**UNITEDSTATES****SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

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**FORM 10-Q**
| **(Mark One)**                                    |
|---------------------------------------------------|
|                                              |   |   |
| x                                                 | ** ** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                        | ** ** | ** ** |
| **For the  quarterly period ended June 30, 2006** |
|                                              |
| **OR**                                            |
|                                              |   |   |
| o                                                 | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

**For thetransition period from             to**

**Commission File Number 000-50689**

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**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)

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Indicate by check markwhether the Registrant (1) has filed all reports required bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the Registrant wasrequired to file such reports) and (2) has been subject to such filingrequirements for the past 90 days.   Yes x   No o

Indicateby check mark whether the Registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. (See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the SecuritiesExchange Act of 1934).   (Check one):

| Large accelerated filer o |   | Accelerated filer o |   | Non-accelerated filer  x |
|---------------------------|--------|---------------------|--------|-------------------------------|

 

Indicateby check mark whether the Registrant is a shell company (as defined in Rule12b-2 of the Exchange Act). Yes o   No x

 

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BH/RE, L.L.C. AND SUBSIDIARIESIndex
| PART I— FINANCIAL  INFORMATION |       |
|------------------------------------------|------------|
|                                     |       |   |   |
|                                     | ITEM  1.   | FINANCIAL  STATEMENTS: |   |
|                                     |       |   |   |
|                                     |       | Condensed Consolidated Statements of Financial Position  (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 4.    | CONTROLS AND PROCEDURES |   |
|                                     |       |   |   |
| PART II  — OTHER INFORMATION:  |       |
|                                     |       |   |   |
|                                     | ITEM  1A.  | RISK  FACTORS |   |
|                                     |       |   |   |
|                                     | ITEM 6.    | EXHIBITS |   |
|                                     |       |   |   |
|                                     | SIGNATURES |   |

 

2

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**PART I - FINANCIAL INFORMATION**

 

**ITEM1.  FINANCIAL STATEMENTS**

 

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

**CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION**

**(amounts in thousands)**

 
| ** **                                            | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                            | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| ** **                                            | ** ** | **(unaudited)**   | ** ** | ** **            | ** ** |
| ASSETS                                                |       |              |       |                  |       |
| Current assets:                                       |       |              |       |                  |       |
| Cash and cash  equivalents                            |       | $                 | 47,826     |                  | $          | 41,419 |   |
| Receivables, net                                      |       | 13,867            |       | 19,793                |       |
| Inventories                                           |       | 1,768             |       | 2,165                 |       |
| Prepaid expenses                                      |       | 4,167             |       | 4,913                 |       |
| Deposits and  other current assets                    |       | 2,166             |       | 3,058                 |       |
| Total current  assets                                 |       | 69,794            |       | 71,348                |       |
|                                                  |       |              |       |                  |       |
| Property and equipment,  net                          |       | 491,665           |       | 485,746               |       |
| Restricted cash and  cash equivalents                 |       | 74,628            |       | 87,787                |       |
| Other assets, net                                     |       | 8,281             |       | 9,614                 |       |
| Total assets                                          |       | $                 | 644,368    |                  | $          | 654,495 |   |
|                                                  |       |              |       |                  |       |
| LIABILITIES AND  MEMBERS’ EQUITY (DEFICIT)       |       |              |       |                  |       |
|                                                  |       |              |       |                  |       |
| Current liabilities:                                  |       |              |       |                  |       |
| Current portion  of long-term debt                    |       | $                 | 5,254      |                  | $          | 2,671 |   |
| Accounts payable                                      |       | 3,797             |       | 3,359                 |       |
| Accrued payroll  and related                          |       | 11,076            |       | 13,373                |       |
| Accrued interest  payable                             |       | 7,950             |       | 6,896                 |       |
| Accrued taxes                                         |       | 2,736             |       | 2,994                 |       |
| Accrued expenses                                      |       | 5,717             |       | 6,183                 |       |
| Deposits                                              |       | 3,736             |       | 4,563                 |       |
| Other current  liabilities                            |       | 5,511             |       | 6,159                 |       |
| Due to  affiliates                                    |       | 1,649             |       | 1,591                 |       |
| Total current  liabilities                            |       | 47,426            |       | 47,789                |       |
|                                                  |       |              |       |                  |       |
| Long-term debt, less  current portion                 |       | 612,065           |       | 604,877               |       |
| Other long-term  liabilities                          |       | 4,237             |       | 4,229                 |       |
| Total  liabilities                                    |       | 663,728           |       | 656,895               |       |
|                                                  |       |              |       |                  |       |
| Commitments and  contingencies (Note 9)               |       |              |       |                  |       |
|                                                  |       |              |       |                  |       |
| Minority interest                                     |       | 11,312            |       | 13,863                |       |
|                                                  |       |              |       |                  |       |
| Members’ equity  (deficit):                      |       |              |       |                  |       |
| Member’s equity                                  |       | 21,500            |       | 21,500                |       |
| Accumulated  deficit                                  |       | (52,172           | )          | (37,763               | )          |
| Total members’  equity (deficit)                 |       | (30,672           | )          | (16,263               | )          |
| Total liabilities and  members’ equity (deficit) |       | $                 | 644,368    |                  | $          | 654,495 |   |

 

The accompanying notesare an integral part of these consolidated financial statements.

3

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

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(amounts in thousands)**

**(unaudited)**

 
| ** **                          | ** ** | **Three Months Ended June 30,** | ** ** |
|-------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                          | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
|                                |       |                                                |       |   |   |
| Operating  revenues:                |       |                                                |       |   |   |
| Casino                              |       | $                                                   | 25,677     |   | $ | 31,327 |   |
| Hotel                               |       | 28,665                                              |       | 28,727 |   |
| Food and beverage                   |       | 15,619                                              |       | 18,061 |   |
| Other                               |       | 4,020                                               |       | 3,128 |   |
| Gross revenues                      |       | 73,981                                              |       | 81,243 |   |
| Promotional allowances              |       | (5,478                                              | )          | (5,870 | ) |
| Net revenues                        |       | 68,503                                              |       | 75,373 |   |
|                                |       |                                                |       |   |   |
| Operating costs  and expenses:      |       |                                                |       |   |   |
| Casino                              |       | 17,330                                              |       | 17,156 |   |
| Hotel                               |       | 10,396                                              |       | 12,485 |   |
| Food and beverage                   |       | 12,024                                              |       | 12,519 |   |
| Other                               |       | 1,668                                               |       | 1,501 |   |
| Selling, general and administrative |       | 18,747                                              |       | 19,366 |   |
| Depreciation and amortization       |       | 5,595                                               |       | 5,898 |   |
|                                |       | 65,760                                              |       | 68,925 |   |
|                                |       |                                                |       |   |   |
| Operating income                    |       | 2,743                                               |       | 6,448 |   |
|                                |       |                                                |       |   |   |
| Other income  (expense):            |       |                                                |       |   |   |
| Interest income (expense), net      |       | (13,263                                             | )          | (13,783 | ) |
| Minority interest                   |       | 1,580                                               |       | 1,213 |   |
| Loss on warrant valuation           |       | (13                                                 | )          | (17 | ) |
| Reorganization costs                |       | —                                              |       | — |   |
|                                |       | (11,696                                             | )          | (12,587 | ) |
|                                |       |                                                |       |   |   |
| Pre-tax loss                        |       | (8,953                                              | )          | (6,139 | ) |
| Provision for  income taxes         |       | —                                              |       | (966 | ) |
| Net loss                            |       | $                                                   | (8,953     | ) | $ | (7,105 | ) |

 

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

4

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| ** **                          | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------|------------|---------------------------------------------------|------------|
| ** **                          | ** ** | **2006**                                          | ** ** | **2005** | ** ** |
|                                |       |                                              |       |   |   |
| Operating  revenues:                |       |                                              |       |   |   |
| Casino                              |       | $                                                 | 55,502     |   | $ | 64,240 |   |
| Hotel                               |       | 57,859                                            |       | 57,964 |   |
| Food and beverage                   |       | 32,270                                            |       | 37,380 |   |
| Other                               |       | 8,164                                             |       | 7,521 |   |
| Gross revenues                      |       | 153,795                                           |       | 167,105 |   |
| Promotional allowances              |       | (11,810                                           | )          | (12,513 | ) |
| Net revenues                        |       | 141,985                                           |       | 154,592 |   |
|                                |       |                                              |       |   |   |
| Operating costs  and expenses:      |       |                                              |       |   |   |
| Casino                              |       | 35,217                                            |       | 34,614 |   |
| Hotel                               |       | 20,311                                            |       | 21,541 |   |
| Food and beverage                   |       | 23,830                                            |       | 25,458 |   |
| Other                               |       | 3,992                                             |       | 3,843 |   |
| Selling, general and administrative |       | 36,392                                            |       | 36,866 |   |
| Depreciation and amortization       |       | 11,286                                            |       | 11,768 |   |
|                                |       | 131,028                                           |       | 134,090 |   |
|                                |       |                                              |       |   |   |
| Operating income                    |       | 10,957                                            |       | 20,502 |   |
|                                |       |                                              |       |   |   |
| Other income  (expense):            |       |                                              |       |   |   |
| Interest income (expense), net      |       | (27,909                                           | )          | (27,418 | ) |
| Minority interest                   |       | 2,551                                             |       | 1,150 |   |
| Loss on warrant valuation           |       | (9                                                | )          | (17 | ) |
|                                |       | (25,367                                           | )          | (26,285 | ) |
|                                |       |                                              |       |   |   |
| Pre-tax loss                        |       | (14,410                                           | )          | (5,783 | ) |
| Provision for  income taxes         |       | —                                            |       | (966 | ) |
| Net loss                            |       | $                                                 | (14,410    | ) | $ | (6,749 | ) |

 

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

5

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

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(amounts in thousands)**

**(unaudited)**

** **
| ** **                                                                                | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                | ** ** | **2006**                                          | ** ** | **2005** | ** ** |
|                                                                                      |       |                                              |       |   |   |
| Cash flows from  operating activities:                                                    |       |                                              |       |   |   |
| Net income  (loss)                                                                        |       | $                                                 | (14,410    | ) | $ | (6,749 | ) |
| Adjustments to  reconcile net income (loss) to net cash provided by operating activities: |       |                                              |       |   |   |
| Depreciation and amortization                                                             |       | 11,286                                            |       | 11,768 |   |
| Amortization of debt discount and issuance costs                                          |       | 3,442                                             |       | 3,473 |   |
| Minority interest                                                                         |       | (2,551                                            | )          | (1,150 | ) |
| Change in value of warrants                                                               |       | 226                                               |       | (58 | ) |
| Changes in assets and liabilities:                                                        |       |                                              |       |   |   |
| Receivables, net                                                                          |       | 5,926                                             |       | 811 |   |
| Inventories and prepaid expenses                                                          |       | 1,142                                             |       | 659 |   |
| Deposits and other current assets                                                         |       | 1,037                                             |       | (2,231 | ) |
| Deferred taxes                                                                            |       | —                                            |       | (935 | ) |
| Accounts payable                                                                          |       | 438                                               |       | 326 |   |
| Accrued expenses and other current liabilities                                            |       | (3,384                                            | )          | 4,021 |   |
| Net cash provided by (used in) operating activities                                       |       | 3,152                                             |       | 9,935 |   |
| Cash flows from  investing activities:                                                    |       |                                              |       |   |   |
| Capital expenditures                                                                      |       | (16,762                                           | )          | (4,953 | ) |
| Restricted cash and cash equivalents                                                      |       | 13,159                                            |       | 2,197 |   |
| Net cash (used in) provided by investing activities                                       |       | (3,603                                            | )          | (2,756 | ) |
| Cash flows from  financing activities:                                                    |       |                                              |       |   |   |
| Payments under bank facility                                                              |       | (788                                              | )          | — |   |
| Payable-in-kind interest added to debt principal                                          |       | 8,330                                             |       | 8,436 |   |
| Payments on CUP financing                                                                 |       | (684                                              | )          | (610 | ) |
| Advances from affiliates                                                                  |       | —                                            |       | 651 |   |
| Net cash provided by (used in) financing activities                                       |       | 6,858                                             |       | 8,477 |   |
| Cash and cash  equivalents:                                                               |       |                                              |       |   |   |
| Increase in cash and cash equivalents                                                     |       | 6,407                                             |       | 15,656 |   |
| Balance, beginning of period                                                              |       | 41,419                                            |       | 37,016 |   |
| Balance, end of period                                                                    |       | $                                                 | 47,826     |   | $ | 52,672 |   |
|                                                                                      |       |                                              |       |   |   |
| Supplemental  cash flow disclosures:                                                      |       |                                              |       |   |   |
| Cash paid for  interest                                                                   |       | $                                                 | 16,690     |   | $ | 14,907 |   |

 

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

6

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**BH/RE, L.L.C. AND SUBSIDIARIES****NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS (UNAUDITED)**

##### **1.****                                      ORGANIZATIONAND BASIS OF PRESENTATION**

###### ***Organization***

BH/RE, L.L.C. (“BH/RE” or the “Company”) is a holdingcompany that owns 85% of EquityCo, L.L.C. (“EquityCo”). The remaining 15% ofEquityCo is owned by a subsidiary of Starwood Hotels & ResortsWorldwide, Inc. (“Starwood”). MezzCo, L.L.C. (“MezzCo”) is a wholly ownedsubsidiary of EquityCo, and OpBiz, L.L.C. (“OpBiz”) is a wholly ownedsubsidiary of MezzCo. 50% of BH/RE’s voting membership interests are held by eachof 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 andHospitality LLC II (“BHCH II”) (collectively “BHCH”) and 40.75% by OCSConsultants, Inc. (“OCS”).

BH/RE and its subsidiaries were formed to acquire, operateand renovate the Aladdin Resort and Casino (the “Aladdin”) located in LasVegas, Nevada. OpBiz, an indirect subsidiary of BH/RE, completed theacquisition of the Aladdin on September 1, 2004 and has begun a renovationproject which, when complete, will transform the Aladdin into the PlanetHollywood Resort and Casino (the “PH Resort”). In connection with therenovation of the Aladdin, OpBiz has entered into an agreement with PlanetHollywood International, Inc. (“Planet Hollywood”) and certain of itssubsidiaries to, among other things, license Planet Hollywood’s trademarks,memorabilia and other intellectual property. OpBiz has also entered into anagreement with Sheraton Operating Corporation (“Sheraton”), a subsidiary ofStarwood, pursuant to which Sheraton provides hotel management, marketing andreservation services for the hotel (the “Hotel”) that comprises a portion ofthe PH Resort.

BH/RE is a Nevada limited liability company and wasorganized on March 31, 2003. BH/RE was formed by BHCH and OCS. BHCH iscontrolled by Douglas P. Teitelbaum, a managing principal of Bay HarbourManagement, L.C. (“Bay Harbour Management”). BHCH was formed byMr. Teitelbaum for the purpose of holding investments in BH/RE by fundsmanaged by Bay Harbour Management. Bay Harbour Management is an investmentmanagement firm. OCS is wholly owned and controlled by Robert Earl and holdsMr. Earl’s investment in BH/RE. Mr. Earl is the founder, chairman andchief executive officer of Planet Hollywood and Mr. Teitelbaum is adirector of Planet Hollywood. Collectively, Mr. Earl, a trust for thebenefit of Mr. Earl’s children and affiliates of Bay Harbour Management,own substantially all of the equity of Planet Hollywood. Mr. Earldisclaims beneficial ownership of any equity of Planet Hollywood owned by thetrust.

***Acquisition of the Aladdin***

Aladdin Gaming,L.L.C. (“Aladdin Gaming”), which was a debtor-in-possession under Chapter 11 ofthe United States Bankruptcy Code, commenced its bankruptcy case in the UnitedStates Bankruptcy Court for the District of Nevada, Southern Division onSeptember 28, 2001. On April 23, 2003, OpBiz and Aladdin Gaming enteredinto a purchase agreement pursuant to which OpBiz agreed to acquire theAladdin. Under the purchase agreement and pursuant to an order of theBankruptcy Court, Aladdin Gaming conducted an auction to sell the Aladdin. OnJune 20, 2003, the Bankruptcy Court declared OpBiz the winner of thatauction and, on August 29, 2003, the Bankruptcy Court entered an orderconfirming Aladdin Gaming’s plan of reorganization and authorizing AladdinGaming to complete the sale of the Aladdin to OpBiz under the purchaseagreement. On September 1, 2004, OpBiz acquired substantially all of thereal and personal property owned or used by Aladdin Gaming to operate theAladdin, and received $15 million of working capital from Aladdin Gaming,including $25.7 million of cash. The acquisition was accounted for as apurchase and, accordingly, the purchase price and working capital adjustmentshave been allocated to the underlying assets acquired and liabilities assumed.The working capital adjustment was determined based on the closing balance sheeton August 31, 2004. OpBiz paid the purchase price for the Aladdin byissuing new secured notes to Aladdin Gaming’s secured creditors and assumedvarious contracts and leases entered into by Aladdin Gaming in connection withits operation of the Aladdin and certain of Aladdin Gaming’s liabilities,including Aladdin Gaming’s energy service obligation to the third party ownerof the central utility plant that supplies hot and cold water and emergencypower to the Aladdin. At the time of purchase, the energy service obligationwas $34.0 million. Upon the completion of the Aladdin acquisition, OpBiz issued$510 million of new secured notes to Aladdin Gaming’s secured creditors underan Amended and Restated Loan and Facilities Agreement (the “Credit Agreement”)with a group of lenders and The Bank of New York, Asset Solutions Division, asadministrative and collateral agent. OpBiz also simultaneously made a $14million cash payment to those secured creditors, which reduced the principalamount of the notes to $496 million and obtained a release of the lien on afour-acre parcel of undeveloped property that OpBiz also acquired from AladdinGaming (the “Timeshare Land”). On December 10, 2004, OpBiz entered into aTimeshare Purchase Agreement with Westgate Resorts, LTD. (“Westgate”), wherebyOpBiz agreed to sell approximately four acres of the Timeshare Land toWestgate, who plans to develop, market, manage and sell timeshare units on theland.  The Timeshare Purchase Agreementremains in effect but the deed to the land has not been transferred asrequisite conditions to consummate the sale have not been completed byWestgate.  To complete the deed transfer,Westgate must obtain financing and obtain all required approvals fromregulatory agencies.  We expect Westgateto meet required conditions by December 31, 2006, at which time, the deed willbe transferred.  The Credit Agreementalso requires that OpBiz provide either cash or a letter of credit in theaggregate amount of $90 million to fund the costs of the planned renovations tothe Aladdin. In August 2004, MezzCo issued $87 million of senior securednotes to a group of purchasers. The net proceeds of this financing were used tomake the $14 million payment described above, to pay certain costs and expensesof BH/RE and its subsidiaries and affiliates related to the acquisition of theAladdin, and to provide OpBiz with a

7

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portion of the funds necessary to meet its obligations regarding theplanned renovations to the Aladdin.

 

The purchaseagreement also provided that OpBiz assume substantially all of Aladdin Gaming’spre-petition contracts and leases and any post-petition contracts or leases towhich OpBiz does not object. In addition, the purchase agreement provided thatOpBiz offer employment to all of Aladdin Gaming’s employees, other thanexecutive management, on terms and conditions substantially similar to theirprevious employment terms and conditions.

###### ***Plan of Operations***

OpBiz is currently conducting a renovation project which,when complete, will transform the Aladdin into the PH Resort. In connectionwith the renovation of the Aladdin, OpBiz has entered into an agreement withPlanet Hollywood and certain of its subsidiaries to, among other things,license Planet Hollywood’s trademarks, memorabilia and other intellectualproperty. OpBiz has also entered into an agreement with Sheraton, a subsidiaryof Starwood, pursuant to which Sheraton provides hotel management, marketingand reservation services for the Hotel that comprises a portion of the PHResort.

###### ***Interim Financial Statements(unaudited)***

The accompanyingcondensed consolidated financial statements included herein have been preparedby the management of BH/RE, without audit, pursuant to the rules andregulations of the Securities and Exchange Commission. Certain information andfootnote disclosures normally included in financial statements prepared inaccordance with U.S. generally accepted accounting principles have beencondensed or omitted pursuant to such rules and regulations. BH/REbelieves that the disclosures are adequate to make the information presentednot misleading. In the opinion of management, all adjustments (which includenormal recurring adjustments) necessary for a fair presentation of the resultsfor the interim periods have been made. The results for the three and sixmonths ended June 30, 2006, are not indicative of results to be expected forthe full fiscal year. These unaudited financial statements should be read inconjunction with the audited financial statements and notes thereto for theyear ended December 31, 2005, included in BH/RE’s Annual Report onForm 10-K filed with the Securities and Exchange Commission on March 31,2006.

##### **2.****                                      SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES**

###### ***Significant Accounting Policies and Estimates***

The condensed consolidated financial statements areprepared in conformity with U.S. generally accepted accounting principles.Certain policies, including the determination of bad debt reserves, theestimated useful lives assigned to assets, asset impairment, insurance reservesand the calculation of liabilities, require that management apply significantjudgment in defining the appropriate assumptions for calculating financialestimates. By their nature, these judgments are subject to an inherent degreeof uncertainty. Management’s judgments are based on historical experience,terms of existing contracts, observance of trends in the gaming industry andinformation available from other outside sources. There can be no assurancethat actual results will not differ from our estimates. To provide anunderstanding of the methodology management applies, BH/RE’s significantaccounting policies and basis of presentation are discussed below, as well asin the management’s discussion and analysis.

###### *Cash and Cash Equivalents*

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

###### *Restricted Cash and CashEquivalents*

Restricted cash and cash equivalents consist ofapproximately $74.6 million and $87.8 million as of June 30, 2006 andDecember 31, 2005, respectively, the majority of which will be appliedtoward the remaining cash commitments for the planned renovations to theAladdin.

###### *Accounts Receivable*

Accounts receivable, including casino and hotel receivables,are typically non-interest bearing and are initially recorded at cost. Anestimated allowance for doubtful accounts is maintained to reduce thereceivables to their carrying amount, which approximates fair value. BH/REestimates the allowance for doubtful accounts by applying standard reservepercentages to aged account balances under a specific dollar amount andspecifically analyzes the collectibility of each account with a balance overthe specified dollar amount, based on the age of the account, the customer’sfinancial condition, collection history and any other known information.

###### *Inventories*

Inventories consist of food and beverage, retailmerchandise and operating supplies, and are stated at the lower of cost ormarket.

8

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Cost is determined by the first-in, first-out and specificidentification methods.

###### *Property and Equipment*

Property andequipment are stated at cost. Recurring repairs and maintenance costs,including items that are replaced routinely in the casino, hotel and food andbeverage departments which do not meet the Company’s capitalization policy of$10,000, are expensed as incurred. The Company has established its capitalexpense policy to be reflective of its individual ongoing repairs andmaintenance programs. Gains or losses on dispositions of property and equipmentare included in the determination of income. Property and equipment aregenerally depreciated over the following estimated useful lives on astraight-line basis:
| Buildings                          |   | 40 years       |   |
|------------------------------------|--------|----------------|--------|
| Building improvements              |   | 15 to 40 years |   |
| Furniture, fixtures and  equipment |   | 3 to 7 years   |   |

 

Property andequipment and other long-lived assets are evaluated for impairment inaccordance with the Financial Accounting Standards Board’s (“FASB”) Statementof Financial Accounting Standards (“SFAS”) No. 144, “*Accountingfor the Impairment or Disposal of Long-Lived Assets*.” For assets tobe disposed of, the asset to be sold is recognized at the lower of carryingvalue or fair value less costs of disposal. Fair value for assets to bedisposed of is estimated based on comparable asset sales, solicited offers or adiscounted cash flow model.

Property andequipment are reviewed for impairment whenever indicators of impairment exist.If an indicator of impairment exists, the estimated future cash flows of theasset, on an undiscounted basis, are compared to the carrying value of theasset. If the undiscounted cash flows exceed the carrying value, no impairmentis 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.

The property andequipment and other long-lived assets that BH/RE obtained in the acquisition ofthe Aladdin were appraised by an independent third party. Property andequipment and the related accumulated depreciation amounts, as well as certainintangible assets recorded in the Company’s condensed consolidated statementsof financial position as of June 30, 2006 and December 31, 2005, are based onthe independent third party appraisal.

*Debt Issuance Costs*

Debt issuancecosts incurred in connection with the issuance of long-term debt arecapitalized and amortized to interest expense over the expected terms of the relateddebt agreements using the effective interest method and are included in otherassets on BH/RE’s consolidated statements of financial position. Debt issuancecosts, net of the related amortization, approximated $6.3 million and $7.0million as of June 30, 2006 and December 31, 2005, respectively.

*IntangibleAssets*

In connection withthe purchase of the Aladdin and as a result of an independent appraisal of theassets purchased, BH/RE recorded intangible assets, which consist of a customerlist and trade name. The customer list was valued at approximately $2.7 millionat the time of purchase and at June 30, 2006, had a net book value ofapproximately $1.5 million. The trade name was valued at approximately $1.0million at the time of purchase and was fully amortized at June 30, 2006. Thecustomer list is being amortized using the straight-line method over a usefullife of 4 years.

*Derivative Instruments and Hedging Activities*

As further considerationto the lenders under the Credit Agreement, BH/RE has issued warrants topurchase membership interests held by BH/RE in EquityCo. BH/RE accounts for theoutstanding warrants in EquityCo as embedded derivative instruments inaccordance with SFAS No. 133, “*Accounting for DerivativeInstruments and Hedging Activities,*” and SFAS No. 138, *“Accounting for Certain Derivative Instruments and HedgingActivities—an Amendment of FASB Statement No. 133*.*”*

Inconjunction with the Mezzanine Financing, MezzCo issued warrants to purchasemembership interests in the fully diluted equity of MezzCo which contain a netcash settlement, and therefore are accounted for in accordance with EmergingIssues Task Force (“EITF”) 00-19, “*Accounting for DerivativeFinancial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock*”.Both SFAS No. 133 and EITF 00-19 require that the warrants berecognized as liabilities, with changes in fair value affecting net income.

9

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*RevenueRecognition and Promotional Allowances*

Casinorevenues are recognized as the net win from gaming activities, which is thedifference between gaming wins and losses. Hotel revenue recognition criteriaare generally met at the time of occupancy. Food and beverage revenuerecognition criteria are generally met at the time of service. Deposits forfuture hotel occupancy or food and beverage services are recorded as deferredincome until revenue recognition criteria are met. Cancellation fees for hoteland food and beverage services are recognized upon cancellation by the customeras defined by a written contract entered into with the customer. All otherrevenues are recognized as the service is provided. Revenues include the retailvalue of food, beverage, rooms, entertainment and merchandise provided on acomplimentary basis to customers. Such complimentary amounts are then deductedfrom revenues as promotional allowances on BH/RE’s consolidated statements ofoperations. The estimated departmental costs of providing such promotionalallowances are included in casino costs and expenses and consist of thefollowing (amounts in thousands):
|                                       | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                            | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                  |       |                                                |       |                                              |       |   |   |   |   |
| Rooms                                 |       | $                                                   | 920        |                                              | $          | 823 |   | $ | 1,902 |   | $ | 1,680 |   |
|                                  |       |                                                |       |                                              |       |   |   |   |   |
| Food and Beverage                     |       | 2,297                                               |       | 2,546                                             |       | 4,822 |   | 5,009 |   |
|                                  |       |                                                |       |                                              |       |   |   |   |   |
| Other                                 |       | 338                                                 |       | 219                                               |       | 675 |   | 405 |   |
|                                  |       |                                                |       |                                              |       |   |   |   |   |
| Total cost of promotional  allowances | ** ** | **$**                                               | **3,555**  | ** **                                        | **$**      | **3,588** | ** ** | **$** | **7,399** | ** ** | **$** | **7,094** | ** ** |

 

###### *Slot Club Program*

TheAladdin’s slot club members earn points based on gaming activity, which can beredeemed for cash. A liability is recorded for the estimated cost of theoutstanding points accrued under the slot club program. The accrued slot clubpoint liability was approximately $1.4 million and $1.7 million as of June 30,2006 and December 31, 2005, respectively.

*Advertising Costs*

Advertising costs areexpensed as incurred and included in selling, general and administrative costsand expenses. Advertising costs totaled approximately $1.1 million and $2.3million for the three and six months ended June 30, 2006, respectively and $1.4million and $2.4 million for the three and six months ended June 30, 2005, respectively.

*Income Taxes*

Thecondensed consolidated financial statements include the operations of BH/RE andits controlled subsidiaries: EquityCo, MezzCo, and OpBiz. BH/RE and EquityCoare limited liability companies and are taxed as partnerships for federalincome tax purposes. MezzCo has elected to be taxed as a corporation for federalincome tax purposes. OpBiz, a wholly owned subsidiary of MezzCo, will betreated as a division of MezzCo for federal income tax purposes, andaccordingly, will also be subject to federal income taxes.

MezzCoand OpBiz account for income taxes in accordance with SFAS No. 109, “*Accounting for Income Taxes*”. SFAS 109 requires therecognition of deferred income tax assets, net of applicable reserves, relatedto net operating loss carryforwards and certain temporary differences. Thestandard requires recognition of future tax benefits to the extent thatrealization of such benefits are more likely than not. Otherwise, a valuationallowance is applied.

###### *Membership Interests*

As of June 30, 2006, BH/RE’smembership interests had not been unitized and BH/RE’s members do not presentlyintend to unitize these membership interests. Accordingly, management of BH/REhas excluded earnings per share data required pursuant to SFAS No. 128, “*Earnings Per Share,*” because management believes that suchdisclosures would not be meaningful to the financial statement presentation.

The Company has entered intovarious employment agreements, as amended, with several executives. Theemployment agreements have initial terms of two to five years. The employmentagreements provide that the executives will receive a base salary with eithermandatory increases or annual adjustments and annual bonus payments. Inaddition, depending on the terms of the employment agreements, these executivesare entitled to options to purchase between 0.2% and 5% of the equity ofMezzCo.

###### ***Basis of Presentation***

*Renovation Project*

The final plans and specificationsof the renovation have not been finalized. Starwood and the lenders under theMezzanine Financing have the right to approve the total scope and cost of therenovation once finalized. We currently estimate that the renovation costs willbe approximately $165 million. We do not have commitments for funding in excessof $100 million. The remaining balance of the $100 million renovation fund isrecorded as restricted cash in the Company’s Consolidated Statement ofFinancial Position.

Our Credit Agreement requires thatwe spend an aggregate of $72,000,000 on renovation capital expenditures byAugust 31, 2006 (See Note 5). If $72,000,000 of such amount is not spentby August 31, 2006, we are required to prepay amounts outstanding underthe Credit Agreement with an amount equal to the difference between $72,000,000and the amount actually spent and paid on renovation capital expenditures. Asof August 31, 2006, we have failed to satisfy such minimum spendrequirement by approximately $35.6 million. If amounts outstanding under theCredit Agreement are required to be prepaid, the $100 million commited fundingfor the renovation would be reduced by the prepayment amount creating anadditional shortfall for the completion of the renovation project.

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The members of BH/RE may elect to contribute the fundingrequired to complete the renovation. If this funding is not obtained, the scopeof the project would be reduced which may adversely affect the Company’s futureoperating results and our ability to complete the project.

***Recentlyissued accounting pronouncements***

*SFAS No.123(R)*

On December 16, 2004, the Financial AccountingStandards Board (“FASB”) issued Statement of Financial Accounting Standards No.123 (revised 2004), “Share-Based Payment” (“SFAS No. 123(R)”), which is arevision to SFAS No. 123, “Accounting for Stock-Based Compensation.”  SFAS No. 123(R) supersedes AccountingPrinciples Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APBNo. 25”) and amends SFAS No. 95, “Statement of Cash Flows.”  Among other items, SFAS No. 123(R) requiresthe recognition of compensation expense in an amount equal to the fair value ofshare-based payments, including employee stock options and restricted stock,granted to employees.

The Company adopted SFAS No. 123(R) on January 1, 2006using the “modified prospective” method, in which compensation cost isrecognized beginning with the effective date (a) based on the requirements ofSFAS No. 123(R) for all share-based payments granted after the effective dateand (b) based on the requirements of SFAS No. 123 for all awards granted toemployees prior to the effective date of SFAS No. 123(R) that remain unvestedon the effective date.

SFAS No. 123(R) also requires the benefits of taxdeductions in excess of recognized compensation cost to be reported as afinancing cash flow, rather than as an operating cash flow. This requirementreduced net operating cash flows and increased net financing cash flows for thethree and six months ended June 30, 2006.

*FASB Interpretation No. 48*

In July 2006, the FASB issued FASB Interpretation No.48 (“FIN 48”) “Accounting for Uncertainty in Income Taxes – an interpretationof FASB No. 109”, to clarify certain aspects of accounting for uncertain taxpositions, including issues related to the recognition and measurement of thosetax positions.  This interpretation iseffective for fiscal years beginning after December 15, 2006.  The Company is in the process of evaluatingthe impact of the adoption of this interpretation on the Company’s results ofoperations and financial condition.

*Accounting for stock-basedcompensation*

EffectiveJanuary 1, 2006, the Company adopted the provisions of SFAS No. 123(R)requiring that compensation cost relating to share-based payment transactionsbe recognized in the operating expenses. The cost is measured at the grantdate, based on the calculated fair value of the award, and is recognized as anexpense over the employee’s requisite service period (generally the vestingperiod of the equity award). Prior to January 1, 2006, the Company accountedfor share-based compensation to employees in accordance with APB No. 25, andrelated interpretations. The Company also followed the disclosure requirementsof SFAS No. 123 as amended by SFAS No. 148, “Accounting for Stock-BasedCompensation-Transition and Disclosure.” The Company adopted SFAS No. 123(R) using the modified prospectivemethod and, accordingly, financial statement amounts for prior periodspresented in this Form 10-Q have not been restated to reflect the fair valuemethod of recognizing compensation cost relating to non-qualified stockoptions.

Therewas $0.1 million and $0.2 million of compensation cost related to non-qualifiedstock options recognized in operating results (included in selling, general andadministrative expenses) for the three and six months ended June 30, 2006,respectively.

Thefair value of each option award is estimated on the date of grant using theBlack-Scholes-Merton option pricing model. Expected volatility is based onhistorical volatility trends as well as implied future volatility observationsas determined by independent third parties. In determining the expected life ofthe option grants, the Company used historical data to estimate option exerciseand employee termination behavior. The expected term represents an estimate ofthe time options are expected to remain outstanding. The risk-free interestrate 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 setsforth the assumptions used to determine compensation cost for the Company’snon-qualified stock options consistent with the requirements of SFAS No.123(R).
|                                    | ** ** | **Six Months  Ended June 30,  2006** | ** ** |
|------------------------------------|------------|-----------------------------------------------------|------------|
| **Weighted-average  assumptions:** | ** ** | ** **                                          | ** ** |
| Expected stock price volatility    |       | 36                                                  | %          |
| Risk-free interest rate            |       | 3.76                                                | %          |
| Expected option life (years)       |       | 7                                                   |       |
| Expected annual  dividend yield    |       | —                                              | %          |

 

UnderAPB No. 25 there was no compensation cost recognized for the Company’snon-qualified stock options awarded in the

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three or sixmonths June 30, 2005 as these non-qualified stock options had an exercise priceequal to the market value of the underlying stock at the grant date. Thefollowing table sets forth pro forma information as if compensation cost hadbeen determined consistent with the requirements of SFAS No. 123:

|                                                                          | ** ** | **Three Months Ended  June 30, 2005** | ** ** | **Six Months Ended  June 30, 2005** | ** ** |
|--------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                               | ** ** | **(Amounts in thousands)**                      | ** ** |
| **Net  income:**                                                         | ** ** | ** **                                                | ** ** | ** **                                              | ** ** |
| As reported                                                              |       | $                                                         | (7,105     | )                                                       | $          | (6,749 | ) |
| Deduct: compensation expense under fair value-based  method (net of tax) |       | (45                                                       | )          | (89                                                     | )          |
| Pro forma                                                                |       | $                                                         | (7,150     | )                                                       | $          | (6,838 | ) |

 

The following sets forth fair value per shareinformation, including related assumptions, used to determine compensation costconsistent with the requirements of SFAS No. 123:

|                                                                                                                                                            | ** ** | **Three Months Ended  June 30, 2006** | ** ** | **Six Months  Ended  June 30, 2006** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                                                                                 | ** ** | ** **                                                | ** ** | ** **                                          | ** ** |
| **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                                                                                                                            |       | —                                                    | %          | —                                              | %          |
|                                                                                                                                                            |            |                                                           |            |                                                     |            |  |  |

 

Thetotal fair value of options vested during the three and six months ended June30, 2006 was $0.1 million and $0.2 million, respectively.

**3.****                                      RECEIVABLES**

Accounts receivable consist of the following (inthousands):
|                                 | ** ** | **June 30   2006** | ** ** | **December 31,  2005** | ** ** |
|---------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                      | ** ** | **(unaudited)**              | ** ** | ** **                  | ** ** |
| Casino                          |       | $                            | 10,285     |                        | $          | 12,173 |   |
| Hotel                           |       | 7,788                        |       | 8,470                       |       |
| Other                           |       | 1,526                        |       | 3,593                       |       |
|                            |       | 19,599                       |       | 24,236                      |       |
| Allowance for doubtful accounts |       | (5,732                       | )          | (4,443                      | )          |
| Receivables, net                |       | $                            | 13,867     |                        | $          | 19,793 |   |

 

**4.****                                      PROPERTYAND EQUIPMENT**

Property andequipment and the related accumulated depreciation consist of the following (inthousands):
|                                    | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                         | ** ** | **(unaudited)**         | ** ** | ** **                  | ** ** |
| Land                               |       | $                       | 97,979     |                        | $          | 97,979 |   |
| Building and  improvements         |       | 367,234                 |       | 367,234                     |       |
| Furniture,  fixtures and equipment |       | 34,626                  |       | 34,194                      |       |
| Construction in  progress          |       | 31,015                  |       | 14,685                      |       |
|                               |       | 530,854                 |       | 514,092                     |       |
| Accumulated  depreciation          |       | (39,189                 | )          | (28,346                     | )          |
| Property and  equipment, net       |       | $                       | 491,665    |                        | $          | 485,746 |   |

 

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In connection with theTimeshare Purchase Agreement between OpBiz and Westgate, OpBiz agreed to sellapproximately 4 acres of land adjacent to the PH Resort to Westgate who plansto develop, market, manage and sell timeshare units on the land.  The land value recorded in the Company’sfinancial statements of $29.5 million was based on an independentappraisal.  The purchase price for theland will be paid by Westgate in the form of fees based on annual sales oftimeshare units.  The Timeshare PurchaseAgreement remains in effect but the deed to the land has not been transferredas requisite conditions to consummate the sale have not been completed byWestgate.  To complete the deed transfer,Westgate must obtain financing and obtain all required approvals fromregulatory agencies.  Accordingly, nogain or loss on the sale of the land has been recorded in the Company’sfinancial statements.

 

Depreciationexpense was approximately $5.6 million and $11.3 million for the three and sixmonths ended June 30, 2006 respectively and $5.9 million and $11.8 million forthe three and six months ended June 30, 2005, respectively.

**5.****                                      LONG-TERMDEBT**

Long-term debtconsists of the following (in thousands):
|                                                                                                | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                                                     | ** ** | **(unaudited)**         | ** ** | ** **                  | ** ** |
| Term Loan A -  $500 million senior notes, net of unamortized discount of $22,934 and $25,632   |       | $                       | 462,202    |                        | $          | 460,293 |   |
| Term Loan B -  $10 million senior notes                                                        |       | 11,475                  |       | 10,985                      |       |
| Mezzanine senior  secured subordinated notes, net of unamortized discount of $3,664 and $3,880 |       | 112,012                 |       | 103,956                     |       |
| Northwind  Aladdin obligation under capital lease                                              |       | 31,630                  |       | 32,314                      |       |
| Total long-term debt                                                                           |       | 617,319                 |       | 607,548                     |       |
| Current portion  of long-term debt                                                             |       | (5,254                  | )          | (2,671                      | )          |
| Total long-term  debt, net                                                                     |       | $                       | 612,065    |                        | $          | 604,877 |   |

 

***CreditAgreement***

The Aladdinacquisition and the planned renovations were funded by the issuance of $510million of secured notes to Aladdin Gaming’s secured creditors pursuant to aCredit Agreement. OpBiz’s obligations under the Credit Agreement are secured byliens on all of its assets, including a mortgage on its real property, theHotel, the Casino and the Theater for the Performing Arts (“TPA”), and securityinterests in its accounts receivable, inventory, equipment and intangibleassets, excluding the Timeshare Land. The Credit Agreement is guaranteed byMezzCo and MezzCo secured its guarantee by pledging its membership interests inOpBiz to the lenders. The Credit Agreement matures on August 31, 2010.

Theloans under the Credit Agreement are evidenced by $500 million of Term Loan Anotes and $10 million of Term Loan B notes. Upon issuance of the notes, BH/REsimultaneously made a $14 million cash payment to the holders of the Term LoanA notes to reduce the principal amount of the Term Loan A notes to $486 millionand obtained a release of the lien on the Timeshare Land.

Thescheduled principal payments on the Term Loan A notes are as follows:

·        $1.25million on the first day of each fiscal quarter during the period beginning onAugust 31, 2006 and ending on August 31, 2007;

·        $3.75million on the first day of each fiscal quarter during the period beginning onAugust 31, 2007 and ending on August 31, 2008;

·        $5.0million on the first day of each fiscal quarter during the period beginning onAugust 31, 2008 and ending on August 31, 2009;

·        $6.25million on the first day of each fiscal quarter during the period beginning onAugust 31, 2009 and ending on August 31, 2010;

·        thethen unpaid balance amount of Term Loan A notes on August 31, 2010.

OpBiz pays interest onthe outstanding Term Loan A notes quarterly, in cash, at the London Inter-BankOffered Rate, or LIBOR, plus an applicable margin that increases over time.Until the earlier of August 31, 2007 or OpBiz’s accumulation of certainpermitted cash reserves, OpBiz’s interest payment will not exceed its quarterlyearnings before interest, taxes, depreciation and amortization (“EBITDA”),reduced by certain permitted reductions (as defined in the Credit Agreement),divided by a factor of 1.20. Interest on the Term Loan B notes will accrue at arate of LIBOR plus 4% and will be added quarterly to the outstanding principalamount of the Term Loan B notes and will be paid when OpBiz pays off the TermLoan B notes. OpBiz is also required to pay an annual administrative fee andcertain other fees and expenses of the lender under the Credit Agreement.

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OpBiz is required toprepay amounts outstanding under the Credit Agreement:

 

·        withexcess cash flow (as defined in the Credit Agreement) after certain permittedcash reserves are accumulated;

·        inscheduled quarterly amounts beginning after August, 31, 2006;

·        withcertain amounts received in connection with the development of the TimeshareLand adjacent to the Desert Passage (as defined in the underlying agreement);

·        withan amount equal to the difference between defined renovation capitalexpenditures and what was actually spent thereon if (i) an aggregateamount of $72.0 million is not spent on renovation capital expenditures byAugust 31, 2006, or (ii) an aggregate amount of $81.0 million is notspent on renovation capital expenditures by February 28, 2007 or(iii) an aggregate amount of $90.0 million is not spent on renovationcapital expenditures by August 31, 2007; and

·        withthe proceeds of certain asset sales.

Inparticular, after OpBiz accumulates certain permitted cash reserves, OpBiz isrequired to pay 100% of its excess cash flow (as defined in the CreditAgreement) from operations to the lenders under the Credit Agreement. Thatpercentage decreases to 75%, then 50%, if OpBiz meets certain targeted ratiosof total debt to EBITDA, or certain leverage ratios, for any two consecutivefiscal quarters.

Our CreditAgreement also requires that we spend not less than $90,000,000 on renovationcapital expenditures by August 31, 2007. If $72,000,000 of such amount isnot spent by August 31, 2006, we are required to prepay amountsoutstanding under the Credit Agreement with an amount equal to the differencebetween $72,000,000 and the amount actually spent and paid on renovationcapital expenditures. As of August 31, 2006, we have failed to satisfysuch minimum spend requirement by approximately $35.6 million. Accordingly,OpBiz may be required to make a mandatory prepayment of amounts outstandingunder the Credit Agreement for the renovation spend shortfall of approximately$35.6 million.

TheCredit Agreement includes covenants that, among other things, restrict OpBiz’sability to sell assets, make distributions to its owners, other thandistributions for taxes, incur or prepay additional indebtedness, enter intotransactions with affiliates, incur liens, make investments, make capitalexpenditures,****develop theTimeshare Land adjacent to the Desert Passage and enter into materialcontracts. In addition, OpBiz is required to maintain certain levels of EBITDAthat increase over time and, beginning August 31, 2007, maintain certainratios of EBITDA to interest expense that increase over time and maintaincertain leverage ratios that decrease over time.

OpBizcurrently projects a shortfall to the minimum EBITDA requirement for the twelvemonth period ended August 31, 2006 of approximately $5 million.  The Credit Agreement contains provisions tosatisfy this covenant during the first two years of its applicability with anequity contribution equal to the difference between the minimum required EBITDAand actual EBITDA within 90 days of the measurement date.  The members of BH/RE have advised BH/RE thatthey intend to make the required contribution within the prescribed timeframeand, accordingly, OpBiz does not anticipate an event of default for non-compliancewith this covenant.  If such equitycontribution is not made, OpBiz would seek a waiver of such default, however,there can be no assurance that it would be granted by the lenders under theCredit Agreement.  Mimimum EBITDAcovenants beyond August 31, 2006 do not provide for the right to cure a defaultwith an equity contribution.  In theevent that OpBiz does not have sufficient EBITDA for the twelve month periodended August 31, 2007, it would constitute an event of default unless OpBizobtains a waiver from the lenders under the Credit Agreement.

Inaddition to the detailed covenants described herein, the Credit Agreementcontains customary events of default, including a change of control of OpBiz,the occurrence of a default under the terms of any indebtedness of MezzCo, adefault by OpBiz under the Hotel management contract or termination of Sheratonas the manager of the Hotel (unless OpBiz replaces Sheraton with anotherapproved manager within 30 days of such termination), a default or terminationof the Planet Hollywood license agreement and certain defaults under theagreements with Boulevard Invest or Northwind Aladdin.

BH/REhas issued warrants to purchase 2.94% of its ownership interest in EquityCo tothe lenders under the Credit Agreement. The warrants can only be exercised uponthe occurrence of (i) a liquidity event or distribution (such as throughthe sale of the hotel/casino); (ii) a public sale of equity securities ofEquityCo, MezzCo or OpBiz; or (iii) payment in full of the obligationsunder the Credit Agreement. The warrants can either be settled in cash or inother membership interests upon exercise. The estimated fair value of thewarrants was approximately $0.1 million as of June 30, 2006. These warrants arerecorded separately from the related debt within other long-term liabilities.

***Mezzanine Financing***

InAugust 2004, MezzCo entered into a mezzanine financing transaction (the “MezzanineFinancing”) with a group of purchasers. Pursuant to the Mezzanine Financing,MezzCo issued $87 million of 16% Senior Secured Subordinated Notes and warrantsto purchase 17,500 of its units representing membership interests equal to17.5% of the fully diluted equity of MezzCo. The gross offering proceeds of theMezzanine Financing were deposited into an escrow account and, in conjunctionwith the closing of the

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Aladdinacquisition, were used to (i) pay approximately $16.1 million of fees andexpenses related to the acquisition of the Aladdin, (ii) fund the $14million lien release payment required under the Credit Agreement, and(iii) fund a portion of the planned renovations to the Aladdin. The notesmature in August 2011 and accrue interest at a rate of 16% per annum.Interest on the notes is payable-in-kind or, at the option of MezzCo, in cash.The warrants are exercisable at any time, subject to the approval of the Nevadagaming authorities, at a purchase price of $0.01 per unit. Subject to theapproval of the Nevada gaming authorities, the warrants may be exercised topurchase either voting or non-voting membership interests of MezzCo or acombination thereof. Currently, all of MezzCo’s voting membership interests arerepresented by units owned by EquityCo. In addition to customary anti-dilutionprotections, the number of units representing MezzCo membership interestsissuable upon exercise of the warrants may be increased from time to time uponthe occurrence of certain events as described in the warrants. The maximumaggregate increase is 19%, following which the warrants would represent rightsto purchase 36.5% of the units representing the fully diluted equity of MezzCo.Holders of the warrants and any securities issued upon exercise of the warrantsmay require MezzCo to redeem such securities commencing in August 2011 ata redemption price based upon a formula set forth in the warrants. Starting inAugust 2008, in the event the Company fails to achieve certain operationalthresholds, the holders of the MezzCo warrants, and securities issued uponexercise thereof, have the right to assume control of MezzCo and OpBiz andconduct a sale of the equity of, or all or substantially all of the assets of,either MezzCo or OpBiz provided that all Control Conditions (as defined in theInvestor Rights Agreement) are met. These rights are subject to (i) repaymentin full of all indebtedness that is senior to the notes (including allindebtedness of OpBiz under the Credit Agreement), (ii) certain covenantsrelated to OpBiz’s ability to achieve targeted levels of EBITDA and(iii) the prior approval of the Nevada gaming authorities. These rightsexpire upon completion of a public offering by MezzCo or OpBiz. In connectionwith the Mezzanine Financing, OpBiz’s obligation to make expenditures onrenovations to the Aladdin was increased from $90 million, as required underthe Credit Agreement, to $100 million.

As ofJune 30, 2006, the MezzCo financing was recorded net of the unamortized balanceof the put warrants of approximately $3.7 million. The estimated fair value ofthe warrants was approximately $4.1 million at June 30, 2006 andDecember 31, 2005, and is recorded separately from the related debt withinother long-term liabilities.

***EnergyServices Agreement***

Northwind Aladdin(“Northwind”), a third party, owns and operates a central utility plant on landleased from OpBiz. The plant supplies hot and cold water and emergency power tothe Aladdin under a contract between Aladdin Gaming and Northwind. OpBiz hasassumed the energy service agreement, which expires in 2020. Under theagreement, OpBiz is required to pay Northwind a monthly consumption charge, amonthly operational charge, a monthly debt service payment and a monthly returnon equity payment. Payments under the Northwind agreement total approximately$0.5 million per month.

**6.****                                      MEMBERSHIPINTERESTS**

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

BH/RE owns 85% of themembership interests in EquityCo and Starwood owns 15%. MezzCo is a whollyowned subsidiary of EquityCo, and OpBiz is a wholly owned subsidiary of MezzCo.BH/RE and Starwood made total equity contributions of $20 million each inEquityCo to fund the costs of the planned renovations to the Aladdin. Starwood’sequity interest in EquityCo is reflected as minority interest in theaccompanying condensed consolidated financial statements. BH/RE recordedminority interest income (loss) related to the Starwood interests ofapproximately $1.6 million and $1.2 million for the three months ended June 30,2006 and 2005, respectively.

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

**7.****                                      RELATEDPARTY TRANSACTIONS**

***Mr. Jess Ravich***

Jess Ravich, a Manager of OpBiz, is CEO and indirectcontrolling shareholder of Libra Securities, LLC, an investment banking firm (“LibraSecurities”). Libra Securities acted as placement agent for MezzCo, L.L.C. inthe placement of the Mezzanine Financing and was paid a placement fee of$4,350,000.

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Mr. Ravich holds a note convertible into 25% of the equityin PDS Gaming, a leasing and finance company specializing in gaming equipment.Conversion of the note is subject to approval of appropriate gaming regulatorsin the jurisdictions in which PDS Gaming does business. PDS Gaming entered intoa gaming equipment lease with OpBiz on December 22, 2004, for a 48-month termwith payments of approximately $137,500 per month. Libra Securities raisedfinancing for PDS Gaming to allow it to purchase the equipment underlying thelease and received a placement fee for its services.

***Planet HollywoodLicensing Agreement***

OpBiz, Planet Hollywoodand certain of Planet Hollywood’s subsidiaries have entered into a licensingagreement pursuant to which OpBiz received a non-exclusive, irrevocable licenseto use various “Planet Hollywood” trademarks and service marks. Under thelicensing agreement, OpBiz also has the right, but not the obligation, to opena Planet Hollywood restaurant and one or more Planet Hollywood retail shopsunder a separate restaurant agreement with Planet Hollywood. OpBiz will payPlanet Hollywood a quarterly licensing fee of 1.75% of OpBiz’s non-casinorevenues. If OpBiz opens an attraction with paid admission using the PlanetHollywood marks or memorabilia prior to beginning operations as the PH Resort,it will pay Planet Hollywood a quarterly licensing fee of 1.75% of the revenuesof the attraction until OpBiz begins operating as the PH Resort. The initialterm of the licensing agreement will expire in 2028. OpBiz can renew thelicensing agreement for three successive 10-year terms.

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

***Sheraton HotelManagement Contract***

OpBizand Sheraton have entered into a management contract pursuant to which Sheratonprovides hotel management services to the Hotel, assists OpBiz in themanagement, operation and promotion of the Hotel and permits OpBiz to use theSheraton brand and trademarks in the promotion of the Hotel. OpBiz paysSheraton a monthly fee of 4% of gross Hotel revenue and certain food andbeverage outlet revenues and 2% of rental income from third-party leases in theHotel. The management contract has a 20-year term that commenced on thecompletion of the Aladdin acquisition and is subject to certain terminationprovisions by either OpBiz or Sheraton. Sheraton is a wholly owned subsidiaryof Starwood, which has a 15% equity interest in EquityCo and has the right toappoint two members to the EquityCo board of managers. Starwood management feestotaled approximately $2.6 million for the three months ended June 30, 2006 and 2005 respectively and $5.2 millionand $5.7 million for the six months ended June 30, 2006 and 2005 respectively.

**8.****                                      INCOMETAXES**

The condensedconsolidated financial statements include the operations of BH/RE and itscontrolled subsidiaries: EquityCo, MezzCo, and OpBiz. BH/RE and EquityCo arelimited liability companies and are taxed as partnerships for federal incometax purposes. MezzCo has elected to be taxed as a corporation for federalincome tax purposes. OpBiz, a wholly owned subsidiary of MezzCo, will betreated as a division of MezzCo for federal income tax purposes, andaccordingly, will also be subject to federal income taxes.

MezzCo and OpBiz accountfor income taxes in accordance with SFAS No. 109, “*Accountingfor Income Taxes*”. SFAS 109 requires the recognition of deferredincome tax assets, net of applicable reserves, related to net operating losscarryforwards and certain temporary differences. The standard requiresrecognition of future tax benefits to the extent that realization of suchbenefits are more likely than not. Otherwise, a valuation allowance is applied.

Management believes it ismore likely than not that its net deferred tax asset will not be realized andhas therefore recorded a valuation allowance against this net deferred taxasset.

The payable in-kindinterest associated with the Mezzanine Financing is subject to the provisionsof Internal Revenue Code Section 163(e)(5) as a high yield debt obligation withdisqualified OID. As a result, a portion of the interest expense associatedwith the Mezzanine Financing is permanently non-deductible for tax purposes andthe balance of the interest expense is only deductible when paid in cash. Thedeferred tax asset associated with the Mezzanine Financing remains fullyreserved.

At December 31,2005, OpBiz had a general business credit carryforward of approximately $0.7million that expires in 2025 and a minimum tax credit carryforward ofapproximately $0.1 million. MezzCo and OpBiz have a valuation allowance atDecember 31, 2005 and 2004 recorded against tax benefits that are more likelythan not unrealizable. The current tax receivable of $194,000 at June 30, 2006represents recoverable taxes paid in a carryback period and a tax deposit forthe first quarter 2006.

**9.****                                      COMMITMENTSAND CONTINGENCIES**

###### **Litigation**

BH/RE is not currently a party to any material legalproceedings.

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***Employment Agreements***

The Company has entered intovarious employment agreements, as amended, with several executives. Theemployment agreements have initial terms of two to five years. The employmentagreements provide that the executives will receive a base salary with eithermandatory increases or annual adjustments and annual bonus payments. Inaddition, depending on the terms of the employment agreements, these executivesare entitled to options to purchase between 0.2% and 5% of the equity ofMezzCo.

***Timeshare Purchase Agreement***

On December 10, 2004, OpBizentered into a Timeshare Purchase Agreement with Westgate Resorts, LTD. (“Westgate”),a Florida limited partnership, whereby OpBiz has agreed to sell approximately 4acres of land adjacent to the Aladdin to Westgate, who plans to develop,market, manage and sell timeshare units on the land. The land valuerecorded by OpBiz in it’s financial statements of $29.5 million was based on anindependent appraisal.  The purchaseprice for the land will be paid by Westgate in the form of fees based on annualsales of timeshare units.  The TimesharePurchase Agreement remains in effect but the deed to the land has not beentransferred as requisite conditions to consummate the sale have not beencompleted by Westgate.  To complete thedeed transfer, Westgate must obtain financing and obtain all required approvalsfrom regulatory agencies.  Accordingly,no gain or loss on the sale of the land has been recorded in the Company’sfinancial statements.

***Theater Lease***

On December 16, 2004, OpBizentered into a long-term lease agreement whereby CC EntertainmentTheatrical-LV, LLC, succesor-in-interest to SFX Entertainment, Inc. pursuant toan assignment dated September 26, 2005 (“CCE”) will be renovating and leasingcertain theaters and related areas located at the Aladdin. CCE will have theexclusive right to use, reconfigure, adapt, change and operate the leasedpremises.

## **ITEM 2.****MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

###### ***Overview of Management’sDiscussion and Analysis of Financial Condition and Results of Operations***

Setforth below is a discussion of the financial condition and results ofoperations of BH/RE and its subsidiaries for the periods covered in thisreport. The discussion of operations herein focuses on events and the revenuesand expenses during the three and six months ended June 30, 2006, as comparedto the three and six months ended June 30, 2005.

Certain statements inthis report, including in this discussion, contain forward-looking statementswith respect to our business, financial condition, results of operations,liquidity and capital resources, expectations regarding the cost and timing tocomplete our renovation project, industry outlook and other non-historicalstatements.  These statements can beidentified by the words “believes,” “intends,” “expects,” “anticipates,” “plans,”“estimates” and similar expressions. These forward-looking statements are subject to numerous risks anduncertainties, including but not limited to construction and renovation risks,our ability to obtain additional financing to complete our renovation project,our compliance with the covenants contained in our Credit Agreement, oursignificant leverage, competition from other gaming operations, the cyclicalnature of the hotel business and gaming business, economic conditions, factorsaffecting our ability to complete acquisitions and dispositions of gamingproperties, the inherent uncertainty and costs associated with litigation andgovernmental and regulatory investigations, licensing and other regulatoryrisks and the other risk factors described from time to time in our filingswith the Securities and Exchange Commission. These factors could cause our actual results to differ materially fromthose expressed in our forward-looking statements.  You are cautioned not to place undue relianceon any forward-looking statements, which speak only as of the date thereof.Factors or events may emerge from time to time and it is not possible for us topredict all of them. We undertake no obligation to update or revise any forward-lookingstatements to reflect new information, changed circumstances or unanticipatedevents.

Thefollowing management’s discussion and analysis of financial condition andresults of operations should be read in conjunction with the consolidatedfinancial statements and the related notes to the consolidated financialstatements of BH/RE included in BH/RE’s Annual Report on Form 10-K filedwith the Securities and Exchange Commission on March 31, 2006, the unauditedcondensed consolidated financial statements and notes hereto included inPart I, Item 1 of this report and “Item 1A – Risk Factors” included inthis report and BH/RE’s Annual Report on Form 10-K.

***RenovationProject***

As discussed more fully under“Results of Operations” below, declines in our operating profits and cash flowwhile we undergo the transition to the PH Resort have been greater thanoriginally anticipated. We originally expected the renovation to be complete byDecember 31, 2006. We currently expect the interior casino renovation tobe substantially complete by December 31, 2006, but expect renovations tothe exterior plaza and façade to extend through the second quarter of 2007. Thefinal plans and specifications of the renovation have not been finalized.Starwood and the lenders under the Mezzanine Financing have the right toapprove the total scope and cost of the renovation once finalized. We currentlyestimate that the renovation costs will be approximately $165 million. We donot have commitments for funding in excess of $100 million. The remainingbalance of the $100 million renovation fund is recorded as restricted cash inthe Company’s Consolidated Statement of Financial Position.

As described more fully under “Descriptionof Certain Indebtedness” below and Item 1A. Risk Factors—“Risks Related to OurSubstantial Indebtedness”, our Credit Agreement requires that we spend anaggregate of $72,000,000 on renovation capital expenditures by August 31,2006. If $72,000,000 of such amount is not spent by August 31, 2006, weare required to prepay amounts outstanding under the Credit Agreement with anamount equal to the difference between $72,000,000 and the amount actuallyspent and paid on renovation capital expenditures. As of August 31, 2006,we have failed to satisfy such minimum spend requirement by approximately $35.6million. If we are required to prepay amounts outstanding under the Credit Agreement,the $100 million commited funding for the renovation would be reduced by theprepayment amount creating an additional shortfall for the completion of therenovation project.

The members of BH/RE may elect tocontribute the funding required to complete the renovation, but we cannotassure you that this contribution will be made or that the required additionalfunds can be obtained on acceptable terms or at all. If this funding is notobtained, the scope of the project would be reduced which may adversely affectour future operating results and our ability to complete the project.

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###### ***Critical Accounting Policiesand Estimates***

###### *Significant Accounting Policies and Estimates*

Our unaudited condensed consolidated financial statementsare prepared in conformity with U.S. generally accepted accounting principles.Certain policies, including the determination of bad debt reserves, theestimated useful lives assigned to assets, asset impairment, insurance reservesand the calculation of liabilities, require that we apply significant judgmentin defining the appropriate assumptions for calculating financial estimates. Bytheir 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 fromother outside sources. There can be no assurance that actual results will notdiffer from our estimates. To provide an understanding of the methodology weapply, our significant accounting policies and basis of presentation arediscussed below, as well as, where appropriate, in the notes to the condensedconsolidated financial statements.

###### *Propertyand Equipment*

Property andequipment are stated at cost. Recurring repairs and maintenance costs,including items that are replaced routinely in the casino, hotel and food andbeverage departments which do not meet our capitalization policy of $10,000,are expensed as incurred. We have established our capital expense policy to bereflective of our individual ongoing repairs and maintenance programs. Gains orlosses on dispositions of property and equipment are included in thedetermination of income. Property and equipment are generally depreciated overthe 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 andequipment and other long-lived assets are evaluated for impairment inaccordance with the Financial Accounting Standards Board’s (“FASB”) Statementof Financial Accounting Standards (“SFAS”) No. 144, “*Accountingfor the Impairment or Disposal of Long-Lived Assets*.” For assets tobe disposed of, the asset to be sold is recognized at the lower of carryingvalue or fair value less costs of disposal. Fair value for assets to bedisposed of is estimated based on comparable asset sales, solicited offers or adiscounted cash flow model.

Property andequipment are reviewed for impairment whenever indicators of impairment exist.If an indicator of impairment exists, the estimated future cash flows of theasset, on an undiscounted basis, are compared to the carrying value of theasset. If the undiscounted cash flows exceed the carrying value, no impairmentis 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.

*Derivative Instruments and Hedging Activities*

BH/REhas issued warrants to provide further consideration to the holders of theSenior Notes and Mezzanine Financing. BH/RE accounts for the senior notewarrants in EquityCo as embedded derivative instruments in accordance with SFASNo. 133, “*Accounting for Derivative Instruments andHedging Activities,*” and SFAS No. 138, “*Accountingfor Certain Derivative Instruments and Hedging Activities — an Amendment ofFASB Statement No. 133*”. The warrants issued in conjunctionwith the Mezzanine Financing contain a net cash settlement, and therefore areaccounted for in accordance with Emerging Issues Task Force (“EITF”) 00-19, “*Accounting for Derivative Financial Instruments Indexed to, andPotentially Settled in, a Company’s Own Stock*”. Both SFASNo. 133 and EITF 00-19 require that the warrants be recognized as liabilities,with changes in fair value affecting net income.

###### *RevenueRecognition and Promotional Allowances*

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

Hotel revenuerecognition criteria are generally met at the time of occupancy. Food andbeverage revenue recognition criteria are generally met at the time of service.Deposits for future hotel occupancy or food and beverage services are recordedas deferred income until revenue recognition criteria are met. Cancellationfees for hotel and food and beverage services are recognized upon cancellationby the customer as defined by a written contract entered into with thecustomer.

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*Income Taxes*

The condensedconsolidated financial statements include the operations of BH/RE and itscontrolled subsidiaries: EquityCo, MezzCo, and OpBiz. BH/RE and EquityCo arelimited liability companies and are taxed as partnerships for federal incometax purposes. MezzCo has elected to be taxed as a corporation for federalincome tax purposes. OpBiz, a wholly owned subsidiary of MezzCo, will betreated as a division of MezzCo for federal income tax purposes, andaccordingly, will also be subject to federal income taxes.

MezzCo and OpBizaccount for income taxes in accordance with SFAS No. 109, “*Accounting for Income Taxes*”. SFAS 109 requires therecognition of deferred income tax assets, net of applicable reserves, relatedto net operating loss carryforwards and certain temporary differences. Thestandard requires recognition of future tax benefits to the extent thatrealization of such benefits are more likely than not. Otherwise, a valuationallowance is applied.

###### *MembershipInterests*

As of June 30, 2006, our membership interests had not beenunitized and our members do not presently intend to unitize these membershipinterests. Accordingly, we have excluded earnings per membership unit datarequired pursuant to SFAS No. 128, “*Earnings Per Share,*”because we believe that such disclosures would not be meaningful to thefinancial statement presentation.

The Company has entered into various employment agreements,as amended, with several executives. The employment agreements have initialterms of two to five years. The employment agreements provide that theexecutives will receive a base salary with either mandatory increases or annualadjustments and annual bonus payments. In addition, depending on the terms ofthe employment agreements, these executives are entitled to options to purchasebetween 0.2% and 5% of the equity of MezzCo.

***Recently issuedaccounting pronouncements***

*SFAS No. 123(R)*

On December 16, 2004, the Financial AccountingStandards Board (“FASB”) issued Statement of Financial Accounting Standards No.123 (revised 2004), “Share-Based Payment” (“SFAS No. 123(R)”), which is arevision to SFAS No. 123, “Accounting for Stock-Based Compensation.”  SFAS No. 123(R) supersedes AccountingPrinciples Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APBNo. 25”) and amends SFAS No. 95, “Statement of Cash Flows.”  Among other items, SFAS No. 123(R) requiresthe recognition of compensation expense in an amount equal to the fair value ofshare-based payments, including employee stock options and restricted stock,granted to employees.

The Company adopted SFAS No. 123(R) on January 1, 2006using the “modified prospective” method, in which compensation cost isrecognized beginning with the effective date (a) based on the requirements ofSFAS No. 123(R) for all share-based payments granted after the effective dateand (b) based on the requirements of SFAS No. 123 for all awards granted toemployees prior to the effective date of SFAS No. 123(R) that remain unvestedon the effective date.

SFAS No. 123(R) also requires the benefits of taxdeductions in excess of recognized compensation cost to be reported as afinancing cash flow, rather than as an operating cash flow. This requirementreduced net operating cash flows and increased net financing cash flows for thethree months ended June 30, 2006.

*FASB Interpretation No. 48*

In July 2006, the FASB issued FASB Interpretation No.48 (“FIN 48”) “Accounting for Uncertainty in Income Taxes – an interpretationof FASB No. 109”, to clarify certain aspects of accounting for uncertain taxpositions, including issues related to the recognition and measurement of thosetax positions.  This interpretation iseffective for fiscal years beginning after December 15, 2006.  The Company is in the process of evaluatingthe impact of the adoption of this interpretation on the Company’s results ofoperations and financial condition.

*Accountingfor stock-based compensation*

EffectiveJanuary 1, 2006, the Company adopted the provisions of SFAS No. 123(R)requiring that compensation cost relating to share-based payment transactionsbe recognized in operating expenses. The cost is measured at the grant date,based on the calculated fair value of the award, and is recognized as anexpense over the employee’s requisite service period (generally the vestingperiod of the equity award). Prior to January 1, 2006, the Company accountedfor share-based compensation to employees in accordance with APB No. 25, andrelated interpretations. The Company also followed the disclosure requirementsof SFAS No. 123 as amended by SFAS No. 148, “Accounting for Stock-BasedCompensation-Transition and Disclosure.” The Company adopted SFAS No. 123(R)

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using the modifiedprospective method and, accordingly, financial statement amounts for priorperiods presented in this Form 10-Q have not been restated to reflect the fairvalue method of recognizing compensation cost relating to non-qualified stockoptions.

Therewas $0.1 million and $0.2 million of compensation cost related to non-qualifiedstock options recognized in operating results (included in selling, general andadministrative expenses) for the three and six months ended June 30, 2006.

Thefair value of each option award is estimated on the date of grant using theBlack-Scholes-Merton option pricing model. Expected volatility is based onhistorical volatility trends as well as implied future volatility observationsas determined by independent third parties. In determining the expected life ofthe option grants, the Company used historical data to estimate option exerciseand employee termination behavior. The expected term represents an estimate ofthe time options are expected to remain outstanding. The risk-free interestrate 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 setsforth the assumptions used to determine compensation cost for the Company’snon-qualified stock options consistent with the requirements of SFAS No.123(R):
|                                    | ** ** | **Six Months  Ended June 30,  2006** | ** ** |
|------------------------------------|------------|-----------------------------------------------------|------------|
| **Weighted-average  assumptions:** | ** ** | ** **                                          | ** ** |
| Expected stock price volatility    |       | 36                                                  | %          |
| Risk-free interest rate            |       | 3.76                                                | %          |
| Expected option life (years)       |       | 7                                                   |       |
| Expected annual  dividend yield    |       | —                                              | %          |

 

UnderAPB No. 25 there was no compensation cost recognized for the Company’snon-qualified stock options awarded in the three or six months June 30, 2005 asthese non-qualified stock options had an exercise price equal to the marketvalue of the underlying stock at the grant date. The following table sets forthpro forma information as if compensation cost had been determined consistentwith the requirements of SFAS No. 123:
|                                                                          | ** ** | **Three Months Ended  June 30, 2005** | ** ** | **Six Months Ended  June 30, 2005** | ** ** |
|--------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                               | ** ** | **(Amounts in thousands)**                      | ** ** |
| **Net  income:**                                                         | ** ** | ** **                                                | ** ** | ** **                                              | ** ** |
| As reported                                                              |       | $                                                         | (7,105     | )                                                       | $          | (6,749 | ) |
| Deduct: compensation expense under fair value-based  method (net of tax) |       | (45                                                       | )          | (89                                                     | )          |
| Pro forma                                                                |       | $                                                         | (7,150     | )                                                       | $          | (6,838 | ) |

 

The following sets forth fair value per shareinformation, including related assumptions, used to determine compensation costconsistent with the requirements of SFAS No. 123:
|                                                                                                                                                            | ** ** | **Three Months Ended  June 30, 2006** | ** ** | **Six Months  Ended  June 30, 2006** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                                                                                 | ** ** | ** **                                                | ** ** | ** **                                          | ** ** |
| **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                                                                                                                            |       | —                                                    | %          | —                                              | %          |
|                                                                                                                                                            |            |                                                           |            |                                                     |            |  |  |

 

Thetotal fair value of options vested during the three and six months ended June30, 2006 was $0.1 million and $0.2 million, respectively.

###### ***Results of Operations***

The followingtable highlights the results of operations of the Aladdin for the three and sixmonths ended June 30, 2006 as compared to the three and six months ended June30, 2005 (dollars in thousands, unaudited).

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|                                     | ** ** | **Three Months Ended June 30,** | ** ** | **Percent** | ** ** | **Six Months Ended June 30,** | ** ** | **Percent** | ** ** |
|-------------------------------------|------------|-----------------------------------------------------|------------|-------------|------------|---------------------------------------------------|------------|-------------|------------|
| ** **                          | ** ** | **2006**                                            | ** ** | **2005**    | ** ** | **Change**                                        | ** ** | **2006**    | ** ** | **2005** | ** ** | **Change** | ** ** |
| ** **                          | ** ** | ** **                                          | ** ** | ** **  | ** ** | ** **                                        | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net Revenues                        |       | $                                                   | 68,503     |        | $          | 75,373                                            |       | -9.1        | %          | $ | 141,985 |   | $ | 154,592 |   | -8.2 | % |
| Operating  Expenses:                |       |                                                |       |        |       |                                              |       |        |       |   |   |   |   |
| Casino                              |       | 17,330                                              |       | 17,156      |       | 1.0                                               | %          | 35,217      |       | 34,614 |   | 1.7 | % |
| Hotel                               |       | 10,396                                              |       | 12,485      |       | -16.7                                             | %          | 20,311      |       | 21,541 |   | -5.7 | % |
| Food and Beverage                   |       | 12,024                                              |       | 12,519      |       | -4.0                                              | %          | 23,830      |       | 25,458 |   | -6.4 | % |
| Other                               |       | 1,668                                               |       | 1,501       |       | 11.1                                              | %          | 3,992       |       | 3,843 |   | 3.9 | % |
| Selling, general and administrative |       | 18,747                                              |       | 19,366      |       | -3.2                                              | %          | 36,392      |       | 36,866 |   | -1.3 | % |
| Depreciation and amortization       |       | 5,595                                               |       | 5,898       |       | -5.1                                              | %          | 11,286      |       | 11,768 |   | -4.1 | % |
| Operating Income                    | ** ** | **$**                                               | **2,743**  | ** **  | **$**      | **6,448**                                         |       | -57.5       | %          | **$** | **10,957** | ** ** | **$** | **20,502** |   | -46.6 | % |

 

Net revenues forthe three and six months ended June 30, 2006 declined when compared to thethree and six months ended June 30, 2005. The renovation project, which iscurrently underway, was the primary reason for the decline in revenuesthroughout the property. Operating income and operating margin also declined asa result of the renovation project due to the level of disruption we areexperiencing while the structural phase of the construction is underway.

Thefollowing table highlights the various sources of our revenues and expenses forthe three and six months ended June 30, 2006 and 2005, respectively (dollars inthousands, unaudited).
|                                               | ** ** | **Three Months Ended** | ** ** | ** **  | ** ** | **Six Months Ended** | ** ** | ** **  | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|-------------|------------|--------------------------------|------------|-------------|------------|
| ** **                                    | ** ** | **June 30,**                | ** ** | **Percent** | ** ** | **June 30,**              | ** ** | **Percent** | ** ** |
| ** **                                    | ** ** | **2006**                         | ** ** | **2005**    | ** ** | **Change**                     | ** ** | **2006**    | ** ** | **2005** | ** ** | **Change** | ** ** |
| ** **                                    | ** ** | ** **                       | ** ** | ** **  | ** ** | ** **                     | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Casino revenues                               |       | $                                | 25,677     |        | $          | 31,327                         |       | -18.0       | %          | $ | 55,502 |   | $ | 64,240 |   | -13.6 | % |
| Casino expenses                               |       | 17,330                           |       | 17,156      |       | 1.0                            | %          | 35,217      |       | 34,614 |   | 1.7 | % |
| *Margin*                                      | * *   | *32.5*                           | *%*        | *45.2*      | *%*        | * *                       | * *   | *36.5*      | *%*        | *46.1* | *%* |   |   |
|                                          |       |                             |       |        |       |                           |       |        |       |   |   |   |   |
| Hotel revenues                                |       | $                                | 28,665     |        | $          | 28,727                         |       | -0.2        | %          | $ | 57,859 |   | $ | 57,964 |   | -0.2 | % |
| Hotel expenses                                |       | 10,396                           |       | 12,485      |       | -16.7                          | %          | 20,311      |       | 21,541 |   | -5.7 | % |
| *Margin*                                      | * *   | *63.7*                           | *%*        | *56.5*      | *%*        | * *                       | * *   | *64.9*      | *%*        | *62.8* | *%* |   |   |
|                                          |       |                             |       |        |       |                           |       |        |       |   |   |   |   |
| Food and  beverage revenues                   |       | $                                | 15,619     |        | $          | 18,061                         |       | -13.5       | %          | $ | 32,270 |   | $ | 37,380 |   | -13.7 | % |
| Food and  beverage expenses                   |       | 12,024                           |       | 12,519      |       | -4.0                           | %          | 23,830      |       | 25,458 |   | -6.4 | % |
| *Margin*                                      | * *   | *23.0*                           | *%*        | *30.7*      | *%*        | * *                       | * *   | *26.2*      | *%*        | *31.9* | *%* |   |   |
|                                          |       |                             |       |        |       |                           |       |        |       |   |   |   |   |
| Other revenues                                |       | $                                | 4,020      |        | $          | 3,128                          |       | 28.5        | %          | $ | 8,164 |   | $ | 7,521 |   | 8.5 | % |
| Other expenses                                |       | 1,668                            |       | 1,501       |       | 11.1                           | %          | 3,992       |       | 3,843 |   | 3.9 | % |
| *Margin*                                      | * *   | *58.5*                           | *%*        | *52.0*      | *%*        | * *                       | * *   | *51.1*      | *%*        | *48.9* | *%* |   |   |
|                                          |       |                             |       |        |       |                           |       |        |       |   |   |   |   |
| Selling, general  and administrative expenses |       | $                                | 18,747     |        | $          | 19,366                         |       | -3.2        | %          | $ | 36,392 |   | $ | 36,866 |   | -1.3 | % |
| *Margin*                                      | * *   | *27.4*                           | *%*        | *25.7*      | *%*        | * *                       | * *   | *25.6*      | *%*        | *23.8* | *%* |   |   |

 

*Casino*

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

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

Casinorevenues decreased 18.0% to $25.7 million for the three months ended June 30,2006, as compared to $31.3 million for the three months ended June 30, 2005.Table games revenue for the three months ended June 30, 2006, decreased byapproximately $3.3 million as compared to the three months ended June 30, 2005.The number of operational table units decreased 25% in connection with therenovation project with a resulting decrease in drop of 15%. Overall winpercentage of 15.8% was also down compared to

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18.1% in the samethree month period in prior year.  Slotrevenue for the three months ended June 30, 2006 decreased approximately $1.8million when compared to the same three month period in prior year. Number ofslot units on the floor decreased 21% with a resulting decrease in slot handleof 14%. Win per unit increased 13% offsetting the decrease in handle andresulting in an overall decrease in revenue of 11.9%. Combined revenues fromthe race and sports book, poker and keno decreased by $0.2 million or 18.4%when compared to the three month period ended June 30, 2005 primarily due todeclines in business levels due to the casino disruption.

Casinoexpenses increased 1.0% to $17.3 million for the three months ended June 30,2006, as compared to $17.1 million for the three months ended June 30, 2005.Operating margin declined 12.7% when comparing the same three month periods.The increase in casino expenses and decline in operating margin were mainlyattributable to the addition of promotional offers and events intended tomaintain revenue during the renovation period. We expect that continued focuson events and promotional offers will help us drive traffic throughout therenovation and that we will experience a resulting decline in operating marginwhen compared to prior year.

Casinorevenues decreased 13.6% to $55.5 million for the six months ended June 30,2006, as compared to $64.2 million for the six months ended June 30, 2005.Table games revenue for the six months ended June 30, 2006, decreased byapproximately $4.8 million as compared to the six months ended June 30, 2005.The number of operational table units decreased 17.6% in connection with therenovation project with a resulting decrease in drop of 10%. Overall winpercentage of 17.3% was also down compared to 18.5% in the same six monthperiod in prior year.  Slot revenue forthe six months ended June 30, 2006 decreased approximately $2.1 million whencompared to the same six month period in prior year. Number of slot units onthe floor decreased 20% with a resulting decrease in slot handle of 14%. Winper unit increased 17% offsetting the decrease in handle and resulting in anoverall decrease in revenue of 9%. Combined revenues from the race and sportsbook, poker and keno decreased by $1.0 million or 34.6% when compared to thesix month period ended June 30, 2005 primarily due to declines in businesslevels due to the casino disruption as well as losses on the NFL finals in thesports book during the first quarter of 2006.

Casinoexpenses increased 1.7% to $35.2 million for the six months ended June 30,2006, as compared to $34.6 million for the six months ended June 30, 2005.Operating margin declined 9.6% when comparing the same six month periods. Inorder to maintain revenue in the casino during the renovation period, we haveimplemented additional promotional offers and events resulting in a decline inoperating profit margin when compared to prior year.  We expect to continue these promotionaloffers and events to assist in increasing traffic while the casino floor isdisrupted.

*Hotel*

Hotel revenue isderived from rooms and suites rented to guests. “average daily rate” is anindustry specific term used to define the average amount of revenue per rentedroom per day. “occupancy percentage” defines the total percentage of roomsoccupied and is computed by dividing the number of rooms occupied by the totalnumber of rooms available. Hotel revenue is recognized at the time the room isprovided to the guest.

Hotelrevenues of $28.7 million for the three months ended June 30, 2006 werecomparable to the three months ended June 30, 2006. Hotel occupancy was alsocomparable to the same period in previous year at  98.8% for the three months ended June 30,2006, as compared to 98.9% for the three months ended June 30, 2005. Averagedaily room rates of $123 for the three months ended June 30, 2006 werecomparable to the three months ended June 30, 2005. We were able to maintainhotel revenues during the renovation period due to continued strong demand forrooms in the Las Vegas market and the improved marketing channels of Starwood.

Hotelrevenues of $58.0 million for the six months ended June 30, 2006, werecomparable to the six months ended June 30, 2005. Hotel occupancy percentagewas 97.3% for the six months ended June 30, 2006, as compared to 96.5% for thesix months ended June 30, 2005. Average daily room rates decreased to $127 forthe six months ended June 30, 2006, as compared to $128 for the six monthsended June 30, 2005.

Hotelexpenses decreased 16.7% to $10.4 million for the three months ended June 30,2006, as compared to $12.5 million for the three months ended June 30, 2005.Hotel expenses decreased 5.7% to $20.3 million for the six months ended June30, 2006, as compared to $21.5 million for the six months ended June 30, 2005.Hotel margins increased 7.2 and 2.1 percentage points over the samethree-and-six month periods.  Thedecrease in hotel expenses and increase in hotel margins as compared to thesame period in previous year is the result elimination of additional repair andmaintenance expenses that were recorded in the three months ended June 30,2005.  Repair and maintenance expense inthe previous year was significantly higher than our normal run rate andincluded replacement of hotel amenities.

*Food andBeverage*

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

Foodand beverage revenues decreased 13.5% to $15.6 million for the three monthsended June 30, 2006, as compared to $18.1 million for the three months endedJune 30, 2005. Food and beverage revenues decreased 13.7% to $32.3 million forthe the six months ended June 30, 2006, as compared to the $37.4 million forthe six months ended June 30, 2005. The decline in food revenue was the resultof cover declines in all outlets due to construction disruption. Beveragerevenue declines were directly attributed the closing of outlets for theconstruction. Those closed beverage outlets were replaced by portable casinobars that did not pick up the lost revenue.

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Foodand beverage expenses decreased 4.0% to $12.0 million for the three monthsended June 30, 2006, as compared to $12.5 million for the three months endedJune 30, 2005. Food and beverage expenses decreased 6.4% to $23.8 million forthe six months ended June 30, 2006, as compared to $25.5 million for the sixmonths ended June 30, 2005. Food and beverage margins decreased 7.7 and 5.7percentage points in comparing the same three and six month periods. Food andbeverage payroll and benefit expenses increased as a result of the addition ofthe culinary union contract in October 2005, but those increases were more thanoffset by expense control measures including flexible staffing based on coverand revenue reductions during the renovation period.

*Other*

Other revenueincludes entertainment sales, retail sales, telephone and other miscellaneousincome and is recognized at the time the goods or services are provided to theguest.

Otherrevenues increased 28.5% to $4.0 million for the three months ended June 30,2006, as compared to $3.1 million for the three months ended June 30, 2005 andincreased 8.5% to $8.2 million for the six months ended June 30, 2006, ascompared to $7.5 million for the six months ended June 30, 2005. The increasesin other revenue when compared to prior year is primarily due to additionalrental income from tenants including timeshare sale kiosks for which we receiverent on a percentage of sales basis.

Otherexpenses increased 11.1% to $1.7 million for the three months ended June 30,2006, as compared to $1.5 million for the three months ended June 30, 2005 andincreased 3.9% to $4.0 million for the six months ended June 30, 2006, ascompared to $3.8 million for the six months ended June 30, 2005. Expensesrelated to the operation of a temporary casino lounge including a nightly bandwere absorbed to offset the loss of entertainment due to the showroom closingfor renovation which occurred in April 2005.

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

SG&Aexpenses decreased 3.2% to $18.7 million for the three months ended June 30,2006, as compared to $19.4 million for the three months ended June 30, 2005 anddecreased 1.3% to $36.4 million for the six months ended June 30, 2006, ascompared to $36.9 million for the six months ended June 30, 2005. SG&Aexpenses as a percentage of net revenues remained relatively consistent whencomparing the same three and six month periods. In reaction to the revenuedeclines related to the renovation, we implemented savings strategies to reducethe level of marketing and fixed admin expenses, including payroll, which willremain in place for the remainder of 2006.

*Depreciationand Amortization*

Depreciationand amortization expense of $5.6 million and $11.3 million for the three andsix months ended June 30, 2006 declined when compared to $5.9 million and $11.8million in expense for the three and six months ended June 30, 2005. Assetadditions resulting from the renovation project will not begin depreciatinguntil construction is complete and they are placed in service.

*NetInterest Expense*

Netinterest expense of  $13.3 million and$27.9 million for the three and six months ended June 30, 2006 compares to$13.8 million and $27.4 million for the three and six months ended June 30,2005. Interest expense for the three and six months ended June 30, 2006includes capitalized interest related to the project.  Excluding the effect of capitalized interest,interest expense has increased as a direct result of increases in LIBOR for thecomparable three and six month periods in prior year.  Interest expense on the Credit Facility iscalculated using LIBOR plus an applicable margin.

###### ***Liquidity and Capital Resources***

Duringthe six months ended June 30, 2006, we generated cash flows from operatingactivities of approximately $3.2 million. Cash generated from operations duringthe period was primarily due to increases in collection of receivables. We alsohave restricted cash and cash equivalents of approximately $74.6 million, whichis designated to be used for costs associated with the renovation andre-theming of the Aladdin into the PH Resort.

Ourprimary cash requirements for the remainder of 2006 are expected to include(i) up to approximately $74.6 million in capital expenditures related tothe renovation project and (ii) approximately $29.0 million in interestand principal payments on our debt.

We believe thatcash generated from operations, the capital invested in OpBiz in connectionwith our acquisition of the Aladdin and available working capital, includingthe cash that we acquired from Aladdin Gaming under the purchase agreement,will be adequate to meet the anticipated working capital, renovation and debtservice obligations of OpBiz for at least the next 12 months ofoperations. We may have other liquidity needs, such as tax distributions to themembers of EquityCo and BH/RE, and we believe that we will have adequate cashto meet these needs if they should arise. The Credit Agreement allows OpBiz tomake tax distributions.

There can be noassurance that we have accurately estimated our liquidity needs, or that wewill not experience unforeseen events that may materially increase our need forliquidity to fund our operations or capital expenditure programs or decreasethe amount of cash generated from our operations. We have experienced areduction in cash generated by our operations during the planned renovations tothe Aladdin and expect those reductions to continue through the remainder of2006.  The terms of the Credit Agreementaddress the anticipated reductions and provide for appropriate remedies. Forexample, the covenant in the Credit Agreement requiring

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OpBiz to achievespecified levels of earnings before interest, taxes, depreciation andamortization (“EBITDA”) during the first two years of the Credit Agreementincludes a provision whereby the members of BH/RE may cure the default bymaking an equity contribution equal to the difference between the requiredminimum EBITDA and actual EBITDA for the measurement period.  We expect that we will have a shortfall torequired EBITDA for the period ended August 31, 2006, but we have been advisedby our members that they intend to make an equity contribution equal to theamount of the shortfall within the required 90 day period.  If such equity contribution is not made,however, we would seek a waiver of such event of default, but there can be noassurance that it would be given.

***Descriptionof Certain Indebtedness***

*CreditAgreement*

The Aladdinacquisition and the planned renovations were funded by the issuance of $510million of secured notes to Aladdin Gaming’s secured creditors pursuant to aCredit Agreement. OpBiz’s obligations under the Credit Agreement are secured byliens on all of its assets, including a mortgage on its real property, theHotel, the Casino and the TPA, and security interests in our accountsreceivable, inventory, equipment and intangible assets, excluding the TimeshareLand. The Credit Agreement is guaranteed by MezzCo and MezzCo secured itsguarantee by pledging its membership interests in OpBiz to the lenders. TheCredit Agreement matures on August 31, 2010.

Theloans under the Credit Agreement are evidenced by $500 million of Term Loan Anotes and $10 million of Term Loan B notes. Upon issuance of the notes, BH/REsimultaneously made a $14 million cash payment to the holders of the Term LoanA notes to reduce the principal amount of the Term Loan A notes to $486 millionand obtained a release of their lien on the Timeshare Land.

Thescheduled principal payments on the Term Loan A notes are as follows:

·        $1.25million on the first day of each fiscal quarter during the period beginning onAugust 31, 2006 and ending on August 31, 2007;

·        $3.75million on the first day of each fiscal quarter during the period beginning onAugust 31, 2007 and ending on August 31, 2008;

·        $5.0million on the first day of each fiscal quarter during the period beginning onAugust 31, 2008 and ending on August 31, 2009;

·        $6.25million on the first day of each fiscal quarter during the period beginning onAugust 31, 2009 and ending on August 31, 2010;

·        thethen unpaid balance amount of Term Loan A notes on August 31, 2010.

OpBizpays interest on the outstanding Term Loan A notes quarterly, in cash, at theLondon Inter-Bank Offered Rate, or LIBOR, plus an applicable margin thatincreases over time. Until the earlier of August 31, 2007 or OpBiz’s accumulationof certain permitted cash reserves, OpBiz’s interest payment will not exceedits quarterly EBITDA, reduced by certain permitted deductions (as defined inthe Credit Agreement), divided by a factor of 1.20. Interest on the Term Loan Bnotes will accrue at a rate of LIBOR plus 4% and will be added quarterly to theoutstanding principal amount of the Term Loan B notes and will be paid whenOpBiz pays off the Term Loan B notes. OpBiz is also required to pay an annualadministrative fee and certain other fees and expenses of the lender under theCredit Agreement.

OpBizis required to prepay amounts outstanding under the Credit Agreement:

·        withexcess cash flow (as defined in the Credit Agreement) after certain permittedcash reserves are accumulated;

·        inscheduled quarterly amounts beginning after August, 31, 2006;

·        withcertain amounts received in connection with the development of the TimeshareLand adjacent to the Desert Passage (as defined in the underlying agreement);

·        withan amount equal to the difference between defined renovation capitalexpenditures and what was actually spent thereon if (i) an aggregateamount of $72.0 million is not spent on renovation capital expenditures byAugust 31, 2006, or (ii) an aggregate amount of $81.0 million is notspent on renovation capital expenditures by February 28, 2007 or(iii) an aggregate amount of $90.0 million is not spent on renovationcapital expenditures by August 31, 2007; and

·        withthe proceeds of certain asset sales.

Inparticular, after OpBiz accumulates certain permitted cash reserves, OpBiz isrequired to pay 100% of its excess cash flow (as defined in the CreditAgreement) from operations to the lenders under the Credit Agreement. Thatpercentage decreases to 75%, then 50%, if OpBiz meets certain targeted ratiosof total debt to EBITDA, or certain leverage ratios, for any two consecutivefiscal quarters.

OurCredit Agreement also requires that we spend not less than $90,000,000 onrenovation capital expenditures by 

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August 31,2007. If $72,000,000 of such amount is not spent by August 31, 2006, weare required to prepay amounts outstanding under the Credit Agreement with anamount equal to the difference between $72,000,000 and the amount actuallyspent and paid on renovation capital expenditures. As of August 31, 2006,we have failed to satisfy such minimum spend requirement by approximately $35.6 million.OpBiz has proposed to enter into gross maximum price contracts with contractorsfor a substantial portion of the renovation work. Under the terms of theproposed contracts, OpBiz would make advanced payments to the contractors inexchange for a discount on the total cost. The cumulative payments to thecontractors, project professionals and consultants under such contracts wouldexceed the minimum spend requirements defined in the Credit Agreement. Webelieve that OpBiz is entitled to make these payments. The lenders under theCredit Agreement, however, have been unwilling to make the necessary fundsavailable to us to enter into such contracts. As a result, we are unable tospend $72.0 million on renovation capital expenditures by August 31, 2006.Accordingly, OpBiz may be required to make a mandatory prepayment of amountsoutstanding under the Credit Agreement for the renovation spend shortfall ofapproximately $35.6 million. Because of our inability to satisfy the spendrequirement with advance payments under the contracts resulting from thelenders’ position on providing funds, we have not yet determined if we willmake such payment. A failure to make such payment when due would result in anevent of default under the Credit Agreement. In light of the lenders’ action,the Company may dispute whether an event of default has occurred.

If there were such an event of default, the holders ofthe indebtedness under the Credit Agreement could cause all amounts outstandingwith respect to that debt to be due and payable immediately.  In addition, any event of default ordeclaration of acceleration under one debt instrument could result in an eventof default under one or more of our other debt instruments.  It is likely that, if the defaulted debt isaccelerated, our liquid assets and cash flow will not be sufficient to fullyrepay borrowings under our outstanding debt instruments and we cannot assureyou that we would be able to refinance or restructure such debt.  Further, if we are unable to repay, refinanceor restructure our indebtedness under the Credit Agreement, the lenders underthe Credit Agreement could proceed against the collateral securing thatindebtedness.

OpBizcurrently projects a shortfall to the minimum EBITDA requirement for the twelvemonth period ended August 31, 2006 of approximately $5 million.  The Credit Agreement contains provisions tosatisfy this covenant during the first two years of its applicability with anequity contribution equal to the difference between the minimum required EBITDAand actual EBITDA within 90 days of the measurement date.  The members of BH/RE have advised us thatthey intend to make the required contribution within the prescribed timeframeand, accordingly, OpBiz does not anticipate an event of default fornon-compliance with this covenant. If such equity contribution is not made, wewould seek a waiver of such default, however, there can be no assurance that itwould be granted by the lenders under the Credit Agreement.  Mimimum EBITDA covenants beyond August 31,2006 do not provide for the right to cure a default with an equitycontribution.  In the event that we donot have sufficient EBITDA for the twelve month period ended August 31, 2007,it would constitute an event of default unless we obtain a waiver from thelenders under the Credit Agreement.

Inaddition to the detailed covenants described herein, the Credit Agreementcontains customary events of default, including a change of control of OpBiz,the occurrence of a default under the terms of any indebtedness of MezzCo, adefault by OpBiz under the Hotel management contract or termination of Sheratonas the manager of the Hotel (unless OpBiz replaces Sheraton with anotherapproved manager within 30 days of such termination), a default or terminationof the Planet Hollywood license agreement and certain defaults under theagreements with Boulevard Invest or Northwind Aladdin.

BH/REhas issued warrants to purchase 2.94% of its ownership interest in EquityCo tothe lenders under the Credit Agreement. The warrants can only be exercised uponthe occurrence of a (i) liquidity event or distribution (such as throughthe sale of the hotel/casino); (ii) a public sale of equity securities ofEquityCo, MezzCo or OpBiz; or (iii) payment in full of the obligationsunder the Credit Agreement. The warrants can either be settled in cash or inother membership interests upon exercise. The estimated fair value of thewarrants was approximately $0.1 million as of June 30, 2006. These warrants arerecorded separately from the related debt within other long-term liabilities.

*Mezzanine Financing*

InAugust 2004, MezzCo entered into the Mezzanine Financing with a group ofpurchasers. Pursuant to the Mezzanine Financing, MezzCo issued $87 million of16% Senior Secured Subordinated Notes and warrants to purchase 17,500 of itsunits representing membership interests equal to 17.5% of the fully dilutedequity of MezzCo. The gross offering proceeds of the Mezzanine Financing weredeposited into an escrow account and, in conjunction with the closing of theAladdin acquisition, were used to (i) pay approximately $16.1 million offees and expenses related to the acquisition of the Aladdin, (ii) fund the$14 million lien release payment required under the Credit Agreement, and(iii) fund a portion of the planned renovations to the Aladdin. The notesmature in August 2011 and accrue interest at a rate of 16% per annum.Interest on the notes is payable-in-kind or, at the option of MezzCo, in cash.

Thewarrants are exercisable at any time, subject to the approval of the Nevadagaming authorities, at a purchase price of $0.01 per unit. Subject to theapproval of the Nevada gaming authorities, the warrants may be exercised topurchase either voting or non-voting membership interests of MezzCo or acombination thereof. Currently, all of MezzCo’s voting membership interests arerepresented by units owned by EquityCo. In addition to customary anti-dilutionprotections, the number of units representing MezzCo membership interestsissuable upon exercise of the warrants may be increased from time-to-time uponthe occurrence of certain events as described in the warrants. The maximumaggregate increase is 19%, following which the warrants would represent rightsto purchase 36.5% of the units representing the fully diluted equity of MezzCo.Holders of the warrants and any securities issued upon exercise of the warrantsmay require MezzCo to redeem such securities commencing in August 2011 ata redemption price based upon a formula set forth in the warrants. Starting inAugust 2008, in the event the Company fails to achieve certain operationalthresholds, the holders of the MezzCo warrants, and securities issued uponexercise thereof, have the right to assume control of MezzCo and OpBiz andconduct a sale of the equity of, or all or substantially all of the assets of,either MezzCo or OpBiz provided that all Control Conditions (as defined in theInvestor Rights Agreement) are met. These rights are subject to(i) repayment in full of all indebtedness that is senior to the notes(including all indebtedness of OpBiz under the Credit Agreement),(ii) certain covenants related to OpBiz’s ability to achieve targetedlevels of EBITDA and (iii) the prior approval of the Nevada gamingauthorities. These rights expire upon

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completion of apublic offering by MezzCo or OpBiz. In connection with the Mezzanine Financing,our obligation to make expenditures on renovations to the Aladdin was increasedfrom $90 million, as required under the Credit Agreement, to $100 million.

As ofJune 30, 2006, the MezzCo financing was recorded net of the unamortized balanceof the warrants of approximately $3.7 million. The estimated fair value of thewarrants was approximately $4.1 million at June 30, 2006 and December 31,2005, and is recorded separately from the related debt within other long-termliabilities.

*EnergyServices Agreement*

Northwind owns andoperates a central utility plant on land leased from us. The plant supplies hotand cold water and emergency power to the Aladdin under a contract betweenAladdin Gaming and Northwind. We have assumed the energy service agreement,which expires in 2020. Under the agreement, we are required to pay Northwind amonthly consumption charge, a monthly operational charge, a monthly debtservice payment and a monthly return on equity payment. Payments under theNorthwind agreement total approximately $0.5 million per month.

## **ITEM 3.****QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

Marketrisk is the risk of loss arising from adverse changes in market rates andprices, such as interest rates, foreign currency exchange rates and commodityprices. Our primary exposure to market risk is interest rate risk associatedwith our long-term debt. We pay interest on the outstanding Term Loan A notesquarterly, in cash, at the London Inter-Bank Offered Rate, or LIBOR, plus anapplicable margin that increases over time. Interest on the Term Loan B noteswill accrue at a rate of LIBOR plus 4% and will be added quarterly to theoutstanding principal amount of the Term Loan B notes and will be paid when wepay off the Term Loan B notes. An increase of one percentage point in theaverage interest rate applicable to the variable rate debt outstanding at June30, 2006, would increase our annual interest expense for the remainder of 2006by approximately $2.5 million.

## **ITEM 4.****CONTROLS ANDPROCEDURES**

Our management, with the participation of ourprincipal executive and chief financial officer, has evaluated theeffectiveness of our disclosure controls and procedures (as defined inRules 13a-15(e) and 15d-15(e) under the Securities Exchange Actof 1934, as amended (the “Exchange Act”)), as of June 30, 2006. Based on theirevaluation, our principal executive and principal financial officers concludedthat our disclosure controls and procedures were effective as of June 30, 2006.

Therehas been no change in our internal control over financial reporting (as definedin Rules 13a-15(f) and 15-d-15(f) under the Exchange Act) thatoccurred during our fiscal quarter ended June 30, 2006, that has materiallyaffected, or is reasonably likely to materially affect, our internal controlover financial reporting.

# **PART II —  OTHER INFORMATION**

**ITEM1A.  RISK FACTORS**

The following riskfactors should be read together with the risk factors contained in Item 1A ofour Annual Report on Form 10-K for the year ended December 31, 2005.

***Risks Related to the Aladdin Renovation***

*Our renovationbudget is only an estimate and actual costs may exceed the budget.*

The final plansand specifications for the renovation of the Aladdin have not been finalized.Starwood and the lenders under the Mezzanine Financing have the right toapprove the total scope and cost of the renovation once finalized.  We currently estimate that renovation costswill be approximately $165 million. While we believe that the budget isreasonable, the costs are an estimate and actual costs may be higher thanexpected. Construction projects like the proposed renovations to the Aladdinentail significant risks, including:

·       unanticipated costincreases;

·       unforeseen engineering,environmental and/or geographical problems;

·       shortages of materials orskilled labor;

·       work stoppages; and

·       weather interference.

Construction, equipment or staffing problems ordifficulties in obtaining any of the requisite licenses, permits andauthorizations from regulatory authorities could increase the total cost of therenovations, delay or prevent the renovations or otherwise affect the

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design and features ofthe PH Resort. We cannot assure you that the actual renovation costs will notexceed the budgeted amounts. Failure to complete the renovations within ourbudget may negatively affect our financial condition and results of operations.

*We may not be ableto fund the intended scope of the project or cost overruns.*

We do not have commitments for funding in excess of$100 million.  Such additional financingcould be provided by our members with equity contributions or from additionaldebt financing. We cannot assure you, however, that such funding, if necessary,will be available on acceptable terms and conditions. Substantially all of ourinternally generated funds will be used to pay interest and principal under theCredit Agreement and therefore, cannot be used to fund the renovation.  If we do not obtain additional funding forthe scope of the project as planned or if we experience cost overruns or otherevents or circumstances that would cause us to require funding in excess ofexisting capital commitments, we might not be able to complete the renovationsor execute the business plans for the PH Resort.

*Renovations to theAladdin have disrupted  and  may continue in the future to disrupt ouroperations.*

We intend to continue operating the Hotel and Casinounder the Aladdin name during renovations. We are conducting the renovation inphases and are otherwise attempting to reduce disruption to our business to theextent practicable. We have experienced reductions in the planned cash flowgenerated from operations during the renovation.  We cannot assure you that the renovationprocess will not result in additional decreases in Hotel occupancy or use of theCasino, either of which would have a continued negative impact on our resultsof operations and operating cash flow.

***RisksRelated to Our Substantial Indebtedness***

*Our substantialindebtedness could adversely affect our financial results.*

As of June 30, 2006, we have $495.4 million ofindebtedness under the Credit Agreement, approximately $30.1million ofindebtedness under the Energy Service Agreement and approximately $115.7million of indebtedness incurred by MezzCo. The indebtedness under the CreditAgreement is secured by a first lien on all of the assets of OpBiz and a pledgeof MezzCo’s equity interest in OpBiz.

The CreditAgreement provides that substantially all of our excess cash flow (as definedin the Credit Agreement) will be used to pay down indebtedness of OpBiz afterOpBiz establishes a $30 million cash reserve from operating cash flow.Therefore, we will have limited cash flow available to fund working capital,capital expenditures permitted under the Credit Agreement and other generalcorporate activities and to make distributions to our owners, other thanlimited distributions to pay interest and principal on indebtedness of MezzCo,and distributions to pay income taxes. Our substantial indebtedness could alsohave the following additional consequences:

·       limit our ability to obtainadditional financing in the future;

·       increase our vulnerabilityto general adverse economic and industry conditions;

·       limit flexibility inplanning for, or reacting to, changes in our business and industry; and

·       place us at a disadvantagecompared to less leveraged competitors.

The occurrence of any one of these events could have amaterial adverse effect on our business, financial condition, results ofoperations or prospects.

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*Our future cash flows may not be sufficient to meetour debt obligations.*

Our ability tomake payments on our indebtedness depends on our ability to generate sufficientcash flow in the future. Our ability to generate cash flow will depend uponmany factors, some of which are beyond our control, including:

·       our ability to complete therenovation of the Aladdin into the PH Resort as planned;

·       our ability to minimizedisruption to our business during the renovation process;

·       demand for our services;

·       economic conditionsgenerally, as well as in Nevada and within the casino industry;

·       competition in the hoteland casino industries;

·       legislative and regulatoryfactors affecting our operations and business; and

·       our ability to hire andretain employees at a reasonable cost.

We cannot assure you that we will generate cash flowfrom operations in an amount sufficient to make payments on our indebtedness orto fund other liquidity needs. Our inability to generate sufficient cash flowwould have a material adverse effect on our financial condition and results ofoperations. In addition, if we are not able to generate sufficient cash flow toservice our indebtedness, we may need to refinance or restructure ourindebtedness, sell assets, reduce or delay capital investment, or seek to raiseadditional capital. If we cannot implement one or more of these alternatives,we may not be able to meet our payment obligations under our indebtedness.

*The CreditAgreement imposes restrictions on our operations.*

The CreditAgreement imposes operating and financial restrictions on us. Theserestrictions include, among other things, limitations on our ability to:

·       incur additional debt orrefinance existing debt;

·       create liens or otherencumbrances;

·       make distributions withrespect to our, or our subsidiaries’, equity (other than distributions for taxobligations) or make other restricted payments;

·       make investments, capitalexpenditures, loans or other guarantees;

·       sell or otherwise disposeof our assets; and

·       merge or consolidate withanother entity.

*Our failure to comply with the covenants contained inthe Credit Agreement, including as a result of events beyond our control, couldresult in an event of default.*

Our Credit Agreement contains certain financial covenants, includingminimum levels of earnings before interest, tax, depreciation and amortization,which we refer to as EBITDA, a minimum ratio of EBITDA to cash interest expenseand a maximum ratio of indebtedness to EBITDA. We currently project a shortfall to the minimum EBITDA requirement forthe twelve month period ended August 31, 2006 of approximately $5 million.  The Credit Agreement contains provisions tosatisfy this covenant during the first two years of its applicability with anequity contribution equal to the difference between the minimum required EBITDAand actual EBITDA within 90 days of the measurement date.  The members of BH/RE have advised us thatthey intend to make the required contribution within the prescribed timeframeand, accordingly, we do not anticipate an event of default for non-compliancewith this covenant.  If such equitycontribution is not made, however, we would seek a waiver of such event ofdefault, but there can be no assurance that it would be granted by the lendersunder the Credit Agreement.  MinimumEBITDA covenants beyond August 31, 2006 do not provide for the right to cure adefault with an equity contribution.  Inthe event that we do not have sufficient EBITDA for the twelve month periodended August 31, 2007, it would constitute an event of default unless we obtaina waiver from the lenders under the Credit Agreement.

OurCredit Agreement also requires that we spent not less than $90,000,000 onrenovation capital expenditures by August 31, 2007. If $72,000,000 of suchamount is not spend by August 31, 2006, we are required to prepay amountsoutstanding under the Credit Agreement with an amount equal to the differencebetween $72,000,000 and the amount actually spent and paid on renovationcapital expenditures. As of August 31, 2006, we have failed to satisfysuch minimum spend requirement by approximately $35.6 million. OpBiz hasproposed to enter into gross maximum price contracts with contractors for asubstantial portion of the renovation work. Under the terms of the proposedcontracts, OpBiz would make advanced payments to the contractors in exchangefor a discount on the total cost. The cumulative payments to the contractors,project professionals and consultants under such contracts would exceed theminimum spent requirements defined in the Credit Agreement. We believe thatOpBiz is entitled to make these payments. The lenders under the CreditAgreement, however, have been unwilling to make the necessary funds availableto us to enter into such contracts. As a result, we are unable to spend $72.0million on renovation capital expenditures by August 31, 2006.Accordingly, OpBiz may be required to make a mandatory prepayment of amountsoutstanding under the Credit Agreement for the renovation spend shortfall ofapproximately $35.6 million. Because of our inability to satisfy the spendrequirement with advance payments under the contracts resulting from thelenders’ position on providing funds, we have not yet determined if we willmake such payment. A failure to make such payment when due would result in anevent of default under the Credit Agreement. In light of the lenders’ action,the Company may dispute whether an event of default has occurred.

If there were suchan event of default, the holders of the indebtedness under the Credit Agreementcould cause all amounts outstanding with respect to that debt to be due andpayable immediately.  In addition, anyevent of default or declaration of acceleration under one debt instrument couldresult in an event of default under one or more of our other debt instruments.  It is likely that, if the defaulted debt isaccelerated, our liquid assets and cash flow will not be sufficient to fullyrepay borrowings under our outstanding debt instruments and we cannot assureyou that we would be able to refinance or restructure the payments of thosedebt securities.  Further, if we areunable to repay, refinance or restructure our indebtedness under the CreditAgreement, the lenders under the Credit Agreement could proceed against thecollateral securing that indebtedness.

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## **ITEM 6.****EXHIBITS**

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

 

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

 

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

 

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

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**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.
|               | BH/RE,  L.L.C.                         |
|--------------------|----------------------------------------|
|               |                                   |
|               |                                   |
| September  1, 2006 | By:                                    | /s/  Donna Lehmann |   |
|               | Donna  Lehmann                         |
|               | Treasurer  and Chief Financial Officer |

 

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**EXHIBIT INDEX**
| 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.    |

 

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