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Brooklyn Basketball, LLC and Subsidiary
(A wholly owned subsidiary)

Report on Consolidated Financial Statements June 30, 2006 and 2005

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Brooklyn Basketball, LLC and Subsidiary
(A wholly owned subsidiary) Contents June 30, ?OQ6 and 2005 Page(s) Report of Independent Consolidated Auditors 1

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Financial Statements 2 3 4 5 6-18

Consolidated Balance Sheets ................................................•......................................................•................ Consolidated Statements of Operations Consolidated Statements of Member's Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements

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PricewaterhouseCoopers LLP 101 East Kennedy Boulevard Suite 1500 Tampa FL 33602-5147 Telephone (813) 229 0221 Facsimile (813) 229 3646

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Report of Independent Auditors

To the Member of Brooklyn Basketball, LLC

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, member's equity and cash flows present fairly, in all material respects, the fmancial position of Brooklyn Basketball, LLC and Subsidiaries (the Company) at June 30, 2006 and 2005 and the results of their operations and their cash flows for the years June 30, 2006 and 2005 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the fmancial statements are free of material misstatement.

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An audit includes examining, on a test basis, evidence supporting the amounts and

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disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

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Tampa, FI September 29, 2006

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Brooklyn Basketball, lLC and Subsidiary
(A Wholly owned subsidiary)

Consolidated Balance Sheets June 30, 2006 and 2005 2006
Assets Current assets Cash and cash equivalents Accounts receivable, net Prepaid expenses and other current assets Total current assets 2,307,420 12,994,149 1,392,011 16,693,580 2,188,871 1,359,959 7,311,000 279,399,292 583,109 , 290,842,231 307,535,811

2005

S

s

1,080,316 5,035,943 1,518,103 7,634,362 2,502,256 4,776,681 5,793,000 319,644,894 481,738. 333,198,569 . 340,832,931

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Property and equipment, net Deferred loan costs, net Investment in NBA-related entities Intangible assets, net Other assets Total assets Liabilities and Member's Equity Current liabilities Accounts payable and accrued expenses Advances from affiliates Deferred compensation Accrued salaries and payroll taxes Deferred revenue Advance season ticket sales Total current liabilities Long-term liabilities, less current maturities Senior notes Revolver loan Term loan Deferred compensation Accrued salaries and payroll taxes Deferred rent Total long-term liabilities Total liabilities Member's equity

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7,019,391 1,007,952 7,346,648 256,392 17,868,026 33,498,409 85,000,000 44,000,000 2,796,730 1,491,917 1,557,15. 134,845,798 168,344,207 139,191,604

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3,841,859 5,199,684 1,007,952 8,516,853 394,000 17,032,479 35,992,827

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61,000,000 80,000,000 3,283,892 6,256,402 t:767~Q55 . 152,307,949 188,300,776 152,532,155 $ 340,832,931

Total liabilities and member's equity

$ 307,535,811

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

Brooklyn Basketball, llC and Subsidiary
(A wholly owned subsidiary)

Consolidated Statements of Operations June 30, 2006 and 2005 2006
Operating income Ticket sales, net of admission taxes and league gate share Television revenues, net Sponsorship and promotional revenues Arena revenues, including concessions, parking and suite revenues Equity in income ofNBA related entities Playoff revenue Other revenues Total operating income Operating expenses Player salaries Loss on players' contracts Team staff salaries Team costs Scouting Public relations Game presentation Sponsorship sales Marketing Ticket sales Ticket operations Broadcast Systems Indemnity insurance General and administrative Acquisition related and organization costs Depreciation and amortization Playoff expenses Total operating expenses Net operating loss Other expenses Interest expense, net Net loss $ 37,913,457 28,677,624 10,979,068 6,334,397 5,114,377 4,999,438 5,183,670 99;202,031 58,896,983 662,139 9,258,580 12,573,596 863,790 546,371 1,384,065 3,894,169 3,055,296 5,914,909 298,836 2,025,087 265,829 2,988,669 8,627,879 41,032,427 2,385,772 154,674,397 (55,472,366) {12,635,368~ $ (68,107,734)

2005 $ 31,434,872
28,005,594 5,428,270 5,329,747 3,509,593 1,839,764 . 1,859,581 77,407,421 41,492,352 1,194,064 7,113,365 9,262,160 596,337 522,839 1,104,027 1,926,843 2,856,866 2,980,541 214,856 917,012 157,223 2,849,817 8,155,369 1,705,954 42,051,322 934,664 126,035,611 (48,628,190) p,333,154) $ (55,961,344)

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The accompanying notes are an integral part of these financial statements. 3

Brooklyn Basketball, LLC and Subsidiary
(A wholly owned subsidiary)

Statements of Member's Equity June 30, 2Q06 and 2005
Balance at August 16,2004 (Commencement of Operations) Member's capital contributions . Member's distributions Net loss Balance at June 30, 2005 Member's capital contributions Member's distributions Net loss Balance at June 30, 2006

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213,281,600 (4,788,101) ~55,961,344~ 152,532,155 65,667,165 (10,899,982) ~68,107,734~ 139,191,604

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The accompanying notes are an integral part of these financial statements.
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Brooklyn Basketball, LLC and Subsidiary
(A wholly owned subsidiary)

Consolidated Statements June 301 2006 and 2005

of Cash Flows

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Casb flows from operating activities Net loss Adjustments to reconcile net loss to net cash flows (used in) operating activities Depreciation and amortization Amortization of deferred loan costs Allowance for doubtful accounts Equity in income ofNBA related entities Changes in operating assets and liabilities Accounts receivable Prepaid expenses and other current assets Other assets Distributions from NBA related entities Accounts payable and accrued expenses Advance from affiliates Accrued salaries and payroll taxes Deferred compensation Deferred revenue Advance season ticket sales Other liabilities and deferred rent Net cash flows used in operating activities Cash flows from investing activities Decrease in restricted cash Acquisition of business, net of cash acquired Acquisition of property and equipment Net cash flows used in investing activities Cash flows from financing activities Deferred loan costs Member capital contributions Member distributions Proceeds from term and revolving credit facility Net (repayment) of revolving credit facility Proceeds from senior notes Net cash flows provided by financing activities Net increase in cash and cash equivalents Cash and cash equivalents Beginning of period End of period Supplemental cash flow information Cash paid for interest See notes 1 and 5 for non-cash activities

2006

2005

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(68,107,734) 41,032,427 4,948,589 (635,240) (5,114,377) (7,322,966) 126,092 (101,371) 3,596,377 3,177,532 (5,199,684) (5,934,690) (487,162) (137,608) 835,547 ~210,504) (39,534,772)

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(55,961,344) 42,051,322 1,452,352 665,240 (3,509,593) (3,729,000) (631,074) (262,461) 2,928,834 (685,722) 5,199,684 (14,927,392) 755,467 (1,260,709) 1,345,668 ~184,1912 (26,752,919) 4,528,675 (166,644,671) ~815,235) ~162,931,23 12 (6,229,033) 158,281,600 (4,788,101) 141,000,000 (97,500,000) 190,764.~466 1,080,316

(47J,439~ ~473,439~ (1,531,868) 65,667,165 (10,899,982) 44,500,000 (141,500,000) 85,000,000 41,235,315 1,227,104 1,080,316 $ 2,307,420 6,771,87().

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1,080,316 5,415,285

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The accompanying notes are an integral part of these financial statements. 5

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Brooklyn Basketball, LLC and Subsidiary
(A wholly owned subsidiary)

Notes to Consolidated Financial Statements June 30, 2006 and 2005

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Nature of the Business and Summary of Significant Accounting Policies Nature of the Business Brooklyn Basketball, LLC (the "Company") a Delaware limited liability company, was formed to acquire 100% of the membership interests in New Jersey Basketball, LLC. Such acquisition closed on August 16, 2004. New Jersey Basketball, LLC's ("Basketball") primary business operates as a professional basketball team in New Jersey under the name of the New Jersey Nets (the "Nets") through a franchise agreement with the National Basketball Association ("NBA"). Revenues are derived primarily from ticket sales, shared arena operating income, NBA related ventures including national media contracts, contracts with advertising sponsors and local cable television contracts. The Company is wholly owned by Nets Sports and Entertainment, LLC ("NS&E"). members of Basketball are members ofNS&E. Certain former

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From July 1,2005 through the date of this report, NS&E contributed approximately $78 million to the Company, including $6 million contributed by two new investors ofNS&E on September 22, 2006, which in turn contributed to Basketball . Basis of Presentation The accompanying financial statements have been prepared on a consolidated basis for the Company and its wholly owned subsidiary, Basketball. The financial statements reflect the results of operations and cash flows for the Company, for the year ended June 30, 2006 and for the period August 16, 2004 (commencing with the closing of its acquisition) through June 30, 2005. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenue and Expense Recognition Revenue from ticket sales, television broadcasting, and advertising and promotions are recorded on a game-by-game basis over the playing season. Team expense, principally player compensation and game expenses, are recorded as expense on the same basis, except for early contract terminations. Accordingly, advance ticket sales for games not played are recorded as deferred revenues until the associated game is played or credit is applied for a subsequent game played. General and administrative expenses, as well as advertising and promotional expenses, are charged to operations as incurred. NBA expansion and relocation fees are recognized on an as-received basis as the NBA controls allocation and disposition of these funds until payments are made to the teams. Cash and Cash Equivalents and Restricted Cash The Company considers all highly liquid debt instruments with an original maturity of three months or less to be cash equivalents.

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S.ro:okryn Basketball, LtC and Subsidiary (AwtioHyowned subsidiary) Notes. to Consolidated Financial Statements ~une30, 2006 an_d200~
Property and Equipment Property and equipment are stated at cost and depreciated by the straight-line method over their estimated useful lives, generally three years for computers and five to seven years for furniture and equipment Amortization of leasehold improvements is provided for over the shorter of the remaining term of the related lease or the estimated useful life of the improvement ranging from 3 to 9 years. At the time property and equipment is retired or otherwise disposed of, the asset and related accumulated depreciation are removed from the accounts and any related gain or loss is included in earnings. Maintenance and repairs are expensed as incurred. Deferred Loan Costs Cost incurred in connection with obtaining the revolving and term loans, and senior notes (Note 6) are capitalized and amortized over the term of the related financing. Amortization of approximately $4,948,589 and $1,452,352 for the years ended June 30, 2006 and the period from August 16,2004 through June 30, 2005 is included in interest expense in the accompanying Consolidated Statements of Operations. The amounts for 2006 include $4,777,000 of previously unamortized loan costs which were written off upon refinancing.

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Intangible Assets Intangible assets represent the Company's excess purchase price over the fair value of net tangible assets acquired. Management is primarily responsible for estimating fair value. Management considered a number of factors, including valuations and appraisals, when estimating fair value. Definite lived intangible assets are being amortized over the estimated period of benefit (see Note 5) . In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, the Company's indefinite lived intangible asset, franchise, is not amortized but rather is reviewed for impairment by comparing the recorded amount to its fair value. The Company is required to perform this impairment test at least annually or more frequently if circumstances indicate possible impairment. No impairments were recorded for the periods presented. Long-Lived Assets Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the estimated undiscounted future cash flows are lower than the carrying amount of the asset, a loss is recognized for the difference between the carrying amount and the estimated fair value of the asset. No such impairment has been recorded for the periods presented. Players' Signing Bonuses Players' signing bonuses are those costs incurred to acquire or enter into contracts with players, and are amortized to team expense on a straight-line basis over the terms of the related contracts. Players' signing bonus expense was approximately $0, $0 and $250,000 for the year ended June 30, 2006 and the periods from August 16, 2004 through June 30, 2005 and from July 1, 2004 through August 15,2004, respectively. Investments in NBA-Related Entities Investments in NBA-related entities are reported on the equity method. Basketball's allocable portion of the operating results of the NBA-related entities totaled approximately $5,114,000 and $3,510,000 for the year ended June 30, 2006 and the period from August 16, 2004 (commencement of operations) through June 30, 2005, respectively. Losses greater than the Nets'

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Brooklyn Basketball, LLC and Subsidiary
(A wholly owned subsidiary)

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Notes to Consolidated Financial Statements June 30 2006 and 2Q05
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investment are not recorded as the Nets are not required to provide funding for the operations of the NBA-related entities. The Nets also received distributions of approximately $3,596,000 and $2,929,000 from the NBA-related entities during the year ended June 30, 2006 and the period from August 16,2004 through June 30, 2005.

Fair Value of Financial Instruments
The Company's financial instruments include cash and cash equivalents, restricted cash, receivables and payables, all of which are short-term in nature and, accordingly, approximate fair value. The Company's term loans and revolving note payable reprice frequently, at current market rates. Therefore, the fair value of these loans approximates their carrying value. Income Taxes The Company is a limited liability company. No provision or liability for federal, state and local income taxes has been reflected in the financial statements of the Company since such liabilities are the responsibility of the individual member. Concentration of Credit Risk Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash, cash equivalents and accounts receivable. As determined by the Company's management, the Company maintains its cash and cash equivalents with high quality financial institutions and minimizes its exposure to accounts receivable through a diverse customer base and through use of contractual relationships. Reclassification Certain amounts previously reported have been reclassified to conform to the current year presentation.

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1.

Accounts Receivable Accounts receivable consist of the following at June 30:

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2006
Due from Philadelphia NBA Franchise Accounts receivable - advertising and sponsorships Due from NBA Properties, Inc. Receivables due from the NBA Accounts receivable - other Less: Allowance for doubtful accounts $ 1,500,000 1,777,436 611,OOO 8,533,637 602,076 13,024,149 30,000 $

2005
540,214 641,000 3,752,136 767,833 5,701,183 665,240 $ 5,035,943

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$ 12,994,149

Brooklyn Basketball, LLC and Subsidiary
(A wholly owned subsidiary)

Notes to Consolidated Financial Statements JunEl30, 2006 and 2005
3. Property and Equipment Property and equipment consist of the following at June 30:

Office furniture, fixtures and equipment Leasehold and arena improvements Data processing equipment Other Less: Accumulated depreciation and amortization

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2006
850,647 2,349,257 313,782 46,664 3,560,350 1,371,479 2,188,871

s

2005
575,448 2,288,819 222,644 3,086,911 584,655 2,502,256

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Depreciation and amortization expense on property and equipment totaled approximately $787,000 and $585,000 for the year ended June 30, 2006 and the period from August 16,2004 through June 30, 2005.

4.

Investments

in NBA Related Entities

Investments in NBA related entities are summarized as follows at June 30:

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,

0/0 Interest
NBA Media Ventures LLC Planet Insurance Ltd . National Basketbal1 Association, a joint venture NBA Development, LLC NBA Holdings, LLC 3.4% 3.4% 3.4% 3.4% 3.4%

2006

% Interest 343,000 3.4% 3.4% 3.4% 3.4% 3.4%

2005

...

s 6,968,000

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5,463,000 330,000

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s 7,311,000

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5,793,000

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Intangible Assets As indicated in Note I, on August 16, 2004 all of the interests in Basketball were acquired by the Company; thereby establishing a new basis of accounting for Basketball's assets and liabilities. A summary of the purchase is as follows:

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Cash paid for purchase price, net of cash acquired Membership Interests issued by parent company Net payoff of predecessor credit facility Net liabilities assumed . Expenses of transaction principally paid by the Company

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162,585,982 55,000,000 93,606,387 45,860,503 4,058,689 $ 361,111,561

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(A wholly owned subsidiary)

Brooklyn Basketball, llC and Subsidiary

Notes to Consolidated Financial Statements June 301.2006 and 2005
A summary of the intangible assets acquired is as follows: Franchise asset Players' contracts Arena lease Management contracts . Season ticket holder list Sponsorship contracts

s 161,111,561

173,500,000 22,600,000 1,800,000 1,600,000 500,000

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$ 361,111,561
A summary of the recorded intangible assets at June 30, 2006 and 2005 are as follows:
2006

Fr_1Ie AsHt Asset val .... Acclllnllatcd omortizatioo
$

Ployen' C....... II S 173,500,000 S

ARIIUI Le_ 22,600,000 (11,300,000) S 11,300,000
$ $.

M_e_ C_cls 1,800,000 !I,200,ooo) 600,000 1005
$

Se.... ToeI<et-Hoider LIst S 1,600,000 (533,334) 1,066,666 $ S

Spoos ....

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Total 361,III,S61 (81,712,269

161,111,561

500,000

168,I7&,935!
$

1500,000)

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161,111,561

$

105,321,06'

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279,399,292

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Play .... • COli_II
$

Are ... u..e $ 22,600,000 S

M_e_nt Contr..... 1,800.000
$

Se.... TIcket-Holder Lill 1,600.000 ~66,667) S 1.333,333 S $

S.,_.....Wp Coacr... 11 500,000 (250,000) 250,000 S
$

Total 361,111.561

Aosetvalues Accumulated amoctization

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173,500,000 (34,700,000)

15,650,000)
S 16,950.000 S

1600,0(0)
1,200,000

141,466,667)
319,644,894

$ 161,111,561

S 138.800,000

Intangible assets are amortized over their estimated useful lives on a straight-line basis over the playing season each year, with the exception of the franchise asset Player contracts, arena lease, management contracts, season ticket holder list and sponsorship contracts are amortized on a straight-line basis generally over 5, 4, 3, 6 and 2 years, respectively. The franchise asset is not amortized as it has been categorized as an indefinite-lived intangible asset. Amortization of the intangible assets for the year ended June 30, 2006 and the period August 16, 2004 through June 30, 2005, was approximately $40,246,000 and $41,467,000, respectively. Estimated future annual amortization expense for intangible assets is as follows: 2007 2008 2009 2010

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40,606,000 $ 40,006,000 $ 33,379,000 4,296,000

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Brooklyn Basketball, LLC and Subsidiary
(A wholly owned subsidiary)

Notes to Consolidated Financial Statements June 30, 2906 and 2005

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Debt The Company's debt consists of the following at June 30: 2006 Term loan; interest payable monthly; 5.125% Term loan; interest payable monthly, 6.875% Senior notes, interest payable semi-annually. 5.31 % Revolving credit facility, 7.125% and 5.223% .$ 85,000,000 44,000,000 129,000,000 $
2005

30,000,000 50,000,000 61,000,000 141,000,000

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On August 16,2004 in conjunction with the acquisition of member interests in Basketball, Basketball entered into a credit facility in the aggregate amount of $150,000,000; comprised of a $30,000,000 collateralized term loan ("Tranche A") and $50,000,000 collateralized term loan (''Tranche B") and a $70,000,000 revolving facility ("Revolver") of which borrowings outstanding over $40,000,000 on February 16,2006 will be converted to a collateralized term loan on such date ("Tranche C"). This credit facility matures August 15, 2008. Tranche A, Tranche C and the Revolver bear interest at either (i) prime (or, if greater, federal funds plus 0.5%) plus 0.75% or (ii) Libor plus 1.75% and Tranche B bears interest at either (i) prime (or if greater, federal funds plus 0.5%) plus 2.5% or (ii) Libor plus 3.5%. In addition, a fee of .50% per annum is payable quarterly on the average daily unused amount of the Revolver. The facility contains covenants including maintenance of a minimum annual reserve, as defined, and minimum fixed charge coverage. Outstanding borrowings are guaranteed by the Company. The Tranche A, Tranche C and Revolver were collateralized by the Company's interests in subsidiaries and other assets and property of each . In September 2005, the Company funded the required reserve with the lender. On December 9, 2005, New Jersey Basketball, issued $85 million principal amount Series D Senior Notes (the "Senior Notes") due June 7, 2012. The Senior Notes were issued to Hardwood Funding, LLC, a special purpose Delaware limited liability company ("Hardwood Funding") created by the NBA, under the NBA's league-wide financing program (the "League-Wide Financing Program"). Simultaneously with the issuance and sale by the former owners of the Senior Notes, Hardwood Funding issued notes to a group oflenders led by JPMorgan Chase Bank, N.A., as collateral agent (the "Collateral Agent") and administrative agent for the Senior Notes. Hardwood Funding used the proceeds of that issuance to purchase the Senior Notes from participating teams, including New Jersey Basketball, LLC. Net proceeds from the sale of the Senior Notes were used to repay other outstanding borrowings. The interest rate on the Senior Notes is 5.31 % per annum and is payable semi-annually in arrears. The interest rate applicable to the Senior Notes will increase upon the occurrence of the following events (each, a "Triggering Event"): (i} events permitting suspension of payments to the NBA under the National Media Contracts; (ii) certain NBA player work stoppages or lockouts; and (iii) upon the corporate ratings of any counterparty (other than the NBA) to the National Media Contracts not being of investment grade (as defined). As of June 30, 2006, the interest rate of the Senior Notes was 5.31 %.

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Consollda

811cial' Statements

The Senior Notes may be redeemed, in whole or in part (but if in part, in an amount not less than 5% of the aggregate principal amount of all Senior Notes then outstanding) at any time with at least 30 days advance notice, for the sum of (a) accrued interest to the date of the redemption and (b) the greater of (i) par or (il) the present value of all remaining interest and principal on the Senior Notes to be redeemed, calculated using a discount rate equal to the sum of (x) 0.50% plus (y) the yield on a U.S. Treasury obligation having a final maturity corresponding with the remaining term of the Senior Notes being redeemed. Pursuant to rules applicable to all teams participating in the League Wide Financing Program, mandatory redemption is triggered when Basketball's current exposure (reflecting, in part, the principal amount outstanding under the Senior Notes) exceeds a percentage of the average NBA membership value or when such exposure exceeds a multiple of its allocated television revenues (as defined), The maximum available outstanding debt amount for any team participating in the League-Wide Financing Program cannot exceed 60% of the average value ofan NBA membership value (such value equals the present value consideration of all sales of 50% or more of the voting equity interest or other controlling equity interests, in existing or expansion NBA memberships that have been consummated during the preceding five-year period); otherwise on or before the first anniversary of the existence of any such excess, the team is required to offer to prepay its outstanding Senior Notes in an amount equal to such excess. Also, a participating team's outstanding debt may not exceed 4.5 times-the sum of (i) its pro forma annual allocated national television revalues (as defined) and (ii) certain other pro forma contractually obligated income streams (as defined). Again, on or before the first anniversary of the existence of any such excess, Basketball is required to offer to prepay its outstanding Senior Notes in an amount equal to such excess. The Senior Notes are collateralized by a pledge to, the Collateral Agent on behalf of Hardwood Funding of equity interests in certain subsidiaries, rights in the regular and post-season network and other television broadcast revenues; membership rights, in the NBA and certain assets associated with that membership, arena interests, certain deposit accounts and substantially all of New Jersey Basketball, LLC's other assets and rights (the "Collateral"). The NBA distributes New Jersey Basketball, LLC's pro rata share of the NBA national television revenues into an account (the "Collection Account") established by the NBA and loaned at and maintained by the Collateral Agent on behalf of Hardwood Funding. Before any distribution of such revenues to Basketball, funds in the Collection Account are applied to, among other things, (i) payment of principal, interest and fees under the Senior Notes and (ii) certain obligations of Basketball, including but not limited to fines, charges, obligations, assessments and other levies imposed by the NBA. In addition, a portion of Basketball's television revenues transferred into the Collection Account is transferred to an interest-bearing debt service reserve account in an amount at least equal to the interest projected to be due on the Senior Notes during a 120-day period beginning July I of each year. Further, after the occurrence of a Triggering Event and until such time as no Triggering Event exists, Basketball must establish an interest reserve with such revenues in an account in an amount that, together with any amount on deposit in the debt service reserve account, is sufficient to cover nine months' interest expense on the Senior Notes (the "Labor Contingency Interest Reserve"). In the event amounts on deposit in the Collection Account are not sufficient to fund such interest reserves, Basketball is required to fund the shortfall from its own accounts.

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Brooklyn Basketball, LLC and Subsidiary
(A wholly owned subsidiary)

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Notes to Consolidated Financial Statements June 3D, 2006 and 2005
On December 9, 2005, the Company entered into a senior collateralized revolving credit facility in an aggregate amount of$65.0 million which is collateralized by a first priority perfected lien, subject to certain exceptions, in all the Company's right, title and interest in certain deposit accounts. The proceeds were used to repay a portion of existing indebtedness and the balance is used for general corporate purposes and to fund the operation of the Nets. On June 9,2007, the revolving credit facility will automatically be reduced to $40.0 million with any excess to be converted into secured term loans. All loans mature on December 9, 2009. The Company is required to prepay the loans and, in certain circumstances, permanently reduce revolving commitments with the net proceeds of (i) any sale or liquidation of Basketball, (ii) certain asset sales of Basketball or the Company, including any sale of equity interests in Basketball, and (iii) certain cash distributions to the Company. Certain changes in the value of our membership in the NBA will also trigger the mandatory prepayment of a designated amount of the loans. The interest rates applicable to loans under the facility are based, at the Company's option, on either Libor plus 2.0% per annum or the alternate base rate plus 1.0% per annum. Calculations of interest are based on a 360-day year. Also, the Company pays a commitment fee equal to 0.175% per annum on the average daily unused portion of the available commitment under the revolving credit facility. The credit facility contains certain customary representations and warranties. In addition, it requires the Company to establish and maintain reserve accounts with the lender for interest and operating expenses, and contains customary covenants that place restrictions on dividends, investments, capital expenditures and sales of certain assets. In addition, the credit facility requires the Company to, as of the end of each fiscal quarter, maintain a minimum ratio of consolidated EBITDA (as defined) (including, for this purpose, certain capital contributions from NS&E to the Company and incremental borrowings by the Company of revolving loans) to consolidated fixed charges of 1.0 to 1.0 for the prior four fiscal quarters. Under the revolving credit facility, the Company had loans outstanding of$44.0 million and $Oas of June 30, 2006 and June 30, 2005, respectively. Interest expense incurred was approximately $1.4 million and SO, for the year ended June 30, 2006 and the period from August 16, 2004 through June 30, 2005, respectively. For the year ended June 30, 2006 and the period from August 16,2004 through June 30, 2005, the Company is in compliance with all debt provisions.

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Brooklyn Basketball, LLC and Subsidiary
(A wholly owned subsidiary)

Notes to Consolidated Financial Statements June 30. 2006 and 2005 7. Deferred Compensation
Deferred compensation represents deferred salary payments due to players and coaches in varying installments through 2014. Payments are due as follows, with interest imputed at rates ranging from 10 to 13.75 percent per year.

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Years Ending
2007 2008 2009 2010 2011 Thereafter Less: Imputed interest Present value of deferred compensation obligations Less: Current maturities $ $ 1,007,952 1,007,952 1,007,952 507,952 507,952 2,023,856 6,063,616 2,258,934 3,804,682 1,007,952 2,796.,730

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Employment Contracts
Employment agreements and contracts with players, coaches and others, in effect at June 30, 2006 are summarized as follows: 2007 2008 2009 2010 2011 $ 72,041,401 67,820,594 47,568,538 21,000,000 15,000,000

$ 223,430,533
These amounts, which are not recorded in the accompanying financial statements as they represent future compensation, can be affected by player retirements, trades, buy-out of player contracts or renegotiation of existing contracts. Certain contracts also include additional bonuses awarded based upon individual and team performance which are not included in the amounts above. As almost all of the aforementioned contracts are guaranteed, Basketball carries life and long-term disability insurance to partially protect against losses which may result. In addition, the NBA has agreed to provide players with certain disability benefits. Insurance polices have been obtained on a league-wide basis to cover these benefits.

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Notes to Consolidated Financial Statements June 30, 2006 and 2005
Subsequent to June 30,2006, Basketball executed a number of additional player and coach signings, player trades, and related transactions. As a result of these transactions, future commitments discussed above have been modified to the following: 2007 2008 2009 2010 2011


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78,206,558 72,636,570 47,813,538 21,000,000 15,000,000

$ 234,65~,666 At June 30, 2006, future payments due, exclusive of expected insurance proceeds and gross of present value adjustments, as a result of player retirements, buyouts, and injury are as follows: Years Ending June 30, 2007 2008

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5,426,624 1,808,875 7,235,499

9.

Collective Bargaining Agreement On January 20,1999, the NBA and the National Basketball Players' Association entered into a collective bargaining agreement (the "Collective Bargaining Agreement"). The Collective Bargaining Agreement was in effect through June 30, 2004. During December 2003, the NBA exercised its option to extend the agreement through the 2004-2005 season. On July 29, 2005, a new Collective Bargaining Agreement was completed and signed. This new agreement is for a six year term (2005-2006 through 2010-2011) with a unilateral option in favor of the NBA to extend for a seventh year on the same terms as year six.

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License Agreement Basketball leases its playing facility from the New Jersey Sports and Exposition Authority (''NJSEA'') under a license agreement, which runs through the 2007-2008 basketball season. Lease payments are based upon certain thresholds (as defined) which include ticket and parking receipts and concession and suite revenue. Basketball has the right to terminate the agreement on an annual basis, provided BasketbaII furnishes written notice to the NJSEA on or before each January 1 for the following NBA season. See Subsequent Event Note 14.

11.

Significant Media Contracts BasketbaII is entitled to receive future media revenues resulting from contracts it has entered into as well as contracts entered into by the NBA on its behalf. The most significant of these are for national broadcast television and local and national cable television broadcasts. The NBA national broadcast contract took effect beginning with the 2002-2003 season and has a six year term. Basketball's local broadcast agreement with the YES Network also began in the 2002-2003 season and runs through the conclusion of the 2021-2022 seasons. In connection with Basketball's local

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Brooklyn Basketball, LLC and Subsidiary
(." wholly owned subsidiary)

Notes to Consolidated Financial Statements .Jlune 30,2006 and 2005
broadcasting agreement prior to the beginning of the 2012-13 and 2017-18 seasons, respectively, the rights fee payable to Basketball will be reset to reflect fair market value, as defined, When the ABA merged with the NBA, rather than take a cash buyout, the Spirit of st. Louis franchise opted to receive a pro rata share in perpetuity, of the annual national media rights fees received by the ABA's four surviving franchises, the New Jersey Nets, San Antonio Spurs, Denver Nuggets and Indiana Pacers. This sharing is equal to 117ofthe per team distribution, calculated on the basis of28 teams. Accordingly, Basketball receives net, approximately 85% of their share of NBA national media contract distributions. For contracts in effect for the year ended June 30,2006, Basketball estimates its net share of 20062007 season media revenues will be as follows: National broadcast and cable television Local cable television

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21,051,000 8,942,000 29,993,000.

The national contracts also call for revenue sharing once certain advertising revenue levels are attained. Revenue sharing earned on the national television and national cable contracts are prorated by the NBA equally among the NBA's 30 teams. The Company recognizes only its portion of the total contract as revenue.

12.

Related Party Transactions From time to time the member and affiliates of member have advanced funds, generally on a noninterest bearing basis, for Company costs and expenses to be reimbursed. At June 30, 2006 and 2005, approximately $0 and $5,199,684 of such advances were outstanding, respectively. For the year ended June 30, 2006 and the period from August 16,2004 through June 30, 2005, Basketball earned approximately $8,598,000 and $8,268,000, respectively, in gross broadcast revenue as a result of their contract with YES Network for local cable television broadcasts. All payments resulting from this contract were received during the respective period. Subsequent to August 15, 2004, for the period ended June 30, 2005, the Basketball approved the reimbursement to an affiliated entity of approximately $370,000 representing costs for finance, legal and public relation services incurred on behalf of the Basketball. For the year ended June 30, 2006, such approved reimbursements were approximately $630,000.

13.

Commitments,

Contingencies

and Litigation

Leases Basketball has a lease agreement for 27,500 square feet of warehouse space that was converted into a gymnasium and is utilized as a practice facility and for 37,500 square feet of office space for administrative and executive offices. The lease, with a term expiring on March 31, 2013, may be terminated by the Company after June 30, 2009 by providing one year's advance notice with payment of liquidating damages of approximately $700,000. Basketball is responsible for all operating costs in connection with its occupancy ofthe property. Basketball has an option to extend the lease for two separate four-year renewal terms by providing six months prior notice.

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Brooklyn Basketball, LLC and Subsidiary
(A wholly owned subsidiary)

Notes to Consolidated Financial Statements June 30, 2006 and 2005
Future minimum lease payments for the facilities over the initial lease term are as follows for the year ending June 30: 2007 2008 2009 2010 2011 Thereafter S 739,500 739,500 739,500 739,500 739,500 1,294,125 4,991,625

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Rent expense for the facilities was approximately $529,000 and $463,000, net of deferred rent, for the year ended June 30, 2006 and the period August 16, 2004 through June 30, 2005. NBAFees Basketball is required under the Constitution and By-laws of the NBA, among other things, to contribute to the NBA certain amounts, as defined, to be used by the league for operating expenses. For the year ended June 30,2006 and the period from August 16,2004 through June 302005, respectively, Basketball contributed a fixed payment of approximately $64,000 and $50,000 allocable from suite revenue and contributed approximately $5,095,000 and $3,132,000, respectively, from regular season and playoff ticket sales based on each game's ticket sales, as defined, applied to a formula specified by the NBA . Pension Plans Basketball participates in the NBA Players' Pension Plan, NBA General Managers Pension Plan and the NBA Coaches, Assistant Coaches and Trainers Pension Plan, all of which are multi employer defined benefit plans administered by the NBA. Contributions charged to pension costs totaled approximately $1,347,000 and $1,020,000 for the year ended June 30, 2006 and the period August 16, 2004 through June 30 2005, respectively. Acquisition of Franchise Basketball may become obligated (because of its execution of an Undertaking and Assumption Agreement among itself, the other former American Basketball Association ["ABA"] teams and the former owner of the Nets) for obligations of the ABA to the extent that any obligation of the ABA is not fulfilled and a creditor of the ABA successfully establishes liability on the part of the member teams of the ABA relating to such obligations. In addition Basketballis obligated to pay certain former ABA team owners a total of one-seventh of its annual national television broadcast revenue (see Note 11). Litigation Basketball is involved in various litigations by virtue of its membership in the NBA, its ordinary course of business, the Undertaking and Assumption Agreement, the Assets Purchase Agreement and an Indemnification Agreement among the expansion teams and the NBA. The Company's management, based upon advice of counsel handling such actions and litigation, does not believe that an adverse outcome, if any, of such litigation will result in a material adverse effect on the Company's financial statements.

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(A wholly owned subsidiary)

Brooklyn Basketball. LLC and Subsidiary

Notes to Consolidated Financial Statements June 30, 2006 and 2005
Otber Basketball enters into various agreements include indemnifications and guarantees. necessary. In the opinion of management, not materially affect the financial position in the ordinary course of business, some of which might Basketball provides for any estimated liability as any liability that may result from these agreements will and operations of Basketball.

As of June 30, 2006 Basketball is involved in arbitration with an insurance company regarding disability benefits payable by the insurance company to another NBA club on behalf of a former Nets player whose insurance policy was assigned by Basketball in conjunction with a player trade in 2002. Under the disability policy terms, the assignee club is owed by the insurance company 80% of the remaining amount of the disabled player's contract, equivalent to approximately $20,000,000. The insurance company contends that Basketball is liable to it for this amount by reason of supposed misrepresentations at the time of the underwriting. See Subsequent Events Note 14. 14. Subsequent Events

Legal Matters On August 17,2006, the outcome of the arbitration (see Note 13) was decided in favor of Basketball with no further opportunity to appeal the decision. The arbitrator determined that the insurance company failed to establish its claim by clear and convincing evidence and its claim was dismissed. Lease Extension The Company and the NJSEA are currently negotiating terms for a five-year extension of the team's lease at the Continental Airlines Arena. The extension is expected to provide for annual options for termination with and without penalty based on specific terms and conditions. The proposed new deal would go into effect for the upcoming 2006-2007 season and is expected to retain substantially the same economic benefits and costs to the Company as the existing lease, but would allow for a more streamlined administration of the lease terms.

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