UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2008

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 000-50689

BH/RE, L.L.C.

(Exact Name of Registrant as Specified in its Charter)

NEVADA		84-1622334
(State or Other Jurisdiction		(I.R.S. Employer
of Incorporation or Organization)		Identification Number)

3667 Las Vegas Boulevard South
Las Vegas, Nevada		89109
(Address of Principal Executive Offices)		(Zip Code)

(702) 785-5555

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the Registrant (1) has filed all reports required 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 o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. (See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act).

Large accelerated filer o	Accelerated filer o		Non-accelerated filer x	Smaller reporting company o

		(Do not check if a smaller reporting company)

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

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PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

BH/RE, L.L.C. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(amounts in thousands)

	September 30, 2008			December 31, 2007
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	21,556		$	21,468
Receivables, net	24,206			26,920
Inventories	2,378			1,729
Prepaid expenses	9,397			7,487
Deposits and other current assets	164			216
Restricted cash and cash equivalents	29,894			32,008
Total current assets	87,595			89,828

Property and equipment, net	581,424			602,098
Restricted cash and cash equivalents	14,062			45,613
Land receivable	15,484			19,728
Deferred income tax	—			172
Other assets, net	2,983			9,629
Total assets	$	701,548		$	767,068

LIABILITIES AND MEMBERS’ EQUITY (DEFICIT)

Current liabilities:
Current portion of long-term debt	$	1,944		$	1,785
Accounts payable	4,180			29,273
Accrued payroll and related	12,936			11,817
Accrued interest payable	7,261			8,182
Accrued taxes	2,835			3,338
Accrued expenses	10,920			9,422
Deposits	6,723			6,476
Other current liabilities	4,729			6,493
Due to affiliates	1,961			1,661
Total current liabilities	53,489			78,447

Long-term debt, less current portion	886,079			887,545
Deferred income tax	—			172
Other long-term liabilities	4,117			4,117
Total liabilities	943,685			970,281

Commitments and contingencies

Minority interest	(22,111		)	(16,272		)

Members’ equity (deficit):
Members’ equity	21,500			21,500
Accumulated deficit	(241,526		)	(208,441		)
Total members’ equity (deficit)	(220,026		)	(186,941		)
Total liabilities and members’ equity (deficit)	$	701,548		$	767,068

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

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BH/RE, L.L.C. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(amounts in thousands)

	Three Months Ended September 30, 2008			Three Months Ended September 30, 2007

Operating revenues:
Casino	$	31,054		$	26,373
Hotel	25,632			22,113
Food and beverage	13,187			11,307
Other	5,806			2,228
Gross revenues	75,679			62,021
Promotional allowances	(6,367		)	(4,892		)
Net revenues	69,312			57,129

Operating costs and expenses:
Casino	19,463			17,920
Hotel	10,221			10,263
Food and beverage	9,530			8,841
Other	77			307
Selling, general and administrative	17,413			21,745
Depreciation and amortization	8,971			10,740
	65,675			69,816

Operating income (loss)	3,637			(12,687		)

Other income (expense):
Interest expense, net	(16,198		)	(18,881		)
Minority interest	1,884			4,735
	(14,314)			(14,146		)

Pre-tax loss	(10,677		)	(26,833		)
Provision for income taxes	—			—
Net loss	$	(10,677	)	$	(26,833	)

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

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BH/RE, L.L.C. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(amounts in thousands)

	Nine Months Ended September 30, 2008			Nine Months Ended September 30, 2007

Operating revenues:
Casino	$	94,367		$	76,636
Hotel	86,948			82,025
Food and beverage	41,225			35,787
Other	13,659			5,790
Gross revenues	236,199			200,238
Promotional allowances	(20,668		)	(14,689		)
Net revenues	215,531			185,549

Operating costs and expenses:
Casino	58,863			49,814
Hotel	31,551			32,616
Food and beverage	28,212			27,116
Other	1,125			892
Selling, general and administrative	57,425			61,434
Depreciation and amortization	26,987			26,631
	204,163			198,503

Operating income (loss)	11,368			(12,954		)

Other income (expense):
Interest expense, net	(50,292		)	(54,317		)
Minority interest	5,839			10,093
	(44,453		)	(44,224		)

Pre-tax loss	(33,085		)	(57,178		)
Provision for income taxes	—			—
Net loss	$	(33,085	)	$	(57,178	)

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

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BH/RE, L.L.C. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands)

	Nine Months Ended September 30, 2008			Nine Months Ended September 30, 2007

Cash flows from operating activities:
Net loss	$	(33,085	)	$	(57,178	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	26,987			26,631
Amortization of debt discount and issuance costs	6,343			5,085
Minority interest	(5,839		)	(10,093		)
Changes in assets and liabilities:
Restricted cash and cash equivalents	2,114			(10,408		)
Receivables, net	2,714			3,701
Inventories and prepaid expenses	(2,559		)	(2		)
Deposits and other current assets	52			176
Due to affiliates	300			137
Accounts payable	(4,287		)	(1,223		)
Accrued payroll and related	1,119			2,475
Accrued expenses	995			2,122
Deposits and other current liabilities	(1,517		)	(2,526		)
Accrued interest	(921		)	1,669
Long term deposits and other assets	—			542
Long term receivable, land	4,244			—
Net cash used in operating activities	(3,340		)	(38,892		)
Cash flows from investing activities:
Purchases of property and equipment	(26,673		)	(90,571		)
Restricted cash and cash equivalents	31,551			67,813
Net cash provided by investing activities	4,878			(22,758		)
Cash flows from financing activities:
Borrowings under Loan Agreement	—			60,330
Payments under CUP financing	(1,307		)	(1,166		)
Financing fees	(143		)	—
Net cash (used in) provided by financing activities	(1,450		)	59,164
Cash and cash equivalents:
Increase (decrease) in cash and cash equivalents	88			(2,486		)
Balance, beginning of period	21,468			25,640
Balance, end of period	$	21,556		$	23,154

Supplemental cash flow disclosures:
Cash paid for interest, net of capitalized interest	$	45,394		$	53,925

Non-cash investing and financing activities:
Sale of land to Westgate	$	—		$	29,500

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

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BH/RE, L.L.C. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. ORGANIZATION AND BASIS OF PRESENTATION

Organization

BH/RE, L.L.C. (“BH/RE” or the “Company”) is a holding company that owns 85% of EquityCo, L.L.C. (“EquityCo”). The remaining 15% of EquityCo is owned indirectly by Starwood Hotels & Resorts Worldwide, Inc. (“Starwood”). MezzCo, L.L.C. (“MezzCo”) is a wholly-owned subsidiary of EquityCo and each of OpBiz, LLC (“OpBiz”) and PH Mezz II LLC (“PH Mezz II”) is a wholly owned subsidiary of MezzCo. PH Mezz I LLC (“PH Mezz I”), is a wholly owned subsidiary of PH Mezz II. PH Fee Owner LLC (“PH Fee Owner”) is a wholly owned subsidiary of PH Mezz I. TSP Owner LLC (“TSP Owner”) is a wholly owned subsidiary of PH Fee Owner. PH Mezz II, PH Mezz I, PH Fee Owner and TSP Owner are Delaware limited liability companies structured as bankruptcy remote special purpose entities which, together with OpBiz, own and operate the Planet Hollywood Resort and Casino (the “PH Resort”). OpBiz is the licensed owner and operator of the gaming assets and leases the casino space and hotel space together with all hotel assets from PH Fee Owner. TSP Owner was formed to hold the parcel of land (the “Timeshare Parcel”) that was sold to Westgate Resorts, LLP, a Florida limited partnership (“Westgate”) subject to the Timeshare Purchase Agreement between OpBiz and Westgate, dated December 10, 2004. 50% of BH/RE’s voting membership interests are held by each of Robert Earl and Douglas P. Teitelbaum, and BH/RE’s equity membership interests are held 40.75% by BH Casino and Hospitality LLC I (“BHCH I”), 18.50% by BH Casino and Hospitality LLC II (“BHCH II”) (together, “BHCH”) and 40.75% by OCS Consultants, Inc. (“OCS”).

BH/RE and its subsidiaries were formed to acquire, operate and renovate the Aladdin Resort and Casino (the “Aladdin”) located in Las Vegas, Nevada. OpBiz, an indirect subsidiary of BH/RE, completed the acquisition of the Aladdin on September 1, 2004 and completed a renovation project which transformed the Aladdin into the PH Resort at the end of 2007. In connection with the operation of the PH Resort, OpBiz has entered into an agreement with Planet Hollywood International, Inc. (“Planet Hollywood”) and certain of its subsidiaries to, among other things, license Planet Hollywood’s trademarks, memorabilia and other intellectual property. OpBiz has also entered into an agreement with Sheraton Operating Corporation (“Sheraton”), a subsidiary of Starwood, pursuant to which Sheraton provides hotel management, marketing and reservation services for the hotel (the “Hotel”) that comprises a portion of the PH Resort.

BH/RE is a Nevada limited liability company and was organized on March 31, 2003. BH/RE was formed by BHCH and OCS. BHCH is controlled by Douglas P. Teitelbaum, a managing principal of Bay Harbour Management, L.C. (“Bay Harbour Management”). BHCH was formed by Mr. Teitelbaum for the purpose of holding investments in BH/RE by funds managed by Bay Harbour Management. Bay Harbour Management is an investment management firm. OCS is wholly owned and controlled by Robert Earl and holds Mr. Earl’s investment in BH/RE. Mr. Earl is the founder, chairman and chief executive officer of Planet Hollywood and Mr. Teitelbaum is a director of Planet Hollywood. Collectively, Mr. Earl, a trust for the benefit of Mr. Earl’s children and affiliates of Bay Harbour Management, own substantially all of the equity of Planet Hollywood. Mr. Earl disclaims beneficial ownership of any equity of Planet Hollywood owned by the trust.

Interim Financial Statements (unaudited)

The accompanying condensed consolidated financial statements included herein have been prepared by the management of BH/RE, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. BH/RE believes that the disclosures are adequate to make the information presented not misleading. In the opinion of management, all adjustments (which include normal recurring adjustments) necessary for a fair presentation of the results for the interim periods have been made. The results for the three and nine months ended September 30, 2008, are not indicative of results to be expected for the full fiscal year. These unaudited financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2007, included in BH/RE’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 28, 2008.

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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Significant Accounting Policies and Estimates

The condensed consolidated financial statements are prepared in conformity with U.S. generally accepted accounting principles. Certain policies, including the determination of bad debt reserves, the estimated useful lives assigned to assets, asset impairment, insurance reserves and the calculation of liabilities require that management apply significant judgment in defining the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. Management’s judgments are based on historical experience, terms of existing contracts, observance of trends in the gaming industry and information available from other outside sources. There can be no assurance that actual results will not differ from management’s estimates.

To provide an understanding of the methodology management applies, BH/RE’s significant accounting policies and basis of presentation are discussed below.

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand, as well as short-term investments with original maturities not in excess of 90 days.

Restricted Cash and Cash Equivalents

The balance in current restricted cash and cash equivalents at September 30, 2008 and December 31, 2007 was approximately $29.9 million and $32.0 million, respectively, which consists of reserves required under the Loan Agreement (as defined in Note 5 to the Condensed Consolidated Financial Statements) including a reserve for payment of property taxes and insurance and a reserve for on-going furniture, fixture and equipment purchases or property improvements. Long-term restricted cash and cash equivalents consist of approximately $14.1 million and $45.6 million at September 30, 2008 and December 31, 2007, respectively, which includes a reserve for the remaining cash commitments for the on-going hotel room renovation project and a reserve for interest shortfalls. The restricted cash related to the renovation includes a contingency required by the Loan Agreement which will be released, in accordance with the terms of the Loan Agreement, upon completion of project funding.

Accounts Receivable

Accounts receivable, including casino and hotel receivables, are typically non-interest bearing and are initially recorded at cost. An estimated allowance for doubtful accounts is maintained to reduce the receivables to their carrying amount, which approximates fair value. BH/RE estimates the allowance for doubtful accounts by applying standard reserve percentages, which are based on historical collections, to aged account balances under a specific dollar amount and specifically analyzes the collectibility of each account with a balance over the specified dollar amount, based on the age of the account, the customer’s financial condition, collection history and any other known information.

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Inventories

Inventories consist of food and beverage, retail merchandise and operating supplies, and are stated at the lower of cost or market. Cost is determined by the first-in, first-out and specific identification methods.

Property and Equipment

Property and equipment are stated at cost. Recurring repairs and maintenance costs, including items that are replaced routinely in the casino, hotel and food and beverage departments which do not meet the Company’s capitalization policy, are expensed as incurred. The Company has established its capital expense policy to be reflective of its individual ongoing repairs and maintenance programs. Gains or losses on dispositions of property and equipment are included in the determination of income. Property and equipment are generally depreciated over the following estimated useful lives on a straight-line basis:

Buildings		40 years
Building improvements		15 to 40 years
Furniture, fixtures and equipment		3 to 7 years

Property and equipment and other long-lived assets are evaluated for impairment in accordance with the Financial Accounting Standards Board’s (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” For assets to be disposed of, the asset to be sold is recognized at the lower of carrying value or fair value less costs of disposal. Fair value for assets to be disposed of is estimated based on comparable asset sales, solicited offers or a discounted cash flow model.

Property and equipment are reviewed for impairment whenever indicators of impairment exist. If an indicator of impairment exists, the estimated future cash flows of the asset, on an undiscounted basis, are compared to the carrying value of the asset. If the undiscounted cash flows exceed the carrying value, no impairment is indicated. If the undiscounted cash flows do not exceed the carrying value, then impairment is measured based on fair value compared to carrying value, with fair value typically based on a discounted cash flow model.

Debt Issuance Costs

Debt issuance costs incurred in connection with the issuance of long-term debt are capitalized and amortized to interest expense over the expected terms of the related debt agreements using the straight-line method, which approximates the effective interest method, and are included in other assets on BH/RE’s consolidated balance sheets. Debt issuance costs, net of the related amortization, approximated $1.5 million and $7.7 million as of September 30, 2008 and December 31, 2007, respectively.

Intangible Assets

In connection with the purchase of the Aladdin, BH/RE recorded intangible assets, which consist of a customer list and trade name. The customer list was valued at approximately $2.7 million at the time of purchase and at September 30, 2008 was fully amortized. The trade name was valued at approximately $1.0 million at the time of purchase and was fully amortized at September 30, 2008. The customer list and trade name were amortized using the straight-line method over a useful life of 4 years and 1.5 years, respectively. Amortization expense for the three months ended September 30, 2008 and 2007 was approximately $112,000 and $168,000, respectively. Amortization expense for the nine months ended September 30, 2008 and 2007 was approximately $447,000 and $503,000, respectively.

Derivative Instruments and Hedging Activities

Pursuant to the refinancing of the Securities Purchase Agreement and the terms of the Restructuring Agreement, the Restructuring Parties (each as defined in Note 5 to the Condensed Consolidated Financial Statements), agreed to amend the warrants issued by MezzCo to purchase 17.5% of the fully diluted equity in MezzCo. The warrants contain a net cash settlement, and therefore are accounted for in accordance with Emerging Issues Task Force (“EITF”) 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock.” Both SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” and EITF 00-19 require that the warrants be recognized as liabilities, with changes in fair value affecting net income. See “Note 5. Long-Term Debt.”

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The terms of the Loan Agreement required the Company to enter into an interest rate cap agreement, which expires on November 30, 2008, to manage interest rate risk. The Company is required to enter into a new interest rate cap agreement when it exercises the first extension option of the Loan (see Note 5 – Long-Term Debt). The Company did not apply cash flow hedge accounting to this instrument. Although this derivative was not afforded cash flow hedge accounting, the Company retained the instrument as protection against the interest rate risk associated with its long-term borrowings. The Company accounts for its derivative activity in accordance with SFAS No. 133 and accordingly, recognizes all derivatives on the balance sheet at fair value with any change in fair value being recorded in interest income or expense in the accompanying consolidated statements of operations.

Revenue Recognition and Promotional Allowances

Casino revenues are recognized as the net win from gaming activities, which is the difference between gaming wins and losses. Hotel revenue recognition criteria are generally met at the time of occupancy. Food and beverage revenue recognition criteria are generally met at the time of service. Deposits for future hotel occupancy or food and beverage services are recorded as deferred income until revenue recognition criteria are met. Cancellation fees for hotel and food and beverage services are recognized upon cancellation by the customer as defined by a written contract entered into with the customer. All other revenues are recognized as the service is provided. Revenues include the retail value of food, beverage, rooms, entertainment and merchandise provided on a complimentary basis to customers. Such complimentary amounts are then deducted from revenues as promotional allowances on BH/RE’s consolidated statements of operations. The estimated departmental costs of providing such promotional allowances are included in casino costs and expenses and consist of the following (amounts in thousands, unaudited):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2008		2007		2008		2007
Rooms	$	1,670	$	1,087	$	4,950	$	2,967
Food and Beverage	2,138		2,429		6,731		6,731
Other	22		9		45		19
Total cost of promotional allowances	$	3,830	$	3,525	$	11,726	$	9,717

Slot Club Program

The PH Resort’s slot club members earn points based on gaming activity, which can be redeemed for cash. A liability is recorded for the estimated cost of the outstanding points accrued under the slot club program. The accrued slot club point liability was approximately $2.1 million and $1.8 million as of September 30, 2008 and December 31, 2007, respectively.

Advertising Costs

Advertising costs are expensed as incurred and included in selling, general and administrative costs and expenses. Advertising costs totaled approximately $1.4 million and $8.3 million for the three and nine months ended September 30, 2008, respectively, and $2.0 million and $5.0 million for the three and nine months ended September 30, 2007, respectively.

Income Taxes

The condensed consolidated financial statements include the operations of BH/RE and its majority-owned subsidiaries: EquityCo, MezzCo, OpBiz, PH Mezz II, PH Mezz I, PH Fee Owner and TSP Owner. BH/RE and EquityCo are limited liability companies and are taxed as partnerships for federal income tax purposes. However, MezzCo has elected to be taxed as a corporation for federal income tax purposes. OpBiz and PH Mezz II, wholly-owned subsidiaries of MezzCo, are treated as divisions of MezzCo for federal income tax purposes, and accordingly, are also subject to federal income taxes. Additionally, PH Mezz I, a wholly-owned subsidiary of PH Mezz II, PH Fee Owner, a wholly owned subsidiary of PH Mezz I, and TSP Owner, a wholly owned subsidiary of PH Fee Owner, are also subject to federal income taxes.

MezzCo, OpBiz, PH Mezz II, PH Mezz I, PH Fee Owner and TSP Owner account for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes”. SFAS 109 requires the recognition of deferred income tax assets, net of applicable reserves, related to net operating loss carryforwards and certain temporary differences. The standard requires recognition of a future tax benefit to the extent that realization of such benefit is more likely than not. Otherwise, a valuation allowance is applied.

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In July 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”) “Accounting for Uncertainty in Income Taxes – an interpretation of FASB No. 109”, to clarify certain aspects of accounting for uncertain tax positions, including issues related to the recognition and measurement of those tax positions. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company adopted the provisions of FIN 48 on January 1, 2007 as required. Further discussion regarding the adoption of FIN 48 can be found in Note 8 to the Condensed Consolidated Financial Statements.

Membership Interests

As of September 30, 2008, BH/RE’s membership interests had not been unitized and BH/RE’s members do not presently intend to unitize these membership interests. Accordingly, management of BH/RE has excluded earnings per share data required pursuant to SFAS No. 128, “Earnings Per Share,” because management believes that such disclosures would not be meaningful to the financial statement presentation.

Reclassifications

Certain reclassifications have been made to conform prior period data to the current presentation. These reclassifications had no effect on reported income.

Recently Issued Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The provisions of SFAS 157 were effective for the Company beginning January 1, 2008 for financial assets and liabilities and are effective January 1, 2009 for non-financial assets and liabilities. The warrants the Company has issued to purchase 17.5% of the equity of MezzCo (see Note 5 – Long-Term Debt) qualify as a level three financial liability as there are no observable market inputs and there is no market activity for the instruments. The changes in valuation of the warrants for the period ended September 30, 2008 were not material to the Company’s financial position or operations. The interest rate cap qualifies as a level two financial asset in accordance with SFAS 157. The balance of the interest rate cap and changes in valuation for the period ended September 30, 2008 were not material to the Company’s financial position or operations.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115.” SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value, with unrealized gains and losses related to these financial instruments reported in earnings at each subsequent reporting date. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The adoption of this statement on January 1, 2008, did not have a material impact on the Company’s financial position, results of operations or cash flows.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations.” SFAS No. 141 (revised) establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and noncontrolling interest in the acquiree and the goodwill acquired. The revision is intended to simplify existing guidance and converge rulemaking under U.S. generally accepted accounting principles with international accounting rules. This statement applies prospectively to business combinations where the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The adoption of SFAS No. 141 (revised) is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interest in Consolidated Financial Statements, an amendment of ARB No. 51.” This statement establishes accounting and reporting standards for ownership interest in subsidiaries held by parties other than the parent and for the deconsolidation of a subsidiary. It also clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS No. 160 changes the way the consolidated statement of operations is presented by requiring consolidated net income to be reported at amounts that include the amount attributable to both the parent and the noncontrolling interests. The statement also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interest of the parent and those of the noncontrolling owners. This statement is effective

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3. RECEIVABLES

Receivables consist of the following (in thousands):

	September 30, 2008			December 31, 2007
	(unaudited)
Casino	$	13,611		$	18,322
Hotel	8,562			6,811
Land sale receivable	21,244			25,373
Other	4,772			3,248
	48,189			53,754
Long-term portion of land sale receivable	(15,484		)	(19,728		)
Allowance for doubtful accounts	(8,499		)	(7,106		)
Receivables, net	$	24,206		$	26,920

4. PROPERTY AND EQUIPMENT

Property and equipment and the related accumulated depreciation consist of the following (in thousands):

	September 30, 2008			December 31, 2007
	(unaudited)
Land	$	68,479		$	68,479
Building and improvements	502,203			502,584
Furniture, fixtures and equipment	102,616			104,253
Construction in progress	18,651			10,767
	691,949			686,083
Accumulated depreciation	(110,525		)	(83,985		)
Property and equipment, net	$	581,424		$	602,098

Depreciation expense was approximately $9.0 million and $27.0 million for the three and nine months ended September 30, 2008, respectively, and $10.7 million and $26.6 million for the three and nine months ended September 30, 2007, respectively.

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5. LONG-TERM DEBT

Long-term debt consists of the following (in thousands):

	September 30, 2008			December 31, 2007
	(unaudited)
$860 million Loan	$	860,000		$	860,000
Northwind Aladdin obligation under capital lease	28,023			29,330
Total long-term debt	888,023			889,330
Current portion of long-term debt	(1,944		)	(1,785		)
Total long-term debt, net	$	886,079		$	887,545

Loan Agreement

On November 30, 2006, OpBiz and PH Fee Owner (collectively the “Borrower”) entered into the Loan Agreement (the “Loan Agreement”) with Column Financial, Inc. (the “Lender”) for a mortgage loan in the principal amount of up to $820 million. The Loan Agreement provided for an initial disbursement in the amount of $759.7 million and a future funding facility in the amount of up to $60.3 million. On July 17, 2007, the Borrower and the Lender entered into an amendment (the “Amendment”) to the Loan Agreement. The Amendment provided for the immediate funding to Borrower of the balance of future funding that was available under the Loan Agreement and established an additional future funding facility in the amount of up to $40 million (“Future Funding Tranche B”). Future Funding Tranche B has the same terms as the Loan Agreement for maturity and extension. The Loan Agreement, as amended by the Amendment, is referred to as the Loan. The Loan is secured by a deed of trust on the PH Resort and a pledge, subject to approval by the Nevada gaming authorities, by MezzCo of its membership interest in OpBiz (as described below).

The initial maturity date of the Loan is December 9, 2008 with three one year extension options available, subject to payment of a fee and the Borrower’s compliance with the requirements for an extension outlined in the Loan Agreement. Interest on the Loan is payable monthly and accrues at the 30 day LIBOR rate (2.488% for the September 30, 2008 interest payment) plus 3.25% with a .25% ticking fee on available but un-advanced future funding. Interest on Future Funding Tranche B is payable monthly and accrues at the 30 day LIBOR rate plus 7.50% with a 1.50% ticking fee on available but un-advanced funds. The Loan does not require amortization during the initial term or, provided certain EBITDA thresholds are met, during the extension periods. The Loan requires that the Borrower establish and maintain certain reserves including a reserve for completion of the renovation project, a reserve for projected interest shortfalls, a reserve for payment of property taxes and insurance and a reserve for on-going furniture, fixture and equipment purchases or property improvements. The Loan restricts the Borrower’s ability to spend excess cash flow until certain debt service coverage ratios are met.

The Borrower has given the Lender notice of its intention to exercise the first of three available one year extension options outlined in the Loan Agreement. In connection with the exercise of the extension options, the Borrower must comply with certain requirements outlined in the Loan Agreement including (i) certification that there is no event of default (ii) replacement of the interest rate cap agreement expiring on November 30, 2008 (iii) payment of an extension fee (applicable to the second and third extension periods only) (iv) payment of Lender’s reasonable out-of-pocket expenses associated with the extension and (v) deposit of additional funds into the interest shortfall reserve account sufficient to result in a debt service coverage ratio for the extension term of at least 1.10:1.00. To the extent that the property generates excess cash flow (as defined in the Loan Agreement) and does not meet certain EBITDA thresholds during the extension periods, the excess cash flow will be held in reserve for amortization of the Loan or additional security for the Lender. The interest reserve of $11 million is included in long-term restricted cash and cash equivalents in the accompanying financial statements and the Company does not anticipate the need to increase the amount of this reserve in connection with the extension of the Loan. Since the Company intends to exercise the first extension option, The Loan is classified as a non-current liability in the accompanying financial statements.

Using the proceeds from the Loan, all amounts outstanding under the Credit Agreement, dated August 31, 2004, among OpBiz, the lenders named therein and The Bank of New York, Asset Solution Division (the “Senior Agent”) were paid in full. Pursuant to the terms of the Credit Agreement, upon repayment of all amounts due, the warrant to purchase 2.5% of the equity in EquityCo issued to the lenders at the closing of the Credit Agreement became exercisable. The Company

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compensated the holders of all unexercised warrants in accordance with the terms of a letter agreement between the parties and the warrants were canceled.

In order to permit the Lender to foreclose on the Hotel and Casino separately and to allow OpBiz to continue to operate the Casino after such a foreclosure (should the Lender choose to do so), title to the real property comprising the Hotel and Casino (the “Property”) was transferred from OpBiz to PH Fee Owner. OpBiz and PH Fee Owner then entered into a lease pursuant to which OpBiz agreed to continue to operate the Hotel in the manner it had been and to pay monthly rent of approximately $917,000. OpBiz and PH Fee Owner also entered into a lease pursuant to which OpBiz agreed to continue to operate the Casino in the manner it had been and to pay monthly rent of approximately $1,167,000.

In connection with the Loan, the Lender required that Trophy Hunter Investments, Ltd., Bay Harbour 90-1, Ltd. and Bay Harbour Master Ltd., which are affiliates of Bay Harbour Management, execute and deliver a certain Guaranty (as defined below). In exchange for Trophy Hunter Investments, Ltd., Bay Harbour 90-1 Ltd. and Bay Harbour Master Ltd. (the “Guarantors”) executing the Guaranty, OpBiz and PH Fee Owner agreed to pay to Trophy Hunter Investments, Ltd. and Bay Harbour Master Ltd. a fee equal to $1,500,000 per year. The fee is accrued and only payable once OpBiz hits certain debt service coverage ratios defined in the Loan Agreement.

In connection with the Loan, the Guarantors entered into a Guaranty, dated November 30, 2006 (the “Guaranty”), pursuant to which the Guarantors agreed to indemnify the Lender against losses related to certain prohibited actions of the Borrower and guarantied full repayment of the Loan in the case of a voluntary or collusive bankruptcy of the Borrower, a transfer of the Property or interests in the Borrower in violation of the Loan Agreement and if the Borrower fails to maintain its status as a bankruptcy remote entity and as a result sees its assets consolidated with those of an affiliate in a bankruptcy. The liability of the Guarantors is capped at $15,000,000 per entity and $30,000,000 in the aggregate, however this cap does not apply to (i) liability arising from events, acts or circumstances actually committed or brought about by the willful acts of any of the Guarantors and (ii) the extent of any benefit received by any of the Guarantors as a result of the acts giving rise to the liability under the Guaranty. Each of Douglas Teitelbaum and Robert Earl executed and delivered guaranties substantially the same as that delivered by the Guarantors, however the liability of each of them was limited to (i) liability arising from events, acts or circumstances actually committed or brought about by willful acts by him and (ii) the extent of any benefit received by him as a result of the acts giving rise to the liability under the Guaranty.

In connection with the Loan, the Guarantors and Robert Earl executed and delivered a Completion Guaranty, dated November 30, 2006, pursuant to which they jointly and severally guarantied the completion of the renovation of the Property and payment of all costs associated therewith. The liability under the Completion Guaranty is capped at the greater of (a) $35,000,000 and (b) only in the case that cost overruns for the renovation exceed $15,000,000, 24% of the then unpaid costs of the completion of the renovation.

In addition, in connection with the Loan Agreement, MezzCo effected a refinancing of the Securities Purchase Agreement, dated August 9, 2004, among MezzCo and the Investors (the “Restructuring Parties”), pursuant to which MezzCo issued to the Investors (i) 16% senior subordinated secured Notes in the original aggregate principal amount of $87 million, and (ii) Warrants for the purchase (subject to certain adjustments as provided for therein) of membership interests of MezzCo, representing 17.5% of its fully diluted equity. Loan proceeds were used to redeem in full the Notes.

In connection with the refinancing of the Securities Purchase Agreement and redemption of the Notes, the Restructuring Parties entered into the Restructuring Agreement, dated November 30, 2006, pursuant to which the Restructuring Parties terminated in full the Securities Purchase Agreement, the Subordination Agreement, dated as of August 31, 2004, among MezzCo, OpBiz, the Senior Agent and the Investors, the Pledge Agreement, dated August 9, 2006, among MezzCo and the Collateral Agent, and the Guaranty, dated August 9, 2004, made by OpBiz to the Investors, and amended certain other existing agreements, as described below.

In accordance with the terms of the Restructuring Agreement, the Investors and EquityCo, MezzCo and OpBiz entered into a Release, Consent and Waiver Agreement, pursuant to which the Investors (i) released OpBiz from its guaranteed obligations, under that certain Guaranty Agreement, dated as of August 9, 2004 and executed by OpBiz in favor of the Investors and the Collateral Agent; (ii) released MezzCo from its pledge of the collateral, under that certain Pledge Agreement, dated as of August 9, 2004, and executed by MezzCo in favor of the Collateral Agent, the Investors released their security interest, as defined in that certain Security Agreement, as amended by that certain Amendment to Security Agreement, in each case dated as of August 9, 2004 and executed by the Company in favor of the Collateral Agent; (iii) released and terminated the Deed of Trust, dated as of August 9, 2004 and executed by MezzCo in favor of the Trustee

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(as defined therein) for the benefit of the Collateral Agent; (iv) released and terminated the Investors’ security interest in the securities account, provided for that certain Securities Account Control Agreement, dated as of August 9, 2004 and executed by the Company, the Collateral Agent and Wells Fargo Bank, N.A.

Additionally, MezzCo, EquityCo, and the Investors entered into an Amended and Restated Investor Rights Agreement, dated November 30, 2006 (the “A&R Investor Rights Agreement”), to amend and restate the original Investor Rights Agreements among the parties thereto, dated August 9, 2004.

Pursuant to the Restructuring Agreement, the Restructuring Parties agreed to amend the Warrants by issuing Amended and Restated Warrants to Purchase Membership Interests of MezzCo (the “A&R Warrants”) to the Investors upon approval by the Nevada gaming authorities. The A&R Warrants will be exercisable at any time, subject to the approval of the Nevada gaming authorities, at a purchase price of $0.01 per unit. Subject to the approval of the Nevada gaming authorities, the warrants may be exercised to purchase either voting or non-voting membership interests of MezzCo or a combination thereof through the expiration date of December 9, 2012. In addition to customary anti-dilution protections, the number of units representing MezzCo membership interests issuable upon exercise of the A&R Warrants may be increased from time to time upon the occurrence of certain events as described in the A&R Warrants. Holders of the A&R Warrants and any securities issued upon exercise thereof may require MezzCo to redeem such securities commencing on December 9, 2011 at a redemption price based upon a formula set forth in the A&R Warrants. These rights expire upon completion of a public offering by MezzCo or OpBiz.

In connection with the Restructuring Agreement, EquityCo entered into a Guaranty Agreement, dated November 30, 2006 (the “Guaranty Agreement”), in favor of the Investors and the Collateral Agent, pursuant to which EquityCo has guaranteed the obligation of MezzCo to pay the redemption price under the A&R Warrants prior to expiration and any indebtedness arising under the Put Note (as defined in the A&R Warrants).

EquityCo and the Collateral Agent also entered into a Pledge Agreement, dated November 30, 2006 (the “Pledge Agreement”), pursuant to which EquityCo has, subject to approval of the Nevada gaming authorities, pledged and granted a first priority security interest to the Collateral Agent for the ratable benefit of the Investors in the membership interests of EquityCo in MezzCo. The Pledge Agreement, once approved, will secure the full payment of the Put Right (as defined in the A&R Warrants), including any obligations under the Put Note.

On November 30, 2006, MezzCo entered into an Indemnification Agreement with the Investors, pursuant to which MezzCo agreed to indemnify the Investors for any losses caused by (i) lack of gaming approvals for the issuance of the A&R Warrants, (ii) lack of gaming approval for the granting of a lien by EquityCo in the equity interests in MezzCo, as described in the Pledge Agreement, and (iii) the inability of the Investors to exercise the Warrants until July 1, 2007.

Energy Services Agreement

Northwind Aladdin (“Northwind”), a third party, owns and operates a central utility plant on land leased from OpBiz. The plant supplies hot and cold water and emergency power to the PH Resort under an energy service agreement, which expires in 2018. Under the agreement, OpBiz is required to pay Northwind a monthly consumption charge, a monthly operational charge, a monthly debt service payment and a monthly return on equity payment. Payments under the Northwind agreement total approximately $0.4 million per month.

6. MEMBERSHIP INTERESTS

The non-voting interests in BH/RE are owned 40.75% by BHCH I, 18.50% by BHCH II and 40.75% by OCS and the voting interests are owned 50% by Douglas P. Teitelbaum and 50% by Robert Earl. BHCH is controlled by Mr. Teitelbaum, managing principal of Bay Harbour Management, an investment management firm. BHCH was formed by Mr. Teitelbaum for the purpose of holding investments in BH/RE by funds managed by Bay Harbour Management. OCS is wholly-owned and controlled by Mr. Earl and holds Mr. Earl’s investment in BH/RE. Mr. Earl is the founder, chairman and chief executive officer of Planet Hollywood and Mr. Teitelbaum is a director of Planet Hollywood. Collectively, Mr. Earl, a trust for the benefit of Mr. Earl’s children, and affiliates of Bay Harbour Management own substantially all of the equity of Planet Hollywood.

BH/RE owns 85% of the membership interests in EquityCo and Starwood owns 15%. MezzCo is a wholly owned

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subsidiary of EquityCo, and OpBiz is a wholly owned subsidiary of MezzCo. BH/RE and Starwood made total equity contributions of $20 million each in EquityCo to fund a portion of the costs of the renovation of the property. Starwood’s equity interest in EquityCo is reflected as minority interest in the accompanying condensed consolidated financial statements. BH/RE recorded minority interest income related to the Starwood interests of approximately $1.9 million and $4.7 million for the three months ended September 30, 2008 and 2007, respectively, and $5.8 million and $10.1 million for the nine months ended September 30, 2008 and 2007, respectively.

BH/RE has the option to purchase all of Starwood’s membership interests in EquityCo if OpBiz is entitled to terminate the hotel management contract between OpBiz and Sheraton as a result of a breach by Sheraton. Starwood can require EquityCo to purchase all of its membership interests in EquityCo if the hotel management contract is terminated for any reason other than in accordance with its terms or as the result of a breach by Sheraton. In addition, BH/RE and Starwood entered into a registration rights agreement with respect to their membership interests in EquityCo.

The Company has entered into various employment agreements, as amended, with several executives. The employment agreements have initial terms of two to five years. The employment agreements provide that the executives will receive a base salary with either mandatory increases or annual adjustments and annual bonus payments. In addition, depending on the terms of the employment agreements, these executives are entitled to options to purchase between 0.2% and 3% of the equity of MezzCo.

Effective January 1, 2006, the Company adopted the provisions of SFAS No. 123(R) “Share Based Payment” requiring that compensation cost relating to share-based payment transactions be recognized in the operating expenses. The cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the employee’s estimated requisite service period (generally the vesting period of the equity award) on a straight-line basis. Estimates are revised if subsequent information indicates that forfeitures will differ from previous estimates, and the cumulative effect on compensation cost of a change in the estimated forfeitures is recognized in the period of the change. Prior to January 1, 2006, the Company accounted for share-based compensation to employees in accordance with APB No. 25, and related interpretations. The Company also followed the disclosure requirements of SFAS No. 123 as amended by SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure.”

There is $0.1 million of compensation cost, which approximated fair value, related to non-qualified stock options recognized in operating results (included in selling, general and administrative expenses) for each of the three and nine month periods ended September 30, 2008 and 2007.

The fair value of each option award is estimated on the date of grant using the Black-Scholes-Merton option pricing model. Expected volatility is based on historical volatility trends as well as implied future volatility observations. In determining the expected life of the option grants, the Company used historical data to estimate option exercise and employee termination behavior. The expected term represents an estimate of the time options are expected to remain outstanding. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. treasury yield curve in effect at the time of grant. The following table sets forth the assumptions used to determine compensation cost for the Company’s non-qualified stock options consistent with the requirements of SFAS No. 123(R).

	Three and Nine Months Ended September 30, 2008			Three and Nine Months Ended September 30, 2007
	(unaudited)			(unaudited)
Weighted-average fair value per share of options granted during the period (estimated on grant date using Black-Scholes-Merton option-pricing model)	$	235.28		$	235.28
Weighted-average assumptions:
Expected stock price volatility	36		%	36		%
Risk-free interest rate	3.76		%	3.76		%
Expected option life (years)	7			7
Expected annual dividend yield	—		%	—		%

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7. RELATED PARTY TRANSACTIONS

Planet Hollywood Licensing Agreement

OpBiz, Planet Hollywood and certain of Planet Hollywood’s subsidiaries have entered into a licensing agreement pursuant to which OpBiz received a non-exclusive, irrevocable license to use various “Planet Hollywood” trademarks and service marks. Under the licensing agreement, OpBiz also has the right, but not the obligation, to open a Planet Hollywood restaurant and one or more Planet Hollywood retail shops under a separate restaurant agreement with Planet Hollywood. OpBiz pays Planet Hollywood a quarterly licensing fee of 1.75% of OpBiz’s non-casino revenues. The initial term of the licensing agreement will expire in 2028. OpBiz can renew the licensing agreement for three successive 10-year terms. The property officially began operation as the PH Resort on April 17, 2007 and began paying fees pursuant to the licensing agreement as of that date. Licensing fees paid to Planet Hollywood totaled approximately $0.7 million and $2.3 million for the three and nine months ended September 30, 2008, respectively, and $0.6 million and $1.2 million for the three and nine months ended September 30, 2007.

In addition to being a manager of BH/RE, Mr. Earl is the chief executive officer and chairman of the board of directors of Planet Hollywood. Similarly, Mr. Teitelbaum is a manager of BH/RE and a director of Planet Hollywood. Together, Mr. Earl, a trust for the benefit of Mr. Earl’s children and affiliates of Bay Harbour Management, own substantially all of the equity of Planet Hollywood. Mr. Earl disclaims beneficial ownership of any equity of Planet Hollywood owned by the trust.

Sheraton Hotel Management Contract

OpBiz and Sheraton have entered into a management contract pursuant to which Sheraton provides hotel management services to OpBiz, assists OpBiz in the management, operation and promotion of the Hotel and permits OpBiz to use the Sheraton brand and trademarks in the promotion of the Hotel. OpBiz pays Sheraton a monthly fee of 4% of gross hotel revenue and certain food and beverage outlet revenues and 2% of rental income from third-party leases in the hotel. The management contract has a 20-year term commencing on the completion of the Aladdin acquisition and is subject to certain termination provisions by either OpBiz or Sheraton. Sheraton is a wholly owned subsidiary of Starwood, which has a 15% equity interest in EquityCo and has the right to appoint two members to the EquityCo board of managers. Management fees paid to Starwood totaled approximately $2.2 million and $2.0 million for the three months ended September 30, 2008 and 2007, respectively, and $7.4 million and $7.1 million for the nine months ended September 30, 2008 and 2007, respectively.

Planet Hollywood (LV) LLC Lease Agreement

OpBiz and Planet Hollywood (LV) LLC (“Planet Hollywood LV”) have entered into a lease agreement pursuant to which Planet Hollywood LV, as tenant, operates a new concept it has developed for an upscale 24-hour diner named “Planet Dailies” within approximately 11,500 square feet of space located on the premises owned by OpBiz. Planet Hollywood LV pays OpBiz base rent in the amount of $500,000 per year (subject to annual increase adjustments), in addition to percentage rent of up to 12% based on annual gross sales (to the extent such percentage rent exceeds base rent). The initial term of the lease agreement will expire in 2017. Planet Hollywood LV can renew the lease agreement for two successive 5-year terms. Planet Dailies began operation on April 1, 2007 and began paying rent pursuant to the lease agreement as of that date. Rent received from Planet Dailies totaled approximately $0.1 million and $0.3 million for the three and nine months ended September 30, 2008, and $0.1 million for the three and nine months ended September 30, 2007.

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Planet Hollywood LV is wholly owned by, and a subsidiary of, Planet Hollywood International, Inc. Together, Mr. Earl, a trust for the benefit of Mr. Earl’s children and affiliates of Bay Harbour Management, own substantially all of the equity of Planet Hollywood International, Inc. Mr. Earl disclaims beneficial ownership of any equity of Planet Hollywood International Inc. owned by the trust.

Earl of Sandwich (Las Vegas), LLC Lease Agreement

OpBiz and Earl of Sandwich (Las Vegas), LLC (“Earl of Sandwich”) have entered into a lease agreement pursuant to which Earl of Sandwich, as tenant, operates a restaurant named “Earl of Sandwich” within approximately 3,030 square feet of space located on the premises owned by OpBiz. Earl of Sandwich pays OpBiz base rent in the amount of $161,600 per year (subject to annual increase adjustments), in addition to percentage rent of up to 12% based on annual gross sales (to the extent such percentage rent exceeds base rent). The initial term of the lease agreement will expire in 2017. Earl of Sandwich can renew the lease agreement for two successive 5-year terms. Earl of Sandwich began operation in September 2007 and began paying rent pursuant to the lease agreement as of that date. Rent received from Earl of Sandwich totaled approximately $100,000 and $300,000 for the three and nine months ended September 30, 2008, and $5,000 for the month of September 2007.

Earl of Sandwich is wholly and indirectly owned by a trust for the benefit of Mr. Earl’s children. Mr. Earl disclaims beneficial ownership of any equity of Earl of Sandwich owned by the trust.

Guaranty Agreement

In connection with the Loan, the Lender required that Trophy Hunter Investments, Ltd., Bay Harbour 90-1, Ltd. and Bay Harbour Master Ltd., which are affiliates of Bay Harbour Management, execute and deliver a certain Guaranty (see Note 5.—Long-Term Debt). In exchange for executing the Guaranty, OpBiz and PH Fee Owner agreed to pay Trophy Hunter Investments, Ltd. and Bay Harbour Master Ltd. a fee equal to $1,500,000 per year. The fee is accrued and only payable once OpBiz achieves certain debt service coverage ratios defined in the Loan Agreement.

Aircraft Charter Arrangements

In the ordinary course from time to time the Company utilizes the services of private aircrafts for charter. The Company currently utilizes several different third party aircraft management/charter vendors for the provision of charter flights depending upon aircraft size, availability and location. One or more affiliates of BH/RE has placed an owned aircraft in service with one such vendor. From time to time, the Company may utilize the services of this vendor which may involve the affiliates’ owned aircraft provided that the rate charged for that aircraft shall be at arms length and fair market for similar aircraft.

8. INCOME TAXES

The condensed consolidated financial statements include the operations of BH/RE and its majority-owned subsidiaries: EquityCo, MezzCo, OpBiz, PH Mezz II, PH Mezz I, PH Fee Owner and TSP Owner. BH/RE and EquityCo are limited liability companies and are taxed as partnerships for federal income tax purposes. However, MezzCo has elected to be taxed as a corporation for federal income tax purposes. OpBiz and PH Mezz II, wholly-owned subsidiaries of MezzCo, will be treated as divisions of MezzCo for federal income tax purposes, and accordingly, will also be subject to federal income taxes. Additionally, PH Mezz I, a wholly-owned subsidiary of PH Mezz II, PH Fee Owner, a wholly owned subsidiary of PH Mezz I and TSP Owner, a wholly owned subsidiary of PH Fee Owner will also be subject to federal income taxes.

Management believes it is more likely than not that its net deferred tax asset will not be realized and has therefore recorded a valuation allowance against this net deferred tax asset.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview of Management’s Discussion and Analysis of Financial Condition and Results of Operations

Set forth below is a discussion of the financial condition and results of operations of BH/RE and its subsidiaries for the periods covered in this report. The discussion of operations herein focuses on events and the revenues and expenses during the three and nine months ended September 30, 2008, as compared to the three and nine months ended September 30, 2007.

The following management’s discussion and analysis of financial condition and results of operations should be read in conjunction with the consolidated financial statements and the related notes to the consolidated financial statements of BH/RE included in BH/RE’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 28, 2008, and the unaudited condensed consolidated financial statements and notes hereto included in Part I, Item 1 of this report.

Critical Accounting Policies and Estimates

Significant Accounting Policies and Estimates

Our unaudited condensed consolidated financial statements are prepared in conformity with U.S. generally accepted accounting principles. Certain policies, including the determination of bad debt reserves, the estimated useful lives assigned to assets, asset impairment, insurance reserves and the calculation of liabilities, require that we apply significant judgment in defining the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. Our judgments are based on historical experience, terms of existing contracts, observance of trends in the gaming industry and information available from other outside sources. There can be no assurance that actual results will not differ from our estimates. To provide an understanding of the methodology we apply, our significant accounting policies and basis of presentation are discussed below, as well as, where appropriate, in the notes to the condensed consolidated financial statements.

Property and Equipment

Property and equipment are stated at cost. Recurring repairs and maintenance costs, including items that are replaced routinely in the casino, hotel and food and beverage departments which do not meet our capitalization policy are expensed as incurred. We have established our capital expense policy to be reflective of our individual ongoing repairs and maintenance programs. Gains or losses on dispositions of property and equipment are included in the determination of income. Property and equipment are generally depreciated over the following estimated useful lives on a straight-line basis:

Buildings		40 years
Building improvements		15 to 40 years
Furniture, fixtures and equipment		3 to 7 years

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Derivative Instruments and Hedging Activities

Pursuant to the refinancing of the Securities Purchase Agreement and the terms of the Restructuring Agreement (each as defined in Note 5 to the Condensed Consolidated Financial Statements), the Restructuring Parties agreed to amend the warrants issued by MezzCo to purchase 17.5% of the fully diluted equity in MezzCo. The warrants contain a net cash settlement, and therefore are accounted for in accordance with Emerging Issues Task Force (“EITF”) 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock”. Both SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities” and EITF 00-19 require that the warrants be recognized as liabilities, with changes in fair value affecting net income.

The terms of the Loan Agreement required the Company to enter into an interest rate cap agreement, which expires on November 30, 2008, to manage interest rate risk. The Company is required to enter into a new interest rate cap agreement when it exercises the first extension option of the Loan. The Company did not apply cash flow hedge accounting to this instrument. Although this derivative was not afforded cash flow hedge accounting, the Company retained the instrument as protection against the interest rate risk associated with its long-term borrowings. The Company accounts for its derivative activity in accordance with SFAS No. 133 and accordingly, recognizes all derivatives on the balance sheet at fair value with any change in fair value being recorded in interest income or expense in the accompanying consolidated statements of operations.

Revenue Recognition and Promotional Allowances

Casino revenues are recognized as the net win from gaming activities, which is the difference between gaming wins and losses. All other revenues are recognized as the service is provided. Revenues include the retail value of food, beverage, rooms, entertainment and merchandise provided on a complimentary basis to customers. Such complimentary amounts are then deducted from revenues as promotional allowances on our condensed consolidated statements of operations. The estimated departmental costs of providing such promotional allowances are included in casino costs and expenses.

Hotel revenue recognition criteria are generally met at the time of occupancy. Food and beverage revenue recognition criteria are generally met at the time of service. Deposits for future hotel occupancy or food and beverage services are recorded as deferred income until revenue recognition criteria are met. Cancellation fees for hotel and food and beverage services are recognized upon cancellation by the customer as defined by a written contract entered into with the customer.

Income Taxes

The condensed consolidated financial statements include the operations of BH/RE and its majority-owned subsidiaries: EquityCo, MezzCo, OpBiz, PH Mezz II, PH Mezz I, PH Fee Owner and TSP Owner. BH/RE and EquityCo are limited liability companies and are taxed as partnerships for federal income tax purposes. However, MezzCo has elected to be taxed as a corporation for federal income tax purposes. OpBiz and PH Mezz II, wholly-owned subsidiaries of MezzCo, will be treated as divisions of MezzCo for federal income tax purposes, and accordingly, will also be subject to federal income taxes. Additionally, PH Mezz I, a wholly-owned subsidiary of PH Mezz II, PH Fee Owner, a wholly owned subsidiary of PH Mezz I and TSP Owner, a wholly owned subsidiary of PH Fee Owner will also be subject to federal income taxes.

In July 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”) “Accounting for Uncertainty in Income Taxes — an interpretation of FASB No. 109”, to clarify certain aspects of accounting for uncertain tax positions, including issues related to the recognition and measurement of those tax positions. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company adopted the provisions of FIN 48 on January 1, 2007.

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Membership Interests

As of September 30, 2008, our membership interests had not been unitized and our members do not presently intend to unitize these membership interests. Accordingly, we have excluded earnings per membership unit data required pursuant to SFAS No. 128, “Earnings Per Share,” because we believe that such disclosures would not be meaningful to the financial statement presentation.

Effective January 1, 2006, the Company adopted the provisions of SFAS No. 123(R) requiring that compensation cost relating to share-based payment transactions be recognized in the operating expenses. The cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the employee’s estimated requisite service period (generally the vesting period of the equity award) on a straight-line basis. Estimates are revised if subsequent information indicates that forfeitures will differ from previous estimates, and the cumulative effect on compensation cost of a change in the estimated forfeitures is recognized in the period of the change. Prior to January 1, 2006, the Company accounted for share-based compensation to employees in accordance with APB No. 25, and related interpretations. The Company also followed the disclosure requirements of SFAS No. 123 as amended by SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure.”

Recently Issued Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The provisions of SFAS 157 were effective for the Company beginning January 1, 2008 for financial assets and liabilities and are effective January 1, 2009 for non-financial assets and liabilities. The warrants the Company issued to purchase 17.5% of the equity of MezzCo (see Note 5 – Long-Term Debt) qualify as a level three financial liability as there are no observable market inputs and there is no market activity for the instruments. The changes in valuation of the warrants for the period ended September 30, 2008 were not material to the Company’s financial position or operations. The interest rate cap qualifies as a level two financial asset in accordance with SFAS 157. The balance of the interest rate cap and changes in valuation for the period ended September 30, 2008 were not material to the Company’s financial position or operations.

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noncontrolling interests. The statement also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interest of the parent and those of the noncontrolling owners. This statement is effective for fiscal years beginning on or after December 15, 2008. The adoption of SFAS No. 160 is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

In March 2008, the FASB issued SFAS No. 161, “Disclosures About Derivative Instruments and Hedging Activities, an amendment of SFAS No. 133”. SFAS No. 161 is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. This statement is effective for fiscal years beginning after November 15, 2008. SFAS No. 161 is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

In May 2008, FASB issued Statement No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP (the GAAP hierarchy). SFAS 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. The adoption of SFAS 162 is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

Results of Operations

The following table highlights the results of operations for the three and nine months ended September 30, 2008 and 2007, respectively (dollars in thousands, unaudited).

	Three Months Ended September 30,					Percent		Nine Months Ended September 30,					Percent
	2008		2007			Change		2008		2007			Change
Net Revenues	$	69,312	$	57,129		21.3	%	$	215,531	$	185,549		16.2	%
Operating Expenses:
Casino	19,463		17,920			8.6	%	58,863		49,814			18.2	%
Hotel	10,221		10,263			(0.4	)%	31,551		32,616			(3.3	)%
Food and Beverage	9,530		8,841			7.8	%	28,212		27,116			4.0	%
Other	77		307			(74.9	)%	1,125		892			26.1	%
Selling, general and adminstrative	17,413		21,745			(19.9	)%	57,425		61,434			(6.5	)%
Depreciation and amortization	8,971		10,740			(16.5	)%	26,987		26,631			1.3	%
Operating (Loss) Income	$	3,637	$	(12,687	)	128.7	%	$	11,368	$	(12,954	)	187.7	%

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Net revenues for the three and nine months ended September 30, 2008 increased when compared to the three and nine months ended September 30, 2007. The property was under renovation until late 2007 so when comparing the three and nine month periods ended September 30, 2008 to the same three and nine month periods in 2007, revenues and operating income have increased in all divisions. While the operating results have improved as a result of the completion of the renovation, we also believe that our revenues for the three and nine months ended September 30, 2008 have been negatively impacted by the weakened United States economy. Disruptions in the housing and stock markets, high travel costs, along with declines in the Las Vegas market due to decreased visitor volume and lower customer spending per trip have and may continue to adversely impact our revenues. We have and will continue to aggressively monitor and reduce expenses to maintain and improve operating margins during 2008.

The following table highlights the various sources of our revenues and expenses for the three and nine months ended September 30, 2008 and 2007, respectively (dollars in thousands, unaudited).

	Three months ended September 30,						Percent		Nine months ended September 30,						Percent
	2008			2007			Change		2008			2007			Change
Casino revenues	$	31,054		$	26,373		17.7	%	$	94,367		$	76,636		23.1	%
Casino expenses	19,463			17,920			8.6	%	58,863			49,814			18.2	%
Margin	37.3		%	32.1		%			37.6		%	35.0		%
Hotel revenues	$	25,632		$	22,113		15.9	%	$	86,948		$	82,025		6.0	%
Hotel expenses	10,221			10,263			(0.4	)%	31,551			32,616			(3.3	)%
Margin	60.1		%	53.6		%			63.7		%	60.2		%
Food and beverage revenues	$	13,187		$	11,307		16.6	%	$	41,225		$	35,787		15.2	%
Food and beverage expenses	9,530			8,841			7.8	%	28,212			27,116			4.0	%
Margin	27.7		%	21.8		%			31.6		%	24.2		%
Other revenues	$	5,806		$	2,228		160.6	%	$	13,659		$	5,790		135.9	%
Other expenses	77			307			(74.9	)%	1,125			892			26.1	%
Margin	98.7		%	86.2		%			91.8		%	84.6		%
Selling, general and administrative expenses	$	17,413		$	21,745		(19.9	)%	$	57,425		$	61,434		(6.5	)%
% of revenue	23.0		%	35.1		%			24.3		%	30.7		%

Casino

Casino revenue is derived primarily from patrons wagering on slot machines, table games and other gaming activities. Table games generally include blackjack or twenty one, craps, baccarat and roulette. Other gaming activities include the race and sports books, poker and keno. Casino revenue is defined as the win from gaming activities, computed as the difference between gaming wins and losses.

Casino revenues vary from time-to-time due to general economic conditions, competition, popularity of entertainment offerings, table game hold, slot machine hold and occupancy percentages in the Hotel. Casino revenues also vary depending upon the amount of gaming activity, as well as variations in the odds for different games of chance. Casino revenue is recognized at the end of each gaming day.

Casino revenues increased 17.7% to $31.1 million for the three months ended September 30, 2008, as compared to $26.4 million for the three months ended September 30, 2007. Table games revenue for the three months ended September 30, 2008 increased by approximately $2.1 million as compared to the three months ended September 30, 2007. Table drop for the three months ended September 30, 2008 increased $15.2 million or 28.2% when compared to the same three month period in the prior year, which is attributable to the completion of the renovation project and addition of amenities to attract casino customers. Table win percentage for the three months ended September 30, 2008 was approximately 2.5% lower than the same three month period in the prior year. Slot revenue for the three months ended September 30, 2008 increased approximately $4.2 million when compared to the same three month period in the prior year. Slot handle for the three months ended September 30, 2008 increased $15.6 million or 6.6% when compared to the same three month period in the prior year. With the renovation project complete, all entryways to the casino are open and the number of slots on the floor has increased by an average of 170 machines when compared to the three months ended September 30, 2007. Combined revenues from the race and sports book, poker and keno for the three months ended September 30, 2008 increased by $0.2 million or 22.3% when compared to the three month period ended September 30, 2007.

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Casino expenses increased 8.6% to $19.5 million for the three months ended September 30, 2008, as compared to $17.9 million for the three months ended September 30, 2007. Operating margin increased 5.2% when comparing the same three month periods. Expenses increased commensurate with the revenue increases in the casino while operating margins improved over prior year.

Casino revenues increased 23.1% to $94.4 million for the nine months ended September 30, 2008, as compared to $76.6 million for the nine months ended September 30, 2007. Table games revenue for the nine months ended September 30, 2008 increased by approximately $7.7 million as compared to the nine months ended September 30, 2007. Table games drop increased approximately 42.9% for the nine month period ended September 30, 2008 when compared to the same nine month period in prior year. Overall table win percentage decreased by 2.5% when compared to the same nine month period in prior year. Slot revenue for the nine months ended September 30, 2008 increased approximately $12.1 million when compared to the same nine month period in prior year. Slot handle increased approximately 19.0% for the nine month period ended September 30, 2008 when compared to the same nine month period in prior year. The renovation project was complete at the end of 2007 and the average number of slot machines on the floor has increased 280 devices when comparing this year to last. Combined revenues from the race and sports book, poker and keno increased by $0.7 million or 28.9% when compared to the nine month period ended September 30, 2007. The increases in casino revenue is attributed to the completion of the renovation project and the improvement of entryways from Las Vegas Boulevard and the mall. The gaming floor is now fully operational with a full compliment of amenities.

Casino expenses increased 18.2% to $58.9 million for the nine months ended September 30, 2008, as compared to $49.8 million for the nine months ended September 30, 2007. Operating margin increased 2.6% when comparing the same nine month periods.

Hotel

Hotel revenue is derived from rooms and suites rented to guests. “Average daily rate” is an industry specific term used to define the average amount of revenue per rented room per day. “Occupancy percentage” defines the total percentage of rooms occupied and is computed by dividing the number of rooms occupied by the total number of rooms available. Hotel revenue is recognized at the time the room is provided to the guest.

Hotel revenues of $25.6 million for the three months ended September 30, 2008 were 15.9% higher than the three months ended September 30, 2007. Hotel occupancy decreased 1.6% to 95.0% when compared to the same three month period in the prior year. Average daily room rates increased to $123 for the three months ended September 30, 2008 compared to $114 for the three months ended September 30, 2007. The final phase of the room renovation is underway which is the primary driver of the reduction in occupancy.

Hotel expenses decreased 0.4% to $10.2 million for the three months ended September 30, 2008, as compared to $10.3 million for the three months ended September 30, 2007. Operating margin increased 6.5% for the three month period ended September 30, 2008 when compared to the same three month period in the previous year.

Hotel revenues of $87.0 million for the nine months ended September 30, 2008, were 6.0% higher than the nine months ended September 30, 2007. Hotel occupancy percentage was 95.5% for the nine months ended September 30, 2008, as compared to 97.6% for the nine months ended September 30, 2007. Average daily room rates increased to $136 for the nine months ended September 30, 2008, as compared to $127 for the nine months ended September 30, 2007.

Hotel expenses decreased 3.3% to $31.6 million for the nine months ended September 30, 2008, as compared to $32.6 million for the nine months ended September 30, 2007. Operating margin increased 3.5 percentage points over the same nine month period.

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Food and Beverage

Food and beverage revenues are derived from food and beverage sales in the restaurants, bars, room service, banquets and entertainment outlets. Food and beverage revenue is recognized at the time the food and/or beverage is provided to the guest.

Food and beverage revenues increased 16.6% to $13.2 million for the three months ended September 30, 2008, as compared to $11.3 million for the three months ended September 30, 2007. Food revenue increased $0.8 million when compared to the same three month period in the previous year. The PH Resort operates Starbucks, the buffet, room service, the pool cafe and banquets with all remaining food outlets leased to third party operators. Beverage revenue increased $0.8 million when compared to the same three month period in the previous year due to the completion of the renovation project and all beverage outlets being fully operational in 2008.

Food and beverage expenses increased 7.8% to $9.5 million for the three months ended September 30, 2008, as compared to $8.8 million for the three months ended September 30, 2007. Operating margin increased 5.9% when compared to the same three month period in previous year. The expense increase and operating margin increase is consistent with the transition from in-house food operations to leased outlets operated by third parties.

Food and beverage revenues increased 15.2% to $41.2 million for the nine months ended September 30, 2008, as compared to the $35.8 million for the nine months ended September 30, 2007.

Food and beverage expenses increased 4.0% to $28.2 million for the nine months ended September 30, 2008, as compared to $27.1 million for the nine months ended September 30, 2007. Food and beverage margins increased 7.4 percentage points in comparing the same nine month periods.

Other

Other revenue includes telephone, marketing fees received from Westgate based on sales of timeshare units and other miscellaneous income and is recognized at the time the goods or services are provided to the guest.

Other revenues increased 160.6% to $5.8 million for the three months ended September 30, 2008, as compared to $2.2 million for the three months ended September 30, 2007, and increased 135.9% to $13.7 million for the nine months ended September 30, 2008, as compared to $5.8 million for the nine months ended September 30, 2007. The increase in other revenue is primarily due to the increase in the amount received from Westgate based on sales of timeshare units. Westgate pays OpBiz 9% of total timeshare sales on a monthly basis with 50% of the proceeds recorded as tenant income and the remaining 50% recorded against land receivable.

Other expenses decreased 74.9% to $0.1 million for the three months ended September 30, 2008, as compared to $0.3 million for the three months ended September 30, 2007 and increased 26.1% to $1.1 million for the nine months ended September 30, 2008, as compared to $0.9 million for the nine months ended September 30, 2007.

Selling, General and Administrative (“SG&A”)

SG&A expenses decreased 19.9% to $17.4 million for the three months ended September 30, 2008, as compared to $21.7 million for the three months ended September 30, 2007. As a percentage of revenue, SG&A expenses decreased to 23.0% for the three months ended September 30, 2008 as compared to 35.1% for the three months ended September 30, 2007. SG&A expenses decreased 6.5% to $57.4 million for the nine months ended September 30, 2008, as compared to $61.4 million for the nine months ended September 30, 2007. SG&A expenses as a percentage of revenues decreased 6.4% for the nine months ended September 30, 2008. The primary driver of SG&A expenses is marketing which is focused on brand recognition during our first year of post-renovation operation.

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Depreciation and Amortization

Depreciation and amortization expense of $9.0 million for the three months ended September 30, 2008 decreased when compared to $10.7 million in expense for the three months ended September 30, 2007. Depreciation and amortization expense of $27.0 million for the nine months ended September 30, 2008 increased when compared to $26.6 million in expense for the nine months ended September 30, 2007. The increase in depreciation expense is a direct result of the additional assets placed in service once the renovation was complete.

Net Interest Expense

Net interest expense decreased to $16.2 million for the three months ended September 30, 2008, as compared to $18.9 million for the three months ended September 30, 2007. Net interest expense decreased to $50.3 million for the nine months ended September 30, 2008, as compared to $54.3 million for the nine months ended September 30, 2007. The decrease in interest expense is directly related to the reduction in the interest rates.

Liquidity and Capital Resources

During the nine months ended September 30, 2008, we utilized cash flows from operating activities of approximately $3.3 million and had a balance of $21.6 million in cash and cash equivalents as of September 30, 2008. We also had current restricted cash and cash equivalents of approximately $29.9 million and long-term restricted cash and cash equivalents of approximately $14.1 million at September 30, 2008. The current restricted cash and cash equivalents are primarily reserve accounts that have been established under the Loan Agreement to guarantee payment of property taxes, insurance and furniture, fixtures and equipment replacement. Current restricted cash also includes the balance in the cash management account. Under the terms of the Loan Agreement, all cash receipts are deposited into a cash management account under Lender control which is used to fund reserves and operating expenses. The long-term restricted cash and cash equivalents include funds designated for the remaining costs associated with the renovation of hotel rooms and the interest reserve account which will be released once certain debt service coverage ratios are achieved. See “Description of Certain Indebtedness” below.

Our primary remaining cash requirements for the remainder of 2008 are expected to include (i) approximately $2.2 million for maintenance capital expenditures or replacement furniture, fixtures and equipment and (ii) up to approximately $16.1 million in interest payments on our debt.

The expected continuation of challenging economic conditions in the Las Vegas market leads us to estimate the need for a working capital contribution to OpBiz of $13.5 million for the liquidity needs of the PH Resort for the next twelve months. In order to fund the $13.5 million contribution, EquityCo has requested that its members make an additional capital contribution of $13.5 million (the “Capital Contribution”) on a pro rata basis in accordance with their relative ownership interests in EquityCo. BH/RE currently owns 85% of EquityCo and Starwood owns the remaining 15%. Starwood, however, has declined to contribute its portion of the Capital Contribution. As a result, the principals of BH/RE have orally agreed to contribute the entire Capital Contribution. Each of the equity owners of BH/RE (BHCH, which holds a combined 59.25% equity membership interest, and OCS, which holds a 40.75% equity membership interest), will contribute their proportionate share of the Capital Contribution to BH/RE, BH/RE will then contribute the capital to EquityCo, which in turn will contribute the capital to MezzCo, which in turn will contribute the capital to OpBiz. As of November 14, 2008, BHCH and OCS have each contributed $1,039,000 of the Capital Contribution. We have estimated that the remaining $11.4 million of the Capital Contribution will be paid by January 2009, at which point BH/RE’s ownership interest in EquityCo will have increased from 85% to 89% and Starwood’s ownership interest in EquityCo will be reduced from 15% to 11%. This transaction is exempt from registration under Section 4(2) of the Securities Act of 1933, as amended. There can be no assurance that we have accurately estimated our liquidity needs, or that we will not experience unforeseen events that may materially increase our need for liquidity to fund our operations or capital expenditure programs or decrease the amount of cash generated from our operations.

As discussed under “Description of Certain Indebtedness” below, the Company also has an obligation under the terms of the Loan to maintain reserves for, among other items, projected interest shortfalls. In connection with the extension of the Loan, we are required to project interest expense for the upcoming twelve months and increase the interest reserve, which is currently established at $11 million, for any projected shortfalls. The interest reserve test (as fully defined in the Loan), essentially compares the annualized operating results based on the previous six months of operation to the expected interest

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payments for the upcoming twelve months using the twelve month forward curve for the thirty-day LIBOR rate plus the applicable spread. At this time, we do not anticipate a need to increase the established interest reserve.

Description of Certain Indebtedness

Loan Agreement

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approval by the Nevada gaming authorities. The A&R Warrants will be exercisable at any time, subject to the approval of the Nevada gaming authorities, at a purchase price of $0.01 per unit. Subject to the approval of the Nevada gaming authorities, the warrants may be exercised to purchase either voting or non-voting membership interests of MezzCo or a combination thereof through the expiration date of December 9, 2012. In addition to customary anti-dilution protections, the number of units representing MezzCo membership interests issuable upon exercise of the A&R Warrants may be increased from time to time upon the occurrence of certain events as described in the A&R Warrants. Holders of the A&R Warrants and any securities issued upon exercise thereof may require MezzCo to redeem such securities commencing on December 9, 2011 at a redemption price based upon a formula set forth in the A&R Warrants. These rights expire upon completion of a public offering by MezzCo or OpBiz.

Energy Services Agreement

Northwind owns and operates a central utility plant on land leased from us. The plant supplies hot and cold water and emergency power to the PH Resort under an energy service agreement, which expires in 2018. Under the agreement, we are required to pay Northwind a monthly consumption charge, a monthly operational charge, a monthly debt service payment and a monthly return on equity payment. Payments under the Northwind agreement total approximately $400,000 per month.

Forward Looking Statements

This quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. When used in this report and elsewhere by management from time to time, the words “believe”, “anticipate”, “expect”, “intend”, “estimate”, “plan”, “may”, “seek”, “will”, and similar expressions are intended to identify forward-looking statements with respect to our financial condition, results of operations and our business including our planned and possible expansion plans, legal proceedings and employee matters. Certain important factors, including but not limited to, competition from other gaming operations, risks surrounding a weakened economy including reduced visitor volume, construction risks, the inherent uncertainty and costs associated with litigation and governmental and regulatory investigations, and licensing and other regulatory risks, could cause our actual results to differ materially from those expressed in or implied by our forward-looking statements. Further information on potential factors which could affect our financial condition, results of operations and business including, without limitation, the expansion, development and acquisition projects, legal proceedings and employee matters are included in “Item 1A—Risk Factors” of BH/RE’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 28, 2008. Readers are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date thereof. We undertake no obligation to publicly release any revisions to such forward-looking statements to reflect events or circumstances after the date hereof.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the risk of loss arising from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates and commodity prices. Our primary exposure to market risk is interest rate risk associated with our

PART I — FINANCIAL INFORMATION

	ITEM 1.	FINANCIAL STATEMENTS:

		Condensed Consolidated Balance Sheets (Unaudited)

		Condensed Consolidated Statements Of Operations (Unaudited)

		Condensed Consolidated Statements Of Cash Flows (Unaudited)

		Notes To Condensed Consolidated Financial Statements (Unaudited)

	ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

	ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

	ITEM 4T.	CONTROLS AND PROCEDURES

PART II — OTHER INFORMATION:

	ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

	ITEM 6.	EXHIBITS

	SIGNATURES

31.1		Certification pursuant to §302 of the Sarbanes-Oxley Act of 2002, Michael V. Mecca.

31.2		Certification pursuant to §302 of the Sarbanes-Oxley Act of 2002, Donna Lehmann.

32.1		Certification pursuant to §906 of the Sarbanes-Oxley Act of 2002, Michael V. Mecca.

32.2		Certification pursuant to §906 of the Sarbanes-Oxley Act of 2002, Donna Lehmann.

	BH/RE, L.L.C.


November 14, 2008	By:	/S/ Donna Lehmann
		Donna Lehmann
		Treasurer and Chief Financial Officer

Exhibit No.		Description
31.1		Certification pursuant to §302 of the Sarbanes-Oxley Act of 2002, Michael V. Mecca.

31.2		Certification pursuant to §302 of the Sarbanes-Oxley Act of 2002, Donna Lehmann.

32.1		Certification pursuant to §906 of the Sarbanes-Oxley Act of 2002, Michael V. Mecca.

32.2		Certification pursuant to §906 of the Sarbanes-Oxley Act of 2002, Donna Lehmann.

1. ORGANIZATION AND BASIS OF PRESENTATION

Organization

Interim Financial Statements (unaudited)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Significant Accounting Policies and Estimates

Cash and Cash Equivalents

Restricted Cash and Cash Equivalents

Accounts Receivable

Inventories

Property and Equipment

Revenue Recognition and Promotional Allowances

Slot Club Program

Litigation

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview of Management’s Discussion and Analysis of Financial Condition and Results of Operations

Critical Accounting Policies and Estimates

Significant Accounting Policies and Estimates

Property and Equipment

Revenue Recognition and Promotional Allowances

Recently Issued Accounting Pronouncements

Results of Operations

Liquidity and Capital Resources

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 4T. CONTROLS AND PROCEDURES

PART II — OTHER INFORMATION

ITEM 6. EXHIBITS