Edward B. Hatchett, Jr.
Auditor of Public Accounts

Independent Auditor's Report

To the People of Kentucky
The Honorable Paul E. Patton, Governor
Mr. Gordon C. Duke, Secretary
Finance and Administration Cabinet

We have audited the accompanying financial statements of the governmental activities, the business-type activities, the aggregate discretely presented component units, each major fund, and the aggregate remaining fund information fo the Commonwealth of Kentucky, as of and for the year ended June 30, 2002, which collectively comprise the Commonweath's basic financial statements as listed in the table of contents. These financial statements are the responsibility of the Commonwealth's management. Our responsibility is to express opinions on these financial statements based on our audit.

We did not audit the financial statements of some of the entities that comprise the Commonwealth. Those financial statements were audited by other auditors whose reports thereon have been furnished to us, and our opinion, insofar as it relates to the amounts included for those component units and funds, is based upon the reports of the other auditors. Those entities were:

Certain portions of the Governmental Funds including:

-Transportation Fund
-Special Revenue Fund - Turnpike Authority
-Debt Service Fund - Turnpike Authority

Certain portions of the Proprietary Funds including:

-Kentucky Lottery Corporation
-Kentucky Workers' Compensation Special Fund
-Kentucky Coal Workers' Pneumoconiosis
-Petroleum Storage Tank Enviornmental Assurance Program

Certain portions of the Risk Management funds within the Internal Service Fund:

-State Workers' Compensation Program
-Transportation Cabinet's Self-Insure Workers' Compensation Trust Program

Certain Fiduciary Funds including:
-Pension Trust Funds
-Kentucky Affordable Prepaid Tuition Plan
-Kentucky Educational Savings Plan Trust

Component Units:

-Kentucky Higher Education Student Loan Corporation
-Kentucky Housing Corporation
-Bluegrass State Skills Corporation
-Kentucky State Fair Board
-Kentucky Educational Television Authority
-Kentucky Local Correctional Facilities Construction Authority
-Kentucky Infrastructure Authority
-Kentucky Center for teh Arts Corporation
-Kentucky Higher Education Assistance Authority
-Kentucky Economic Development Finance Authority
-Kentucky Access
-Kentucky River Authority

To the People of Kentucky
The Honorable Paul E. Patton, Governor
Mr. Gordon C. Duke, Secretary
Finance and Administration Cabinet
Page 2

Colleges and Universities:

-University of Kentucky
-University of Louisville
-Eastern Kentucky University
-Kentucky State University
-Morehead State University
-Murray State University
-Northern Kentucky University
-Kentucky Community and Technical College System

Those financial statements reflect total assets and revenues of the government-wide financial statements and total assets and revenues or additions of the fund financial statements as follows:

Government-Wide Financial Statements:

We conducted our audit in accordance with auditing standards generally accepted in the United States of America, and the standards applicable to financial audits contained in Government auditing Standards issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit and the reports of other auditors provide a reasonable basis for our opinions.

In our opinion, based on our audit and the reports of other auditors, the financial statements referred to above, present fairly, in all material respects, the respective financial position of the governmental activities, the business-type activities, the aggregate discretely presented component units, each major fund, and the aggregate remaining fund information of the Commonwealth of Kentucky, as of June 30,2002, and the respective changes in financial position and cash flows, where applicable, thereof for the year ended in conformity with accounting principles generally accepted in the United States of America.

15

To the People of Kentucky
The Honorable Paul E. Patton, Governor
Mr. Gordon C. Duke, Secretary
Finance and Administration Cabinet
Page 3

As discussed in Note 2 of the basic financial statements, the Commonwealth of Kentucky adopted Governmental Accounting Standards Board Statement No. 33, Accounting and Financial Reporting for Non-exchange Transactions; Statement no. 34, Basic Financial Statements - and Management's Discussion and Analysis - for State and Local Governments; Statement No. 35, Basic Financial Statements - and Management's Discussion and Analysis - for Public Colleges and Universities; Statement No. 36, Recipient Reporting for Certain Shared Non-exchange Revenues; Statement No. 37, Basic Financial Statements - and Management's Discussion and Analysis - for State and Local Governments: Omnibus; and Statement No. 38, Certain Financial Statement Note Disclosures.

The management's discussion and analysis on pages 17 through 27, budgetary comparison schedules and corresponding notes on pages 113 through 133, and information about infrastructure assets reported using the modified accrual approach on pages 134 and 135, and claims development information for entity risk pools on page 136, are not required parts of the basic financial statements but are supplementary information required by the Governmental Accounting Standards Board. We and the other auditors have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement adn presentation of the required supplementary information. However, we did not audit the information and express no opinion on it.

Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the Commonwealth of Kentucky's basic financial statments. The combining and individual fund statements and schedules - non-major funds, presented in this report on pages 137 through 184 are presented for purposes of additional analysis and are not a required part of the basic financial statements of the Commonwealth of Kentucky. This information has been subjected to the auditing procedures applied in our audit of the basic financial statements and in the audits performed by other auditors and, in our opinion, based on our audit adn the reports of other auditors, is fairly presented, in all material respects, in relation to the basic financial statements taken as a whole. The Introductory Statistical sections presented in this report on pages 1 through 7 and 185 through 196 are also presented for purposes of additional analysis and are not a required part of the basic financial statements. This information has not been subjected to the auditing procedures applied by us and the other auditors in the audit of the basic financial statements and, accordingly, we express no opinion on them.

In accordance with Government Auditing Standards, we will also issue our report on our consideration of the Commonwealth of Kentucky's internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grants. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be read in conjunction with this report in considering the results of our audit.

December, 20 2002