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

**WASHINGTON, D.C. 20549**

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**FORM 10-Q**

**(MarkOne)**
| **x** | ** ** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|------------|--------------------------------------------------------------------------------------------------------|

 

**For the quarterly period ended September 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 |
|---------------------------|--------|---------------------|--------|-------------------------------|

 

Indicate by check markwhether the Registrant is a shell company (as defined in Rule 12b-2 of theExchange 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**

**ITEM 1.  FINANCIAL STATEMENTS**

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

**CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION**

**(amounts inthousands)**
| ** **                                   | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                   | ** ** | **2006**               | ** ** | **2005 ***       | ** ** |
| ** **                                   | ** ** | **(unaudited)**        | ** ** | ** **            | ** ** |
| ASSETS                                       |       |                   |       |                  |       |
| Current assets:                              |       |                   |       |                  |       |
| Cash and cash  equivalents                   |       | $                      | 46,436     |                  | $          | 41,419 |   |
| Receivables, net                             |       | 14,663                 |       | 19,793                |       |
| Inventories                                  |       | 1,599                  |       | 2,165                 |       |
| Prepaid expenses                             |       | 4,933                  |       | 4,913                 |       |
| Deposits and  other current assets           |       | 1,516                  |       | 3,058                 |       |
| Total current  assets                        |       | 69,147                 |       | 71,348                |       |
|                                         |       |                   |       |                  |       |
| Property and equipment,  net                 |       | 505,752                |       | 485,746               |       |
| Restricted cash and  cash equivalents        |       | 57,786                 |       | 87,787                |       |
| Other assets, net                            |       | 7,606                  |       | 9,614                 |       |
| Total assets                                 |       | $                      | 640,291    |                  | $          | 654,495 |   |
|                                         |       |                   |       |                  |       |
| LIABILITIES AND  MEMBERS’ DEFICIT       |       |                   |       |                  |       |
|                                         |       |                   |       |                  |       |
| Current liabilities:                         |       |                   |       |                  |       |
| Current portion  of long-term debt           |       | $                      | 6,548      |                  | $          | 2,671 |   |
| Accounts payable                             |       | 4,482                  |       | 3,359                 |       |
| Accrued payroll  and related                 |       | 13,436                 |       | 13,373                |       |
| Accrued interest  payable                    |       | 8,673                  |       | 6,896                 |       |
| Accrued taxes                                |       | 2,493                  |       | 2,994                 |       |
| Accrued expenses                             |       | 6,771                  |       | 6,183                 |       |
| Deposits                                     |       | 4,606                  |       | 4,563                 |       |
| Other current  liabilities                   |       | 5,847                  |       | 6,159                 |       |
| Due to  affiliates                           |       | 1,411                  |       | 1,591                 |       |
| Total current  liabilities                   |       | 54,267                 |       | 47,789                |       |
|                                         |       |                   |       |                  |       |
| Long-term debt, less  current portion        |       | 615,969                |       | 604,877               |       |
| Other long-term  liabilities                 |       | 4,204                  |       | 4,229                 |       |
| Total  liabilities                           |       | 674,440                |       | 656,895               |       |
|                                         |       |                   |       |                  |       |
| Commitments and  contingencies (Note 9)      |       |                   |       |                  |       |
|                                         |       |                   |       |                  |       |
| Minority interest                            |       | 9,092                  |       | 13,863                |       |
|                                         |       |                   |       |                  |       |
| Members’ deficit:                       |       |                   |       |                  |       |
| Member’s equity                         |       | 21,500                 |       | 21,500                |       |
| Accumulated  deficit                         |       | (64,741                | )          | (37,763               | )          |
| Total members’  deficit                 |       | (43,241                | )          | (16,263               | )          |
| Total liabilities and  members’ deficit |       | $                      | 640,291    |                  | $          | 654,495 |   |

 

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

 

* Condensed fromaudited 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 September 30,** | ** ** |
|-------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                          | ** ** | **2006**                                                 | ** ** | **2005** | ** ** |
|                                |       |                                                     |       |   |   |
| Operating  revenues:                |       |                                                     |       |   |   |
| Casino                              |       | $                                                        | 25,099     |   | $ | 32,629 |   |
| Hotel                               |       | 25,714                                                   |       | 25,522 |   |
| Food and beverage                   |       | 14,828                                                   |       | 18,823 |   |
| Other                               |       | 3,084                                                    |       | 4,201 |   |
| Gross revenues                      |       | 68,725                                                   |       | 81,175 |   |
| Promotional allowances              |       | (4,794                                                   | )          | (6,802 | ) |
| Net revenues                        |       | 63,931                                                   |       | 74,373 |   |
|                                |       |                                                     |       |   |   |
| Operating costs  and expenses:      |       |                                                     |       |   |   |
| Casino                              |       | 16,459                                                   |       | 19,793 |   |
| Hotel                               |       | 10,201                                                   |       | 8,931 |   |
| Food and beverage                   |       | 11,578                                                   |       | 12,654 |   |
| Other                               |       | 641                                                      |       | 2,630 |   |
| Selling, general and administrative |       | 20,080                                                   |       | 19,443 |   |
| Depreciation and amortization       |       | 5,605                                                    |       | 5,944 |   |
|                                |       | 64,564                                                   |       | 69,395 |   |
|                                |       |                                                     |       |   |   |
| Operating (loss)  income            |       | (633                                                     | )          | 4,978 |   |
|                                |       |                                                     |       |   |   |
| Other income  (expense):            |       |                                                     |       |   |   |
| Interest expense, net               |       | (14,190                                                  | )          | (14,240 | ) |
| Minority interest                   |       | 2,220                                                    |       | 1,277 |   |
| Gain on warrant valuation           |       | 33                                                       |       | 2 |   |
| Other income                        |       | —                                                   |       | 12 |   |
|                                |       | (11,937                                                  | )          | (12,949 | ) |
|                                |       |                                                     |       |   |   |
| Pre-tax loss                        |       | (12,570                                                  | )          | (7,971 | ) |
| Income tax  benefit                 |       | —                                                   |       | 918 |   |
| Net loss                            |       | $                                                        | (12,570    | ) | $ | (7,053 | ) |

 

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

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| ** **                          | ** ** | **Nine Months Ended September 30,** | ** ** |
|-------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                          | ** ** | **2006**                                                | ** ** | **2005** | ** ** |
| ** **                          | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| Operating  revenues:                |       |                                                    |       |   |   |
| Casino                              |       | $                                                       | 80,601     |   | $ | 96,869 |   |
| Hotel                               |       | 83,572                                                  |       | 83,486 |   |
| Food and beverage                   |       | 47,099                                                  |       | 56,203 |   |
| Other                               |       | 11,248                                                  |       | 11,722 |   |
| Gross revenues                      |       | 222,520                                                 |       | 248,280 |   |
| Promotional allowances              |       | (16,604                                                 | )          | (19,315 | ) |
| Net revenues                        |       | 205,916                                                 |       | 228,965 |   |
|                                |       |                                                    |       |   |   |
| Operating costs  and expenses:      |       |                                                    |       |   |   |
| Casino                              |       | 51,676                                                  |       | 54,407 |   |
| Hotel                               |       | 30,512                                                  |       | 30,472 |   |
| Food and beverage                   |       | 35,408                                                  |       | 38,112 |   |
| Other                               |       | 4,633                                                   |       | 6,473 |   |
| Selling, general and administrative |       | 56,472                                                  |       | 56,309 |   |
| Depreciation and amortization       |       | 16,891                                                  |       | 17,712 |   |
|                                |       | 195,592                                                 |       | 203,485 |   |
|                                |       |                                                    |       |   |   |
| Operating income                    |       | 10,324                                                  |       | 25,480 |   |
|                                |       |                                                    |       |   |   |
| Other income  (expense):            |       |                                                    |       |   |   |
| Interest expense, net               |       | (42,098                                                 | )          | (41,659 | ) |
| Minority interest                   |       | 4,771                                                   |       | 2,427 |   |
| Gain (loss) on warrant valuation    |       | 24                                                      |       | (15 | ) |
| Other income                        |       | —                                                  |       | 12 |   |
|                                |       | (37,303                                                 | )          | (39,235 | ) |
|                                |       |                                                    |       |   |   |
| Pre-tax loss                        |       | (26,979                                                 | )          | (13,755 | ) |
| Provision for  income taxes         |       | —                                                  |       | (48 | ) |
| Net loss                            |       | $                                                       | (26,979    | ) | $ | (13,803 | ) |

 

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

5

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

**CONDENSED CONSOLIDATED STATEMENTS OFCASH FLOWS**

**(amounts in thousands)**

**(unaudited)**
| ** **                                                                       | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                       | ** ** | **2006**                                                | ** ** | **2005** | ** ** |
| ** **                                                                       | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| Cash flows from  operating activities:                                           |       |                                                    |       |   |   |
| Net loss                                                                         |       | $                                                       | (26,979    | ) | $ | (13,803 | ) |
| Adjustments to  reconcile net loss to net cash provided by operating activities: |       |                                                    |       |   |   |
| Depreciation and amortization                                                    |       | 16,891                                                  |       | 17,712 |   |
| Amortization of debt discount and issuance costs                                 |       | 5,208                                                   |       | 5,241 |   |
| Minority interest                                                                |       | (4,771                                                  | )          | (2,427 | ) |
| Change in value of warrants                                                      |       | 308                                                     |       | 37 |   |
| Changes in assets and liabilities:                                               |       |                                                    |       |   |   |
| Receivables, net                                                                 |       | 5,130                                                   |       | (3,479 | ) |
| Inventories and prepaid expenses                                                 |       | 546                                                     |       | 546 |   |
| Deposits and other current assets                                                |       | 1,815                                                   |       | (326 | ) |
| Accounts payable                                                                 |       | 1,123                                                   |       | 986 |   |
| Accrued expenses and other current liabilities                                   |       | 1,477                                                   |       | 2,303 |   |
| Net cash provided by operating activities                                        |       | 748                                                     |       | 6,790 |   |
| Cash flows from  investing activities:                                           |       |                                                    |       |   |   |
| Capital expenditures                                                             |       | (36,286                                                 | )          | (7,115 | ) |
| Restricted cash and cash equivalents                                             |       | 30,001                                                  |       | 4,195 |   |
| Net cash used in investing activities                                            |       | (6,285                                                  | )          | (2,920 | ) |
| Cash flows from  financing activities:                                           |       |                                                    |       |   |   |
| Payments under bank facility                                                     |       | (1,181                                                  | )          | — |   |
| Payable-in-kind interest added to debt principal                                 |       | 12,775                                                  |       | 12,429 |   |
| Payments on CUP financing                                                        |       | (1,040                                                  | )          | (928 | ) |
| Net cash provided by financing activities                                        |       | 10,554                                                  |       | 11,501 |   |
| Cash and cash  equivalents:                                                      |       |                                                    |       |   |   |
| Increase in cash and cash equivalents                                            |       | 5,017                                                   |       | 15,371 |   |
| Balance, beginning of period                                                     |       | 41,419                                                  |       | 37,016 |   |
| Balance, end of period                                                           |       | $                                                       | 46,436     |   | $ | 52,387 |   |
|                                                                             |       |                                                    |       |   |   |
| Supplemental  cash flow disclosures:                                             |       |                                                    |       |   |   |
| Cash paid for  interest, net of capitalized interest                             |       | $                                                       | 25,236     |   | $ | 23,331 |   |

 

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

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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

7

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consummate the sale havenot been completed by Westgate.  Tocomplete the deed transfer, Westgate must obtain financing and obtain allrequired approvals from regulatory agencies. We expect Westgate to meet required conditions by December 31, 2006, atwhich time, the deed will be transferred. The Credit Agreement also requires that OpBiz provide either cash or aletter of credit in the aggregate amount of $90 million to fund the costs ofthe planned renovations to the Aladdin. In August 2004, MezzCo issued $87million of senior secured notes to a group of purchasers. The net proceeds ofthis financing were used to make the $14 million payment described above, topay certain costs and expenses of BH/RE and its subsidiaries and affiliatesrelated to the acquisition of the Aladdin, and to provide OpBiz with a portionof the funds necessary to meet its obligations regarding the plannedrenovations 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 ninemonths ended September 30, 2006, are not indicative of results to be expectedfor the full fiscal year. These unaudited financial statements should be readin conjunction 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.****             SUMMARY OF 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 Cash Equivalents*

Restricted cash and cash equivalents consist ofapproximately $57.8 million and $87.8 million as of September 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 hotelreceivables, are typically non-interest bearing and are initially recorded atcost. An estimated allowance for doubtful accounts is maintained to reduce thereceivables to their carrying amount, which approximates

8

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fair value. BH/RE estimates the allowance for doubtfulaccounts by applying standard reserve percentages to aged account balancesunder a specific dollar amount and specifically analyzes the collectibility ofeach account with a balance over the specified dollar amount, based on the ageof the account, the customer’s financial condition, collection history and anyother known information.

###### *Inventories*

Inventories consist of food and beverage, retailmerchandise and operating supplies, and are stated at the lower of cost ormarket. 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 September 30, 2006 and December 31, 2005, are basedon the 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 therelated debt agreements using the effective interest method and are included inother assets on BH/RE’s consolidated statements of financial position. Debtissuance costs, net of the related amortization, approximated $5.9 million and$7.0 million as of September 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 September 30, 2006, had a net book value ofapproximately $1.3 million. The trade name was valued at approximately $1.0million at the time of purchase and was fully amortized at September 30, 2006.The customer list is being amortized using the straight-line method over auseful life of 4 years.

*Derivative Instruments and Hedging Activities*

Asfurther consideration to the lenders under the Credit Agreement, BH/RE hasissued warrants to purchase membership interests held by BH/RE in EquityCo.BH/RE accounts for the outstanding warrants in EquityCo as embedded derivativeinstruments in accordance with SFAS No. 133, “*Accountingfor Derivative Instruments and Hedging Activities,*” and SFASNo. 138, *“Accounting for Certain DerivativeInstruments and Hedging Activities—an Amendment of FASB Statement No. 133*.*”*

9

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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 OwnStock*”. Both SFAS No. 133 and EITF 00-19 require that thewarrants be recognized as liabilities, with changes in fair value affecting netincome (loss).

*RevenueRecognition and Promotional Allowances*

Casino revenuesare recognized as the net win from gaming activities, which is the differencebetween gaming wins and losses. Hotel revenue recognition criteria aregenerally met at the time of occupancy. Food and beverage revenue recognitioncriteria are generally met at the time of service. Deposits for future hoteloccupancy or food and beverage services are recorded as deferred income untilrevenue recognition criteria are met. Cancellation fees for hotel and food andbeverage services are recognized upon cancellation by the customer as definedby a written contract entered into with the customer. All other revenues arerecognized as the service is provided. Revenues include the retail value offood, 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 September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|---------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                            | ** ** | **2006**                                                 | ** ** | **2005**                                                | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                  |       |                                                     |       |                                                    |       |   |   |   |   |
| Rooms                                 |       | $                                                        | 905        |                                                    | $          | 1,047 |   | $ | 2,807 |   | $ | 2,727 |   |
|                                  |       |                                                     |       |                                                    |       |   |   |   |   |
| Food and  Beverage                    |       | 2,136                                                    |       | 2,806                                                   |       | 6,958 |   | 7,815 |   |
|                                  |       |                                                     |       |                                                    |       |   |   |   |   |
| Other                                 |       | 82                                                       |       | 188                                                     |       | 757 |   | 593 |   |
|                                  |       |                                                     |       |                                                    |       |   |   |   |   |
| Total cost of  promotional allowances | ** ** | **$**                                                    | **3,123**  | ** **                                              | **$**      | **4,041** | ** ** | **$** | **10,522** | ** ** | **$** | **11,135** | ** ** |

 

###### *Slot ClubProgram*

The Aladdin’s slotclub members earn points based on gaming activity, which can be redeemed forcash. A liability is recorded for the estimated cost of the outstanding pointsaccrued under the slot club program. The accrued slot club point liability wasapproximately $1.5 million and $1.7 million as of September 30, 2006 and December 31,2005, respectively.

*Advertising Costs*

Advertisingcosts are expensed as incurred and included in selling, general andadministrative costs and expenses. Advertising costs totaled approximately $0.9million and $3.2 million for the three and nine months ended September 30,2006, respectively and $1.0 million and $4.1 million for the three and ninemonths ended September 30, 2005, respectively.

*Income Taxes*

The condensedconsolidated financial statements include the operations of BH/RE and its controlledsubsidiaries: EquityCo, MezzCo, and OpBiz. BH/RE and EquityCo are limitedliability companies and are taxed as partnerships for federal income taxpurposes. MezzCo has elected to be taxed as a corporation for federal incometax purposes. OpBiz, a wholly owned subsidiary of MezzCo, will be treated as adivision of MezzCo for federal income tax purposes, and accordingly, will alsobe 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 September 30, 2006, BH/RE’s membership interests hadnot been unitized and BH/RE’s members do not presently intend to unitize thesemembership interests. Accordingly, management of BH/RE has excluded earningsper share data required pursuant to SFAS No. 128, “*Earnings PerShare,*” because management believes that such disclosures would notbe meaningful to the financial statement presentation.

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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.

*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 $176.3 million. We do not expect the renovation fund of $100million plus operating cash available for use, as permitted under the CreditAgreement, to be sufficient to fund the project as currently budgeted and we donot have commitments for additional funding. The remaining balance of the $100 million renovation fund is recorded asrestricted cash in the Company’s Consolidated Statement of Financial Position.

The members of BH/RE may elect to contribute the fundingrequired to complete the renovation or OpBiz may seek to obtain additionalfinancing, but we cannot assure you that this contribution will be made or thatthe required additional funds can be obtained on acceptable terms or at all. Ifthis funding or financing is not obtained, the scope of the project would bereduced which may adversely affect our future operating results and our abilityto 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 nine months ended September 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-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 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.

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Therewas $0.1 million and $0.2 million of compensation cost, which approximated fairvalue, related to non-qualified stock options recognized in operating results(included in selling, general and administrative expenses) for the three andnine months ended September 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).
|                                    | ** ** | **Nine  Months  Ended September 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    |       | —                                                          | %          |

 

Under APB No. 25 there was no compensation costrecognized for the Company’s non-qualified stock options awarded in the threeor nine months September 30, 2005 as these non-qualified stock options had anexercise price equal to the market value of the underlying stock at the grantdate. The following table sets forth pro forma information as if compensationcost had been determined consistent with the requirements of SFAS No. 123:
|                                                                          | ** ** | **Three Months Ended  September 30, 2005** | ** ** | **Nine Months Ended  September 30, 2005** | ** ** |
|--------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                               | ** ** | **(Amounts in thousands)**                           | ** ** |
| **Net  income:**                                                         | ** ** | ** **                                                     | ** ** | ** **                                                    | ** ** |
| As reported                                                              |       | $                                                              | (7,053     | )                                                             | $          | (13,803 | ) |
| Deduct: compensation expense under fair value-based  method (net of tax) |       | (45                                                            | )          | (134                                                          | )          |
| Pro forma                                                                |       | $                                                              | (7,098     | )                                                             | $          | (13,937 | ) |

 

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  September 30, 2006** | ** ** | **Nine Months  Ended  September 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                                                                                                                            |       | —                                                         | %          | —                                                    | %          |
|                                                                                                                                                            |            |                                                                |            |                                                           |            |  |  |

 

*SFAS No.157*

In September 2006,the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), whichclarifies the definition of fair value, establishes guidelines for measuringfair value, and expands disclosures regarding fair value measurements. SFAS 157 does not require any new fair value measurements and eliminatesinconsistencies in guidance found in various prior accounting pronouncements. SFAS 157 will be effective for the Company on January 1, 2008. TheCompany is currently evaluating the impact of adopting SFAS 157 on itsfinancial position, cash flows, and results of operations.

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*SAB No.108*

InSeptember 2006, the Securities and Exchange Commission (“SEC”) released StaffAccounting Bulletin No. 108, “Considering the Effects of Prior YearMisstatements when Quantifying Misstatements in Current Year FinancialStatements” (“SAB 108”). SAB 108 provides interpretive guidance on the SEC’sviews on how the effects of the carryover or reversal of prior yearmisstatements should be considered in quantifying a current year misstatement.The provisions of SAB 108 will be effective for the Company for the fiscal yearended December 31, 2006. The Company is currently evaluating the impact ofapplying SAB 108 but does not believe that the application of SAB 108 will havea material effect on its financial position, cash flows, and results ofoperations.

**3.****                                      RECEIVABLES**

Accounts receivable consist of the following (inthousands):
|                                 | ** ** | **September 30   2006** | ** ** | **December 31,  2005** | ** ** |
|---------------------------------|------------|-----------------------------------|------------|-----------------------------|------------|
| ** **                      | ** ** | **(unaudited)**                   | ** ** | ** **                  | ** ** |
| Casino                          |       | $                                 | 9,545      |                        | $          | 12,173 |   |
| Hotel                           |       | 8,084                             |       | 8,470                       |       |
| Other                           |       | 3,395                             |       | 3,593                       |       |
|                            |       | 21,024                            |       | 24,236                      |       |
| Allowance for doubtful accounts |       | (6,361                            | )          | (4,443                      | )          |
| Receivables, net                |       | $                                 | 14,663     |                        | $          | 19,793 |   |

 

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

Property andequipment and the related accumulated depreciation consist of the following (inthousands):
|                                    | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                         | ** ** | **(unaudited)**              | ** ** | ** **                  | ** ** |
| Land                               |       | $                            | 97,979     |                        | $          | 97,979 |   |
| Building and  improvements         |       | 367,663                      |       | 367,234                     |       |
| Furniture,  fixtures and equipment |       | 34,680                       |       | 34,194                      |       |
| Construction in  progress          |       | 50,055                       |       | 14,685                      |       |
|                               |       | 550,377                      |       | 514,092                     |       |
| Accumulated  depreciation          |       | (44,625                      | )          | (28,346                     | )          |
| Property and  equipment, net       |       | $                            | 505,752    |                        | $          | 485,746 |   |

 

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In connection withthe Timeshare Purchase Agreement between OpBiz and Westgate, OpBiz agreed tosell approximately 4 acres of land adjacent to the PH Resort to Westgate whoplans to 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 $16.9 million for the three and ninemonths ended September 30, 2006, respectively, and $5.9 million and $17.7 million for the three and nine months endedSeptember 30, 2005, respectively.

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

Long-term debtconsists of the following (in thousands):

|                                                                                                | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                                     | ** ** | **(unaudited)**              | ** ** | ** **                  | ** ** |
| Term Loan A -  $500 million senior notes, net of unamortized discount of $21,548 and $25,632   |       | $                            | 463,195    |                        | $          | 460,293 |   |
| Term Loan B -  $10 million senior notes                                                        |       | 11,753                       |       | 10,985                      |       |
| Mezzanine senior  secured subordinated notes, net of unamortized discount of $3,548 and $3,880 |       | 116,295                      |       | 103,956                     |       |
| Northwind  Aladdin obligation under capital lease                                              |       | 31,274                       |       | 32,314                      |       |
| Total long-term debt                                                                           |       | 622,517                      |       | 607,548                     |       |
| Current portion  of long-term debt                                                             |       | (6,548                       | )          | (2,671                      | )          |
| Total long-term  debt, net                                                                     |       | $                            | 615,969    |                        | $          | 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:

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

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

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

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

·        the then unpaid balanceamount 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’saccumulation of certain permitted cash reserves, OpBiz’s interest payment willnot exceed its quarterly earnings before interest, taxes, depreciation andamortization (“EBITDA”), reduced by certain permitted reductions (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.

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OpBiz is requiredto prepay amounts outstanding under the Credit Agreement:

·        with excess cash flow (asdefined in the Credit Agreement) after certain permitted cash reserves areaccumulated;

·        in scheduled quarterlyamounts beginning after August, 31, 2006;

·        with certain amountsreceived in connection with the development of the Timeshare Land adjacent tothe Desert Passage (as defined in the underlying agreement);

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

·        with the proceeds ofcertain 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.

TheCredit Agreement also requires that OpBiz spend not less than $90,000,000 onrenovation capital expenditures by August 31, 2007.   Pursuant to the Credit Agreement, if$72,000,000 of such amount was not spent by August 31, 2006, OpBiz wasrequired, absent a waiver from the lenders, 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.  As of August 31, 2006, OpBiz failed tosatisfy such minimum spend requirement by approximately $35.6 million. OnOctober 23, 2006, OpBiz and the lenders under the Credit Agreement entered intoa waiver and amendment to the Credit Agreement (“Amendment 1”) pursuant towhich OpBiz obtained a waiver from the lenders for the alleged default arisingfrom the failure to make the pre-payment required because of the failure tosatisfy the minimum renovation capital expenditure of $72.0 million by August31, 2006.  Amendment No. 1 also modifiedthe terms of the minimum spend requirement from $72,000,000 by August 31, 2006to $81,000,000 by April 30, 2007 and removed OpBiz’s obligation to prepayamounts outstanding under the Credit Agreement by any shortfall capitalexpenditure amount.  OpBiz is stillrequired to spend an aggregate amount of $90,000,000 on renovation capitalexpenditures by August 31, 2007.  Thefailure to spend such amounts would be an event of default.

Amendment1 also requires OpBiz pay an exit fee equal to 0.75% of the outstanding balanceof the Credit Agreement as of  September1, 2006.  The exit fee, which isapproximately $3.7 million, is payable upon maturity of the Credit Agreementobligations, whether at scheduled maturity, voluntary prepayment, mandatoryprepayment or otherwise.  Beginning onSeptember 1, 2006 and ending on August 31, 2007, OpBiz is also required to paya “Term Loan A Interest Differential” amount on each day that interest is dueand payable on the Term Loan A notes equal to the difference between theinterest due and payable on the Term Loan A notes and an amount equal to a rateper annum equal to the three month LIBOR plus 3.25% on the unpaid principalbalance of the outstanding Term Loan A notes during the fiscal quarter lastended prior to such interest payment date. The Term Loan A Interest Differential amount for the period beginningSeptember 1, 2006 and ending September 30, 2006 will be added to the Term Abalance on the effective date of the waiver.

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 maintain certainleverage ratios that decrease over time.

OpBizrealized a shortfall to the minimum EBITDA requirement for the twelve monthperiod 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 fornon-compliance with this covenant.  Ifsuch equity contribution is not made, OpBiz would seek a waiver of suchdefault, however, there can be no assurance that it would be granted by thelenders under the Credit Agreement. Minimum EBITDA covenants beyond August 31, 2006 do not provide for theright to cure a default with an equity contribution.  In the event that OpBiz does not have sufficientEBITDA for the twelve month period ended August 31, 2007, it would constitutean event of default unless OpBiz obtains a waiver from the lenders under theCredit 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 

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Hotel managementcontract or termination of Sheraton as the manager of the Hotel (unless OpBizreplaces Sheraton with another approved manager within 30 days of suchtermination), a default or termination of the Planet Hollywood licenseagreement and certain defaults under the agreements with Boulevard Invest orNorthwind 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 September 30, 2006. Thesewarrants are recorded separately from the related debt within other long-termliabilities.

***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 Aladdin acquisition, were used to (i) payapproximately $16.1 million of fees and expenses related to the acquisition ofthe Aladdin, (ii) fund the $14 million lien release payment required underthe Credit Agreement, and (iii) fund a portion of the planned renovationsto the Aladdin. The notes mature in August 2011 and accrue interest at arate of 16% per annum. Interest on the notes is payable-in-kind or, at theoption of MezzCo, in cash. The warrants are exercisable at any time, subject tothe approval of the Nevada gaming authorities, at a purchase price of $0.01 perunit. Subject to the approval of the Nevada gaming authorities, the warrantsmay be exercised to purchase either voting or non-voting membership interestsof MezzCo or a combination thereof. Currently, all of MezzCo’s votingmembership interests are represented by units owned by EquityCo. In addition tocustomary anti-dilution protections, the number of units representing MezzComembership interests issuable upon exercise of the warrants may be increasedfrom time to time upon the occurrence of certain events as described in thewarrants. The maximum aggregate increase is 19%, following which the warrantswould represent rights to purchase 36.5% of the units representing the fullydiluted equity of MezzCo. Holders of the warrants and any securities issuedupon exercise of the warrants may require MezzCo to redeem such securitiescommencing in August 2011 at a redemption price based upon a formula setforth in the warrants. Starting in August 2008, in the event the Company failsto achieve certain operational thresholds, the holders of the MezzCo warrants,and securities issued upon exercise thereof, have the right to assume controlof MezzCo and OpBiz and conduct a sale of the equity of, or all orsubstantially all of the assets of, either MezzCo or OpBiz provided that allControl Conditions (as defined in the Investor Rights Agreement) are met. Theserights are subject to (i) repayment in full of all indebtedness that issenior to the notes (including all indebtedness of OpBiz under the CreditAgreement), (ii) certain covenants related to OpBiz’s ability to achievetargeted levels of EBITDA and (iii) the prior approval of the Nevadagaming authorities. These rights expire upon completion of a public offering byMezzCo or OpBiz. In connection with the Mezzanine Financing, OpBiz’s obligationto make expenditures on renovations to the Aladdin was increased from $90million, as required under the Credit Agreement, to $100 million.

As ofSeptember 30, 2006, the MezzCo financing was recorded net of the unamortizedbalance of the put warrants of approximately $3.5 million. The estimated fairvalue of the warrants was approximately $4.1 million at September 30, 2006 andDecember 31, 2005, and is recorded separately from the related debt withinother long-term liabilities.

***EnergyServices Agreement***

NorthwindAladdin (“Northwind”), a third party, owns and operates a central utility planton land leased from OpBiz. The plant supplies hot and cold water and emergencypower to the Aladdin under a contract between Aladdin Gaming and Northwind.OpBiz has assumed the energy service agreement, which expires in 2020. Underthe agreement, OpBiz is required to pay Northwind a monthly consumption charge,a monthly operational charge, a monthly debt service payment and a monthlyreturn on equity payment. Payments under the Northwind agreement totalapproximately $0.5 million per month.

**6.****                                      MEMBERSHIPINTERESTS**

Thenon-voting interests in BH/RE are owned 40.75% by BHCH I, 18.50% by BHCH II and40.75% by OCS and the voting interests are owned 50% by Douglas P. Teitelbaumand 50% by Robert Earl. BHCH is controlled by Mr. Teitelbaum, managingprincipal of Bay Harbour Management, an investment management firm. BHCH wasformed by Mr. Teitelbaum for the purpose of holding investments in BH/REby funds managed by Bay Harbour Management. OCS is wholly-owned and controlledby Mr. Earl and holds Mr. Earl’s investment in BH/RE. Mr. Earlis the 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/REowns 85% of the membership interests in EquityCo and Starwood owns 15%. MezzCois a wholly owned subsidiary of EquityCo, and OpBiz is a wholly ownedsubsidiary of MezzCo. BH/RE and Starwood made total equity contributions of $20million

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each in EquityCo to fund the costs of the plannedrenovations to the Aladdin. Starwood’s equity interest in EquityCo is reflectedas minority interest in the accompanying condensed consolidated financialstatements. BH/RE recorded minority interest income related to the Starwoodinterests of approximately $2.2 million and $1.3 million for the three monthsended September 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. JessRavich***

Jess Ravich, a Manager of OpBiz, isCEO and indirect controlling shareholder of Libra Securities, LLC, aninvestment banking firm (“Libra Securities”). Libra Securities acted asplacement agent for MezzCo, L.L.C. in the placement of the Mezzanine Financingand was paid a placement fee of $4,350,000.

Mr. Ravich holds a note convertibleinto 25% of the equity in PDS Gaming, a leasing and finance companyspecializing in gaming equipment. Conversion of the note is subject to approvalof appropriate gaming regulators in the jurisdictions in which PDS Gaming doesbusiness. PDS Gaming entered into a gaming equipment lease with OpBiz onDecember 22, 2004, for a 48-month term with payments of approximately $137,500per month. Libra Securities raised financing for PDS Gaming to allow it topurchase the equipment underlying the lease and received a placement fee forits services.

***Planet Hollywood Licensing Agreement***

OpBiz,Planet Hollywood and certain of Planet Hollywood’s subsidiaries have enteredinto a licensing agreement pursuant to which OpBiz received a non-exclusive,irrevocable license to use various “Planet Hollywood” trademarks and servicemarks. Under the licensing agreement, OpBiz also has the right, but not theobligation, to open a Planet Hollywood restaurant and one or more PlanetHollywood retail shops under a separate restaurant agreement with PlanetHollywood. OpBiz will pay Planet Hollywood a quarterly licensing fee of 1.75%of OpBiz’s non-casino revenues. If OpBiz opens an attraction with paidadmission using the Planet Hollywood marks or memorabilia prior to beginningoperations as the PH Resort, it will pay Planet Hollywood a quarterly licensingfee of 1.75% of the revenues of the attraction until OpBiz begins operating asthe PH Resort. The initial term of the licensing agreement will expire in 2028.OpBiz can renew the licensing agreement for three successive 10-year terms.

Inaddition to being a manager of BH/RE, Mr. Earl is the chief executiveofficer and chairman of the board of directors of Planet Hollywood. Similarly,Mr. Teitelbaum is a manager of BH/RE and a director of Planet Hollywood.Collectively, Mr. Earl, a trust for the benefit of Mr. Earl’schildren and affiliates of Bay Harbour Management, own substantially all of theequity of Planet Hollywood. Mr. Earl disclaims beneficial ownership of anyequity of Planet Hollywood owned by the trust.

***Sheraton Hotel Management 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 $2.3 million and $2.4 million for the  three months ended September 30, 2006 and2005, respectively, and $7.5 million and $8.1 million for the nine months endedSeptember 30, 2006 and 2005, respectively.

**8.****             INCOMETAXES**

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 forfederal income tax purposes. OpBiz, a wholly owned subsidiary of MezzCo, willbe treated 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

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morelikely than not. Otherwise, a valuation allowance is applied.

Managementbelieves it is more likely than not that its net deferred tax asset will not berealized and has therefore recorded a valuation allowance against this netdeferred tax asset.

Thepayable in-kind interest associated with the Mezzanine Financing is subject tothe provisions of Internal Revenue Code Section 163(e)(5) as a high yield debtobligation with disqualified OID. As a result, a portion of the interestexpense associated with the Mezzanine Financing is permanently non-deductiblefor tax purposes and the balance of the interest expense is only deductiblewhen paid in cash. The deferred tax asset associated with the MezzanineFinancing remains fully reserved.

AtDecember 31, 2005, OpBiz had a general business credit carryforward ofapproximately $0.7 million that expires in 2025 and a minimum tax creditcarryforward of approximately $0.1 million. MezzCo and OpBiz have a valuationallowance at December 31, 2005 and 2004 recorded against tax benefits that aremore likely than not unrealizable. The current tax receivable of $194,000 atSeptember 30, 2006 represents recoverable taxes paid in a carryback period anda tax deposit for the first quarter 2006.

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

###### **Litigation**

BH/RE is not currently a party toany material legal proceedings.

***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.

***TimesharePurchase 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 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.

***TheaterLease***

On December 16, 2004, OpBizentered into a long-term lease agreement whereby CC EntertainmentTheatrical-LV, LLC, successor-in-interest to SFX Entertainment, Inc. pursuantto an assignment dated September 26, 2005 (“CCE”) will be renovating andleasing certain theaters and related areas located at the Aladdin. CCE willhave the exclusive right to use, reconfigure, adapt, change and operate theleased premises.

## **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 of operationsof BH/RE and its subsidiaries for the periods covered in this report. Thediscussion of operations herein focuses on events and the revenues and expensesduring the three and nine months ended September 30, 2006, as compared to thethree and nine months ended September 30, 2005.

Certainstatements in this report, including in this discussion, containforward-looking statements with respect to our business, financial condition,results of operations, liquidity and capital resources, expectations regardingthe cost and timing to complete our renovation project, industry outlook andother non-historical statements.  Thesestatements can be identified 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

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anyforward-looking statements, which speak only as of the date thereof. Factors orevents may emerge from time to time and it is not possible for us to predictall 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 financial statementsof BH/RE included in BH/RE’s Annual Report on Form 10-K for the year endedDecember 31, 2005 filed with the Securities and Exchange Commission on March31, 2006, the unaudited condensed consolidated financial statements and notesthereto included in Part I, Item 1 of this report and “Item 1A – RiskFactors” included in this report and BH/RE’s Annual Report on Form 10-K.

***RenovationProject***

As discussed more fully under “Resultsof Operations” below, declines in our operating profits and cash flow while weundergo the transition to the PH Resort have been greater than originallyanticipated. 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 third 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 $176.3 million. We donot expect the renovation fund of $100 million plus operating cash availablefor use, as permitted under the Credit Agreement, to be sufficient to fund theproject as currently budgeted and we do not have commitments for additionalfunding.  The remaining balance of the$100 million renovation fund is recorded as restricted cash in the Company’sConsolidated Statement of Financial Position.

The members of BH/RE may elect tocontribute the funding required to complete the renovation or OpBiz may seek toobtain additional financing, but we cannot assure you that this contributionwill be made or that the required additional funds can be obtained onacceptable terms or at all. If this funding is not obtained, the scope of theproject would be reduced which may adversely affect our future operatingresults and our ability to complete the project.

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

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

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

###### *Propertyand Equipment*

Propertyand equipment 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   |   |

 

Propertyand equipment 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.

Propertyand equipment are reviewed for impairment whenever indicators of impairmentexist. If an indicator of impairment exists, the estimated future cash flows ofthe asset, 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

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discounted cashflow 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*

Casinorevenues are recognized as the net win from gaming activities, which is thedifference between gaming wins and losses. All other revenues are recognized asthe service 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.

Hotelrevenue recognition criteria are generally met at the time of occupancy. Foodand beverage revenue recognition criteria are generally met at the time ofservice. Deposits for future hotel occupancy or food and beverage services arerecorded as deferred income until revenue recognition criteria are met.Cancellation fees for hotel and food and beverage services are recognized uponcancellation by the customer as defined by a written contract entered into withthe customer.

*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 forfederal income tax purposes. OpBiz, a wholly owned subsidiary of MezzCo, willbe treated 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.

###### *MembershipInterests*

As of September 30, 2006, ourmembership interests had not been unitized and our members do not presentlyintend to unitize these membership interests. Accordingly, we have excludedearnings per membership unit data required pursuant to SFAS No. 128, “*Earnings Per Share,*” because we believe 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 either mandatoryincreases or annual adjustments and annual bonus payments. In addition,depending on the terms of the employment agreements, these executives areentitled to options to purchase between 0.2% and 5% of the equity of MezzCo.

***Recently IssuedAccounting Pronouncements***

*SFAS No.123(R)*

OnDecember 16, 2004, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards No. 123 (revised 2004), “Share-BasedPayment” (“SFAS No. 123(R)”), which is a revision to SFAS No. 123, “Accountingfor Stock-Based Compensation.”  SFAS No.123(R) supersedes Accounting Principles Board Opinion No. 25, “Accounting forStock Issued to Employees” (“APB No. 25”) and amends SFAS No. 95, “Statement ofCash Flows.”  Among other items, SFAS No.123(R) requires the recognition of compensation expense in an amount equal tothe fair value of share-based payments, including employee stock options andrestricted stock, granted to employees.

TheCompany adopted SFAS No. 123(R) on January 1, 2006 using the “modifiedprospective” method, in which compensation cost is recognized beginning withthe effective date (a) based on the requirements of SFAS No. 123(R) for allshare-based payments granted after the effective date and (b) based on therequirements of SFAS No. 123 for all awards granted to employees prior to theeffective date of SFAS No. 123(R) that remain unvested on the effective date.

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SFASNo. 123(R) also requires the benefits of tax deductions in excess of recognizedcompensation cost to be reported as a financing cash flow, rather than as anoperating cash flow. This requirement reduced net operating cash flows andincreased net financing cash flows for the three and nine months endedSeptember 30, 2006.

*FASB Interpretation No. 48*

InJuly 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”) “Accountingfor Uncertainty in Income Taxes – an interpretation of FASB No. 109”, toclarify certain aspects of accounting for uncertain tax positions, includingissues related to the recognition and measurement of those tax positions.  This interpretation is effective for fiscalyears beginning after December 15, 2006. The Company is in the process of evaluating the impact of the adoptionof this interpretation on the Company’s results of operations and financialcondition.

*SFAS No.157*

In September 2006,the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), whichclarifies the definition of fair value, establishes guidelines for measuringfair value, and expands disclosures regarding fair value measurements. SFAS 157 does not require any new fair value measurements and eliminatesinconsistencies in guidance found in various prior accounting pronouncements. SFAS 157 will be effective for the Company on January 1, 2008. The Companyis currently evaluating the impact of adopting SFAS 157 on its financialposition, cash flows, and results of operations. 

*SAB No.108*

InSeptember 2006, the Securities and Exchange Commission (“SEC”) released StaffAccounting Bulletin No. 108, “Considering the Effects of Prior YearMisstatements when Quantifying Misstatements in Current Year FinancialStatements” (“SAB 108”). SAB 108 provides interpretive guidance on the SEC’sviews on how the effects of the carryover or reversal of prior yearmisstatements should be considered in quantifying a current year misstatement.The provisions of SAB 108 will be effective for the Company for the fiscal yearended December 31, 2006. The Company is currently evaluating the impact ofapplying SAB 108 but does not believe that the application of SAB 108 will havea material effect on its financial position, cash flows, and results ofoperations.

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

Thefollowing table highlights the results of operations of the Aladdin for thethree and nine months ended September 30, 2006 as compared to the three andnine months ended September 30, 2005 (dollars in thousands, unaudited).
|                                     | ** ** | **Three Months Ended September 30,** | ** ** | **Percent** | ** ** | **Nine Months Ended September 30,** | ** ** | **Percent** | ** ** |
|-------------------------------------|------------|----------------------------------------------------------|------------|-------------|------------|---------------------------------------------------------|------------|-------------|------------|
| ** **                          | ** ** | **2006**                                                 | ** ** | **2005**    | ** ** | **Change**                                              | ** ** | **2006**    | ** ** | **2005** | ** ** | **Change** | ** ** |
| ** **                          | ** ** | ** **                                               | ** ** | ** **  | ** ** | ** **                                              | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net Revenues                        |       | $                                                        | 63,931     |        | $          | 74,373                                                  |       | -14.0       | %          | $ | 205,916 |   | $ | 228,965 |   | -10.1 | % |
| Operating  Expenses:                |       |                                                     |       |        |       |                                                    |       |        |       |   |   |   |   |
| Casino                              |       | 16,459                                                   |       | 19,793      |       | -16.8                                                   | %          | 51,676      |       | 54,407 |   | -5.0 | % |
| Hotel                               |       | 10,201                                                   |       | 8,931       |       | 14.2                                                    | %          | 30,512      |       | 30,472 |   | 0.1 | % |
| Food and Beverage                   |       | 11,578                                                   |       | 12,654      |       | -8.5                                                    | %          | 35,408      |       | 38,112 |   | -7.1 | % |
| Other                               |       | 641                                                      |       | 2,630       |       | -75.6                                                   | %          | 4,633       |       | 6,473 |   | -28.4 | % |
| Selling, general and administrative |       | 20,080                                                   |       | 19,443      |       | 3.3                                                     | %          | 56,472      |       | 56,309 |   | 0.3 | % |
| Depreciation and amortization       |       | 5,605                                                    |       | 5,944       |       | -5.7                                                    | %          | 16,891      |       | 17,712 |   | -4.6 | % |
| Operating (Loss) Income             | ** ** | **$**                                                    | **(633**   | **)**       | **$**      | **4,978**                                               |       | -112.7      | %          | **$** | **10,324** | ** ** | **$** | **25,480** |   | -59.5 | % |

 

Net revenues forthe three and nine months ended September 30, 2006 declined when compared tothe three and nine months ended September 30, 2005. The renovation project,which is currently 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 nine months ended September 30, 2006 and 2005, respectively (dollarsin thousands, unaudited).

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|                                               | ** ** | **Three Months Ended** | ** ** | ** **  | ** ** | **Nine Months Ended** | ** ** | ** **  | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|-------------|------------|---------------------------------|------------|-------------|------------|
| ** **                                    | ** ** | **September 30,**           | ** ** | **Percent** | ** ** | **September 30,**          | ** ** | **Percent** | ** ** |
| ** **                                    | ** ** | **2006**                         | ** ** | **2005**    | ** ** | **Change**                      | ** ** | **2006**    | ** ** | **2005** | ** ** | **Change** | ** ** |
| ** **                                    | ** ** | ** **                       | ** ** | ** **  | ** ** | ** **                      | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Casino revenues                               |       | $                                | 25,099     |        | $          | 32,629                          |       | -23.1       | %          | $ | 80,601 |   | $ | 96,869 |   | -16.8 | % |
| Casino expenses                               |       | 16,459                           |       | 19,793      |       | -16.8                           | %          | 51,676      |       | 54,407 |   | -5.0 | % |
| *Margin*                                      | * *   | *34.4*                           | *%*        | *39.3*      | *%*        | * *                        | * *   | *35.9*      | *%*        | *43.8* | *%* |   |   |
|                                          |       |                             |       |        |       |                            |       |        |       |   |   |   |   |
| Hotel revenues                                |       | $                                | 25,714     |        | $          | 25,522                          |       | 0.7         | %          | $ | 83,572 |   | $ | 83,486 |   | 0.1 | % |
| Hotel expenses                                |       | 10,201                           |       | 8,931       |       | 14.2                            | %          | 30,512      |       | 30,472 |   | 0.1 | % |
| *Margin*                                      | * *   | *60.3*                           | *%*        | *65.0*      | *%*        | * *                        | * *   | *63.5*      | *%*        | *63.5* | *%* |   |   |
|                                          |       |                             |       |        |       |                            |       |        |       |   |   |   |   |
| Food and  beverage revenues                   |       | $                                | 14,828     |        | $          | 18,823                          |       | -21.2       | %          | $ | 47,099 |   | $ | 56,203 |   | -16.2 | % |
| Food and  beverage expenses                   |       | 11,578                           |       | 12,654      |       | -8.5                            | %          | 35,408      |       | 38,112 |   | -7.1 | % |
| *Margin*                                      | * *   | *21.9*                           | *%*        | *32.8*      | *%*        | * *                        | * *   | *24.8*      | *%*        | *32.2* | *%* |   |   |
|                                          |       |                             |       |        |       |                            |       |        |       |   |   |   |   |
| Other revenues                                |       | $                                | 3,084      |        | $          | 4,201                           |       | -26.6       | %          | $ | 11,248 |   | $ | 11,722 |   | -4.0 | % |
| Other expenses                                |       | 641                              |       | 2,630       |       | -75.6                           | %          | 4,633       |       | 6,473 |   | -28.4 | % |
| *Margin*                                      | * *   | *79.2*                           | *%*        | *37.3*      | *%*        | * *                        | * *   | *58.8*      | *%*        | *44.8* | *%* |   |   |
|                                          |       |                             |       |        |       |                            |       |        |       |   |   |   |   |
| Selling, general  and administrative expenses |       | $                                | 20,080     |        | $          | 19,443                          |       | 3.3         | %          | $ | 56,472 |   | $ | 56,309 |   | 0.3 | % |
| *Percent  of net revenues*                    | * *   | *29.2*                           | *%*        | *25.7*      | *%*        | * *                        | * *   | *25.4*      | *%*        | *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 23.1% to $25.1 million for the three months ended September30, 2006, as compared to $32.6 million for the three months ended September 30,2005. Table games revenue for the three months ended September 30, 2006,decreased by approximately $3.5 million as compared to the three months endedSeptember 30, 2005. The number of operational table units decreased 33% inconnection with the renovation project with a resulting decrease in drop of40%. Overall win percentage of 18.9% was up compared to 16.2% in the same threemonth period in prior year.  Slot revenuefor the three months ended September 30, 2006 decreased approximately $4.0million when compared to the same three month period in the prior year. Thenumber of slot units on the floor decreased 12% with a resulting decrease inslot handle of 22%. Combined revenues from the race and sports book, poker andkeno decreased by $0.5 million or 37.3% when compared to the three month periodended September 30, 2005 primarily due to declines in business levels due to thecasino disruption.

Casinoexpenses decreased 16.8% to $16.5 million for the three months ended September30, 2006, as compared to $19.8 million for the three months ended September 30,2005. Operating margin declined 4.9% when comparing the same three monthperiods. The decline in operating margin was attributable to the declines inbusiness levels and 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 continue to experience a decline in operatingmargin when compared to the prior year for the remainder of 2006.  Decreases in payroll and related benefitsresulting from the decline in the number of table units and reduced businesslevels helped offset the promotional expense increases.

Casinorevenues decreased 16.8% to $80.6 million for the nine months ended September30, 2006, as compared to $96.9 million for the nine months ended September 30,2005. Table games revenue for the nine months ended September 30, 2006,decreased by approximately $8.3 million as compared to the nine months endedSeptember 30, 2005. The number of operational table units decreased 22.8% inconnection with the renovation project with a resulting decrease in drop of20.5%. Overall win percentage of 17.7% was comparable to the same nine monthperiod in prior year.  Slot revenue forthe nine months ended September 30, 2006

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decreasedapproximately $6.0 million when compared to the same nine month period in theprior year. The number of slot units on the floor decreased 17.4% with aresulting decrease in slot handle of 16.9%. Win per unit increased 8.6%offsetting the decrease in handle. Combined revenues from the race and sportsbook, poker and keno decreased by $1.5 million or 35.4% when compared to thenine month period ended September 30, 2005 primarily due to declines inbusiness levels due to the casino disruption as well as losses on the NFL finalsin the sports book during the first quarter of 2006.

Casinoexpenses decreased 5.0% to $51.7 million for the nine months ended September30, 2006, as compared to $54.4 million for the nine months ended September 30,2005. Operating margin declined 7.9% when comparing the same nine monthperiods. In order to maintain revenue in the casino during the renovationperiod, we have implemented additional promotional offers and events resultingin a decline in operating profit margin when compared to the prior year.  We expect to continue these promotionaloffers and events to assist in increasing traffic while the casino floor isdisrupted. Decreases in payroll and related benefits resulting from the declinein the number of table units and reduced business levels helped offset thepromotional expense increases.

*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 $25.7 million for the three months ended September 30, 2006 wereslightly higher than the $25.5 million for the three months ended September 30, 2005. Hotel occupancy was alsocomparable to the same period in the previous year at  98.3% for the three months ended September30, 2006, as compared to 98.0% for the three months ended September 30, 2005.Average daily room rates of $110 for the three months ended September 30, 2006were comparable to the three months ended September 30, 2005. We were able tomaintain hotel revenues during the renovation period due to continued strongdemand for rooms in the Las Vegas market and the improved marketing channels ofStarwood.

Hotelrevenues of $83.6 million for the nine months ended September 30, 2006, werecomparable to the nine months ended September 30, 2005. Hotel occupancypercentage was 97.6% for the nine months ended September 30, 2006, as comparedto 97.0% for the nine months ended September 30, 2005. Average daily room ratesdecreased to $121 for the nine months ended September 30, 2006, as compared to$122 for the nine months ended September 30, 2005.

Hotelexpenses increased 14.2% to $10.2 million for the three months endedSeptember 30, 2006, as compared to $8.9 million for the three monthsended September 30, 2005. The hotel operating margin for the three monthsended September 30, 2006 decreased 4.7% when compared to the three monthsended September 30, 2005. The increase in hotel expenses and decrease inhotel operating margin is the result of additional expenses incurred for unionwages and benefits. Hotel expenses for the nine months ended September 30,2006 remained consistent with the nine months ended September 30, 2005 at$30.5 million in each period. The operating margins for the nine monthperiods ended September 30, 2006 and 2005 were also consistent.

*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 21.2% to $14.8 million for the three monthsended September 30, 2006, as compared to $18.8 million for the three monthsended September 30, 2005. Food and beverage revenues decreased 16.2% to $47.1million for the nine months ended September 30, 2006, as compared to the $56.2million for the nine months ended September 30, 2005. The decline in foodrevenue was the result of cover declines in open outlets due to constructiondisruption and the closing of the high end restaurants for conversion to tenantspace. Beverage revenue declines were directly attributed the closing ofoutlets for the construction. Those closed beverage outlets were replaced byportable casino bars that did not pick up the lost revenue.

Foodand beverage expenses decreased 8.5% to $11.6 million for the three monthsended September 30, 2006, as compared to $12.7 million for the three monthsended September 30, 2005. Food and beverage expenses decreased 7.1% to $35.4million for the nine months ended September 30, 2006, as compared to $38.1million for the nine months ended September 30, 2005. Food and beverage marginsdecreased 10.9 and 7.4 percentage points in comparing the same three and ninemonth periods. Food and beverage payroll and benefit expenses increased as aresult of the addition of the culinary union contract in October 2005, butthose increases were more than offset by expense control measures includingflexible staffing based on cover and revenue reductions during the renovationperiod and position elimination due to outlet closures.

*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 decreased 26.6% to $3.1 million for the three months ended September30, 2006, as compared to $4.2 million for the three months ended September 30,2005 and decreased 4.0% to $11.2 million for the nine months ended September30, 2006, as compared to $11.7 million for the nine months ended September 30,2005. The decrease in other revenue when compared to the prior year isprimarily due to closure of the theatre for performing arts for tenantrenovation.  Loss of entertainmentrevenue has been offset

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by additionalrental income from tenants including timeshare sale kiosks for which we receiverent on a percentage of sales basis.

Otherexpenses decreased 75.6% to $0.6 million for the three months ended September30, 2006, as compared to $2.6 million for the three months ended September 30,2005 and decreased 28.4% to $4.6 million for the nine months ended September30, 2006, as compared to $6.5 million for the nine months ended September 30,2005. Expense reductions related to the closure of the theatre for performingarts.  Additionally, we eliminated thenightly casino band due to disruption on the property related to therenovation.

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

SG&Aexpenses increased 3.3% to $20.1 million for the three months ended September30, 2006, as compared to $19.4 million for the three months ended September 30,2005 and remained relatively consistent for the nine months ended September 30,2006, as compared to the nine months ended September 30, 2005 at $56.5 millionand $56.3 million, respectively. SG&A expenses as a percentage of netrevenues increased to 29.2% for the three months ended September 30, 2006compared to 25.7% for the three months ended September 30, 2005 and increasedto 25.4% for the nine months ended September 30, 2006 when compared to 23.8%for the nine months ended September 30, 2005. The increases are mainly attributable to additional expenses absorbedrelated to the company’s capitalization policy whereby purchases that do notmeet the company’s capitalization policy are expensed.

*Depreciationand Amortization*

Depreciationand amortization expense of $5.6 million and $16.9 million for the three andnine months ended September 30, 2006 declined when compared to $5.9 million and$17.7 million in expense for the three and nine months ended September 30,2005. Asset additions resulting from the renovation project will not begindepreciating until construction is complete and they are placed in service.

*NetInterest Expense*

Netinterest expense of  $14.2 million and$42.1 million for the three and nine months ended September 30, 2006 comparesto $14.2 million and $41.7 million for the three and nine months endedSeptember 30, 2005. Interest expense for the three and nine months endedSeptember 30, 2006 includes 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 nine month periods in prior year.  Interest expense on the Credit Agreement iscalculated using LIBOR plus an applicable margin.

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

Duringthe nine months ended September 30, 2006, we generated cash flows fromoperating activities of approximately $0.7 million. Cash generated fromoperations during the period was primarily due to increases in collection ofreceivables. We also have restricted cash and cash equivalents of approximately$57.8 million, which is designated to be used for costs associated with therenovation and re-theming of the Aladdin into the PH Resort.

Ourprimary cash requirements for the remainder of 2006 are expected to include(i) up to approximately $57.8 million in capital expenditures related tothe renovation project which is currently included in restricted cash and cashequivalents and (ii) approximately $10.9 million in interest and principalpayments 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 and debt serviceobligations of OpBiz for at least the next 12 months of operations. We mayhave other liquidity needs, such as tax distributions to the members ofEquityCo and BH/RE, and we believe that we will have adequate cash to meetthese needs if they should arise. The Credit Agreement allows OpBiz to make taxdistributions.

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 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

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have realized a shortfallto required EBITDA for the period ended August 31, 2006 of approximately $5million, but we have been advised by our members that they intend to make anequity contribution equal to the amount of the shortfall within the required 90day period.  If such equity contributionis not made, however, we would seek a waiver of such event of default, butthere can be no assurance that it would be given.

As discussed more fully under “Results of Operations” inItem 2., Managements Discussion and Analysis, declines in our operating profitsand cash flow while we undergo the transition to the PH Resort have beengreater than originally anticipated. We originally expected the renovation tobe complete by December 31, 2006. We currently expect the interior casinorenovation to be substantially complete by December 31, 2006, but expectrenovations to the exterior plaza and façade to extend through the thirdquarter of 2007. The final plans and specifications of the renovation have notbeen finalized. Starwood and the lenders under the Mezzanine Financing have theright to approve the total scope and cost of the renovation once finalized. Wecurrently estimate that the renovation costs will be approximately $176.3million. We do not expect the renovation fund of $100 million plus operatingcash available for use, as permitted under the Credit Agreement, to besufficient to fund the project as currently budgeted and we do not havecommitments for additional funding.  Theremaining balance of the $100 million renovation fund is recorded as restrictedcash in the Company’s Consolidated Statement of Financial Position.

The members of BH/RE may elect to contribute the fundingrequired to complete the renovation or OpBiz may seek to obtain additionalfinancing, but we cannot assure you that this contribution will be made or thatthe required additional funds can be obtained on acceptable terms or at all. Ifthis funding or financing is not obtained, the scope of the project would bereduced which may adversely affect our future operating results and our abilityto complete the project.

***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:

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

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

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

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

·        the then unpaid balanceamount 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’saccumulation of certain permitted cash reserves, OpBiz’s interest payment willnot exceed its quarterly EBITDA, reduced by certain permitted deductions (asdefined in the Credit Agreement), divided by a factor of 1.20. Interest on theTerm Loan B notes will accrue at a rate of LIBOR plus 4% and will be addedquarterly to the outstanding principal amount of the Term Loan B notes and willbe paid when OpBiz pays off the Term Loan B notes. OpBiz is also required topay an annual administrative fee and certain other fees and expenses of thelender under the

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Credit Agreement.

OpBizis required to prepay amounts outstanding under the Credit Agreement:

·        with excess cash flow (asdefined in the Credit Agreement) after certain permitted cash reserves areaccumulated;

·        in scheduled quarterlyamounts beginning after August, 31, 2006;

·        with certain amountsreceived in connection with the development of the Timeshare Land adjacent tothe Desert Passage (as defined in the underlying agreement);

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

·        with the proceeds ofcertain 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.

TheCredit Agreement also requires that OpBiz spend not less than $90,000,000 onrenovation capital expenditures by August 31, 2007.  Pursuant to the Credit Agreement, if$72,000,000 of such amount was not spent by August 31, 2006, OpBiz wasrequired, absent a waiver from the lenders, 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.  As of August 31, 2006, OpBiz failed tosatisfy such minimum spend requirement by approximately $35.6 million. OnOctober 23, 2006, OpBiz and the lenders under the Credit Agreement entered intoa waiver and amendment to the Credit Agreement (“Amendment 1”) pursuant towhich OpBiz obtained a waiver from the lenders for the alleged default arisingfrom the failure to make the pre-payment required because of the failure tosatisfy the minimum renovation capital expenditure of $72.0 million by August31, 2006.  Amendment No. 1 also modifiedthe terms of the minimum spend requirement from $72,000,000 by August 31, 2006to $81,000,000 by April 30, 2007 and removed OpBiz’s obligation to prepayamounts outstanding under the Credit Agreement by any shortfall capitalexpenditure amount.  OpBiz is stillrequired to spend an aggregate amount of $90,000,000 on renovation capitalexpenditures by August 31, 2007.  Thefailure to spend such amounts would be an event of default.

Amendment1 also requires OpBiz pay an exit fee equal to 0.75% of the outstanding balanceof the Credit Agreement as of  September1, 2006.  The exit fee, which isapproximately $3.7 million, is payable upon maturity of the Credit Agreementobligations, whether at scheduled maturity, voluntary prepayment, mandatoryprepayment or otherwise.  Beginning onSeptember 1, 2006 and ending on August 31, 2007, OpBiz is also required to paya “Term Loan A Interest Differential” amount on each day that interest is dueand payable on the Term Loan A notes equal to the difference between theinterest due and payable on the Term Loan A notes and an amount equal to a rateper annum equal to the three month LIBOR plus 3.25% on the unpaid principalbalance of the outstanding Term Loan A notes during the fiscal quarter lastended prior to such interest payment date. The Term Loan A Interest Differential amount for the period beginningSeptember 1, 2006 and ending September 30, 2006 will be added to the Term Abalance on the effective date of the waiver.

OpBiz realized ashortfall to the minimum EBITDA requirement for the twelve month period endedAugust 31, 2006 of approximately $5 million. The Credit Agreement contains provisions to satisfy this covenant duringthe first two years of its applicability with an equity contribution equal tothe difference between the minimum required EBITDA and actual EBITDA within 90days of the measurement date.  Themembers of BH/RE have advised us that they intend to make the requiredcontribution within the prescribed timeframe and, accordingly, OpBiz does notanticipate an event of default for non-compliance with this covenant. If such equitycontribution is not made, we would seek a waiver of such default, however,there can be no assurance that it would be granted by the lenders under theCredit Agreement.  Minimum EBITDAcovenants beyond August 31, 2006 do not provide for the right to cure a defaultwith an equity contribution.  In theevent that we do not have sufficient EBITDA for the twelve month period endedAugust 31, 2007, it would constitute an event of default unless we obtain awaiver 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

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Hotel managementcontract or termination of Sheraton as the manager of the Hotel (unless OpBizreplaces Sheraton with another approved manager within 30 days of suchtermination), a default or termination of the Planet Hollywood licenseagreement and certain defaults under the agreements with Boulevard Invest orNorthwind 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 September 30, 2006. Thesewarrants are recorded 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.

The warrants areexercisable at any time, subject to the approval of the Nevada gamingauthorities, at a purchase price of $0.01 per unit. Subject to the approval ofthe Nevada gaming authorities, the warrants may be exercised to purchase eithervoting or non-voting membership interests of MezzCo or a combination thereof.Currently, all of MezzCo’s voting membership interests are represented by unitsowned by EquityCo. In addition to customary anti-dilution protections, thenumber of units representing MezzCo membership interests issuable upon exerciseof the warrants may be increased from time-to-time upon the occurrence ofcertain events as described in the warrants. The maximum aggregate increase is19%, following which the warrants would represent rights to purchase 36.5% ofthe units representing the fully diluted equity of MezzCo. Holders of thewarrants and any securities issued upon exercise of the warrants may requireMezzCo to redeem such securities commencing in August 2011 at a redemptionprice based upon a formula set forth in the warrants. Starting in August 2008,in the event the Company fails to achieve certain operational thresholds, theholders of the MezzCo warrants, and securities issued upon exercise thereof,have the right to assume control of MezzCo and OpBiz and conduct a sale of theequity of, or all or substantially all of the assets of, either MezzCo or OpBizprovided that all Control Conditions (as defined in the Investor RightsAgreement) are met. These rights are subject to (i) repayment in full ofall indebtedness that is senior to the notes (including all indebtedness ofOpBiz under the Credit Agreement), (ii) certain covenants related to OpBiz’sability to achieve targeted levels of EBITDA and (iii) the prior approvalof the Nevada gaming authorities. These rights expire upon 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 ofSeptember 30, 2006, the MezzCo financing was recorded net of the unamortizedbalance of the warrants of approximately $3.5 million. The estimated fair valueof the warrants was approximately $4.1 million at September 30, 2006 andDecember 31, 2005, and is recorded separately from the related debt withinother long-term liabilities.

*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.

***ProposedNew Financing Facility***

OpBiz has enteredinto a non-binding summary of terms with a lending source to obtain additionalfunding that will be used to refinance its existing indebtedness and tocomplete the renovation and transformation of the Aladdin into the PHResort.  Pursuant to the non-bindingsummary of terms, the financing facility may consist of both a mortgage loanand/or a mezzanine loan in an aggregate amount of up to $820 million.  The proposed new financing facility wouldhave a term of 24 months and bear interest at a rate equal to LIBOR plus anagreed upon spread based on the final loan amount (to be adjusted monthly andsubject to a cap).  The non-bindingsummary of terms does not represent a commitment to lend and we cannot assure you thatthis additional financing will ultimately be obtained on acceptable terms andconditions or at all.

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**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 atSeptember 30, 2006, would increase our annual interest expense for theremainder of 2006 by approximately $1.3 million.

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

Our management, with the participation of ourprincipal executive and chief financial officers, 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 September 30, 2006. Based ontheir evaluation, our principal executive and principal financial officersconcluded that our disclosure controls and procedures were effective as ofSeptember 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 September 30, 2006, that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over 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 renovation budget is only an estimate and actualcosts may exceed the budget.*

The final plans andspecifications 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 $176.3 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, equipmentor staffing problems or difficulties in obtaining any of the requisitelicenses, permits and authorizations from regulatory authorities could increasethe total cost of the renovations, delay or prevent the renovations orotherwise 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 able tofund the intended scope of the project or cost overruns.*

We do not expect the remaining renovation fund plusoperating cash available for use, as permitted under the Credit Agreement, tobe sufficient to fund the project as currently budgeted and we do not havecommitments for additional funding.  Such additional financing could be provided byour members with equity contributions or from additional debt financing. Wecannot assure you, however, that such funding, if necessary, will be availableon acceptable terms and conditions. Substantially all of our internallygenerated funds will be used to pay interest and principal under the CreditAgreement and therefore, cannot be used to fund the renovation.  If we do not obtain additional funding for thescope 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 continueoperating the Hotel and Casino under the Aladdin name during renovations. Weare conducting the renovation in phases and are otherwise attempting to reducedisruption to our business to the extent practicable. We have experiencedreductions in the planned cash flow generated from operations during therenovation.  We cannot assure you thatthe renovation process will not result in additional decreases in Hoteloccupancy or use of the Casino, either of which would have a continued negativeimpact on our results of operations and operating cash flow.

***RisksRelated to Our Substantial Indebtedness***

*Our substantial indebtedness could adversely affectour financial results.*

As of September 30, 2006,we have $496.5 million of indebtedness under the Credit Agreement,approximately $31.3 million of indebtedness under the Energy Service Agreementand approximately $119.8 million of indebtedness incurred by MezzCo. Theindebtedness under the Credit Agreement is secured by a first lien on all ofthe assets of OpBiz and a pledge of MezzCo’s equity interest in OpBiz.

The Credit Agreementprovides that substantially all of our excess cash flow (as defined in theCredit Agreement) will be used to pay down indebtedness of OpBiz after OpBizestablishes a $30 million cash reserve from operating cash flow. Therefore, wewill have limited cash flow available to fund working capital, capitalexpenditures permitted under the Credit Agreement and other general corporateactivities and to make distributions to our owners, other than limiteddistributions to pay interest and principal on indebtedness of MezzCo, anddistributions to pay income taxes. Our substantial indebtedness could also havethe following additional consequences:

·       limit our ability to obtain additional financingin the future;

·       increase our vulnerability to general adverseeconomic and industry conditions;

·       limit flexibility in planning for, or reactingto, changes in our business and industry; and

·       place us at a disadvantage compared to lessleveraged competitors.

The occurrence of any oneof these events could have a material adverse effect on our business, financialcondition, results of operations or prospects.

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*Ourfuture cash flows may not be sufficient to meet our debt obligations.*

Our ability to makepayments on our indebtedness depends on our ability to generate sufficient cashflow in the future. Our ability to generate cash flow will depend upon manyfactors, some of which are beyond our control, including:

·          ourability to complete the renovation of the Aladdin into the PH Resort asplanned;

·          ourability to minimize disruption 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 andregulatory factors affecting our operations and business; and

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

We cannot assure you thatwe will generate cash flow from operations in an amount sufficient to makepayments on our indebtedness or to fund other liquidity needs. Our inability togenerate sufficient cash flow would have a material adverse effect on ourfinancial condition and results of operations. In addition, if we are not ableto generate sufficient cash flow to service our indebtedness, we may need torefinance or restructure our indebtedness, sell assets, reduce or delay capitalinvestment, or seek to raise additional capital. If we cannot implement one ormore of these alternatives, we may not be able to meet our payment obligationsunder our indebtedness.

*The Credit Agreement imposes restrictions on ouroperations.*

The Credit Agreementimposes operating and financial restrictions on us. These restrictions include,among other things, limitations on our ability to:

·       incur additional debt;

·       create liens or other encumbrances;

·       make distributions with respect to our, or oursubsidiaries’, equity (other than distributions for tax obligations) or makeother restricted payments;

·       make investments, capital expenditures, loans orother guarantees;

·       sell or otherwise dispose of our assets; and

·       merge or consolidate with another entity.

*Our failure to complywith the covenants contained in the Credit Agreement, including as a result ofevents beyond our control, could result 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 have realized a shortfall to the minimum EBITDA requirement for thetwelve 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 

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31, 2006 do notprovide for the right to cure a default with an equity contribution.  In the event that we do not have sufficientEBITDA for the twelve month period ended August 31, 2007, it would constitutean event of default unless we obtain a waiver from the lenders under the CreditAgreement.

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 debtinstruments.  It is likely that, if thedefaulted debt is accelerated, our liquid assets and cash flow will not besufficient to fully repay borrowings under our outstanding debt instruments andwe cannot assure you that we would be able to refinance or restructure thepayments of those debt securities. Further, if we are unable to repay, refinance or restructure ourindebtedness under the Credit Agreement, the lenders under the Credit Agreementcould proceed against the collateral securing that indebtedness.

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

10                                        Waiverand Amendment No. 1 Agreement to the Credit Agreement (incorporated herein byreference to the Company’s Current Report on Form 8-K filed on November 1,2006)

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          Certificationpursuant to §906 of the Sarbanes-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.                         |
|--------------------|---------------------------------------|
|               |                                  |   |
|               |                                  |   |
| November 14,  2006 | By:                                   | /s/ Donna Lehmann |
|               | Donna Lehmann                         |
|               | Treasurer and Chief Financial Officer |

 

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**EXHIBITINDEX**
| Exhibit No. | ** ** | **Description**                                                                                                                                                               |
|-------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |       |                                                                                                                                                                          |
| 10          |       | Waiver and Amendment No. 1 Agreement to the Credit  Agreement (incorporated herein by reference to the Company’s Current Report  on Form 8-K filed on November 1, 2006). |
|        |       |                                                                                                                                                                          |
| 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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