 31, 2005 of 72%, $436 and $313, respectively.

 

**Mauritius Properties.**InMauritius, we earned management fees, net of minority interest and equityearnings of $5.9 million and $3.8 million, respectively, in 2005, compared to$6.7 million and $4.3 million, respectively, in 2004 with respect to our fiveproperties.

 

**One&Only Kanuhura.**Weearned management fees, net of minority interest and equity earnings of $0.6million and $0, respectively, in 2005 and $0.9 million and $0.4 million,respectively, in 2004. In June 2005, One&Only Kanuhura was closed for anextensive, four-month renovation, which included the redevelopment of theresort’s water villas and enhancements to its existing beach villas,restaurants, public areas and spa. The resort re-opened in mid-October 2005. In2005, we received insurance payments of $3.5 million for business interruptionand $3.5 million for property damage.

 

**One&Only Royal Mirage.**In2005, we earned management fees from One&Only Royal Mirage of $4.1 million,compared to $3.4 million in 2004.

 

**Direct Expenses.**Therewas a  $3.1 million decrease in directexpenses due primarily to a $1.8 million write off of affiliated receivables in2004 and cost reductions effected in 2005 associated with the management of thebusiness.

 

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***2004 vs. 2003.***

 

**Overview.**During 2004, wecontinued to build the management team and sales and marketing structure forour One&Only Resorts business, which enabled One&Only Resorts toimprove upon 2003’s results with increases in management fees and equityearnings at our resorts in Mauritius, the Maldives and Dubai. The One&OnlyResorts segment contributed $4.9 million to income in 2004, compared to $0.3million in 2003. Contributing to this improvement were stronger results fromSRL (a $2.8 million increase in equity earnings and management fees) andOne&Only Royal Mirage (a $2.1 million increase in management fees). Inaddition, net revenue from tour operators increased by $8.6 million from $11.9million in 2003 to $20.6 million in 2004, primarily due to a more favorabletravel market in 2004 as compared to 2003 and exchange rate movements relatedto the Euro and Sterling.

 

**One&Only Ocean Club.**Theresort contributed $3.6 million to income in 2004, as compared to $4.7 millionin 2003, a 23% decrease primarily from $0.8 million of clean up and repaircosts and complimentary goods and services provided due to Hurricane Frances.As a result of Hurricane Frances, the property was closed for eleven daysbefore reopening on a fully-operational basis. Revenue was $37.7 million and$34.2 million in 2004 and 2003, respectively. This 10.2% increase in revenue ispartially attributed to the fact that One&Only Ocean Club opened three newluxury villas in June 2004. The increase in revenue was offset by a $3.5million increase in operating expenses as compared to 2003, which resulted froma $1.4 million increase in depreciation and amortization due to the new villas,along with increased room expense and selling, general and administrativeexpenses. Occupancy remained flat in 2004, as compared to 2003, at 79%. ADR andRevPAR were up during 2004 compared to 2003, $762 versus $722, respectively,and $600 versus $568, respectively. Eleven days have been excluded from thenumber of available room nights used in the calculation of occupancy and RevPARfor the year ended December 31, 2004 in connection with the temporary closureof One&Only Ocean Club due to Hurricane Frances.

 

**One&Only Palmilla.**InFebruary 2004, we held the grand re-opening of One&Only Palmilla. During2004, One&Only Palmilla contributed a loss before interest and taxes, netof minority interest of $1.8 million, which included $1.4 million of our shareof re-opening expenses. During 2003, One&Only Palmilla contributed anequity loss of $4.8 million and management, development and accounting fees of$1.8 million. The equity loss was primarily due to our share of pre-openingexpenses of $4.8 million, as the resort was closed for the majority of 2003during its redevelopment. For the year ended December 31, 2004, occupancy andRevPAR at One&Only Palmilla were 61% and $304, respectively.

 

**Mauritius Properties.**InMauritius, we earned management fees, net of minority interest and equityearnings of $6.7 million and $4.3 million, respectively, in 2004, compared to$5.9 million and $2.3 million, respectively, in 2003, with respect to our fiveproperties.

 

**One&Only Kanuhura.**Weearned management fees, net of minority interest and equity earnings (losses)of $0.9 million and $0.4 million, respectively, in 2004 and $0.6 million and($0.1) million, respectively, in 2003.

 

**One&Only Royal Mirage.**In2004, we earned management fees from One&Only Royal Mirage of $3.4 million,compared to $1.3 million in 2003, as business at One&Only Royal Miragerecovered following the war in Iraq in 2003.

 

**One&Only Maldives at Reethi Rah.**Additionally,we earned $1.3 million and $0.4 million in development fees in 2004 and 2003,respectively, related to the development of One&Only Maldives at Reethi Rah.

 

**Direct Expenses.**Therewas a $4.7 million increase in direct expenses due primarily to a $1.8 million writeoff of affiliated receivables in 2004 and higher costs incurred in connectionwith the pursuit of new One&Only projects and direct costs incurred bymanagement in the launch of One&Only Palmilla.

 

**Corporateand Other Expenses**

 

***2005 vs.******2004****.*Corporate and other expenses increasedby $9.3 million in 2005 over 2004 (from $34.5 million to $43.8 million) dueprimarily to an increase of $5.8 million in expenses related to new businessdevelopment projects in Singapore and non-capitalizable costs related to ourprojects in Morocco and Cape Town, a $2.2 million write-down of homes held forsale at Ocean Club Estates and a $1.7 million write-down of the net book valueof assets of the former restaurant where Nobu is now located. We do notallocate losses on sales of fixed assets to any segment.

 

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***2004 vs. 2003****.*Corporate and other expenses increasedby $1.7 million in 2004 over 2003 (from $32.8 million to $34.5 million) dueprimarily to an increase of $1.8 million 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 2003included a $1.5 million charitable contribution to a new hotel school in SouthAfrica.

 

**InterestIncome**

** **

***2005 vs. 2004.***Interestincome in 2005 and 2004 was $9.1 million and $4.7 million, respectively. The$4.4 million increase is primarily the result of interest earned on our higheraverage short-term investment and cash balances at higher interest rates ascompared to 2004. The short-term investments were purchased during the latterpart of the second quarter of 2004 with proceeds received from the issuance ofthe 2.375% Notes. Also contributing to the higher average cash balance during2005 were the proceeds received from the sale of 3.0 million Ordinary Shares toIstithmar in August 2004.

 

***2004 vs. 2003****.*Interest income in 2004 and 2003 was$4.7 million and $3.4 million, respectively. The $1.3 million increase in 2004is primarily attributable to $2.9 million of interest income earned on theproceeds received from the issuance of the 2.375% Notes in April 2004 and theissuance of 3.0 million Ordinary Shares to Istithmar in August 2004 (see “Liquidityand Capital Resources” for further discussion) offset by $1.2 million ofinterest income earned in 2003 on $15.0 million principal amount of debtsecurities of LCI that we purchased in 2002 and sold during 2003.

 

**InterestExpense**

** **

The following table presents details of interest expense, net ofcapitalization, for the years ended December 31, 2005, 2004 and 2003. (Amountsin table are in thousands of U.S. dollars).

 
| ** **                                    | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| 8 7/8% Senior  Subordinated Notes             |       | $        | 23,080     |     | $          | 28,495   |       | $ | 25,923 |   |
| 6 3/4 % Senior  Subordinated Notes            |       | 7,425    |       | —   |       | —   |       |
| 2.375%  Convertible Senior Subordinated Notes |       | 5,462    |       | 3,995    |       | —   |       |
| Other interest  expense                       |       | 1,477    |       | 1,424    |       | 2,082    |       |
| One&Only  Palmilla(1)                     |       | 10,948   |       | 6,271    |       | —   |       |
| One&Only  Maldives at Reethi Rah          |       | 3,930    |       | —   |       | —   |       |
| Amortization of  debt issuance costs          |       | 3,579    |       | 2,435    |       | 1,692    |       |
| Capitalized  interest                         |       | (11,814  | )          | (5,806   | )          | (433     | )          |
| Interest  expense, net of capitalization      |       | $        | 44,087     |     | $          | 36,814   |       | $ | 29,264 |   |

 

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(1)   Includes amortization of debt issuance costsrelated to One&Only Palmilla.

 

***2005 vs. 2004.***Interest expense, net of capitalization was $44.1 million and $36.8 million in2005 and 2004, respectively. The $7.3 million increase in interest expense isprimarily attributable to higher variable interest rates, which resulted in a$4.3 million increase in interest expense on the portion of our 87/8% Notes that had beenswapped to variable rate under our interest rate swap agreements. Theseagreements were terminated in September 2005 in connection with the tender forour 87/8%Notes (See “Liquidity and Capital Resources – Financing Activities” for furtherdiscussion). Additionally, we experienced a $4.7 million increase in interestexpense related to the Palmilla Notes, which incur interest expense on avariable rate basis. Also contributing to the increase in 2005 interest expensewas the inclusion of $3.9 million of interest expense on Reethi Rah’s thirdparty debt. In accordance with the provisions of FIN 46R, we beganconsolidating Reethi Rah on May 1, 2005, thus necessitating that we include theentity’s financial results in ours. These increases in interest expense werepartially offset by a $6.0 million increase in capitalized interest associatedwith the Phase III expansion and our investment in Atlantis, The Palm.

 

At December 31, 2005 and 2004, our variable rate debt, including theeffect of interest rate swaps, and fixed rate debt were 21% and 79% (0% and100% excluding One&Only Palmilla and Reethi Rah) and 35% and 65% (24% and76% excluding One&Only Palmilla), respectively. The average cost of debt,including the effect of interest rate swaps, during 2005 and 2004 was 7.1% and6.4%, respectively.

 

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***2004 vs. 2003****.*Interest expense increased by $7.6million, or 25.8%, due to $6.3 million of interest expense incurred in 2004related to the consolidation of Palmilla. Our portion of minority interestincome related to One&Only Palmilla’s interest expense is $3.2 million.Also included in interest expense is $4.4 million related to the 2.375% Notesissued in April 2004, along with a decreased benefit to interest expenseattributable to our interest rate swaps on our 87/8% Notes of $2.6 milliondue to higher LIBOR rates in 2004 and the cancellation in July 2004 of $25.0million notional amount of our then $175.0 million of interest rate swaps.Capitalized interest increased by $5.4 million to a total of $5.8 million in2004 primarily related to the Phase III expansion.

 

At December 31, 2004 and 2003, our variable rate debt, including theeffect of interest rate swaps, and fixed rate debt were 35% and 65% (24% and 76%excluding One&Only Palmilla) and 44% and 56%, respectively. The averagecost of debt, including the effect of interest rate swaps, during both 2004 and2003 was 6.4%.

 

**OtherFactors Affecting Earnings and Earnings Per Share**

** **

***2005 vs. 2004.***

 

***Consolidation of Reethi Rah***

** **

As of May 1, 2005, the Company became the primary beneficiary of ReethiRah under FIN 46R, resulting in the consolidation of Reethi Rah into theconsolidated financial statements of the Company as of that date. Reethi Rahincurred net losses totaling $12.3 million after intercompany eliminations forthe period from May 1, 2005 to December 31, 2005. Of this amount, approximately$6.7 million exhausted the fair value owners’ equity capital (the fair value ofwhich was estimated by the Company as of May 1, 2005) and is included inminority and noncontrolling interests in the accompanying consolidatedstatements of operations for the year ended December 31, 2005. The balance of $5.6million is reflected as a reduction to the Company’s consolidated net incomefor this period. Should Reethi Rah incur additional net losses, in the absenceof any increase to the owners’ equity capital in future periods, such losseswill be reflected in the Company’s consolidated results of operations. IfReethi Rah realizes net income in the future, the Company will be creditedthrough an increase to the Company’s consolidated net income only to the extentof the losses previously absorbed by the Company on behalf of Reethi Rah.

 

***Impairment of Notes Receivable***

** **

During the year ended December 31, 2005, we recorded a $27.8million impairment of our subordinated notes receivable due from Reethi Rah.During 2005, we obtained an appraisal of the resort that led us to perform animpairment analysis, the results of which indicated that the carrying amount ofour subordinated notes receivable due from Reethi Rah was not fullyrecoverable.

 

***Gain on Sale of Atlantic City Land***

** **

Duringthe year ended December 31, 2005, we completed the sale of a portion of ourAtlantic City land, for which we had previously recorded an impairment charge,as well as two additional ancillary pieces of land, all of which resulted in atotal gain of $1.4 million.

 

***Loss on Early Extinguishment of Debt and TaxBenefit Related to Refinancing***

** **

During the year endedDecember 31, 2005, we recognized a $27.9 million loss on early extinguishmentof debt and a tax benefit of $15.7 million related to the refinancing of our 87/8%Notes (see “Liquidity and Capital Resources - Financing Activities” for furtherdiscussion regarding the refinancing of our 87/8% Notes). This lossconsisted of $33.0 million of consent solicitation and prepayment penalties andthe write off of $5.8 million of debt issuance costs. These costs were offsetby the write off of a $4.3 million unamortized premium on the 87/8% Notes and net proceedsof $4.9 million received from the termination of our related interest rate swapagreement and related write off of the $1.7 million interest rate swap contraasset.

 

***Higher Diluted Weighted Average Number of SharesOutstanding***

** **

The number of diluted weighted average shares outstanding during 2005was 37.7 million, representing an 11% increase over 2004, reflecting thedilutive effect of a 31% increase in the average stock price during the year,along

 

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with the dilutive effect of a full year of the 3.0 million OrdinaryShares issued to Istithmar in August 2004 and the exercise of 0.7 million shareoptions.

 

***2004 vs. 2003.***

 

***Impairment of Atlantic City Land***

** **

In July 2004, we obtained an appraisal on undeveloped real estate thatwe owned in Atlantic City, which indicated that the carrying amount of thisreal estate was not fully recoverable. We commissioned the appraisal after wereceived an unsolicited offer to acquire some of the undeveloped land for aprice substantially less than our book value and certain other informationrelated to third party sales of nearby comparable properties at pricessubstantially less than our book value for the undeveloped property. As aresult, 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.

 

***Higher Diluted Weighted Average Number of SharesOutstanding***

** **

As of December 31, 2004, the number of fully diluted weighted averageshares outstanding was 33.9 million, representing a 15% increase over 2003,reflecting the dilutive effect of a 56% increase in the average stock priceduring the year, along with the issuance of 3.0 million and 0.4 millionOrdinary Shares related to the Istithmar share purchase and BDR offering,respectively, and the exercise of 1.9 million of stock options.

 

**OtherMatters**

** **

**ForeignCurrencies**

** **

We prepare our financial statements in U.S. dollars. Our mostsignificant non-U.S. operations are in The Bahamas. Due to current governmentalpolicies in The Bahamas that equate one Bahamian dollar to one U.S. dollar andthe large portion of our cash and cash equivalents being held in U.S. dollars,we believe that we do not have material market risk exposures in thisjurisdiction relative to changes in foreign exchange rates. Due to thestability of the other markets in which we operate and the fact that we do notoperate in any highly inflationary economies, we do not believe that we havematerial market risk exposures in these jurisdictions relative to changes inforeign exchange rates.

 

**Consolidationof Variable Interest Entities**

** **

In December 2003, the FASB issued FIN 46R. This interpretation ofAccounting Research Bulletin 51, “Consolidated Financial Statements,” addressesconsolidation by business enterprises of variable interest entities which haveone or both of the following characteristics: (i) the equity investment at riskis not sufficient to permit the entity to finance its activities withoutadditional subordinated financial support from other parties which is providedthrough other interests that will absorb some or all of the expected losses ofthe entity or (ii) the equity investors lack one or more of the followingcharacteristics of a controlling financial interest: (a) the direct or indirectability to make decisions about the entity’s activities through voting rightsor similar rights, (b) the obligation to absorb the expected losses of theentity if they occur, which makes it possible for the entity to finance itsactivities or (c) the right to receive the expected residual returns of theentity if they occur, which is the compensation of the risk of absorbing theexpected losses. We adopted FIN 46R on January 1, 2004.

 

We have determined that Palmilla, in which we have a 50% equityinterest, constitutes a variable interest entity that is subject toconsolidation in accordance with the provisions of FIN 46R, as the related operatingagreement contains a put option that, if exercised, would obligate the Companyto purchase the remaining 50% of the entity, resulting in our being the primarybeneficiary of the entity. As such, effective January 1, 2004, we consolidatedthe results of operations and financial position of Palmilla, with theremaining 50% interest reflected as minority interest and included in minorityand noncontrolling interests in the accompanying condensed consolidatedstatements of operations and consolidated balance sheets.

 

Although we do not have an equity ownership interest in Reethi Rah, wehave determined that Reethi Rah is a variable interest entity that is subjectto consolidation in accordance with the provisions of FIN 46R. We haveagreements with Reethi Rah that provide for construction financing andoperating loans, as well as management and

 

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development agreements. As of May 1, 2005, when the resortcommenced operations, we became the primary beneficiary of Reethi Rah under FIN46R, resulting in consolidation of Reethi Rah’s financial statements in ourconsolidated financial statements as of that date, with the owners’ equityinterest reflected as noncontrolling interest and included in minority and noncontrollinginterests in our consolidated financial statements.

 

On August 30, 2005, we entered into an agreement with Turnberry to formResidences at Atlantis Development Limited, a joint venture established for thepurpose of developing and selling units in The Residences at Atlantis, a495-unit condominium-hotel adjacent to Atlantis, Paradise Island. Based on theterms of the agreement, we have determined that Residences at AtlantisDevelopment Limited is a variable interest entity that is subject to consolidation,and we are the primary beneficiary. Turnberry’s interest is reflected as acomponent of minority interest and is included in minority and noncontrollinginterests in the consolidated statements of operations and is offset againstdue to affiliates in the consolidated balance sheets.

 

**(C) Liquidity and Capital Resources**

 

We believe we are well positioned to fund our commitments related toour announced development projects. In 2005, we commenced construction of the 22-story,600-room, all-suite hotel component of the Phase III expansion and thedevelopment of the Ocean Club Residences & Marina project, which isfinanced by pre-sales and project level financing. In August 2005, we completedthe second phase of the Harborside at Atlantis development, which was precededby the completion of the Marina Village at Atlantis in July 2005. We commencedconstruction of the 1,500-room Atlantis, The Palm in November 2005 and willcommence construction of The Residences at Atlantis if the entity receives a sufficientlevel of reservations and financing has been secured by the venture. In 2005,we financed these development projects with our current cash on hand and cashflow from operations and anticipate to use these sources along with borrowingsunder our Amended Credit Facility to finance the development going forward. Weusually invest our excess cash in U.S. Treasury bills (“T-Bills”) andprime-rated money market funds.

 

Beginning in 2004, we made significant progress in preparing for ourupcoming development and capital needs. We began enhancing our funding capacityin anticipation of our future development plans in April 2004 with the issuanceof $230.0 million principal amount of 2.375% Notes due 2024. In July 2004, wealso completed an equity offering in The Bahamas of approximately 4.3 millionBahamian Depository Receipts, the equivalent of approximately 0.4 millionOrdinary Shares, that resulted in net proceeds of approximately $19.1 million.In August 2004, we issued 3.0 million Ordinary Shares to Istithmar at a priceof $51.25 per share, resulting in net proceeds of $153.4 million. In September2005, we commenced a tender offer and consent solicitation of our 87/8%Notes and used the proceeds from the issuance of the $400.0 million 63⁄4%  Notes to purchase 99.60% of the 87/8%Notes. In October 2005, we amended our revolving credit facility to increasethe maximum amount of borrowings outstanding from $500.0 million to $650.0million. These transactions, along with operating cash flows, allowed us to accumulate$20.0 million and $203.9 million of short-term investments and $116.0 millionand $180.3 million in cash and cash equivalents as of December 31, 2005 and2004, respectively. These amounts do not include restricted cash of $4.3million and $2.8 million as of December 31, 2005 and 2004, respectively. TheAmended Credit Facility was undrawn at December 31, 2005, and we had $644.6million available after giving effect to $5.4 million in letters of creditoutstanding. The Amended Credit Facility contains customary affirmative andrestrictive covenants that, 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 of indebtedness and(e) limit asset expenditures and dispositions outside the ordinary course ofbusiness. See “Tabular Disclosure of Contractual Obligations” below for moreinformation.

 

We believe our operating cash flows, as a percentage of operatingincome, were higher than that of many of our competitors due primarily to the incomefrom Mohegan Sun, management fees, the lack of corporate income tax in TheBahamas and net operating loss carryforwards that offset our U.S.-sourcedfederal taxable 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 requireadditional funding, particularly if we identify any significant newopportunities. Accordingly, from time to time, we evaluate our need of capitalfor major development projects and the various options available to us in thecapital markets. With respect to our investment initiatives such as BLB andKerzner Istithmar, along with certain other equity investments, a majority ofthe financing has and will be raised at the project level, on a non-recourse orlimited recourse basis to Kerzner.

 

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***Operating Activities***

** **

During 2005, we generated $175.2 million of cash flow from operatingactivities compared to $136.5 million in 2004. The cash flow from operatingactivities during 2005 was primarily due to the Contribution to Net Income fromour Atlantis, Paradise Island operations of $122.5 million, which is net of$53.0 million of non-cash depreciation and amortization. In addition, we earned$38.8 million of relinquishment and other fees from TCA, of which we received$37.1 million in cash receipts during 2005. There are no significant relatedexpenses associated with our relinquishment fees from TCA, other than $2.9million of taxes paid to the State of Connecticut. Other sources of cash flowfrom operating activities include the Contribution to Net Income of $15.1million from our One&Only Resorts segment, which is net of $19.3 million ofnon-cash depreciation and excludes the $27.8 million impairment of subordinatednotes receivable. These cash flows were offset by cash outflows fromoperations, which included $40.9 million of cash interest payments (excluding$11.8 million of capitalized interest) and approximately $43.8 million of cashpayments related to corporate expenses.

 

***Investing Activities***

** **

In 2005, net cash outflows used in investing activities were $182.4million compared to $467.5 million during 2004.

 

In 2005, approximately $205.0 million principal amount of our T-Billsmatured, and we purchased approximately $20.0 million principal amount ofadditional T-Bills. At December 31, 2005, the adjusted carrying value and fairvalue of these securities was $20.0 million, and the remaining T-Bill maturedin January 2006.

 

Our business requires capital to fund our joint ventures, develop newproperties and maintain our existing properties, which maintenance consists ofitems such as information technology upgrades, new slot machines andimprovements to the resorts, including renovations, carpeting and banquet andrestaurant equipment upgrades. During 2005, we used $198.2 million for capitalexpenditures, which included $122.6 million of capital expenditures incurredprimarily for the development on Paradise Island related to the Phase IIIexpansion, including $28.4 million incurred related to the Marina Village atAtlantis, $14.0 million of payments of capital creditors at One&OnlyMaldives at Reethi Rah during the period from May 1, 2005 to December 31, 2005,$7.9 million associated with room renovations in the Coral and Beach Towers atAtlantis, Paradise Island, $3.7 million related to the build-out of Nobu in theAtlantis Casino, capital additions of $3.4 million related to the developmentof the casino facility in Northampton and $2.5 million of capital expendituresfor The Residences at Atlantis. We also spent $4.9 million and $1.0 million ofdesign and development costs related to our potential projects in Morocco andCape Town, respectively. The remaining balance of $38.4 million was primarilyused for ongoing projects on Paradise Island and at One&Only Palmilla.During 2005, capital expenditures were primarily funded by our available cashon hand and cash flow from operations. We also paid $28.0 million, net ofrelated costs, for the acquisition of Hurricane Hole Marina, which is in closeproximity to the Marina Village at Atlantis and includes frontage on NassauHarbour. In the future, we anticipate redeveloping Hurricane Hole Marina,developing additional retail/restaurants and possibly adding timeshare units.

 

During 2006, we anticipate our ongoing capital expenditures will rangefrom approximately $60.0 million to $65.0 million, primarily for projects onParadise Island relating to renovations of the Royal and Beach Towers atAtlantis, Paradise Island. By 2009, we plan to have renovated, refinished andupdated the interior of each tower within the property.

 

In connection with the Phase III expansion, we expect our totalinvestment (exclusive of the One&Only Ocean Club luxury villas, Harborsideat Atlantis, The Residences at Atlantis, the Athol Golf Course and Ocean ClubResidences & Marina) to be approximately $730.0 million, which consists ofcapital expenditures and pre-opening expenses. From late 2003 to December 31,2005, in connection with the Phase III expansion, we spent $189.2 million, and weexpect to spend between $400.0 million and $450.0 million in 2006 and $75.0 to$125.0 million in 2007. In accordance with our amended Heads of Agreement, wehave committed to substantially complete the all-suite hotel and certain otheraspects of the Phase III expansion by December 2006. We expect The Residencesat Atlantis and Ocean Club Residences & Marina to cost approximately $250.0million and $130.0 million, respectively. These projects are joint ventures andthey will be primarily financed from proceeds received from pre-sales of unitsand limited-recourse financing secured by the joint ventures.

 

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During 2004, we funded $47.4 million in connection with BLB’sacquisition of a 22.2% ownership interest in Wembley during 2004. We did notfund any amounts to BLB during 2005. In February 2005, Wembley and BLBannounced that they had entered into a conditional sale agreement providing forthe purchase by BLB of a holding company that owned Wembley’s U.S. operations,which included the Lincoln Park racino in Rhode Island and three greyhoundtracks and one horse racing track in Colorado, in exchange for BLB’s then-existingstake in Wembley plus additional cash provided in the form of debt financingfrom a consortium of banks. In July 2005, BLB completed the approximately$464.0 million acquisition of Wembley’s U.S. operations. BLB exchanged its22.2% interest, acquired in 2004 and valued at $116.0 million, in Wembley aspartial consideration for the acquisition. The balance of the acquisition pricewas financed on a non-recourse basis by a consortium of banks that underwrote a$495.0 million senior secured credit facility, which included a $125.0 millionrevolving credit facility that will be used primarily to finance theredevelopment of Lincoln Park that commenced in the third quarter of 2005. Theredevelopment is expected to be completed in early 2007. Based on the mostrecent costs estimates, which indicate a significant rise in the totaldevelopment costs of this project, we expect to make an additional equityinvestment of $10.0 million to $15.0 million to finance our pro rata share ofthese additional costs.

 

Through December 31, 2005, we had funded $129.6 million (including$37.0 million funded in 2005 prior to consolidation of Reethi Rah onMay 1, 2005) in subordinated completion and operating loans for thedevelopment and operation of One&Only Maldives at Reethi Rah, resulting inoutstanding balances as of December 31, 2005 of $94.7 million and $6.8 millionrespectively, which have been eliminated in consolidation. (See “OtherMatters—Consolidation of Variable Interest Entities” for further discussion). The$94.7 million balance does not reflect the $27.8 million impairment chargerecorded during the year ended December 31, 2005 as a result of an appraisal ofthe resort by a third party valuation firm, which indicated that the carryingamount of our subordinated notes receivable due from Reethi Rah was not fullyrecoverable.

 

During 2005, we advanced $2.3 million to Harborside at Atlantis inconnection with the second phase of timeshare development. During the year,they repaid $13.8 million of promissory notes outstanding. The remainingbalance as of December 31, 2005 was $5.0 million.

 

In January 2005, we announced that we and CapitaLand had entered into amemorandum of understanding relating to the creation of a joint venture to beowned 60% by us and 40% by CapitaLand for the purpose of submitting a jointconcept proposal to the Singapore Government for the potential development ofan integrated entertainment resort complex on Sentosa Island in Singapore. Inconnection with this project, included within corporate expenses in theconsolidated statements of operations is $4.2 million of costs incurred, whichrepresent our 60% share of the costs associated with this project. As ofDecember 31, 2005, we had a receivable due from CapitaLand of $1.5 million,related to their 40% share of the costs incurred. During 2006, we expect to continueto expense our 60% share of costs associated with the creation of a jointproposal and its submission to the Singaporean authorities.

 

During 2005, we invested $52.8 million in Kerzner Istithmar andcapitalized $2.4 million of interest on our capital contributions. As of December31, 2005, we had invested $74.1 million in Kerzner Istithmar since inceptionrelated to the development of Atlantis, The Palm. In August 2005, under theprovisions of Kerzner Istithmar’s senior credit facilities, we were required toplace into escrow the difference between our previous equity commitment to theproject of $125.0 million and any amounts previously funded. The Company’srestricted cash—non-currentas of December 31, 2005 included $57.2 million of escrowed funds for the solepurpose of funding our equity investment in Kerzner Istithmar and $0.7 millionof accrued interest.

 

In the fourth quarter of 2005, we announced an increase in theAtlantis, The Palm project budget and consequently increased  ourequity commitment to the joint venture to $200.0 million. Kerzner Istithmar’scapital structure is expected to consist of an equity investment of $200.0million by each partner and the $700.0 million term loan facility. Theremaining project financing will comprise an additional $275.0 million ofsecond lien debt, of which Istithmar has committed to provide $75.0 million. Ascurrently contemplated by the commitments for both the first lien and secondlien loan facilities, no additional restricted cash will be required, since theequity from the project sponsors will be invested before the drawdown of anydebt from the facilities rather than on a pro rata basis with the debt, aspreviously contemplated. Kerzner Istithmar has received a commitment, subjectto various conditions, from third party underwriters for the remaining $200.0million commitment and expects to enter into binding definitive documentationfor this financing by the end of the April 2006. 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

 

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cost overruns and post-completion debt service obligations. Further,Istithmar has agreed to provide an additional guarantee for cost overruns inexcess of this amount. Construction of Atlantis, The Palm commenced in November2005, with completion scheduled for late 2008. As of December 31, 2005, KerznerIstithmar had incurred approximately $117.7 million of development and designrelated costs for Atlantis, The Palm.

 

During 2006 we expect to fund $125.9 million related to our remainingtotal commitment. Based on our current budget, the development costs of theproject are estimated at $1.5 billion, which includes the cost of purchasingthe site on which the property will be located from the developer of The Palm,Jumeirah in exchange for a $125.0 million payment-in-kind note that will besubordinated to the first and second lien debt.

 

With respect to the destination resort casino project in Morocco,  we have entered into a joint venture agreementand related development and long-term management agreements with two localMoroccan companies. The joint venture agreement requires each party to provideequity based on the initially estimated project cost of $230.0 million. Ourcomponent of the equity contribution as stated in the joint venture agreementis $46.0 million. Based on the current preliminary designs for the project, thebudget is now anticipated to be approximately $300.0 million, although a moredefinitive amount will not be available until further detailed design work hasbeen completed. As a result of the previously announced budget increase, bothparties are working together to arrange debt and equity financing to fund theproject. Although no assurances can be given at this time, we expect to reachagreement with our Moroccan partners on amended project documents and proceedwith the project, subject to obtaining third party debt financing. During 2005,we expensed $2.0 million of non-capitalizable costs associated with the Moroccoproject. In addition, during 2005, we incurred $4.9 million of design anddevelopment costs which are included in construction in progress in theconsolidated balance sheets. As of December 31, 2005, we had approximately $6.5million capitalized with respect to design and development costs. If thisproject does not proceed, we will be required to write off these costs thathave been capitalized.

 

In connection with the development of a casino facility in Northampton,we incurred $4.3 million in construction costs as of December 31, 2005. Weexpect the build of the core and shell infrastructure of the facility to becompleted in April 2006, after which fit-out will commence and we expect thefacility to be open by the first quarter of 2007. The Northampton project isexpected to cost approximately £10.8 million (approximately $18.9 millionin U.S. dollars as of February 28, 2006).

 

We are committed to making a contribution towards the construction ofthe raft and shell infrastructure to house the proposed regional casino at The O2. The Company expects to incur approximately £6.5million (approximately $11.3 million U.S. dollars as of February 28, 2006) in2006. If a regional casino license is not awarded at The O2, the Companyis eligible to recover 80% of its investment, and the balance of the costs isexpected to be expensed as incurred.

 

In November 2003, we entered into an agreement with V&AWaterfront to develop and manage a new luxury 132-room hotel, One&Only CapeTown, at the highest end of the market in Cape Town, South Africa. Under thisagreement, we committed to enter into a land lease and relevant developmentagreements related to the property. Consequently, in 2004, we entered into a50-year land lease with V&A Waterfront and formed a joint venture, inwhich our local partners own 80% and we own the remaining 20%, to develop hotelproperties in southern Africa. In March 2006, we formed a project company underthe joint venture to focus specifically on the Cape Town property. This projectcompany entered into development and management agreements (as contemplated inthe original agreement) with wholly-owned subsidiaries of Kerzner. Kerznerassigned the land lease to the project company. Along with our equity investment,we are providing financing assistance in the form of loans and guarantees,which are in an aggregate amount of approximately $24.4 million.

 

One&Only Cape Town will be located in the Victoria& Alfred Waterfront, a popular shopping and entertainment destinationlocated on Cape Town’s harbor. In addition to guest rooms, the top two floorsof the hotel will be residential in nature, with ten apartments selling on asectional title basis. Owners will have the option to release their units intothe hotel’s guest room rental pool.

 

One&Only Cape Town has been in the design stagesfor the past few years, as the project was delayed for a year by litigationinvolving V&A Waterfront relating to alleged zoning violations. In late2005, V&A Waterfront received a favorable judgment, allowing us to proceedwith the project. Architectural design work for the new hotel is now nearcomplete, and subject to planning and environmental approval, construction isexpected to start in

 

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January 2007, with completion scheduled for 2009. As of December 31,2005, we had approximately $7.0 million capitalized with respect to thisproject and we expect our equity investment in this project to totalapproximately $18.0 million. If this project does not proceed, we will berequired to write off the amounts that have been incurred. Also during 2005, weexpensed $0.9 million of non-capitalizable costs associated with the Cape Townproject.

 

In October 2003, we funded $1.7 million in theform of a loan for the purchase of land related to the potential development ofan additional One&Only property in South Africa. This land is currentlybeing developed as a private game reserve. Once the conservancy has beenestablished, we have the option to build a luxury lodge on an exclusive site ofour choice. We expect to make a decision on the project by the end of 2007, andif we decide not to proceed, we expect to be refunded $1.5 million plusinterest.

 

In September 2005, we formed a 50-50 joint venture with a localBahamian partner for the purpose of developing Ocean Club Residences &Marina. Our initial equity contribution was the site rights for the land onwhich the condominium will be developed. Our cost basis of the land rights andcertain direct costs related to the construction and development of the projectwas $4.3 million. During the fourth quarter of 2005, we acquired additionalbeachfront property on Paradise Island adjoining Ocean Club Estates for $15.7million. We contributed the right to use this land into the Ocean ClubResidences & Marina joint venture for future development and received a$7.9 million distribution, representing our partner’s 50% share.

 

In July 2005, we completed the sale of a portion ofour Atlantic City land, as well as an additional ancillary piece of land, bothof which resulted in total cash received and a total gain of $7.0 million and$1.4 million, respectively.

 

In October 2005, we entered into an agreement topurchase land adjacent to Club Med for $12.0 million and made a $1.2 milliondeposit. We expect the sale to close in the second quarter of 2006 and expectto pay approximately $12.0 million.

 

In connection with the operating agreement related to One&OnlyPalmilla, the owner of the other 50% interest has the right to require us toacquire its 50% interest from the owner for a price of $36.3 million, plus 50%of One&Only Palmilla’s working capital, with the price subject toadjustment, as defined in the purchase agreement, during the first year of theoption period. The purchase price during the second year of the option periodis based on a formula, as specified in the purchase agreement. The optionperiod began on September 12, 2005 and expires on September 12, 2007.

 

***Financing Activities***

** **

Net cash used in financing activities was $57.2million in 2005, as compared to net cash provided by financing activities of$451.1 million in 2004. Cash received during 2004 consisted of net proceedsreceived of $223.7 million related to the issuance of the 2.375% Notes, $153.4million related to the issuance of 3.0 million Ordinary Shares to Istithmar,$40.5 million in proceeds received from the exercise of share options and $19.1million in proceeds received from the issuance of 0.4 million Ordinary Sharesin connection with the BDR offering. Cash provided by financing activities in2005 consisted of net proceeds received of $392.7 million related to theissuance of the 63⁄4% Notes, which was used to repurchase our 87/8%Notes (see below), and $17.8 million received from the exercise of stockoptions.

 

Included in early redemption and repayment of debt of$432.1 million is $426.5 million of early redemption of debt related to thetender of our 87/8% Notes. On September 12, 2005, we commenceda cash tender offer to purchase any and all of our outstanding 87/8% Notes. We used the netproceeds from the issuance of $400.0 million of our 63⁄4% Notes onSeptember 22, 2005, together with cash on hand of approximately $39.3million, to retire $398.4 million of the 87/8% Notes. In connectionwith this refinancing, the Company incurred $33.1 million of consentsolicitation and prepayment penalties. Additionally, our interest rate swapagreements were terminated in connection with this refinancing, resulting innet proceeds received of $5.1 million. Repayment of debt of $5.7 millionrepresents $3.9 million and $1.8 million of repayments on Reethi Rah debt andcapital lease obligations, respectively.

 

In August 2005, our Board of Directors approved ashare repurchase program authorizing the Company to purchase up to two millionof our Ordinary Shares. The share repurchases will be made at management’sdiscretion from time to time in the open market through block trades orotherwise. Depending upon market conditions and other factors, sharerepurchases may be commenced or suspended at any time or from time to timewithout prior

 

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written notice. As of December 31, 2005, 612,500 shares have beenrepurchased for a total of $35.7 million at an average price of $58.21.

 

As shown in Tabular Disclosure of Contractual Obligations, as ofDecember 31, 2005, we did not have any significant scheduled debt repaymentsdue until 2007, when the principal of the $110.0 million Palmilla Notesmatures. The issuers of the Palmilla Notes may exercise three successiveone-year extensions, which, if exercised, would extend the repayment of theprincipal of the Palmilla Notes until 2010. Any repayments under our AmendedCredit Facility are not due until July 2009. We anticipate that prior tomaturity, interest payments will be provided from cash flows from operations.We believe we are in compliance with the debt covenants of our Amended CreditFacility. If we were to consider taking on additional financing in the future,our ability to meet our existing debt covenants would be a factor indetermining whether we would be able to obtain future financing to fund ourcapital needs. We monitor our debt compliance on an ongoing basis and confirmcompliance quarterly. During the year ended December 31, 2005, our average costof debt was approximately 7.1%.

 

***Working Capital***

** **

Working capital, which equals current assets less current liabilities,was $15.8 million at December 31, 2005, reflecting a current ratio, which equalscurrent assets divided by current liabilities, of 1.06:1. Working capitaldecreased by $290.7 million from December 31, 2004, due to a decrease inshort-term investments of $184.0 million, as a majority of the T-Bills maturedduring the year and we utilized the cash to fund ongoing development projects, a$64.4 million decrease in cash primarily due to $57.9 million of non-currentrestricted cash placed into an escrow account related to Atlantis, The Palm, a$30.0 million increase in capital creditors due to the fact that the Phase IIIexpansion is further along as compared to 2004, a $27.2 million increase inaccounts payable and accrued expenses primarily as a result of theconsolidation of Reethi Rah and The Residences at Atlantis in accordance withthe provisions of FIN 46R and a $12.3 million decrease in assets held for saleas we completed the sales of the Atlantic City land and real estate at theOcean Club Estates. These amounts were offset by a $21.5 million increase indue from affiliates primarily due to an $11.4 million receivable due fromTurnberry for customer deposits related to The Residences at Atlantis whichdeposits are being held in escrow by Turnberry on behalf of the joint venture,along with additional amounts due from SRL, Harborside at Atlantis and OceanClub Residences & Marina.

 

***Interest Rate Swap and Cap Agreements***

*** ***

Historically, we have limited our exposure to interest rate risk bymanaging the mix of fixed and variable rate debt, and by entering into interestrate swap agreements to hedge a portion of our debt. These interest rate swapagreements were entered into with financial institutions with investment gradecredit ratings, thereby minimizing counterparty credit risk.

 

In August and December 2001, we entered into fixed-to-variable rateswap agreements with respect to our 87/8% Notes. ThroughSeptember 22, 2005, the aggregate notional amount of the swap agreements was$150.0 million. Under the terms of the swap agreements, we made payments basedon specific spreads over six-month LIBOR and received payments equal to theinterest payments due on the notes. The spreads in excess of six-month LIBORwere 3.02% for $100.0 million, 2.95% for $25.0 million and 2.91% for theremaining $25.0 million. In connection with the refinancing of our 87/8%Notes in September 2005, we received $5.1 million from the cancellation of$150.0 million notional amount of interest rate swaps on our 87/8% Notes. During the year ended December 31, 2005 and 2004, theweighted average variable rate on the swap agreements was 5.0% and 4.9%,respectively.

 

The Palmilla Notes bear interest at a floating rate of one-month LIBORplus 3.75%; however, One&Only Palmilla was required to enter into aninterest rate cap agreement contemporaneously with its issuance of the PalmillaNotes. The interest rate cap has an effective date of December 17, 2004 and amaturity of January 9, 2007. If the one-month LIBOR rate exceeds 5.0% on a ratereset date during the period from December 17, 2004 to January 9, 2007, thecounterparty will pay One&Only Palmilla the amount equal to $110.0 millionmultiplied by one-month LIBOR minus 5.0% multiplied by the number of days inthe period divided by 360.

 

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**OtherMatters**

** **

**CriticalAccounting Policies**

** **

Our critical accounting policies include those which require our mostsubjective or complex judgments as a result of the need to make certainestimates and assumptions when there is uncertainty as to their financialeffects. Although all of the policies identified in “Note 2 - Summary ofSignificant Accounting Policies” to the consolidated financial statements areimportant to an understanding of such consolidated financial statements, thepolicies discussed below are considered by management to be central to theirunderstanding because of (i) the higher level of measurement uncertaintiesinvolved in their application and (ii) the effect that changes in theseestimates and assumptions could have on the consolidated financial statements.

 

We base our estimates on, among other things, currently availableinformation, our historical experience and on various assumptions, the resultsof which form the basis of making judgments about the carrying values of assetsand liabilities that are not readily apparent from other sources. Although webelieve that that these assumptions are reasonable under the circumstances,estimates would differ if different assumptions were utilized and theseestimates may prove in the future to have been inaccurate. There can be noassurance that actual results will not differ from these estimates.

 

*Equity-Based Compensation.*We haveelected to follow Accounting Principles Board Opinion No. 25, “Accounting forStock Issued to Employees” and related Interpretations in accounting for ouremployee stock options as allowed pursuant to FASB Statement No. 123, asamended by FASB Statement No. 148 (“SFAS 123”). Accordingly, no compensationexpense related to stock options has been recognized for the years endedDecember 31, 2005, 2004 and 2003 or for the restricted shares issued toour Chief Executive Officer in August 2005.

 

If the compensation cost for our stock option plans had been determinedon the basis of the fair value at the grant date for awards under those plansconsistent with SFAS 123 and our existing valuation method for our employeestock options, the Black Scholes option pricing model, we estimate that our netincome for the years ended December 31, 2005, 2004 and 2003 would havebeen reduced by $12.2 million, $7.4 million and $3.7 million,respectively, or 24%, 11% and 5%, respectively. However, SFAS 123 requires theuse of option valuation models that require the input of highly subjectiveassumptions, including expected stock price volatility. The Company beganapplying SFAS 123(R) for its first quarter beginning January 1, 2006,which we expect to result in compensation expense of approximately $13.6million (not including tax effects) for 2006, based on option grantsoutstanding at December 31, 2005, and restricted shares issued to ourChief Executive Officer in August 2005. The foregoing amount does notinclude compensation expense for any stock options or other instruments thatmay be granted after December 31, 2005. See “Recent AccountingPronouncements—Share-Based Payment.” The effect of applying the fair valuemethod of accounting for stock options on reported net income for the yearsended December 31, 2005, 2004 and 2003 may not be representative of the effectsfor future years because outstanding options vest over a period of severalyears and additional awards are generally made each year.

 

*Income Taxes.*We are subject tocorporate income taxes in various jurisdictions. Accordingly, the accompanyingconsolidated statements of operations include a provision for income taxesbased on the prevailing tax laws of those jurisdictions.

 

We account for income taxes in accordance with SFAS No. 109, “Accountingfor Income Taxes.” Realization of future tax benefits related to deferred taxassets is dependent on many factors, including our ability to generate futuretaxable income. We adjust the valuation allowance related to our deferred taxassets to the amount that is more likely than not to be realized. As ofDecember 31, 2005, we had deferred tax assets, net of valuation allowance,totaling $29.8 million. In determining our net realizable tax assets, weconsider our ability to carry back certain net operating losses, future taxableincome and ongoing prudent and feasible tax planning strategies. We havedetermined that, as of December 31, 2005, a valuation allowance of $81.6million was necessary to offset our deferred tax assets. This represents areduction of $66.8 million from our valuation allowance of $148.4 million atDecember 31, 2004; $21.5 million represents amounts released during 2005 asincome tax benefit and the remaining amount relates primarily to tax effectedexpiration of net operating loss carryforwards. Our ability to utilizethe net amount of deferred tax assets that we believe we are more likely thannot to utilize is primarily dependent on our ability to generate future taxableincome. Should our future taxable income results differ from our currentestimates,

 

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this could cause a material adjustment to our valuation allowance. Inthe event that we were to determine that we would not be able to realize all orpart of our deferred tax assets in the future, or that the realization ofadditional deferred tax assets is more likely than not, an adjustment to thevaluation allowance would occur in the period such determination is made.

 

From time to time, we may be subject to audits covering a variety oftax matters by taxing authorities in any taxing jurisdiction where we conductbusiness. While we believe that the tax returns we file and any tax positionswe take are supportable and accurate, some tax authorities may not agree withour positions. This can give rise to tax uncertainties that, upon audit, maynot be resolved in our favor. We have established accruals for various taxuncertainties that we believe are probable and reasonably estimable. Theseaccruals are based on certain assumptions, estimates and judgments includingestimates of amounts for settlements, associated interest and penalties.Changes to these assumptions, estimates and judgments could have a materialimpact on our provision for income taxes. For the year ended December 31, 2005,we reduced our tax accruals by $1.7 million as a result of the expiration ofcertain statutes of limitation, which resulted in an income tax benefit.

 

*Long-Lived Assets.*Wereview our long-lived assets and certain identifiable intangibles forimpairment whenever events or changes in circumstances indicate that thecarrying amount of an asset may not be fully recoverable. If changes incircumstances indicate that the carrying amount of an asset that we expect tohold and use may not be recoverable, future cash flows expected to result fromthe use of the asset and its disposition are estimated. If the undiscounted valueof the future cash flows is less than the carrying value of the asset, thecarrying value of the long-lived asset will be reduced by the amount by whichthe carrying value exceeds fair value. During 2005, we determined that none ofour long-lived assets were impaired, except for certain real estate at OceanClub Estates for which we recorded a write-down of $2.2 million

 

*Allowance for**Doubtful Accounts Receivableand Amounts Due from**Affiliates.*We maintain allowances for doubtful accountsreceivable arising from casino, hotel and other services and amounts due fromaffiliates. These allowances are based upon a specific review of outstandingreceivables for estimated losses resulting from our inability to collect fromcustomers or affiliates. As of December 31, 2005, our accounts receivable, netof a $6.2 million allowance, totaled $49.9 million. The allowance includes $4.1million related to doubtful gaming receivables. Bad debt expense related togaming receivables was a reversal of $0.9 million and an expense of $0.9million in 2005 and 2004, respectively. Contributing to the difference is $1.4million of lower bad debt expense as a result of improved collection efforts,combined with a $0.4 million increase in bad debt recoveries. The allowance fordoubtful accounts related to gaming was 25% and 29% of total gaming receivablesas of December 31, 2005 and 2004, respectively. During the year ended December31, 2004, we recognized $1.8 million of bad debt expense associated withcertain affiliated receivables.

 

In extending credit, we attempt to assess our ability to collect by,among other things, evaluating the customer’s financial condition, bothinitially and on an ongoing basis. In evaluating the adequacy of our allowancefor doubtful accounts receivable, we primarily analyze trade receivablebalances, the percentage by aging category and historical bad debts, amongother things.

 

If the likelihood of collection on accounts or our ability to collectwere to deteriorate, an increase to the allowance might be required. Also,should actual collections of accounts receivable be different than ourestimates included in the determination of our allowance, the allowance wouldbe increased or decreased through charges or credits to selling, general andadministrative expenses in the consolidated statements of operations in theperiod in which such changes in collection became known. If conditions changein future periods, additional allowances or reversals may be required. Suchadditional allowances could be significant.

 

*Loan Impairment.*Weapply SFAS No. 114, “Accounting by Creditors for Impairment of a Loan” and SFASNo. 118, “Accounting by Creditors for Impairment of a Loan-Recognition andDisclosures, an amendment of SFAS No. 114,” when determining if a loan isimpaired. Under the provisions of these standards, we record a loan impairmentwhen, based on current information and events, it is probable that we will beunable to collect all amounts due according to the contractual terms of theloan agreement. For collateralized loans, impairment is measured based on thefair value of the underlying collateral. (See Other Factors Affecting Earningsand Earnings Per Share—Impairment of Notes Receivable, for a discussion of our$27.8 million impairment of notes receivable recorded during the year endedDecember 31, 2005.)

 

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*Costs**Associated with Potential Resort Projects.*We selectivelypursue opportunities related to each of our three segments to expand ourbusiness. In connection with these potential projects we often are required tofund or elect to incur project costs associated with the acquisition,development, and construction of a project prior to the acquisition of theproperty or the formation of a joint venture. These costs principally includearchitectural, design, engineering and other related costs directly related tothe proposed project. We capitalize such direct costs when we believe it isprobable that we will proceed with such proposed projects, and we believe wehave the ability to finance or obtain financing for the proposed project. As ofDecember 31, 2005, we have approximately $7.0 million and $6.5 millioncapitalized (principally comprised of architectural, design and engineeringcosts) relating to our proposed development of a luxury resort property in CapeTown, South Africa and destination resort casino in the Kingdom of Morocco,respectively. Should we subsequently conclude that it is no longer probablethat we will proceed with such proposed projects, we would be required toexpense such capitalized costs.

 

**RecentAccounting Pronouncements**

** **

*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. With limited exceptions, the amount ofcompensation cost will be measured based on the grant-date fair value of theequity or liability instruments issued. In addition, compensation expense forliability awards (those usually settled in cash rather than stock) will beremeasured to fair value each reporting period until the award is settled. 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 theCompany for its first quarter beginning January 1, 2006.

 

SFAS 123(R) allows fortwo transition alternatives for public companies: (a) modified-prospectivetransition or (b) modified-retrospective transition. The Company intends toapply the modified-prospective transition method. Under this method, companiesare required to recognize compensation cost for share-based payments toemployees based on their grant-date fair value from the beginning of the fiscalperiod in which the recognition provisions are first applied. Measurement andattribution of compensation cost for awards that were granted prior to, but notvested, as of the date SFAS 123(R) became effective would generally be based onthe same estimate of the grant-date fair value and the same attribution methodused previously under SFAS 123 (either for financial statement recognition orpro forma disclosure purposes). Prior periods are not restated. For periodsprior to adoption, the financial statements are unchanged (and the pro formadisclosures previously required by SFAS 123 continue to be required under thenew standard to the extent those amounts differ from those in the incomestatement). For periods subsequent to adoption, the impact of this transitionmethod generally is the same as if the modified-retrospective method wereapplied. Accordingly, pro forma disclosure will not be necessary for periodsafter the adoption of the new standard.

 

SFAS 123(R) also requiresthe benefits of tax deductions in excess of recognized compensation cost to bereported as financing cash flow, rather than as operating cash flow aspreviously required.

 

We expect that theapplication of SFAS 123(R) beginning January 1, 2006, will result incompensation expense of approximately $13.6 million (not including tax effects)for the year ended December 31, 2006, based on option grants outstanding atDecember 31, 2005, and giving effect to amortization expense related to therestricted shares issued to the Company’s Chief Executive Officer in August2005.

 

*AccountingChanges and Error Correction*

 

In May 2005, the FASB issued SFAS No. 154, “AccountingChanges and Error Corrections—A Replacement of APB Opinion No. 20 and FASBStatement No. 3” (“SFAS 154”), which requires retrospective application toprior periods’ financial statements for changes in accounting principle. SFAS154 is effective for accounting changes made in its fiscal years beginningafter December 15, 2005. The Company does not expect that the adoption of SFAS154 will have a material impact on its consolidated financial statements.

 

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

 

Not applicable.

 

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**(E) Trend Information**

 

During the first two months of 2006, Atlantis,Paradise Island achieved an average occupancy of 81% and an ADR of $294, whichcompares to an average occupancy of 83% and an ADR of $284 during the sameperiod in 2005. Atlantis, Paradise Island’s RevPAR of approximately $239 was $5higher than the same period last year.

 

In the Atlantis Casino slot win was 7.6% for thefirst two months of 2006 as compared to 8.5% for the same period in 2005. Slotwin decreased by 7.3% below the same period in 2005. Slot coin in was 3.7% higherwhile slot win decreased by $0.9 million. Table win for the first two months of2006 increased by $1.0 million despite a decrease in table hold of 0.3%. Due tothe normal volatility patterns experienced in the Atlantis Casino, particularlywith table games, these results may not necessarily be indicative of continuingtrends.

 

In addition, selling, general and administrative expensesfor the first two months were higher than 2005 by $1.2 million primarily due toadditional compensation costs related to the adoption of SFAS 123(R). Salesand marketing expense also exceeded the prior year by $1.4 million due to thetiming of advertising and special events.

 

Future results will be driven by the Phase IIIexpansion, which is on schedule for completion in April 2007.

 

Relinquishment fees and other fees earned by usfrom TCA were $38.8 million for the year ended December 31, 2005. Weanticipate that relinquishment fees will be slightly higher for the year endingDecember 31, 2006 due to increases in Mohegan Sun revenues.

 

Corporate expenses were $43.8 million for the yearended December 31, 2005. We anticipate that these expenses will be higherin 2006 due to additional compensation costs and expense related to theadoption of SFAS 123(R).

 

**(F)  Off-Balance Sheet Arrangements**

** **

At December 31, 2005, our off-balance sheet arrangements and othercommitments were as follows:

 

(a)          Reethi Rah Commitment

 

At December 31, 2005, Reethi Rah had outstandingindebtedness that included $94.7 million and $6.8 million principalamount of subordinated development and operating loans, respectively, advancedby Kerzner. The total $101.5 million balance does not reflect the $27.8 millionimpairment charge recorded during the year ended December 31, 2005 as a resultof an appraisal of the resort that indicated that the carrying amount of oursubordinated notes receivable due from Reethi Rah was not fully recoverable.These loans were eliminated upon the consolidation of Reethi Rah as of May 1,2005 in accordance with FIN 46R. In addition, the Company entered into aguarantee agreement with a third party financial institution (the “Lender”)that provides for the Company to guarantee certain amounts due to the Lender,such amounts not to exceed the lesser of (i) $6.0 million or (ii) the amount ofprincipal and interest due but not paid to the Lender pursuant to a loanfacility that Reethi Rah entered into in December 2004 for an aggregate amountequal to $50.0 million to be used towards the development of One&OnlyMaldives at Reethi Rah (“Reethi Rah Term Loan Facility”). The guarantee iseffective for four years beginning May 1, 2005, the date at which One&OnlyMaldives at Reethi Rah commenced operations.

 

In addition, the Company entered into a creditarrangement with Reethi Rah that provides for operating loans over a four-yearperiod with each annual loan amount equal to the difference between $6.0million and Reethi Rah’s net operating income, as defined.

 

(b)         One&Only KanuhuraGuarantee ($10.7 million)

 

In connection with our purchase of a 25% initialequity interest in One&Only Kanuhura, we were required to guarantee certainobligations totaling $10.7 million to its other shareholders. We are notobligated under these guarantees unless the property’s senior bank debtagreement prevents available cash flow from being distributed to theshareholders, nor until One&Only Kanuhura repays certain senior debt owed.As of December 31, 2005, the amount of senior debt owed was

 

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$2.3 million, excluding accrued interest. Ourobligations under these guarantees expire when the underlying obligations arerepaid. Upon having to satisfy these guarantees, we would be deemed to havemade a loan to One&Only Kanuhura on the same terms of the underlying note thatwas satisfied.

 

(c)          Atlantis, The PalmCommitment ($55.0 million)

 

In connection with the financing for Atlantis, ThePalm, we and Istithmar will provide, on a joint and several basis, additionalsponsor support of up to $55.0 million with respect to cost overruns andpost-completion debt service obligations. See “Liquidity and Capital Resources—Investing Activities” for further discussionon Atlantis, The Palm.

 

(d)         Morocco Commitment ($46.0million)

 

With respect to the destinationcasino project in Morocco, we have entered into a joint venture agreement andrelated development and long-term management agreements with two local Moroccancompanies. The joint venture agreement requires each party to provide equitybased on the initially-estimated project cost of $230.0 million. Our componentof the equity contribution as stated in the joint venture agreement is $46.0million. Based on the current preliminary designs for the project, the budgetis now anticipated to be approximately $300.0 million, although a moredefinitive amount will not be available until further detailed design work hasbeen completed. As a result of the previously announced budget increase, bothparties are working together to arrange debt and equity financing to fund theproject. Although no assurances can be given at this time, we expect to reachagreement with our Moroccan partners on amended project documents and proceedwith the project, subject to obtaining third party debt financing. During 2005,we expensed $2.0 million of non-capitalizable costs associated with the Moroccoproject. In addition, during 2005, we incurred $4.9 million of design anddevelopment costs that are included in construction in progress in theconsolidated balance sheets. As of December 31, 2005, we had approximately $6.5million capitalized with respect to design and development costs. If thisproject does not proceed, we will be required to write off these costs thathave been capitalized. See “Item 4. The Properties—Destination Resorts—Morocco.”

 

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**(G)  Tabular Disclosure of Contractual Obligations**

 

At December 31, 2005, we believe our contractual obligations, otherthan the guarantees and commitments described above, were as follows (inthousands):

 
| **Contractual Cash Obligations** | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------------|------------|-----------|------------|
| 6 3⁄4% Notes (a)                        |       | $        | 27,000     |     | $          | 27,000   |       | $        | 27,000     |     | $          | 27,000         |       | $         | 27,000     |   | $ | 530,500 |   | $ | 665,500 |   |
| 2.375% Notes (b)                           |       | 5,463    |       | 5,463    |       | 5,463    |       | 5,463    |       | 5,463    |       | 301,217        |       | 328,532   |       |
| 8 7/8% Notes (c)                           |       | 143      |       | 143      |       | 143      |       | 143      |       | 143      |       | 1,758          |       | 2,473     |       |
| Palmilla  Notes*(d)                        |       | —   |       | 110,000  |       | —   |       | —   |       | —   |       | —         |       | 110,000   |       |
| Amended Credit  Facility (e)               |       | —   |       | —   |       | —   |       | —   |       | —   |       | —         |       | —    |       |
| Reethi Rah Term  Loan Facility*(f)         |       | 5,000    |       | 5,000    |       | 5,000    |       | 5,000    |       | 5,000    |       | 22,200         |       | 47,200    |       |
| Reethi Rah Loan  (g)                       |       | 1,439    |       | 1,649    |       | 944      |       | —   |       | —   |       | —         |       | 4,032     |       |
| Operating leases  (h)                      |       | 2,625    |       | 2,146    |       | 1,863    |       | 1,941    |       | 2,004    |       | 14,678         |       | 25,257    |       |
| Reethi Rah land  lease (i)                 |       | 633      |       | 668      |       | 704      |       | 739      |       | 775      |       | 27,861         |       | 31,380    |       |
| Capital leases  (j)                        |       | 1,287    |       | 1,071    |       | 1,000    |       | 1,084    |       | —   |       | —         |       | 4,442     |       |
| Purchase  obligations (k)                  |       | 9,328    |       | —   |       | —   |       | —   |       | —   |       | —         |       | 9,328     |       |
| Atlantis, The  Palm (l)                    |       | 125,941  |       | —   |       | —   |       | —   |       | —   |       | —         |       | 125,941   |       |
| Paradise Island  land purchase (l)         |       | 12,000   |       | —   |       | —   |       | —   |       | —   |       | —         |       | 12,000    |       |
| Phase III  construction commitments (m)    |       | 186,224  |       | 32,863   |       | —   |       | —   |       | —   |       | —         |       | 219,087   |       |
| Total contractual  cash obligations        |       | $        | 377,083    |     | $          | 186,003  |       | $        | 42,117     |     | $          | 41,370         |       | $         | 40,385     |   | $ | 898,214 |   | $ | 1,585,172 |   |

 

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* Obligationspresented exclude interest commitment as amounts are subject to variableinterest rates.

 

(a)          Balance representsamounts outstanding under our 63⁄4% Notes.

 

(b)         The 2.375% Notes areunsecured senior subordinated obligations and mature on April 15, 2024 unlessthey are converted, redeemed or repurchased before the maturity date. The2.375% Notes may be converted into cash and Ordinary Shares at an initialconversion rate of 17.1703 shares per $1,000 principal amount in accordancewith the terms of the indenture. This conversion rate is equal to a conversionprice of approximately $58.24 per Ordinary Share. Upon conversion, all of theprincipal amount of the notes converted must be paid in cash. The aggregateprincipal amount of the 2.375% Notes is $230 million. The closing price ofour Ordinary Shares was $68.75 on December 31, 2005 and $67.29 on February 28,2006.

 

The 2.375% Notes areconvertible, at the holder’s option, prior to the maturity date into cash andOrdinary Shares in the following circumstances:

 

•                  Duringany fiscal quarter commencing after the date of original issuance of the notes,if the closing sale price of our Ordinary Shares over a specified number oftrading days during the previous quarter is more than 120% of the conversionprice, or $69.89, of the notes;

 

•                  Ifthe notes are called for redemption and the redemption has not yet occurred;

 

•                  Duringthe five trading day period immediately after any five consecutive trading dayperiod in which the trading price of the notes per $1,000 principal amount foreach day of such period was less than 95% of the product of the closing saleprice of our Ordinary Shares on such day multiplied by the number of ourOrdinary Shares issuable upon conversion of $1,000 principal amount of thenotes; or

 

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•                  Uponthe occurrence of specified corporate transactions.

 

(c)          Balance represents theremaining amounts outstanding under our 87/8% Senior SubordinatedNotes.

 

(d)         In December 2004,One&Only Palmilla entered into the Palmilla Notes for $110.0 million.Interest on the Palmilla Notes is paid monthly at LIBOR plus 3.75%. Inconnection with the terms of the Palmilla Notes, One&Only Palmilla enteredinto an interest rate cap agreement, which caps LIBOR at 5%. The maximumcontractual interest rate on the Palmilla Notes is 8.75%. The indenturegoverning the promissory notes provides recourse to Kerzner in the eventcertain representations and warranties are violated.

 

(e)          As of December 31, 2005,we had $644.6 million available under the Amended Credit Facility, after givingeffect to the $5.4 million in letters of credit outstanding. There were noamounts outstanding under the Amended Credit Facility as of December 31, 2005. See“Item 4 Capital Structure, Amended Credit Facility” for discussion on terms ofthe Amended Credit Facility, including interest provisions.

 

(f)            On December 29,2004, Reethi Rah entered into a facility agreement (the “Reethi Rah Term LoanFacility”) with a third party financial institution (the “Lender”). Under theReethi Rah Term Loan Facility, the Lender agreed to make available to ReethiRah a term loan facility in an aggregate amount equal to $50.0 million, whichwas used towards the development of One&Only Maldives at Reethi Rah. Loansunder the Reethi Rah Term Loan Facility bear interest at (a) LIBOR plus 3.25%for the period up to and including May 1, 2005, (b) LIBOR plus 2.00% on thefirst $6.0 million of loans and LIBOR plus 3.25% on any other outstandingamounts above $6.0 million for the period from May 2, 2005 through May 1, 2009,and (c) LIBOR plus 3.25% from May 2, 2009 thereafter. Interest on outstandingloans is paid semi-annually on March 31 and September 30. Principal payments of$2.5 million are due semi-annually on June 30 and December 31 beginningDecember 31, 2005 through June 30, 2015. As of December 31, 2005, Reethi Rahhad $47.2 million of loans outstanding under the Reethi Rah Term Loan Facility.

 

(g)         On December 1, 2002Reethi Rah entered into a loan facility agreement (“Reethi Rah Loan”) with asyndicate of banks for a principal aggregate amount of up to $5.0 million.Amounts under the Reethi Rah Loan bear interest at 12% per annum. Principal andinterest payments are due in monthly installments through January 31, 2008. Asof December 31, 2005, Reethi Rah had $4.0 million outstanding under the ReethiRah Loan.

 

(h)         As of December 31, 2005,operating leases were primarily office leases, in particular the lease relatedto the Company’s office in Plantation, Florida.

 

(i)             Reethi Rah hasentered into a long-term land lease through 2030 with the Government of theMaldives for the land on which One&Only Maldives at Reethi Rah wasconstructed.

 

(j)             As of December 31,2005, capital leases represented $4.0 million of machinery and equipment atOne&Only Maldives at Reethi Rah and $0.4 million of leased equipmentconsisting primarily of golf carts at Atlantis, Paradise Island.

 

(k)          As of December 31, 2005,purchase obligations were primarily open purchase orders for hotel relatedprovisions such as food, beverage and nonperishable goods. Purchase orders areprimarily short-term in nature and generally do not exceed 90 days.

 

(l)             For furtherdiscussion of the funding requirements for Atlantis, The Palm and the ParadiseIsland land purchase, see “Liquidity and Capital Resources—InvestingActivities.”

 

(m)       The Company has constructioncommitments of $219.1 million arising from the Phase III expansion.

 

In addition, the following contingent contractual obligation, theamount of which can not accurately be estimated, is not included in the tableabove:

 

•                  Theoperating agreement for the One&Only Palmilla joint venture between us anda subsidiary of GS Emerging Market Real Estate Fund, L.P., our joint venturepartner, provides for a put right available to such subsidiary commencing inSeptember 2005 and ending in September 2007 (subject to extension under certainconditions). The exercise of this put right could require us to make a cashpayment of $36.3 million

 

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subject to increase basedon certain adjustments to acquire our joint venture partner’s 50% interest inOne&Only Palmilla.

 

It is anticipated that the Phase III expansion investment in TheBahamas will exceed $1.0 billion. Exclusive of the One&Only Ocean Clubluxury villas, Harborside at Atlantis, The Residences at Atlantis, the AtholGolf Course and Ocean Club Residences & Marina, we expect our investment tobe approximately $730.0 million, of which we have funded approximately $189.2million through December 31, 2005.

 

## **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                |
| Stephen  M. Ross      |       | United States               |       | 2005                |

 

The current officers of the Company are:

 

| **Name**           | ** ** | **Title**                                              | ** ** | **Age** | ** ** | **Officer  Since** |
|--------------------|------------|--------------------------------------------------------|------------|---------|------------|--------------------|
| Solomon  Kerzner   |       | Chairman  of the Board of Directors                    |       | 70      |       | 1993               |
| Howard  B. Kerzner |       | Chief  Executive Officer and Director                  |       | 42      |       | 1995               |
| John  R. Allison   |       | Executive  Vice President—Chief Financial Officer |       | 59      |       | 1994               |
| Richard  M. Levine |       | Executive  Vice President—General Counsel         |       | 44      |       | 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. FromOctober 1993 to June 1996, Mr. Kerzner served as our Presidentand from October 1993 until December 2003, he served as our ChiefExecutive Officer. Mr. Kerzner is the Chairman of WLG, which, togetherwith its affiliates, as of February 28, 2006, owned approximately 10.7% ofour outstanding Ordinary Shares. Mr. Kerzner is one of the visionaryleaders of the resort and gaming industries. Prior to founding Kerzner,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 Cityfeatures four hotels with approximately 1,300 rooms, an entertainment center, a46-acre man-made lake for water sports and approximately 55,000 square feet ofgaming space. In 1992, Sun City was expanded to include The Lost City, a themedresort that features a 350-room luxury hotel and a man-made jungle in whichover one million trees were transplanted. Mr. Kerzner has been responsiblefor the development of 21 hotels and founded both of southern Africa’s largesthotel groups, Southern Sun Hotels and Sun International South Africa. We do nothave any interest in any of the southern African properties developed byMr. Kerzner. Mr. Kerzner is the father of Mr. Howard 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. Kerznerjoined Kerzner in May 1995 as Executive Vice President—CorporateDevelopment and was President from June 1996 until December 2003. Priorto that time, he was Director—Corporate Development of SIIL fromSeptember 1992. Previously, Mr. Kerzner was an Associate of LazardFrères & Co. LLC from September 1991. Prior to thatMr. Kerzner worked for the First Boston Corporation. Mr. Kerzner isthe son of Mr. Solomon Kerzner.

 

*John R. Allison, Executive VicePresident*—*Chief FinancialOfficer:*  Mr. Allisonjoined Kerzner in May 1995 as Chief Financial Officer. Mr. Allisonjoined SIIL in March 1994 as Group Financial Director. FromDecember 1987 until February 1994, Mr. Allison was FinancialDirector of Sun International Inc., a resort and management holdingcompany with interests in approximately 27 hotels in southern Africa. Prior tothat time, he

 

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was the Group Financial Director of Kimberly-Clark (South Africa)Limited for four years. He is a fellow of the Institute of Chartered Accountantsin England and Wales and a member of the South African Institute of CharteredAccountants.

 

*Richard M. Levine, Executive Vice President—GeneralCounsel: *Mr. Levinejoined the Company in April 2004 as Executive Vice President and GeneralCounsel. Mr. Levine began his legal career with the law firm of Cleary,Gottlieb, Steen & Hamilton and worked as an associate in both their NewYork and Tokyo offices. Mr. Levine subsequently joined Credit Suisse FirstBoston as the General Counsel for its Private Equity Division and most recentlywas General Counsel for a private equity firm, Hellman & Friedman, LLC.

 

**Peter N. Buckley,Director:**  Mr. Buckley has been a Directorsince April 1994. Mr. Buckley is also the Chairman of Caledonia(appointed 1994) and was the Chief Executive Officer of Caledoniafrom 1987 to 2002.  As of February 28, 2006, Caledoniabeneficially owned approximately 8.3% of our Ordinary Shares.  Heis also a non-executive Director of Close Brothers Group plcand Bristow Group Inc. (a NYSE listed company).

 

*Hamed Kazim, Director*:  Mr. Kazim has been a Director sinceDecember 8, 2004. Mr. Kazim served as the Managing Partner of Ernst& Young-Dubai until May 31, 2004 when he joined The Corporate Officeas Group Chief Financial Officer and Head of The Corporate Office, which isowned by the Royal Family of Dubai. During 1999 and 2000, Mr. Kazim wasseconded to Dubai Internet City as Chief Executive Officer to start the project.Mr. Kazim has also acted as an advisor to some of the largest groups inDubai on various organizational and business issues.

 

*Howard S. Marks, Director:*  Mr. Marks has been a Director sinceApril 1994. Mr. Marks is Chairman of Oaktree Capital Management, LLC,which manages funds in excess of $30.0 billion for institutional investors.Previously, Mr. Marks was employed by The TCW Group, Inc. where hebecame Chief Investment Officer for Domestic Fixed Income and President of itslargest affiliate, TCW Asset Management Company.

 

*Eric B. Siegel, Director:*  Mr. Siegel has been a Director sinceApril 1994. Mr. Siegel is a retired limited partner of ApolloAdvisors, L.P. Mr. Siegel is also a Director and Chairman of the ExecutiveCommittee of El Paso Electric Company (a NYSE-listed company) and is a Directorof Ares Capital Corporation (a NASDAQ-listed company).

 

*Heinrich von Rantzau, Director:*  Mr. von Rantzau has been a Directorsince July 2001. Mr. von Rantzau is a principal of Cement MerchantsSA, which as of February 28, 2006 beneficially owned approximately 5.9% ofour Ordinary Shares, and an executive of Deutsche Afrika-Linien GmbH, ReedereiJohn T. Essberger and VORA Schiffahrts-und Beteiligungsgesellschaft GmbH.Mr. von Rantzau is a board member of The United Kingdom Mutual Steam ShipAssurance Association (Bermuda) Limited and a member of the Trade AdvisoryBoard of Germanischer Lloyd, Lloyd’s Register of Shipping and German NationalCommittee.

 

*Stephen M. Ross, Director*. Mr.Ross has been a director since June 2005. Mr. Ross is Chairman, Chief ExecutiveOfficer and founder of The Related Companies, L.P., a developer, manager andfinancier of premier real estate properties, including the Time Warner Centerin New York City. Mr. Ross is a founder and Chairman of CharterMac (a NYSE-listedcompany) and a Director of the Real Estate Board of New York and the JuvenileDiabetes Foundation. Mr. Ross is also Chairman of Equinox Holdings, Inc., whichwas acquired by The Related Companies, L.P., in December 2005.

 

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 andRelated Party Transactions, (B) Related Party Transactions—RegistrationRights and Governance Agreement.” Further, in connection with the strategic investment by Istithmar in ourOrdinary Shares, we agreed to add a representative of Istithmar to our Board ofDirectors. As a result, Mr. Kazim took a seat on our Board of Directors. Atsuch time, our Board of Directors also decided to add an additional seat on ourBoard of Directors, which was taken by our Chief Executive Officer, ButchKerzner.

 

**(B)**       Compensation

** **

The aggregate cash compensation for our directors andofficers, including salaries, bonuses and benefits in kind granted, for theyear ended December 31, 2005 was $6.7 million. None of the directorsor officers participates in a pension plan. We do not set aside any amounts forpension or retirement benefits for any of our directors or officers.

 

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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 earnings per share, and suchbonuses are calculated as a percentage of each individual’s salary. Suchpercentage is based on, among other things, each employee’s level ofresponsibility. Bonuses paid to our officers under this bonus plan could reacha maximum of 100% of the respective employee’s base salary in 2005. Bonusesranging from 45.3% to 75.5% were granted in 2005.

 

We adopted stock option plans for our employees,officers and directors in 1995 (the “1995 Plan”), in 1997 (the “1997 Plan”) andin 2000 (the “2000 Plan”) that provide for the issuance of options to acquirean aggregate of 7,500,000 Ordinary Shares. As of December 31, 2003, allavailable options under those plans had been granted. In connection with theacquisition in December 1996 of Sun International North America, Inc. (formerlyGriffin Gaming & Entertainment, Inc.), we assumed the Griffin Gaming &Entertainment, Inc. 1994 Stock Option Plan (the “Griffin Plan”) and the optionsthat were outstanding under the Griffin Plan at the time the acquisition wasconsummated. In addition, in 2003, we adopted a stock incentive plan (the “2003Plan”) that provides for the issuance of an aggregate of 3,000,000 OrdinaryShares in connection with awards of stock options, restricted stock and other stock-basedawards. On December 13, 2005, we adopted a new stock incentive plan (the “2005Plan”) that provides for the issuance of an aggregate of 2,000,000 OrdinaryShares in connection with awards of stock appreciation rights (“SARs”), stockoptions, restricted stock and other stock-based awards. As of the adoption ofthe 2005 Plan, awards with respect to 213,374 Ordinary Shares remainedavailable to grant under the 2003 Plan.

 

All options issued under the 1995 Plan, the 1997 Plan andthe Griffin Plan had already vested and become exercisable as ofFebruary 28, 2006. The 2000 Plan provides for the vesting period to beginone year after the grant date in respect of one third of the options, andthereafter in installments of one third per year over a two-year period. The2003 Plan and the 2005 Plan provide generally for options to become exercisable25% per year on each of the first four anniversaries of the date of grant, andfor restricted stock to become vested in three equal installments on each ofthe second, third and fourth anniversaries of the date of grant. Optionsgranted under the Plans generally have a term of ten years from the dateof grant (except that options granted under the 2003 Plan and the 2005 Plangenerally have a term of seven years from the date of grant) and, unlessotherwise specifically provided by the compensation committee, the optionprices are equal to the fair market value per Ordinary Share on the date ofgrant. SARs granted under the 2005 Plan generally have a term of seven yearsfrom the date of grant and generally become vested in installments of 25% peryear on each of the first four anniversaries of the date of grant and, unlessotherwise specifically provided by the compensation committee, are granted atan exercise price equal to the fair market value per Ordinary Share on the dateof grant. Consultants may also be granted awards under the 2003 Plan and the2005 Plan. Nonqualified stock options may be transferred to trusts with respectto which any such participants are beneficiaries and to corporations or toother entities controlled by such participants.

 

In August 2005, the Company entered into a RestrictedStock Agreement (the “Restricted Stock Agreement”) with Butch Kerzner, pursuantto which the Company granted Butch Kerzner 500,000 restricted Ordinary Sharesunder the 2003 Plan (the “Restricted Shares”). This long-term arrangement doesnot provide for vesting of any of the granted shares until 2009 at the earliestand postpones the vesting of the final tranche of granted shares until notearlier than 2011, except in limited circumstances that relate to a terminationof Butch Kerzner’s employment or the occurrence of a change of control of theCompany. In addition, in all cases, the vesting of the granted shares is subjectto achievement of specified target stock prices (other than in the event of achange of control, in which case the vesting is based upon a deal price above athreshold rather than the more customary automatic vesting of granted sharesirrespective of price). In addition, prior to vesting, the Restricted Sharesmust be voted by Butch Kerzner in accordance with the recommendations of theCompany’s Board of Directors or, in the event that the Board of Directors doesnot make a recommendation, in the same proportion as all other Ordinary Sharesof the Company. This summary is qualified in its entirety by reference to theparticular provisions of the Restricted Stock Agreement, which was filed withthe SEC as Exhibit 4.1 to our Form 6-K filed August 5, 2005.

 

During 2005, we did not grant any stock options and granted500,000 restricted Ordinary Shares to our directors and officers pursuantto the 2003 Plan (as described in the preceding paragraph) and no stockoptions, SARs or restricted Ordinary Shares were granted under the 2005 Plan toour directors and officers.

 

As of February 28, 2006, total options to acquire 2,533,382 OrdinaryShares were outstanding, of which 742,382 were exercisable as of that date. Asof February 28, 2006, 105,500 total SARs were outstanding, of whichzero were vested as of that date. As of February 28, 2006, a total of1,082,930 restricted shares had been granted under our Plans, of which 41,484had vested as of that date and 1,041,446 remained subject to vesting conditions.As of February 28, 2006, our officers and directors, as a group, heldoptions to acquire approximately 111,667

 

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Ordinary Shares (excluding options held by The Kerzner Family Trust andButch Kerzner), of which options to acquire approximately 63,667 OrdinaryShares are currently exercisable. Our officers and directors also heldapproximately 16,000 SARs, of which zero are currently vested, and 30,667restricted Ordinary Shares (excluding restricted Ordinary Shares held by TheKerzner Family Trust and Butch Kerzner). The options outstanding held by theofficers and directors as of February 28, 2006 (excluding options held byThe Kerzner Family Trust and Butch Kerzner), were granted at exercise pricesranging from $20.07 to $57.31. The expiration dates for these options rangefrom December 11, 2010 to December 26, 2012. The outstanding SARsheld by the officers and directors as of February 28, 2006, (excludingSARs held by The Kerzner Family Trust and Butch Kerzner) were granted at theexercise price of $66.70 and have an expiration date of January 27, 2013. Fora description of options and restricted shares held by The Kerzner Family Trustand Butch Kerzner, see “Share Ownership”.

 

**(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. Following receipt of the necessary regulatory approvalon December 8, 2004, Mr. Kazim, a representative of Istithmar, took aseat on our Board of Directors. Butch Kerzner, our Chief Executive Officer, simultaneouslyjoined our Board of Directors. Following the decision by our Board of Directorson May 12, 2005 to increase the number of directors from seven to eight,Mr. Ross was added to our Board of Directors. At our July 19, 2005annual general meeting, our directors, consisting of Mr. S. Kerzner, ButchKerzner, Mr. Buckley, Mr.  Kazim, Mr. Marks, Mr. Ross,Mr. Siegel and Mr. von Rantzau, were elected to terms set to expireat our next annual general meeting.

 

Our Board of Directors has appointed an auditcommittee of the Board of Directors consisting of Mr. Siegel, Mr. Buckley,Mr. Marks and Mr. von Rantzau, and Mr. Siegel is the Chairman of theaudit committee. Deloitte & Touche LLP, the Company’s independent registeredpublic accounting firm, has full and free access to meet with the auditcommittee, without management representatives present, to discuss the resultsof the audit, the adequacy of internal controls and the quality of financialreporting. The primary function of the audit committee is to assist our Boardof Directors in fulfilling its oversight responsibilities by reviewing thefinancial information that will be provided to the shareholders and others, thesystems of internal controls that our management and Board of Directors haveestablished and the audit process. The audit committee of our Board ofDirectors reviews the selection of our independent registered public accountingfirm each year. The audit committee convenes at least eight times per year. TheAudit Committee Charter can be found as Exhibit 11.1(a) to Form 20-F AnnualReport of Kerzner for the year ended December 31, 2003, filed on March 30,2004 and the Amended and Restated Audit Committee Charter can be found asExhibit 11.1(b) to Form 20-F Annual Report of Kerzner for the yearended December 31, 2004, filed on March 30, 2005.

 

We also have a compensation committee consisting ofMr. Siegel, Mr. Buckley, Mr. Marks and Mr. von Rantzau, andMr. Siegel is the Chairman of the compensation committee. The compensation committeeis mandated 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.

 

**CorporateGovernance Standards**

** **

Pursuant to home country practices exemptions grantedto us by the NYSE, we are permitted to follow certain corporate governancepractices complying with relevant Bahamian laws, which are different from thoserequired by U.S. domestic companies under the NYSE’s listing standards. The NYSErules and our current practices relating to corporate governance have thefollowing significant differences:

 

***IndependentDirectors.***The NYSE requires that domestic-listedcompanies have at least a majority of independent directors on their boards,make affirmative determinations of independence and have regularly-scheduledmeetings of non-management directors without management participation. As aforeign private issuer, we are not required to satisfy this listing standard. Wehave not made any determination as to whether a majority of our directors meetthe independence requirements set forth in the NYSE listing standards and we donot have regularly-scheduled meetings of non-management directors.

 

***Audit Committee.***TheNYSE requires that a listed company have an audit committee consisting of atleast three independent directors, one of which must have accounting or relatedfinancial management expertise, and that the audit committee be charged withthe responsibility of selecting, monitoring and communicating with the outside

 

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auditor of the Company. None of our audit committee members isqualified as a financial expert pursuant to Section 407 of theSarbanes-Oxley Act of 2002 and Regulation S-K Item 401(h)(2); however, webelieve that our audit committee has the aggregate experience andsophistication to provide financial expertise as a group.

 

***Nominating/CorporateGovernance and Compensation Committees.***The NYSE requiresthat domestic-listed companies must have a board committee composed entirely ofindependent directors that perform certain nominating and corporate governancefunctions. We do not have a nominating and corporate governance committee,although we do convene an ad hoc independent committee to review and select newcandidates for board positions. The NYSE also requires that domestic-listedcompanies must have a board committee composed entirely of independentdirectors that perform certain compensation-related functions. As a foreignprivate issuer, we are not required to satisfy these listing standards. We havea compensation committee, but have not made any determination as to whether thedirectors who constitute the committee meet the independence requirements setforth in the NYSE listing standards.

 

***Certifications.***TheNYSE requires that a listed Company’s chief executive officer must certify tothe NYSE each year that he or she is not aware of any violation by the companyof NYSE corporate governance listing standards. As a foreign private issuer,our Chief Executive Officer is not required to make this certification.

 

***CorporateGovernance Guidelines.***The NYSE requires that domestic-listedcompanies adopt detailed corporate governance guidelines. As a foreign privateissuer, we are not required to adopt, and have not adopted, such guidelines.

 

***Shareholder ApprovalPolicy.***Pursuant to the amendment to the corporategovernance standards that was approved by the Securities and ExchangeCommission on June 30, 2003, the NYSE requires, with limited exceptions,that shareholder approval be obtained with respect to any equity-compensationplan, which is generally defined as a plan or other arrangement that providesfor the delivery of equity securities (either newly-issued or treasury shares)of the listed company to any employee, director or other service provider ascompensation for services. We follow Bahamian laws that do not apply specificrules to equity compensation plans; they are considered an issue of shareswhich does not require shareholder approval.

 

The NYSE also requires that, with certain exceptionsspecified in its rules, shareholder approval be obtained prior to issuance ofcommon stock or securities convertible into or exercisable for common stock(1) to a director, an officer, a substantial security holder or a partyrelated to any of them if the number of shares of common stock which are to beissued or are issuable upon conversion exceeds either 1% of the number ofshares of common stock or 1% voting power outstanding before the issuance,(2) in any transaction or series of related transactions, if the votingpower 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 the issuer. Wefollow Bahamian laws which do not require shareholder approval with respect tothe issuance of common stock or securities convertible into or exercisable forcommon stock. Under Bahamian laws, these are considered an issuance of shareswhich does not require shareholder approval.

 

On June 6, 2002, the Corporate Accountability andListing Standards Committee of the NYSE issued a report recommending that theExchange adopt significant changes to its corporate governance listingstandards. On August 16, 2002, the NYSE filed with the Securities andExchange Commission proposed changes to its corporate governance standards,which reflect the findings of the Committee. The areas of corporate governancecovered by the proposed changes include the definition and role of independentdirectors, committees under the board of directors, corporate governanceguidelines, codes of business conduct and ethics, shareholder approval ofequity-compensation plans and annual certifications by chief executive officers.On June 30, 2003, the Securities and Exchange Commission approved theportion of the proposed corporate governance standards relating to shareholderapproval of equity-compensation plans, which is described under “ShareholderApproval Policy” above. Also, in light of the promulgation by the Securitiesand Exchange Commission of Rule 10A-3 pursuant to Section 301 of theSarbanes-Oxley Act, on April 4, 2003, the NYSE filed with the Securitiesand Exchange Commission an amendment to the remainder of its proposed rulechanges in order to reflect the requirements of Rule 10A-3. That portionof the proposed rule changes, as amended, became effective upon the Securitiesand Exchange Commission’s approval on November 4, 2003.

 

The rules generally continue to grant home countrypractices exemptions to foreign private issuers listed on the NYSE, includingus, but, pursuant to the requirements of Rule 10A-3, those provisions ofthe amended corporate

 

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governance standards that implement the requirements of Rule 10A-3are applicable to listed foreign private issuers. Among such requirements, aforeign private issuer listed on the NYSE is now required to have an auditcommittee consisting of at least three directors all of whom must beindependent under the standards set forth in paragraph (b) ofRule 10A-3, and the audit committee will be required to be directlyresponsible for the appointment, compensation, retention and oversight of thework of the accounting firm engaged (including resolution of disagreementsbetween management and the auditor regarding financial reporting) for thepurpose of preparing or issuing an audit report or performing other audit,review or attest services for the issuer, unless one or more of the exemptionsset forth in Rule 10A-3 apply. These new corporate governance standards ofthe NYSE became applicable to foreign private issuers listed on the NYSE onJuly 31, 2005. The Company has taken appropriate steps with respect to itscorporate governance system so that its audit committee satisfies therequirements set forth in Rule 10A-3.

 

***Certain Takeover Considerations.***UnderBahamian law and as permitted by our Restated Articles of Association (the “Articles”),our Board of Directors may amend the Articles without shareholder approval. Asa result, the Board of Directors has the power to adopt charter provisions thatwould prevent or impede a change in control of the Company, such as arestriction on transfers of shares that would result in the ownership of anyshareholder or group of shareholders exceeding a specified threshold. Inaddition, our Articles currently provide that a person is eligible for electionto our Board of Directors only if nominated by the Board of Directors. As aresult, under our Articles as they currently are in effect it would not bepossible for a stockholder to conduct a proxy fight to replace incumbentdirectors.

 

Our shareholders may, however, by a majority vote ofthe shareholders at any meeting where a quorum (holders of more than 50% of theoutstanding Ordinary Shares) is present, amend the Articles without the needfor prior Board of Director approval. Accordingly, the existing need for Boardof Directors approval of nominees for director or any anti-takeover provisionsadded by the Board of Directors to our Articles could be deleted over theobjection of the Board of Directors if the requisite vote of shareholders couldbe obtained. Our Articles currently provide that a special shareholders meetingcan be called by the holders of 10% or more of our Ordinary Shares. The Boardof Directors could amend this provision, subject to the requirements ofBahamian corporate law that holders of 50% or more of the Ordinary Shares of aBahamian company can convene a special meeting regardless of any charterprovision to the contrary. Finally, our Articles provide that any specialbusiness can be addressed at our Annual General Meeting only if the generalnature of such business is included in the notice of the meeting. Specialbusiness is defined as any business other than approving a dividend or ouraccounts and election of directors and officers. Under our existing Articles,shareholders are not able to compel any particular business to be included inthe notice of our Annual General Meeting over the objection of the Board ofDirectors. The need for such notice is not a requirement of Bahamian law, andthis provision could be modified or eliminated by the requisite vote of holdersof our Ordinary Shares at a special shareholders meeting called for thatpurpose or an Annual General Meeting where consideration of such an amendmentwas included in the notice of the meeting.

 

In addition, we believe the under Bahamian law theBoard of Directors has the authority to adopt a shareholder rights plancomparable to those in place in many United States companies. It is not clearwhether or not Bahamian courts would follow United States precedents regardingthe administration of a shareholder rights plan.

 

The foregoing is provided as a general summary ofcertain provisions of Bahamian law and our Articles that could be relevant inthe context of a contested takeover. It does not purport to address all thesignificant issues that could arise under Bahamian law or our Articles in suchan event.

 

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**(D)**       Employees

 

Set forth below is a table showing the approximatetotal number of employees at our consolidated properties worldwide bygeographic location for the periods indicated.

 
| ** **    | ** ** | **At December 31,** | ** ** |
|---------------|------------|-------------------------------|------------|
| ** **    | ** ** | **2005**                      | ** ** | **2004** | ** ** | **2003** | ** ** |
|          |       |                          |       |   |   |   |   |
| The Bahamas   |       | 6,456                         |       | 5,803 |   | 5,785 |   |
| United States |       | 455                           |       | 420 |   | 425 |   |
| Other         |       | 1,663                         |       | 147 |   | 75 |   |
|          |       |                          |       |   |   |   |   |
| Total:        |       | 8,574                         |       | 6,370 |   | 6,285 |   |

 

In addition to the above, as of December 31,2005, we had approximately 4,800 employees under management at ourOne&Only and other managed properties in Mauritius, Dubai, the Maldives andthe Bahamas. We do not employ a significant number of temporary workers.

 

**UnionContract Arrangements**

 

In The Bahamas, as of December 31, 2005,approximately 4,200 of our employees were represented by The Bahamas Hotel,Catering and Allied Workers Union. Kerzner International Bahamas Limitedparticipates in The Bahamas Hotel Employers Association, which representsresort operators in the Paradise Island-New Providence Island area. Theassociation has signed a new contract with the union that will expire onJanuary 7, 2008. Labor relations in The Bahamas have been unstable attimes with occasional work stoppages occurring not only at Atlantis, ParadiseIsland, but also at publicly-run entities such as the Bahamian ElectricCorporation and Bahamas Telephone Company. As the country’s largest privateemployer, we are 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.”

 

At One&Only Palmilla in Mexico, as of December 31,2005, approximately 537 of our employees were represented by the Sindicato DeTrabajadores de la Industria Hotelera, Gastronomica y Conexos de la RepublicaMexicana - Seccion 70. Approximately 477 of these employees are hotel employeesand approximately 60 of these employees are golf employees. Under thecontracts, salary levels are renewed each year and all other contract terms arerenewed every other year. The Company expects to renew the salary levelsrelating to the hotel employees by July 1, 2006 and those relating to the golfemployees by September 1, 2006. The Company expects to renew all other contractterms for hotel and golf employees by July 1, 2007 and September 1, 2007,respectively. The Company believes that its relations with these employees aregood.

 

**(E)**         ShareOwnership

** **

As of February 28, 2006, the Kerzner FamilyTrust, which is a trust controlled by Mr. S. Kerzner, held 750,000 options, allof which were transferred to the trust by Mr. S. Kerzner. Such options consistof (i) zero vested and exercisable options and (ii) 750,000unexercisable and unvested options with an exercise price of $36.86 and anexpiration date of December 11, 2010. As of February 28, 2006, Butch Kerznerholds 500,000 Restricted Shares, as described above, and 750,000 unexercisableand unvested options with an exercise price of $36.86 and an expiration date ofDecember 11, 2010. As of February 28, 2006, WLG, an entity controlledby the Kerzner Family Trust, had the right to vote approximately 10.7% of ourOrdinary Shares (which includes 3,795,794 Ordinary Shares held by WLG and 116,225Ordinary Shares over which WLG has the right to vote through certain proxyarrangements with Kersaf). See table in “Item 7. Major Shareholders andRelated Party Transactions, (A) Major Shareholders—Restructuring ofRelationship with Majority Shareholder.” Familienstiftung Von Rantzau-Essberger, a family trust of Mr. vonRantzau, is the sole shareholder of CMS which beneficially owns 2,159,193Ordinary Shares. See table in “Item 7. Major Shareholders and RelatedParty Transactions, (A) Major Shareholders.” Each of our other directorsand officers beneficially owns less than 1% of outstanding Ordinary Shares.

 

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

 

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

 

**(A)**       MajorShareholders

 

As of February 28, 2006, we had 36,726,911Ordinary Shares outstanding. The following table sets forth certain informationas of February 28, 2006 (or certain other dates, to the extent indicatedbelow), regarding the beneficial ownership of our Ordinary Shares by:  (i) any person who is known to us to bethe owner of more than 5% of any class of our voting securities and(ii) our directors and officers as a group. Due to the arrangementsdescribed below, certain of our Ordinary Shares are beneficially owned byseveral parties.

 
| **Beneficial Owner**                                                                                  | ** ** | **Number of Shares** | ** ** | **Percent of Shares** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|---------------------------------|------------|
| Caledonia  Investments plc (“Caledonia”)                                                         |       | 3,038,518                      | (1)        | 8.3                             |       |
| Istithmar PJSC  (“Istithmar”)                                                                    |       | 4,500,000                      | (2)        | 12.3                            |       |
| World Leisure  Group Limited (“WLG”)                                                             |       | 3,912,019                      | (3)        | 10.7                            |       |
| Royale Resorts  International Limited (“Kersaf”)                                                 |       | 317,134                        | (4), (6)   | 0.9                             |       |
| Baron Capital  Group, Inc. (“Baron”)                                                             |       | 5,813,945                      | (5)        | 15.8                            |       |
| Cement Merchants  SA (“CMS”)                                                                     |       | 2,159,193                      | (6), (7)   | 5.9                             |       |
| FMR Corp.                                                                                                  |       | 4,919,384                      | (8)        | 13.4                            |       |
| Emminence  Capital, LLC (“Emminence”)                                                            |       | 2,240,000                      | (9)        | 6.1                             |       |
| Directors and  officers as a group (excluding shares beneficially owned by the Kerzner  Family Trust (10)) |       | *                              |       | *                               |       |

 

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* Lessthan 5% of outstanding voting securities.

 

(1)          Consists of:  (i) 2,922,293 Ordinary Shares heldby Caledonia (based upon information contained in the Schedule 13D/A filed byCaledonia on June 24, 2005) and (ii) 116,225 Ordinary Shares over whichCaledonia has a proxy (see Note 4 below).

 

(2)          Based upon informationcontained in the Schedule 13D/A filed by Istithmar on August 10, 2004. Istithmaris an entity indirectly wholly-owned by the Royal Family of Dubai.

 

(3)          Consists of:  (i) 3,795,794 Ordinary Shares held forthe account of WLG (based upon information contained in the Schedule 13D/Afiled by Mr. S. Kerzner on June 20, 2005 and Form 144s filed by Mr. S. Kerznerand Butch Kerzner) and (ii) 116,225 Ordinary Shares over which WLG has a proxy(see Note 4 below). The Kerzner Family Trust is controlled by Mr. S. Kerzner.

 

(4)          Consists of317,134 Ordinary Shares held by Royale Resorts International Limited (“RRIL”)and Royale Resorts Holdings Limited (“RRHL”), a wholly-owned subsidiary ofRRIL, each of which companies are jointly owned by Kersaf and CMS (73.3% byKersaf and 26.7% by CMS).

 

Kersaf does not have anyvoting rights with respect to its Ordinary Shares of the Company. In connectionwith the July 2001 restructuring of our majority shareholder, Kersaf andcertain of its affiliates granted irrevocable proxies, in varying amounts, tovote all of its Ordinary Shares to Caledonia, WLG and CMS (the “Kersaf ProxyShares”). Therefore, the amounts presented in this table for Caledonia and WLGeach include 116,225 of the Kersaf Proxy Shares. The amounts presented in thistable for CMS include the remaining 84,684 of Kersaf Proxy Shares.

 

(5)          Based upon informationcontained in the Schedule 13G/A filed by Baron on February 14, 2006.

 

(6)          Amounts presented inthis table reflect the beneficial ownership by each of Kersaf and CMS of the317,134 Ordinary Shares held by RRIL and RRHL; Kersaf and CMS share dispositivepower over the 317,134 Ordinary Shares held by RRHL and RRIL due to their jointownership 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 Ordinary Shares subject to this option iscurrently 84,684 Ordinary Shares. This option expires on July 2, 2006. Amountspresented in this table treat all of the Ordinary Shares subject to this optionas being beneficially owned by both Kersaf and CMS, both due to the sharedrights of disposition described in the preceding paragraph and the option.

 

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(7)          Consists of:  (i) 1,842,059 Ordinary Shares held by CMS and(ii) 317,134 Ordinary Shares held by RRHL and RRIL over which CMS and Kersafshare dispositive power as discussed in Note 6 above, which shares include84,684 Kersaf Proxy Shares as defined and discussed in Note 4 above. Based uponinformation contained in the Schedule 13D/A filed by CMS on February 23, 2006.

 

(8)          Based upon informationcontained in the Schedule 13G/A filed by FMR Corp. and certain affiliateson February 14, 2006.

 

(9)          Based upon informationcontained in the Schedule 13D filed by Eminence on February 6, 2006.

 

(10)    If the directors and officersas a group were to exercise their vested options, they would own 0.2% of theOrdinary Shares outstanding as of February 28, 2006 (excluding sharesbeneficially owned by the Kerzner Family Trust).

 

As of February 28, 2006, we had approximately 705 holdersof record of approximately 36.7 million Ordinary Shares, excluding 7.1 millionOrdinary Shares held as treasury stock. As of February 28, 2006, there were anestimated 646 U.S. holders of record holding approximately 90% of our OrdinaryShares. Certain of these Ordinary Shares are beneficially owned by holderslocated outside of the United States.

 

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, FMR Corp. and Eminence and other sources.

 

In April 2004, the Company issued $230.0 millionprincipal amount of 2.375% Notes due 2024 which, after related issuance costs,resulted in net proceeds of approximately $223.7 million. The 2.375% Notesare unsecured senior subordinated obligations and mature on April 5, 2024,unless they are converted, redeemed or repurchased before the maturity date. The2.375% Notes may be converted into cash and Ordinary Shares at an initialconversion rate of 17.1703 shares per $1,000 principal amount in accordancewith the terms of the indenture. This conversion rate is equal to a conversionprice 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 wasdissolved and its shareholders received interests in us directly proportionateto their interests in SIIL. SIIL was owned in equal thirds by Kersaf, Caledoniaand WLG, a company controlled by a Kerzner family trust. SIIL previously wasgoverned by a shareholders agreement pursuant to which all major decisions ofSIIL required the unanimous consent of its shareholders. Kersaf operates anumber of hotel, casino and resort properties in southern Africa under the “SunInternational” name and there had been some confusion regarding the use of the “SunInternational” name by both Kersaf and us. In October 2001, we commenced alawsuit against Kersaf and certain of its subsidiaries. See “Item 8. FinancialInformation, (A) Consolidated Statements and Other FinancialInformation—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 2001restructuring:

 

•                  TheSIIL shareholders agreement was terminated effective July 3, 2001, andSIIL was dissolved in May 2002. SIIL’s former shareholders now hold theirshares 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 the restructuring agreements, Mr. von Rantzau,a principal of CMS, joined our Board 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

 

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involving us, includingany merger or the sale of substantially all of our assets. See below “RegistrationRights and Governance Agreement.”

 

•                  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 satisfied this obligation by completing the saleof 2.3 million Ordinary Shares of Kerzner (the “Kersaf Offering”) in aregistered public offering, using securities registered under the UniversalShelf 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. InJuly 2002, we changed our corporate name 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 ofthe November 2002 settlement, we relinquished all of our rights to aninterest in this project. 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 infull 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 and 2002. Seebelow “—Long-Term Contract Fees.” As part of the November 2002 settlement,Kersaf’s obligation to make 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 2001restructuring agreements, Kersaf agreed to, among other things, sell at least2.0 million of our Ordinary Shares in a registered public offering, adhereto a certain non-compete agreement, continue to make an annual payment to uspursuant to a long-term contract, which payment was approximately $3.3 millionin 2003 and 2002, and grant us an interest in a proposed project in PortGhalib, Egypt. In October 2001, we filed a lawsuit in New York againstKersaf and certain of its affiliates alleging, among other things, that Kersafhad breached its non-compete obligation under the July 2001 restructuringagreements. As part of the November 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

 

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•                  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. This agreement, and a related proxy, governs thevoting of Kersaf’s Ordinary Shares that are subject to a proxy discussed abovein “(A) Major Shareholders.” Among other things, under this agreement, asamended:

 

•                  Kersaf,Caledonia, WLG and CMS agreed to certain transfer restrictions that generallylimit the ability of each party to purchase or sell our Ordinary Shares. Aspart of the November 2002 settlement, this agreement was modified so thatKersaf will no longer have the right to enforce 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 ourshares in a registered public offering before June 30, 2002 (which datewas subsequently extended to February 28, 2003), subject to certainextensions (the “Minimum Year One Sale”), (ii) following such offering,Kersaf and certain of its affiliates have one or more demand registrationrights each covering no less than 1.0 million Ordinary Shares,(iii) following March 31, 2002, Caledonia and certain of itsaffiliates have one or more demand registration rights each covering no lessthan 1.0 million Ordinary Shares, (iv) following June 30, 2003,WLG and certain of its affiliates have one demand registration right coveringno less than 0.5 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 than1.0 million Ordinary Shares. Kersaf satisfied the Minimum Year One Sale bycompleting a secondary offering of 2.3 million of our Ordinary Shares onDecember 18, 2002.

 

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

 

•                  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. Inaddition, subject to certain rights of first refusal as between themselves,each of Caledonia, WLG and CMS has agreed not to acquire any additional sharesof Kerzner 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$5.0 million at December 31, 2005. The largest amount of loansoutstanding at any one time to Harborside at Atlantis was $25.0 millionduring 2001. We earn interest on these advances at an average weighted rateequal to one-month

 

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LIBOR plus 250 basis points, which was 5.9% at December 31, 2005. Theloans were made simultaneously with loans from Starwood, which mirror theamounts, terms and conditions of our loans. Our loans and the Starwood loansare *pari passu* with respect topayments of principal and accrued interest and such payments will be made incash, as it is available from the sale of timeshare units.

 

We provide marketing, administrative and developmentservices to Harborside at Atlantis from which we earned fees of $3.7 million,$2.8 million and $1.8 million for the years ended December 31,2005, 2004 and 2003, 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 weprovide to SRL are subcontracted to Kerzner by One&Only Management, acompany owned 75% by us and 25% by SRL as of January 1, 2006. We provide alldevelopment and marketing services to SRL and receive fees for providing suchservices.

 

We assigned to One&Only Management the managementagreement for One&Only Kanuhura and One&Only Maldives at Reethi Rah,each a Maldives company, in which we initially owned a 25% equity interest anda 0% interest, respectively. As of January 1, 2005, our ownership interestin One&Only Kanuhura further decreased to 18.75% and SRL’s interestincreased to 6.25%, as SRL purchased an additional 1.25% interest from us. Pursuantto an additional subcontract arrangement with One&Only Management, weprovide comprehensive management services to One&Only Kanuhura andOne&Only Maldives at Reethi Rah. The terms of the management agreement runconcurrent with the terms of a lease between One&Only Kanuhura and thegovernment of the Maldives to lease One&Only Kanuhura. That lease expiresin 2026 and is subject to extension. Similar to our agreements in Mauritius, weprovide all development and marketing services to One&Only Kanuhura.

 

We provide management services to One&OnlyPalmilla, a deluxe, five-star property located near Cabo San Lucas. Inconnection with the purchase of our 50% ownership interest in One&OnlyPalmilla, we entered into long-term management and development agreementsrelated to the property that will expire in 2022.

 

We provide management services to One&Only RoyalMirage, a luxury 466-room hotel in Dubai, pursuant to a long-term managementagreement with the Government of Dubai that will expire in 2019.

 

In June 2002, we entered into management anddevelopment agreements for One&Only Maldives at Reethi Rah, a 130-roomluxury resort on North Male Atoll in the Maldives that opened on May 1,2005. The management and development agreements related to this property areco-terminus with the owner’s lease, which expires in 2030. SRL’s board ofdirectors has approved the exercise of its right to participate on aproportionate basis (SRL’s participation is 25%) with us in connection withOne&Only Maldives at Reethi Rah. We have transferred the managementagreement for One&Only Maldives at Reethi Rah to One&Only Management. See“Item 5. Operating and Financial Review and Prospects, (F) Off-BalanceSheet Arrangements” for further information.

 

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 Atlantis, The Palm (see “Item 4. Information onthe Company, (B) Business Overview—The Properties—DestinationResorts—Atlantis, The Palm”). As of December 31, 2005, we had notrecognized any management, development or marketing fees associated with thisproject, other than $0.9 million in development fees.

 

**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 isapproximately £205,000 (which was the equivalent of approximately $353,000 atDecember 31, 2005) and is subject to increase every five years to thecurrent fair market value. Tennyson Properties Limited is owned by a familytrust 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 inDecember 2002. Of this amount, $11.2 million (which represents thefuture payments that were to be received over

 

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the term of the underlying agreements from 2006 to 2008) was classifiedas deferred revenue as of December 31, 2005. This long-term contract feepayment was established at $2.4 million in 1994 and increased at a rate of3.3% per year and was paid annually. We received our last payment onDecember 2, 2002, and pursuant to the settlement agreement with Kersaf,described above in “Global Settlement,” Kersaf’s obligation to make paymentswas terminated effective as of that date. See Note 20—Gain on Settlementof Territorial and Other Disputes in the accompanying consolidated financialstatements.

 

**(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 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.

 

*Trademark Litigation*

* *

On January 27, 2006, wefiled a complaint in the United States District Court, District of Nevada,against Monarch Casino & Resort, Inc. and Golden Road Motor Inn, Inc.(collectively, “Monarch”) alleging, *inter alia*,that Monarch has no right to use the mark “Atlantis” in connection with casinoservices in Las Vegas, Nevada and that its assertions that it has trademarkrights for the “Atlantis” mark throughout the State of Nevada infringes oncertain of our United States registered “Atlantis” trademark rights. Thecomplaint seeks both injunctive relief and damages. In the action, we seek adeclaratory judgment pursuant to Sections 32(1), 43(A) and 43(C) of theTrademark Act of 1946 (the “Lanham Act”) that Monarch’s use of the “Atlantis”mark in Las Vegas would constitute infringement of our registered trademark andresult in consumer confusion and a dilution of our “Atlantis” trademark. Inaddition to the Lanham Act claims, our complaint alleges common law trademarkinfringement and dilution under Nevada law.

 

On February 14, 2006, wefiled an amended complaint alleging further that Monarch’s conduct constituteddeceptive trade practices in violation of Sections 41.600 and 598.0915 of theNevada Revised Statutes.

 

On February 16, 2006, Monarch filed a motion to transfervenue from Las Vegas, Nevada to Reno, Nevada, which we have opposed. OnFebruary 24, 2006, Monarch filed an answer and counterclaim. In itscounterclaim, Monarch brings claims for (1) cancellation of our United States “Atlantis”trademark registration for casino services; (2) breach of a 1996 licenseagreement that was entered into by Monarch with Atlantis Lodge, Inc. (“Lodge”),and later assigned from Lodge to us; (3) a declaration that we have infringedupon Monarch’s trademark rights; and (4) a declaration that we have engaged indeceptive trade practices in violation of Nevada law. We believe thecounterclaims to be without merit and intend to vigorously defend them.

 

*Class Action Complaint*

 

On March 23, 2006, a complaint was filed in LosAngeles Superior Court seeking to enjoin the sale of the Company to an investorgroup as described under “Item 4. Information on the Company—RecentDevelopments”. The complaint purports to be a class action on behalf of theCompany’s public shareholders. It names us and all our directors as defendants,and alleges that the defendants have breached their fiduciary duties to theCompany’s public shareholders and are pursuing an unlawful plan to cash themout for grossly inadequate compensation. We believe the complaint is completelywithout merit and intend to contest vigorously all its allegations of improperconduct.

 

*Enforceability Of CivilLiabilities*

* *

We are a Bahamian international business companyincorporated under the International Business Companies Act, 2000 of theCommonwealth of The Bahamas. Certain of our directors and executive officersreside outside the

 

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United States. A substantial portion of the assets of such persons andmost of our assets are located outside the United States. As a result, in theopinion of Harry B. Sands and Company, our Bahamian counsel, it may bedifficult or impossible to effect service of process within the United Statesupon such persons, to bring suit in the United States or to enforce, in U.S.courts, any judgment obtained there against such persons predicated upon anycivil liability provisions of 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 securities laws.Furthermore, judgments predicated upon any civil liability provisions of theU.S. federal securities laws are not directly enforceable in The Bahamas. Rather,a lawsuit must be brought in The Bahamas on any such judgment. Subject toconsideration of private international law, in general, a judgment obtainedafter due trial by a court of competent jurisdiction, which is final andconclusive as to the issues in connection, is actionable in Bahamian courts andis impeachable only upon the grounds of (i) fraud, (ii) public policyand (iii) natural justice.

 

Gaming debts may not be legally enforced incertain foreign jurisdictions or in certain jurisdictions within the UnitedStates. As a result, we may be unable to collect gaming debts from patrons ofour casinos who reside in such jurisdictions.

 

**DividendPolicy**

** **

Pursuant to our Articles of Association, the Board ofDirectors may from time to time declare dividends. We historically havenot paid dividends and there 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 sinceDecember 31, 2005.

 

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

 

**(A)**       Offer andListing Details

 

The Ordinary Shares do not trade on any foreignexchange. The Ordinary Shares have been listed and traded on the New York StockExchange (“NYSE”) since March 1, 1996. On February 28, 2006, theclosing price of our Ordinary Shares on the NYSE was $67.29.

 

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.

 

Forthe year:

 
| ** ** | ** ** | **High** | ** ** | **Low** | ** ** |
|------------|------------|----------|------------|---------|------------|
| 2005       |       | $        | 69.81      |    | $          | 53.04 |   |
| 2004       |       | 62.75    |       | 38.47   |       |
| 2003       |       | 39.02    |       | 19.37   |       |
| 2002       |       | 31.20    |       | 18.80   |       |
| 2001       |       | 28.50    |       | 17.13   |       |
|            |            |          |            |         |            |  |  |

 

Forthe quarter:

 
| ** ** | ** **   | **High** | ** ** | **Low** | ** ** |
|------------|--------------|----------|------------|---------|------------|
| 2005:      | 4th  quarter |     | $          | 69.81   |       | $ | 53.04 |   |
|       | 3rd  quarter |     | 61.26      |    | 53.59      |   |
|       | 2nd  quarter |     | 61.95      |    | 54.32      |   |
|       | 1st  quarter |     | 66.90      |    | 56.05      |   |
|       |         |     |       |    |       |   |
| 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      |   |

 

Forthe month:

 
| ** **     | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------|------------|----------|------------|---------|------------|
| 2006 February  |       | $        | 68.20      |    | $          | 64.38 |   |
| 2006 January   |       | 70.00    |       | 65.24   |       |
| 2005 December  |       | 69.81    |       | 65.80   |       |
| 2005 November  |       | 65.01    |       | 58.74   |       |
| 2005 October   |       | 58.35    |       | 53.04   |       |
| 2005 September |       | 58.55    |       | 53.59   |       |
|                |            |          |            |         |            |  |  |

 

**(B)**       Plan ofDistribution

 

Not applicable.

 

**(C)**       Markets

 

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

 

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 TheBahamas International Securities Exchange.

 

**(D)**       SellingShareholders

** **

Not applicable.

 

**(E)**         Dilution

** **

Not applicable.

 

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**(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 and Restated Articles of Association wasfiled as Exhibit 1.1(b) to our Form 20-F for the year endedDecember 31, 2004, filed on March 31, 2005 in filenumber 1-04226.

 

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, tothese Restated Articles of Association were filed with the SEC with our proxystatement for the annual general meeting held 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. Asubsequent amendment, dated as of May 17, 2002, to this Amended andRestated Memorandum of Association was filed with the SEC as an exhibit to ourRegistration Statement on Form F-4/A, filed on August 12, 2002 infile 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 theMemorandum, is “to engage in any act or activity that is not prohibited underany law for the time being in force in the 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 andDecember 2004, we entered into supplements to the Heads of Agreement,pursuant to which we modified certain components involved in the Phase IIIexpansion, which now includes a new luxury all-suite hotel, an expansion of ourconvention facilities, expanded water attractions and an addition to Harborsideat Atlantis. A description of the Heads of Agreement, as supplemented, and thePhase III expansion can be found at “Item 4. Information on the Company,(B) Business Overview—Certain Matters Affecting Our BahamianOperations—Heads of Agreement” and “Item 4. Information on the Company,(B) Business Overview—The Properties—Destination Resorts—Atlantis,Paradise Island.”

 

**2.375%Convertible Senior Subordinated Notes Indenture**

** **

In April 2004, Kerzner issued $230.0 millionprincipal amount of 2.375% Notes due 2024 which, after related issuance costs,resulted in net proceeds of approximately $223.7 million. All of theproceeds received from the issuance of the 2.375% Notes will be used to fundfuture capital expenditures and for general corporate purposes.

 

The 2.375% 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.

 

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The 2.375% Notes, which are unsecured obligations, arenot guaranteed by any of Kerzner’s subsidiaries and therefore are effectivelysubordinated to the subsidiary guarantees of the 87/8% Senior SubordinatedNotes. Interest on the 2.375% Notes is payable semi-annually and commenced onOctober 15, 2004.

 

**63⁄4%Senior Subordinated Notes Indenture**

** **

On September 22, 2005, Kerzner issued$400.0 million principal amount of 63⁄4% senior subordinated notes due 2015,which, after debt issuance costs, resulted in net proceeds of approximately$392.7 million. The proceeds received from the issuance of the 63⁄4% SeniorSubordinated Notes were used to repurchase our outstanding 87/8%Senior Subordinated Notes pursuant to the Tender Offer and Consent Solicitationfor such notes described in “Item 4. Capital Structure—Tender Offer andConsent Solicitation for 87/8% Senior Subordinated Notes”.

 

The 63⁄4% senior subordinated notes were issued withoutregistration under the Securities Act, in reliance on Rule 144A promulgatedunder the Securities Act. In connection with the sale of those notes, weentered into a registration rights agreement, under which we agreed to use ourreasonable efforts to consummate an exchange offer for the 63⁄4% seniorsubordinated notes. We filed an exchange offer registration statement onNovember 23, 2005, which was declared effective by the SEC onDecember 2, 2005. On December 2, 2005 we commenced an exchange offer toexchange any and all of our outstanding 63⁄4% senior subordinated notes foridentical notes registered under the Securities Act. On January 6, 2006,we closed the exchange offer and, together with KINA, issued$400.0 million of 63⁄4% Senior Subordinated Notes in exchange for ouroutstanding 63⁄4% senior subordinated notes.

 

The 63⁄4% Notes, which are unsecured obligations, wereco-issued by Kerzner and KINA and are unconditionally guaranteed bysubstantially all of the wholly-owned subsidiaries of Kerzner other than KINA. Intereston the 63⁄4% Senior Subordinated Notes is payable semi-annually on April 1and October 1, commencing on April 1, 2006. The indenture for the 63⁄4%Notes contains certain covenants, including limitations on the ability of theco-issuers to, among other things: (i) incur additional indebtedness, (ii) incur certain liensand (iii) make certain other restricted payments.

 

**AmendedCredit Facility**

** **

On October 31, 2005, Kerzner, KINA and KIB, asco-borrowers, entered into an amended and restated revolving credit facilitywith a syndicate of lenders. This facility 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, 2005 under the Amended Credit Facility. Ouravailability as of December 31, 2005 was $644.6 million, due to the$5.4 million in outstanding letters of credit.

 

**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 are described in “Item 4. Information onthe 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 Familyof Dubai, to develop Atlantis, The Palm. On June 23, 2004, we entered into anagreement with Istithmar, an entity indirectly wholly-owned by the Royal Familyof Dubai, which assumed all obligations and rights of its affiliate, NakheelLLC. The budget for this development has been increased from $1.2 billion toapproximately $1.5 billion (inclusive of land acquisition costs). The jointventure’s capital structure includes an equity investment of $200.0 million byeach partner. The remaining project financing is expected to consist of a$700.0 million senior first-lien term loan facility, which is subject tovarious conditions, and an additional $275.0 million of second-lien debt. Istithmarhas committed to provide $75.0 million of the senior second-lien debt. Thejoint venture has received a commitment, subject to various conditions, fromthird party underwriters for the remaining $200.0 million. The joint ventureexpects to enter into binding definitive documentation for the seniorfirst-lien term loan facility and the second-lien debt during the secondquarter of 2006. In addition, we and Istithmar will each provide, on a jointand several basis, additional sponsor support of up to $55.0 million with respectto cost overruns and post-completion debt services obligations. Further,Istithmar has agreed to provide an additional guarantee for cost overruns inexcess of this amount and as necessary to achieve completion. The transactionremains subject to various closing conditions, including obtaining allrequisite governmental consents and

 

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construction of supporting infrastructure by Nakheel. See “Item 4. Informationon the Company, (B) Business Overview—The Properties—DestinationResorts—Atlantis, The Palm” for further information.

 

**Managementand Development Agreements**

 

In November 2003, we entered into an agreementwith V&A Waterfront to develop One&Only Cape Town, a new luxury hotelat the highest end of the market in Cape Town, South Africa. We intend toform a joint venture in which we will own a minority interest to developand operate this 132-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. Informationon the Company, (B) Business Overview—The Properties—DestinationResorts—Atlantis, The Palm.”  We have along-term management agreement with the joint venture that entitles us toreceive a base management fee based on the gross revenues generated byAtlantis, The Palm and an incentive management fee based on operating income,as defined. The base management fee is likely to be subordinated to senior andsubordinated debt facilities discussed above. We also have a developmentagreement with the joint venture that entitles us to receive $20.0 million andreimbursement of certain expenses over the development period.

 

In September 2002, we purchased a 50% ownershipinterest in the 115-room One&Only Palmilla, a deluxe, five-star propertylocated near Cabo San Lucas in Baja, Mexico for approximately$40.8 million, including transaction costs. In connection with thepurchase, we entered into long-term management and development agreementsrelated to the property that will expire in 2022. In connection with theexpansion of the resort, we guaranteed $46.5 million of the debt financingthat One&Only Palmilla obtained from third parties. In 2004, we alsoprovided One&Only Palmilla with approximately $14.5 million ofcompletion loans. On December 17, 2004, One&Only Palmilla entered intotwo promissory notes pursuant to which it borrowed $110.0 million and allof One&Only Palmilla’s existing loans were repaid, including Kerzner’scompletion loans, and Kerzner’s $46.5 million guarantee was extinguished. Thenew indenture governing the promissory notes provides recourse to Kerzner inthe event certain representations and warranties are violated. See “Item 5.Operating and Financial Review and Prospects, (C) Operating Results—Off-BalanceSheet Arrangements.”  In connection withthe operating agreement related to One&Only Palmilla, the owner of theother 50% interest has the right to require us to acquire its 50% interest fora price of $36.3 million, plus 50% of One&Only Palmilla’s workingcapital, with the price subject to adjustment, during the first year of theoption period. See “Item 5. Operating and Financial Review and Prospects,(F) Tabular Disclosure of Contractual Obligations.”

 

In June 2002, we entered into management and developmentagreements for One&Only Maldives at Reethi Rah, a 130-room luxury resort onNorth Male Atoll in the Maldives, that opened on May 1, 2005. Themanagement and development agreements related to this property are co-terminuswith the owner’s lease, which expires in 2030. SRL’s board of directors hasapproved the exercise of its right to participate on a proportionate basis(currently 25%) with us in connection with One&Only Maldives at Reethi Rah.We have transferred the management agreement for One&Only Maldives atReethi 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 CapitalResources—Off-Balance Sheet Arrangements.”

 

We have long-term management agreements with each offive hotels in Mauritius that are owned by SRL: One&Only Le Saint Géran, One&Only Le Touessrok, Sugar BeachResort, La Pirogue Hotel and Le Coco Beach Hotel. The term of each of thesemanagement agreements was extended from 2008 until 2023 in December 2002when we entered into an agreement with SRL to form One&Only Management forthe purpose of, among other things, managing the five properties owned by SRL inMauritius and One&Only Kanuhura and One&Only Maldives at Reethi Rah inthe Maldives. As of January 1, 2006, One&Only Management was owned 75% byus and 25% by SRL. Subject to certain conditions, SRL’s ownership interest willincrease incrementally through 2009, at which time it will own 50% ofOne&Only Management. See “Item 4. Information on the Company, (A)History and Development of the Company” for more information. In connectionwith the formation of One&Only Management, we subcontracted to it all ofour Mauritius management agreements and assigned to it the One&OnlyKanuhura and One&Only Maldives at Reethi Rah management agreements, and SRLpurchased 20% of our debt and equity interests in One&Only Kanuhura. As ofJanuary 1, 2005, our ownership interest in One&Only Kanuhura furtherdecreased to 18.75% and SRL’s interest increased to 6.25%, as SRL purchased anadditional 1.25% interest from us. See “Item 4. Information on theCompany, (A) History and Development of the Company” for more information.

 

Pursuant to an additional subcontract arrangement withOne&Only Management, we provide comprehensive management services to thefive Mauritius resorts and receive a management fee calculated as a percentageof

 

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revenues and adjusted EBITDA, as defined. One&Only Management alsois entitled to a marketing fee calculated as a percentage of revenues, althoughit has subcontracted to us all marketing services and benefits thereof withrespect to the five Mauritius resorts.

 

In July 2001, we entered into a managementagreement to provide comprehensive management services to One&Only Kanuhurain the Maldives. In connection with the formation of One&Only Management,we assigned the One&Only Kanuhura management agreement to One&OnlyManagement, which subsequently subcontracted such agreement back to us. Themanagement fee is calculated as percentages of revenue and adjusted EBITDA andit expires in 2026. One&Only Management also receives a marketing feecalculated as a percentage of revenues, although it has subcontracted to us allmarketing services and related benefits with respect to One&Only Kanuhura. See“Item 5. Operating and Financial Review and Prospects, (F) Off-BalanceSheet Arrangements” for further information.

 

We have a management agreement to manage the expandedOne&Only Royal Mirage, which originally opened in August 1999. Pursuantto this agreement, we receive a management fee calculated as a percentage ofrevenues and gross operating profits, as defined. The management fee schedulemay be renegotiated after 10 years. This management agreement expires in2019.

 

**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 timeshare sales. Wealso receive development fees in connection with a development agreement withHarborside at Atlantis, pursuant to which we receive fees based on a percentageof the total construction costs.

 

**ColonyAgreement**

** **

In February 2004, we and Colony entered into anagreement pursuant to which we sold the undeveloped real estate adjacent toResorts Atlantic City to a wholly-owned subsidiary (the “Purchaser”) of ColonyRIH Holdings, Inc. for a purchase price of $40.0 million. The salewas completed on March 18, 2004. The purchase price was paid in the form of apromissory note which matures on March 10, 2009 (the “Colony Note”). TheColony Note began accruing interest on September 30, 2004 at a rate of 4.0%,which rate steps up at various intervals from the closing date of thetransaction. All principal and interest due under the Colony Note is due onMarch 10, 2009, which date may be accelerated by us upon certain events. TheColony 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 Colony Notewill also be guaranteed by Resorts International Hotel and Casino, Inc. Thisguarantee will go into effect when that company’s outstanding publicindebtedness, which is due on March 9, 2009, has been paid.

 

**NYProject Development Services Agreement**

** **

In March 2001, TCNY entered into a development servicesagreement with the Stockbridge-Munsee Tribe for the development of a casinoproject in the Catskills region of the State of New York. The development agreementwas amended and restated in February 2002 and subsequently amended in bothOctober 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 theCatskills Project. If the Catskills Project is approved and ultimatelydeveloped, TCNY will earn a development fee of 5% of gross revenues (as definedin the development agreement) as compensation for its services (subject tocertain priorities), beginning with the opening of the Catskills Project andcontinuing for a period of twenty years. See “Item 4. Information on theCompany, (B) Business Overview—Gaming—Trading Cove New York” for moreinformation.

 

**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 wasrestructured and Station received an option through early January 2003 topurchase 50% of the operation in consideration for the $4.5 millionpreviously received. Since that time, we concluded that this business would notbe economically viable in the short to medium term. We discontinued theoperations of Kerzner Interactive Limited during the first quarter of 2003 and

 

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the Company and Station mutually agreed to terminate this transaction. See“Item 4. Information on the Company, (B) Business Overview—InternetGaming” 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 Boardof Great Britain had granted us a Certificate of Consent, which has enabled usto transfer a gaming license held by LCI into our name and proceed with ourplans for a casino in Northampton. In February 2005, the Northampton projectwas approved by the local planning authorities and we have commencedconstruction on this project. We expect to develop and operate the new casinofacility of approximately 30,000 square feet. See “Item 4. Information onthe Company, (B) Business Overview—Gaming—United Kingdom” for more information.

 

**Developmentof Resort Casinos in the United Kingdom**

** **

In April 2005, the United Kingdom passed gaming reformlegislation that was less favorable than we had previously anticipated relatedto our previously announced Scottish Exhibition + Conference Center, Sportcityand The O2 projects. During the six months ended June 30,2005, we wrote off $11.2 million related to all previously capitalized anddeferred costs incurred for the planning and development of the aforementionedprojects. Although the future of gaming in the United Kingdom is unclear as aresult of the passage of legislation in April 2005, we continue to pursuepotential opportunities on a selective basis. Costs related to theseopportunities, other than the Northampton project and certain costs relating toThe O2, are expensed as incurred. See “Item 4.Information on the Company, (B) Business Overview—Gaming—United Kingdom” formore 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 2005, the Company entered into a joint venture agreementwith SOMED and CDG, and into related development and long-term managementagreements. See “Item 4. Information on the Company, (B) BusinessOverview—Destination Resorts—Morocco” for more information on this project.

 

**UnionContract Arrangements**

** **

In The Bahamas, as of December 31, 2005,approximately 4,200 of our employees were represented by The Bahamas Hotel,Catering and Allied Workers Union. Kerzner International Bahamas Limitedparticipates in The Bahamas Hotel Employers Association, which representsresort operators in the Paradise Island-New Providence Island area. Theassociation and the union are parties to a contract that expires onJanuary 7, 2008.

 

At One&Only Palmilla in Mexico, as of December 31,2005, approximately 537 of our employees were represented by the Sindicato DeTrabajadores de la Industria Hotelera, Gastronomica y Conexos de la RepublicaMexicana - Seccion 70. Approximately 477 of these employees are hotel employeesand approximately 60 of these employees are golf employees. Under thecontracts, salary levels are renewed each year and all other contract terms arerenewed every other year. The Company expects to renew the salary levelsrelating to the hotel employees by July 1, 2006 and those relating to the golfemployees by September 1, 2006. The Company expects to renew all other contractterms for hotel and golf employees by July 1, 2007 and September 1, 2007,respectively.

 

**CompensationArrangements**

** **

On August 4, 2005, the Company entered into aRestricted Stock Agreement with Butch Kerzner, pursuant to which the Companygranted Butch Kerzner 500,000 restricted Ordinary Shares under the 2003 StockIncentive Plan. See “Item 5. (B) Compensation” for more information.

 

On December 13, 2005, our Board of Directorsadopted the 2005 Stock Incentive Plan, which provides for the issuance of anaggregate of 2,000,000 Ordinary Shares in connection with awards of stockappreciation rights, stock options, restricted stock and other stock-basedawards. See “Item 5. (B) Compensation” for more information.

 

**(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 hasgranted

 

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approved investment status in respect of our holding of the capitalstock of our Bahamian subsidiaries. The granting of such status will mean thatall payments of a current nature, including the repatriation of dividends orother distributions to us out of the revenues of our Bahamian subsidiaries andany proceeds received on the sale of such subsidiaries will be routinelyapproved by the Central Bank following proper application. Any other paymentsto us by our Bahamian subsidiaries will require standard approval by theCentral 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 this discussion, a “U.S. Holder” means anindividual citizen or resident of the United States, a corporation or entitytreated as a corporation organized under the laws of the United States or ofany state or political subdivision thereof, or an estate or trust the income ofwhich is includible in gross income for U.S. federal income tax purposesregardless of its source.

 

Rules regarding partnerships are complex. Partners inpartnerships should consult their tax advisers regarding the implications ofowning Ordinary Shares.

 

This discussion is not intended to be exhaustive andis based on statutes, regulations, rulings and judicial decisions currently ineffect. This discussion does not consider any specific circumstances of anyparticular U.S. Holder and applies only to U.S. Holders that hold OrdinaryShares as a capital asset. Investors are urged to consult their tax advisersregarding the U.S. federal tax consequences of acquiring, holding and disposingof Ordinary Shares, as well as any tax consequences that may arise under thelaws of any foreign, state, local or other taxing jurisdiction.

 

**IRSCircular 230 Disclosure**

** **

To ensure compliance with requirements imposed by theInternal Revenue Service, we inform you that: (i) any U.S. federal tax advice contained in this document(including any attachment) is not intended or written by us to be used, andcannot be used, by any taxpayer for the purpose of avoiding tax penalties underthe Internal Revenue Code; (ii) such advice was written in connection withthe promotion or marketing of the transactions or matters addressed herein; and(iii) taxpayers should seek advice based on their particular circumstances froman independent tax advisor.

 

**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 be eligible for a maximum tax rate of 15% fordividends received before January 1, 2009, provided that such holder holdsthe Ordinary Shares for at least 60 days of the 121-day period beginning60 days before the date on which Ordinary Shares become ex-dividend withrespect to such dividend and certain other conditions are satisfied. Furthermore,such dividends will generally not be eligible for the dividends receiveddeduction available to certain U.S. corporations under Section 243 of theInternal Revenue Code of 1986, as amended.

 

We are not a “passive foreign investment company” (a “PFIC”)or a “controlled foreign corporation” (a “CFC”) for U.S. federal income taxpurposes. We are not a CFC, since U.S. persons each owning (directly,indirectly or by attribution) 10% or more of the voting power or of our stock (“10%Shareholders”) do not collectively own more than 50% of the voting power orvalue of our stock. If more than 50% of the voting power or value of our stockwere owned (directly, indirectly or by attribution) by 10% Shareholders, wewould become a CFC and each such 10% Shareholder would be required to includein its taxable income as a constructive dividend an amount equal to its shareof a portion of our undistributed income. If our foreign ownership interestswere to decrease, or if U.S. persons were to acquire a greater ownershipinterest in our foreign stock holders, then it is possible that we could becomea CFC if we otherwise satisfied the tests 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”income or more than 50% of the average value of our assets in any year willconsist of assets that produce, or are held for the production of, such passiveincome. If such income and asset tests were not met and we

 

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were to become a PFIC, U.S. Holders would, in certain circumstances, berequired to pay an interest charge together with tax calculated at maximumrates on certain “excess distributions” (defined to include any gain on thesale of stock).

 

If we were a PFIC, an individual U.S. Holder would notbe eligible for the 15% tax rate on dividends discussed in the first paragraphof this section.

 

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 hasheld such Ordinary Shares for more than one year, such gain or loss will be along-term capital gain 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 isbased on Bahamian law currently in effect.

 

The Bahamas does not impose any income, capital gainsor withholding taxes. Therefore, the Company will not be subject to income taxin The Bahamas on an ongoing basis and if we were to pay dividends on OrdinaryShares to holders thereof, they would not be subject to a Bahamian withholdingtax. The Company, however, is subject to gaming taxes and other governmentalfees and charges. There are no reciprocal tax treaties with The Bahamas.

 

**(F)**         Dividendsand Paying Agents

** **

Not applicable.

 

**(G)**       Statement byExperts

** **

Not applicable.

 

**(H)**       Documents onDisplay

** **

Kerzner is subject to the informational requirementsof the Exchange Act and files reports and other information with the SEC. Youmay read and copy all or any portion of the Annual Report and its exhibits atthe public reference facilities maintained by the SEC, 450 Fifth Street, N.W.,Judiciary Plaza, Room 1024, Washington, D.C. 20549, and at its regional officeat Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois60661-2511. You may request copies of all or any portion of these documents,upon payment of a duplication fee, by writing to the public reference sectionof the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtainmore information about the public reference room by calling the SEC at1-800-SEC-0330. Our reports and other information filed with the SEC are also availableto the public from commercial document retrieval services and the websitemaintained by the SEC at www.sec.gov.

 

**(I)**            SubsidiaryInformation

** **

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

 

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

## ** **

Our major market risk exposure is interest rate risk directlyrelated to our bank debt. We attempt to limit our exposure to interest raterisk by 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. See “Item 5. Operating and Financial Review and Prospects,(B) Liquidity and Capital Resources—Interest Rate Swap Agreements” forfurther discussion. These interest rate swap agreements are entered into with anumber of financial institutions with investment grade credit ratings, therebyminimizing the risk of credit loss.

 

We prepare our financial statements in U.S. dollars. Ourmost 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, we believe that we do not have material market risk exposures inthis jurisdiction relative to changes in foreign exchange rates. Due to thestability of the other markets in which we operate, we also believe that we donot have material market risk exposures in these jurisdictions relative tochanges in foreign exchange rates.

 

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Fair value estimates are made at a specific point intime, based on relevant market information about the financial instrument. Theseestimates are subjective in nature and involve uncertainties and matters ofsignificant judgment. The fair value of fixed rate debt is based on the marketvalue on the balance sheet date plus accrued interest to the last payment date.The fair value of interest rate swaps is determined from representations offinancial institutions and represents the discounted future cash flows throughmaturity or expiration using current rates, and is effectively the amount wewould pay or receive to terminate the agreements. We estimated the fair valueof our $2.8 million Palmilla guarantee by calculating the net presentvalue of the difference in cash flows of interest payments between theestimated interest amounts payable without the guarantee and the cash flows ofthose same interest payments with the guarantee, the difference representingthe estimated fair value of the guarantee.

 

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

 

Notapplicable.

 

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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

## ** **

Notapplicable.

 

## **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 and procedures. Basedon this evaluation, the Company’s Chief Executive Officer and Chief Financial Officerconcluded that as of the end of the period covered by this report suchdisclosure controls and procedures were effective 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, 2005 that has materiallyaffected, or is reasonably likely to materially affect, the Company’s internalcontrol over financial reporting.

 

## **Item 16A.**             AuditCommittee Financial Expert

## ** **

Our audit committee consists of Messrs. Buckley,Marks, Siegel and von Rantzau. None of our audit committee members is qualifiedas a financial expert pursuant to Section 407 of the Sarbanes-Oxley Act of2002 and Regulation S-K, Item 401(h)(2); however, we believe that ouraudit committee has the aggregate experience and qualifications to providefinancial expertise as a group. Biographical information for each member of theaudit committee is available in “Item 6. Directors, Senior Management andEmployees of this Annual Report.”

 

## **Item 16B.**             Code ofEthics

 

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 accounting officer).A copy of our Code of Business Conduct and Ethics is available in print onrequest and can be found as Exhibit 11.2 to our Annual Report on Form 20-F forthe 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.

 

## **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:

 
| ** **              | ** ** | **2005**                | ** ** | **2004** | ** ** |
|-------------------------|------------|-------------------------|------------|----------|------------|
| ** **              | ** ** | **(in thousands)** | ** ** |
| Audit fees              |       | $                       | 1,182      |     | $          | 1,533 |   |
| Audit-related  fees (1) |       | 787                     |       | 499      |       |
| Tax fees (2)            |       | 252                     |       | 780      |       |
| Other fees (3)          |       | 300                     |       | —   |       |
|                    |       |                    |       |     |       |
| Total fees              |       | $                       | 2,521      |     | $          | 2,812 |   |

 

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(1)     Audit-relatedfees primarily consist of fees related to the performance of audits and attestservices not required by statute or regulations, audits of the Company’sbenefit plan, consents, comfort letters, registration statements, advisoryservices related to Section 404 of the Sarbanes-Oxley Act of 2002, andfinancial accounting and reporting consultations.

 

(2)     Taxfees consist of tax compliance, tax advice and tax planning services.

 

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(3)          Other fees consist ofpermitted consulting services to perform a construction cost assessment relatedto one of the Company’s development projects.

 

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 auditcommittee has a policy for the pre-approval of all audit and permissiblenon-audit services provided by the independent auditor. The audit committeepre-approved 100% of the fees for 2005.

 

## **Item 16D.**             Exemptionsfrom the Listing Standards for Audit Committees

 

Not applicable.

 

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## **Item 16E.**               Purchasesof Equity Securities by the Issuer and Affiliated Purchasers

 
| **Period**     | ** ** | **Total Number of  Shares Purchased** | ** ** | **Average Price  Paid Per Share** | ** ** | **Total Number of  Shares Purchased  as Part of  Publicly  Announced Plans  or Programs** | ** ** | **Maximum  Number (or  Approximate  Dollar Value) of  Shares that May  Yet to Be  Purchased Under  the Plans or  Programs** | ** ** |
|----------------|------------|------------------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| January 2005   |       | —                                               |       | —                                           |       | —                                                                                                                  |       | —                                                                                                                                                                        |       |
| February 2005  |       | —                                               |       | —                                           |       | —                                                                                                                  |       | —                                                                                                                                                                        |       |
| March 2005     |       | —                                               |       | —                                           |       | —                                                                                                                  |       | —                                                                                                                                                                        |       |
| April 2005     |       | —                                               |       | —                                           |       | —                                                                                                                  |       | —                                                                                                                                                                        |       |
| May 2005       |       | —                                               |       | —                                           |       | —                                                                                                                  |       | —                                                                                                                                                                        |       |
| June 2005      |       | —                                               |       | —                                           |       | —                                                                                                                  |       | —                                                                                                                                                                        |       |
| July 2005      |       | —                                               |       | —                                           |       | —                                                                                                                  |       | —                                                                                                                                                                        |       |
| August 2005    |       | 323,700                                              |       | $                                                | 58.19      |                                                                                                                    | 323,700    |                                                                                                                                                                          | 1,676,300  |   |
| September 2005 |       | 288,800                                              |       | $                                                | 58.23      |                                                                                                                    | 288,800    |                                                                                                                                                                          | 1,387,500  |   |
| October 2005   |       | —                                               |       | —                                           |       | —                                                                                                                  |       | —                                                                                                                                                                        |       |
| November 2005  |       | —                                               |       | —                                           |       | —                                                                                                                  |       | —                                                                                                                                                                        |       |
| December 2005  |       | —                                               |       | —                                           |       | —                                                                                                                  |       | —                                                                                                                                                                        |       |
| Total          |       | 612,500                                              |       | $                                                | 58.21      |                                                                                                                    | 612,500    |                                                                                                                                                                          | 1,387,500  |   |

 

On August 12, 2005, theCompany announced that its Board of Directors approved a share repurchaseprogram authorizing the Company to repurchase up to two million of the Company’sOrdinary Shares. As of December 31, 2005, the Company had purchased 612,500Ordinary Shares at a weighted average price of $58.21 per share and had 1,387,500shares remaining under this program.

 

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**PART III**

 

## **Item 17.**                  FinancialStatements

 

Notapplicable.

 

## **Item 18.**                  FinancialStatements

 

**(A)          List of Financial Statements andFinancial Statement Schedules**

 
| Report  of Independent Registered Public Accounting Firm                                  |   |
|-------------------------------------------------------------------------------------------|--------|
| Consolidated  Balance Sheets                                                              |   |
| Consolidated  Statements of Operations                                                    |   |
| Consolidated  Statements of Changes in Shareholders’ Equity and Comprehensive Income |   |
| Consolidated  Statements of Cash Flows                                                    |   |
| Notes  to Consolidated Financial Statements                                               |   |

 

102

----

 

## **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                                                                                                                                                                                                                                                                            |       | Exhibit 1.1(b)  to Form 20-F Annual Report of Kerzner for the year ended December 31,  2004, filed on March 31, 2005, File No. 001-04226 |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                 |       |                                                                                                                                                    |
| 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                                                            |

 

103

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| **Exhibit  Numbers** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                     | ** ** | **Incorporation by Reference to**                                                                                                                       |
|----------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                |       |                                                                                                                                                    |
| 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                                                 |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                |       |                                                                                                                                                    |
| 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                                                                                                                                                                                                                                                                         |       | Exhibit 2.2(h)  to Form 20-F Annual Report of Kerzner for the year ended December 31,  2004, filed on March 31, 2005, File No. 001-04226 |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                |       |                                                                                                                                                    |
| 2.2(i)               |       | Sixth  Supplemental Indenture dated as of March 24, 2005 to Indenture dated as  of August 14, 2001                                                                                                                                                                                                                                                                        |       | Exhibit 2.2(i)  to Form 20-F Annual Report of Kerzner for the year ended December 31,  2004, filed on March 31, 2005, File No. 001-04226 |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                |       |                                                                                                                                                    |
| 2.2(j)               |       | Seventh  Supplemental Indenture dated as of September 9, 2005 to Indenture dated as of  August 14, 2001                                                                                                                                                                                                                                                                             |       | Exhibit  4.2(j) to Registration Statement on Form F-4, filed on November 23, 2005,  File No. 333-129945                                                 |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                |       |                                                                                                                                                    |
| 2.2(k)               |       | Eighth  Supplemental Indenture dated as of September 21, 2005 to Indenture dated as  of August 14, 2001                                                                                                                                                                                                                                                                             |       | Exhibit  4.2(k) to Registration Statement on Form F-4, filed on November 23, 2005,  File No. 333-129945                                                 |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                |       |                                                                                                                                                    |
| 2.2(l)               |       | 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(m)               |       | 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(n)               |       | 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(o)               |       | 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                                                    |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                |       |                                                                                                                                                    |
| 2.4(a)               |       | Purchase  Agreement dated as of September 22, 2005, among Kerzner, the subsidiary  guarantors party thereto, and Deutsche Bank Securities Inc., JPMorgan  Securities Inc., Bear, Stearns & Co., Merrill Lynch Pierce, Fenner &  Smith Incorporated and Wells Fargo Securities, LLC, as Initial Purchasers                                                                   |       | Exhibit  4.4(a) to Registration Statement on Form F-4, filed on November 23, 2005,  File No. 333-129945                                                 |

 

104

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| **Exhibit  Numbers** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | ** ** | **Incorporation by Reference to**                                                                                                                |
|----------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       |                                                                                                                                             |
| 2.4(b)               |       | Indenture  dated as of September 22, 2005, among Kerzner, the guarantors named therein  and The Bank of New York Trust Company, N.A., as Trustee                                                                                                                                                                                                                                                                                                                                                                                        |       | Exhibit  4.4(b) to Registration Statement on Form F-4, filed on November 23, 2005,  File No. 333-129945                                          |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       |                                                                                                                                             |
| 2.4(c)               |       | Registration  Rights Agreement dated as of September 22, 2005, among Kerzner, the  subsidiary guarantors party thereto and Deutsche Bank Securities Inc. and  JPMorgan Securities Inc., as Representatives of the Initial Purchasers                                                                                                                                                                                                                                                                                                    |       | Exhibit  4.4(d) to Registration Statement on Form F-4, filed on November 23, 2005,  File No. 333-129945                                          |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       |                                                                                                                                             |
| 2.4(d)               |       | First  Supplemental Indenture dated as of September 22, 2005 to Indenture dated as  of September 22, 2005                                                                                                                                                                                                                                                                                                                                                                                                                               |       | Exhibit  4.4(c) to Registration Statement on Form F-4, filed on November 23, 2005,  File No. 333-129945                                          |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       |                                                                                                                                             |
| 2.5                  |       | Agreement  and Plan of Merger dated as of March 20, 2006, among Kerzner, K-Two Holdco  Limited and K-Two Subco Limited                                                                                                                                                                                                                                                                                                                                                                                                             |       | Exhibit 2.1  to Form 6-K of Kerzner, filed on March 20, 2006, File No. 001-04226                                             |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       |                                                                                                                                             |
| 2.6                  |       | Cooperation  Agreement dated as of March 20, 2006, among Kerzner, Solomon Kerzner and  Howard B. Kerzner                                                                                                                                                                                                                                                                                                                                                                                                                      |       | Exhibit  10.1 to Form 6-K of Kerzner, filed on March 20, 2006, File  No. 001-04226                                                |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       |                                                                                                                                             |
| 2.7                  |       | Voting  Agreement dated as of March 20, 2006, among Kerzner, Solomon Kerzner,  Howard B. Kerzner and World Leisure Group Limited                                                                                                                                                                                                                                                                                                                                                                                              |       | Exhibit  10.2 to Form 6-K of Kerzner, filed on March 20, 2006, File  No. 001-04226                                                |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       |                                                                                                                                             |
| 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                                         |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       |                                                                                                                                             |
| 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                                             |

 

105

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|   |   |                                                                                                                                                                                                                                                                                |   |                                                                                                                                                    |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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                           |   | Exhibit 4.3(i)  to Form 20-F Annual Report of Kerzner for the year ended December 31,  2004, filed on March 31, 2005, File No. 001-04226 |
|   |   |                                                                                                                                                                                                                                                                                |   |                                                                                                                                                    |
| 4.3(j) |   | Sixth  Amended and Restated Credit Agreement dated as of October 31, 2005, 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 |   | Exhibit  10.3(j) to Registration Statement on Form F-4, filed on November 23, 2005,  File No. 333-129945                                                |

 

 

106

----

 

 
| **Exhibit****Numbers** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                          |   | **Incorporation  by Reference to**                                                                                                                      |
|------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------|
|                   |       |                                                                                                                                                                                                                                                                                                                                                     |   |                                                                                                                                                    |
|                   |       | Lenders,  JPMorgan Chase Bank, N.A., as the Administrative Agent, Deutsche Bank  Securities Inc., as the Syndication Agent and JPMorgan Chase Bank, N.A., Bear  Stearns Corporate Lending Inc., Goldman Sachs Credit Partners L.P. and  Merrill Lynch Capital Corporation, as the Co-Documentation Agents                                                |   |                                                                                                                                                    |
|                   |       |                                                                                                                                                                                                                                                                                                                                                     |   |                                                                                                                                                    |
| 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                 |   | Exhibit 4.5(b)  to Form 20-F Annual Report of Kerzner for the year ended December 31,  2004, filed on March 31, 2005, File No. 001-04226 |
|                   |       |                                                                                                                                                                                                                                                                                                                                                     |   |                                                                                                                                                    |
| 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          |   | Exhibit 4.5(c)  to Form 20-F Annual Report of Kerzner for the year ended December 31,  2004, filed on March 31, 2005, File No. 001-04226 |
|                   |       |                                                                                                                                                                                                                                                                                                                                                     |   |                                                                                                                                                    |
| 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              |
|                   |       |                                                                                                                                                                                                                                                                                                                                                     |   |                                                                                                                                                    |
| 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                                                                                                                                                                                                 |   | Exhibit 4.8(b)  to Form 20-F Annual Report of Kerzner for the year ended December 31,  2004, filed on March 31, 2005, File No. 001-04226 |
|                   |       |                                                                                                                                                                                                                                                                                                                                                     |   |                                                                                                                                                    |
| 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                                                                                                                                                                    |   | Exhibit 4.8(c)  to Form 20-F Annual Report of Kerzner for the year ended December 31,  2004, filed on March 31, 2005, File No. 001-04226 |
|                   |       |                                                                                                                                                                                                                                                                                                                                                     |   |                                                                                                                                                    |
| 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                                                                                                                                                                                                      |   | Exhibit  10.9 to Registration Statement on Form F-4, filed on September 21, 2001,  File                                                            |

 

107

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| **Exhibit****Numbers** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   | **Incorporation  by Reference to**                                                                                                                       |
|------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------|
|                   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                                                                                                                                                     |
|                   |       | 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                                                                            |   | 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                                                                      |
|                   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                                                                                                                                                     |
| 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | Exhibit 4.19(a)  to Form 20-F Annual Report of Kerzner for the year ended December 31,  2004, filed on March 31, 2005, File No. 001-04226 |
|                   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                                                                                                                                                     |
| 4.19(b)                |       | Amended  and Restated KINA Retirement Savings Plan, dated January 1, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | Filed  herewith as Exhibit 4.19(b)                                                                                                                       |
|                   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                                                                                                                                                     |
| 4.19(c)                |       | Amendment  2003-1, dated December 15, 2003 to the KINA Retirement Savings Plan dated  January 1, 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | Exhibit 4.19(b)  to Form 20-F Annual Report of Kerzner for the year ended December 31,  2004, filed on March 31, 2005, File No. 001-04226 |
|                   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                                                                                                                                                     |
| 4.19(d)                |       | Amendment  2004-1, dated June 4, 2004 to the KINA Retirement Savings Plan dated January  1, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   | Filed  herewith as Exhibit 4.19(d)                                                                                                                       |
|                   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                                                                                                                                                     |
| 4.19(e)                |       | Amendment  2005-1, dated December 31, 2005 to the KINA Retirement Savings Plan dated  January 1, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | Filed  herewith as Exhibit 4.19(e)                                                                                                                       |
|                   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                                                                                                                                                     |
| 4.19(f)                |       | Restricted  Stock Agreement, dated as of August 4, 2005, between Kerzner International  Limited and Howard B. Kerzner                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   | Exhibit  4.1 to Form 6-K of Kerzner, filed on August 5, 2005                                                                                             |
|                   |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                                                                                                                                                     |
| 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,                                                                |

 

108

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| **Exhibit****Numbers** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                    |   | **Incorporation  by Reference to**                                                                                                                       |
|------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------|
|                   |       |                                                                                                                                                                                                                                                                                                                                                                                               |   |                                                                                                                                                     |
|                   |       |                                                                                                                                                                                                                                                                                                                                                                                               |   | 2003,  filed on March 30, 2004, File No. 001-04226                                                                                                       |
|                   |       |                                                                                                                                                                                                                                                                                                                                                                                               |   |                                                                                                                                                     |
| 4.22                   |       | Kerzner  International Limited 2005 Stock Incentive Plan                                                                                                                                                                                                                                                                                                                                           |   | Filed  herewith as Exhibit 4.22                                                                                                                          |
|                   |       |                                                                                                                                                                                                                                                                                                                                                                                               |   |                                                                                                                                                     |
| 4.23                   |       | 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         |
|                   |       |                                                                                                                                                                                                                                                                                                                                                                                               |   |                                                                                                                                                     |
| 4.24                   |       | 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                                                                                                                                                                                                      |   | Exhibit 4.24(b)  to Form 20-F Annual Report of Kerzner for the year ended December 31,  2004, filed on March 31, 2005, File No. 001-04226 |
|                   |       |                                                                                                                                                                                                                                                                                                                                                                                               |   |                                                                                                                                                     |
| 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                      |       | Listing  of Significant Subsidiaries of Kerzner International Limited                                                                                                                                                                                                                                                                                                                              |   | 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                                                                                                                                                                                                                                                                                                                                              |   | Exhibit 11.1(b)  to Form 20-F Annual Report of Kerzner for the year ended December 31,  2004, filed on March 31, 2005, File No. 001-04226 |
|                   |       |                                                                                                                                                                                                                                                                                                                                                                                               |   |                                                                                                                                                     |
| 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                                                                                                                          |
|                   |       |                                                                                                                                                                                                                                                                                                                                                                                               |   |                                                                                                                                                     |
| 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, 2005, 2004 and 2003                                                                                                                                                                                                                                                                                                                |   | Filed  herewith as Exhibit 14.3                                                                                                                          |
|                   |       |                                                                                                                                                                                                                                                                                                                                                                                               |   |                                                                                                                                                     |
| 14.4                   |       | Consent  of Ernst & Young LLP                                                                                                                                                                                                                                                                                                                                                                  |   | Filed  herewith as Exhibit 14.4                                                                                                                          |

 

109

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| **Exhibit****Numbers** | ** ** | **Description**                                                                                                                                       |   | **Incorporation  by Reference to** |
|------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------|
|                   |       |                                                                                                                                                  |   |                               |
| 14.5                   |       | Harborside  at Atlantis Joint Venture Limited Financial Statements December 31, 2005,  2004 and 2003                                                  |   | Filed  herewith as Exhibit 14.5    |
|                   |       |                                                                                                                                                  |   |                               |
| 14.6                   |       | Consent  of Deloitte & Touche LLP (with respect to Harborside at Atlantis Joint  Venture Limited Financial Statements December 31, 2004 and 2003) |   | Filed  herewith as Exhibit 14.6    |

 

110

----

 

**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 31, 2006 | By:                           | /s/ John R. Allison |   |
|                      | Name:                         | John R.  Allison |
|                      | Title:                        | Executive  Vice President and Chief Financial  Officer |

 

111

----

 

**KERZNER INTERNATIONALLIMITED**

 

**ConsolidatedFinancial Statements as of December 31, 2005 and 2004 and for each of theThree Years in the Period Ended December 31, 2005**

 

F-1

----

 

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 
| To the Board of Directors and Shareholders of |   |   |
|-----------------------------------------------|--------|--------|
| Kerzner International Limited:                |   |   |

 

We have audited the accompanying consolidated balance sheets of KerznerInternational Limited and subsidiaries (the “Company”), as of December 31, 2005and 2004, and the related consolidated statements of operations, changes inshareholders’ equity and comprehensive income, and cash flows for each of thethree years in the period ended December 31, 2005. These consolidated financialstatements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these consolidated financialstatements based on our audits. We did not audit the consolidated financialstatements for the year ended December 31, 2005 of Harborside at Atlantis JointVenture Limited (“Harborside”), the Company’s investment in which is accountedfor by use of the equity method. The Company’s equity of $24.8 million inHarborside’s net assets at December 31, 2005 and of $16.1 million inHarborside’s net income for the year ended December 31, 2005, are included inthe accompanying consolidated financial statements. The financial statements ofHarborside were audited by other auditors whose report has been furnished tous, and our opinion, insofar as it relates to the amounts included for suchcompany, is based solely on the report of such other auditors.

 

We conducted our audits in accordance with the standards of the PublicCompany Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatement. The Company is notrequired to have, nor were we engaged to perform, an audit of its internalcontrol over financial reporting. Our audits included consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting. Accordingly, we express no such opinion. An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits and the report of otherauditors provide a reasonable basis for our opinion.

 

In our opinion, based on our audits and the report of other auditors,such consolidated financial statements present fairly, in all materialrespects, the financial position of Kerzner International Limited andsubsidiaries, as of December 31, 2005 and 2004, and the results of theiroperations and their cash flows for each of the three years in the period endedDecember 31, 2005, in conformity with accounting principles generally acceptedin the United States of America.

 

 
| /s/ DELOITTE & TOUCHE LLP |   |
|-------------------------------|--------|
|                          |
| Certified Public Accountants  |
|                          |
| Miami, Florida                |
| March 31, 2006                |

 

F-2

----

 

**KERZNER INTERNATIONAL LIMITEDCONSOLIDATED BALANCE SHEETS**

 

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

 
| ** **                                                                                                                                                                                        | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                        | ** ** | **2005**              | ** ** | **2004** | ** ** |
| **ASSETS**                                                                                                                                                                                        |       |                  |       |   |   |
| Current assets:                                                                                                                                                                                   |       |                  |       |   |   |
| Cash and cash equivalents                                                                                                                                                                         |       | $                     | 115,951    |   | $ | 180,341 |   |
| Restricted cash                                                                                                                                                                                   |       | 4,281                 |       | 2,768 |   |
| Short-term investments                                                                                                                                                                            |       | 19,969                |       | 203,940 |   |
| Accounts receivable, net                                                                                                                                                                          |       | 50,167                |       | 41,743 |   |
| Due from affiliates                                                                                                                                                                               |       | 37,164                |       | 15,682 |   |
| Inventories                                                                                                                                                                                       |       | 19,260                |       | 13,453 |   |
| Assets held for sale                                                                                                                                                                              |       | —                |       | 12,289 |   |
| Prepaid expenses and other assets                                                                                                                                                                 |       | 22,932                |       | 21,685 |   |
| Total current assets                                                                                                                                                                              |       | 269,724               |       | 491,901 |   |
|                                                                                                                                                                                              |       |                  |       |   |   |
| Property and equipment, net                                                                                                                                                                       |       | 1,647,335             |       | 1,347,640 |   |
| Intangible asset, net                                                                                                                                                                             |       | 14,695                |       | — |   |
| Due from affiliates – non-current                                                                                                                                                            |       | 9,718                 |       | 81,737 |   |
| Deferred tax asset, net                                                                                                                                                                           |       | 29,756                |       | 11,181 |   |
| Deferred charges and other assets, net                                                                                                                                                            |       | 39,882                |       | 40,678 |   |
| Restricted cash – non-current                                                                                                                                                                |       | 57,935                |       | — |   |
| Investments in associated companies                                                                                                                                                               |       | 207,577               |       | 114,138 |   |
| Total assets                                                                                                                                                                                      |       | $                     | 2,276,622  |   | $ | 2,087,275 |   |
|                                                                                                                                                                                              |       |                  |       |   |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                                                                    |       |                  |       |   |   |
| Current liabilities:                                                                                                                                                                              |       |                  |       |   |   |
| Current maturities of long-term debt                                                                                                                                                              |       | $                     | 7,689      |   | $ | 659 |   |
| Accounts payable and accrued liabilities                                                                                                                                                          |       | 195,395               |       | 168,225 |   |
| Due to affiliates                                                                                                                                                                                 |       | 4,790                 |       | 500 |   |
| Capital creditors                                                                                                                                                                                 |       | 46,065                |       | 16,032 |   |
| Total current liabilities                                                                                                                                                                         |       | 253,939               |       | 185,416 |   |
|                                                                                                                                                                                              |       |                  |       |   |   |
| Deferred revenue                                                                                                                                                                                  |       | 21,812                |       | 20,419 |   |
| Other long-term liabilities                                                                                                                                                                       |       | 10,845                |       | 7,099 |   |
| Due to affiliates – non-current                                                                                                                                                              |       | 34,884                |       | — |   |
| Long-term debt, net of current maturities                                                                                                                                                         |       | 789,617               |       | 754,129 |   |
| Total liabilities                                                                                                                                                                                 |       | 1,111,097             |       | 967,063 |   |
|                                                                                                                                                                                              |       |                  |       |   |   |
| Minority and noncontrolling interest                                                                                                                                                              |       | 3,763                 |       | 3,934 |   |
| Commitments and contingencies (Note 23)                                                                                                                                                           |       |                  |       |   |   |
| Shareholders’ equity:                                                                                                                                                                        |       |                  |       |   |   |
| Preference shares, $.001 par value,  100,000,000 authorized at December 31, 2005 and 2004; zero issued and  outstanding at December 31, 2005 and 2004                                   |       | —                |       | — |   |
| Ordinary Shares, $.001 par value,  250,000,000 authorized at December 31, 2005 and 2004; 43,573,494 and  42,971,878 issued and outstanding at December 31, 2005 and 2004,  respectively |       | 44                    |       | 43 |   |
| Capital in excess of par                                                                                                                                                                          |       | 956,185               |       | 971,952 |   |
| Retained earnings                                                                                                                                                                                 |       | 388,760               |       | 336,543 |   |
| Accumulated other comprehensive loss                                                                                                                                                              |       | (7,557                | )          | (13,898 | ) |
| Deferred compensation                                                                                                                                                                             |       | (12,901               | )          | (15,593 | ) |
|                                                                                                                                                                                              |       | 1,324,531             |       | 1,279,047 |   |
| Treasury shares, 7,072,029 shares at  December 31, 2005 and 2004                                                                                                                             |       | (162,769              | )          | (162,769 | ) |
| Total shareholders’ equity                                                                                                                                                                   |       | 1,161,762             |       | 1,116,278 |   |
|                                                                                                                                                                                              |       |                  |       |   |   |
| Total liabilities and shareholders’ equity                                                                                                                                                   |       | $                     | 2,276,622  |   | $ | 2,087,275 |   |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

F-3

----

 

**KERZNER INTERNATIONAL LIMITED****CONSOLIDATED STATEMENTS OF OPERATIONS****(Inthousands of U.S. dollars, except per share data)**

 
| ** **                                                                                       | ** ** | **For the Year Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                       | ** ** | **2005**                                 | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenue:                                                                                         |       |                                     |       |   |   |   |   |
| Gaming                                                                                           |       | $                                        | 146,010    |   | $ | 130,879 |   | $ | 138,587 |   |
| Rooms                                                                                            |       | 255,647                                  |       | 215,868 |   | 188,235 |   |
| Food and beverage                                                                                |       | 179,490                                  |       | 151,827 |   | 130,879 |   |
| Tour operations                                                                                  |       | 54,524                                   |       | 47,115 |   | 40,790 |   |
| Management, development and other fees                                                           |       | 19,355                                   |       | 19,894 |   | 15,177 |   |
| Other revenue                                                                                    |       | 90,737                                   |       | 78,536 |   | 68,424 |   |
| Gross revenue                                                                                    |       | 745,763                                  |       | 644,119 |   | 582,092 |   |
| Less: promotional allowances                                                                     |       | (24,239                                  | )          | (23,034 | ) | (23,579 | ) |
| Net revenue                                                                                      |       | 721,524                                  |       | 621,085 |   | 558,513 |   |
|                                                                                             |       |                                     |       |   |   |   |   |
| Costs and expenses:                                                                              |       |                                     |       |   |   |   |   |
| Gaming                                                                                           |       | 63,289                                   |       | 59,504 |   | 63,283 |   |
| Rooms                                                                                            |       | 42,379                                   |       | 39,949 |   | 33,395 |   |
| Food and beverage                                                                                |       | 119,513                                  |       | 104,078 |   | 89,502 |   |
| Tour operations                                                                                  |       | 46,003                                   |       | 39,994 |   | 35,406 |   |
| Other operating expenses                                                                         |       | 119,957                                  |       | 96,149 |   | 85,257 |   |
| Selling, general and administrative                                                              |       | 136,808                                  |       | 118,334 |   | 101,584 |   |
| Corporate expenses                                                                               |       | 42,569                                   |       | 38,601 |   | 36,431 |   |
| Depreciation and amortization                                                                    |       | 73,292                                   |       | 58,948 |   | 55,782 |   |
| Hurricane related expenses                                                                       |       | —                                   |       | 3,426 |   | — |   |
| Insurance recovery                                                                               |       | —                                   |       | — |   | (2,819 | ) |
| Pre-opening expenses                                                                             |       | 7,975                                    |       | 3,258 |   | — |   |
| UK gaming write off                                                                              |       | 11,179                                   |       | — |   | — |   |
| Loss (gain) on damaged assets                                                                    |       | —                                   |       | 1,194 |   | (2,514 | ) |
| (Gain on sale) impairment of Atlantic City  land                                                 |       | (1,433                                   | )          | 7,303 |   | — |   |
| Impairment of notes receivable                                                                   |       | 27,812                                   |       | — |   | — |   |
| Costs and expenses                                                                               |       | 689,343                                  |       | 570,738 |   | 495,307 |   |
|                                                                                             |       |                                     |       |   |   |   |   |
| Income from operations                                                                           |       | 32,181                                   |       | 50,347 |   | 63,206 |   |
|                                                                                             |       |                                     |       |   |   |   |   |
| Relinquishment fees – equity in earnings of  TCA                                            |       | 37,882                                   |       | 35,909 |   | 33,960 |   |
|                                                                                             |       |                                     |       |   |   |   |   |
| Other income (expense):                                                                          |       |                                     |       |   |   |   |   |
| Interest income                                                                                  |       | 9,130                                    |       | 4,722 |   | 3,394 |   |
| Interest expense, net of capitalization                                                          |       | (44,087                                  | )          | (36,814 | ) | (29,264 | ) |
| Equity in earnings (losses) of associated  companies                                             |       | 22,092                                   |       | 7,455 |   | (320 | ) |
| Gain on settlement of territorial and other  disputes                                            |       | —                                   |       | — |   | 1,479 |   |
| Loss on early extinguishment of debt                                                             |       | (27,912                                  | )          | (1,655 | ) | — |   |
| Other, net                                                                                       |       | 13                                       |       | 1,358 |   | (686 | ) |
| Other expense, net                                                                               |       | (40,764                                  | )          | (24,934 | ) | (25,397 | ) |
|                                                                                             |       |                                     |       |   |   |   |   |
| Income from continuing operations before  income taxes and minority and noncontrolling interests |       | 29,299                                   |       | 61,322 |   | 71,769 |   |
| Benefit (provision) for income taxes                                                             |       | 16,104                                   |       | (424 | ) | (162 | ) |
| Minority and noncontrolling interests                                                            |       | 6,814                                    |       | 7,234 |   | (1,340 | ) |
|                                                                                             |       |                                     |       |   |   |   |   |
| Income from continuing operations                                                                |       | 52,217                                   |       | 68,132 |   | 70,267 |   |
| Income from discontinued operations, net of  income tax effect                                   |       | —                                   |       | — |   | 1,305 |   |
|                                                                                             |       |                                     |       |   |   |   |   |
| Net income                                                                                       |       | $                                        | 52,217     |   | $ | 68,132 |   | $ | 71,572 |   |

 

F-4

----

 
| ** **                                                     | ** ** | **For the Year Ended  December 31,** | ** ** |
|----------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                     | ** ** | **2005**                                  | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                           |       |                                      |       |   |   |   |   |
| Basic earnings per share:                                      |       |                                      |       |   |   |   |   |
| Income from continuing operations                              |       | $                                         | 1.46       |   | $ | 2.09 |   | $ | 2.46 |   |
| Income from discontinued operations, net of  income tax effect |       | —                                    |       | — |   | 0.04 |   |
| Earnings per share-basic                                       |       | $                                         | 1.46       |   | $ | 2.09 |   | $ | 2.50 |   |
|                                                           |       |                                      |       |   |   |   |   |
| Weighted average number of shares  outstanding-basic           |       | 35,794                                    |       | 32,550 |   | 28,575 |   |
|                                                           |       |                                      |       |   |   |   |   |
| Diluted earnings per share:                                    |       |                                      |       |   |   |   |   |
| Income from continuing operations                              |       | $                                         | 1.39       |   | $ | 2.01 |   | $ | 2.39 |   |
| Income from discontinued operations, net of  income tax effect |       | —                                    |       | — |   | 0.05 |   |
| Earnings per share-diluted                                     |       | $                                         | 1.39       |   | $ | 2.01 |   | $ | 2.44 |   |
|                                                           |       |                                      |       |   |   |   |   |
| Weighted average number of shares  outstanding-diluted         |       | 37,667                                    |       | 33,884 |   | 29,377 |   |

 

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

 

F-5

----

 

**KERZNER INTERNATIONAL LIMITED**

**CONSOLIDATED STATEMENTS OF CHANGES INSHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME**

**For the Years Ended December 31, 2005,2004 and 2003****(****In thousands)**

 
| ** **                                                          | ** ** | ** **           | ** ** | ** **      | ** ** | ** **         | ** ** | ** **        | ** ** | **Accumulated  Other** | ** ** | ** **       | ** ** | ** **             | ** ** | **Total**          | ** ** | **Comprehensive**   | ** ** |
|---------------------------------------------------------------------|------------|----------------------|------------|-----------------|------------|--------------------|------------|-------------------|------------|------------------------|------------|------------------|------------|------------------------|------------|--------------------|------------|---------------------|------------|
| ** **                                                          | ** ** | **Ordinary  Shares** | ** ** | **Capital  in** | ** ** | **Retained**       | ** ** | **Comprehensive** | ** ** | **Deferred**           | ** ** | **Treasury**     | ** ** | **Shareholders’** | ** ** | **Income  (Loss)** | ** ** |
| ** **                                                          | ** ** | **Shares**           | ** ** | **Amount**      | ** ** | **Excess  of Par** | ** ** | **Earnings**      | ** ** | **Income  (Loss)**     | ** ** | **Compensation** | ** ** | **Shares**             | ** ** | **Equity**         | ** ** | **for the  Period** | ** ** |
|                                                                |       |                 |       |            |       |               |       |              |       |                   |       |             |       |                   |       |               |       |                |       |
| Balance at  January 1, 2003                                         |       | 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                 | )          | (2,599           | )          | (162,769               | )          | 839,590            |       | 71,970              |       |
|                                                                |       |                 |       |            |       |               |       |              |       |                   |       |             |       |                   |       |               |       |                |       |
| Translation  reserves                                               |       | —               |       | —          |       | —             |       | —            |       | 606                    |       | —           |       | —                 |       | 606                |       | 606                 |       |
| Unrealized losses  on available-for-sale securities                 |       | —               |       | —          |       | —             |       | —            |       | (639                   | )          | —           |       | —                 |       | (639               | )          | (639                | )          |
| Unrealized losses  on investment 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                | )          | (15,593          | )          | (162,769               | )          | 1,116,278          |       | 61,970              |       |
|                                                                |       |                 |       |            |       |               |       |              |       |                   |       |             |       |                   |       |               |       |                |       |
| Translation  reserves and other                                     |       | —               |       | —          |       | —             |       | —            |       | (419                   | )     | —           |       | —                 |       | (419               | )     | (419                | )          |
| Unrealized gains  on available-for-sale securities                  |       | —               |       | —          |       | —             |       | —            |       | 631                    |       | —           |       | —                 |       | 631                |       | 631                 |       |
| Unrealized gains  on investment in associated companies             |       | —               |       | —          |       | —             |       | —            |       | 7,283                  |       | —           |       | —                 |       | 7,283              |       | 7,283               |       |
| Reversal of  unrealized gains on investment in associated companies |       | —               |       | —          |       | —             |       | —            |       | (1,154                 | )          | —           |       | —                 |       | (1,154             | )          | (1,154              | )          |
| Exercise of share  options                                          |       | 679                  |       | 1               |       | 17,831             |       | —            |       | —                 |       | —           |       | —                 |       | 17,832             |       | —              |       |
| Repurchase of Ordinary  Shares                                      |       | (618                 | )          | (1              | )          | (35,942            | )          | —            |       | —                 |       | —           |       | —                 |       | (35,943            | )          | —              |       |
| Issuance of  restricted share awards                                |       | 546                  |       | 1               |       | 2,678              |       | —            |       | —                 |       | (2,678           | )          | —                 |       | 1                  |       | —              |       |
| Cancellation of  restricted share awards                            |       | (6                   | )          | —          |       | (334               | )          | —            |       | —                 |       | 334              |       | —                 |       | —             |       | —              |       |
| Amortization of  deferred compensation expense                      |       | —               |       | —          |       | —             |       | —            |       | —                 |       | 5,036            |       | —                 |       | 5,036              |       | —              |       |
| Net income                                                          |       | —               |       | —          |       | —             |       | 52,217            |       | —                 |       | —           |       | —                 |       | 52,217             |       | 52,217              |       |
| Balance at  December 31, 2005                                  |       | 43,573               |       | $               | 44         |               | $          | 956,185           |       | $                      | 388,760    |             | $          | (7,557                 | )          | $                  | (12,901    | )                   | $          | (162,769 | ) | $ | 1,161,762 |   | $ | 58,558 |   |
|                                                                     |            |                      |            |                 |            |                    |            |                   |            |                        |            |                  |            |                        |            |                    |            |                     |            |  |  |  |  |  |  |  |  |

 

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

 

F-6

----

 

**KERZNERINTERNATIONAL LIMITED**

**CONSOLIDATED STATEMENTS OF CASH FLOWS****(Inthousands of U.S. dollars)**

 
| ** **                                                                   | ** ** | **For the Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                   | ** ** | **2005**                                 | ** ** | **2004** | ** ** | **2003** | ** ** |
| Cash flows from operating activities:                                        |       |                                     |       |   |   |   |   |
| Net income                                                                   |       | $                                        | 52,217     |   | $ | 68,132 |   | $ | 71,572 |   |
| Depreciation and amortization                                                |       | 73,292                                   |       | 58,948 |   | 55,782 |   |
| Amortization of debt issuance costs,  premiums and discounts                 |       | 5,144                                    |       | 2,904 |   | 1,217 |   |
| Impairment of notes receivable                                               |       | 27,812                                   |       | — |   | — |   |
| Impairment (gain on sale) of Atlantic City  land                             |       | (1,433                                   | )          | 7,303 |   | — |   |
| Loss on early extinguishment of debt                                         |       | 27,912                                   |       | 1,655 |   | — |   |
| UK gaming write off                                                          |       | 11,179                                   |       | — |   | — |   |
| Recognition of equity-based compensation                                     |       | 5,036                                    |       | 1,796 |   | — |   |
| Loss on disposition of property and  equipment                               |       | 1,752                                    |       | 544 |   | 451 |   |
| Equity in earnings from associated  companies, net of dividends received     |       | (20,574                                  | )          | (6,163 | ) | (3,646 | ) |
| Minority and noncontrolling interests                                        |       | (7,341                                   | )          | (7,750 | ) | — |   |
| Income from discontinued operations, net of  income tax effect               |       | —                                   |       | — |   | (1,305 | ) |
| Provision for doubtful accounts                                              |       | 224                                      |       | 3,017 |   | 1,326 |   |
| Deferred income tax benefit                                                  |       | (21,479                                  | )          | (3,499 | ) | (11,732 | ) |
| Net change in working capital accounts:                                      |       |                                     |       |   |   |   |   |
| Interest income related to restricted cash                                   |       | (709                                     | )          | (1,323 | ) | 75 |   |
| Trade receivables                                                            |       | (1,821                                   | )          | (1,977 | ) | (619 | ) |
| Due from affiliates                                                          |       | 10,081                                   |       | (3,461 | ) | 7,362 |   |
| Inventories and prepaid expenses and other  assets                           |       | (4,672                                   | )          | (5,537 | ) | (2,506 | ) |
| Accounts payable and accrued liabilities                                     |       | 11,091                                   |       | 12,454 |   | 16,996 |   |
| Due to affiliates                                                            |       | 1,096                                    |       | 500 |   | — |   |
| Net change in other balance sheet accounts:                                  |       |                                     |       |   |   |   |   |
| Due from affiliates – non-current                                       |       | (253                                     | )          | (57 | ) | (598 | ) |
| Deferred charges and other assets                                            |       | (4,406                                   | )          | 741 |   | 785 |   |
| Deferred revenue                                                             |       | 2,240                                    |       | 6,451 |   | (3,376 | ) |
| Other long-term liabilities                                                  |       | 3,826                                    |       | 980 |   | 1,674 |   |
| Due to affiliates – non-current                                         |       | 3,566                                    |       | — |   | — |   |
| Loss (gain) on damaged assets                                                |       | —                                   |       | 1,194 |   | (2,514 | ) |
| Other, net                                                                   |       | 1,460                                    |       | (338 | ) | 1,199 |   |
| Net cash provided by continuing operations                                   |       | 175,240                                  |       | 136,514 |   | 132,143 |   |
| Cash provided by discontinued operations                                     |       | —                                   |       | — |   | 523 |   |
| Net cash provided by operating activities                                    |       | 175,240                                  |       | 136,514 |   | 132,666 |   |
|                                                                         |       |                                     |       |   |   |   |   |
| Cash flows from investing activities:                                        |       |                                     |       |   |   |   |   |
| Payments for property and equipment                                          |       | (198,206                                 | )          | (119,398 | ) | (50,849 | ) |
| Acquisition of land and other assets                                         |       | (43,671                                  | )          | (30,877 | ) | (20,049 | ) |
| Redemption (purchase) of short-term  investments, net                        |       | 185,236                                  |       | (204,309 | ) | — |   |
| Advances/loans to affiliates                                                 |       | (40,325                                  | )          | (78,626 | ) | (17,003 | ) |
| Repayments from affiliates                                                   |       | 13,750                                   |       | 29,200 |   | 4,950 |   |
| Acquisition of equity interest in  associated companies                      |       | (55,170                                  | )          | (69,191 | ) | — |   |
| Capital distribution from associated  companies                              |       | 7,849                                    |       | — |   | — |   |
| Cash resulting from the initial  consolidation of variable interest entities |       | 1,519                                    |       | 7,047 |   | — |   |
| Deferred contract acquisition costs                                          |       | (813                                     | )          | (1,631 | ) | (2,115 | ) |
| Deposit and purchase of land and casino  license                             |       | —                                   |       | — |   | (6,147 | ) |
| Proceeds from the sale of land, property  and equipment                      |       | 7,009                                    |       | 238 |   | 1,099 |   |
| Acquisition of tour operator, net of cash  acquired                          |       | —                                   |       | — |   | 1,384 |   |
| Repayment of notes receivable                                                |       | —                                   |       | — |   | 13,409 |   |
| Change in restricted cash                                                    |       | (58,739                                  | )          | — |   | — |   |
| Deposits and other                                                           |       | (1,205                                   | )          | — |   | 1,250 |   |
| Sale of debt and equity interest in  One&Only Kanuhura                   |       | 340                                      |       | — |   | 1,464 |   |
| Net cash used in investing activities                                        |       | (182,426                                 | )          | (467,547 | ) | (72,607 | ) |
|                                                                              |            |                                          |            |  |  |  |  |  |  |  |

 

F-7

----

 
| ** **                                                                                                                         | ** ** | **For the Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                                                         | ** ** | **2005**                                 | ** ** | **2004** | ** ** | **2003** | ** ** |
| Cash flows from financing activities:                                                                                              |       |                                     |       |   |   |   |   |
| Proceeds from issuance of debt                                                                                                     |       | 400,000                                  |       | 230,000 |   | — |   |
| Borrowings                                                                                                                         |       | 1,227                                    |       | 117,068 |   | 29,600 |   |
| Early redemption and repayment of debt                                                                                             |       | (432,102                                 | )          | (94,079 | ) | (101,898 | ) |
| Debt issuance and modification costs                                                                                               |       | (8,218                                   | )          | (14,769 | ) | (140 | ) |
| Proceeds from exercise of share options                                                                                            |       | 17,832                                   |       | 40,503 |   | 39,007 |   |
| 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                                                                                                      |       | (35,943                                  | )          | — |   | (408 | ) |
| Net cash provided by (used in) financing  activities                                                                               |       | (57,204                                  | )          | 451,142 |   | (33,839 | ) |
|                                                                                                                               |       |                                     |       |   |   |   |   |
| Increase (decrease) in cash and cash  equivalents                                                                                  |       | (64,390                                  | )          | 120,109 |   | 26,220 |   |
| Cash and cash equivalents at beginning of  period                                                                                  |       | 180,341                                  |       | 60,232 |   | 34,012 |   |
| Cash and cash equivalents at end of period                                                                                         |       | $                                        | 115,951    |   | $ | 180,341 |   | $ | 60,232 |   |
|                                                                                                                               |       |                                     |       |   |   |   |   |
| Supplemental disclosure of cash flow and  non-cash investing and financing activities:                                             |       |                                     |       |   |   |   |   |
|                                                                                                                               |       |                                     |       |   |   |   |   |
| Interest paid, net of capitalized interest  of $11.8 million, $5.8 million and $0.4 million                                        |       | $                                        | 40,907     |   | $ | 31,887 |   | $ | 27,914 |   |
|                                                                                                                               |       |                                     |       |   |   |   |   |
| Income taxes paid                                                                                                                  |       | 3,754                                    |       | 4,776 |   | 4,166 |   |
|                                                                                                                               |       |                                     |       |   |   |   |   |
| Change in fair value of interest rate swap  agreements                                                                             |       | 8,693                                    |       | 3,557 |   | 7,735 |   |
|                                                                                                                               |       |                                     |       |   |   |   |   |
| Equipment acquired under capital lease  obligations                                                                                |       | —                                   |       | 1,395 |   | — |   |
|                                                                                                                               |       |                                     |       |   |   |   |   |
| Note payable and taxes related to asset  acquisition                                                                               |       | —                                   |       | — |   | 18,500 |   |
|                                                                                                                               |       |                                     |       |   |   |   |   |
| Assets acquired and liabilities assumed,  net, excluding cash, in connection with initial consolidation of Palmilla JV,  LLC       |       | —                                   |       | 62,029 |   | — |   |
|                                                                                                                               |       |                                     |       |   |   |   |   |
| Assets acquired and liabilities assumed,  net, excluding cash, in connection with initial consolidation of Reethi Rah              |       | 4,908                                    |       | — |   | — |   |
|                                                                                                                               |       |                                     |       |   |   |   |   |
| Assets acquired and liabilities assumed,  net, excluding cash, in connection with initial consolidation of Residences  at Atlantis |       | (615                                     | )          | — |   | — |   |
|                                                                                                                               |       |                                     |       |   |   |   |   |
| Capital creditors accrued for the purchase  of property and equipment                                                              |       | 11,237                                   |       | 6,530 |   | 3,101 |   |
|                                                                                                                               |       |                                     |       |   |   |   |   |
| Contribution of the right to use land to  equity investment in Ocean Club Residences & Marina                                  |       | 19,998                                   |       | — |   | — |   |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

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**KERZNER INTERNATIONAL LIMITED**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(****amounts in tables are in thousands of U.S. dollars, except share data**)

 

**Note 1—Organizationand Basis of Presentation**

 

**Organization**

 

Kerzner International Limited (“Kerzner”), an international resort andgaming company, was incorporated in 1993 under the laws of the Commonwealth ofThe Bahamas. In these notes to our consolidated financial statements, the words“Company”, “we”, “our” and “us” refer to Kerzner together with its subsidiariesas the context may require.

 

We are a leading developer and operator of premier destination resorts,luxury resort hotels and gaming 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% equity interest in Kerzner Istithmar Limited(“Kerzner Istithmar”), which is currently developing Atlantis, The Palm, Dubai,United Arab Emirates (“Atlantis, The Palm”), and we have entered into a jointventure agreement with two partners and related development and long-termmanagement agreements for the development and operation of a destination resortcasino in Morocco. In our gaming segment (“Gaming”), we developed and earnincome from the Mohegan Sun Casino (“Mohegan Sun”) located in Uncasville,Connecticut. Our Gaming segment also includes the costs associated with thedevelopment of a casino in Northampton, England, costs associated with othergaming opportunities in the United Kingdom, equity earnings (losses) from our37.5% investment in BLB Investors, L.L.C. (“BLB”) and our 50% investment inTrading Cove New York (“TCNY”). In our One&Only resorts segment(“One&Only Resorts”), we operate ten beach resorts at locations in TheBahamas, Mauritius, Dubai, the Maldives and Mexico and have another resort thatis under development in South Africa (collectively “One&Only Resorts”).

 

During the year ended December 31, 2005, the Company consolidatedReethi Rah Resort Pvt Ltd (“Reethi Rah”) and Residences at Atlantis DevelopmentLimited (“Residences at Atlantis”) into its consolidated financial statementsas the Company has determined that it is the primary beneficiary of thesevariable interest entities in accordance with the provisions of FinancialAccounting Standards Board (“FASB”) Interpretation No. 46(R) (“FIN 46R”),“Consolidation of Variable Interest Entities”. See Note 3—Consolidation ofVariable Interest Entities for further discussion.

 

**DestinationResorts**

 

*Atlantis, Paradise Island*

* *

Through certain of our Bahamian subsidiaries, Kerzner owns and operatesAtlantis, Paradise Island, our flagship property. Atlantis, Paradise Island isan ocean-themed destination resort located on Paradise Island, The Bahamas.Atlantis, Paradise Island features three interconnected hotel towers builtaround a lagoon and an extensive marine environment that includes an open-airmarine habitat.

 

In 1999, Kerzner formed a joint venture with Starwood VacationOwnership (“Starwood Vacation”) (formerly Vistana, Inc.), a subsidiary ofStarwood Hotels and Resorts Worldwide Inc., to develop a timeshare projecton Paradise Island adjacent to Atlantis, Paradise Island (“Harborside atAtlantis”). Starwood Vacation and the Company each own a 50% interest inHarborside at Atlantis. In 2004, we announced an expansion of Harborside atAtlantis, which included the addition of timeshare units between the Nassauharbor and the Marina at Atlantis. The Company’s share of earnings 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 for marketing and for administrative anddevelopment services provided to Harborside at Atlantis, which are included inmanagement, development and other fees in the accompanying consolidatedstatements of operations.

 

In May 2003, the Company entered into a “Heads of Agreement” with theBahamian Government with respect to the Phase III expansion (“Phase III”) onParadise Island. In May 2004 and December 2004, we entered intosupplements to the Heads of Agreement, pursuant to which we modified certaincomponents involved in the Phase III expansion, which includes a luxury all-suitehotel, expanded water attractions and a condominium-hotel. Certain

 

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elements of the Phase III expansion commenced in 2003, includingconstruction of five new restaurants and additional retail space (“MarinaVillage”) and the completion of three luxury villas (“Ocean Club Villas”) atOne&Only Ocean Club (“Ocean Club”). The Ocean Club Villas were completed inJune 2004 and the Marina Village was completed in July 2005. Under the Heads ofAgreement, the Company has committed to substantially complete the all-suitehotel by December 2006. The Heads of Agreement also contemplates thecompletion of the Residences at Atlantis condominium-hotel project during 2007.See Note 23—Commitments and Contingencies—Heads of Agreement for furtherdiscussion.

 

In December 2004, the Company announced the development of theOcean Club Residences & Marina (“Ocean Club Residences”), an ultra-luxurycondominium project at the Ocean Club Estates, a residential developmentadjacent to the Ocean Club Golf Course. We have formed a joint venture with aBahamian partner for this project and anticipate completion in 2007. TheCompany commenced pre-sales and development of the Ocean Club Residences &Marina in the second quarter of 2005. The Company’s share of earnings fromOcean Club Residences are included in equity in earnings (losses) of associatedcompanies in the accompanying consolidated statements of operations.

 

On August 30, 2005, the Company entered into a joint venture,Residences at Atlantis, with Turnberry Associates L.P. (“Turnberry”) to developThe Residences at Atlantis, a condominium-hotel located adjacent to Atlantis,Paradise Island. As of this date, the Company determined that it was theprimary beneficiary of the joint venture in accordance with the provisions ofFIN 46R and consolidated Residences at Atlantis into its consolidated financialstatements. See Note 3—Consolidation of Variable Interest Entities for furtherdiscussion.

 

*Atlantis, The Palm*

* *

In September 2003, we announced that we had agreed to form a jointventure with Nakheel LLC (“Nakheel”), an entity owned by the Royal Family ofDubai, 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 to develop Atlantis, The Palm located onThe Palm, Jumeirah, a land reclamation project in Dubai. Atlantis, The Palmwill include an ocean-themed destination resort and an extensive water parksituated on beachfront property. The Company has agreed to invest $200.0million in the form of common stock in Kerzner Istithmar.

 

Construction of Atlantis, The Palm commenced in 2005 and the Companyanticipates that the project will be completed in late 2008. As part of thistransaction, the Company entered into a long-term management agreement with thejoint venture that entitles the Company to receive a base management fee basedon the gross revenue generated by Atlantis, The Palm, and an incentivemanagement fee based on operating income. The Company also entered into adevelopment agreement with the joint venture that entitles it to receive$20.0 million and reimbursement of certain expenses over the developmentperiod. The Company currently has a 50% ownership interest in Kerzner Istithmarand as such, we expect to recognize $10.0 million, or 50%, in development feesover the development period.

 

*Morocco*

* *

In July 2004, we announced that we and two local Moroccan companies,Société Maroc Emirates Arabs Unis de Développement (“SOMED”) and Caisse deDépôt et de Gestion (“CDG”), had entered into an agreement with the Governmentof the Kingdom of Morocco for the development and management of a destinationresort casino in Morocco through the formation of a joint venture of which weown 50%. In the second quarter of 2005 we, SOMED and CDG entered into a jointventure agreement and related development and long-term management agreementsfor the development and operation of this resort. We expect to commenceconstruction of the project in 2007 and to complete the project in 2009.

 

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**Gaming**

 

*Mohegan Sun*

* *

We own a 50% interest in, and are a managing partner of, Trading CoveAssociates (“TCA”), a Connecticut general partnership that developed and, untilJanuary 1, 2000, managed Mohegan Sun, a casino and entertainment complexin Uncasville, Connecticut. TCA managed Mohegan Sun from its opening inOctober 1996 to December 31, 1999 pursuant to a management agreement(the “Management Agreement”). In 1998, the Mohegan Tribal Gaming Authority, aninstrumentality of the Mohegan Tribe of Indians of Connecticut (the “MoheganTribe”) appointed TCA to develop a $1.0 billion expansion of Mohegan Sunfor a development fee of $14.0 million. In addition, TCA and the MoheganTribe entered 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.

 

Pursuant to the Relinquishment Agreement, the Management Agreement wasterminated and, commencing January 1, 2000, TCA receives payments of 5% ofthe gross revenues of Mohegan Sun for a 15-year period, including revenuegenerated by Mohegan Sun’s 1998 expansion that was completed in 2002. Revenuesare defined in the Relinquishment Agreement as gross gaming revenues (otherthan Class II gaming revenue, i.e., bingo) and all other facilityrevenues. Such revenue includes hotel revenues, food and beverage sales,parking revenues, ticket revenues and other fees or receipts from theconvention/events center in the Mohegan Sun expansion and all rental or otherreceipts from lessees, licensees and concessionaires operating in the facility,but not the gross receipts of such lessees, licensees and concessionaires. Suchrevenues exclude revenues generated by any future expansion of the Mohegan Sun.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 ofcertain expenses and the return of certain capital contributions) pursuant tothe Relinquishment 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 itsexpansion of Mohegan Sun pursuant to a development services agreement (the “TCADevelopment Agreement”). In turn, TCA subcontracted with an affiliate of theCompany pursuant to a subcontract development services agreement (the“Subcontract Agreement”), which was later assigned to the Company. Inconsideration for the services provided under the Subcontract Agreement, TCApaid a fee to the Company. These fees are included within management,development and other fees in the accompanying consolidated statements ofoperations for the year ended December 31, 2003.

 

We are one of two managing partners of TCA. All decisions of themanaging partners require the concurrence of us and the other managing partner,Waterford Gaming, L.L.C. In the event of a deadlock, there are mutual buy-outprovisions.

 

The Company’s investment in TCA is reflected within investments inassociated companies in the accompanying consolidated balance sheets. Equityearnings from TCA are reflected within relinquishment fees—equity in earningsof TCA in the accompanying consolidated statements of operations.

 

*Investment in BLB*

* *

In March 2004, we announced that we entered into a joint venture, BLB,with an affiliate of Starwood Capital Group Global, L.L.C. (“Starwood Capital”)and an affiliate of Waterford Group, L.L.C. (“Waterford”) for the purpose ofacquiring an interest in Wembley plc (“Wembley”), which owned gaming and trackoperations in the United States and owns race tracks in the United Kingdom. Asof December 31, 2004, BLB had a 22.2% ownership interest in Wembley. TheCompany and Starwood each have a 37.5% ownership interest in BLB and Waterfordowns the remaining 25%.

 

In July 2005, BLB acquired the U.S. operations of Wembley in RhodeIsland and Colorado for approximately $464.0 million. These operations includedWembley’s flagship property, Lincoln Park in Rhode Island, a

 

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greyhound racetrack with video lottery terminals. See Note 4—BusinessAcquisitions and Dispositions for further discussion.

 

*Trading Cove New York*

* *

Through Kerzner New York, Inc. (“KNY”), a wholly-owned subsidiary,we own 50% of TCNY. TCNY is managed by KNY and Waterford Development New York,LLC. In March 2001, TCNY entered into a development services agreement(the “TCNY Development Agreement”) with the Stockbridge-Munsee band of MohicanIndians (“Stockbridge-Munsee Tribe”) for the development of a casino (the“Catskills Project”) in the Catskills region of the State of New York (forpurposes of this section, the “State”). The TCNY Development Agreement wasamended and restated in February 2002 and subsequently amended in Octoberand December 2004. The Stockbridge-Munsee Tribe does not currently havereservation land in the State but is federally recognized and operates a casinoon 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-MunseeTribe and the State entered into the “Agreement of Settlement and Compromise toResolve the Stockbridge-Munsee Land Claims in the State of New York” (the “NYSettlement Agreement”).

 

The New York Settlement Agreement provided that it would automaticallyterminate on September 1, 2005 in the event key approvals and authorizinglegislation were not obtained, subject to extension by the mutual writtenconsent of the parties. As of September 1, 2005, many of the key approvals andauthorizing legislation had not been obtained, and the New York SettlementAgreement was not extended by the parties. Two recent court decisions haveimpacted the effectuation of the settlement and the State’s general strategy indealing with Native American land claims, including the Stockbridge-MunseeTribe’s land claim. The Company can make no representation as to whether theCatskills Project will be completed.

 

Pursuant to the TCNY Development Agreement, as amended, TCNY wouldprovide preliminary funding, certain financing and exclusive developmentservices to the Stockbridge-Munsee Tribe in conjunction with the CatskillsProject. If the Catskills Project is approved and ultimately developed, TCNYwill earn a development fee in an amount equal to 5% of gross revenues as compensationfor these services (subject to certain priorities), as defined in the TCNYDevelopment Agreement, beginning with the opening of the Catskills Project andcontinuing 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 TrustApplication with the U.S. Department of the Interior, Bureau of Indian Affairs(the “BIA”), for the Catskills Project site properties. Should the BIA approvethe Land 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 investment in TCNY is reflected within investments inassociated companies in the accompanying consolidated balance sheets. Equitylosses from TCNY are reflected within equity in earnings (losses) of associatedcompanies in the accompanying consolidated statements of operations.

 

**One&OnlyResorts**

 

Our One&Only Resorts business consists of a collection of managedand/or owned/partially-owned premier luxury resort properties that primarilyoperate in the five-star, deluxe-end of the market. In December 2002, weintroduced our One&Only brand for certain of our luxury resort properties.These One&Only managed properties are located in The Bahamas, Mauritius,the Maldives, Dubai and Mexico. We are also planning a proposed property,One&Only Cape Town (“Cape Town”), located in the Victoria & AlfredWaterfront in Cape Town, South Africa.

 

We manage the resorts in Mauritius, Dubai, the Maldives and Mexicounder long-term management and marketing agreements and receive management andmarketing fees based upon percentages of the revenue and

 

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adjusted gross operating profits of these properties. Such amountsrelated to management and marketing fees from resorts in Mauritius, Dubai andthe Maldives are included in management, development and other fees in theaccompanying consolidated statements of operations. Our share of earnings orlosses resulting from our ownership interests in Mauritius and One&OnlyKanuhura in the Maldives are included in equity in earnings (losses) ofassociated companies in the accompanying consolidated statements of operations.

 

*The Bahamas*

* *

In Paradise Island, The Bahamas, we own and operate the Ocean Club, ahigh-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,oceanfront home sites situated around the golf course. As part of the Phase IIIexpansion, we completed the development of three luxury villas during 2004.

 

*Mauritius*

* *

In Mauritius, we manage and own interests in five beach resorts(“Mauritius Resorts”) including One&Only Le Saint Géran Hotel, One&OnlyLe Touessrok Hotel, La Pirogue Hotel, Le Coco Beach Hotel and Sugar BeachResort. As of December 31, 2005, we owned a 20.4% interest in Sun ResortsLimited (“SRL”), the company that owns the Mauritius Resorts.

 

*The Maldives*

* *

In the Maldives, located approximately 600 miles southwest of thesouthern tip of India, we manage and own an interest in One&Only Kanuhura(“Kanuhura”), a luxury resort located on Lhaviyani Atoll. EffectiveAugust 1, 2001, we acquired a 25% ownership interest in Kanuhura forapproximately $3.8 million. Effective January 1, 2003, we reduced ourownership interest to 20%, and as of January 1, 2005, this interest wasfurther reduced to 18.75%.

 

During 2002, we entered into management and development agreements forOne&Only Maldives at Reethi Rah (“One & Only Maldives at Reethi Rah”),a luxury resort on North Male Atoll, which opened on May 1, 2005. Although theCompany does not have any equity ownership interest in Reethi Rah, the entitythat owns and operates the resort, we have determined that Reethi Rah is avariable interest entity that is subject to consolidation in accordance withthe provisions of FIN 46R. See Note 3—Consolidation of Variable InterestEntities for further discussion.

 

See Note 17—Related Party Transactions—Mauritius Resorts for discussionof an agreement with SRL entered into in connection with the management of theresorts in Mauritius and the Maldives.

 

*Dubai*

* *

In Dubai, we manage One&Only Royal Mirage (“Royal Mirage”). Underthe terms of the management agreement, we receive management fees based on apercentage of the revenue and gross operating profits of the Royal Mirage.

 

*Mexico*

* *

We own a 50% interest in Palmilla JV, LLC (“Palmilla”), which operatesOne&Only Palmilla, a deluxe five-star One&Only property located nearCabo San Lucas in Baja, Mexico. As of January 1, 2004, pursuant to ouradoption of FIN 46R, we determined that Palmilla, a previously unconsolidatedequity method investment, must be consolidated as the operating agreementcontains a provision which gives our 50% joint venture partner the right tocause us to acquire its 50% interest. We entered into long-term management anddevelopment agreements related to the property that will expire in 2022. InJanuary 2004, Palmilla completed an expansion project that increased the roomcount and significantly upgraded the amenities and public areas offered by theresort.

 

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*Cape Town*

* *

In South Africa, we have a luxury resort under development, Cape Town,which we intend to manage as a One&Only property located at theVictoria & Alfred Waterfront in Cape Town, South Africa. In the firstquarter of 2006, we acquired an equity ownership interest and entered intomanagement and development agreements in connection with Cape Town. We arecurrently evaluating whether the joint venture should be consolidated in 2006in accordance with the provisions of FIN 46R.

 

**Note 2—Summaryof Significant Accounting Policies**

 

*Principles ofConsolidation*

* *

The accompanying consolidated financial statements include the accountsof Kerzner, its subsidiaries and variable interest entities subject toconsolidation pursuant to FIN 46R. All significant intercompany transactionsand balances have been eliminated in consolidation.

 

*Use of Estimates*

* *

The preparation of consolidated financial statements in conformity withaccounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the consolidated financial statements. Theseestimates and assumptions also affect the reported amounts of revenue and costsand expenses during the reporting period. On a regular basis, managementevaluates its estimates. Actual results could differ from those estimates.

 

We provide allowances for doubtful accounts arising from casino, hoteland other services and amounts due from affiliates, which are based upon aspecific review of outstanding receivables. In determining the amounts of theallowances, we are required to make certain estimates and assumptions. Accrualsfor potential liabilities related to any lawsuits or claims brought against us,calculation of inventory provisions, determination of fair value of employeestock options to determine compensation expense for disclosure purposes, fairvalues of financial instruments and guarantees, purchase price allocations,calculation of income tax liabilities and contingencies, valuation allowance ondeferred tax assets, percentage-of-completion calculations, recoverability oflong-lived assets and goodwill and realizability of notes receivable and otherliabilities require that we apply significant judgment in determining theappropriate assumptions for use in the calculation of financial estimates. Wealso must estimate the useful lives assigned to our assets. Actual results maydiffer from the estimates and assumptions.

 

*Cash Equivalents andRestricted Cash*

* *

We consider all of our short-term money market securities, purchasedwith original maturities of three months or less, to be cash equivalents. As ofDecember 31, 2005, restricted cash—non-current primarily relates to restrictedcash held in accordance with Atlantis, The Palm’s financing agreements andcurrent restricted cash primarily represents amounts held in relation toPalmilla’s debt. As of December 31, 2004, restricted cash primarilyrelated to restricted cash held in relation to Palmilla’s debt and letters ofcredit for one of our tour operators.

 

*Short-Term Investments*

* *

Short-term investments consist of U.S. Treasury Bills (“T-Bills”) withreadily determinable fair values. 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 reported as aseparate component of comprehensive income (loss) in shareholders’ equity.

 

*Accounts Receivable, Duefrom Affiliates and Credit Risk*

* *

Financial instruments that potentially subject the Company to creditrisk consist principally of gaming accounts receivable and notes receivablefrom affiliates. The Company issues markers to approved casino customersfollowing background checks and investigations of creditworthiness. AtDecember 31, 2005, a substantial portion of the Company’s receivables weredue from customers residing in the United States. We also had receivables duefrom customers residing in other foreign countries. Business or economicconditions or other significant events in

 

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these countries could affect the collectibility of these receivables.Due from affiliates consist of amounts due from related parties that primarilyarise from construction funding made by the Company to assist in the financingof development projects.

 

Accounts receivable, including gaming and hotel receivables, aretypically non-interest bearing and are initially recorded at cost. Accounts arewritten off when management deems the account to be uncollectible. Recoveriesof accounts previously written off are 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 allowance is estimated based on specific review ofcustomer accounts as well as historical collection experience and currenteconomic and business conditions.

 

*Inventories*

* *

Inventories are carried at the lower of cost (on a first-in, first-outbasis) or market value. Inventories consist primarily of food and beverages,operating supplies, retail and other items. Provisions are made, as necessary,to reduce excess or obsolete inventories to their estimated net realizablevalue.

 

*Assets Held for Sale*

* *

Assets held for sale as of December 31, 2004 consisted of $5.4million of undeveloped real estate which we owned in Atlantic City and hadrecorded an impairment of $7.3 million during 2004 and $6.9 million ofreal estate at the Ocean Club Estates. During the year ended December 31, 2005,the Company completed the sale of its real estate in Atlantic City, resultingin a gain of $1.4 million.

 

During the year ended December 31, 2005, the Company sold $2.4 millionof the real estate held for sale at the Ocean Club Estates, resulting in a lossof $0.1 million and also recorded a write-down on real estate of $2.2 million.These amounts are included within other operating expenses in the accompanyingconsolidated statement of operations. The remaining $2.3 million of Ocean Clubreal estate has been reclassified to property and equipment, net as of December31, 2005.

 

*Property and Equipmentand Depreciation*

* *

Property and equipment is stated at cost and its components (other thanland) are depreciated over the estimated useful lives reported below using thestraight-line method. Buildings at One&Only Maldives at Reethi Rah aredepreciated over 25 years, which represents the term of the land lease for theisland on which the property is located. Leasehold improvements are amortizedover the shorter of the lease term or the estimated useful lives of theimprovements.

 
| Buildings                           |   | 25-40 years |   |
|-------------------------------------|--------|-------------|--------|
| Land  improvements and utilities    |   | 14 years    |   |
| Furniture,  machinery and equipment |   | 3-10 years  |   |

 

Expenditures for renewals and betterments, which increase the estimateduseful life or capacity of the assets, are capitalized; expenditures forrepairs and maintenance are expensed when incurred. Gains or losses ondispositions of property and equipment are included in other operating expensesin the accompanying consolidated statements of operations. Construction inprogress relates to assets not yet placed in service and are not currentlybeing depreciated.

 

For redevelopment of existing operating properties, the net book valueof the existing property under redevelopment plus the cost for the constructionand improvements incurred in connection with the redevelopment are capitalizedto the extent the capitalized costs of the property do not exceed the estimatedfair value of the redeveloped property when complete.  If the total costof the redeveloped property, including the undepreciated net

 

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book value of the property carried forward, exceeds the estimated fairvalue of redeveloped property, the excess is charged to expense.  For theyear ended December 31, 2005, the total amount of undepreciated book valuecarried forward on redeveloped properties was $3.5 million.

 

*Intangible Asset*

* *

Reethi Rah has entered into a long-term land lease with the governmentof the Republic of the Maldives for the land on which One&Only Maldives atReethi Rah is constructed. This land lease was valued using the businesscombination principles under Statement of Financial Accounting Standards(“SFAS”) No. 141, “Business Combinations” (“SFAS 141”) and wasconsolidated at fair value in accordance with FIN 46R on May 1, 2005. The fairvalue of the land lease was estimated to be $15.1 million and its net bookvalue is $14.7 million at December 31, 2005, after the effect of accumulatedamortization of $0.4 million. The land lease is being amortized over the termof the lease of 25 years and the Company expects to record $0.6 million ofamortization expense each year from 2006 through 2029. Amortization expense ofthis intangible asset was $0.4 million for the year ended December 31, 2005.

 

*Capitalized Interest*

* *

The Company capitalizes interest costs associated with debt incurred inconnection with major construction projects and capital contributions to equitymethod investees who utilize such funds for construction-related activities.When debt is not specifically identified as being incurred in connection with aconstruction project, the Company capitalizes interest on amounts expended onthe project at the Company’s average cost of borrowed capital. Capitalizationof interest ceases when a project is substantially complete or constructionactivities have ceased. The amounts capitalized during the years endedDecember 31, 2005, 2004 and 2003 were $11.8 million, $5.8 million and$0.4 million, respectively.

 

*Software and DevelopmentCosts*

* *

The Company capitalizes purchased software that is ready for serviceand development costs for software incurred from the time the preliminaryproject stage is completed until the software 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 includeonly:  (i) external direct costs ofmaterials and services consumed in developing or obtaining internal-usesoftware, and (ii) payroll and payroll-related costs for employees who aredirectly associated with and who devote time to the internal-use softwareproject. Capitalization of such costs ceases no later than the point at whichthe project is substantially complete and ready for its intended purpose. As ofDecember 31, 2005, $2.7 million of these costs were capitalized andprimarily related to upgrades to our customer database. As of December 31,2004, $8.3 million of these costs were capitalized and primarily relatedto upgrades to our Bahamian tour operator’s reservation system which was placedin service in 2005.

 

*Impairment of Long-LivedAssets*

* *

The Company reviews its long-lived assets other than goodwill forimpairment whenever events or changes in circumstances indicate that thecarrying amount of an asset may not be recoverable. If an asset is still underdevelopment, the analysis includes the remaining construction costs. If suchreview indicates that an asset may not be recoverable, an impairment loss isrecognized for the excess of the carrying amount over the fair value of anasset to be held and used or over the fair value less cost to sell of an assetto be disposed or sold. For the year ended December 31, 2005, the Company hasdetermined that none of its long-lived assets were impaired, except for certainreal estate at the Ocean Club Estates, as discussed above in “Assets Held forSale”. The Company determined that for the year ended December 31, 2004,none of its long-lived assets were impaired, except for a portion of land inAtlantic City, as further discussed in Note 9—Property and Equipment, net.

 

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*Loan Impairment*

* *

The Company applies SFAS No. 114, “Accounting by Creditors for Impairmentof a Loan” (“SFAS 114”) and SFAS No. 118, “Accounting by Creditors forImpairment of a Loan-Recognition and Disclosures, an amendment of SFAS No.114”, when determining if a loan is impaired. Under the provisions of thesestandards, the Company records a loan impairment when, based on currentinformation and events, it is probable that the Company will be unable tocollect all amounts due according to the contractual terms of the loanagreement. For collateralized loans, impairment is measured based on the fairvalue of the underlying collateral. See Note 17—Related Party Transactions, fora discussion of the Company’s $27.8 million impairment of notes receivablerecorded during the year ended December 31, 2005.

 

*Debt Issuance Costs*

* *

The Company incurs discounts, structuring fees and other costs inconnection with its issuance of debt 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 associated companies represent investments in which theCompany maintains an interest in excess of 20% but less than or equal to 50%and/or has significant influence over the investee. These investments areaccounted for in accordance with the equity method of accounting, under whicheach investment is reported at cost and the carrying amount of the investmentis adjusted by the Company’s proportionate share of the income or loss,including other comprehensive income or loss, less dividends received, of theinvestee since its acquisition. In certain instances, the Company’s investmentbalance also includes interest capitalized during construction, as appropriate.Differences, if any, between the Company’s carrying value and the underlyingequity in the net assets of the investee are accounted for as if the investeewere a consolidated subsidiary.

 

*Goodwill*

* *

Goodwill consists of amounts associated with certain investments inassociated companies accounted for under the equity method of accounting. Thisequity method goodwill is included in investments in associated companies andwas $7.9 million as of December 31, 2005 and 2004. The Companyassesses its equity method goodwill for impairment whenever events or changesin circumstances may indicate that the carrying amount of the related equityinvestment amount may not be recoverable. We have determined that there was noimpairment as of December 31, 2005 and 2004.

 

*Capital Creditors*

* *

Capital creditors represent amounts due to vendors for capitalimprovement and construction related projects.

 

*Fair Value of Guarantees*

* *

In accordance with FASB 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 equal to an estimate of the guarantee’sfair value for the obligations we have undertaken in issuing the guarantee,including its ongoing obligation to stand ready to perform over the term of theguarantee in the event that the specified triggering events or conditionsoccur. See Note 23—Commitments and Contingencies—Guarantees for the Company’sdisclosures regarding the fair value of guarantees.

 

*Accumulated OtherComprehensive Income (Loss)*

* *

Financial statements of foreign entities in which the Company maintainsan investment are prepared in their respective local currencies and translatedinto U.S. dollars at the current exchange rates for assets and liabilities andan average rate for the year for revenue and expenses. Net gains or lossesresulting from the translation of foreign financial statements are charged orcredited to the translation reserves component of accumulated other

 

F-17

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comprehensive income (loss). Other comprehensive income (loss) has notax impact as it relates to translation reserves on investments owned byforeign entities that are not subject to taxation. Other comprehensive income(loss) also includes unrealized holding gains or losses, net of income taxes,relating to the Company’s investments in available for sale securities andunrealized gains and losses (and the reversal of such gains and losses uponsale) relating to the change in the fair value of available for sale securitiesheld by BLB including foreign currency effects. Translation reserves and otheralso includes the change in fair value of interest rate swaps relating to BLB.

 

As of December 31, 2005 and 2004, accumulated other comprehensive lossconsisted of the following:

 
| ** **                                                          | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                          | ** ** | **2005**              | ** ** | **2004** | ** ** |
|                                                                |       |                  |       |   |   |
| Translation reserves and other                                      |       | $                     | (7,549     | ) | $ | (7,130 | ) |
| Unrealized losses on available-for-sale  securities                 |       | (8                    | )          | (639 | ) |
| Unrealized gains (losses) on investment in  associated companies    |       | 1,154                 |       | (6,129 | ) |
| Reversal of unrealized gains on investment in  associated companies |       | (1,154                | )          | — |   |
|                                                                |       | $                     | (7,557     | ) | $ | (13,898 | ) |

 

*Treasury Stock*

* *

Ordinary Shares (the “Ordinary Shares”), which were repurchased andheld in treasury, are stated at cost in the accompanying consolidated balancesheets.

 

*Revenue Recognition*

* *

We recognize the net win from casino gaming activities (the differencebetween gaming wins and losses) as gaming revenue with liabilities recognizedfor funds deposited by patrons before gaming play occurs and for chips in thepatrons’ possession, both of which are included in gaming-related deposits andliabilities.

 

Rooms, food and beverage, and other operating revenue are recognized asservices are performed. Advance deposits on rooms are deferred and included inhotel advanced deposits and other deposits and unearned revenues withinaccounts payable and accrued liabilities until services are provided to thecustomer. Golf initiation fees are deferred upon receipt and then amortizedinto revenue on a straight-line basis over their average estimated membership.The retail value of accommodations, food and beverage, and other servicesfurnished to hotel and casino guests without charge is included in grossrevenue and then deducted as promotional allowances. (See “PromotionalAllowances” below for further discussion.)

 

Revenue and expenses from tour operations include the sale of traveland leisure packages and are recognized on the day the travel package begins.Amounts collected in advance from guests are deferred and included in customerdeposits and unearned revenues within accounts payable and accrued liabilitiesuntil such amounts are earned.

 

Revenue generated from construction services performed pursuant to theterms of development agreements are recognized on the percentage-of-completionbasis in accordance with SOP 81-1, “Accounting for Performance of Construction-Typeand Certain Production-Type Contracts”. The percent complete and the amountearned at the end of each accounting period is determined by the percentage ofcosts incurred on the project at the end of each period as a percentage of thetotal estimated costs of the project. The Company accounts for revisions inestimated project costs by recording a cumulative catch-up of recognizedrevenue. The impact of such revisions was not material during the year endedDecember 31, 2005. Development fees earned are included in management, developmentand other fees in the accompanying consolidated statements of operations.

 

F-18

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Management, development and other fees include amounts charged tounconsolidated affiliates for hotel management, executive management andproject consulting and are recognized when the services have been rendered andthe appropriate revenue recognition criteria have been met.

 

Other revenue primarily represents incidental revenues generated fromhotel and golf operations at our consolidated properties, including retailshops, guest activities, telephone, the Marina at Atlantis, utilities andcancellations. Rental revenue associated with operating leases from retailestablishments is included in other revenue and is recognized on a straight-linebasis commencing on the date that the lessor is granted access to the spacewith rental holiday periods being recorded as a deferred rent asset in deferredcharges and other assets, net and amortized over the lease term as a reductionto rental revenue. Rental revenue associated with leases that containcontingent rental provisions based on a percentage of sales are recognized inthe period in which specific levels have been achieved. Other revenue alsoincludes the revenue recognized from a settlement payment from a significantshareholder. For additional information, see Note 20—Gain on Settlement ofTerritorial and Other Disputes. The detail of other revenue is as follows:

 
| ** **                                 | ** ** | **For the Year Ended December 31,** | ** ** |
|--------------------------------------------|------------|------------------------------------------|------------|
| ** **                                 | ** ** | **2005**                                 | ** ** | **2004** | ** ** | **2003** | ** ** |
| Retail shops                               |       | $                                        | 16,208     |   | $ | 14,997 |   | $ | 12,347 |   |
| Golf revenue                               |       | 14,147                                   |       | 11,806 |   | 7,608 |   |
| Guest activities                           |       | 11,068                                   |       | 8,726 |   | 8,701 |   |
| Telephone                                  |       | 9,262                                    |       | 10,464 |   | 10,543 |   |
| Marina at Atlantis                         |       | 7,777                                    |       | 4,805 |   | 4,549 |   |
| Rental                                     |       | 7,750                                    |       | 6,341 |   | 6,946 |   |
| Utilities                                  |       | 7,441                                    |       | 6,933 |   | 6,689 |   |
| Revenue recognized from settlement payment |       | 3,487                                    |       | 3,375 |   | 3,268 |   |
| Cancellations                              |       | 3,053                                    |       | 4,744 |   | 3,257 |   |
| Other hotel revenue                        |       | 10,544                                   |       | 6,345 |   | 4,516 |   |
|                                       |       | $                                        | 90,737     |   | $ | 78,536 |   | $ | 68,424 |   |

 

*Promotional Allowances*

* *

The retail value of accommodations, food, beverage and other servicesprovided to customers without charge is included in gross revenue and deductedas promotional allowances. The estimated departmental costs of providing suchpromotional allowances are included in gaming costs and expenses as follows:

 
| ** **         | ** **   | **For the Year Ended December 31,** | ** **   |
|--------------------|--------------|------------------------------------------|--------------|
| ** **         | ** **   | **2005**                                 | ** **   | **2004** | ** ** | **2003** | ** ** |
| *** ***       | *** *** | *** ***                             | *** *** | *** *** | *** *** | *** *** | *** *** |
| Rooms              |         | $                                        | 2,291        |   | $ | 2,285 |   | $ | 2,363 |   |
| Food and  beverage |         | 6,673                                    |         | 6,340 |   | 6,727 |   |
| Other              |         | 326                                      |         | 367 |   | 441 |   |
|               |         | $                                        | 9,290        |   | $ | 8,992 |   | $ | 9,531 | *** *** |

 

*Rental Expense*

* *

The Company has various lease agreements for office space as well as aland lease in connection with the One&Only Maldives at Reethi Rah. Rentalexpense associated with operating leases is recognized on a straight-line basisover the lease term. For tenant improvement allowance and other leaseincentives, the Company records the current portion of the deferred rentliability in

 

F-19

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accounts payable, the remaining portion in other long-term liabilitiesand amortizes the deferred rent over the term of the lease as a reduction torent expense.

 

*Advertising Expense*

* *

We expense advertising costs as incurred. Advertising expense was $18.5million, $15.1 million, and $16.1 million for the years endedDecember 31, 2005, 2004 and 2003, respectively, and is included inselling, general and administrative expenses in the accompanying consolidatedstatements of operations.

 

*Foreign Currency*

* *

Transactions denominated in foreign currencies are recorded in localcurrency at actual exchange rates at 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. Anygains or losses arising on monetary assets and liabilities from a change inexchange rates subsequent to the date of the transaction have been included incorporate expenses in the accompanying consolidated statements of operations.These amounts were not significant for the years ended December 31, 2005,2004 and 2003.

 

The financial statements of our equity method investees and certainforeign subsidiaries are translated from their respective local currencies intoU.S. dollars using current and historical exchange rates. Translation adjustmentsresulting from this process are reported separately and accumulated as acomponent of accumulated other comprehensive income (loss) in shareholders’equity in the accompanying consolidated balance sheets. Upon sale orliquidation of our investments, the translation adjustment would be reported aspart of the gain or loss on sale or liquidation. We do not have operationslocated in countries with highly inflationary economies.

 

*Hurricane RelatedExpenses*

* *

Hurricane related expenses primarily consist of clean up and repaircosts and complimentary goods and services to guests associated with HurricaneFrances at the Company’s Paradise Island properties.

 

*Insurance Recovery*

* *

Insurance recovery represents proceeds received for businessinterruption amounts relating to Hurricane Michelle, which were recorded whenrealized.

 

*Pre-Opening Expenses*

* *

Pre-opening expenses are charged to expense as incurred. Costsclassified as pre-opening expenses include payroll, outside services,advertising and other expenses incurred prior to the commencement of newoperations. Pre-opening expenses of $8.0 million in the accompanyingconsolidated statement of operations for the year ended December 31, 2005primarily represent costs incurred relating to the Marina Village at Atlantisand the Phase III expansion.

 

Pre-opening expenses for the year ended December 31, 2004 representcosts incurred prior to the June 2004 opening of the One&Only Ocean Clubexpansion and Palmilla’s grand re-opening event in February 2004. During theyear ended December 31, 2003, we did not incur any pre-opening expenses.

 

*Loss (Gain) on DamagedAssets*

* *

Loss on damaged assets represents the write off of assets damagedduring Hurricane Frances. Gain on damaged assets represents insurance proceedsreceived in excess of the net book value of assets damaged during HurricaneMichelle.

 

*Costs of Management andDevelopment Agreements*

* *

The Company expenses any costs incurred relating to the pursuit ofbusiness acquisitions while the potential acquisition process is ongoing. Whenthe Company enters into a definitive agreement in connection with a

 

F-20

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management or development agreement, certain direct incremental costsrelated to the acquisition of the agreement and paid to third parties aredeferred and amortized to expense or recorded as a reduction to the relatedrevenue, as appropriate, over the terms of the underlying agreements. Suchcosts are deferred only when the income on such contracts is expected to exceedthe related costs incurred and the related project is considered probable.Deferred contract acquisition costs are included in deferred charges and otherassets, net in the accompanying consolidated balance sheets.

 

*Income Taxes*

* *

We are subject to income taxes in various jurisdictions in which weconduct business. Accordingly, the accompanying consolidated statements ofoperations include a benefit (provision) for income taxes based on prevailingtax laws of those jurisdictions.

 

We account for income taxes 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. The valuation allowance is adjusted in theperiod we determine it is more likely than not that deferred tax assets will orwill not be realized.

 

*Minority andNoncontrolling Interest*

* *

Components of minority and noncontrollinginterests were as follows:

 
| ** **               | ** **   | **For the Year Ended December 31,** | ** **   |
|--------------------------|--------------|------------------------------------------|--------------|
| ** **               | ** **   | **2005**                                 | ** **   | **2004** | ** ** | **2003** | ** ** |
| *** ***             | *** *** | *** ***                             | *** *** | *** *** | *** *** | *** *** | *** *** |
| Reethi Rah               |         | $                                        | 6,677        |   | $ | — |   | $ | — |   |
| Residences  at Atlantis  |         | 1,692                                    |         | — |   | — |   |
| Palmilla                 |         | 155                                      |         | 8,751 |   | — |   |
| One&Only  Management |         | (1,710                                   | )            | (1,517 | ) | (1,340 | ) |
|                     |         | $                                        | 6,814        |   | $ | 7,234 |   | $ | (1,340 | ***)*** |

 

As of May 1, 2005, the Company became the primary beneficiary of ReethiRah under FIN 46R, resulting in the consolidation of Reethi Rah into theconsolidated financial statements of the Company as of that date. Reethi Rahincurred net losses totaling $12.3 million after intercompany eliminations forthe period from May 1, 2005 to December 31, 2005. Of this amount, approximately$6.7 million exhausted the fair value of the owners’ equity capital (the fairvalue of which was estimated by the Company as of May 1, 2005) and is includedin minority and noncontrolling interests in the accompanying condensedconsolidated statements of operations for the year ended December 31, 2005. Thebalance of $5.6 million is reflected as a reduction to the Company’sconsolidated net income for these periods. Should Reethi Rah incur additionalnet losses, in the absence of any increase to the owners’ equity capital infuture periods, such losses will be reflected in the Company’s results ofoperations. If Reethi Rah realizes net income in the future, the Company willbe credited through an increase to the Company’s consolidated net income onlyto the extent of the losses previously absorbed by the Company on behalf ofReethi Rah.

 

As of August 30, 2005, the Company determined that Residences atAtlantis must be consolidated into its consolidated financial statements. As ofand for the year ended December 31, 2005, we have consolidated Residences atAtlantis, with the remaining 50% interest reflected as minority interest in theaccompanying consolidated statement of operations for the year endedDecember 31, 2005, and a minority interest liability reflected within theaccompanying consolidated balance sheet as of December 31, 2005.

 

As of January 1, 2004, pursuant to our adoption of FIN 46R, wedetermined that Palmilla, a 50% owned equity method investment, must beconsolidated. As of and for the years ended December 31, 2005 and 2004, wehave consolidated Palmilla, with the remaining 50% interest reflected asminority interest in the accompanying

 

F-21

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consolidatedstatements of operations for the years ended December 31, 2005 and 2004,and a minority interest liability reflected within the accompanyingconsolidated balance sheets as of December 31, 2005 and 2004.

 

EffectiveJanuary 1, 2003, we entered into an agreement with SRL to formOne&Only (Indian Ocean) Management Limited (“One&Only Management”) forthe purpose of, among other things, managing Kanuhura and the Mauritius Resorts.As of December 31, 2005, SRL owned 25% of One&Only Management and we ownedthe remaining 75%. Subject to certain conditions, SRL’s ownership interest willincrease incrementally through 2009, at which time SRL will own 50% ofOne&Only Management. As of and for the years ended December 31, 2005and 2004, we have consolidated One&Only Management, with SRL’s interest inthe operations of One&Only Management reflected as a minority interest inthe accompanying consolidated statements of operations and a minority interestliability reflected within accounts payable and accrued liabilities in theaccompanying consolidated balance sheets. See Note 17—Related PartyTransactions for further discussion.

 

*Earnings Per Share Data*

* *

The followingis a reconciliation of the shares used in our earnings per share computations(shares in thousands):

 
| ** **                                                | ** ** | **For the Year Ended December 31,** | ** ** |
|-----------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                                | ** ** | **2005**                                                     | ** ** | **2004** | ** ** | **2003** | ** ** |
| Weighted average shares used in basic  computations       |       | 35,794                                                       |       | 32,550 |   | 28,575 |   |
| Dilutive stock options and restricted  shares outstanding |       | 1,737                                                        |       | 1,334 |   | 802 |   |
| Dilutive effect of convertible notes                      |       | 136                                                          |       | — |   | — |   |
| Weighted average shares used in diluted  computations     |       | 37,667                                                       |       | 33,884 |   | 29,377 |   |

 

The net incomeamount used as the numerator in calculating basic and diluted earnings pershare is the net income in the accompanying consolidated statements ofoperations. All options were included in the computation of diluted earningsper share in 2005. The Company did not include 0.1 million and 2.2 millionoptions in the computation of diluted earnings per share in 2004 and 2003,respectively, because their effect would have been anti-dilutive.

 

In accordancewith EITF Issue No. 04-08, “The Effect of Contingently Convertible Instrumentson Diluted Earnings Per Share” (“EITF 04-08”), the Company includes sharesissuable under convertible instruments in diluted earnings per sharecomputations (if dilutive) regardless of whether the market price trigger (orother contingent feature) has been met. In April 2004, the Company issuedcontingent convertible notes. In accordance with EITF 04-08, the impact on thediluted earnings per share related to these notes occurs when the Company’saverage common stock price exceeds the conversion price of $58.24 even thoughthe market price trigger of 120% of the conversion price, or $69.89, has notbeen met. For the year ended December 31, 2005, the Company has reflected theadditional common shares in the calculation of diluted earnings per share usingthe treasury stock method. EITF 04-08 did not impact earnings per share for theyear ended December 31, 2004, as the average stock price for the year did notexceed $58.24.

 

*Equity-Based Compensation*

* *

We haveelected to apply Accounting Principles Board Opinion No. 25, “Accountingfor Stock Issued to Employees” as interpreted in FASB InterpretationNo. 44, “Accounting for Certain Transactions Involving Stock Compensation”in accounting for compensation under our stock option plans in lieu of thealternative fair value accounting provided for under Statement of FinancialAccounting Standards No. 123, “Accounting for Stock-Based Compensation” asamended by SFAS No. 148, “Accounting for Stock-Based Compensation –Transition and Disclosure – An Amendment of FASB Statement No. 123” (“SFAS 123”).Accordingly, no compensation expense

 

F-22

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has beenrecorded for those stock options granted at option prices equal to the fairmarket value of the common stock at the date of grant.

 

SFAS 123requires the use of option valuation models that require the input of highlysubjective assumptions, including expected stock price volatility. The effectof applying the fair value method of accounting for stock options on reportednet income and earnings per share for 2005, 2004 and 2003 may not berepresentative of the effects for future years because outstanding options vestover a period of several years and additional awards are generally made eachyear.

 

The fair valueof compensation relating to stock options granted during 2004 and 2003 wasestimated as of the respective dates of grant using the Black-Scholes option-pricingmodel with the following assumptions. The weighted average fair value peroption granted in 2004 and 2003 was $15.40 and $12.44, respectively. There wereno options granted during the year ended December 31, 2005. See discussionbelow for the assumptions used in estimating the fair value of the 2005restricted shares granted to our Chief Executive Officer.

 
| ** **                                           | ** ** | **For the Year Ended December 31,** | ** ** |
|------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                           | ** ** | **2005**                                                     | ** ** | **2004** | ** ** | **2003** | ** ** |
| Risk-free interest rate                              |       | —                                                       |       | 3.2 | % | 3.2 | % |
| Expected volatility                                  |       | —                                                       |       | 32.9 | % | 37.2 | % |
| Expected life of equity-based compensation  in years |       | —                                                       |       | 4 |   | 4-5 |   |
| Expected dividend yield                              |       | —                                                       |       | — |   | — |   |

 

The followingtable illustrates the effect on net income and earnings per share if Kerznerhad applied the fair value recognition provisions of SFAS 123 to equity-basedemployee compensation. 

 
| ** **                       | ** ** | **For the Year Ended December 31,** | ** ** |
|----------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                       | ** ** | **2005**                                                     | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net income, as reported          |       | $                                                            | 52,217     |   | $ | 68,132 |   | $ | 71,572 |   |
|                             |       |                                                         |       |   |   |   |   |
| Deduct: pro forma adjustments(1) |       | 12,205                                                       |       | 7,357 |   | 3,699 |   |
|                             |       |                                                         |       |   |   |   |   |
| Pro forma net income             |       | $                                                            | 40,012     |   | $ | 60,775 |   | $ | 67,873 |   |
|                             |       |                                                         |       |   |   |   |   |
| Earnings per share:              |       |                                                         |       |   |   |   |   |
| Basic – as reported         |       | $                                                            | 1.46       |   | $ | 2.09 |   | $ | 2.50 |   |
| Basic – pro forma           |       | $                                                            | 1.12       |   | $ | 1.87 |   | $ | 2.38 |   |
| Diluted – as reported       |       | $                                                            | 1.39       |   | $ | 2.01 |   | $ | 2.44 |   |
| Diluted – pro forma         |       | $                                                            | 1.06       |   | $ | 1.79 |   | $ | 2.31 |   |

 

----

(1) Amountrepresents total equity-based compensation for all stock option awards and the2005 restricted stock granted to our Chief Executive Officer as discussedbelow.

 

During theyears ended December 31, 2005 and 2004, the Company issued 45,600 and0.3 million****restricted shares, respectively,with weighted average grant date fair values of $58.75 and $49.27,respectively, under the 2003 stock option plan to certain officers, directorsand employees. The restricted shares’ vesting period ranges from three to fiveyears on either a graduated or cliff vesting basis, provided that the recipientis still with the Company upon vesting. The aggregate market value of therestricted shares at the date of issuance of $2.7 million and$14.8 million, respectively, has been recorded as deferred compensation,as a separate component of shareholders’ equity, and is being amortized tocompensation expense over the applicable vesting period.

 

In August2005, the Company entered into a restricted stock agreement with its ChiefExecutive Officer. This long-term arrangement does not provide for vesting ofany of the granted shares until 2009 at the earliest and postpones the vestingof the final tranche of granted shares until not earlier than 2011, except inlimited

 

F-23

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circumstancesthat relate to a termination of Mr. Kerzner’s employment or the occurrence of achange of control of the Company. Pursuant to the agreement, 500,000 restrictedOrdinary Shares were granted under the Company’s 2003 stock incentive plan.These restricted shares are divided into five tranches, each of 100,000restricted shares that vest, subject to conditions in the agreement, upon theprice of our Ordinary Shares reaching target prices ranging from $75 to $95.The Chief Executive Officer’s rights with respect to such Ordinary Shares maybecome fully vested and non-forfeitable subject to the terms and the conditionsof the agreement. The estimated aggregate fair value of these restricted shareswas $24.4 million as of the date of grant. The fair value of compensationrelating to these restricted shares granted was estimated at the date of grantusing a lattice valuation model with the following assumptions: risk-freeinterest rate of 4.5%, expected volatility of 31.2%, expected life of 4.5 yearsand an expected dividend yield of 0%. The weighted average fair value per sharefor these restricted shares was $48.85.

 

Also duringthe year ended December 31, 2005, the Company cancelled 6,200 restricted sharesdue to the termination of certain employees. Compensation costs recognized forrestricted shares were $5.0 million, $1.8 million, and $0 for the years endedDecember 31, 2005, 2004 and 2003, respectively.

 

*Derivative FinancialInstruments*

* *

ThroughSeptember 2005, the Company’s derivatives included interest rate swapagreements which were used to manage the impact of interest rate changes on ourlong-term debt obligations and were accounted for as fair value hedges inaccordance with SFAS No. 133, “Accounting for Derivative Instruments andHedging Activities” (“SFAS 133”). In September 2005, our interest rate swapagreements were terminated in connection with a refinancing of our 87/8%senior subordinated notes, which resulted in proceeds received of $5.1 million.

 

Palmilla hasan interest rate cap agreement that is accounted for as a cash flow hedge inaccordance with SFAS 133. See Note 14—Long-Term Debt for further discussion.

 

**RecentAccounting Pronouncements**

** **

*Share-Based Payment*

* *

InDecember 2004, the FASB issued a revision of SFAS 123 (“SFAS 123(R)”) thatwill require compensation costs related to share-based payment transactions tobe recognized in the statement of operations. With limited exceptions, theamount of compensation cost will be measured based on the grant-date fair valueof the equity or liability instruments issued. In addition, compensationexpense for liability awards (those usually settled in cash rather than stock)will be remeasured to fair value each reporting period until the award issettled. Compensation cost will be recognized over the period that an employeeprovides service in exchange for the award. SFAS 123(R) replaces SFAS 123 andis effective for the Company as of January 1, 2006.

 

The Companyadopted SFAS 123(R) as of January 1, 2006. SFAS 123(R) allows for twotransition alternatives for public companies: (a) modified-prospectivetransition or (b) modified-retrospective transition. The Company applied themodified-prospective transition method. Under this method, companies arerequired to recognize compensation cost for share-based payments to employeesbased on their grant-date fair value from the beginning of the fiscal period inwhich the recognition provisions are first applied. Measurement and attributionof compensation cost for awards that were granted prior to, but not vested, asof the date SFAS 123(R) became effective would generally be based on the sameestimate of the grant-date fair value and the same attribution method usedpreviously under SFAS 123 (either for financial statement recognition or proforma disclosure purposes). Prior periods are not restated. Historically, theCompany has recorded forfeitures based on actual amounts. SFAS 123(R) requiresforfeiture amounts to be estimated. However, this required change is not expectedto have a material effect on the Company’s consolidated statement ofoperations.

 

SFAS 123(R)also requires the benefits of tax deductions in excess of recognizedcompensation cost to be reported as financing cash flow, rather than asoperating cash flow as previously required.

 

F-24

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Theapplication of SFAS 123(R) beginning January 1, 2006, will result inadditional compensation expense of approximately $13.6 million (not includingtax effects) for the year ended December 31, 2006, based on option grantsoutstanding at December 31, 2005 and restricted shares issued to our ChiefExecutive Officer in August 2005. The foregoing amount does not includecompensation expense for any stock options or other equity instruments that maybe granted after December 31, 2005.

 

*Accounting Changes andError Correction*

* *

In May 2005,the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections—AReplacement of APB Opinion No. 20 and FASB Statement No. 3” (“SFAS 154”), whichrequires retrospective application to prior periods’ financial statements forchanges in accounting principle and redefines “restatement” as the revising ofpreviously issued financial statements to reflect the correction of an error.SFAS 154 is effective for accounting changes and corrections of errors made infiscal years beginning after December 15, 2005. The Company will adopt SFAS 154beginning January 1, 2006.

 

**Note3—Consolidation of Variable Interest Entities**

** **

*Reethi Rah*

* *

Reethi Rah isthe entity that owns and operates One&Only Maldives at Reethi Rah, a luxuryresort located on the North Male Atoll in the Maldives. Although the Companydoes not have any equity ownership interest in Reethi Rah, we have determinedthat Reethi Rah is a variable interest entity that is subject to consolidationin accordance with the provisions of FIN 46R.

 

On May 1,2005, when the resort commenced operations and the Company finalized a seniorsubordinated credit agreement with Reethi Rah, the Company became the primarybeneficiary of Reethi Rah under FIN 46R, resulting in the Company consolidatingReethi Rah into its consolidated financial statements as of this date. There isno pro-forma disclosure as the resort commenced operations on May 1, 2005. Uponconsolidation, the total consideration was allocated based on the fair value ofthe assets acquired, liabilities assumed and noncontrolling interest as shownbelow:

 

| Current assets                            |   | $       | 8,187   |   |
|-------------------------------------------|--------|---------|---------|--------|
| Property and equipment                    |   | 145,865 |    |
| Intangible asset (a)                      |   | 15,100  |    |
|                                      |   | $       | 169,152 |   |
|                                      |   |    |    |
| Current maturities of long-term debt      |   | $       | 4,896   |   |
| Other current liabilities                 |   | 26,265  |    |
| Due to affiliates—non-current (b)    |   | 77,800  |    |
| Long term debt, net of current maturities |   | 53,764  |    |
| Owner’s equity (c)                   |   | 6,427   |    |
|                                      |   | $       | 169,152 |   |

 

----

(a)  Afavorable land lease was identified as an intangible asset. See Note 2—Summaryof Significant Accounting Policies, Intangible Asset for further discussion.

 

(b)  Dueto affiliates included $84.5 million of notes payable and related interest tothe Company, net of a $27.8 million allowance which was recorded to reflect thefair value of the notes recorded prior to consolidation. Subsequent to May 1,2005, the net balance of $56.7 million is eliminated in consolidation. See Note17—Related Party Transactions, Reethi Rah, for further discussion. Theremaining $21.1 million represents notes payable due to SRL.

 

F-25

----

 

(c)  Owner’sequity is reclassified to minority interest upon consolidation. Any lossesincurred by Reethi Rah are first allocated to the owner’s equity and onceexhausted, the excess losses are absorbed by the Company in its consolidatedstatement of operations. See Note 2—Summary of Significant Accounting Policies,Minority and Noncontrolling Interest for further discussion.

 

The Companyhas agreements with Reethi Rah that provide for construction financing andoperating loans (see Note 17—Related Party Transactions), as well as managementand development agreements that are considered variable interests. Reethi Rah’screditors have no recourse to the Company, except for certain amounts due undera term loan facility agreement with a third party financial institution. Inaddition, certain of Reethi Rah’s assets collateralize its debt obligations. SeeNote 14—Long-Term Debt for further discussion.

 

*Residences at Atlantis*

* *

In August2005, the Company entered into a joint venture with Turnberry, Residences atAtlantis, to develop a condominium-hotel located adjacent to Atlantis, ParadiseIsland. The Company has determined that Residences at Atlantis is a variableinterest entity and it is the primary beneficiary of the joint venture andaccordingly is subject to consolidation in accordance with the provisions ofFIN 46R. Effective August 30, 2005, the Company has consolidated Residences atAtlantis into its consolidated financial statements. As of December 31, 2005,the Company has consolidated $15.3 million of assets related to Residences at Atlantis.

 

*Palmilla*

* *

OnSeptember 12, 2002, we acquired a 50% ownership interest in Palmilla, adeluxe five-star One&Only property located near Cabo San Lucas in Baja,Mexico, for approximately $40.8 million, including direct acquisitioncosts. This acquisition was funded through a combination of cash on hand andborrowings under our revolving credit facility as part of our strategy toexpand 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 the operating agreement, the other 50%owner has the right to require us to acquire its 50% interest for a price of$36.3 million, plus 50% of Palmilla’s working capital, with the price subjectto adjustment, as defined in the purchase agreement, during the first year ofthe option period. The purchase price during the second year of the optionperiod is based on a formula, as defined. The option period began onSeptember 12, 2005 and expires on September 12, 2007. As previouslydescribed, as a result of this put option, Palmilla has been consolidatedeffective January 1, 2004, pursuant to FIN 46R.

 

**Note4—Business Acquisitions and Dispositions**

** **

*Wembley*

* *

In a series ofprivate transactions which commenced on March 10, 2004 and ended onApril 16, 2004, BLB acquired a 22.2% interest in Wembley at 800 penceper share (approximately US$14.38 per share). The Company invested$47.4 million in BLB during 2004 for its proportionate share of BLB’s interestin Wembley.

 

In July 2005,BLB acquired the U.S. operations of Wembley in Rhode Island and Colorado forapproximately $464.0 million. The acquired operations include Lincoln Park inRhode Island, which include a greyhound racetrack with video lottery terminals.In connection with this transaction, Wembley repurchased BLB’s 22.2%shareholding in Wembley for approximately $116.0 million. The balance of thepurchase price was financed on a non-recourse basis by a consortium of banksthat underwrote a $495.0 million senior secured credit facility, whichincludes a $125.0 million revolving credit facility that is being usedprimarily to finance the redevelopment of Lincoln Park which commenced in thethird quarter of 2005.

 

*Hurricane Hole Marina*

* *

During 2005,the Company acquired certain assets of Hurricane Hole Marina, which is in closeproximity to the Marina Village and includes frontage on Nassau Harbour, andsome additional buildings and facilities for $28.0 million. The Company intendsto utilize the Hurricane Hole Marina to accommodate excess demand at theAtlantis

 

F-26

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Marina andanticipates upgrading this marina and bringing it into Atlantis’s productoffering. This acquisition includes additional real estate, which the Companyplans to use for new development. The purchase price was allocated to propertyand equipment, including $27.5 million to land, resulting in no recognition ofgoodwill. There were no contingent payments, options or commitments and therewere no purchased research and development assets associated with thisacquisition. The pro-forma effect of this acquisition to the Company’sconsolidated results of operations for the year ended December 31, 2005 wasinsignificant.

 

*U.K. Development Projectsand Acquisition of Casino License*

* *

During theyear ended December 31, 2005, the Company wrote off $11.2 million of previouslycapitalized costs included in construction in progress as of December 31, 2004.These costs related to the planning and development of all of the Company’sproposed gaming projects in the United Kingdom (excluding costs associated withthe Company’s casino project in Northampton) and were expensed due to thepassage of gaming reform legislation in April 2005 that was less favorable thanthe Company had previously anticipated. Included in this write off was a $2.9 million paymentmade in July 2004 as consideration for our exclusive appointment as thepreferred developer and operator of a proposed resort casino and hotel at theScottish Exhibition + Conference Centre in Glasgow and a$4.0 million initial payment made in April 2003 as consideration for thedevelopment of a casino and hotel at The O2 (formerly theMillenium Dome) in London.

 

In 2003, wealso made a $1.3 million and $0.8 million payment for the acquisitionof a casino license and land, respectively, in Northampton, England.

 

*Kanuhura*

* *

OnJanuary 1, 2005 and 2003, we sold 5% and 20%, respectively, of our equityinterest in Kanuhura to SRL at our net book value of $0.1 million and$1.5 million, respectively, resulting in no gain or loss on eithertransaction. As a result, our ownership interest in Kanuhura was 18.75% in 2005and was 20% in 2004 and 2003. See Note 17—Related Party Transactions—SunResorts Limited for further discussion.

 

*Kerzner Interactive*

* *

Through awholly-owned subsidiary, the Company previously owned and operated KerznerInteractive Limited (“Kerzner Interactive”), an online 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 thepotential for expansion into other markets, including the United States, theoutlook for new business substantially decreased. As a result, during the firstquarter of 2003, the Company discontinued the operations of Kerzner Interactive.The operating results of Kerzner Interactive for the year endedDecember 31, 2003 are presented as income from discontinued operations,net of income tax effect in the accompanying consolidated statements ofoperations.

 

OnFebruary 15, 2002, the Company entered into an agreement with StationCasinos, Inc. (“Station”), pursuant to which Station agreed to purchase a 50%interest in Kerzner Interactive. The companies later renegotiated the originalagreement such that Station purchased an option from us in July 2002 for$4.5 million to buy a 50% interest in Kerzner Interactive. The Company andStation mutually agreed to terminate this transaction. As a result, the$4.5 million non-refundable deposit was recognized as income during thefirst quarter of 2003 and was offset by net losses incurred while winding downthe operations of the business, including the write-down of net assets andother associated costs.

 

The operatingresults of Kerzner Interactive for the year ended December 31, 2003 wereas follows and are presented as income from discontinued operations, net ofincome tax effect in the accompanying consolidated statements of operations:

 

F-27

----

 

| Revenue      |   | $      | — |   |
|--------------|--------|--------|--------|--------|
| Expenses     |   | (3,195 | )      |
| Other income |   | 4,500  |   |
| Net income   |   | $      | 1,305  |   |

 

*Club Méditerranée(Bahamas) Limited*

* *

OnOctober 29, 2003, the Company entered into an agreement to acquire theassets of Club Méditerranée (Bahamas) Limited (“Club Med”) on Paradise Islandfor $38.5 million. During the year ended December 31, 2003, theCompany paid $20.0 million in connection with the acquisition. During theyear ended December 31, 2004, the Company paid $3.5 million inrelated stamp taxes, as well as the remaining balance of $15.0 million,which was paid in September 2004 when the Company took possession of theproperty. Effective with the Company’s possession of the property, we exercisedan option to purchase certain adjacent land lots at a price of$5.0 million, plus $0.5 million in related stamp taxes. The purchaseprice of the Club Med assets acquired was allocated to the fair value of assetsacquired as indicated below. The Company did not acquire the operations of ClubMed.

 

| 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 tothe acquisition of the land lots referred to above, during the year endedDecember 31, 2004, the Company acquired from land owners certain land lotsin proximity of the Club Med property for $6.9 million.

 

*Atlantic City Land*

* *

In July 2004,the Company obtained an appraisal on undeveloped real estate which we own inAtlantic City, that indicated the carrying amount of this real estate was notfully recoverable. The appraisal was commissioned after the Company hadreceived an unsolicited offer to acquire some of the undeveloped land for aprice substantially less than the Company’s book value and certain otherinformation related to third party sales of nearby comparable properties atprices 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 million impairment loss as these assets werewritten down to fair value less estimated costs to sell of $5.4 million. Thisamount was reclassified to assets held for sale in the accompanying balancesheet as of December 31, 2004.

 

In July 2005,the Company completed the sale of a portion of its Atlantic City land, as wellas an additional ancillary piece of land, which together resulted in a gain of$1.4 million.

 

**Note5—Cash Equivalents and Restricted Cash**

** **

As ofDecember 31, 2005 and 2004, the Company held $3.5 million and$117.0 million, respectively, of money market funds. Based on the maturitydates of such funds, these amounts are included in cash and cash equivalents inthe accompanying consolidated balance sheets. Cash equivalents as ofDecember 31, 2005 and 2004 also included reverse repurchase agreements(federal government securities purchased under agreements to resell thosesecurities) under which we had not taken delivery of the underlying securitiesand investments in a money market fund that invests exclusively in U.S.Treasury obligations. As of December 31, 2005 and 2004, we held reverserepurchase agreements of $47.8 million and $33.4 million,respectively, all of which matured in the first week of the following month.

 

F-28

----

 

As of December31, 2005, restricted cash—non-current included $57.9 million of escrowed funds,which have been set aside to fund a portion of the Company’s equity investmentin the joint venture that owns Atlantis, The Palm. Under the joint venture’soriginal senior credit facilities, the Company was required to place intoescrow the difference between the Company’s equity commitment to the projectand any amounts previously funded. As of December 31, 2005 and 2004,current restricted cash included $4.0 million and $2.3 million, respectively,held as a result of certain provisions related to Palmilla’s debt primarily toservice current interest payments and other related items.

 

**Note6—Short-Term Investments**

** **

During theyear ended December 31, 2005, the Company purchased $20.0 million principalamount of T-Bills and $205.0 million principal amount of the Company’s T-Billsmatured or were redeemed. As of December 31, 2005, the adjusted carrying valueand fair value of these securities held by the Company was $20.0 million,which matured in January 2006. During the year ended December 31, 2005 and2004, the Company recognized $2.7 million and $1.5 million, respectively, ofinterest income from its short-term investments.

 

The Company’sT-Bills are classified and accounted for as available-for-sale securities andare reported at fair market value with the resulting net unrealized holdinggains or losses, net of income taxes, reported as a separate component ofcomprehensive income (loss). For year ended December 31, 2005 and 2004, theCompany recorded $0.6 million and $(0.6) million of unrealized holdinggains (losses), respectively, in connection with its T-Bills.

 

**Note7—Accounts Receivable, net**

** **

The Companyextends credit to approved casino customers. These receivables potentiallysubject the Company to concentration of credit risk. The Company maintains anallowance for doubtful accounts to reduce the receivables to their estimatedcollectible amount, which approximates fair value. The collectibility offoreign and domestic receivables could be affected by future business oreconomic conditions or other significant events in the United States or in thecountries in which foreign customers reside.

 

Components ofaccounts receivable, net were as follows:

 
| ** **                            | ** ** | **December 31,** | ** ** |
|---------------------------------------|------------|-----------------------|------------|
| ** **                            | ** ** | **2005**              | ** ** | **2004** | ** ** |
|                                  |       |                  |       |   |   |
| Gaming                                |       | $                     | 16,189     |   | $ | 16,740 |   |
| Less: allowance for doubtful accounts |       | (4,059                | )          | (4,853 | ) |
|                                  |       | 12,130                |       | 11,887 |   |
|                                  |       |                  |       |   |   |
| Hotel and related                     |       | 23,376                |       | 22,088 |   |
| Other                                 |       | 17,158                |       | 9,389 |   |
|                                  |       | 40,534                |       | 31,477 |   |
| Less: allowance for doubtful accounts |       | (2,497                | )          | (1,621 | ) |
|                                  |       | 38,037                |       | 29,856 |   |
|                                  |       |                  |       |   |   |
|                                  |       | $                     | 50,167     |   | $ | 41,743 |   |

 

Otherreceivables as of December 31, 2005 includes a $4.3 million receivable forReethi Rah relating to customs duty amounts paid which we expect to recoverfrom the government of the Maldives.

 

Bad debtexpense related to trade receivables was a reversal of $0.6 million for the yearended December 31, 2005 and was $1.2 million and $1.3 million for theyears ended December 31, 2004 and 2003, respectively, and is included in selling, general and administrativeexpenses in the accompanying statements of operations.

 

F-29

----

 

**Note8—Prepaid Expenses and Other Current Assets**

** **

Components ofprepaid expenses and other current assets were as follows:

 
| ** **                                           | ** ** | **December 31,** | ** ** |
|------------------------------------------------------|------------|-----------------------|------------|
| ** **                                           | ** ** | **2005**              | ** ** | **2004** | ** ** |
|                                                 |       |                  |       |   |   |
| Prepaid windstorm, construction and other  insurance |       | $                     | 13,045     |   | $ | 12,253 |   |
| Prepaid tour operator-related costs                  |       | 2,950                 |       | 1,804 |   |
| Prepaid rent-current                                 |       | —                |       | 1,422 |   |
| Prepaid taxes                                        |       | —                |       | 823 |   |
| Other                                                |       | 6,937                 |       | 5,383 |   |
|                                                 |       | $                     | 22,932     |   | $ | 21,685 |   |

 

Windstorm,construction and other insurance as of December 31, 2005 included$5.0 million for all risk insurance related to the Company’s ParadiseIsland properties and $2.9 million of prepaid construction insurance inconnection with the Company’s Phase III expansion on Paradise Island. Thepolicy year for the windstorm insurance began on June 1, 2005 and expiresMay 31, 2006. As of December 31, 2005, other prepaid expenses consistedprimarily of vendor and supplier prepayments made during the normal course ofbusiness.

 

Prepaid taxesof $0.8 million as of December 31, 2004 consists of payments made byPalmilla to the Mexican taxing authority for income and asset taxes.

 

**Note9—Property and Equipment, net**

** **

Components ofproperty and equipment, net were as follows: 

 
| ** **                           | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|-----------------------|------------|
| ** **                           | ** ** | **2005**              | ** ** | **2004** | ** ** |
|                                 |       |                  |       |   |   |
| Land                                 |       | $                     | 314,815    |   | $ | 289,125 |   |
| Land improvements and utilities      |       | 277,213               |       | 239,153 |   |
| Buildings and leasehold improvements |       | 871,107               |       | 764,828 |   |
| Furniture, machinery and equipment   |       | 378,965               |       | 284,754 |   |
| Construction in progress             |       | 210,198               |       | 106,566 |   |
|                                 |       | 2,052,298             |       | 1,684,426 |   |
| Less: accumulated depreciation       |       | (404,963              | )          | (336,786 | ) |
|                                 |       | $                     | 1,647,335  |   | $ | 1,347,640 |   |

 

Included inproperty and equipment, net as of December 31, 2005, is $139.1 million relatedto Reethi Rah, which was consolidated as of May 1, 2005, and $4.9 millionrelated to Residences at Atlantis, which was consolidated as of August 30,2005.

 

Constructionin progress as of December 31, 2005 consisted of $200.2 million of costsassociated with development projects and $10.0 million related to othercapital projects including $2.7 million of software related costs. Developmentproject costs as of December 31, 2005 primarily included$179.2 million of costs related to the Phase III expansion and $4.7million of costs related to the Residences at Atlantis condominium-hotel project.Also included in construction in progress as of December 31, 2005 was $6.1million related to the development of Cape Town, $5.9 million of costs relatedto the development of a destination resort casino in Morocco and $4.3 millionof costs associated with the development of a casino in Northampton, England asthese projects are considered probable.

 

F-30

----

 

Constructionin progress as of December 31, 2004 consisted of $86.9 million ofcosts associated with development projects and $19.7 million related toother capital projects including $8.3 million of software related costs. Developmentproject costs as of December 31, 2004 primarily included$47.6 million of Phase III expansion costs, $26.4 million of costsrelated to the Marina Village construction on Paradise Island and$4.3 million of costs associated with the development of the Ocean ClubResidences & Marina. Also included in construction in progress as ofDecember 31, 2004 were costs related to the planning and development ofthe Company’s proposed gaming projects in the United Kingdom. During the yearended December 31, 2005, the Company wrote off $11.2 million of these costs,which related to the planning and development of all of the Company’s proposedgaming projects in the United Kingdom (excluding costs associated with theCompany’s casino project in Northampton) and were expensed due to the passageof gaming reform legislation in April 2005 that was less favorable than theCompany had previously anticipated.

 

Depreciationexpense was $73.3 million, $58.9 million and $55.8 million forthe years ended December 31, 2005, 2004 and 2003, respectively.

 

**Note10—Deferred Charges and Other Assets, net**

** **

Components ofdeferred charges and other assets, net were as follows:

 
| ** **                                              | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------|------------|-----------------------|------------|
| ** **                                              | ** ** | **2005**              | ** ** | **2004** | ** ** |
|                                                    |       |                  |       |   |   |
| Debt issuance costs, net                                |       | $                     | 18,408     |   | $ | 21,419 |   |
| Deferred compensation plan investments                  |       | 7,004                 |       | 3,981 |   |
| Deposits for property and equipment                     |       | 4,682                 |       | — |   |
| Deferred contract acquisition costs                     |       | 2,285                 |       | 2,906 |   |
| Deposit and casino license for UK  development projects |       | 1,405                 |       | 1,306 |   |
| Employee notes receivable                               |       | 1,176                 |       | 1,225 |   |
| Interest rate cap asset                                 |       | 77                    |       | 114 |   |
| Interest rate swap asset, net                           |       | —                |       | 6,833 |   |
| Other                                                   |       | 4,845                 |       | 2,894 |   |
|                                                    |       | $                     | 39,882     |   | $ | 40,678 |   |

 

Debt issuancecosts, net of amortization, relates to costs incurred in connection with theissuance of our debt and our Amended Credit Facility. The amortization of debtissuance costs included in interest expense was $5.6 million, $3.4 millionand $1.2 million for the years ended December 31, 2005, 2004 and2003, respectively.

 

Deferredcompensation plan investments relate to assets held in a rabbi trust for ourdeferred compensation plan. See Note 18—Employee Benefit Plans for furtherdiscussion.

 

Deposits forproperty and equipment primarily relate to deposits made in connection with thePhase III expansion and The Residences at Atlantis condominium-hotel project.

 

Deferredcontract acquisition costs primarily relate to direct incremental costs incurredin connection with the acquisition of development and management contracts inconnection with Atlantis, The Palm and projects in Morocco and South Africa.

 

See Note17—Related Party Transactions for discussion of the Company’s employee notesreceivable.

 

Interest rateswap asset is the fair value of $150.0 million notional amount of swapagreements on our 87/8% senior subordinatednotes as of December 31, 2004, which represents the amount that would havebeen received had the swap agreements been terminated on that date. InSeptember 2005, our interest rate swap agreements were terminated inconnection with a refinancing of our 87/8% senior subordinated notes, which resulted inproceeds received of $5.1 million.

 

F-31

----

 

The interestrate swap asset was $8.7 million as of December 31, 2004. Inconnection with the termination of $25.0 million notional amount of two ofour interest rate swap agreements in September 2003 and July 2004, we received$1.4 million and $1.1 million, respectively, which was classified asa contra asset in deferred charges and other assets, net as ofDecember 31, 2004, and was accreted to interest expense over the term ofthe underlying debt. The balance of the contra asset as of December 31,2004 was $1.9 million. The balance of this contra asset at the date of therefinancing of our 87/8% senior subordinatednotes was $1.7 million and was included as a reduction of loss on earlyextinguishment of debt of $27.9 million during the year ended December 31,2005.

 

**Note11—Accounts Payable and Accrued Liabilities**

** **

Components ofaccounts payable and accrued liabilities were as follows:

 
| ** **                                                              | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                              | ** ** | **2005**              | ** ** | **2004** | ** ** |
| ** **                                                              | ** ** | ** **            | ** ** | ** ** | ** ** |
| Hotel advance deposits                                                  |       | $                     | 32,279     |   | $ | 22,270 |   |
| Payroll and related benefits                                            |       | 31,816                |       | 30,511 |   |
| Other deposits and unearned revenue                                     |       | 23,438                |       | 18,044 |   |
| Trade payables                                                          |       | 18,873                |       | 15,869 |   |
| Hotel-related costs and expenses                                        |       | 17,655                |       | 16,651 |   |
| Gaming-related deposits and liabilities                                 |       | 11,146                |       | 12,212 |   |
| Tour operator advanced deposits                                         |       | 10,879                |       | 6,642 |   |
| Accrued interest                                                        |       | 10,262                |       | 13,330 |   |
| Accrued tour operator-related costs and  expenses                       |       | 4,366                 |       | 6,882 |   |
| Majority shareholder settlement – deferred  revenue – current |       | 3,602                 |       | 3,487 |   |
| Accrued taxes                                                           |       | 3,416                 |       | 5,310 |   |
| Other                                                                   |       | 27,663                |       | 17,017 |   |
|                                                                    |       | $                     | 195,395    |   | $ | 168,225 |   |

 

**Note12—Deferred Revenue**

** **

Components ofdeferred revenue were as follows:

 
| ** **                                     | ** ** | **December 31,** | ** ** |
|------------------------------------------------|------------|-----------------------|------------|
| ** **                                     | ** ** | **2005**              | ** ** | **2004** | ** ** |
| ** **                                     | ** ** | ** **            | ** ** | ** ** | ** ** |
| Kerzner Istithmar development fee              |       | $                     | 8,538      |   | $ | 5,215 |   |
| Majority shareholder settlement                |       | 7,564                 |       | 11,166 |   |
| Lessee prepayment                              |       | 2,271                 |       | 2,521 |   |
| Deferred revenue from Atlantic City land  sale |       | 2,168                 |       | 412 |   |
| Other                                          |       | 1,271                 |       | 1,105 |   |
|                                           |       | $                     | 21,812     |   | $ | 20,419 |   |

 

KerznerIstithmar development fee represents the deferred portion of payments receivedfrom Kerzner Istithmar related to the $20.0 million development fee asdiscussed in Note 17—Related Party Transactions.

 

Majorityshareholder settlement represents the non-current portion of a settlementpayment as further discussed in Note 20—Gain on Settlement of Territorialand Other Disputes.

 

Lesseeprepayment consists of the long-term portion of an amount paid to the Companyby an entity which is operating Palmilla’s spa facility, and is amortized toother revenue over the term of the underlying lease. The

 

F-32

----

 

currentportion of the lessee prepayment is included in the other deposits and unearnedrevenue component of accounts payable and accrued liabilities.

 

Through awholly-owned subsidiary we previously owned and operated a resort and casinoproperty in Atlantic City, New Jersey (“Resorts Atlantic City”). On April 25,2001, we completed the sale of Resorts Atlantic City to an affiliate of ColonyCapital LLC (“Colony”). In connection with this transaction, we sold certainundeveloped real estate to Colony for $40.0 million, which was paid in the formof a promissory note that will mature in March 2009. Although this transactionqualifies as a legal sale, it does not qualify as an accounting sale pursuantto SFAS No. 66, “Accounting for Sales of Real Estate”. The$40.0 million balance of the note is not expected to be received untilMarch 2009.

 

During theyear ended December 31, 2005, the Company received a $0.2 million paymenttowards the purchase price and has also received $1.6 million and $0.4 millionof related interest payments during the years ended December 31, 2005 and 2004,respectively. These amounts have been recorded as deferred revenue in theaccompanying consolidated balance sheets. As sufficient cumulative paymentstoward the purchase price were not received as of December 31, 2005,collectibility of the sales price cannot be reasonably assured. As such, thesale has not been recognized as of December 31, 2005. The net carryingvalue of the related undeveloped real estate is $40.0 million and isincluded in land within property and equipment, net in the accompanyingconsolidated balance sheets.

 

**Note13—Other Long-Term Liabilities**

** **

Components ofother long-term liabilities were as follows:

 
| ** **                       | ** ** | **December 31,** | ** ** |
|----------------------------------|------------|-----------------------|------------|
| ** **                       | ** ** | **2005**              | ** ** | **2004** | ** ** |
|                             |       |                  |       |   |   |
| Deferred compensation obligation |       | $                     | 7,013      |   | $ | 3,973 |   |
| Deferred rent credit             |       | 2,175                 |       | 2,437 |   |
| Other                            |       | 1,657                 |       | 689 |   |
|                             |       | $                     | 10,845     |   | $ | 7,099 |   |

 

For moreinformation on the deferred compensation obligation, see Note 18—Employee BenefitPlans. The deferred rent credit relates to a building lease entered into during2002 for our office in Plantation, Florida.

 

F-33

----

 

**Note14—Long-Term Debt**

** **

Long-term debtconsisted of the following:

 
| ** **                                                               | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                               | ** ** | **2005**              | ** ** | **2004** | ** ** |
| ** **                                                               | ** ** | ** **            | ** ** | ** ** | ** ** |
| Amended Credit Facility (a)                                              |       | $                     | —     |   | $ | — |   |
| $400 million 63⁄4% Senior Subordinated Notes  due 2015 (b)            |       | 400,000               |       | — |   |
| $400 million 87/8%  Senior Subordinated Notes due 2011 (c)               |       | 1,632                 |       | 413,427 |   |
| $230 million 2.375% Convertible Senior  Subordinated Notes due  2024 (d) |       | 230,000               |       | 230,000 |   |
| Palmilla Notes (e)                                                       |       | 110,000               |       | 110,000 |   |
| Reethi Rah Term Loan Facility (f)                                        |       | 47,200                |       | — |   |
| Reethi Rah Loan (g)                                                      |       | 4,032                 | ** ** | ** ** | ** ** |
| Other (h)                                                                |       | 4,442                 |       | 1,361 |   |
|                                                                     |       | 797,306               |       | 754,788 | ** ** |
| Less: amounts due within one year                                        |       | (7,689                | )          | (659 | ) |
|                                                                     |       | $                     | 789,617    |   | $ | 754,129 |   |

 

***(a)***    Amended Credit Facility

*** ***

On October 31,2005, Kerzner entered into an amendment to our credit facility (the “AmendedCredit Facility”) with a syndicate of banks. Under the Amended Credit Facility,the maximum amount of borrowings that may be outstanding is $650.0 million(the “Commitment Amount”). In addition, should we obtain the requisitecommitment from existing or new lenders, we have the right to increase theCommitment Amount of our credit facility by up to $250.0 million, for atotal of $900.0 million. The Commitment Amount under the Amended Credit Facility may bevoluntarily reduced from time to time in multiples of $1.0 million. TheCommitment Amount also shall be automatically and permanently reduced inconnection with certain asset sales. The Amended Credit Facility allows forinvestments not to exceed $400.0 million plus the sum of (i) 100% of netequity proceeds received by the Company from and after July 7, 2004, plus (ii) 50%of net income (without deductions for losses) of the Company for each of thefull fiscal quarters occurring from and after January 1, 2004  In addition, the Company is permitted to makeinvestments in Atlantis, The Palm and a destination resort casino in Morocco of$125.0 million and $55.0 million, respectively.

 

Loans underthe Amended Credit Facility bear interest at (i) the higher of (a) abase rate or (b) the Federal Funds Rate plus one-half of one percent, ineither case plus up to an additional 1.00% based on a debt to EBITDA ratioduring the period, as defined (the “Leverage Ratio”), (ii) the LondonInterbank Offered Rate (“LIBOR”) rate plus 0.75% to 2.00% based on the LeverageRatio or (iii) the Federal Funds Rate plus 0.75% to 2.00% based on theLeverage Ratio. For loans based on the Alternate Base Rate (as defined),interest is payable quarterly. For loans based on the LIBOR rate, interest ispayable on the last day of each applicable interest period. Loans under theAmended Credit Facility may be prepaid and re-borrowed at any time and are duein full on December 31, 2010. Commitment fees are calculated at per annum ratesranging from 0.25% to 0.60% based on the Leverage Ratio, applied to the undrawnamount of the Amended Credit Facility and are payable quarterly.

 

The AmendedCredit Facility contains affirmative and restrictive covenants which, amongother things: (a) require periodic financial reporting, (b) requiremeeting certain financial amounts and ratio tests, (c) restrict thepayment of dividends, (d) limit the incurrence of indebtedness and(e) limit asset expenditures and dispositions outside the ordinary courseof business. As of December 31, 2005, management believes the Company wasin compliance with all such covenants.

 

F-34

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The AmendedCredit Facility is secured by a pledge of substantially all of our assets.

 

As ofDecember 31, 2005, the Company had $644.6 million of borrowingsavailable on the Amended Credit Facility after giving effect to $5.4 millionin letters of credit outstanding. In connection with this facility, the Companyincurred $0.9 million of debt issuance costs during the year endedDecember 31, 2005. These costs are being amortized to interest expenseover the expected life of the facility of 5 years. These costs, net ofaccumulated amortization, are included in deferred charges and other assets,net in the Company’s consolidated balance sheet as of December 31, 2005. Inconnection with the amendment of our credit facility during the year endedDecember 31, 2005, we wrote off $0.9 million of debt issuance costs associatedwith the previous facility to interest expense, net of capitalization in theaccompanying consolidated statement of operations.

 

***(b)***    63⁄4% Senior Subordinated Notes

*** ***

In September2005, we issued $400.0 million principal amount of 63⁄4% senior subordinated notes due 2015(the “63⁄4% Senior Subordinated Notes”) which, after debt issuance costs of $7.3million, resulted in net proceeds of approximately $392.7 million. All of theproceeds received from the issuance of the 63⁄4% Senior Subordinated Notes wereused to repay approximately 99.6% of the Company’s tendered $400.0 millionprincipal amount of 87/8% senior subordinatednotes due 2011 (the “87/8% Senior Subordinated Notes”).

 

The 63⁄4% SeniorSubordinated Notes are unconditionally guaranteed by substantially all of ourwholly-owned subsidiaries. Interest on these notes is paid semi-annually onApril 1 and October 1 beginning April 1, 2006. The indenture for the 63⁄4% SeniorSubordinated Notes contains various restrictive covenants, includinglimitations on the ability of the issuers and the guarantors to, among otherthings: (a) incur additional indebtedness, (b) incur certain liens,(c) engage in certain transactions with affiliates and (d) paydividends and make certain other payments. We believe we are in compliance withall such covenants as of December 31, 2005.

 

All of ouroutstanding 63⁄4% Senior Subordinated Notes rank *paripassu* with each other and are all subordinated to the Amended CreditFacility.

 

***(c)***    87/8% Senior Subordinated Notes

*** ***

In August2001, the Company issued $200.0 million principal amount of 87/8%Senior Subordinated Notes, which, after debt issuance costs of $6.0 million,resulted in net proceeds of approximately $194.0 million. All of theproceeds received from the issuance of the 87/8% Senior SubordinatedNotes were used to repay amounts outstanding under a previous revolving creditfacility. In May 2002, we issued, at 103%, an additional $200.0 million of87/8%Senior Subordinated Notes and used the proceeds of approximately$201.5 million, net of related debt issuance costs of $4.5 million,to repay our $200.0 million principal amount of 9% senior subordinated notes.

 

The 87/8%Senior Subordinated Notes are unconditionally guaranteed by substantially allof our wholly-owned subsidiaries. Interest on these notes is paid semi-annuallyon February 15 and August 15. The indenture for the 87/8% Senior SubordinatedNotes contains various restrictive covenants, including limitations on theability of the issuers and the guarantors to, among other things:(a) incur additional indebtedness, (b) incur certain liens,(c) engage in certain transactions with affiliates and (d) paydividends and make certain other payments. We believe we are in compliance withall such covenants as of December 31, 2004.

 

In September2005, the Company commenced an offer (the “Tender Offer”) and consentsolicitation (the “Consent Solicitation” and, together with the Tender Offer,the “Offer and Solicitation”) relating to the 87/8%Senior Subordinated Notes. The Company offered to purchase the 87/8% Senior SubordinatedNotes pursuant to the Tender Offer at $1,082.83 per $1,000 principal amount ofthe 87/8%Senior Subordinated Notes to each seller in cash (the “Total Consideration”).The Total Consideration included a consent payment of $22.25 per $1,000principal amount of the 87/8% Senior Subordinated Notes (the “Consent Payment”)payable only to holders who tendered their 87/8% Senior SubordinatedNotes and validly delivered their consents (and did not withdraw them) on orprior to September 21, 2005. Holders who tendered their 87/8% Senior SubordinatedNotes after September 21, 2005 and on or prior to October 8, 2005 (the “ExpirationDate”) received the Total Consideration less the Consent Payment. As

 

F-35

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of theExpiration Date, approximately 99.6% of the $400.0 million aggregateprincipal amount outstanding of the 87/8% Senior SubordinatedNotes were received and accepted for payment by the Company and one of itswholly-owned subsidiaries, Kerzner International North America, Inc. (“KINA”).As of December 31, 2005, $1.6 million aggregate principal amount of the 87/8%Senior Subordinated Notes remained outstanding.

 

See Note21—Loss on Early Extinguishment of Debt for disclosure of the related lossincurred in connection with the redemption of our 87/8%Senior Subordinated Notes.

 

***(d)***    2.375% Convertible SeniorSubordinated Notes

*** ***

In April 2004,the Company 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. The proceeds from the issuance of the2.375% Convertible Senior Subordinated Notes are being used to fund futurecapital expenditures which may include, among other things, development costsfor the Phase III expansion on Paradise Island, the Company’s equityinvestment in Kerzner Istithmar and general corporate purposes. During theyears ended December 31, 2005 and 2004, a portion of these proceeds wereutilized to purchase T-Bills. The debt issuance costs are being amortized tointerest expense over ten years, as there is an option to put such debt to usten years from the issuance date. These costs, net of accumulated amortization,are included in deferred charges and other assets, net in the accompanyingconsolidated balance sheet as of December 31, 2005 and 2004. During theyear ended December 31, 2005 and 2004, the Company recorded $0.6 million and$0.4 million, respectively, of amortization of these debt issuance costs.

 

The 2.375%Convertible Senior Subordinated Notes are unsecured senior subordinatedobligations and mature on April 15, 2024 unless they are converted,redeemed or repurchased before the maturity date. The 2.375% Convertible SeniorSubordinated Notes may be converted into cash and Ordinary Shares at an initialconversion rate of 17.1703 shares per $1,000 principal amount in accordancewith the terms of the indenture. This conversion rate is equal to a conversionprice of approximately $58.24 per Ordinary Share. Upon conversion, all of theprincipal amount of the notes converted must be paid in cash.

 

These notesare convertible, at the holder’s option, prior to the maturity date into cashand Ordinary Shares in the following circumstances:

 

•      Duringany fiscal quarter commencing after the date of original issuance of the notes,if the closing sale price of our Ordinary Shares over a specified number oftrading days during the previous quarter is more than 120% of the conversionprice, or $69.89, of the notes;

 

•      Ifthe notes are called for redemption and the redemption has not yet occurred;

 

•      Duringthe five trading day period immediately after any five consecutive trading dayperiod in which the trading price of the notes per $1,000 principal amount foreach day of such period was less than 95% of the product of the closing saleprice of our Ordinary Shares on such day multiplied by the number of shares ofour Ordinary Shares issuable upon conversion of $1,000 principal amount of thenotes; or

 

•      Uponthe occurrence of specified corporate transactions.

 

The 2.375%Convertible Senior Subordinated Notes are subordinated to the Amended CreditFacility and rank *pari passu* with our 63⁄4% SeniorSubordinated Notes, however, they are not guaranteed by our wholly-ownedsubsidiaries, they are effectively subordinated to our subsidiaries’ existingand future liabilities. Interest on the 2.375% Convertible Senior SubordinatedNotes is paid semi-annually in arrears on April 15 and October 15.

 

F-36

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***(e)***    Palmilla Notes

*** ***

OnDecember 17, 2004, Palmilla entered into two promissory notes totaling aprincipal amount of $110.0 million (the “Palmilla Notes”). The PalmillaNotes mature on January 9, 2007 and are governed by the terms of thePalmilla Notes and the note indenture dated December 17, 2004 (the “PalmillaNote Indenture”).

 

In connectionwith the Palmilla Notes, Palmilla paid $4.0 million in debt issuance costsduring the year ended December 31, 2004, which are being amortized tointerest expense over two years, the term of the Palmilla Notes. These costs,net of accumulated amortization, are included in deferred charges and otherassets, net in the accompanying consolidated balance sheets.

 

Interest onthe Palmilla Notes is paid monthly on the ninth day of each month. The PalmillaNotes bear interest at LIBOR plus 3.75%. The average interest rate for theperiod that the notes were outstanding during 2005 was 7.15%. The PalmillaNotes contain affirmative and restrictive covenants which, among other things,require periodic financial reporting and include limitations on Palmilla toincur certain liens. In addition, the Palmilla Note Indenture provides recourseto Kerzner solely in the event certain representations and warranties areviolated. We believe we are in compliance with all such covenants as ofDecember 31, 2005.

 

***(f)***     Reethi Rah Term Loan Facility

*** ***

On December29, 2004, Reethi Rah entered into a facility agreement (the “Reethi Rah TermLoan Facility”) with a third party financial institution (the “Lender”). Underthe Reethi Rah Term Loan Facility, the Lender agreed to make available toReethi Rah a term loan facility in an aggregate amount equal to $50.0 millionto be used towards the development of One&Only Maldives at Reethi Rah.Loans under the Reethi Rah Term Loan Facility bear interest at (a) LIBOR plus3.25% for the period up to and including May 1, 2005, (b) LIBOR plus 2.00% onthe first $6.0 million of loans and LIBOR plus 3.25% on any other outstandingamounts above $6.0 million for the period from May 2, 2005 through May 1, 2009,and (c) LIBOR plus 3.25% from May 2, 2009 thereafter. Interest on outstandingloans is paid semi-annually on March 31 and September 30. The average interestrate for the eight months ended December 31, 2005 was 6.79%. Principal paymentsof $2.5 million are due semi-annually on June 30 and December 31 beginningDecember 31, 2005 through June 30, 2015. As of December 31, 2005, Reethi Rahhad $47.2 million of loans outstanding under the Reethi Rah Term Loan Facility.

 

The Reethi RahTerm Loan Facility contains affirmative and restrictive covenants which, amongother things: (a) require periodic financial reporting, (b) requiremeeting certain financial amounts, (c) limit the incurrence ofindebtedness and (d) limit asset expenditures and dispositions outside theordinary course of business. As of December 31, 2005, management believes thatReethi Rah was in compliance with all such covenants. In addition, the ReethiRah Term Loan Facility is secured by substantially all assets of Reethi Rah,including property and equipment and certain other assets, which have beenpledged as collateral.

 

The Reethi RahTerm Loan Facility is guaranteed, in part, by the Company. The Company and SRLentered into a guarantee agreement with the Lender which provides for theCompany to make certain operating loans to Reethi Rah in an amount not toexceed the lesser of its proportionate share of (i) $6.0 million or (ii) theamount of principal and interest due but not paid to the Lender pursuant to theReethi Rah Term Loan Facility. The guarantee is effective for four years on anon-cumulative basis beginning May 1, 2005, the date at which One&OnlyMaldives at Reethi Rah commenced operations. Upon the Company’s performance ofthis guarantee, the Company would be deemed to have made a loan on the sameterms of its senior subordinated credit agreement with Reethi Rah as discussedin Note 17—Related Party Transactions. Also see Note 17—Related PartyTransactions, for discussion of operating loans funded to Reethi Rah.

 

F-37

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***(g)***    Reethi Rah Loan

*** ***

On December 1,2002, Reethi Rah entered into a loan facility agreement (“Reethi Rah Loan”)with a syndicate of banks for a principal aggregate amount of up to $5.0million. Amounts under the Reethi Rah Loan bear interest at 12% per annum.Principal and interest payments are due in monthly installments through January31, 2008. As of December 31, 2005, Reethi Rah had $4.0 million outstandingunder the Reethi Rah Loan, of which $1.4 million is to be repaid within oneyear. The Reethi Rah Loan is secured by a first priority mortgage of theunderlying Reethi Rah property and equipment.

 

***(h)***    Other

*** ***

Otherlong-term debt consists of capital leases for machinery and equipment. As ofDecember 31, 2005, this amount includes Reethi Rah’s obligation under $4.1million of capital leases for property and equipment at One&Only Maldivesat Reethi Rah.

 

**DerivativeFinancial Instruments**

** **

*Interest Rate RiskManagement*

* *

We attempt tolimit our exposure to interest rate risk by managing our long-term fixed andvariable rate borrowings. In August and December 2001, we entered intointerest rate swap agreements (the “Swap Agreements”) designated as fair valuehedges of $200.0 million principal amount of our 87/8%Senior Subordinated Notes whereby we receive fixed interest rate payments inexchange for making variable interest rate payments on our 87/8% Senior SubordinatedNotes.

 

These SwapAgreements qualify for the “shortcut” method of accounting provided underSFAS 133, which allows for the assumption of no ineffectiveness in ourhedging relationship. Accordingly, there is no income statement impact fromchanges in the fair value of the Swap Agreements. Instead, the changes in thefair value of the Swap Agreements are recorded as an asset or liability on theaccompanying consolidated balance sheet with an offsetting adjustment to thecarrying value of the related debt.

 

In September2003, we cancelled $25.0 million notional amount of our then$200.0 million of interest rate swaps on our 87/8%Senior Subordinated Notes. We received $1.4 million from thiscancellation, which was accreted to interest expense over the term of theunderlying debt.

 

In July 2004,we cancelled $25.0 million notional amount of our then $175.0 millionof interest rate swaps on our 87/8% Senior SubordinatedNotes. We received $1.1 million from this cancellation, of which$0.4 million was applied to our outstanding interest receivable, and$0.7 million was accreted to reduce interest expense over the term of theunderlying debt.

 

In connectionwith the refinancing of our 87/8% Senior SubordinatedNotes in September 2005, we cancelled the remaining $150.0 million notionalamount of interest rate swaps on our 87/8% Senior Subordinated Notes and received $5.1 millionfrom this cancellation. See Note 21—Loss on Early Extinguishment of Debtfor further discussion.

 

Included indeferred charges and other assets, net in the Company’s balance sheets atDecember 31, 2004 is $8.7 million, representing the fair value of theSwap Agreements as of that date. This represents the amount we would havereceived had the Swap Agreements been terminated on each respective date. Thisresulted in a corresponding increase to the carrying value of our 87/8%Senior Subordinated Notes.

 

As ofDecember 31, 2004, the aggregate notional principal amount of the SwapAgreements was $150.0 million. For the years ended December 31, 2005,2004 and 2003, the weighted average variable rate on the Swap Agreements was4.97%,  4.93% and 4.18%, respectively.

 

F-38

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As ofDecember 31, 2005 and 2004, after giving effect to the Swap Agreementsduring their outstanding portion of the year, our fixed rate borrowingsrepresented approximately 79% and 65% and our variable rate borrowingsrepresented 21% and 35%, respectively, of total borrowings.

 

*Interest Rate CapAgreement*

* *

OnDecember 17, 2004, Palmilla entered into an interest rate cap agreementfor $0.2 million in order to cap the LIBOR component of the interest on thePalmilla Notes at 5% (“Interest Rate Cap Agreement”). The Interest Rate CapAgreement is designated as a cash flow hedge. The Company records the effectiveportion of changes in the fair value of the Interest Rate Cap Agreement inaccumulated other comprehensive income (loss).

 

As ofDecember 31, 2005 and 2004, the fair value of the Interest Rate CapAgreement was $0.1 million, which is included in deferred charges andother assets in the accompanying consolidated balance sheet. No hedge ineffectivenesson the Interest Rate Cap Agreement was recognized during the years endedDecember 31, 2005 and 2004.

 

*Guarantees*

* *

For adescription of the Company’s guarantees of certain debt of affiliated entities,see Note 23—Commitments and Contingencies.

 

*Overdraft Loan Facility*

* *

We have anunused revolving overdraft loan facility with The Bank of Nova Scotia in theamount of Bahamian $5.0 million, which is equal to U.S. $5.0 million.The overdraft facility would bear interest at The Bank of Nova Scotia’s base ratefor Bahamian dollar loans plus 1.5% with repayment, subject to annual review. Theoverdraft facility is secured by substantially all of our Bahamian assets andranks *pari passu* with our AmendedCredit Facility.

 

*Debt Maturity*

* *

Aggregateannual maturities of long-term debt as of December 31, 2005, for each ofthe next five years and thereafter are as follows:

 

| **Year  Ending December 31,** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------|------------|------------|------------|------------|
|                               |       |       |       |       |
| 2006                               |       | $          | 7,689      |       |
| 2007                               |       | 117,757    |       |
| 2008                               |       | 6,944      |       |
| 2009                               |       | 6,084      |       |
| 2010                               |       | 5,000      |       |
| Thereafter                         |       | 653,815    |       |
|                               |       | 797,289    |       |
| Debt premium                       |       | 17         |       |
|                               |       | $          | 797,306    |       |

 

**Note15—Shareholders’ Equity**

** **

In August2005, the Company announced that its Board of Directors approved a sharerepurchase program authorizing the Company to purchase up to two million of theCompany’s Ordinary Shares. The share repurchases will be made at management’sdiscretion from time to time in the open market through block trades orotherwise. Depending upon market conditions and other factors, sharerepurchases may be commenced or suspended at any time. During the year endedDecember 31, 2005, the Company repurchased 0.6 million of its Ordinary Sharesfor

 

F-39

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$35.7 million.Also during the year ended December 31, 2005, the Company repurchased andsubsequently cancelled 4,346 shares from employees for $0.3 million.

 

In July 2004,the Company completed an equity offering in The Bahamas of approximately4.3 million Bahamian Depositary Receipts, the equivalent of approximately0.4 million Ordinary Shares, that resulted in net proceeds ofapproximately $19.1 million.

 

In August2004, the Company sold 3.0 million newly issued Ordinary Shares at a priceof $51.25 per share to Istithmar, resulting in net proceeds of$153.4 million. As a part of Istithmar’s overall investment in theCompany, 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. These secondary sales closed simultaneously withIstithmar’s purchase of Ordinary Shares from the Company. In connection withthis transaction, we added a designee of Istithmar to our Board of Directors.

 

**Note16—Equity-Based Compensation**

** **

Ourshareholders approved stock option plans in 1995 (the “1995 Plan”), 1997 (the “1997Plan”) and in 2000 (the “2000 Plan”) that provide for the issuance of optionsto acquire an aggregate of 7,500,000 Ordinary Shares. As of December 31, 2003,all available options under those plans had been granted. In connection withthe acquisition in December 1996 of Sun International North America, Inc.(formerly Griffin Gaming & Entertainment, Inc.), we assumed the GriffinGaming & Entertainment, Inc. 1994 Stock Option Plan (the “Griffin Plan”and, together with the 1995 Plan, the 1997 Plan and the 2000 Plan, the “Plans”)and the options that were outstanding under the Griffin Plan at the time theacquisition was consummated. Pursuant to the Plans, the option prices are equalto the market value per share of the Ordinary Shares on the date of the grant. Alloptions issued under the 1995 Plan, the 1997 Plan and the Griffin Plan hadalready vested and become exercisable as of February 28, 2006. The 2000 Planprovides for the vesting period to begin one year after the grant date inrespect of one third of the options, and thereafter in installments of onethird per year over the remaining two-year period. Options granted under thePlans have a term of 10 years from the date of grant. The Plans provide foroptions with respect to Ordinary Shares to be granted to our directors,officers and employees.

 

Our Board ofDirectors approved a stock option plan in December 2003 (the “2003 Plan”)that provides for the issuance of options, restricted share awards and otherstock-based awards to acquire an aggregate of 3,000,000 Ordinary Shares. Pursuantto the 2003 Plan, the prices are equal to the fair market value per OrdinaryShare on the date of grant, unless otherwise specifically provided by the compensationcommittee. Unless otherwise specified by the compensation committee, optionsgranted under the 2003 Plan shall become vested and exercisable in installmentsof 25% on each of the first four anniversaries of the grant date. Optionsgranted under the 2003 Plan have a term of seven years from the date of grant. Restrictedshares granted under the 2003 Plan generally become vested in three equalinstallments on each of the second, third and fourth anniversaries of the dateof grant. The 2003 Plan provides for awards with respect to Ordinary Shares tobe granted to directors, officers, employees and consultants of the Company.

 

During theyears ended December 31, 2005 and 2004, the Company issued 45,600 and0.3 million, respectively, of restricted shares under the 2003 Plan tocertain officers, directors and employees. In addition, in August 2005, theCompany granted 500,000 restricted shares with an estimated aggregate fairvalue of $24.4 million to the Company’s Chief Executive Officer.

 

F-40

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A summary ofour stock option activity for 2005, 2004 and 2003 is as follows (in thousands,except exercise price per share data):

 
| ** **                       | ** ** | **December 31,** | ** ** |
|----------------------------------|------------|-----------------------|------------|
| ** **                       | ** ** | **2005**              | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                       | ** ** | **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 |       | 3,333                 |       | $ | 32.70 |   | 5,059 |   | $ | 27.91 |   | 5,347 |   | $ | 21.54 |   |
| Granted                          |       | —                |       | — |   | 255 |   | 49.56 |   | 1,796 |   | 36.40 |   |
| Exercised                        |       | (679                  | )          | 26.26 |   | (1,858 | ) | 21.78 |   | (2,074 | ) | 18.81 |   |
| Forfeited and expired            |       | (42                   | )          | 29.31 |   | (123 | ) | 25.57 |   | (10 | ) | — |   |
|                             |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| Outstanding at end of year       |       | 2,612                 |       | 34.89 |   | 3,333 |   | 32.70 |   | 5,059 |   | 27.91 |   |
| Exercisable at end of year       |       | 804                   |       | 28.01 |   | 935 |   | 25.58 |   | 2,266 |   | 22.95 |   |
| Available for grant              |       | 215                   |       |   |   | 713 |   |   |   | 1,179 |   |   |   |
|                                  |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The weightedaverage exercise price and weighted average contractual life of stock optionsoutstanding and exercisable at December 31, 2005 is as follows (in thousands,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                         |       | 33              |       | $                                                      | 19.15      |   | 6.1 |   | 23 |   | $ | 18.86 |   | 5.6 |   |
| $20.00 - $24.99                         |       | 226             |       | 20.67                                                  |       | 6.8 |   | 226 |   | 20.67 |   | 6.8 |   |
| $25.00 - $29.99                         |       | 348             |       | 25.90                                                  |       | 5.6 |   | 348 |   | 25.90 |   | 5.6 |   |
| $30.00 - $34.99                         |       | 42              |       | 32.82                                                  |       | 2.7 |   | 39 |   | 32.95 |   | 2.5 |   |
| $35.00 - $39.99                         |       | 1,699           |       | 36.74                                                  |       | 4.9 |   | 87 |   | 35.86 |   | 4.7 |   |
| $40.00 - $49.99                         |       | 142             |       | 42.39                                                  |       | 5.1 |   | 43 |   | 42.27 |   | 4.7 |   |
| $50.00 - $57.31                         |       | 122             |       | 57.31                                                  |       | 5.9 |   | 38 |   | 57.31 |   | 5.9 |   |
|                                    |       | 2,612           |       | $                                                      | 34.89      |   | 5.2 |   | 804 |   | $ | 28.01 |   | 5.7 |   |

 

F-41

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**Note 17—Related Party Transactions**

 

In the normalcourse of business, the Company undertakes transactions with a number ofunconsolidated affiliated companies. Certain of the Company’s subsidiariesprovide construction funding, project consulting, operating advances andmanagement and development services to such affiliates. Due from affiliates andmanagement, development and other fees from affiliates consisted of thefollowing:

 
| ** **                         | ** ** | ** **                        | ** ** | ** **                       | ** ** | **Management, Development and  Other Fees** | ** ** |
|------------------------------------|------------|-----------------------------------|------------|----------------------------------|------------|------------------------------------------------------------|------------|
| ** **                         | ** ** | **Due From Affiliates** | ** ** | **For the Year**       | ** ** |
| ** **                         | ** ** | **December 31,**             | ** ** | **Ended December 31,** | ** ** |
| ** **                         | ** ** | **2005**                          | ** ** | **2004**                         | ** ** | **2005**                                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Reethi Rah                         |       | $                                 | —     |                             | $          | 56,543                                                     |       | $ | — |   | $ | 1,270 |   | $ | 394 |   |
| Turnberry                          |       | 11,396                            |       | —                           |       | —                                                     |       | — |   | — |   |
| SRL                                |       | 9,172                             |       | 6,707                            |       | 9,016                                                      |       | 9,614 |   | 7,619 |   |
| Harborside at Atlantis             |       | 9,050                             |       | 18,414                           |       | 3,655                                                      |       | 2,826 |   | 1,847 |   |
| Kanuhura                           |       | 4,614                             |       | 4,022                            |       | 1,104                                                      |       | 1,466 |   | 787 |   |
| Kerzner Istithmar                  |       | 4,712                             |       | 2,520                            |       | 496                                                        |       | 380 |   | — |   |
| Ocean Club Residences & Marina |       | 2,956                             |       | —                           |       | —                                                     |       | — |   | — |   |
| Royal Mirage                       |       | 1,292                             |       | 1,378                            |       | 4,135                                                      |       | 3,403 |   | 1,293 |   |
| South Africa                       |       | 1,557                             |       | 1,743                            |       | —                                                     |       | — |   | — |   |
| Singapore                          |       | 1,451                             |       | —                           |       | —                                                     |       | — |   | — |   |
| Trading Cove Associates            |       | 459                               |       | 233                              |       | 927                                                        |       | 935 |   | 1,755 |   |
| Cape Town                          |       | —                            |       | 5,790                            |       | —                                                     |       | — |   | — |   |
| Palmilla                           |       | —                            |       | —                           |       | —                                                     |       | — |   | 1,482 |   |
| Other                              |       | 223                               |       | 69                               |       | 22                                                         |       | — |   | — |   |
|                               |       | 46,882                            |       | 97,419                           |       | $                                                          | 19,355     |   | $ | 19,894 |   | $ | 15,177 |   |
| Less: Amounts due within one year  |       | (37,164                           | )          | (15,682                          | )          |                                                       |       |   |   |   |   |
|                               |       | $                                 | 9,718      |                             | $          | 81,737                                                     |       |   |   |   |   |   |   |

 

During theyear ended December 31, 2004, the Company recognized $1.8 million of baddebt expense associated with certain affiliated receivables.

 

*Reethi Rah*

* *

On December 4,2002, the Company entered into a credit arrangement with Reethi Rah and variousother financial institutions for the purpose of providing subordinatedfinancing for the building and developing of One&Only Maldives at ReethiRah. In connection with this financing arrangement, the Company had enteredinto a series of completion loans in the principal amount of $101.5 million and$54.4 million as of December 31, 2005 and 2004, respectively. During the yearended December 31, 2005, the Company obtained an appraisal of the resort whichindicated that the carrying amount of the Company’s subordinated notesreceivable due from Reethi Rah was not fully recoverable. As a result, theCompany recorded a $27.8 million impairment of its subordinated notesreceivable for the year ended December 31, 2005.

 

In May 2005,the Company entered into a senior subordinated credit agreement with Reethi Rah(the “Reethi Rah Credit Agreement”), which superseded any and all creditarrangements among Reethi Rah, the Company and SRL, an equity method investee,and provides for the Company and SRL to provide up to $130.0 million inconstruction financing to Reethi Rah. In addition, the Reethi Rah CreditAgreement provides for operating loans over a four-year period with each annualloan amount equal to the difference between $6.0 million and Reethi Rah’s NetOperating Income, as defined. Pursuant to the Reethi Rah Credit Agreement,during the year ended December 31, 2005, the Company loaned to Reethi Rah $47.1million, net of repayments, for construction and operating loans. As ofDecember 31, 2005, the Company had outstanding completion and operating loanswith principal amounts of

 

F-42

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$94.7 millionand $6.8 million, respectively, net of an allowance of $27.8 million. No assetrelating to these loans is presented in the accompanying condensed consolidatedbalance sheet as of December 31, 2005 since the Company consolidated Reethi Rahas ofMay 1, 2005.

 

Prior to ourconsolidation of Reethi Rah, as of December 31, 2004, the Company hadoutstanding completion loans of $54.4 million, which is included in due fromaffiliates—non-current, net in the accompanying consolidated balance sheet as ofDecember 31, 2004. As of December 31, 2004, other amounts incurred inconnection with Reethi Rah of $1.6 million primarily represent developmentcosts that Kerzner has incurred on behalf of the resort, which are reimbursableto the Company. These amounts have been eliminated upon the consolidation ofReethi Rah.

 

During theyear ended December 31, 2005, Reethi Rah purchased $1.7 million of goods andservices in the normal course of business from certain affiliated companies ofone of the owners of the resort. As of December 31, 2005, $0.1 million wasoutstanding to these companies and this amount is included in accounts payableand accrued liabilities in the accompanying consolidated balance sheet. Inaddition, as of December 31, 2005, Reethi Rah had amounts receivable from oneof the owners of the resort of $0.2 million related to expenses reimbursable tothe Company.

 

*Turnberry*

* *

As of December 31, 2005, $11.4 million wasdue from Turnberry to Residences at Atlantis, a consolidated variable interestentity, for customer deposits related to the condominium-hotel, which are beingheld in escrow by Turnberry on behalf of the joint venture.

 

*SRL*

* *

The Companyhas long-term management contracts through 2023 with each of the five hotels inMauritius that are owned by SRL: One&Only Le Saint Géran, One&Only LeTouessrok, La Pirogue Hotel, Sugar Beach Resort and Le Coco Beach Hotel. EffectiveJanuary 1, 2003, the Company entered into an agreement with SRL to formOne&Only Management for the purpose of, among other things, managingKanuhura and the Mauritius Resorts. The Company and SRL have subsequentlyentered into an agreement to assign to One&Only Management the managementresponsibilities for One&Only Maldives at Reethi Rah effective on theresort opening date of May 1, 2005.

 

EffectiveJanuary 1, 2003, SRL owned 20% of One&Only Management and the Companyowned the remaining 80%. Subject to certain conditions, SRL’s ownershipinterest will increase incrementally through 2009, at which time it will own50% of One&Only Management. Effective January 1, 2005, SRL’s ownershipinterest increased to 25% and our ownership interest decreased to 75%.

 

Pursuant to asubcontract arrangement with One&Only Management, the Company providescomprehensive management services to Kanuhura, One&Only Maldives at ReethiRah and the Mauritius Resorts and receives a management fee, which iscalculated as a percentage of revenue and adjusted EBITDA, as defined. One&OnlyManagement is also entitled to a marketing fee as calculated as a percentage ofrevenue, although it has subcontracted to the Company all marketing servicesand benefits thereof with respect to Kanuhura, One&Only Maldives at ReethiRah and the Mauritius Resorts. Amounts relating to One&Only Maldives atReethi Rah are eliminated upon consolidation. For the years endedDecember 31, 2005, 2004 and 2003, the Company has recognized$7.9 million, $8.4 million and $7.4 million, respectively,related to these management agreements in Mauritius. Additionally, during 2002,the Company completed a major redevelopment of One&Only Le Touessrok forwhich it earned project fees of $0.2 million for the year endedDecember 31, 2003.

 

As of and forthe years ended December 31, 2005 and 2004, the Company has consolidatedOne&Only Management, with SRL’s 25% and 20% interest, respectively,reflected as a minority interest in the accompanying consolidated statements ofoperations and a minority interest liability reflected within accounts payableand accrued liabilities in the accompanying consolidated balance sheets. TheCompany signed an agreement with SRL that provided for, among other things, thesale of 20% of its debt and equity interests in Kanuhura to SRL for which it

 

F-43

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received$1.5 million. Following this sale, which was effective January 1,2003, as of December 31, 2004, the Company had a 20% equity interest inKanuhura. In connection with the incremental ownership interest increases inOne&Only Management, effective January 1, 2005, the Company sold anadditional 5% of its original debt and equity interests in Kanuhura to SRL. Accordingly,the Company’s equity interest in Kanuhura is now 18.75%.

 

Included inamounts due from SRL as of December 31, 2005 is $2.3 million relating to SRL’sproportionate share of completion loans to Reethi Rah which were made by theCompany on behalf of SRL. This amount has been received by the Company inFebruary 2006.

 

*Harborside at Atlantis*

* *

In 2000, theCompany entered into a series of promissory notes with Harborside at Atlantisto fund 50% of the construction cost of the timeshare units on Paradise Islandin The Bahamas. In December 2004, the Company loaned an additional$1.5 million to Harborside at Atlantis related to the development ofadditional timeshare units in connection with the Phase III expansionpursuant to the existing series of promissory notes. During the year endedDecember 31, 2005, the Company loaned an additional $2.3 million and Harborsideat Atlantis repaid $13.8 million of the notes. The balance of these notes was$5.0 million and $16.5 million as of December 31, 2005 and 2004,respectively. In November 2005, the Company and Harborside at Atlantis extendedthe maturity date of the notes to December 31, 2006, however, such notes areclassified as non-current in the accompanying consolidated balance sheet as ofDecember 31, 2005 as the Company does not anticipate payment byDecember 31, 2006 and expects to further extend this maturity date.

 

The Companyearns interest on these advances at a rate equal to one-month LIBOR plus250 basis points. The average interest rate for the year endedDecember 31, 2005 was 5.9%. Interest income earned on these advances was$0.9 million, $0.6 million and $0.7 million for the years ended December 31,2005, 2004 and 2003, respectively. Interest due from Harborside at Atlantis onthese notes was $0.1 million as of December 31, 2005 and 2004. Theloans were made simultaneously with loans from Starwood Vacation, which mirrorthe amounts, terms and conditions of the Company’s loans. The Company’s loansand Starwood Vacation’s loans are *pari passu*with respect to payments of principal and accrued interest and such paymentswill be made in cash, as it is available from the sale of timeshare units.

 

The Companyprovides marketing and administrative services to Harborside at Atlantis fromwhich it earned fees of $3.3 million, $2.5 million and$1.8 million for the years ended December 31, 2005, 2004 and 2003,respectively. Development fees earned during the years ended December 31,2005 and 2004 amounted to $0.4 million and $0.3 million, respectively. Theseamounts are included within management, development and other fees in theaccompanying consolidated statements of operations. The amount due fromHarborside at Atlantis related to these services and other reimbursable costswas $4.0 million and $1.9 million as of December 31, 2005 and2004, respectively.

 

*Kanuhura*

* *

As describedabove, we assigned to One&Only Management the management agreement ofKanuhura, in which we own an 18.75% interest as of December 31, 2005. Theterms of the management agreement run concurrently with the terms of a leasebetween Kanuhura and the government of the Republic of Maldives. That leaseexpires in 2026 and is subject to extension.

 

During 2002,we advanced funds to Kanuhura in the amount of $3.6 million, whichrepresented our share of funding for operations. This advance is payable aftersatisfaction of certain Kanuhura financial obligations which mature no earlierthan December 2007. However, during 2004, Kanuhura repaid$1.2 million, including principal and accrued interest. Effective January1, 2005, $0.1 million principal amount of the Kanuhura advances weretransferred to SRL in connection with the Company’s sale of 5% of its debt andequity interest. These loans accrue interest at a rate of LIBOR plus600 basis points. The average interest rate for the year endedDecember 31, 2005 was 8.87%. Interest income earned on these advances was$0.3 million, $0.2 million and $0.3 million for the years ended December 31,2005, 2004 and 2003, respectively. As of December 31, 2005, the balance ofthe Kanuhura advances was $2.3 million, excluding accrued interest.

 

F-44

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Fees formanagement and marketing services during the years ended December 31,2005, 2004 and 2003 were $1.1 million, $1.5 million and$0.8 million, respectively, and are included in management, developmentand other fees in the accompanying consolidated statements of operations.

 

*Kerzner Istithmar*

* *

The Companyhas entered into a development agreement with Kerzner Istithmar that entitlesus to receive $20.0 million and reimbursement of certain expenses over thedevelopment period of Atlantis, The Palm. We currently have a 50% ownership interestin Kerzner Istithmar, and as such, we expect to recognize $10.0 million indevelopment fees over the development period. For the years endedDecember 31, 2005 and 2004, we recognized $0.5 million and$0.4 million, respectively, of development fees related to Atlantis, ThePalm. These amounts are included within management, development and other feesin the accompanying consolidated statements of operations for the years endedDecember 31, 2005 and 2004. The $4.7 million and $2.5 million duefrom Kerzner Istithmar as of December 31, 2005 and 2004, respectively,primarily consists of development related costs that have been advanced by theCompany which are reimbursable under the terms of the development agreement.

 

*Ocean Club Residences& Marina*

* *

As of December31, 2005, amounts due from affiliates included $3.0 million of costs paid bythe Company on behalf of the joint venture related to the development of theOcean Club Residences & Marina.

 

*Royal Mirage*

* *

Fees formanagement services to the Royal Mirage during the year ended December 31,2005, 2004 and 2003 were $4.1 million, $3.4 million and$1.3 million, respectively, and are included in management, developmentand other fees in the accompanying consolidated statements of operations.

 

*South Africa*

* *

In October2003, we funded $1.7 million for the purchase of land related to thepotential development of an additional One&Only property in South Africa.

 

*Singapore*

* *

Due from affiliates as of December 31, 2005includes $1.5 million due from CapitaLand Commercial and Integrated Development(“CapitaLand”). On January 10, 2005, the Company entered into a memorandum ofunderstanding relating to the creation of a joint venture to be owned 60% bythe Company and 40% by CapitaLand for the purpose of submitting a joint conceptproposal to the Singapore government for the development of an integratedentertainment resort complex on Sentosa Island in Singapore. The $1.5 millionamount represents CapitaLand’s share of costs incurred by the Company in thedevelopment of the proposal which is expected to be reimbursed by CapitaLand.

 

*Cape Town*

* *

In November2003, we entered into an agreement with Victoria & Alfred Waterfront (Pty)Limited to develop a new luxury hotel on the waterfront in Cape Town, SouthAfrica, subject to various conditions. In the first quarter of 2006, we formeda joint venture in which we own a minority interest to develop and operate CapeTown. As of December 31, 2005, the Company had advanced $6.1 million and$5.8 million, respectively, related to the development of this luxuryhotel. These amounts are included in construction in progress within propertyand equipment, net in the accompanying consolidated balance sheet as ofDecember 31, 2005.

 

*Palmilla*

* *

Prior to ourconsolidation of Palmilla JV, LLC on January 1, 2004, fees for managementservices from Palmilla for the year ended December 31, 2003 were$0.1 million and are included in management, development and other fees inthe accompanying consolidated statements of operations.

 

F-45

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In April 2003,Palmilla commenced its expansion and redevelopment. In connection with theredevelopment, the Company earned $1.3 million and $0.2 million ofdevelopment and management fees, respectively, for the year endedDecember 31, 2003 which are included in management, development and otherfees in the accompanying consolidated statements of operations.

 

InDecember 2004, Palmilla paid $0.8 million to Goldman,Sachs & Co., a related party of our 50% joint venture partner, fordebt issuance costs associated with the Palmilla Notes. This amount is includedin deferred charges and other assets, net, in the accompanying consolidatedbalance sheet.

 

*Office Lease*

* *

EffectiveFebruary 2002, we entered into a lease agreement with Tennyson PropertiesLimited, whereby we are leasing office space in Buckinghamshire in the UnitedKingdom for a period of 15 years. The annual rent is approximately£205,000 (which is the equivalent of approximately $0.4 million atDecember 31, 2005) and is subject to increase every five years to thecurrent fair market value. Tennyson Properties Limited is owned by a familytrust established by Mr. S. Kerzner, Chairman of the Company.

 

*Employee Receivables*

* *

Employee notesreceivable as of December 31, 2005 and 2004 includes $0.8 millionrelated to a secured housing loan which was issued in December 2002. Additionally,$0.3 million and $0.4 million of employee notes receivable as ofDecember 31, 2005 and 2004, respectively, relates to funds advanced to anemployee for a secured housing loan, which is being amortized through July 2012.Also, as of December 31, 2005, the Company had amounts due from its Chairmanand Chief Executive Officer of $0.2 million and $0.1 million, respectively,relating to expenses reimbursable to the Company.

 

**Note18—Employee Benefit Plans**

** **

Certain of theCompany’s subsidiaries participate in a defined contribution plan coveringsubstantially all of their full-time employees. The Company makes contributionsto this plan based on a percentage of eligible employee contributions. Totalexpenses for this plan were $0.4 million, $0.4 million and$0.3 million for the years ended December 31, 2005, 2004 and 2003,respectively.

 

In addition tothe plan described above, union and certain other employees of Kerzner’ssubsidiaries in The Bahamas are covered by multi-employer defined benefitpension plans to which employers make contributions. In connection with theseplans, the Company expensed contributions of $7.7 million,$7.3 million and $7.0 million for the years ended December 31,2005, 2004 and 2003, respectively.

 

In October2002, the Company established a deferred compensation plan (the “DeferredCompensation Plan”) for the purpose of allowing certain management of theCompany to defer portions of their compensation and accumulate earnings on atax-deferred basis. The amount that is elected to be deferred is withheld fromthe employee’s compensation and remitted to the trustee of the DeferredCompensation Plan. The trustee is responsible for utilizing such funds topurchase certain investments, which are held in a rabbi trust.

 

Thecompensation withheld from management, together with investment income on theDeferred Compensation Plan, is reflected as a deferred compensation obligationto participants and is classified within other long-term liabilities in theaccompanying consolidated balance sheets. The related assets which are held inthe rabbi trust are classified within deferred charges and other assets in theaccompanying consolidated balance sheets and are reported at cash surrendervalue with the resulting change in cash surrender value included in theaccompanying consolidated statements of operations. At December 31, 2005and 2004, the balance of the liability and the corresponding asset totaled$7.0 million and $4.0 million, respectively. During the years endedDecember 31, 2005 2004, and 2003, the net change in the fair value of planassets resulted in a charge to corporate expense of $0.2 million,$0.1million and $0.2 million, respectively.

 

F-46

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**Note 19—Investmentsin and Equity in Earnings (Losses) of Associated Companies**

** **

Components ofinvestments in associated companies and equity in earnings (losses) ofassociated companies were as follows:

 
| ** **                                             | ** ** | **Investments in** | ** ** | **Equity in Earnings (Losses) of** | ** ** |
|--------------------------------------------------------|------------|-------------------------|------------|--------------------------------------------------------|------------|
| ** **                                             | ** ** | **Associated**          | ** ** | **Associated Companies**                          | ** ** |
| ** **                                             | ** ** | **Companies**           | ** ** | **For the Year**                             | ** ** |
| ** **                                             | ** ** | **December 31,**   | ** ** | **Ended December 31,**                       | ** ** |
| **Associated Company  (Ownership Interest)** | ** ** | **2005**                | ** ** | **2004**                                               | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Kerzner Istithmar (50%)                                |       | $                       | 75,435     |                                                   | $          | 21,440 |   | $ | (676 | ) | $ | — |   | $ | — |   |
| BLB (37.5%)                                            |       | 47,290                  |       | 38,273                                                 |       | 2,099 |   | (2,970 | ) | — |   |
| SRL (20.4%)                                            |       | 26,367                  |       | 26,323                                                 |       | 3,810 |   | 4,297 |   | 2,292 |   |
| Harborside at Atlantis (50%)                           |       | 24,799                  |       | 9,044                                                  |       | 16,106 |   | 6,651 |   | 3,329 |   |
| Ocean Club Residences & Marina (50%)               |       | 13,968                  |       | —                                                 |       | 1,817 |   | — |   | — |   |
| Kanuhura (18.75%)                                      |       | 2,160                   |       | 2,303                                                  |       | 2 |   | 439 |   | (51 | ) |
| Trading Cove New York (50%)                            |       | 1,826                   |       | 1,809                                                  |       | (983 | ) | (947 | ) | (1,086 | ) |
| Palmilla (50%)                                         |       | —                  |       | —                                                 |       | — |   | — |   | (4,805 | ) |
| Other (50%)                                            |       | 30                      |       | 38                                                     |       | (83 | ) | (15 | ) | 1 |   |
|                                                   |       | 191,875                 |       | 99,230                                                 |       | $ | 22,092 |   | $ | 7,455 |   | $ | (320 | ) |
|                                                   |       |                    |       |                                                   |       |   |   |   |   |   |   |
| Trading Cove Associates (50%)                          |       | 15,702                  |       | 14,908                                                 |       | $ | 37,882 |   | $ | 35,909 |   | $ | 33,960 |   |
|                                                   |       | $                       | 207,577    |                                                   | $          | 114,138 |   |   |   |   |   |   |   |

 

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.

 

In the normalcourse of business, the Company undertakes transactions with a number ofunconsolidated affiliated companies. See Note 17—Related PartyTransactions for further discussion.

 

F-47

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The following represents summarized financial information of Kerzner’sequity method investees (converted to U.S. dollars at the applicable exchangerate, where appropriate):

 
| ** **                                             | ** ** | **For the Year Ended December 31,** | ** ** |
|--------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                             | ** ** | **2005**                                                     | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenue                                                |       | $                                                            | 373,600    |   | $ | 260,092 |   | $ | 240,198 |   |
| Income from  operations                                |       | 156,506                                                      |       | 117,789 |   | 89,485 |   |
| Income from  continuing operations before income taxes |       | 136,458                                                      |       | 104,737 |   | 78,464 |   |
| Net income                                             |       | 128,620                                                      |       | 101,254 |   | 71,590 |   |
|                                                        |            |                                                              |            |  |  |  |  |  |  |  |

 

| ** **                 | ** ** | **As of December 31,** | ** ** |
|----------------------------|------------|---------------------------------------|------------|
| ** **                 | ** ** | **2005**                              | ** ** | **2004** | ** ** |
|                       |       |                                  |       |   |   |
| Current assets             |       | $                                     | 229,223    |   | $ | 81,625 |   |
| Non-current  assets        |       | 1,202,576                             |       | 568,917 |   |
| Total assets               |       | 1,431,799                             |       | 650,542 |   |
| Current  liabilities       |       | 206,653                               |       | 78,007 |   |
| Non-current  liabilities   |       | 688,681                               |       | 188,520 |   |
| Shareholders’  equity |       | 536,465                               |       | 384,015 |   |
|                            |            |                                       |            |  |  |  |  |

 

*Kerzner Istithmar*

* *

As of December 31, 2005 and 2004, the Company had invested $77.0million and $21.8 million, respectively, in Kerzner Istithmar. As these fundswere utilized by Kerzner Istithmar during the construction of Atlantis, ThePalm, $2.9 million and $0.5 million, respectively, of related capitalizedinterest is included in the investment as of December 31, 2005 and 2004. As ofDecember 31, 2005 and 2004, the investment has been reduced by $0.9 million and$0.4 million, respectively, representing the portion of the developmentfee pertaining to our 50% ownership interest in Kerzner Istithmar. As ofDecember 31, 2005, the Company’s investment has been reduced by our share ofpre-opening expenses incurred at Atlantis, The Palm during 2005 of $2.1 millionand our investment has been increased by our share of unrealized gains during2005 of $1.4 million resulting from interest rate swaps entered into by KerznerIstithmar.  

 

*BLB*

* *

Kerzner invested $47.4 million in BLB during 2004 for itsproportionate share of BLB’s 22.2% interest in Wembley and to fund BLB’sintended acquisition of all of Wembley’s outstanding shares. During 2004, werecognized a $3.0 million equity loss in BLB, which included our share offailed transaction costs of $3.0 million related to the intendedacquisition of all of Wembley’s outstanding shares, our $1.0 million shareof a hedge loss, offset by $1.0 million of our share of dividend incomereceived by BLB from Wembley. Also included in the investment in BLB as ofDecember 31, 2004 was $8.9 million in unrealized loss related to a declinein the fair value of Wembley’s shares and $2.8 million in foreign currencytranslation gain.

 

During the year ended December 31, 2005, the Company recognized $2.1million of equity earnings from its investment in BLB. During 2005, the Companyrecognized through accumulated other comprehensive income (loss) $11.4 millionin unrealized gain related to an increase in the fair value of Wembley’s sharesand $4.1 million in foreign currency translation loss. On the acquisitiondate, the Company recorded a reversal of its cumulative unrealized gain of $1.2million on its investment as presented in the accompanying consolidatedstatements of changes in the shareholders’ equity and comprehensive income.

 

F-48

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*SRL*

* *

The Company recognized $3.8 million, $4.3 million and$2.3 million of equity earnings from SRL during the years endedDecember 31, 2005, 2004 and 2003, respectively. During the years endedDecember 31, 2005, 2004 and 2003, the Company received dividends from SRLof $2.3 million, $1.8 million and $1.5 million, respectively.

 

SRL’s shares are traded on the Stock Exchange of Mauritius and ourequity ownership interest had a fair market value of $42.3 million and $32.2million, as of December 31, 2005 and 2004, respectively. During the years endedDecember 31, 2005, 2004 and 2003, the Company recorded unrealized foreigncurrency (losses) gains of $(1.5) million, $0.2 million and $0 related to itsinvestment in SRL. These amounts are included within translation reserves ascomponents of accumulated other comprehensive income (loss) in the accompanyingconsolidated statements of changes in the shareholders’ equity andcomprehensive income.

 

*Harborside at Atlantis*

* *

Harborside at Atlantis constructs, sells, finances and managestimeshare units on Paradise Island, The Bahamas. Construction of the firstphase of the timeshare units was completed in February 2001, and sales oftimeshare units began in May 2000. As of December 31, 2005, substantiallyall of the first phase of the timeshare units were sold. In 2004, sales oftimeshare units began on the second phase of the Harborside at Atlantisdevelopment in connection with the Phase III expansion. As of December 31,2005 and 2004, 37% and 13%, respectively, of the second phase of timeshareunits were sold.

 

For the years ended December 31, 2005, 2004 and 2003, the Companyrecognized $16.1 million, $6.7 million and $3.3 million, respectivelyin equity earnings from Harborside at Atlantis. Amounts recognized in 2005included $0.3 million representing our portion of the total $0.7 million ofdevelopment fee which pertains to our 50% ownership interest. Included in theseamounts for the years ended December 31, 2004 and 2003, are $0.2 millionand $1.8 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 forthe years ended December 31, 2004 and 2003, are insurance recoveries realizedby Harborside at Atlantis related to the settlement of the remediation claims,our portion of which was $4.2 million and $1.5 million, respectively.The Company initially contributed land to Harborside at Atlantis at its cost,resulting in a $4.5 million difference between the Company’s investment and theamount of underlying equity in Harborside at Atlantis’ net assets.

 

*Ocean Club Residences& Marina*

* *

The Company’s investment in the Ocean Club Residences & Marinaincludes $4.3 million of the Company’s cost basis of land and certain directcosts related to the construction and development of the project, which werecontributed to the joint venture in exchange for its 50% equity ownershipinterest.

 

During the fourth quarter of 2005, the Company acquired additionalbeachfront property on Paradise Island adjoining Ocean Club Estates for $15.7million. The Company has contributed the right to use this land into the OceanClub Residences & Marina for future development and received a $7.9 milliondistribution, representing our partner’s 50% share. During the year endedDecember 31, 2005, the Company recognized $1.8 million in equity earnings fromthe joint venture.

 

*Kanuhura*

* *

Effective January 1, 2005, the Company sold 1.25% of its equityownership in Kanuhura for its book value of $0.1 million to SRL, resulting inour direct ownership decreasing from 20% to 18.75%. Despite this change inownership percentage, the Company continues to have the ability to exercisesignificant influence over the operating and financial policies of Kanuhurathrough its direct ownership and, indirect ownership through SRL, and itsrepresentation on Kanuhura’s board of directors. As a result, the Companyaccounts for its investment in Kanuhura pursuant to the equity method ofaccounting.

 

For the years ended December 31, 2005, 2004 and 2003, the Companyrecognized $0, $0.4 million and ($0.1) million, respectively, inequity earnings (losses) from Kanuhura.

 

F-49

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*Trading Cove New York*

* *

Through a wholly-owned subsidiary, 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 of TCNY by expensing certaincosts that TCNY capitalized due to the Company’s evaluation of the uncertaintyof the recoverability of such costs. During the years ended December 31,2005, 2004 and 2003, the Company recognized $1.0 million, $0.9 million and$1.1 million, respectively, of equity losses in TCNY.

 

As it has been the Company’s policy to expense certain costs that TCNYcapitalized due to the uncertainty of the recoverability of such costs, theCompany’s investment as of December 31, 2005 was $1.8 million, which consistedalmost entirely of underlying land acquired for the potential project. As such,the Company believes the book value of land included in the Company’sinvestment is at least equal to its fair value and should TCNY not proceed withthe Catskills Project, the Company would not anticipate a significant write off.

 

*Trading Cove Associates*

* *

The Company’s equity in earnings from TCA totaled $37.9 million,$35.9 million and $34.0 million for the years ended December 31,2005, 2004 and 2003, respectively. Such amounts do not equal 50% of thereported net income of TCA, primarily as a result of a priority distribution. Forseven years beginning January 1, 2000, TCA pays us the first$5.0 million of the profits it receives each year (after the payment ofcertain expenses and the return of certain capital contributions) pursuant tothe Relinquishment Agreement as a priority payment prior to making pro ratadistributions to its partners. The Company received cash distributions of$37.1 million, $35.4 million and $29.0 million for the yearsended December 31, 2005, 2004, and 2003, respectively.

 

**Note 20—Gainon Settlement of Territorial and Other Disputes**

** **

*Majority ShareholderReorganization*

* *

In July 2001, the Company announced the restructuring of its thenmajority shareholder, Sun International Investments Limited (“SIIL”), and theresolution of certain matters, including a territorial dispute, with SIIL andcertain of its shareholders (collectively the “Reorganization”). At the time ofthe Reorganization, SIIL and its shareholders beneficially owned approximately67% of our issued and outstanding Ordinary Shares. SIIL was itself owned inequal thirds by Sun International Limited (formerly Kersaf Investments Limited)(“Kersaf”), Caledonia Investments PLC and World Leisure Group Limited, acompany 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 theReorganization, among other things, SIIL was dissolved and the shareholders’agreement governing SIIL was terminated. Accordingly, SIIL’s shareholdersobtained direct ownership of their Ordinary Shares. In addition, SIIL’sshareholders agreed to certain standstill provisions in effect throughJune 2006, pursuant to which each of them would refrain from proposing orconsummating certain extraordinary corporate transactions involving theCompany, including any merger or the sale of substantially all of our assets.

 

Pursuant to a registration rights and governance agreement executed inconnection with the Reorganization, Kerzner granted certain registration rightsto SIIL’s shareholders in respect of the Ordinary Shares held by them, in partin order to facilitate the required sale of at least 2,000,000 of Kersaf’sOrdinary Shares in a registered public offering, which requirement wassatisfied on December 12, 2002. Kerzner agreed that, after a transitionperiod not to exceed one year from June 30, 2001, it would cease, and ithas ceased, using the names “Sun” and “Sun International”. In connection withthe Reorganization, Kersaf agreed to pay Kerzner $15.5 million which waspaid in full in 2001. Of this amount, we recognized a $1.5 million netgain on the settlement of this territorial dispute during the year endedDecember 31, 2003.

 

*Subsequent Disputes andSettlement with Kersaf Investments Limited*

* *

As part of the Reorganization, the Company and Kersaf agreed torestructure certain agreements which included, among other things, anobligation for Kersaf to sell at least 2,000,000 shares of the Company’s sharesin a registered public offering, certain non-compete agreements, thecontinuation of an obligation of Kersaf to pay

 

F-50

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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 Company executed a settlement agreement thatresolved all of these outstanding matters on November 1, 2002.

 

According to the settlement agreement, among other things,(i) Kersaf was obligated, and on December 18, 2002 satisfied thisobligation, to sell at least 2,000,000 shares in a registered public offering;(ii) Kersaf’s obligation to make the Contribution Payment was terminatedeffective December 1, 2002 and; (iii) Kersaf paid us$32.1 million in December 2002. Of this amount, $11.2 millionand $14.7 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, 2005 and2004, respectively. The long-term portion of $7.6 million and$11.2 million as of December 31, 2005 and 2004, respectively, isincluded within deferred revenue and the current portion of $3.6 millionand $3.5 million is included in accounts payable and accrued liabilitiesin the accompanying consolidated balance sheets. These amounts are beingrecognized as other revenue over the term of the original underlying Mauritiusmanagement contracts, which extended through December 2008. The remainingamount of $9.4 million, net of $1.4 million of direct legal expenses,was recognized in the fourth quarter of 2002 as an additional gain onsettlement of territorial and other disputes. In exchange for this settlement,we agreed to terminate all existing lawsuits related to Kersaf and havereleased all parties from any related claims and we shall no longer have anyinterest in the Egypt Project.

 

**Note 21—Losson Early Extinguishment of Debt**

 

During the year ended December 31, 2005, in connection with therefinancing of our 87/8% Senior SubordinatedNotes, the Company recognized a $27.9 million loss on early extinguishment ofdebt. This loss consisted of $33.0 million of consent solicitation payments andthe write off of $5.8 million of debt issuance costs. These costs were offsetby the write off of a $4.3 million unamortized premium and net proceeds of $4.9million from the termination of our related interest rate swap agreement plusaccrued interest and related write off of the $1.7 million interest rate swapcontra asset. 

 

During the year ended December 31, 2004, the Company recognized a$1.7 million loss on early extinguishment of debt related to the write offof debt issuance costs associated with Palmilla’s previous senior creditfacility.

 

**Note22—Income Taxes**

 

A significant portion of our operations are located in The Bahamaswhere there are no income taxes. In 2005, 2004 and 2003, the income tax(benefit) provision relating to U.S. and other non-Bahamian operations were asfollows: 

 
| ** ** | ** ** | **For the Year Ended December 31,** | ** ** |
|------------|------------|--------------------------------------------------------------|------------|
| ** ** | ** ** | **2005**                                                     | ** ** | **2004** | ** ** | **2003** | ** ** |
| Current:   |       |                                                         |       |   |   |   |   |
| Federal    |       | $                                                            | 1,124      |   | $ | (854 | ) | $ | 7,917 |   |
| State      |       | 2,948                                                        |       | 3,424 |   | 3,393 |   |
| Foreign    |       | 1,303                                                        |       | 1,353 |   | 584 |   |
|       |       | 5,375                                                        |       | 3,923 |   | 11,894 |   |
| Deferred:  |       |                                                         |       |   |   |   |   |
| Federal    |       | (21,479                                                      | )          | (3,499 | ) | (11,732 | ) |
|       |       |                                                         |       |   |   |   |   |
|       |       | $                                                            | (16,104    | ) | $ | 424 |   | $ | 162 |   |

 

F-51

----

 

The effective tax rate on income varies from the statutory U.S. federaltax rate as a result of the following factors: 

 
| ** **                                                                              | ** ** | **For the Year Ended  December 31,** | ** ** |
|-----------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                                              | ** ** | **2005**                                                 | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                                    |       |                                                     |       |   |   |   |   |
| Statutory U.S.  federal income tax rate                                                 |       | 35.0                                                     | %          | 35.0 | % | 35.0 | % |
| Non-U.S.-source  income                                                                 |       | (24.2                                                    | )          | (28.4 | ) | (25.4 | ) |
| State tax cost                                                                          |       | 8.1                                                      |       | 5.0 |   | 4.7 |   |
| Benefit of  capital loss carryforward                                                   |       | (4.6                                                     | )          | — |   | — |   |
| Reduction of  valuation allowance relating to prior years’ operating loss utilized |       | (59.5                                                    | )          | (5.1 | ) | (16.4 | ) |
| Release of  accruals for tax uncertainties                                              |       | (4.8                                                     | )          | (5.4 | ) | — |   |
| Foreign tax cost                                                                        |       | 3.6                                                      |       | 2.0 |   | 0.8 |   |
| Other                                                                                   |       | 1.8                                                      |       | (2.5 | ) | 1.7 |   |
|                                                                                    |       | (44.6                                                    | )%         | 0.6 | % | 0.2 | % |

 

Deferred income taxes reflect the net tax effects of temporarydifferences between the carrying amounts of assets and liabilities forfinancial reporting purposes and the amounts used for income tax purposes.

 

The components of the deferred tax assets and liabilities were asfollows:

 
| ** **                                                            | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                            | ** ** | **2005**              | ** ** | **2004** | ** ** |
|                                                                  |       |                  |       |   |   |
| Non-current  deferred tax liabilities:                                |       |                  |       |   |   |
| Basis  difference-land                                                |       | $                     | 12         |   | $ | 960 |   |
| Equity earnings                                                       |       | 80                    |       | — |   |
| Basis  differences on property and equipment                          |       | —                |       | 153 |   |
| Total deferred  tax liabilities                                       |       | 92                    |       | 1,113 |   |
|                                                                  |       |                  |       |   |   |
| Non-current  deferred tax assets:                                     |       |                  |       |   |   |
| NOL  carryforwards                                                    |       | 97,928                |       | 140,694 |   |
| Basis  differences on property and equipment                          |       | 1,489                 |       | — |   |
| Basis  differences on land held for investment, development or resale |       | —                |       | 8,169 |   |
| Book accruals  not yet deductible for tax return purposes             |       | 4,770                 |       | 3,041 |   |
| Tax credit  carryforwards                                             |       | 2,844                 |       | 3,240 |   |
| Other                                                                 |       | 4,436                 |       | 5,591 |   |
| Total deferred  tax assets                                            |       | 111,467               |       | 160,735 |   |
| Valuation  allowance for deferred tax assets                          |       | (81,619               | )          | (148,441 | ) |
| Deferred tax  assets, net of valuation allowance                      |       | 29,848                |       | 12,294 |   |
|                                                                  |       |                  |       |   |   |
| Non-current net  deferred tax assets:                                 |       | $                     | 29,756     |   | $ | 11,181 |   |

 

Realization of future tax benefits related to deferred tax assets isdependent on many factors, including our ability to generate future taxableincome. 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. Weconsidered these factors in reaching our conclusion to reduce the valuationallowance by $66.8 million, $40.4 million and $40.6 millionduring 2005, 2004 and 2003, respectively. Of this reduction,$21.5 million, $3.5 million and $11.7 million represent amountsreleased as income tax benefit, and accordingly, reduced our provision forincome taxes for the years ended December 31, 2005, 2004 and 2003,respectively. The remaining reduction to the valuation allowance resultedprimarily from the

 

F-52

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tax effected expiration of net operating loss (“NOL”) carryforwards. 

 

For federal income tax purposes, Kerzner International NorthAmerica, Inc. (“KINA”), one of our wholly-owned subsidiaries, had NOLcarryforwards of approximately $279.8 million at December 31, 2005,of which $279.3 million are unrestricted as to use. NOL carryforwards of $112.0million expired in 2005. A portion of these expired NOLs accelerated thefree-up of limitations on some of our remaining NOLs.

 

Our NOL carryforwards expire as follows: $23.5 million in 2006,$30.6 million in 2007, $56.9 million in 2008, $8.0 million in2011, $57.0 million in 2012, $32.3 million in 2019,$17.7 million in 2020, $49.0 million in 2021 and $4.8 million in2024.

 

From time to time, we may be subject to audits covering a variety oftax matters by taxing authorities in any taxing jurisdiction where we conductour business. While we believe that the tax returns we file and any taxpositions we take are supportable and accurate, some tax authorities may notagree with our positions. This can give rise to tax uncertainties which, uponaudit, may not be resolved in our favor. We have established accruals forvarious tax uncertainties that we believe are probable and reasonably estimable.These accruals are based on certain assumptions, estimates and judgments,including estimates of amounts for settlements, associated interest andpenalties. Changes to these assumptions, estimates and judgments could have amaterial impact on our provision for income taxes. For the years endedDecember 31, 2005 and 2004, we reduced our tax accruals by $1.7 millionand $3.7 million, respectively, as a result of the expiration of certainstatutes of limitation or a change in our judgment with respect to variouspotential tax uncertainties. This resulted in a reduction to our provision forincome taxes by the same amount. As of December 31, 2005, we have anincome tax accrual of $3.0 million related to certain tax positions whichmight be challenged by tax authorities. If challenged, the amount of taxes,penalties and interest which could be assessed by taxing authorities may differfrom the amount that has been accrued.

 

**Note23—Commitments and Contingencies**

** **

*Lease Obligations*

* *

We lease office space in numerous locations throughout the UnitedStates and Europe for sales and marketing, public relations, tour operationsand travel reservation services and other administrative services. Theseoffices support our operations throughout the world. We also have obligationsunder certain operating leases related to equipment acquired for our operations.In addition, Reethi Rah has entered into to a long-term land lease with thegovernment of the Maldives for the land on which One&Only Maldives atReethi Rah is constructed.

 

F-53

----

 

Future minimum lease obligations under various non-cancelable operatingleases with terms in excess of one year at December 31, 2005 are asfollows: 

 

| **Year Ending  December 31,** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------|------------|------------|------------|------------|
|                               |       |       |       |       |
| 2006                               |       | $          | 3,258      |       |
| 2007                               |       | 2,814      |       |
| 2008                               |       | 2,567      |       |
| 2009                               |       | 2,681      |       |
| 2010                               |       | 2,779      |       |
| Thereafter                         |       | 42,538     |       |
|                               |       |       |       |
|                               |       | $          | 56,637     |       |

 

*Casino License*

* *

The operations of casinos in The Bahamas are subject to regulatorycontrols. The operator must obtain a casino license and the license must beperiodically renewed and is subject to revocation at any time.

 

*Heads of Agreement*

* *

We have an agreement with the Bahamian Government, which is titledHeads of Agreement. This agreement provides us with certain tax incentives inexchange for the Company investing in the expansion of Atlantis, ParadiseIsland. The most significant of these incentives are the casino fee and taxincentives.

 

We restated our agreement with the Bahamian Government on May 26, 2003in anticipation of the Phase III expansion on Paradise Island. Such agreementwas supplemented in both May and December 2004. The restated Heads ofAgreement, as supplemented, maintains the current basic casino tax and feestructure that calls for an annual license fee of $100,000 per thousand squarefeet of casino space, a minimum annual casino tax of $4.3 million on all gamingwin up to $20.0 million, a 12.5% win tax on gaming win between $20.0 millionand $120.0 million and a 10% win tax on gaming win in excess of $120.0 million.The Company is entitled to a credit of $5.0 million in relation to the annuallicense fee and a 45% credit against all win tax on gaming win between $20.0million and $120.0 million.

 

With the commencement of construction of the Phase III expansionas discussed in Note 1—Organization and Basis of Presentation, the basictax 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 a periodof 20 years after the earlier of the date of the substantial completion ofthe Phase III expansion and December 31, 2007. 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 shall also apply from the commencement ofconstruction of the Phase III expansion and shall expire at the end of2024.

 

In order to secure the tax incentives described in the precedingparagraph, we were obligated to commence construction on certain aspects of thePhase III expansion by December 31, 2003, commence construction on certainother aspects of the Phase III expansion by June 30, 2004, and notify theBahamian Government. If we do not proceed with the condominium-hotel and theAthol Golf Course, casino tax concessions and the joint marketing contributionfrom the Government will be reduced beginning in 2009 in accordance with aschedule contained in the Heads of Agreement.

 

The Heads of Agreement also provides for an extension of our jointmarketing agreement with the Bahamian Government pursuant to which the BahamianGovernment agreed to match our contribution, up to $4.0 million annually,toward the direct costs related to staging certain marketing events, publicrelations activities and the production and placement of advertisements in allmedia to promote the destination and our Paradise Island properties, includingthe Phase III expansion. This joint marketing agreement will expire onDecember 31, 2010.

 

F-54

----

 

Pursuant to the Heads of Agreement, the Company is obligated tocontribute $5.0 million to benefit community programs in The Bahamas asdesignated by the Bahamian Government. As of December 31, 2005, we havecontributed $1.0 million, with the balance of $4.0 million included in capitalcreditors in the accompanying consolidated balance sheet.

 

*Guarantees*

* *

In connection with the Company’s purchase of a 25% initial equityinterest in Kanuhura, the Company was required to guarantee certainobligations, totaling $10.7 million to its other shareholders.  TheCompany is not obligated under these guarantees unless the property’s seniorbank debt agreement prevents available cash flow from being distributed to theshareholders, nor until Kanuhura repays certain senior debt owed. As ofDecember 31, 2005, the amount of senior debt owed was $2.3 million,excluding accrued interest. The Company’s obligations under these guaranteesexpire when the underlying obligations are repaid.  Upon having to satisfythese guarantees, the Company would be deemed to have made a loan to Kanuhuraon the same terms of the underlying note that was satisfied. As theseguarantees were issued in July 2001 and we did not modify these guaranteesafter December 31, 2002, no amount has been recorded for the fair value ofthese guarantees.

 

*Commitment with ReethiRah*

* *

The Company has entered into a guarantee agreement in connection withthe Reethi Rah Term Loan Facility as discussed in Note 14—Long-Term Debt.

 

*Atlantis, The PalmCommitment*

* *

In September 2003, the Company entered into agreements to form ajoint venture with Nakheel, an entity owned by the Royal Family of Dubai, todevelop Atlantis, The Palm.  The first phase of the project will include aresort and an extensive water theme park situated on beachfront property. Atlantis, The Palm will be located on The Palm, Jumeirah, a land reclamationproject in Dubai.  On June 23, 2004, the Company announced that ithad entered into an agreement with Istithmar which assumed all obligations andrights of its affiliate, Nakheel, pursuant to which the scope of Atlantis, ThePalm was increased.  In November 2005, the Company and its joint venturepartner, Istithmar, agreed to a revised construction budget for Atlantis, ThePalm, totaling approximately $1.5 billion (inclusive of land acquisition costsof $125 million).

 

In October 2005 the joint venture announced a revised financingstructure for the project in which the Company and Istithmar have each agreedto provide an equity investment of $200.0 million in the joint venture. In addition, each of Istithmar and Kerzner will provide, on a joint and severalbasis, additional sponsor support of up to $55.0 million with respect to cost overrunsand post-completion debt service obligations.

 

*UK Gaming Commitment*

* *

The Company is committed to making a contribution towards theconstruction of the raft and shell works to house a proposed regional casino atThe O2 in the United Kingdom. The Company expects toincur £6.5 million (approximately $11.2 million U.S. dollars as of December 31,2005) in 2006. If a regional casino license is not awarded at the Dome, the Companyis eligible to recover 80% of its investment from Anschutz Entertainment Group,Inc., its joint venture partner, and 20% is expected to be expensed asincurred.

 

*Phase III ConstructionCommitment*

* *

The Company has construction commitments of $219.1 million arising fromthe Phase III expansion.

 

*Morocco Commitment*

* *

With respect to the destination resort casino project in Morocco, wehave entered into a joint venture agreement and related development andlong-term management agreements with two local Moroccan companies. The jointventure agreement requires each party to provide equity based on the initiallyestimated project cost of $230.0 million. Our component of the equitycontribution as stated in the joint venture agreement is $46.0 million. Basedon the current preliminary designs for the project, the budget is nowanticipated to be approximately $300.0 million,

 

F-55

----

 

although a more definitive amount will not be available until furtherdetailed design work has been completed. As a result of the previouslyannounced budget increase, both parties are working together to arrange debtand equity financing to fund the project. Although no assurances can be givenat this time, we expect to reach agreement with our Moroccan partners onamended project documents and proceed with the project, subject to obtainingthird party debt financing. During 2005, we expensed $2.0 million ofnon-capitalizable costs associated with the Morocco project. In addition,during 2005, we incurred $4.9 million of design and development costs which areincluded in construction in progress in the consolidated balance sheets. As ofDecember 31, 2005, we had approximately $6.5 million capitalized with respectto design and development costs. If this project does not proceed, we will berequired to write off these costs that have been capitalized.

 

*Executive and EmployeeBonus Plans*

* *

We have a bonus plan whereby our employees, including officers, willqualify for bonuses if we attain certain levels of earnings and such bonusesare calculated as a percentage of each individual’s salary. Such percentage isbased on, among other things, each employee’s level of responsibility. Bonusespaid to our officers under this bonus plan could reach a maximum of 100% of therespective employee’s base salary. Bonuses ranging from 45.3% to 75.5% weregranted in 2005 to our officers and employees. The compensation expense relatedto this bonus plan amounted to $13.8 million, $13.5 million and$13.8 million for the years ended December 31, 2005, 2004 and 2003,respectively.

 

*Litigation, Claims andAssessments*

* *

The Company is involved in certain litigation and claims incidental toits business.  Management does not believe, based on currently availableinformation, that these matters will have a material adverse effect on theaccompanying consolidated financial statements. See Note 27—Subsequent Eventsfor additional discussion of claims affecting the Company.

 

*Trademark Litigation*

* *

On January 27, 2006, we filed a Complaint in the United States DistrictCourt, District of Nevada, against Monarch Casino & Resort, Inc. and GoldenRoad Motor Inn, Inc. (collectively, “Monarch”) alleging, inter alia, thatMonarch has no right to use the mark “Atlantis” in connection with casinoservices in Las Vegas, Nevada and that its assertions that it has trademark rightsfor the “Atlantis” mark throughout the State of Nevada infringes on certain ofour United States registered “Atlantis” trademark rights. The complaint seeksboth injunctive relief and damages. In the action, we seek a declaratoryjudgment pursuant to Sections 32(1), 43(A) and 43(C) of the Trademark Act of1946 (the “Lanham Act”) that Monarch’s use of the “Atlantis” mark in Las Vegaswould constitute infringement of our registered trademark and result inconsumer confusion and a dilution of our “Atlantis” trademark. In addition tothe Lanham Act claims, our Complaint alleges common law trademark infringementand dilution under Nevada law.

 

On February 14, 2006, we filed an Amended Complaint alleging furtherthat Monarch’s conduct constituted deceptive trade practices in violation ofSections 41.600 and 598.0915 of the Nevada Revised Statutes.

 

On February 16, 2006, Monarch filed a Motion to Transfer Venue from LasVegas, Nevada to Reno, Nevada, which we have opposed. On February 24, 2006,Monarch filed an answer and counterclaim. In its counterclaim, Monarch bringsclaims for (1) cancellation of our United States “Atlantis” trademarkregistration for casino services; (2) breach of a 1996 license agreement thatwas entered into by Monarch with Atlantis Lodge, Inc. (“Lodge”), and laterassigned from Lodge to us; (3) a declaration that we have infringed uponMonarch’s trademark rights; and (4) a declaration that we have engaged indeceptive trade practices in violation of Nevada law. We believe the counterclaimsto be without merit and intend to vigorously defend them.

 

**Note 24—SegmentInformation**

** **

The Company develops and operates premier resort casinos and otherproperties throughout the world and manages its business in three segments:Destination Resorts, Gaming and One&Only Resorts.

 

The Destination Resorts segment, our largest segment from a revenue,net income and total assets basis, includes the Company’s flagship property,Atlantis, Paradise Island, its tour operator which supports Atlantis,

 

F-56

----

 

Paradise Island, PIV, Inc., and its 50% investment in Harborside atAtlantis. The Destination Resorts segment also includes Atlantis, The Palm,Residences at Atlantis and costs associated with the development of adestination resort casino located in Morocco. The Gaming segment consistsprimarily of the relinquishment and development fee income from Mohegan Sun inUncasville, Connecticut, costs associated with the potential development of acasino in Northampton, United Kingdom, our equity investment in BLB and ourequity investment in TCNY. The One&Only Resorts segment is comprised ofKerzner’s luxury resort hotel businesses which consist of premier propertiesthat primarily operate in the five-star deluxe end of the resort market. TheOne&Only Resorts segment includes resorts located in The Bahamas, Mexico,Mauritius, the Maldives and Dubai. We have also entered into an agreement todevelop and manage a property on the Victoria & Alfred Waterfront in CapeTown, South Africa, which we expect will be operated under the One&Onlybrand. As each segment operates in various geographic areas, they aredelineated within the tables that follow.

 

The Company evaluates the performance of its segments based primarilyon their Contribution to Net Income (“Contribution to Net Income”), which istheir respective revenue generated after direct operating costs, anddepreciation and amortization attributable to each segment. Corporate expenses,interest income and expense, income taxes and other income and expenses are notallocated to the segments but are separately evaluated. The accounting policiesof these reportable segments are the same as those disclosed inNote 2—Summary of Significant Accounting Policies. The following tablesare an analysis of net revenue, Contribution to Net Income and total assets,depreciation and amortization and capital additions by segment:

 

F-57

----

 

**Net Revenue**

 
| ** **                           | ** ** | **For The Year Ended December 31,** | ** ** |
|--------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                           | ** ** | **2005**                                                     | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                 |       |                                                         |       |   |   |   |   |
| Destination  Resorts:                |       |                                                         |       |   |   |   |   |
| Atlantis,  Paradise Island (1)       |       | $                                                            | 517,598    |   | $ | 474,611 |   | $ | 463,276 |   |
| Tour operations                      |       | 35,025                                                       |       | 26,564 |   | 28,875 |   |
| Harborside at  Atlantis fees         |       | 3,655                                                        |       | 2,826 |   | 1,847 |   |
|                                 |       | 556,278                                                      |       | 504,001 |   | 493,998 |   |
| Atlantis, The  Palm development fees |       | 496                                                          |       | 380 |   | — |   |
|                                 |       | 556,774                                                      |       | 504,381 |   | 493,998 |   |
| Gaming:                              |       |                                                         |       |   |   |   |   |
| Connecticut fees  (2)                |       | 926                                                          |       | 935 |   | 1,755 |   |
|                                 |       |                                                         |       |   |   |   |   |
| One&Only  Resorts:               |       |                                                         |       |   |   |   |   |
| Ocean Club                           |       | 43,237                                                       |       | 37,731 |   | 34,186 |   |
| Palmilla (3)                         |       | 63,565                                                       |       | 37,875 |   | 1,481 |   |
| Reethi Rah (4)                       |       | 18,185                                                       |       | 1,270 |   | 394 |   |
| Other resorts  (5)                   |       | 14,278                                                       |       | 14,483 |   | 9,700 |   |
| Tour operations                      |       | 19,499                                                       |       | 20,551 |   | 11,915 |   |
|                                 |       | 158,764                                                      |       | 111,910 |   | 57,676 |   |
|                                 |       |                                                         |       |   |   |   |   |
| Other (6)                            |       | 5,060                                                        |       | 3,859 |   | 5,084 |   |
| Net revenue                          |       | $                                                            | 721,524    |   | $ | 621,085 |   | $ | 558,513 |   |

 

----

(1)   Consistsof revenue from Atlantis, Paradise Island, the Ocean Club Golf Course, theCompany’s wholly-owned tour operator, PIV Inc., and marketing and developmentfee income from Harborside at Atlantis.

 

(2)   Consistsof development and other fees related to Mohegan Sun. Relinquishmentfees–equity in earnings of TCA related to our Gaming segment are included as aseparate component outside of income from operations in the accompanyingconsolidated statements of operations.

 

(3)   Consistsof revenue from Palmilla in connection with the consolidation of Palmilla JV,LLC for the years ended December 31, 2005 and 2004 as a result of FIN 46R.Revenue for the year ended December 31, 2003 represents management anddevelopment fees related to Palmilla.

 

(4)   Consistsof revenue from Reethi Rah in connection with the consolidation of Reethi Rahfor the year ended December 31, 2005. Revenue for the years ended December 31,2004 and 2003 represent development fees.

 

(5)   Includesmanagement, marketing and development fees from One&Only Resorts propertieslocated in Mauritius, Dubai and the Maldives, excluding One&Only Maldivesat Reethi Rah.

 

(6)   Includesrevenue not directly attributable to Destination Resorts, Gaming orOne&Only Resorts.

 

F-58

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**Contributionto Net Income**

 
| ** **                                              | ** ** | **For The Year Ended December 31,** | ** ** |
|---------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                              | ** ** | **2005**                                                     | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                              | ** ** | ** **                                                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Destination  Resorts:                                   | ** ** | ** **                                                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Atlantis,  Paradise Island                              |       | $                                                            | 95,532     |   | $ | 86,951 |   | $ | 83,523 |   |
| Tour operations                                         |       | 7,064                                                        |       | 5,885 |   | 5,089 |   |
| Harborside at  Atlantis (1)                             |       | 19,761                                                       |       | 9,477 |   | 5,176 |   |
| Ocean Club  Residences & Marina  (2)           |       | 1,817                                                        |       | — |   | — |   |
| Residences at  Atlantis (3)                             |       | (1,693                                                       | )          | — |   | — |   |
|                                                    |       | 122,481                                                      |       | 102,313 |   | 93,788 | ** ** |
| Atlantis, The  Palm (4)                                 |       | (224                                                         | )          | 346 |   | — |   |
|                                                    |       | 122,257                                                      |       | 102,659 |   | 93,788 | ** ** |
| ** **                                              | ** ** | ** **                                                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Gaming:                                                 |       |                                                         |       |   |   |   |   |
| Connecticut (5)                                         |       | 38,808                                                       |       | 36,843 |   | 35,715 |   |
| United Kingdom                                          |       | (15,339                                                      | )          | (2,182 | ) | (329 | ) |
| BLB (6)                                                 |       | 2,099                                                        |       | (2,970 | ) | — |   |
| Other (7)                                               |       | (983                                                         | )          | (1,387 | ) | (1,086 | ) |
|                                                    |       | 24,585                                                       |       | 30,304 |   | 34,300 |   |
| One&Only  Resorts:                                  |       |                                                         |       |   |   |   |   |
| Ocean Club                                              |       | 6,392                                                        |       | 3,644 |   | 4,720 |   |
| Palmilla (8)                                            |       | 9,032                                                        |       | (1,831 | ) | (3,013 | ) |
| Reethi Rah (9)                                          |       | (3,225                                                       | )          | 1,270 |   | 394 |   |
| Other resorts  (10)                                     |       | 15,975                                                       |       | 17,703 |   | 10,346 |   |
| Tour operations                                         |       | 1,196                                                        |       | 1,155 |   | 160 |   |
| Direct expenses  (11)                                   |       | (14,009                                                      | )          | (17,074 | ) | (12,347 | ) |
|                                                    |       | 15,361                                                       |       | 4,867 |   | 260 | ** ** |
| Impairment of  notes receivable                         |       | (27,812                                                      | )          | — |   | — |   |
|                                                    |       | (12,451                                                      | )          | 4,867 |   | 260 | ** ** |
| ** **                                              | ** ** | ** **                                                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Corporate  expense and other                            |       | (43,825                                                      | )          | (34,489 | ) | (32,842 | ) |
| Gain on sale  (impairment) of Atlantic City land        |       | 1,433                                                        |       | (7,303 | ) | — |   |
| Interest income                                         |       | 9,130                                                        |       | 4,722 |   | 3,394 |   |
| Interest  expense, net of capitalization                |       | (44,087                                                      | )          | (36,814 | ) | (29,264 | ) |
| Gain on  settlement of territorial and other disputes   |       | —                                                       |       | — |   | 1,479 |   |
| Loss on early  extinguishment of debt                   |       | (27,912                                                      | )          | (1,655 | ) | — |   |
| Other, net                                              |       | 13                                                           |       | 1,358 |   | (686 | ) |
| Benefit  (provision) for income taxes                   |       | 16,104                                                       |       | (424 | ) | (162 | ) |
| Minority and  noncontrolling interest (12)              |       | 6,970                                                        |       | 4,907 |   | — |   |
| Income from  discontinued operations, net of income tax |       | —                                                       |       | — |   | 1,305 |   |
| Net income                                              |       | $                                                            | 52,217     |   | $ | 68,132 |   | $ | 71,572 |   |

 

----

(1)   Consistsof equity in earnings, marketing, development and other fees related toHarborside at Atlantis.

 

(2)   Consistsof equity earnings from Ocean Club Residences & Marina.

 

(3)   Consistsof losses before interest and taxes, net of minority interest related toResidences at Atlantis for the year ended December 31, 2005.

 

F-59

----

 

(4)   Consistsof equity in losses and development fees related to Atlantis, The Palm.

 

(5)   Consistsof relinquishment fees – equity in earnings of TCA and development and otherfees related to Mohegan Sun.

 

(6)   Consistsof equity in earnings (losses)  relatedto BLB.

 

(7)   Consistsof equity losses related to TCNY and other expenses related to the Gamingsegment.

 

(8)   Consistsof earnings (losses) before interest and taxes, net of minority interestrelated to Palmilla for the years ended December 31, 2005 and 2004. Resultsfor the year ended December 31, 2003 includes management, development andother fees and the Company’s share of net loss from Palmilla prior to theCompany’s adoption of FIN 46R.

 

(9)   Consistsof losses before interest and taxes, net of minority interest related to ReethiRah for the period from May 1, 2005 to December 31, 2005. Results for theyears ended December 31, 2004 and 2003 represent development fees related toReethi Rah prior to consolidation in accordance with FIN 46R.

 

(10) Consistsof equity in earnings (losses) of associated companies and management,marketing, development and other fees, net of minority interest from SRL andKanuhura.

 

(11) Consistsof direct expenses associated with the One&Only Resorts segment.

 

(12) Consistsof minority and noncontrolling interest related to Reethi Rah interest expenseand our portion of Palmilla’s loss on early extinguishment of debt, interestexpense and taxes, which is not allocated to the One&Only Resorts segment.

 

F-60

----

 

**TotalAssets, Depreciation and Amortization and Capital Additions**

 
| ** **                    | ** ** | **As of December 31, 2005** | ** ** | **Year Ended December 31, 2005** | ** ** |
|-------------------------------|------------|-------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                    | ** ** | **Total**                                       | ** ** | **Depreciation and**                                 | ** ** | **Capital** | ** ** |
| ** **                    | ** ** | **Assets**                                      | ** ** | **Amortization**                                     | ** ** | **Additions(5)** | ** ** |
| Destination  Resorts:         |       |                                            |       |                                                 |       |   |   |
| Atlantis,  Paradise Island(1) |       | $                                               | 1,411,331  |                                                 | $          | 53,031 |   | $ | 213,886 |   |
| Atlantis, The  Palm           |       | 75,435                                          |       | —                                               |       | — |   |
| Other (2)                     |       | 6,520                                           |       | —                                               |       | 4,881 |   |
|                          |       | 1,493,286                                       |       | 53,031                                               |       | 218,767 |   |
| Gaming:                       |       |                                            |       |                                                 |       |   |   |
| Connecticut(3)                |       | 16,160                                          |       | —                                               |       | — |   |
| United Kingdom                |       | 8,998                                           |       | 3                                                    |       | 3,488 |   |
| Other(3)                      |       | 49,146                                          |       | —                                               |       | — |   |
|                          |       | 74,304                                          |       | 3                                                    |       | 3,488 |   |
| One&Only                  |       |                                            |       |                                                 |       |   |   |
| Ocean Club                    |       | 84,848                                          |       | 5,949                                                |       | 1,139 |   |
| Palmilla                      |       | 160,014                                         |       | 5,669                                                |       | 2,906 |   |
| Reethi Rah                    |       | 169,477                                         |       | 7,270                                                |       | 13,645 |   |
| Other Resorts(4)              |       | 57,713                                          |       | 435                                                  |       | 1,768 |   |
|                          |       | 472,052                                         |       | 19,323                                               |       | 19,458 |   |
|                          |       |                                            |       |                                                 |       |   |   |
| General  corporate            |       | 236,980                                         |       | 935                                                  |       | 164 |   |
|                          |       | $                                               | 2,276,622  |                                                 | $          | 73,292 |   | $ | 241,877 |   |

 

----

(1)   Includesassets from Atlantis, Paradise Island, the Company’s wholly-owned touroperator, PIV, Inc., the Ocean Club Golf Course and our investment inHarborside at Atlantis.

 

(2)   Includesconstruction in progress related to the Company’s planned destination resortcasino in Morocco.

 

(3)   Connecticutincludes our investment in TCA and other amounts due from TCA. Other includesour investments in BLB and TCNY.

 

(4)   Includesthe Company’s investments in SRL and Kanuhura and construction in progress relatedto Cape Town.

 

(5)   Capitaladditions for the year ended December 31, 2005 include payments forproperty and equipment of $198.2 million, the acquisition of HurricaneHole Marina in The Bahamas of $28.0 million and the acquisition of beachfrontproperty on Paradise Island adjoining the Ocean Club Estates for $15.7 million.

 

F-61

----

 
| ** **                    | ** ** | **As of December 31, 2004** | ** ** | **Year Ended December 31, 2004** | ** ** |
|-------------------------------|------------|-------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                    | ** ** | **Total**                                       | ** ** | **Depreciation and**                            | ** ** | **Capital** | ** ** |
| ** **                    | ** ** | **Assets**                                      | ** ** | **Amortization**                                     | ** ** | **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)   Includesassets from Atlantis, Paradise Island, the Company’s wholly-owned touroperator, PIV, Inc., the Ocean Club Golf Course and our investment inHarborside at Atlantis.

 

(2)   Connecticutincludes our investment in TCA and other amounts due from TCA. Other includesour investments in BLB and TCNY.

 

(3)   Includesthe Company’s investments in SRL and Kanuhura.

 

(4)   Capitaladditions for the year ended December 31, 2004 include payments forproperty and equipment of $119.4 million and acquisition of assets fromClub Méditerranée (Bahamas) Limited of $30.9 million.

 

(5)   Generalcorporate includes $203.9 million of short-term investments.

 

F-62

----

 
| ** **                      | ** ** | **Year Ended December 31, 2003** | ** ** |
|---------------------------------|------------|------------------------------------------------------|------------|
| ** **                      | ** ** | **Depreciation  and  Amortization**                  | ** ** | **Capital  Additions (3)** | ** ** |
| Destination  Resorts:           |       |                                                 |       |   |   |
| Atlantis,  Paradise Island (1)  |       | $                                                    | 50,996     |   | $ | 66,756 |   |
|                            |       |                                                 |       |   |   |
| Gaming:                         |       |                                                 |       |   |   |
| United Kingdom                  |       | 1                                                    |       | 2,276 |   |
|                            |       | 1                                                    |       | 2,276 |   |
| One&Only Resorts            |       |                                                 |       |   |   |
| One&Only  Ocean Club        |       | 3,678                                                |       | 802 |   |
| One&Only  Other Resorts (3) |       | 247                                                  |       | 476 |   |
|                            |       | 3,925                                                |       | 1,278 |   |
|                            |       |                                                 |       |   |   |
| General  Corporate              |       | 860                                                  |       | 588 |   |
|                            |       | $                                                    | 55,782     |   | $ | 70,898 |   |

 

----

(1)   Includesassets from Atlantis, Paradise Island, the Company’s wholly-owned touroperator, PIV, Inc., the Ocean Club Golf Course and the Company’s investment inHarborside at Atlantis.

 

(2)   Includesthe Company’s investments in associated companies related to the One&OnlyResort businesses located in Mexico, Mauritius and the Maldives.

 

(3)   Capitaladditions for the year ended December 31, 2003 are net of $6.9 million ofinsurance proceeds received for damaged assets Atlantis, Paradise Islandrelated to Hurricane Michelle.

 

**Note 25—FairValue of Financial Instruments**

 

The fair value of a financial instrument represents the amount at whichthe instrument could be exchanged in a current transaction between willingparties, other than in a forced sale or liquidation. Fair value estimates aremade at a specific point in time, based on relevant market information aboutthe financial instrument. These estimates are subjective in nature and involveuncertainties and matters of significant judgment and therefore cannot bedetermined with precision. The assumptions used have a significant effect onthe estimated amounts reported.

 

The Company used the following methods and assumptions in estimatingfair value disclosures for financial instruments: (a) cash and cashequivalents, restricted cash, short-term investments, trade receivables, other currentassets, accounts payable, accrued liabilities and variable rate debt: theamounts reported in the accompanying consolidated balance sheets approximatefair value due to the nature and short-term maturities of such assets andliabilities; (b) fixed-rate debt: fixed rate debt is valued based uponpublished market quotations, as applicable (the fair value of our fixed ratedebt at December 31, 2005 was approximately $695.1 million ascompared to its carrying value of $631.6 million and the fair value of ourfixed rate debt at December 31, 2004 was approximately $738.1 millionas compared to its carrying value of $643.4 million); and (c) swapand cap agreements: the fair value of its swap and cap agreements wasdetermined from the representations of financial institutions. The fair valueof the Company’s swap agreements at December 31, 2004 equaled theircarrying value of $8.7 million, and the fair value of Palmilla’s capagreement was $0.1 million as of December 31, 2005 and 2004. These amountsare included in deferred charges and other assets in the accompanyingconsolidated balance sheets.

 

F-63

----

 

**Note 26—Supplemental Condensed ConsolidatingFinancial Information**

 

As discussed in Note 14—Long-Term Debt, in September 2005,the Company commenced a tender offer and consent solicitation relating to its$400.0 million aggregate principal amount outstanding of its 87/8%Senior Subordinated Notes. As of December 31, 2005, approximately 99.6% of the$400.0 million aggregate principal amount outstanding of the 87/8%Senior Subordinated Notes were received and accepted for payment by the Companyand one of its wholly-owned subsidiaries, KINA. The Company used the proceedsfrom a new offering of $400.0 million 63⁄4% Senior Subordinated Notes thatclosed on September 22, 2005, together with the cash on hand, to repay thetendered 87/8% Senior Subordinated Notes. The 63⁄4% SeniorSubordinated Notes were co-issued by the Company and KINA. The 63⁄4% SeniorSubordinated Notes are guaranteed by substantially all of the Company’swholly-owned subsidiaries (the “Subsidiary Guarantors”) and are jointly andseverally irrevocably and unconditionally guaranteed. The followingsupplemental financial information sets forth condensed consolidated balancesheets, statements of operations and statements of cash flows for each of theco-issuers of the 63⁄4% Senior Subordinated Notes, Kerzner and KINA, and, on acombined basis, for the Subsidiary Guarantors and non-guarantor subsidiaries.For purposes of these statements the investment in subsidiaries amounts havebeen accounted for pursuant to the equity method of accounting.

 

F-64

----

 

**Condensed Consolidating Balance Sheet as of December 31, 2005**

 
| ** **                                      | ** ** | **Kerzner** | ** ** | **KINA** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------|------------|-------------|------------|----------|------------|-----------------------------|------------|----------------------------------|------------|------------------|------------|------------------|------------|
| **ASSETS**                                      |       |        |       |     |       |                        |       |                             |       |             |       |             |       |
| Current assets:                                 |       |        |       |     |       |                        |       |                             |       |             |       |             |       |
| Cash and cash equivalents                       |       | $           | 4,070      |     | $          | 3,260                       |       | $                                | 96,447     |             | $          | 12,174           |       | $ | — |   | $ | 115,951 |   |
| Restricted cash                                 |       | —      |       | —   |       | 370                         |       | 3,911                            |       | —           |       | 4,281            |       |
| Short-term investments                          |       | —      |       | —   |       | 19,969                      |       | —                           |       | —           |       | 19,969           |       |
| Accounts receivable, net                        |       | 35          |       | 909      |       | 38,638                      |       | 10,913                           |       | (328             | )          | 50,167           |       |
| Due from affiliates                             |       | 551,407     |       | 1,173    |       | (516,287                    | )          | 18,645                           |       | (17,774          | )          | 37,164           |       |
| Inventories                                     |       | —      |       | —   |       | 13,937                      |       | 5,323                            |       | —           |       | 19,260           |       |
| Prepaid expenses and other assets               |       | 173         |       | 95       |       | 23,451                      |       | 3,898                            |       | (4,685           | )          | 22,932           |       |
| Total current assets                            |       | 555,685     |       | 5,437    |       | (323,475                    | )          | 54,864                           |       | (22,787          | )          | 269,724          |       |
|                                            |       |        |       |     |       |                        |       |                             |       |             |       |             |       |
| Property and equipment, net                     |       | —      |       | 40,053   |       | 1,303,134                   |       | 283,187                          |       | 20,961           |       | 1,647,335        |       |
| Intangible asset, net                           |       | —      |       | —   |       | —                      |       | 14,695                           |       | —           |       | 14,695           |       |
| Due from affiliates - non-current               |       | 82,925      |       | 200,000  |       | (191,895                    | )          | —                           |       | (81,312          | )          | 9,718            |       |
| Deferred tax asset, net                         |       | —      |       | 29,756   |       | —                      |       | —                           |       | —           |       | 29,756           |       |
| Deferred charges and other assets, net          |       | 5,782       |       | 14,142   |       | 14,844                      |       | 3,126                            |       | 1,988            |       | 39,882           |       |
| Restricted cash - non-current                   |       | —      |       | —   |       | 57,935                      |       | —                           |       | —           |       | 57,935           |       |
| Investment in subsidiaries                      |       | 757,343     |       | 44,413   |       | —                      |       | —                           |       | (801,756         | )          | —           |       |
| Investments in associated companies             |       | 2,160       |       | —   |       | 203,786                     |       | —                           |       | 1,631            |       | 207,577          |       |
| Total assets                                    |       | $           | 1,403,895  |     | $          | 333,801                     |       | $                                | 1,064,329  |             | $          | 355,872          |       | $ | (881,275 | ) | $ | 2,276,622 |   |
|                                            |       |        |       |     |       |                        |       |                             |       |             |       |             |       |
| **LIABILITIES AND  SHAREHOLDERS’ EQUITY**  |       |        |       |     |       |                        |       |                             |       |             |       |             |       |
|                                            |       |        |       |     |       |                        |       |                             |       |             |       |             |       |
| Current liabilities:                            |       |        |       |     |       |                        |       |                             |       |             |       |             |       |
| Current maturities of long-term debt            |       | $           | —     |     | $          | —                      |       | $                                | 250        |             | $          | 7,439            |       | $ | — |   | $ | 7,689 |   |
| Accounts payable and accrued liabilities        |       | 8,370       |       | 12,060   |       | 151,456                     |       | 32,709                           |       | (9,200           | )          | 195,395          |       |
| Due to affiliates                               |       | —      |       | 11,575   |       | (5,943                      | )          | 16,729                           |       | (17,571          | )          | 4,790            |       |
| Capital creditors                               |       | —      |       | —   |       | 39,272                      |       | 6,793                            |       | —           |       | 46,065           |       |
| Total current liabilities                       |       | 8,370       |       | 23,635   |       | 185,035                     |       | 63,670                           |       | (26,771          | )          | 253,939          |       |
|                                            |       |        |       |     |       |                        |       |                             |       |             |       |             |       |
| Deferred revenue                                |       | —      |       | 2,168    |       | 16,437                      |       | 3,207                            |       | —           |       | 21,812           |       |
| Other long-term liabilities                     |       | —      |       | 7,013    |       | 3,175                       |       | 761                              |       | (104             | )          | 10,845           |       |
| Due to affiliates – non-current            |       | —      |       | —   |       | (2,538                      | )          | 150,253                          |       | (112,831         | )          | 34,884           |       |
| Long-term debt, net of current maturities       |       | 230,000     |       | 401,632  |       | 107                         |       | 156,947                          |       | 931              |       | 789,617          |       |
| Total liabilities                               |       | 238,370     |       | 434,448  |       | 202,216                     |       | 374,838                          |       | (138,775         | )          | 1,111,097        |       |
|                                            |       |        |       |     |       |                        |       |                             |       |             |       |             |       |
| Minority and noncontrolling interest            |       | 3,763       |       | —   |       | —                      |       | —                           |       | —           |       | 3,763            |       |
|                                            |       |        |       |     |       |                        |       |                             |       |             |       |             |       |
| Shareholders’ equity                       |       | 1,161,762   |       | (100,647 | )          | 862,113                     |       | (18,966                          | )          | (742,500         | )          | 1,161,762        |       |
| Total liabilities and shareholders’ equity |       | $           | 1,403,895  |     | $          | 333,801                     |       | $                                | 1,064,329  |             | $          | 355,872          |       | $ | (881,275 | ) | $ | 2,276,622 |   |

 

F-65

----

 

**Condensed Consolidating Balance Sheet as of 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          |       |
| Accounts receivable, 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   |       | 139,204                     |       | 12,795                           |       | (11,547          | )          | 168,225          |       |
| Due to affiliates                               |       | —      |       | —   |       | 2,752                       |       | 1,021                            |       | (3,273           | )          | 500              |       |
| 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 and noncontrolling 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-66

----

 

**Condensed Consolidating Statement of Operations for the Year EndedDecember 31, 2005**

 
| ** **                                                                          | ** ** | **Kerzner** | ** ** | **KINA** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------------------------------|------------|-------------|------------|----------|------------|-----------------------------|------------|----------------------------------|------------|------------------|------------|------------------|------------|
| Revenue:                                                                            |       |        |       |     |       |                        |       |                             |       |             |       |             |       |
| Casino and resort revenue                                                           |       | $           | —     |     | $          | —                      |       | $                                | 590,569    |             | $          | 81,749           |       | $ | (5,494 | ) | $ | 666,824 |   |
| Less: promotional allowances                                                        |       | —      |       | —   |       | (24,239                     | )          | —                           |       | —           |       | (24,239          | )          |
|                                                                                |       | —      |       | —   |       | 566,330                     |       | 81,749                           |       | (5,494           | )          | 642,585          |       |
| Tour operations                                                                     |       | —      |       | —   |       | 54,524                      |       | —                           |       | —           |       | 54,524           |       |
| Management, development and other fees                                              |       | —      |       | 14,436   |       | 14,496                      |       | 8,823                            |       | (18,400          | )          | 19,355           |       |
| Other revenue                                                                       |       | —      |       | —   |       | 4,810                       |       | 250                              |       | —           |       | 5,060            |       |
| Affiliated sales                                                                    |       | —      |       | —   |       | 11,394                      |       | —                           |       | (11,394          | )          | —           |       |
|                                                                                |       | —      |       | 14,436   |       | 651,554                     |       | 90,822                           |       | (35,288          | )          | 721,524          |       |
|                                                                                |       |        |       |     |       |                        |       |                             |       |             |       |             |       |
| Equity in subsidiaries’ earnings                                               |       | 70,725      |       | —   |       | —                      |       | —                           |       | (70,725          | )          | —           |       |
|                                                                                |       |        |       |     |       |                        |       |                             |       |             |       |             |       |
| Cost and Expenses:                                                                  |       |        |       |     |       |                        |       |                             |       |             |       |             |       |
| Casino and resort expenses                                                          |       | —      |       | —   |       | 320,378                     |       | 39,645                           |       | (14,885          | )          | 345,138          |       |
| Tour operations                                                                     |       | —      |       | —   |       | 46,024                      |       | —                           |       | (21              | )          | 46,003           |       |
| Selling, general and administrative                                                 |       | —      |       | 94       |       | 111,846                     |       | 31,038                           |       | (6,170           | )          | 136,808          |       |
| Management fee                                                                      |       | 2,980       |       | —   |       | 9,597                       |       | 1,859                            |       | (14,436          | )          | —           |       |
| Corporate expenses                                                                  |       | 10,109      |       | 10,635   |       | 20,961                      |       | 626                              |       | 238              |       | 42,569           |       |
| Depreciation and amortization                                                       |       | —      |       | 17       |       | 60,329                      |       | 12,946                           |       | —           |       | 73,292           |       |
| Pre-opening expenses                                                                |       | —      |       | —   |       | 7,674                       |       | 314                              |       | (13              | )          | 7,975            |       |
| UK gaming write off                                                                 |       | —      |       | —   |       | 3,750                       |       | 7,429                            |       | —           |       | 11,179           |       |
| Gain on sale of Atlantic City land                                                  |       | —      |       | (1,433   | )          | —                      |       | —                           |       | —           |       | (1,433           | )          |
| Impairment of notes receivable                                                      |       | 27,812      |       | —   |       | —                      |       | —                           |       | —           |       | 27,812           |       |
|                                                                                |       | 40,901      |       | 9,313    |       | 580,559                     |       | 93,857                           |       | (35,287          | )          | 689,343          |       |
|                                                                                |       |        |       |     |       |                        |       |                             |       |             |       |             |       |
| Income (loss) from operations                                                       |       | 29,824      |       | 5,123    |       | 70,995                      |       | (3,035                           | )          | (70,726          | )          | 32,181           |       |
|                                                                                |       |        |       |     |       |                        |       |                             |       |             |       |             |       |
| Relinquishment fees – equity in earnings of  TCA                               |       | —      |       | —   |       | 37,882                      |       | —                           |       | —           |       | 37,882           |       |
|                                                                                |       |        |       |     |       |                        |       |                             |       |             |       |             |       |
| Other income (expense):                                                             |       |        |       |     |       |                        |       |                             |       |             |       |             |       |
| Interest income                                                                     |       | 6,261       |       | 197      |       | 8,186                       |       | 422                              |       | (5,936           | )          | 9,130            |       |
| Affiliated interest income                                                          |       | 3,859       |       | 17,035   |       | —                      |       | —                           |       | (20,894          | )          | —           |       |
| Affiliated interest expense                                                         |       | —      |       | —   |       | (20,893                     | )          | (5,937                           | )          | 26,830           |       | —           |       |
| Interest expense, net of capitalization                                             |       | (3,747      | )          | (33,614  | )          | 8,152                       |       | (14,879                          | )          | 1                |       | (44,087          | )          |
| Equity in earnings of associated companies                                          |       | 2           |       | —   |       | 22,090                      |       | —                           |       | —           |       | 22,092           |       |
| Loss on early extinguishment of debt                                                |       | 6,543       |       | (14,857  | )          | (19,598                     | )          | —                           |       | —           |       | (27,912          | )          |
| Other, net                                                                          |       | —      |       | —   |       | 13                          |       | —                           |       | —           |       | 13               |       |
| Other expense, net                                                                  |       | 12,918      |       | (31,239  | )          | (2,050                      | )          | (20,394                          | )          | 1                |       | (40,764          | )          |
|                                                                                |       |        |       |     |       |                        |       |                             |       |             |       |             |       |
| Income (loss) from continuing operations  before income taxes and minority interest |       | 42,742      |       | (26,116  | )          | 106,827                     |       | (23,429                          | )          | (70,725          | )          | 29,299           |       |
|                                                                                |       |        |       |     |       |                        |       |                             |       |             |       |             |       |
| Benefit (provision) for income taxes                                                |       | 951         |       | 18,608   |       | (2,834                      | )          | (621                             | )          | —           |       | 16,104           |       |
| Minority and noncontrolling interests                                               |       | 8,524       |       | —   |       | —                      |       | (1,710                           | )          | —           |       | 6,814            |       |
| Net income (loss)                                                                   |       | $           | 52,217     |     | $          | (7,508                      | )          | $                                | 103,993    |             | $          | (25,760          | )          | $ | (70,725 | ) | $ | 52,217 |   |

 

F-67

----

 

**Condensed Consolidating Statement of Operations for the Year EndedDecember 31, 2004**

 
| ** **                                                                          | ** ** | **Kerzner** | ** ** | **KINA** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------------------------------|------------|-------------|------------|----------|------------|-----------------------------|------------|----------------------------------|------------|------------------|------------|------------------|------------|
| Revenue:                                                                            |       |        |       |     |       |                        |       |                             |       |             |       |             |       |
| Casino and resort revenue                                                           |       | $           | —     |     | $          | —                      |       | $                                | 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 revenue                                                                       |       | —      |       | 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 and noncontrolling interests                                               |       | 8,751       |       | —   |       | —                      |       | (1,517                           | )          | —           |       | 7,234            |       |
| Net income (loss)                                                                   |       | $           | 68,132     |     | $          | (17,704                     | )          | $                                | 93,427     |             | $          | (10,681          | )          | $ | (65,042 | ) | $ | 68,132 |   |

 

F-68

----

 

**Condensed Consolidating Statement of Operations for the Year EndedDecember 31, 2003**

 
| ** **                                                                          | ** ** | **Kerzner** | ** ** | **KINA** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------------------------------|------------|-------------|------------|----------|------------|-----------------------------|------------|----------------------------------|------------|------------------|------------|------------------|------------|
| Revenue:                                                                            |       |        |       |     |       |                        |       |                             |       |             |       |             |       |
| Casino and resort revenue                                                           |       | $           | —     |     | $          | —                      |       | $                                | 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 revenue                                                                       |       | —      |       | 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 and noncontrolling interests                                               |       | —      |       | —   |       | —                      |       | (1,340                           | )          | —           |       | (1,340           | )          |
| Income (loss) from continuing operations                                            |       | 67,282      |       | (6,607   | )          | 75,595                      |       | 5,359                            |       | (71,362          | )          | 70,267           |       |
|                                                                                |       |        |       |     |       |                        |       |                             |       |             |       |             |       |
| Income 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-69

----

 

**CondensedConsolidating Statement of Cash Flows for the Year Ended December 31, 2005**

 
| ** **                                                                   | ** ** | **Kerzner** | ** ** | **KINA** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------------------------|------------|-------------|------------|----------|------------|-----------------------------|------------|----------------------------------|------------|------------------|------------|------------------|------------|
|                                                                         |       |        |       |     |       |                        |       |                             |       |             |       |             |       |
| Net cash provided by (used in) operating  activities                         |       | $           | (42,757    | )        | $          | 323                         |       | $                                | 228,887    |             | $          | (11,213          | )          | $ | — |   | $ | 175,240 |   |
|                                                                         |       |        |       |     |       |                        |       |                             |       |             |       |             |       |
| Cash flows from investing activities:                                        |       |        |       |     |       |                        |       |                             |       |             |       |             |       |
| Payments for property and equipment                                          |       | —      |       | (13      | )          | (179,117                    | )          | (19,076                          | )          | —           |       | (198,206         | )          |
| Acquisition of land and other assets                                         |       | —      |       | —   |       | (43,671                     | )          | —                           |       | —           |       | (43,671          | )          |
| Redemption of short-term investments, net                                    |       | —      |       | —   |       | 185,236                     |       | —                           |       | —           |       | 185,236          |       |
| Repayments (advances/loans) to affiliates,  net                              |       | 55,761      |       | 30,869   |       | (169,568                    | )          | 42,613                           |       | —           |       | (40,325          | )          |
| Repayments from affiliates                                                   |       | 3,150       |       | —   |       | 10,600                      |       | —                           |       | —           |       | 13,750           |       |
| Acquisition of equity interest in associated  companies                      |       | —      |       | —   |       | (55,170                     | )          | —                           |       | —           |       | (55,170          | )          |
| Capital distribution from associated  companies                              |       | —      |       | —   |       | 7,849                       |       | —                           |       | —           |       | 7,849            |       |
| Cash resulting from the initial consolidation  of variable interest entities |       | —      |       | —   |       | —                      |       | 1,519                            |       | —           |       | 1,519            |       |
| Deferred contract acquisition costs                                          |       | —      |       | —   |       | (813                        | )          | —                           |       | —           |       | (813             | )          |
| Proceeds from the sale of land, property and  equipment                      |       | —      |       | 6,884    |       | 125                         |       | —                           |       | —           |       | 7,009            |       |
| Change in restricted cash                                                    |       | —      |       | —   |       | (58,739                     | )          | —                           |       | —           |       | (58,739          | )          |
| Deposits and other                                                           |       | —      |       | —   |       | (1,205                      | )          | —                           |       | —           |       | (1,205           | )          |
| Sale of debt and equity interest in  One&Only Kanuhura                   |       | 340         |       | —   |       | —                      |       | —                           |       | —           |       | 340              |       |
| Net cash provided by (used in) investing  activities                         |       | 59,251      |       | 37,740   |       | (304,473                    | )          | 25,056                           |       | —           |       | (182,426         | )          |
|                                                                         |       |        |       |     |       |                        |       |                             |       |             |       |             |       |
| Cash flows from financing activities:                                        |       |        |       |     |       |                        |       |                             |       |             |       |             |       |
| Proceeds from issuance of debt                                               |       | —      |       | 400,000  |       | —                      |       | —                           |       | —           |       | 400,000          |       |
| Borrowings                                                                   |       | —      |       | —   |       | 27                          |       | 1,200                            |       | —           |       | 1,227            |       |
| Early redemption and repayment of debt                                       |       | 4,847       |       | (431,383 | )          | 413                         |       | (5,979                           | )          | —           |       | (432,102         | )          |
| Debt issuance and modification costs                                         |       | —      |       | (7,256   | )          | (962                        | )          | —                           |       | —           |       | (8,218           | )          |
| Proceeds from exercise of share options                                      |       | 17,832      |       | —   |       | —                      |       | —                           |       | —           |       | 17,832           |       |
| Repurchase of Ordinary Shares                                                |       | (35,943     | )          | —   |       | —                      |       | —                           |       | —           |       | (35,943          | )          |
| Net cash used in financing activities                                        |       | (13,264     | )          | (38,639  | )          | (522                        | )          | (4,779                           | )          | —           |       | (57,204          | )          |
|                                                                         |       |        |       |     |       |                        |       |                             |       |             |       |             |       |
| Increase (decrease) in cash and cash  equivalents                            |       | 3,230       |       | (576     | )          | (76,108                     | )          | 9,064                            |       | —           |       | (64,390          | )          |
| Cash and cash equivalents at beginning of  period                            |       | 840         |       | 3,836    |       | 172,555                     |       | 3,110                            |       | —           |       | 180,341          |       |
| Cash and cash equivalents at end of period                                   |       | $           | 4,070      |     | $          | 3,260                       |       | $                                | 96,447     |             | $          | 12,174           |       | $ | — |   | $ | 115,951 |   |

 

F-70

----

 

**CondensedConsolidating 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                                          |       | —      |       | (16      | )          | (101,465                    | )          | (17,917                          | )          | —           |       | (119,398         | )          |
| Purchase of short-term investments, net                                      |       | —      |       | —   |       | (204,309                    | )          | —                           |       | —           |       | (204,309         | )          |
| Advances/loans to affiliates                                                 |       | (67,000     | )          | —   |       | (11,626                     | )          | —                           |       | —           |       | (78,626          | )          |
| 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 variable interest entities |       | —      |       | —   |       | —                      |       | 7,047                            |       | —           |       | 7,047            |       |
| Deferred contract acquisition costs                                          |       | —      |       | —   |       | (1,631                      | )          | —                           |       | —           |       | (1,631           | )          |
| Acquisition of land and other assets                                         |       | —      |       | —   |       | (30,877                     | )          | —                           |       | —           |       | (30,877          | )          |
| Proceeds from the sale of land, property and  equipment                      |       | —      |       | —   |       | 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          |       |
| Early redemption and 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-71

----

 

**CondensedConsolidating 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                        |       | —      |       | (14      | )          | (50,835                     | )          | —           |       | (50,849          | )          |
| (Advances/loans) repayments to affiliates,  net            |       | (36,783     | )          | 21,991   |       | (2,211                      | )          | —           |       | (17,003          | )          |
| 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 land and other assets                       |       | —      |       | —   |       | (20,049                     | )          | —           |       | (20,049          | )          |
| Proceeds from the sale of land, property and  equipment    |       | —      |       | 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 and other                                         |       | —      |       | —   |       | 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-72

----

 

**Note 27—Subsequent Events**

 

On March 20, 2006, theCompany and an investor group which is being led by our Chairman, SolomonKerzner, and our Chief Executive Officer, Howard B. Kerzner, announced thatthey have entered into a definitive agreement under which the Company would beacquired by the investor group for $76.00 in cash per outstanding Ordinary Share.The investor group also includes Istithmar, which is a significant shareholderof the Company, Whitehall Street Global Real Estate Limited Partnership 2005,Colony Capital LLC, Providence Equity Partners, Inc. and The Related Companies,L.P., which is affiliated with one of the Company’s Directors.

 

On March 23, 2006, acomplaint was filed in Los Angeles Superior Court seeking to enjoin the sale ofthe Company to the investor group. The complaint purports to be a class actionon behalf of the Company’s public shareholders. The complaint also names theCompany and all our directors as defendants, and alleges that the defendantshave breached their fiduciary duties to the Company’s public shareholders andare pursuing an unlawful plan to cash them out for grossly inadequatecompensation. We intend to contest vigorously all of the claim’s allegations ofimproper conduct.

 

F-73

----