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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

For the quarterly period ended March 31, 2003

OR

For the transition period from                      to                     

Commission file number 033-80655

MOHEGAN TRIBAL GAMING AUTHORITY

(Exact name of registrant as specified in its charter)

(860) 862-8000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:    Yes x    No  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934):    Yes  ¨    No  x

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MOHEGAN TRIBAL GAMING AUTHORITY

INDEX TO FORM 10-Q

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PART I. FINANCIAL INFORMATION.

Item 1.    Financial Statements.

MOHEGAN TRIBAL GAMING AUTHORITY

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

The accompanying notes to the condensed consolidated financial statements should be read  

in conjunction with the condensed consolidated financial statements

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MOHEGAN TRIBAL GAMING AUTHORITY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in thousands)

The accompanying notes to the condensed consolidated financial statements should be read

in conjunction with the condensed consolidated financial statements

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MOHEGAN TRIBAL GAMING AUTHORITY

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN CAPITAL

(in thousands)

The accompanying notes to the condensed consolidated financial statements should be read

in conjunction with the condensed consolidated financial statements

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MOHEGAN TRIBAL GAMING AUTHORITY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

The accompanying notes to the condensed consolidated financial statements should be read  

in conjunction with the condensed consolidated financial statements

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MOHEGAN TRIBAL GAMING AUTHORITY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1—ORGANIZATION AND BASIS OF PRESENTATION:

The Mohegan Tribe of Indians of Connecticut (the “Tribe”) is a federally recognized Indian tribe with an approximately 405-acre reservation located in southeastern Connecticut. The Tribe established the Mohegan Tribal Gaming Authority (the “Authority”) in July 1995 with the exclusive power to conduct and regulate gaming activities for the Tribe on Tribal lands. The Authority is engaged primarily in the ownership, operation and development of gaming facilities. Under the Indian Gaming Regulatory Act of 1988, federally recognized Indian tribes are permitted to conduct full-scale casino gaming operations on tribal land, subject to, among other things, the negotiation of a compact with the affected state. The Tribe and the State of Connecticut have entered into such a compact (the “Mohegan Compact”), which has been approved by the United States Secretary of the Interior. On October 12, 1996, the Authority opened a casino known as the Mohegan Sun Casino (“Mohegan Sun”). The Authority is governed by a nine-member Management Board, consisting of the same nine members as those of the Tribal Council (the governing body of the Tribe). Any change in the composition of the Tribal Council results in a corresponding change in the Authority’s Management Board. The President and Chief Executive Officer and other senior officers are hired by the Management Board and are employees of the Authority.

On January 27, 2003, the Authority created a wholly owned subsidiary, the Mohegan Basketball Club LLC (“MBC”) for the purpose of acquiring a membership in the Women’s National Basketball Association (“WNBA”) and the right to own and operate a professional basketball team in the WNBA. See Note 7 for a further discussion of the Authority’s investment in a WNBA franchise.

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In accordance with Rule 10-01, the unaudited condensed consolidated financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete consolidated financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals and adjustments) considered necessary for a fair presentation have been included. Operating results for the quarter and six months ended March 31, 2003 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2003. For further information, refer to the financial statements and footnotes thereto included in the Authority’s Annual Report on Form 10-K, for the fiscal year ended September 30, 2002 as filed with the Securities and Exchange Commission (“SEC”).

Principles of Consolidation

The condensed consolidated financial statements include the accounts of the Authority and its wholly owned subsidiary, MBC. In consolidating, all intercompany transactions have been eliminated.

Reclassifications

Certain amounts in the fiscal year 2002 condensed consolidated financial statements have been reclassified to conform to the fiscal year 2003 presentation.

New Accounting Pronouncements

In August 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(“SFAS 144”). SFAS 144 modifies the rules for accounting for the impairment or disposal of long-lived assets. The new rules became effective for fiscal years beginning after December 15, 2001, with earlier application encouraged. The Authority adopted SFAS 144 on October 1, 2002. The adoption of this standard did not affect the Authority’s financial position, results of operations or cash flows.

In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements 4, 44, and 64, Amendment of FASB Statement 13, and Technical Corrections as of April 2002” (“SFAS 145”). The key provision of SFAS 145 rescinds the existing rule that all gains or losses from the extinguishment of debt should be classified as extraordinary items. Instead, such gains and losses must be analyzed to determine if they meet the criteria for extraordinary item classification based on the event being both unusual and infrequent. Prior period gains and losses must be analyzed to determine if they meet the criteria to be classified as extraordinary items. If they fail the criteria, prior period gains and losses must be reclassified. The Authority adopted SFAS 145 on October 1, 2002. The adoption of this standard did not affect the Authority’s financial position, results of operations or cash flows.

In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”). SFAS 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan, as previously required under Emerging Issues Task Force (“EITF”) Issue 94-3. Examples of costs covered by SFAS 146 include, among other things, lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. SFAS 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The Authority adopted SFAS 146 on January 1, 2003. The adoption of this standard did not affect the Authority’s financial position, results of operations or cash flows.

In November 2002, the FASB issued FASB Interpretation No. (“FIN”) 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees” (“FIN 45”). FIN 45 clarifies the requirements related to the guarantor’s accounting for, and disclosure of, the issuance of certain types of guarantees. Disclosure of guarantees is required for financial statements of interim or annual periods ending after December 15, 2002. Initial recognition and measurement will be applied on a prospective basis to guarantees issued or modified after December 31, 2002. The Authority adopted the disclosure requirements for guarantees during the quarter ended December 31, 2002 and adopted the recognition and measurement requirements during the quarter ended March 31, 2003. The adoption of this standard did not materially affect the Authority’s financial position, results of operations or cash flows.

In January 2003, the FASB issued FIN No. 46, “Consolidation of Variable Interest Entities—an interpretation of ARB No. 51” (“FIN 46”). FIN 46 provides an interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” regarding the consolidation of variable interest entities and the corresponding improvement in the financial reporting by enterprises involved with these entities. This interpretation applies immediately to variable interest entities created or obtained after January 2003. For entities in which an enterprise holds a variable interest that it acquired before February 2003, FIN 46 will apply in the first fiscal year or interim period beginning after June 15, 2003. The Authority did not obtain an interest in any variable interest entities after January 2003. Therefore, the adoption of the respective provision of the standard in the quarter ended March 31, 2003 did not affect the Authority’s financial position, results of operations or cash flows. The Authority does not believe the adoption of the standard pertaining to variable interest entities held before February 2003 will materially affect the Authority’s financial position, results of operations or cash flows in subsequent periods.

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (“SFAS 149”). SFAS 149 amends and clarifies financial accounting and reporting for

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS 149 is generally effective for contracts entered into or modified after June 30, 2003 (with a few exceptions) and for hedging relationships designated after June 30, 2003. The guidance is to be applied prospectively. The Authority does not believe the adoption of this standard will materially affect the Authority’s financial position, results of operations or cash flows in subsequent periods.

NOTE 3—FINANCING FACILITIES:

Financing facilities, as described below, consisted of the following (in thousands):

Old Bank Credit Facility

On March 25, 2003, the Authority repaid the entire outstanding $251.0 million indebtedness under its reducing, revolving, collateralized credit facility (the “Old Bank Credit Facility”). As of March 25, 2003, the Old Bank Credit Facility has been terminated. Based upon relevant provisions in EITF Issue 98-14, “Debtor’s Accounting for Changes in Line of Credit or Revolving Debt Arrangements,” certain unamortized debt issuance costs of $403,000, not pertaining to a transition to a new credit facility, were written off in March 2003.

New Bank Credit Facility

On March 25, 2003, the Authority entered into an Amended and Restated Loan Agreement (the “New Bank Credit Facility”), for up to $391.0 million from a syndicate of 12 financial institutions and commercial banks, with Bank of America, N.A. serving as administrative agent. The New Bank Credit Facility replaces the Old Bank Credit Facility and is comprised of a revolving loan of up to $291.0 million and a $100.0 million term loan, both of which mature on March 31, 2008. The Authority may seek to increase the size of the New Bank Credit Facility, so long as, among other things, the aggregate principal amount is not in excess of $500.0 million. The maximum aggregate principal amount of $500.0 million includes amounts available under letters of credit. As of March 31, 2003, this amount was $350,000, of which no amount was drawn (see “Letters of Credit” below). Pursuant to the terms of the New Bank Credit Facility, the term loan shall automatically reduce by one-twelfth of the initial principal balance, or $8.3 million, beginning on June 30, 2005 and continuing each quarter thereafter. The revolving loan has no mandatory amortization provisions and is payable in full on March 31, 2008. The Authority has approximately $170 million available for borrowing under the revolving loan as of March 31, 2003.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The New Bank Credit Facility is collateralized by a lien on substantially all of the Authority’s assets and a leasehold mortgage on the land and improvements which comprise Mohegan Sun. On April 15, 2003, the Authority received the required requisite governmental consent for the leasehold mortgage. The New Bank Credit Facility subjects the Authority to a number of restrictive covenants, including financial covenants. These financial covenants relate to, among other things, the Authority’s permitted total debt and senior debt leverage ratios, its minimum fixed charge coverage ratio and its maximum capital expenditures. The New Bank Credit Facility includes other covenants by the Tribe and the Authority of the type customarily found in loan agreements for similar transactions. The non-financial covenants in the New Bank Credit Facility include requirements that:

As of March 31, 2003, the Authority was in compliance with all covenant requirements.

At the Authority’s option, each advance of loan proceeds accrues interest on the basis of a base rate or on the basis of a one-month, two-month, three-month, six-month or twelve-month London Inter-Bank Offered Rate (“LIBOR”), plus in either case, the applicable spread (based on the Authority’s Total Leverage Ratio, as defined in the New Bank Credit Facility), at the time each loan is made. The applicable spread for base rate advances shall be between 0.50% and 1.25%, and the applicable spread for LIBOR rate advances shall be between 1.75% and 2.50%. The base rate is the higher of Bank of America’s announced prime rate or the federal funds rate plus 0.50%. Interest on LIBOR loans shall be payable at the end of each applicable interest period or quarterly, if earlier. Interest on base rate advances shall be payable quarterly. As of March 31, 2003, the Authority had no base rate loans. Accrued interest on the New Bank Credit Facility was $163,000 at March 31, 2003.

The initial advances under the New Bank Credit Facility were LIBOR based advances and were comprised of the full $100.0 million term loan and two advances of $121.0 million and $30.0 million under the revolving loan. The proceeds of the initial advances were used to repay the entire outstanding $251.0 million indebtedness under the Old Bank Credit Facility. During the quarter ended March 31, 2003, the Authority paid down the $30.0 million advance under the revolving loan. The outstanding advances are both based on one-month LIBOR plus the applicable spread. As of March 31, 2003, one-month LIBOR was 1.26% and the applicable spread was 2.50%.

8 ¹/8% Senior Notes

On March 3, 1999, the Authority issued $200.0 million Senior Notes with fixed interest payable at a rate of 8.125% per annum (the “Senior Notes”). The proceeds from this financing were used to extinguish or defease existing debt, pay transaction costs and fund initial costs related to the major expansion of Mohegan Sun known as Project Sunburst. Interest on the Senior Notes is payable semi-annually on January 1 and July 1. The Senior Notes mature on January 1, 2006. The Senior Notes are uncollateralized general obligations of the Authority and rank pari passu in right of payment with all current and future uncollateralized senior indebtedness of the Authority. Borrowings under the New Bank Credit Facility and other capital lease obligations are collateralized by first priority liens on substantially all of the assets of the Authority. As a result, upon any distribution to creditors in a bankruptcy, liquidation or reorganization or similar proceeding relating to the Authority or the

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Tribe, the holders of collateralized debt may be paid in full in cash before any payment may be made with respect to the Senior Notes. The Senior Notes rank equally in right of payment with 50% of the Authority’s payment obligations under the Relinquishment Agreement (see Note 6) that are then due and owing, and rank senior to the remaining 50% of the Authority’s payment obligations under the Relinquishment Agreement (see Note 6) that are then due and owing, the 1999 Senior Subordinated Notes, the 2001 Senior Subordinated Notes and the 2002 Senior Subordinated Notes. As of March 31, 2003 and September 30, 2002, accrued interest on the Senior Notes was $4.1 million.

1999 8 ³/4% Senior Subordinated Notes

On March 3, 1999, the Authority issued $300.0 million Senior Subordinated Notes with fixed interest payable at a rate of 8.75% per annum (the “1999 Senior Subordinated Notes”). The proceeds from this financing were used to extinguish or defease existing debt, pay transaction costs and fund initial costs related to Project Sunburst. Interest on the 1999 Senior Subordinated Notes is payable semi-annually on January 1 and July 1. The 1999 Senior Subordinated Notes mature on January 1, 2009. The first call date for the 1999 Senior Subordinated Notes is January 1, 2004. The 1999 Senior Subordinated Notes are uncollateralized general obligations of the Authority and are subordinated to the New Bank Credit Facility, the Senior Notes and in a liquidation, bankruptcy or similar proceeding 50% of the Authority’s payment obligations under the Relinquishment Agreement (see Note 6) that are then due and owing. The 1999 Senior Subordinated Notes rank equally with the remaining 50% of the Authority’s payment obligations under the Relinquishment Agreement (see Note 6) that are then due and owing, the 2001 Senior Subordinated Notes and the 2002 Senior Subordinated Notes. As of March 31, 2003 and September 30, 2002, accrued interest on the 1999 Senior Subordinated Notes was $6.6 million.

2001 8 ³/8% Senior Subordinated Notes

On July 26, 2001, the Authority issued $150.0 million Senior Subordinated Notes with fixed interest payable at a rate of 8.375% per annum (the “2001 Senior Subordinated Notes”). The proceeds from this financing were used to pay transaction costs, pay down $90.0 million on the Old Bank Credit Facility and fund costs related to Project Sunburst. Interest on the 2001 Senior Subordinated Notes is payable semi-annually on January 1 and July 1. The 2001 Senior Subordinated Notes mature on July 1, 2011. The first call date for the 2001 Senior Subordinated Notes is July 1, 2006. The 2001 Senior Subordinated Notes are uncollateralized general obligations of the Authority and are subordinated to the New Bank Credit Facility, the Senior Notes and in a liquidation, bankruptcy or similar proceeding 50% of the Authority’s payment obligations under the Relinquishment Agreement (see Note 6) that are then due and owing. The 2001 Senior Subordinated Notes rank equally with the 1999 Senior Subordinated Notes, the 2002 Senior Subordinated Notes and the remaining 50% of the Authority’s payment obligations under the Relinquishment Agreement (see Note 6) that are then due and owing. As of March 31, 2003 and September 30, 2002, accrued interest on the 2001 Senior Subordinated Notes was $3.1 million.

2002 8% Senior Subordinated Notes

On February 20, 2002, the Authority issued $250.0 million Senior Subordinated Notes with fixed interest payable at a rate of 8.0% per annum (the “2002 Senior Subordinated Notes”). The proceeds from this financing were used to pay transaction costs and pay down $243.0 million on the Old Bank Credit Facility. Interest on the 2002 Senior Subordinated Notes is payable semi-annually on April 1 and October 1. The 2002 Senior Subordinated Notes mature on April 1, 2012. The first call date for the 2002 Senior Subordinated Notes is April 1, 2007. The 2002 Senior Subordinated Notes are uncollateralized general obligations of the Authority and are subordinated to the New Bank Credit Facility, the Senior Notes and, in a liquidation, bankruptcy or similar

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

proceeding, 50% of the Authority’s payment obligations under the Relinquishment Agreement (see Note 6) that are then due and owing. The 2002 Senior Subordinated Notes rank equally with the 1999 Senior Subordinated Notes, the 2001 Senior Subordinated Notes and the remaining 50% of the Authority’s payment obligations under the Relinquishment Agreement (see Note 6) that are then due and owing. As of March 31, 2003 and September 30, 2002, accrued interest on the 2002 Senior Subordinated Notes was $10.0 million and $12.3 million, respectively.

WNBA Promissory Note

On January 28, 2003, the Authority and MBC entered into a Membership Agreement with WNBA, LLC (the “Membership Agreement”). The Membership Agreement sets forth the terms and conditions pursuant to which MBC acquired a membership in the WNBA and the right to own and operate a professional basketball team in the WNBA. The Authority guaranteed MBC’s obligations under the Membership Agreement.

In consideration for this acquisition, MBC paid $2.0 million (with funds invested by the Authority in MBC) and issued a promissory note (the “WNBA Note”) for $8.0 million that will accrue interest at an annual rate equal to 3-month LIBOR plus 1.5%. The Authority guaranteed MBC’s obligations under the WNBA Note. Pursuant to the WNBA Note, principal payments of $1.0 million, subject to adjustment for certain revenue thresholds in fiscal years 2006 through 2008, are required to be paid on each anniversary of the WNBA Note. Interest payments are also due on each anniversary date. As of March 31, 2003, accrued interest on the WNBA Note was $40,000. See Note 7 for a further discussion of the Authority’s investment in a WNBA franchise.

Line of Credit

On March 24, 2003, the Authority voluntarily terminated a $25.0 million revolving loan agreement with Fleet National Bank.

Derivative Instruments

The Authority is considered an “end user” of derivative instruments and engages in derivative transactions for risk management purposes only.

Derivative instruments held by the Authority at March 31, 2003 are as follows (in thousands):

The Authority’s derivative instruments are based upon six-month LIBOR. Six-month LIBOR was 1.26% on March 31, 2003.

In February 2003, the Authority terminated its then existing interest rate swap agreements for net proceeds to the Authority of $177,000. On February 25, 2003, the Authority entered into two interest rate swap agreements, each based on six-month LIBOR plus spreads of 388 basis points and 387.5 basis points, respectively, and each hedging $75.0 million of the 2001 Senior Subordinated Notes. On March 10, 2003, the Authority sold these instruments for a net deferred gain of approximately $1.1 million, net of interest settlements

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

of $178,000. These interest rate swap agreements qualified for hedge accounting in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” Accordingly, the $1.1 million net deferred gain was added to the carrying value of the 2001 Senior Subordinated Notes and will be amortized and recorded as a reduction in interest expense over the remaining life of the 2001 Senior Subordinated Notes.

On March 18, 2003, the Authority entered into two interest rate swap agreements, each based on six-month LIBOR plus spreads of 418 basis points and 420 basis points, respectively, and each hedging $75.0 million of the 2001 Senior Subordinated Notes. The Authority elected not to use hedge accounting for these interest rate swap agreements, and accordingly, all gains and losses resulting from changes in the fair market value of the derivative instruments are recognized in the Authority’s condensed consolidated statements of income.

On March 25, 2003, the Authority terminated an interest rate cap entered into in March 2000 related to the Old Bank Credit Facility. The interest rate cap had no value at termination and therefore there was no gain or loss recognized.

The aggregate fair market value change in all derivative instruments was $1.7 million for the six months ended March 31, 2003, which has been recorded as an offset to interest expense in the Authority’s condensed consolidated statements of income. The Authority also recorded an interest expense credit of $1.5 million for the six months ended March 31, 2003, related to interest settlements on the Authority’s derivative instruments. As of March 31, 2003 and September 30, 2002, derivative instruments having an aggregate fair market value of $(1.3 million) and $(3.0 million), respectively, were included in other long-term liabilities in the accompanying condensed consolidated balance sheets.

In previous periods, the Authority modified certain derivative instruments. The resulting negative fair market values at the date of modification will be reclassified from other comprehensive loss to interest expense over the original terms of the derivative instruments. For the quarter and six months ended March 31, 2003, the Authority reclassified approximately $196,000 and $393,000, respectively, of the negative fair market value into interest expense and expects to reclassify approximately $697,000 of the negative fair market value into interest expense over the next 12 months.

Letters of Credit

The Authority maintains letters of credit in order to satisfy potential workers compensation liabilities, as required by the State of Connecticut, that may arise. The Authority has available a $250,000 uncollateralized letter of credit that will expire in August 2003. The Authority also has a $100,000 uncollateralized letter of credit that expires in March 2004. The $100,000 letter of credit was reduced from $180,000 in March 2003. As of March 31, 2003, no amounts were drawn on the letters of credit.

NOTE 4—RELATED PARTY TRANSACTIONS:

The Tribe provides governmental and administrative services to the Authority in conjunction with the operation of Mohegan Sun. For the quarters ended March 31, 2003 and 2002, the Authority incurred expenses for such services of $3.3 million and $1.2 million, respectively, and for the six months ended March 31, 2003 and 2002, incurred $6.6 million and $4.1 million, respectively, for such services. The Tribe, through one of its limited liability companies, has entered into various land lease agreements with the Authority for roadway access, parking and related purposes in conjunction with the operation of Mohegan Sun. For the quarters ended March 31, 2003 and 2002, expenses related to these agreements totaled $65,000 and $97,000, respectively. For the six months ended March 31, 2003 and 2002, expenses totaled $135,000 and $194,000, respectively.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 5—COMMITMENTS AND CONTINGENCIES:

Project Sunburst

The Authority has received authorization from the Tribe to expend up to $1.0 billion, excluding capitalized interest, for completion of Project Sunburst. As of March 31, 2003, the Authority had incurred $998.3 million, excluding capitalized interest, on Project Sunburst and expects to incur an additional $1.7 million during the remainder of fiscal year 2003. As of March 31, 2003, cumulative capitalized interest for Project Sunburst construction expenses totaled $63.5 million. Capitalized interest totaled $5.5 million and $10.1 million for the quarter and six months ended March 31, 2002. There was no capitalized interest for the quarter or six months ended March 31, 2003.

The Mohegan Compact

In May 1994, the Tribe and the State of Connecticut entered into a Memorandum of Understanding (“MOU”) which sets forth certain matters regarding implementation of the Mohegan Compact. The MOU stipulates that a portion of the revenues earned on slot machines must be paid to the State of Connecticut (“Slot Win Contribution”). The Slot Win Contribution payments will not be required if the State of Connecticut legalizes any other gaming operations with slot machines or other commercial casino table games within Connecticut, except those consented to by the Tribe and the Mashantucket Pequot Tribe. For each 12-month period commencing July 1, 1995, the Slot Win Contribution shall be the lesser of (a) 30% of gross slot revenues, or (b) the greater of (i) 25% of gross slot revenues or (ii) $80.0 million.

For the quarters ended March 31, 2003 and 2002, the Authority reflected expenses associated with the Slot Win Contribution totaling $45.2 million and $41.2 million, respectively. For the six months ended March 31, 2003 and 2002, the Authority reflected expenses of $91.3 million and $84.2 million, respectively. As of March 31, 2003 and September 30, 2002, outstanding Slot Win Contribution payments to the State of Connecticut totaled $16.9 million and $15.0 million, respectively.

Priority Distribution Agreement

On August 1, 2001, the Authority and the Tribe entered into an agreement (the “Priority Distribution Agreement”), which obligates the Authority to make monthly payments to the Tribe to the extent of the Authority’s net cash flow, as defined in the Priority Distribution Agreement. The Priority Distribution Agreement, which has a perpetual term, also clarifies and records the terms pursuant to which the Authority made such payments to the Tribe prior to the effective date of the Priority Distribution Agreement. The Priority Distribution Agreement limits the maximum aggregate payments by the Authority to the Tribe in each calendar year to $14.0 million, as adjusted annually in accordance with the formula specified in the Priority Distribution Agreement to reflect the effects of inflation. However, payments pursuant to the Priority Distribution Agreement do not reduce the Authority’s obligations to make payments to reimburse the Tribe for governmental services provided by the Tribe or any payments under any other agreements with the Tribe. The monthly payments under the Priority Distribution Agreement are limited obligations of the Authority payable only to the extent of its net cash flow and are not secured by a lien or encumbrance on any assets or property of the Authority. The Authority’s financial statements reflect payments associated with the Priority Distribution Agreement of $3.8 million and $7.5 million for the quarter and six months ended March 31, 2003, respectively, and $3.7 million and $7.7 million for the quarter and six months ended March 31, 2002, respectively.

Radio Station Guarantee

In June 2001, the Authority entered into an agreement with AAA Entertainment, LLC (“AAA”) to operate the radio station WMOS on the premises of Mohegan Sun. The term of the agreement shall expire on the earliest

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

of (a) the closing of the acquisition of the station by the Authority at any time for any reason, or (b) if the Federal Communications Commission revokes or refuses to renew the license of the station or the license is otherwise cancelled for any reason or (c) three years after the commencement date. Either party may, upon notice to the other given not less than 120 days prior to the expiration of the initial term, extend the agreement for up to two additional one-year terms. In the event WMOS’s annual net revenue is less than $600,000, the Authority agrees to reimburse AAA $600,000 less the actual net revenue. AAA will retain 100% of WMOS’s annual net revenues between $600,000 and $750,000, and the Authority will share one-half of annual net revenues that exceed $750,000. Amounts to be reimbursed are assessed monthly, but payments are calculated on a cumulative annual basis. The maximum potential future payments (undiscounted) the Authority could be required to make under the initial term of the agreement is $700,000. If both additional one-year renewal options were exercised, the maximum potential future payments (undiscounted) the Authority could be required to make under the renewal options is $1.4 million, which includes a 9% increase during each of the one-year renewal periods. Payments to AAA totaled $19,000 for the quarter ended March 31, 2003. There were no payments made during the quarter ended March 31, 2002. Payments to AAA totaled $19,000 and $61,000 for the six months ended March 31, 2003 and 2002, respectively.

ACLS of New England, Inc.

In October 2002, the Authority entered into a 10-year laundry services agreement with ACLS of New England, Inc. (“ACLS”). The Authority has an option to renew the agreement for one additional 10-year term. Under the laundry services agreement, the Authority will pay an agreed upon rate for laundry services, adjusted annually for the Consumer Price Index and unusual increases in energy costs. Additionally, the Authority has made a $500,000 loan to ACLS to develop the laundry service facility. Pursuant to the terms of the loan, interest may accrue based on the exercise of the renewal options or other certain circumstances. In the event that circumstances occur where interest will be accrued, interest shall accrue commencing from the date of the advance at an annual rate of five percent.

The Authority also entered into a co-investment agreement with ACLS. Under the terms of the co-investment agreement, the Authority is a guarantor of a term loan entered into between ACLS and Citizens Bank of Connecticut. The term of the co-investment agreement is for ten years and, in the event of default by ACLS, the maximum potential future payments (undiscounted) the Authority could be required to make is approximately $6.4 million.

Litigation

The Authority is a defendant in certain litigation incurred in the normal course of business. In the opinion of management, based on the advice of counsel, the aggregate liability, if any, arising from such litigation will not have a material adverse affect on the Authority’s financial position, results of operations or cash flows.

NOTE 6—TCA AGREEMENTS:

Relinquishment Agreement

In February 1998, the Authority and Trading Cove Associates (“TCA”) entered into an agreement (the “Relinquishment Agreement”). Effective January 1, 2000 (the “Relinquishment Date”), the Relinquishment Agreement superseded a then existing management agreement with TCA. The Relinquishment Agreement provides, among other things, that the Authority will make certain payments to TCA out of, and determined as a percentage of, Revenues (as defined in the Relinquishment Agreement) generated by Mohegan Sun over a 15-year period commencing on the Relinquishment Date. The payments (“Senior Relinquishment Payments” and

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MOHEGAN TRIBAL GAMING AUTHORITY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

“Junior Relinquishment Payments”) have separate schedules and priority. Senior Relinquishment Payments commenced on April 25, 2000, twenty-five days following the end of the first three-month period following the Relinquishment Date and continue at the end of each three-month period occurring thereafter until January 25, 2015. Junior Relinquishment Payments commenced on July 25, 2000, twenty-five days following the end of the first six-month period following the Relinquishment Date and continue at the end of each six-month period occurring thereafter until January 25, 2015. Each Senior Relinquishment Payment and Junior Relinquishment Payment is an amount equal to 2.5% of the Revenues generated by Mohegan Sun over the immediately preceding three-month or six-month payment period, as the case may be. “Revenues” are defined as gross gaming revenues (other than Class II gaming revenue) and all other facility revenues (including, without limitation, hotel revenues, room service, food and beverage sales, ticket revenues, fees or receipts from convention/events center and all rental or other receipts from lessees and concessionaires but not the gross receipts of such lessees, licenses and concessionaires).

In the event of any bankruptcy, liquidation or reorganization or similar proceeding relating to the Authority or the Tribe, the Relinquishment Agreement provides that each of the Senior and Junior Relinquishment Payments are subordinated in right to payment of senior secured obligations, which includes the New Bank Credit Facility and capital lease obligations, and that the Junior Relinquishment Payments are further subordinated to payment of all other senior obligations, including the Authority’s Senior Notes. The Relinquishment Agreement also provides that all relinquishment payments are subordinated in right of payment to the minimum priority distribution payments, which are monthly payments required to be made by the Authority to the Tribe, to the extent then due.

The Authority, in accordance with SFAS No. 5, “Accounting for Contingencies,” has recorded a relinquishment liability of the estimated present value of its obligations under the Relinquishment Agreement. The Authority reassesses projected revenues (and consequently the relinquishment liability) (i) annually in conjunction with the Authority’s budgeting process or (ii) when necessary to account for material increases or decreases in projected revenues over the relinquishment period. If the reassessment causes an overall increase to the projected revenues over the relinquishment period, the relinquishment liability will be increased by five percent of such increase in revenues, discounted at the Authority’s risk-free rate of investment (an incremental layer). If the reassessment causes an overall decrease to the projected revenues over the relinquishment period, the relinquishment liability will be decreased by five percent of such decrease in revenues, discounted based upon a weighted-average discount rate (a decremental layer). The weighted-average discount rate is defined as the average discount rate used to discount all previous incremental layers weighted by the amount of each such incremental layer. Further, the Authority records a quarterly accretion to the relinquishment liability to reflect the impact of the time value of money. Since there is a high level of estimates and judgments used with respect to calculating the relinquishment liability, future events that affect such estimates and judgments may cause the actual liability to differ significantly from the estimate. In addition, the Authority has capitalized $130.0 million of this relinquishment liability in connection with the trademark value of the Mohegan Sun brand name. The Authority adopted SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), on October 1, 2001. Under SFAS 142, the Mohegan Sun trademark is no longer subject to amortization as it has been deemed to have an indefinite useful life. However, SFAS 142 requires the trademark to be evaluated at least annually for impairment by applying a fair-value based test and, if impairment occurs, the amount of impaired trademark must be written off immediately. With the adoption of SFAS 142, the Authority no longer records amortization of the trademark.

A relinquishment liability of $549.1 million was established at September 30, 1998 based on the present value of the estimated future Mohegan Sun revenues utilizing the Authority’s risk-free investment rate. At March 31, 2003, the carrying amount of the relinquishment liability was $542.5 million as compared to $557.6 million at September 30, 2002. The decrease during the six months ended March 31, 2003 is due to $31.9 million in

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MOHEGAN TRIBAL GAMING AUTHORITY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

relinquishment payments, offset by $16.8 million for the accretion of relinquishment liability discount. Of the $31.9 million in relinquishment payments, $14.4 million represents payment of principal and $17.5 million represents payment of the accretion of relinquishment liability discount. During the six months ended March 31, 2002, the Authority paid $24.5 million in relinquishment payments, consisting of $6.4 million in principal amounts and $18.1 million for the payment of the accretion of relinquishment liability discount. The accretion of relinquishment liability discount resulted from the impact of the discount for the time value of money. At March 31, 2003 and September 30, 2002 relinquishment payments earned but unpaid were $14.9 million and $16.3 million, respectively.

Development Agreement

On February 7, 1998, the Authority and TCA entered into a development services agreement (the “Development Agreement”). Under the Development Agreement, TCA is responsible for the administration and supervision of the construction manager and the entire construction process of Project Sunburst. TCA is acting as the Authority’s representative in connection with construction contracts that are approved by the Authority. Specifically, TCA is responsible for overseeing all persons performing work on the expansion site, inspecting the progress of construction, determining completion dates and reviewing contractor payment requests submitted to the Authority.

Payment of the Development Fee

Under the Development Agreement, the Authority is required to pay to TCA a development fee of $14.0 million. Pursuant to the payment schedule described in the Development Agreement, on January 15, 2000, the Authority began paying the development fee to TCA on a quarterly basis, based upon the estimated percentage of completion of Project Sunburst. As of March 31, 2003, the Authority had incurred $13.9 million related to the TCA development fee, of which $13.8 million has been paid. All amounts incurred have been included in property and equipment, net in the accompanying condensed consolidated balance sheets.

Termination and Disputes

The Development Agreement terminates upon the earlier of (a) completion of Project Sunburst or (b) February 7, 2008. In addition, each party has the right to terminate the Development Agreement if there is a material default or failure to perform a material duty or obligation by the other party. The parties must submit disputes arising under the Development Agreement to arbitration and have agreed that punitive damages may not be awarded to either party by an arbitrator. The Authority has also waived its sovereign immunity for the purpose of permitting, compelling or enforcing arbitration and has agreed to be sued by TCA in any court of competent jurisdiction for the purposes of compelling arbitration or enforcing any arbitration or judicial award arising out of the Development Agreement.

NOTE 7—Investment in WNBA Franchise

On January 27, 2003, the Authority created a wholly owned subsidiary, MBC, for the purpose of acquiring a membership in the WNBA and the right to own and operate a professional basketball team in the WNBA. On January 28, 2003, the Authority and MBC entered into the Membership Agreement with WNBA, LLC. The Membership Agreement sets forth the terms and conditions pursuant to which MBC acquired a membership in the WNBA and the right to own and operate a professional basketball team in the WNBA. The Authority guaranteed MBC’s obligations under the Membership Agreement.

In consideration for this acquisition, MBC paid $2.0 million (with funds invested by the Authority in MBC) and issued the WNBA Note for $8.0 million that will accrue interest at an annual rate equal to 3-month LIBOR plus 1.5%. The Authority guaranteed MBC’s obligations under the WNBA Note. Pursuant to the WNBA Note, principal payments of $1.0 million, subject to adjustment for certain revenue thresholds in fiscal years 2006

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MOHEGAN TRIBAL GAMING AUTHORITY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

through 2008, are required to be paid on each anniversary of the WNBA Note. Interest payments are also due on each anniversary date. As of March 31, 2003, accrued interest on the WNBA Note was $40,000.

MBC recorded an aggregate investment of $10.3 million for the acquisition, of which $10.0 million represents the purchase price and $0.3 million pertains to capitalized purchase costs. As part of the acquisition, an independent valuation firm estimated the fair value of the player contract rights at approximately $4.8 million. The player contract rights are being amortized over seven years. As of March 31, 2003, accumulated amortization on the player contract rights was $114,000. The difference between the aggregate investment and the value of the player contract rights, $5.5 million, has been assigned to franchise value and other intangible assets. The allocation of the purchase price for this investment is preliminary and will be adjusted, if necessary, based on a final valuation. The intangible assets associated with the acquisition will be periodically assessed for impairment pursuant to appropriate accounting standards.

In connection with MBC’s purchase of a membership in the WNBA, MBC has an approximately 3.6% ownership position in WNBA, LLC. Under the Limited Liability Company Agreement of WNBA, LLC, if at any time WNBA, LLC’s board of governors determines that additional funds are necessary or desirable for the WNBA, LLC’s or any league entity’s general business, the board of governors may require additional cash capital contributions. In that circumstance, each member of the league shall be obligated to contribute to WNBA, LLC an amount of cash equal to that member’s proportionate share of ownership. Pursuant to the WNBA Note, the principal payment due on the WNBA Note after any such contribution made by MBC will be reduced by the contribution amount. Through March 31, 2003, there were no cash capital contributions required by WNBA, LLC. MBC’s operating activities for the quarter ended March 31, 2003 were minimal.

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REPORT OF INDEPENDENT ACCOUNTANTS

To the Mohegan Tribal Gaming Authority:

We have reviewed the accompanying condensed consolidated balance sheet of the Mohegan Tribal Gaming Authority and its subsidiary (“the Authority”) as of March 31, 2003, and the related condensed consolidated statements of income and of changes in capital for each of the three-month and six-month periods ended March 31, 2003 and 2002 and the condensed consolidated statements of cash flows for the six-month periods ended March 31, 2003 and 2002. These interim financial statements are the responsibility of the Authority’s management.

We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We previously audited in accordance with auditing standards generally accepted in the United States of America, the balance sheet as of September 30, 2002, and the related statements of income, of changes in capital and of cash flows for the year then ended (not presented herein), and in our report dated December 17, 2002, we expressed an unqualified opinion on those financial statements. In our opinion, the information set forth in the accompanying condensed balance sheet as of September 30, 2002, is fairly stated in all material respects in relation to the balance sheet from which it has been derived.

/s/    PRICEWATERHOUSECOOPERS LLP

Hartford, CT

May 12, 2003

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Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Some information included in this Quarterly Report on Form 10-Q and other materials filed by the Mohegan Tribal Gaming Authority, or the Authority, with the Securities and Exchange Commission, or the SEC, contain forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such statements include information relating to business development activities, as well as capital spending, financing sources and the effects of regulation (including gaming and tax regulation) and increased competition. These statements can sometimes be identified by our use of forward-looking words such as “may,” “will,” “anticipate,” “estimate,” “expect” or “intend” and similar expressions. Such forward-looking information involves important risks and uncertainties that could significantly affect anticipated results in the future and, accordingly, such results may differ materially from those expressed in any forward-looking statements made by or on behalf of the Authority. These risks and uncertainties include, but are not limited to, those relating to development and construction activities, increased competition (including the legalization of expanded gaming in Connecticut, New York, Massachusetts and Rhode Island), changes in interest rates, dependence on existing management, leverage and debt service, regional, domestic or global economic conditions, changes in federal tax laws or the administration of such laws, changes in gaming laws or regulation and the availability of financing for development and operations. Additional information concerning potential factors that could affect the Authority’s financial results are included in the Authority’s Annual Report on Form 10-K for the fiscal year ended September 30, 2002, as well as the Authority’s other reports and filings with the SEC. The forward-looking statements included in this Quarterly Report on Form 10-Q are made only as of the date of this report. The Authority does not undertake any obligation to update or supplement any forward-looking statements to reflect subsequent events or circumstances. The Authority can not assure you that projected results or events will be achieved.

The following discussion and analysis should be read in conjunction with the Authority’s condensed consolidated financial statements and the related notes beginning on page 1 of this Quarterly Report on Form 10-Q.

Overview

The Tribe and the Authority

The Mohegan Tribe of Indians of Connecticut, or the Tribe, is a federally recognized Indian tribe with an approximately 405-acre reservation situated in southeastern Connecticut, adjacent to Uncasville, Connecticut. Under the Indian Gaming Regulatory Act, federally recognized Indian tribes are permitted to conduct full-scale casino gaming operations on tribal lands, subject to, among other things, the negotiation of a gaming compact with the state in which they operate. The Tribe and the State of Connecticut have entered into such a compact, the Mohegan Compact, that has been approved by the United States Secretary of the Interior. The Tribe’s gaming operation is one of only two legally authorized gaming operations in New England offering traditional slot machines and table games. The Tribe has established an instrumentality, the Mohegan Tribal Gaming Authority, with the exclusive power to conduct and regulate gaming activities on the existing reservation of the Tribe. The Authority is governed by a nine-member Management Board, consisting of the same nine members of the Mohegan Tribal Council (the governing body of the Tribe).

Mohegan Sun

In October 1996, the Authority opened a gaming and entertainment complex known as Mohegan Sun. Mohegan Sun is located on a 240-acre site on the Tribe’s reservation overlooking the Thames River with direct access from Routes I-395 and 2A via a four-lane access road constructed by the Authority. Mohegan Sun is approximately 125 miles from New York City and approximately 100 miles from Boston, Massachusetts. Within the past year, the Authority substantially completed a major expansion of Mohegan Sun known as Project Sunburst. The first phase of Project Sunburst, the Casino of the Sky, which included increased gaming, restaurant and retail space and an entertainment arena, opened on September 25, 2001. The remaining components,

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including the majority of an approximately 1,200-room luxury hotel and approximately 100,000 square feet of convention space, opened in April 2002. Substantial completion of Project Sunburst occurred in June 2002.

Mohegan Sun operates in an approximately 3.0 million square foot facility, which, at March 31, 2003, includes the following two casinos:

Casino of the Earth.    The Casino of the Earth, the original casino at Mohegan Sun, has approximately 176,500 square feet of gaming space and offers:

Casino of the Sky.    The Casino of the Sky has approximately 119,000 square feet of gaming space and offers:

As of March 31, 2003, Mohegan Sun has parking spaces for approximately 13,000 guests and 3,100 employees. In addition, the Authority operates the Mohegan Sun gasoline and convenience center, an approximately 4,000 square foot, 20-pump facility located adjacent to Mohegan Sun.

The Connecticut Sun

On January 27, 2003, the Authority created a wholly owned subsidiary, the Mohegan Basketball Club LLC, or MBC, for the purpose of acquiring a membership in the Women’s National Basketball Association, or WNBA,

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and the right to own and operate a professional basketball team in the WNBA. The team is known as the Connecticut Sun and will play its home games in the Mohegan Sun Arena.

Other Reservation Enhancements

Child Development Center.    The Tribe has constructed an approximately 36,000 square foot child development center. The project cost approximately $13.0 million. The Authority originally paid $1.1 million of the facility’s cost, which was later reimbursed fully by the Tribe. The child development center opened in January 2003.

Explanation of Key Financial Statement Captions

Gross revenues.    The Authority’s gross revenues are derived primarily from the following four sources:

The table below summarizes the Authority’s percentage of gross revenues from each of these sources:

Revenues.    The Authority’s largest component of revenue is gaming revenue which is recognized as gaming wins less gaming losses. Within the gaming revenue category, the Authority’s largest component of revenue is the revenue from its slot machines. The Authority reports gross slot revenue, which the Authority also refers to as gross slot win, to the State of Connecticut pursuant to the Mohegan Compact. On a monthly basis, the Authority posts gross slot win on its website at www.mohegansun.com.

Other commonly used terms in the discussion of gaming revenues include progressive jackpots, net slot revenue, slot handle, gross slot hold percentage, net slot hold percentage, table games revenue and table games drop. Gross slot revenue, also referred to as gross slot win, represents all amounts played in the slot machines reduced by both (1) the winnings paid out and (2) all amounts deposited by the Authority into the slot machines to ensure sufficient coins in each machine to pay out the winnings. Progressive slot machines retain some of each amount wagered and aggregates these amounts with similar amounts from other slot machines in order to create one-time winnings that are substantially larger than those paid in the ordinary course. The Authority refers to such aggregated amounts as progressive jackpots. In-house progressive jackpot amounts are accrued by the Authority until paid and such accrued amounts are deducted from gross slot revenue, along with wide-area progressive jackpot amounts, to arrive at net slot revenue, also referred to as net slot win. Wide-area progressive jackpot amounts are paid by a third-party vendor and the Authority remits a weekly payment to the vendor. Net slot revenue is included in gaming revenues in the accompanying condensed consolidated statements of income. Slot handle is defined as the total amount wagered by patrons on slot machines during the period. Gross slot hold percentage is defined as gross slot win as a percentage of slot handle. Net slot hold percentage is defined as net slot win as a percentage of slot handle. Table games revenue represents all amounts played at gaming tables reduced by both (1) the winnings paid out and (2) all amounts deposited by the Authority into gaming tables to ensure sufficient pay-out of winnings. Table games drop is defined as the total amount of cash, chips and cash advance drafts contained in the locked container at each gaming table, plus the amount of credit issued at the table.

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Revenues from food and beverages, hotel, retail, entertainment events and other services are recognized at the time the service is performed. Minimum rental revenues that the Authority receives pursuant to its rental lease agreements for the Shops at Mohegan Sun are recognized on a straight-line basis over the terms of the leases. Percentage rents are recognized in the period in which the tenants exceed their respective percentage rent thresholds.

Promotional allowances.    The Authority operates a voluntary program for its guests, without membership fees, called the Mohegan Sun Player’s Club. This complimentary program provides food, beverages, hotel, retail, entertainment and other services to guests based on points that are awarded for guests’ gaming activities. These points may be used to purchase items at the retail stores and restaurants located within Mohegan Sun, including the Shops at Mohegan Sun and the Mohegan Sun gasoline and convenience center. Points also may be used to purchase hotel services, tickets to entertainment events held at Mohegan Sun facilities and items from the Sun Select Catalog, which includes vacations, electronics and gift items. The retail value of these points is included in gross revenue when redeemed at Mohegan Sun operated facilities and then deducted as promotional allowances to arrive at net revenues. Promotional expenses related to redemption of points at third party retail outlets at the Shops at Mohegan Sun and from the Sun Select Catalog are included in gaming expenses.

The retail value of providing such promotional allowances was included in gross revenues as follows (in thousands):

The estimated cost of the goods and services associated with providing these promotional allowances was charged to gaming expenses as follows (in thousands):