** **

**UNITED STATES**

**SECURITIES ANDEXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

** **

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**FORM 10-Q**

** **
| **(Mark One)**                                              | ** ** | ** **                                                                                              |
|-------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|
| **x**                                                       | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
| ** **                                                  | ** ** | ** **                                                                                              |
| **For the quarterly period ended  September 30, 2007** |
| ** **                                                  | ** ** | ** **                                                                                              |
| **OR**                                                      |
| ** **                                                  | ** ** | ** **                                                                                              |
| **o**                                                       | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For the transition period from             to             **

** **

**Commission File Number 000-50689**

** **

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

(Exact Name ofRegistrant 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’sTelephone Number, Including Area Code)

 

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Indicate by check mark whether the Registrant(1) has filed all reports required by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the Registrant was required to file such reports) and(2) has been subject to such filing requirements for the past 90 days.   Yes x   No o

 

Indicate by check mark whether the Registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. (Seedefinition of “accelerated filer and large accelerated filer” inRule 12b-2 of the Securities Exchange Act of 1934).   (Check one):

 

Largeaccelerated filer o      Acceleratedfiler o      Non-acceleratedfiler x

 

Indicate by check mark whether the Registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act). Yes o   No x

 

 

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

 

Index

 
| PART I — FINANCIAL INFORMATION |
|-------------------------------------|
|                                |   |   |   |   |
|                                |   | ITEM 1. |   | FINANCIAL STATEMENTS: |
|                                |   |   |   |   |
|                                |   |   |   | Condensed Consolidated Balance Sheets  (Unaudited) |
|                                |   |   |   |   |
|                                |   |   |   | Condensed Consolidated Statements Of  Operations (Unaudited) |
|                                |   |   |   |   |
|                                |   |   |   | Condensed Consolidated Statements Of Cash  Flows (Unaudited) |
|                                |   |   |   |   |
|                                |   |   |   | Notes To Condensed Consolidated Financial  Statements (Unaudited) |
|                                |   |   |   |   |
|                                |   | ITEM 2. |   | MANAGEMENT’S DISCUSSION AND ANALYSIS OF  FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
|                                |   |   |   |   |
|                                |   | ITEM 3. |   | QUANTITATIVE AND QUALITATIVE DISCLOSURES  ABOUT MARKET RISK |
|                                |   |   |   |   |
|                                |   | ITEM 4. |   | CONTROLS AND PROCEDURES |
|                                |   |   |   |   |
| PART II — OTHER INFORMATION:   |
|                                |   |   |   |   |
|                                |   | ITEM 6. |   | EXHIBITS |
|                                |   |   |   |   |
|                                |   | SIGNATURES |

 

2

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** **

**PARTI - FINANCIAL INFORMATION**

 

**ITEM1. FINANCIAL STATEMENTS**

 

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

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(amounts in thousands)**

 
| ** **                                  | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                  | ** ** | **2007**               | ** ** | **2006**              | ** ** |
| ** **                                  | ** ** | **(unaudited)**        | ** ** | ** **            | ** ** |
| ASSETS                                      |       |                   |       |                  |       |
| Current assets:                             |       |                   |       |                  |       |
| Cash and cash equivalents                   |       | $                      | 23,154     |                  | $          | 25,640 |   |
| Receivables, net                            |       | 17,373                 |       | 12,917                |       |
| Inventories                                 |       | 1,291                  |       | 1,656                 |       |
| Prepaid expenses                            |       | 8,476                  |       | 8,111                 |       |
| Deposits and other current assets           |       | 1,396                  |       | 1,564                 |       |
| Restricted cash and cash equivalents        |       | 28,750                 |       | 18,341                |       |
| Total current assets                        |       | 80,440                 |       | 68,229                |       |
|                                        |       |                   |       |                  |       |
| Property and equipment, net                 |       | 558,997                |       | 524,054               |       |
| Restricted cash and cash equivalents        |       | 60,236                 |       | 128,049               |       |
| Land receivable                             |       | 21,344                 |       | —                |       |
| Other assets, net                           |       | 10,896                 |       | 16,862                |       |
| Total assets                                |       | $                      | 731,913    |                  | $          | 737,194 |   |
|                                        |       |                   |       |                  |       |
| LIABILITIES  AND MEMBERS’ DEFICIT      |       |                   |       |                  |       |
|                                        |       |                   |       |                  |       |
| Current liabilities:                        |       |                   |       |                  |       |
| Current portion of long-term debt           |       | $                      | 1,735      |                  | $          | 1,592 |   |
| Accounts payable                            |       | 14,126                 |       | 15,349                |       |
| Accrued payroll and related                 |       | 15,048                 |       | 12,573                |       |
| Accrued interest payable                    |       | 7,727                  |       | 6,059                 |       |
| Accrued taxes                               |       | 2,396                  |       | 2,526                 |       |
| Accrued expenses                            |       | 8,522                  |       | 6,270                 |       |
| Deposits                                    |       | 5,328                  |       | 5,752                 |       |
| Other current liabilities                   |       | 5,588                  |       | 7,519                 |       |
| Due to affiliates                           |       | 1,562                  |       | 1,425                 |       |
| Total current liabilities                   |       | 62,032                 |       | 59,065                |       |
|                                        |       |                   |       |                  |       |
| Long-term debt, less current portion        |       | 848,006                |       | 788,985               |       |
| Other long-term liabilities                 |       | 4,117                  |       | 4,117                 |       |
| Total liabilities                           |       | 914,155                |       | 852,167               |       |
|                                        |       |                   |       |                  |       |
| Commitments and contingencies (Note 9)      |       |                   |       |                  |       |
|                                        |       |                   |       |                  |       |
| Minority interest                           |       | (13,127                | )          | (3,034                | )          |
|                                        |       |                   |       |                  |       |
| Members’ deficit:                      |       |                   |       |                  |       |
| Members’ equity                        |       | 21,500                 |       | 21,500                |       |
| Accumulated deficit                         |       | (190,615               | )          | (133,439              | )          |
| Total members’ deficit                 |       | (169,115               | )          | (111,939              | )          |
| Total liabilities and members’ deficit |       | $                      | 731,913    |                  | $          | 737,194 |   |

 

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

 

3

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

**UNAUDITEDCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(amounts in thousands)**

 
| ** **                          | ** ** | **Three Months**            | ** ** | **Three Months**            | ** ** |
|-------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                          | ** ** | **Ended**                        | ** ** | **Ended**                        | ** ** |
| ** **                          | ** ** | **September 30, 2007** | ** ** | **September 30, 2006** | ** ** |
| ** **                          | ** ** | ** **                       | ** ** | ** **                       | ** ** |
| Operating revenues:                 |       |                             |       |                             |       |
| Casino                              |       | $                                | 26,373     |                             | $          | 25,099 |   |
| Hotel                               |       | 22,113                           |       | 25,714                           |       |
| Food and beverage                   |       | 11,307                           |       | 14,828                           |       |
| Other                               |       | 2,228                            |       | 3,084                            |       |
| Gross revenues                      |       | 62,021                           |       | 68,725                           |       |
| Promotional allowances              |       | (4,892                           | )          | (4,794                           | )          |
| Net revenues                        |       | 57,129                           |       | 63,931                           |       |
|                                |       |                             |       |                             |       |
| Operating costs and expenses:       |       |                             |       |                             |       |
| Casino                              |       | 17,920                           |       | 16,459                           |       |
| Hotel                               |       | 10,263                           |       | 10,201                           |       |
| Food and beverage                   |       | 8,841                            |       | 11,578                           |       |
| Other                               |       | 307                              |       | 641                              |       |
| Selling, general and administrative |       | 21,745                           |       | 20,080                           |       |
| Depreciation and amortization       |       | 10,740                           |       | 5,605                            |       |
|                                |       | 69,816                           |       | 64,564                           |       |
|                                |       |                             |       |                             |       |
| Operating loss                      |       | (12,687                          | )          | (633                             | )          |
|                                |       |                             |       |                             |       |
| Other income (expense):             |       |                             |       |                             |       |
| Interest expense, net               |       | (18,881                          | )          | (14,190                          | )          |
| Minority interest                   |       | 4,735                            |       | 2,220                            |       |
| Loss on warrant valuation           |       | —                           |       | 33                               |       |
|                                |       | (14,146                          | )          | (11,937                          | )          |
|                                |       |                             |       |                             |       |
| Pre-tax loss                        |       | (26,833                          | )          | (12,570                          | )          |
| Provision for income taxes          |       | —                           |       | —                           |       |
| Net loss                            |       | $                                | (26,833    | )                                | $          | (12,570 | ) |

 

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

 

4

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

**UNAUDITEDCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(amounts in thousands)**

 
| ** **                          | ** ** | **Nine Months**             | ** ** | **Nine Months**             | ** ** |
|-------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                          | ** ** | **Ended**                        | ** ** | **Ended**                        | ** ** |
| ** **                          | ** ** | **September 30, 2007** | ** ** | **September 30, 2006** | ** ** |
| ** **                          | ** ** | ** **                       | ** ** | ** **                       | ** ** |
| Operating revenues:                 |       |                             |       |                             |       |
| Casino                              |       | $                                | 76,636     |                             | $          | 80,601 |   |
| Hotel                               |       | 82,025                           |       | 83,572                           |       |
| Food and beverage                   |       | 35,787                           |       | 47,099                           |       |
| Other                               |       | 5,790                            |       | 11,248                           |       |
| Gross revenues                      |       | 200,238                          |       | 222,520                          |       |
| Promotional allowances              |       | (14,689                          | )          | (16,604                          | )          |
| Net revenues                        |       | 185,549                          |       | 205,916                          |       |
|                                |       |                             |       |                             |       |
| Operating costs and expenses:       |       |                             |       |                             |       |
| Casino                              |       | 49,814                           |       | 51,676                           |       |
| Hotel                               |       | 32,616                           |       | 30,512                           |       |
| Food and beverage                   |       | 27,116                           |       | 35,408                           |       |
| Other                               |       | 892                              |       | 4,633                            |       |
| Selling, general and administrative |       | 61,434                           |       | 56,472                           |       |
| Depreciation and amortization       |       | 26,631                           |       | 16,891                           |       |
|                                |       | 198,503                          |       | 195,592                          |       |
|                                |       |                             |       |                             |       |
| Operating (loss) income             |       | (12,954                          | )          | 10,324                           |       |
|                                |       |                             |       |                             |       |
| Other income (expense):             |       |                             |       |                             |       |
| Interest expense, net               |       | (54,317                          | )          | (42,098                          | )          |
| Minority interest                   |       | 10,093                           |       | 4,771                            |       |
| Loss on warrant valuation           |       | —                           |       | 24                               |       |
|                                |       | (44,224                          | )          | (37,303                          | )          |
|                                |       |                             |       |                             |       |
| Pre-tax loss                        |       | (57,178                          | )          | (26,979                          | )          |
| Provision for income taxes          |       | —                           |       | —                           |       |
| Net loss                            |       | $                                | (57,178    | )                                | $          | (26,979 | ) |

 

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

 

5

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

**UNAUDITEDCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(amounts in thousands)**

 
| ** **                                                                                 | ** ** | **Nine Months**             | ** ** | **Nine Months**             | ** ** |
|--------------------------------------------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                                                                 | ** ** | **Ended**                        | ** ** | **Ended**                        | ** ** |
| ** **                                                                                 | ** ** | **September 30, 2007** | ** ** | **September 30, 2006** | ** ** |
| ** **                                                                                 | ** ** | ** **                       | ** ** | ** **                       | ** ** |
| Cash flows from operating activities:                                                      |       |                             |       |                             |       |
| Net loss                                                                                   |       | $                                | (57,178    | )                                | $          | (26,979 | ) |
| Adjustments to reconcile net loss to net  cash (used in) provided by operating activities: |       |                             |       |                             |       |
| Depreciation and amortization                                                              |       | 26,631                           |       | 16,891                           |       |
| Amortization of debt discount and issuance  costs                                          |       | 5,085                            |       | 5,208                            |       |
| Minority interest                                                                          |       | (10,093                          | )          | (4,771                           | )          |
| Change in value of warrants                                                                |       | —                           |       | 308                              |       |
| Changes in assets and liabilities:                                                         |       |                             |       |                             |       |
| Receivables, net                                                                           |       | (25,799                          | )          | 5,130                            |       |
| Inventories and prepaid expenses                                                           |       | (2                               | )          | 546                              |       |
| Restricted cash and cash equivalents                                                       |       | (10,408                          | )          | —                           |       |
| Deposits and other assets                                                                  |       | 718                              |       | 1,815                            |       |
| Accounts payable                                                                           |       | (1,223                           | )          | 1,123                            |       |
| Accrued expenses and other current  liabilities                                            |       | 3,877                            |       | 1,477                            |       |
| Net cash (used in) provided by operating  activities                                       |       | (68,392                          | )          | 748                              |       |
| Cash flows from investing activities:                                                      |       |                             |       |                             |       |
| Purchases of property and equipment                                                        |       | (90,571                          | )          | (36,286                          | )          |
| Transfer of land                                                                           |       | 29,500                           |       | —                           |       |
| Restricted cash and cash equivalents                                                       |       | 67,813                           |       | 30,001                           |       |
| Net cash provided by (used in) investing  activities                                       |       | 6,742                            |       | (6,285                           | )          |
| Cash flows from financing activities:                                                      |       |                             |       |                             |       |
| Borrowings under Loan Agreement                                                            |       | 60,330                           |       | —                           |       |
| Payable-in-kind interest added to debt  principal                                          |       | —                           |       | 12,775                           |       |
| Payments under CUP financing                                                               |       | (1,166                           | )          | (1,040                           | )          |
| Payments under bank facility                                                               |       | —                           |       | (1,181                           | )          |
| Net cash provided by financing activities                                                  |       | 59,164                           |       | 10,554                           |       |
| Cash and cash equivalents:                                                                 |       |                             |       |                             |       |
| (Decrease) increase in cash and cash  equivalents                                          |       | (2,486                           | )          | 5,017                            |       |
| Balance, beginning of period                                                               |       | 25,640                           |       | 41,419                           |       |
| Balance, end of period                                                                     |       | $                                | 23,154     |                             | $          | 46,436 |   |
|                                                                                       |       |                             |       |                             |       |
| Supplemental cash flow disclosures:                                                        |       |                             |       |                             |       |
| Cash paid for interest, net of capitalized  interest                                       |       | $                                | 53,925     |                             | $          | 25,236 |   |

 

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

 

6

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

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

 

##### **1.****                                      ORGANIZATION ANDBASIS OF PRESENTATION**

#####  

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

######  

BH/RE, L.L.C. (“BH/RE” or the “Company”) is aholding company that owns 85% of EquityCo, L.L.C. (“EquityCo”). The remaining15% of EquityCo is owned indirectly by Starwood Hotels & ResortsWorldwide, Inc. (“Starwood”). MezzCo, L.L.C. (“MezzCo”) is a wholly ownedsubsidiary of EquityCo and each of OpBiz, LLC (“OpBiz”) and PH Mezz II LLC (“PHMezz II”) are wholly owned subsidiaries of MezzCo. PH Mezz I LLC (“PH Mezz I”),is a wholly owned subsidiary of PH Mezz II. PH Fee Owner LLC (“PH Fee Owner”)is a wholly owned subsidiary of PH Mezz I. TSP Owner LLC (“TSP Owner”) is awholly owned subsidiary of PH Fee Owner. PH Mezz II, PH Mezz I, PH Fee Ownerand TSP Owner are Delaware limited liability companies structured as bankruptcyremote special purpose entities which, together with OpBiz, own and operate thePlanet Hollywood Resort and Casino (the “PH Resort”). OpBiz is the licensedowner and operator of the gaming assets, and leases the casino space and hotelspace together with all hotel assets from PH Fee Owner. TSP Owner is the ownerof the parcel of land (the “Timeshare Parcel”) that was sold on September 19,2007 to Westgate Resorts, LLC (“Westgate”). Westgate plans to develop, market,manage and sell timeshare units on the land adjacent to the PH Resort. 50% ofBH/RE’s voting membership interests are held by each of Robert Earl and DouglasP. Teitelbaum, and BH/RE’s equity membership interests are held 40.75% by BHCasino and Hospitality LLC I (“BHCH I”), 18.50% by BH Casino and HospitalityLLC II (“BHCH II”) (together, “BHCH”) and 40.75% by OCS Consultants, Inc.(“OCS”).

 

BH/RE andits subsidiaries were formed to acquire, operate and renovate the formerAladdin Resort and Casino (the “Aladdin”) located in Las Vegas, Nevada. OpBiz,an indirect subsidiary of BH/RE, completed the acquisition of the Aladdin onSeptember 1, 2004 and is currently completing a renovation project on theproperty. On April 17, 2007, the property officially began operation asthe PH Resort. In connection with the acquisition of the resort, OpBiz hasentered into an agreement with Planet Hollywood International, Inc. (“PlanetHollywood”) and certain of its subsidiaries to, among other things, licensePlanet Hollywood’s trademarks, memorabilia and other intellectual property.OpBiz has also entered into an agreement with Sheraton Operating Corporation (“Sheraton”),a subsidiary of Starwood, pursuant to which Sheraton provides hotel management,marketing and reservation services for the hotel (the “Hotel”) that comprises aportion of the PH Resort.

 

BH/RE is aNevada limited liability company and was organized on March 31, 2003.BH/RE was formed by BHCH and OCS. BHCH is controlled by Douglas P. Teitelbaum,a managing principal of Bay Harbour Management, L.C. (“Bay HarbourManagement”). BHCHwas formed by Mr. Teitelbaum for the purpose of holding investments inBH/RE by funds managed by Bay Harbour Management. Bay Harbour Management is aninvestment management firm. OCS is wholly owned and controlled by Robert Earland holds Mr. Earl’s investment in BH/RE. Mr. Earl is the founder,chairman and chief executive officer of Planet Hollywood and Mr. Teitelbaumis a director 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.

 

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

######  

The accompanying condensed consolidated financialstatements included herein have been prepared by the management of BH/RE,without audit, pursuant to the rules and regulations of the Securities andExchange Commission. Certain information and footnote disclosures normallyincluded in financial statements prepared in accordance with U.S. generallyaccepted accounting principles have been condensed or omitted pursuant to suchrules and regulations. BH/RE believes that the disclosures are adequate tomake the information presented not misleading. In the opinion of management,all adjustments (which include normal recurring adjustments) necessary for afair presentation of the results for the interim periods have been made. Theresults for the three and nine months ended September 30, 2007, are notindicative of results to be expected for the full fiscal year. These unauditedfinancial statements should be read in conjunction with the audited financialstatements and notes thereto for the year ended December 31, 2006,included in BH/RE’s Annual Report on Form 10-K filed with the Securitiesand Exchange Commission on April 2, 2007.

 

7

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

#####  

###### ***SignificantAccounting Policies and Estimates***

######  

Theunaudited condensed consolidated financial statements are prepared inconformity with U.S. generally accepted accounting principles. Certainpolicies, including the determination of bad debt reserves, the estimateduseful lives assigned to assets, asset impairment, insurance reserves and thecalculation of liabilities require that management apply significant judgmentin defining the appropriate assumptions for calculating financial estimates. Bytheir nature, these judgments are subject to an inherent degree of uncertainty.Management’s judgments are based on historical experience, terms of existingcontracts, observance of trends in the gaming industry and informationavailable from other outside sources. There can be no assurance that actualresults will not differ from management’s estimates.

 

To providean understanding of the methodology management applies, BH/RE’s significantaccounting policies and basis of presentation are discussed below.

 

###### *Cashand Cash Equivalents*

######  

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

 

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

######  

The balance in current restricted cash and cash equivalentsat September 30, 2007 and December 31, 2006 was approximately $28.7 million and$18.3 million, respectively, which consists of reserves required under the LoanAgreement (as defined in Note 5 to the Condensed Consolidated FinancialStatements) including a reserve for payment of property taxes andinsurance and a reserve for on-going furniture, fixture and equipment purchasesor property improvements. Long-term restricted cash and cash equivalents consist of approximately$60.2 million and $128.0 million at September 30, 2007 and December 31, 2006,respectively, which represents the remaining cash commitments for the plannedrenovations to the PH Resort and includes a reserve for interest shortfalls anda contingency required by the Loan Agreement which will be released, inaccordance with the terms of the Loan Agreement,  if the cost of the renovation does not exceedthe current budget.

 

###### *AccountsReceivable*

######  

Accountsreceivable, including casino and hotel receivables, are typically non-interestbearing and are initially recorded at cost. An estimated allowance for doubtfulaccounts is maintained to reduce the receivables to their carrying amount,which approximates fair value. BH/RE estimates the allowance for doubtfulaccounts by applying standard reserve percentages, which are based onhistorical collections, to aged account balances under a specific dollar amountand specifically analyzes the collectibility of each account with a balanceover the specified dollar amount, based on the age of the account, the customer’sfinancial condition, collection history and any other known information.

 

8

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###### *Inventories*

######  

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

 

###### *Property and Equipment*

######  

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

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

 

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

 

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

 

*Capitalized Interest*

 

The interest cost associated with the renovationproject is capitalized and added to the cost of the project. Interestcapitalization will cease once the project is substantially complete. TheCompany capitalizes interest expense on amounts expended on the project at theCompany’s cost of borrowed money for the period. Capitalized interestapproximated $8.6 million and $3.2 million as of September 30, 2007and December 31, 2006, respectively.

 

*DebtIssuance Costs*

 

Debt issuance costs incurred in connection with theissuance of long-term debt are capitalized and amortized to interest expenseover the expected terms of the related debt agreements using the straight-linemethod, which approximates the effective interest method, and are included inother assets on BH/RE’s consolidated balance sheets. Debt issuance costs, netof the related amortization, approximated $9.8 million and $14.8 million as ofSeptember 30, 2007 and December 31, 2006, respectively.

 

*Intangible Assets*

 

In connection with the purchase of the Aladdin and asa result of an independent appraisal of the assets purchased, BH/RE recordedintangible assets, which consist of a customer list and trade name. Thecustomer list was valued at approximately $2.7 million at the time of purchaseand at September 30, 2007, had a net book value of approximately $0.6 million.The customer list is being amortized using the straight-line method over auseful life of 4 years. The trade name was valued at approximately $1.0 millionat the time of purchase and was fully amortized at September 30, 2007.

 

*Derivative Instruments and Hedging Activities*

 

Pursuant to therefinancing of the Securities Purchase Agreement and the terms of theRestructuring Agreement (each as defined in Note 5 to the CondensedConsolidated Financial Statements), the restructuring parties agreed to amendthe

 

9

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warrants issued by MezzCo to purchase 17.5% of thefully diluted equity in MezzCo. The warrants contain a net cash settlement, andtherefore are accounted for in accordance with Emerging Issues Task Force (“EITF”)00-19, “*Accounting for Derivative Financial InstrumentsIndexed to, and Potentially Settled in, a Company’s Own Stock*”. BothSFAS No. 133 and EITF 00-19 require that the warrants be recognizedas liabilities, with changes in fair value affecting net income. See “Note 5-  Long-Term Debt.”

 

The terms of the LoanAgreement required the Company to enter into an interest rate cap agreement,which expires on November 30, 2008, to manage interest rate risk. TheCompany did not apply cash flow hedge accounting to this instrument. Althoughthis derivative was not afforded cash flow hedge accounting, the Companyretained the instrument as protection against the interest rate risk associatedwith its long-term borrowings. The Company accounts for its derivative activityin accordance with SFAS No. 133 and accordingly, recognizes allderivatives on the balance sheet at fair value with any in change in fair valuebeing recorded in interest income or expense in the accompanying consolidatedstatements of operations. The interest rate cap is included in other assets inthe accompanying financial statements at a value of $0.1 million as ofSeptember 30, 2007. As of December 31, 2006, the value of the interestrate cap was $0.2 million.

 

###### *Revenue Recognition and PromotionalAllowances*

######  

Casino revenues are recognized as the net win fromgaming activities, which is the difference between gaming wins and losses.Hotel revenue recognition criteria are generally met at the time of occupancy.Food and beverage revenue recognition criteria are generally met at the time 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. All other revenues are recognized as the service is provided.Revenues include the retail value of food, beverage, rooms, entertainment andmerchandise provided on a complimentary basis to customers. Such complimentaryamounts are then deducted from revenues as promotional allowances on BH/RE’sconsolidated statements of operations. The estimated departmental costs ofproviding such promotional allowances are included in casino costs and expensesand consist of the following (amounts in thousands, unaudited):

 
| ** **                           | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                           | ** ** | **2007**                                                 | ** ** | **2006**                                                | ** ** | **2007** | ** ** | **2006** | ** ** |
| Rooms                                |       | $                                                        | 1,087      |                                                    | $          | 905 |   | $ | 2,967 |   | $ | 2,807 |   |
| Food and Beverage                    |       | 2,429                                                    |       | 2,136                                                   |       | 6,731 |   | 6,958 |   |
| Other                                |       | 9                                                        |       | 82                                                      |       | 19 |   | 757 |   |
| Total cost of promotional allowances | ** ** | **$**                                                    | **3,525**  | ** **                                              | **$**      | **3,123** | ** ** | **$** | **9,717** | ** ** | **$** | **10,522** | ** ** |

 

###### *Slot Club Program*

######  

The PH Resort’s slot club members earn points based ongaming activity, which can be redeemed for cash. A liability is recorded forthe estimated cost of the outstanding points accrued under the slot clubprogram. The accrued slot club point liability was approximately $1.7 millionand $1.6 million as of September 30, 2007 and December 31, 2006,respectively.

 

*Advertising Costs*

 

Advertisingcosts are expensed as incurred and included in selling, general andadministrative costs and expenses. Advertising costs totaled approximately $2.0million and $5.0 million for the three and nine months ended September 30,2007, respectively, and $0.9 million and $3.2 million for the three and ninemonths ended September 30, 2006, respectively.

 

10

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*MembershipInterests*

 

As of September 30, 2007, 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.

 

*RecentlyIssued Accounting Pronouncements*

 

In September 2006, the FASB issued Statement of FinancialAccounting Standards No. 157, “Fair Value Measurements” (“SFAS 157”), whichdefines fair value, establishes a framework for measuring fair value, andexpands disclosures above fair value measurements. SFAS 157 is effectivefor financial statements issued for fiscal years beginning afterNovember 15, 2007, and interim periods within those fiscal years. Managementis currently evaluating the impact SFAS 157 will have on the financialstatements of the Company.

 

In February2007, the FASB issued Statement of Financial Accounting Standards No. 159,“The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS159”). SFAS 159 permits entities to choose to measure many financialinstruments and certain warranty and insurance contracts at fair value on acontract-by-contract basis. A business entity is required to report unrealizedgains and losses on items for which the fair value option has been elected inearnings at each subsequent reporting date. SFAS 159 is effective forfinancial statements issues for fiscal years beginning after November 15,2007. Management is currently evaluating the impact SFAS 159 will have on thefinancial statements of the Company.

 

**3.****                                      RECEIVABLES**

 

Receivablesconsist of the following (in thousands):

 
| ** **                               | ** ** | **September 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                               | ** ** | **(unaudited)**              | ** ** | ** **                  | ** ** |
| Casino                                   |       | $                            | 10,585     |                        | $          | 9,972 |   |
| Hotel                                    |       | 7,767                        |       | 8,014                       |       |
| Current portion  of land sale receivable |       | 5,062                        |       | —                      |       |
| Other                                    |       | 1,591                        |       | 1,487                       |       |
|                                     |       | 25,005                       |       | 19,473                      |       |
| Allowance for  doubtful accounts         |       | (7,632                       | )          | (6,556                      | )          |
| Receivables, net                         |       | $                            | 17,373     |                        | $          | 12,917 |   |

 

 

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

 

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

 
| ** **                        | ** ** | **September 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|-----------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                        | ** ** | **(unaudited)**              | ** ** | ** **                  | ** ** |
| Land                              |       | $                            | 68,479     |                        | $          | 97,979 |   |
| Building and improvements         |       | 475,468                      |       | 367,663                     |       |
| Furniture, fixtures and equipment |       | 70,197                       |       | 36,444                      |       |
| Construction in progress          |       | 21,058                       |       | 72,044                      |       |
|                              |       | 635,202                      |       | 574,130                     |       |
| Accumulated depreciation          |       | (76,205                      | )          | (50,076                     | )          |
| Property and equipment, net       |       | $                            | 558,997    |                        | $          | 524,054 |   |

 

Depreciation expense was approximately $10.7 million and $26.6 millionfor the three and nine months ended September 30, 2007, respectively, and $5.6million and $16.9 million for the three and nine months ended September 30, 2006,respectively.

 

11

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OnSeptember 19, 2007, the sale of the land and deed transfer to Westgate wascompleted. See Note 9 for additional discussion on the completion of the landsale.

 

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

 

Long-term debt consists of the following (inthousands):

 
| ** **                                        | ** ** | **September 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|---------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                        | ** ** | **(unaudited)**              | ** ** | ** **                  | ** ** |
| $860 million Loan Agreement        |       | $                            | 820,000    |                        | $          | 759,670 |   |
| Northwind Aladdin obligation under capital  lease |       | 29,741                       |       | 30,907                      |       |
| Total long-term debt                              |       | 849,741                      |       | 790,577                     |       |
| Current portion of long-term debt                 |       | (1,735                       | )          | (1,592                      | )          |
| Total long-term debt, net                         |       | $                            | 848,006    |                        | $          | 788,985 |   |

 

***LoanAgreement***

* *

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

 

The term of the Loan istwenty four months with three one year extension options subject to payment ofa fee and the Borrower’s compliance with the requirements for an extensionoutlined in the Loan Agreement. Interest on the Loan is payable monthly andaccrues at a rate of LIBOR plus 3.25% (9.00% and 8.60% at September 30, 2007and December 31, 2006, respectively) with a .25% ticking fee on availablebut un-advanced future funding. Interest on Future Funding Tranche B is payablemonthly and accrues at a rate of LIBOR plus 7.50% (13.25% at September 30,2007) with a 1.50% ticking fee on available but un-advanced funds. The Loandoes not require amortization during the initial term or, provided certainEBITDA thresholds are met, during the extension periods. The Loan requires thatthe Borrower establish and maintain certain reserves including a reserve forcompletion of the renovation project as currently budgeted, a reserve forprojected interest shortfalls, a reserve for payment of property taxes andinsurance and a reserve for on-going furniture, fixture and equipment purchasesor property improvements. The Loan restricts the Borrower’s ability to spendexcess cash flow until certain debt service coverage ratios are met.

 

Using the proceeds fromthe Loan, all amounts outstanding under the Credit Agreement, datedAugust 31, 2004, among OpBiz, the lenders named therein (the “Lenders”)and The Bank of New York, Asset Solution Division (the “Senior Agent”) werepaid in full. Pursuant to the terms of the Credit Agreement, upon repayment ofall amounts due, the warrant to purchase 2.5% of the equity in EquityCo issuedto the Lenders at the closing of the Credit Agreement became exercisable. TheCompany compensated the holders of all unexercised warrants in accordance withthe terms of a letter agreement between the parties and the warrants werecanceled.

 

In addition, in order topermit the Lender to foreclose on the hotel and casino separately and to allowOpBiz to continue to operate the casino after such a foreclosure (should theLender choose to do so), title to the real property comprising the hotel andcasino (the “Property”) was transferred from OpBiz to PH Fee Owner. OpBiz andPH Fee Owner then entered into a lease pursuant to which OpBiz agreed tocontinue to operate the hotel in the manner it had been and to pay monthly rentof approximately $916,000. OpBiz and PH Fee Owner also entered into a leasepursuant to which OpBiz agreed to continue to operate the casino in the mannerit had been and to pay monthly rent of approximately $1,160,000.

 

In connection with theLoan, the Lender required that Trophy Hunter Investments, Ltd., Bay Harbour 90-1,Ltd. and Bay Harbour Master Ltd., which are affiliates of Bay HarbourManagement, execute and deliver a certain Guaranty (as described below). Inexchange for Trophy Hunter Investments, Ltd. and Bay Harbour Master Ltd. (the “Guarantors”)executing the

 

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Guaranty, OpBiz and PH Fee Owner agreed to pay toTrophy Hunter Investments, Ltd. and Bay Harbour Master Ltd. a fee equal to$1,500,000 per year. The fee is accrued and only payable when OpBiz meetscertain debt service coverage ratios defined in the Loan Agreement.

 

In connection with theLoan, the Guarantors entered into a Guaranty, dated November 30, 2006 (the“Guaranty”), pursuant to which the Guarantors agreed to indemnify the Lenderagainst losses related to certain prohibited actions of the Borrower andguarantied full repayment of the Loan in the case of a voluntary or collusivebankruptcy of the Borrower, a transfer of the Property or interests in theBorrower in violation of the Loan Agreement and if the Borrower fails tomaintain its status as a bankruptcy remote entity and as a result sees itsassets consolidated with those of an affiliate in a bankruptcy.

 

The liability of the Guarantors is capped at$15,000,000 per entity and $30,000,000 in the aggregate, however this cap doesnot apply to (i) liability arising from events, acts or circumstancesactually committed or brought about by the willful acts of any of the Guarantorsand (ii) the extent of any benefit received by any of the Guarantors as aresult of the acts giving rise to the liability under the Guaranty. Each ofDouglas Teitelbaum and Robert Earl executed and delivered guarantiessubstantially the same as that delivered by the Guarantors, however, theliability of each of them was limited to (i) the liability arising fromevents, acts or circumstances actually committed or brought about by willfulacts by him and (ii) the extent of any benefit received by him as a resultof the acts giving rise to the liability under the Guaranty.

 

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

 

In addition, inconnection with the Loan Agreement, a refinancing of the Securities PurchaseAgreement, dated August 9, 2004, among MezzCo and the investors thereto(the “Investors”), pursuant to which MezzCo issued to the Investors(i) 16% senior subordinated secured Notes in the original aggregateprincipal amount of $87 million, and (ii) Warrants for the purchase(subject to certain adjustments as provided for therein) of membership interestsof MezzCo, representing 17.5% of its fully diluted equity was completed. Loanproceeds were used to redeem the Notes in full.

 

In connection with therefinancing of the Securities Purchase Agreement and redemption of the Notes,the restructuring parties entered into the Restructuring Agreement, datedNovember 30, 2006, pursuant to which the restructuring parties terminatedin full the Securities Purchase Agreement, the Subordination Agreement, datedas of August 31, 2004, among MezzCo, OpBiz, the Senior Agent and theInvestors, the Pledge Agreement, dated August 9, 2006, among MezzCo andthe Collateral Agent, and the Guaranty, dated August 9, 2004, made byOpBiz to the Investors, and amended certain other existing agreements, asdescribed below.

 

In accordance with theterms of the Restructuring Agreement, the Investors and EquityCo, MezzCo andOpBiz entered into a Release, Consent and Waiver Agreement, pursuant to whichthe Investors (i) released OpBiz from its guaranteed obligations, under thatcertain Guaranty Agreement, dated as of August 9, 2004 and executed byOpBiz in favor of the Investors and the collateral agent; (ii) releasedMezzCo from its pledge of the collateral, under that certain Pledge Agreement,dated as of August 9, 2004, and executed by MezzCo in favor of thecollateral agent, the Investors released their security interest, as defined inthat certain Security Agreement, as amended by that certain Amendment toSecurity Agreement, in each case dated as of August 9, 2004 and executed bythe Company in favor of the collateral agent; (iii) released andterminated the Deed of Trust, dated as of August 9, 2004 and executed byMezzCo in favor of the Trustee (as defined therein) for the benefit of thecollateral agent; (iv) released and terminated the Investors’ securityinterest in the securities account, provided for that certain SecuritiesAccount Control Agreement, dated as of August 9, 2004 and executed by theCompany, the collateral agent and Wells Fargo Bank, N.A.

 

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

 

Pursuant to theRestructuring Agreement, the Restructuring Parties agreed to amend the Warrantsby issuing Amended and Restated Warrants to Purchase Membership Interests ofMezzCo (the “A&R Warrants”) to the Investors. The A&R Warrants will beexercisable 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 17.5%of 

 

13

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either voting or non-voting membership interests ofMezzCo or a combination thereof through the expiration date of December 9,2012. In addition to customary anti-dilution protections, the number of unitsrepresenting MezzCo membership interests issuable upon exercise of the A&RWarrants may be increased from time to time upon the occurrence of certainevents as described in the A&R Warrants. Holders of the A&R Warrantsand any securities issued upon exercise thereof may require MezzCo to redeemsuch securities commencing on December 9, 2011 at a redemption price basedupon a formula set forth in the A&R Warrants. These rights expire uponcompletion of a public offering by MezzCo or OpBiz. The A&R Investor RightsAgreement and the A&R Warrants were amended to permit the Company to incurthe additional Future Funding Tranche B debt but provides that the number ofunits representing MezzCo membership interests issuable upon exercise of theA&R Warrants may be increased from time to time upon the occurrence ofcertain additional events surrounding the use of Tranche B Future Funding asdescribed in the Investor Rights Agreement.

 

In connection with theRestructuring Agreement, EquityCo entered into a Guaranty Agreement, datedNovember 30, 2006 (the “Guaranty Agreement”), in favor of the Investorsand the Collateral Agent, pursuant to which EquityCo has guaranteed theobligation of MezzCo to pay the redemption price under the A&R Warrantsprior to expiration and any indebtedness arising under the Put Note (as definedin the A&R Warrants).

 

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

 

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

 

***Energy Services Agreement***

*** ***

Northwind Aladdin (“Northwind”),a third party, owns and operates a central utility plant on land leased fromOpBiz. The plant supplies hot and cold water and emergency power to the PHResort under an energy services agreement between OpBiz and Northwind, whichexpires in 2018. Under the agreement, OpBiz is 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 $0.4 million per month.

 

**6.****                                      MEMBERSHIPINTERESTS**

 

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

 

BH/RE owns 85%of the membership interests in EquityCo and Starwood owns 15%. MezzCo is awholly owned subsidiary of EquityCo, and OpBiz is a wholly owned subsidiary ofMezzCo. BH/RE and Starwood made total equity contributions of $20 million eachin EquityCo to fund the costs of the planned renovations to the Aladdin. Starwood’sequity interest in EquityCo is reflected as minority interest in theaccompanying condensed consolidated financial statements. BH/RE recordedminority interest income related to the Starwood interests of approximately$4.7 million and $2.2 million for the three months ended September 30, 2007 and2006, respectively, and $10.1million and $4.8 million for the nine months endedSeptember 30, 2007 and 2006, respectively.

 

BH/RE has theoption to purchase all of Starwood’s membership interests in EquityCo if OpBizis entitled to terminate the hotel management contract between OpBiz andSheraton as a result of a breach by Sheraton. Starwood can require EquityCo topurchase all of its membership interests in EquityCo if the hotel managementcontract is terminated for any

 

14

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reason otherthan in accordance with its terms or as the result of a breach by Sheraton. Inaddition, BH/RE and Starwood entered into a registration rights agreement withrespect to their membership interests in EquityCo.

 

The Companyhas entered into various employment agreements, as amended, with severalexecutives. The employment agreements have initial terms of two to five years.The employment agreements provide that the executives will receive a basesalary with either mandatory increases or annual adjustments and annual bonuspayments. In addition, depending on the terms of the employment agreements,these executives are entitled to options to purchase between 0.2% and 3% of theequity of MezzCo.

 

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

 

There is $0.05 million and $0.1 million of compensation cost, whichapproximated fair value, related to non-qualified stock options recognized inoperating results (included in selling, general and administrative expenses)for the three and nine months ended September 30, 2007, respectively.

 

The fair value of each option award is estimated on the date of grantusing the Black-Scholes-Merton option pricing model. Expected volatility isbased on historical volatility trends as well as implied future volatilityobservations as determined by independent third parties. In determining theexpected life of the option grants, the Company used historical data toestimate option exercise and employee termination behavior. The expected termrepresents an estimate of the time options are expected to remain outstanding.The risk-free interest rate for periods within the contractual life of theoption is based on the U.S. treasury yield curve in effect at the time ofgrant. The following table sets forth the assumptions used to determinecompensation cost for the Company’s non-qualified stock options consistent withthe requirements of SFAS No. 123(R).

 

15

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| ** **                                                                                                                                             | ** ** | **Three and Nine  Months  Ended  September   30, 2007** | ** ** | **Three and Nine  Months  Ended  September  30, 2006** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                                                                                                             | ** ** | **(unaudited)**                                                             | ** ** | **(unaudited)**                                                       | ** ** |
| Weighted-average fair value per share of  options granted during the period (estimated on grant date using  Black-Scholes-Merton option-pricing model) |       | $                                                                           | 235.28     |                                                                  | $          | 235.28 |   |
| Weighted-average assumptions:                                                                                                                          |       |                                                                        |       |                                                                  |       |
| Expected stock price volatility                                                                                                                        |       | 36                                                                          | %          | 36                                                                    | %          |
| Risk-free interest rate                                                                                                                                |       | 3.76                                                                        | %          | 3.76                                                                  | %          |
| Expected option life (years)                                                                                                                           |       | 7                                                                           |       | 7                                                                     |       |
| Expected annual dividend yield                                                                                                                         |       | —                                                                      | %          | —                                                                | %          |
|                                                                                                                                                        |            |                                                                             |            |                                                                       |            |  |  |

 

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

 

***Planet Hollywood Licensing Agreement***

*** ***

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

 

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

 

***Sheraton Hotel Management Contract***

*** ***

OpBiz and Sheraton haveentered into a management contract pursuant to which Sheraton provides hotelmanagement services to OpBiz, assists OpBiz in the management, operation andpromotion of the Hotel and permits OpBiz to use the Sheraton brand andtrademarks in the promotion of the Hotel. OpBiz pays Sheraton a monthly fee of4% of gross hotel revenue and certain food and beverage outlet revenues and 2%of rental income from third-party leases in the hotel. The management contracthas a 20-year term which commenced on September 1, 2004 and is subject tocertain termination provisions by either OpBiz or Sheraton. Sheraton is awholly owned subsidiary of Starwood, which has a 15% equity interest inEquityCo and has the right to appoint two members to the EquityCo board ofmanagers. Management fees paid to Starwood totaled approximately $2.0 millionand $2.3 million for the three months ended September 30, 2007 and 2006,respectively, and $7.1 million and $7.5 million for the nine months endedSeptember 30, 2007 and 2006, respectively.

 

***Planet Hollywood (LV) LLC Lease Agreement***

*** ***

OpBiz and PlanetHollywood (LV) LLC (“Planet Hollywood LV”) have entered into a lease agreementpursuant to which Planet Hollywood LV, as tenant, will operate a new concept ithas developed for an upscale 24-hour diner named “Planet Dailies” withinapproximately 11,500 square feet of space located on the premises owned byOpBiz. Planet Hollywood LV will pay OpBiz base rent in the amount of $500,000per year (subject to annual increase adjustments), in addition to percentagerent of up to 12% based on annual gross sales (to the extent such percentagerent exceeds base rent), following commencement of its business operations inthe leased space. The initial term of the lease agreement will expire in 2017.Planet Hollywood LV can renew the lease agreement for two successive 5-yearterms. The Company believes that the provisions of this lease agreement reflectarm’s length market terms and that it is comparable to other lease agreementsOpBiz has entered into with third-party restaurant operators. Planet Dailiesbegan operation on April 1, 2007 and began paying rent pursuant to the leaseagreement as of that date. Rent received from Planet Dailies totaledapproximately $0.1 million for each of the three and nine months endedSeptember 30, 2007.

 

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Planet Hollywood LV iswholly owned by, and a subsidiary of, Planet Hollywood International, Inc.Together, Mr. Earl, a trust for the benefit of Mr. Earl’s childrenand affiliates of Bay Harbour Management, own substantially all of the equityof Planet Hollywood International, Inc. Mr. Earl disclaims beneficialownership of any equity of Planet Hollywood International Inc. owned by thetrust.

 

***Earl of Sandwich (Las Vegas), LLC Lease Agreement***

*** ***

OpBiz and Earl ofSandwich (Las Vegas), LLC (“Earl of Sandwich”) have entered into a leaseagreement pursuant to which Earl of Sandwich, as tenant, will operate arestaurant named “Earl of Sandwich” within approximately 3,030 square feet ofspace located on the premises owned by OpBiz. Earl of Sandwich will pay OpBizbase rent in the amount of $161,600 per year (subject to annual increaseadjustments), in addition to percentage rent of up to 12% based on annual grosssales (to the extent such percentage rent exceeds base rent), followingcommencement of its business operations in the leased space. The initial termof the lease agreement will expire in 2017. Earl of Sandwich can renew thelease agreement for two successive 5-year terms. Earl of Sandwich beganoperation in September 2007 and began paying rent pursuant to the leaseagreement as of that date. Rent received from Earl of Sandwich totaledapproximately $5,000 for the month of September 2007. The Company believes thatthe provisions of this lease agreement reflect arm’s length market terms andthat it is comparable to other lease agreements OpBiz has entered into withthird-party restaurant operators.

 

Earl of Sandwich iswholly and indirectly owned by a trust for the benefit of Mr. Earl’schildren. Mr. Earl disclaims beneficial ownership of any equity of Earl ofSandwich owned by the trust.

 

***Guaranty Agreement***

*** ***

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

 

***Aircraft Charter Arrangements***

 

In the ordinary course from time to time the Company utilizes theservices of private aircrafts for charter. The Company currently utilizesseveral different third-party aircraft management/charter vendors for theprovision of charter flights depending upon aircraft size, availability and location.One or more affiliates of BH/RE have placed an owned aircraft in service withone such vendor. From time to time, the Company may utilize the services ofthis vendor which may involve the affiliates’ owned aircraft provided that therate charged for that aircraft shall be at arm’s length and fair market forsimilar aircraft.

 

**8.****                                      INCOMETAXES**

 

The condensedconsolidated financial statements include the operations of BH/RE and itsmajority-owned subsidiaries: EquityCo, MezzCo, OpBiz, PH Mezz II, PH Mezz I, PHFee Owner and TSP Owner. BH/RE and EquityCo are limited liability companies andare taxed as partnerships for federal income tax purposes. However, MezzCo haselected to be taxed as a corporation for federal income tax purposes. OpBiz andPH Mezz II,  wholly-owned subsidiaries ofMezzCo, will be treated as divisions of MezzCo for federal income tax purposes,and accordingly, will also be subject to federal income taxes. Additionally, PHMezz I, a wholly-owned subsidiary of PH Mezz II, PH Fee Owner, a wholly ownedsubsidiary of PH Mezz I and TSP Owner, a wholly owned subsidiary of PH FeeOwner will also be subject to federal income taxes.

 

MezzCo, OpBiz, PH MezzII, PH Mezz I, PH Fee Owner and TSP Owner account for income taxes inaccordance with SFAS No. 109, “*Accounting for IncomeTaxes*”. SFAS 109 requires the recognition of deferred income taxassets, net of applicable reserves, related to net operating loss carryforwardsand certain temporary differences. The standard requires recognition of a futuretax benefit to the extent that realization of such benefit is more likely thannot. Otherwise, a valuation allowance is applied.

 

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

 

17

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As of December 31,2006, MezzCo has federal net operating losses of $147,180,060 which begin toexpire after 2024. MezzCo has general business credit carryforwards atDecember 31, 2006 of $1,036,000 which begin to expire after 2024 and aminimum tax credit carryforward of $15,000.

 

The Company adopted FASBInterpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”),on January 1, 2007. FIN 48 clarifies the accounting for uncertainty in incometaxes recognized in an enterprise’s financial statements in accordance withFASB 109. FIN 48 also prescribes a recognition threshold and measurementstandard for the financial statement recognition and measurement of an incometax position taken or expected to be taken in a tax return. Only tax positionsthat meet the more-likely-than not recognition threshold at the effective datemay be recognized or continue to be recognized upon adoption. In addtion, FIN48 provides guidance on derecognition, classification, interest and penalties,accounting in interim periods, disclosure and transition.

 

At the time FIN 48 becameeffective, the Company had $1.8 million of uncertain tax benefits. Upon theadoption of FIN 48, the Company reclassified the uncertain tax benefits asrequired and reclassified a portion of the existing valuation allowance. Accordingly,there has been no adjustment to retained earnings recorded as a result of theFIN 48 reclassifications. Absent the existing valuation allowance,$0.3 million of uncertain tax benefits would affect the effective tax rate.The Company recognizes penalties and interest as a component of income taxexpense. We do not expect any penalty assessment associated with our adoptionof FIN 48 and do not expect any significant increases or decreases to amountsof unrecognized tax benefits for the next twelve months. We are no longersubject to U.S. federal tax examinations by tax authorities for tax years before2003.

 

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

 

###### ***Litigation***

######  

BH/RE isnot currently a party to any material legal proceedings.

 

***Employment Agreements***

*** ***

The Companyhas entered into various employment agreements, as amended, with severalexecutives. The employment agreements have initial terms of two to five years.The employment agreements provide that the executives will receive a basesalary with either mandatory increases or annual adjustments and annual bonuspayments. In addition, depending on the terms of the employment agreements,these executives are entitled to options to purchase between 0.2% and 3% of theequity of MezzCo.

 

***Timeshare Purchase Agreement***

*** ***

OnDecember 10, 2004, OpBiz entered into a Timeshare Purchase Agreement withWestgate Resorts, LTD. (“Westgate”), a Florida limited partnership, wherebyOpBiz agreed to sell approximately 4 acres of land adjacent to the PH Resort toWestgate, who plans to develop, market, manage and sell timeshare units on theland. On September19, 2007, the sale of the land and deed transfer to Westgate was completed. Inconnection with the close of the transaction, OpBiz, PH Fee Owner, LLC and TSPOwner, LLC, entered into a modification agreement (the “Modification Agreement”)with Westgate. The Modification Agreement defines the development phases forthe Timeshare Parcel and outlines the permitted number of timeshare, wholeownership and penthouse units. The Modification Agreement also outlinespermitted amenities on the Timeshare Parcel and documents Seller’s approval ofWestgate’s financing for the project.

 

 Pursuant to theterms of the Timeshare Purchase Agreement, the purchase price of the land was$29.5 million which was the value per independent third party appraisal. TheCompany was carrying the land at a value of $29.5 million per the sameindependent third party appraisal. Accordingly, no gain on the sale of thisland has been recognized in the accompanying financial statements. Westgatepays the Company a monthly fee equal to 9% of total timeshare sales. 50% of thefees received will be used to pay the purchase price for the land and theremaining 50% will be recorded as income as received. As of September 30, 2007,the Company has a receivable balance for the sale of land of $26.2 million,$21.3 million of which is classified as long-term in the accompanying financialstatements.

 

***Theater Lease***

 

On December 16, 2004, OpBiz entered into a long-termlease agreement whereby CC Entertainment Theatrical-LV,

 

18

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LLC,successor-in-interest to SFX Entertainment, Inc. pursuant to an assignmentdated September 26, 2005 (“CCE”) renovated and is operating a showroom on themezzanine level and the 7,500 seat theater located at the PH Resort. CCE hasthe exclusive right to use, reconfigure, adapt, change and operate the leasedpremises.

 

19

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

##  

###### ***Overview of Management’s Discussion and Analysisof Financial Condition and Results of Operations***

######  

Set forth below is a discussion of the financialcondition and results of operations of BH/RE and its subsidiaries for theperiods covered in this report. The discussion of operations herein focuses onevents and the revenues and expenses during the three and nine months endedSeptember 30, 2007, as compared to the three and nine months ended September30, 2006.

 

The following management’s discussion and analysis offinancial condition and results of operations should be read in conjunctionwith the consolidated financial statements and the related notes to theconsolidated financial statements of BH/RE included in BH/RE’s Annual Report onForm 10-K filed with the Securities and Exchange Commission on April 2,2007, and the unaudited condensed consolidated financial statements and noteshereto included in Part I, Item 1 of this report.

 

###### ***Critical Accounting Policies and Estimates***

######  

Adescription of our critical accounting policies is included in Item 7 of ourAnnual Report on Form 10-K for the year ended December 31, 2006. Therehave been no material changes to these policies for the nine months endedSeptember 30, 2007.

 

###### ***Recently Issued Accounting Pronouncements***

######  

###### In September 2006, the FASB issued Statementof Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS 157”),which defines fair value, establishes a framework for measuring fair value, andexpands disclosures above fair value measurements. SFAS 157 is effective forfinancial statements issued for fiscal years beginning after November 15, 2007,and interim periods within those fiscal years. Management is currentlyevaluating the impact SFAS 157 will have on the financial statements of theCompany.

######  

###### In February 2007, the FASB issued Statementof Financial Accounting Standards No. 159, “The Fair Value Option for FinancialAssets and Financial Liabilities” (“SFAS 159”). SFAS 159 permits entities tochoose to measure many financial instruments and certain warranty and insurancecontracts at fair value on a contract-by-contract basis. A business entity isrequired to report unrealized gains and losses on items for which the fairvalue option has been elected in earnings at each subsequent reporting date. SFAS159 is effective for financial statements issues for fiscal years beginningafter November 15, 2007. Management is currently evaluating the impact SFAS 159will have on the financial statements of the Company.

######  

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

######  

The following table highlights the results of operationsfor the three and nine months ended September 30, 2007 and 2006, respectively(dollars in thousands, unaudited).

 
| ** **                          | ** ** | **Three Months Ended September 30,** | ** **  | **Percent** | ** ** | **Nine Months Ended September 30,** | ** ** | **Percent** | ** ** |
|-------------------------------------|------------|----------------------------------------------------------|-------------|-------------|------------|---------------------------------------------------------|------------|-------------|------------|
| ** **                          | ** ** | **2007**                                                 | ** **  | **2006**    | ** ** | **Change**                                              | ** ** | **2007**    | ** ** | **2006** | ** ** | **Change** | ** ** |
| Net Revenues                        |       | $                                                        | 57,129      |        | $          | 63,931                                                  |       | -10.6       | %          | $ | 185,549 |   | $ | 205,916 |   | -9.9 | % |
| Operating Expenses:                 |       |                                                     |        |        |       |                                                    |       |        |       |   |   |   |   |
| Casino                              |       | 17,920                                                   |        | 16,459      |       | 8.9                                                     | %          | 49,814      |       | 51,676 |   | -3.6 | % |
| Hotel                               |       | 10,263                                                   |        | 10,201      |       | 0.6                                                     | %          | 32,616      |       | 30,512 |   | 6.9 | % |
| Food and Beverage                   |       | 8,841                                                    |        | 11,578      |       | -23.6                                                   | %          | 27,116      |       | 35,408 |   | -23.4 | % |
| Other                               |       | 307                                                      |        | 641         |       | -52.1                                                   | %          | 892         |       | 4,633 |   | -80.7 | % |
| Selling, general and administrative |       | 21,745                                                   |        | 20,080      |       | 8.3                                                     | %          | 61,434      |       | 56,472 |   | 8.8 | % |
| Depreciation and amortization       |       | 10,740                                                   |        | 5,605       |       | 91.6                                                    | %          | 26,631      |       | 16,891 |   | 57.7 | % |
| Operating (Loss) Income             | ** ** | **$**                                                    | **(12,687** | **)**       | **$**      | **(633**                                                | )          | 1,904.3     | %          | **$** | **(12,954** | **)** | **$** | **10,324** |   | -225.5 | % |

 

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Net revenues for the three and nine months endedSeptember 30, 2007 declined when compared to the three and nine months endedSeptember 30, 2006. Declines were seen in the hotel, food and beverage andother operating departments while casino revenues increased when compared tothe same three month period in prior year. On April 17, 2007, we officiallybegan operation as the PH Resort with substantially all of the interiorrenovations complete. Renovation of the hotel rooms is on-going resulting inout of order rooms which is the primary reason for the declines in revenue inthe non-gaming areas.

 

The following table highlights the various sources of our revenues andexpenses for the three and nine months ended September 30, 2007 and 2006,respectively (dollars in thousands, unaudited).

 
| ** **                                    | ** ** | **Three months ended** | ** ** | ** **  | ** ** | **Nine months ended** | ** ** | ** **  | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|-------------|------------|---------------------------------|------------|-------------|------------|
| ** **                                    | ** ** | **September 30,**           | ** ** | **Percent** | ** ** | **September 30,**          | ** ** | **Percent** | ** ** |
| ** **                                    | ** ** | **2007**                         | ** ** | **2006**    | ** ** | **Change**                      | ** ** | **2007**    | ** ** | **2006** | ** ** | **Change** | ** ** |
| Casino revenues                               |       | $                                | 26,373     |        | $          | 25,099                          |       | 5.1         | %          | $ | 76,636 |   | $ | 80,601 |   | -4.9 | % |
| Casino expenses                               |       | 17,920                           |       | 16,459      |       | 8.9                             | %          | 49,814      |       | 51,676 |   | -3.6 | % |
| *Margin*                                      | * *   | *32.1*                           | *%*        | *34.4*      | *%*        | *35.0*                          | *%*        | *35.9*      | *%*        | * * | * * | * * | * * |
| Hotel revenues                                |       | $                                | 22,113     |        | $          | 25,714                          |       | -14.0       | %          | $ | 82,025 |   | $ | 83,572 |   | -1.9 | % |
| Hotel expenses                                |       | 10,263                           |       | 10,201      |       | 0.6                             | %          | 32,616      |       | 30,512 |   | 6.9 | % |
| *Margin*                                      | * *   | *53.6*                           | *%*        | *60.3*      | *%*        | *60.2*                          | *%*        | *63.5*      | *%*        | * * | * * | * * | * * |
| Food and beverage revenues                    |       | $                                | 11,307     |        | $          | 14,828                          |       | -23.7       | %          | $ | 35,788 |   | $ | 47,099 |   | -24.0 | % |
| Food and beverage expenses                    |       | 8,841                            |       | 11,578      |       | -23.6                           | %          | 27,116      |       | 35,408 |   | -23.4 | % |
| *Margin*                                      | * *   | *21.8*                           | *%*        | *21.9*      | *%*        | *24.2*                          | *%*        | *24.8*      | *%*        | * * | * * | * * | * * |
| Other revenues                                |       | $                                | 2,228      |        | $          | 3,084                           |       | -27.8       | %          | $ | 5,790 |   | $ | 11,248 |   | -48.5 | % |
| Other expenses                                |       | 307                              |       | 641         |       | -52.1                           | %          | 892         |       | 4,633 |   | -80.7 | % |
| *Margin*                                      | * *   | *86.2*                           | *%*        | *79.2*      | *%*        | *84.6*                          | *%*        | *58.8*      | *%*        | * * | * * | * * | * * |
| Selling, general and administrative  expenses |       | $                                | 21,745     |        | $          | 20,080                          |       | 8.3         | %          | $ | 61,434 |   | $ | 56,472 |   | 8.8 | % |
| *% of revenue*                                | * *   | *35.1*                           | *%*        | *29.2*      | *%*        | * *                        | * *   | *30.7*      | *%*        | *25.4* | * * | * * | * * |

 

*Casino*

 

Casino revenue is derived primarily from patrons wageringon slot machines, table games and other gaming activities. Table gamesgenerally include blackjack or twenty one, craps, baccarat and roulette. Othergaming activities include the race and sports books, poker and keno. Casinorevenue is defined as the win from gaming activities, computed as thedifference between gaming wins and losses.

 

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

 

Casino revenues increased 5.1% to $26.4 million for the three monthsended September 30, 2007, as compared to $25.1 million for the three monthsended September 30, 2006. Table games revenue for the three months endedSeptember 30, 2007 increased by approximately $0.6 million as compared to thethree months ended September 30, 2006. Table drop for the three months endedSeptember 30, 2007 increased $8.2 million or 17.8% when compared to the samethree month period in the prior year. Table win percentage for the three monthsended September 30, 2007 was approximately 1.6% lower than the same three monthperiod in the prior year offsetting the drop increase. With the completion ofsubstantially all of the interior casino renovations, we are seeing increasesin the casino traffic and table drop when compared to the same three monthperiod in the previous year. Slot revenue for the three months ended September30, 2007 increased approximately $0.4 million when compared to the same threemonth period in the prior year. Slot handle for the three months endedSeptember 30, 2007 increased $7.4 million or 3.2% when compared to the samethree month period in the prior year attributable to the increase in foottraffic from the Las Vegas Boulevard and mall entries which have reopened substantiallyfull time as the renovation to the façade is completed. Combined revenues fromthe race and sports book and poker for the three months ended September 30,2007 decreased by $0.1 million or 4.7% when compared to the three month periodended September 30, 2006 primarily due to a decrease in race and sports bookrevenue driven by its relocation during the final stages of the renovation.

 

Casino expenses increased 8.9% to $17.9 million for the three monthsended September 30, 2007, as compared to $16.5 million for the three monthsended September 30, 2006. Operating margin decreased 2.3% when comparing thesame three

 

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month periods. The increase in expenses is mainly driven by addition ofstaff and promotional programs as we near the grand re-opening date for theproperty.

 

Casino revenues decreased 4.9% to $76.6 million for the nine monthsended September 30, 2007, as compared to $80.6 million for the nine monthsended September 30, 2006. Table games revenue for the nine months endedSeptember 30, 2007 decreased by approximately $1.1 million as compared to thenine months ended September 30, 2006. Table games drop declined approximately9.6% for the nine month period ended September 30, 2007 when compared to thesame nine month period in prior year. Overall table win percentage increased by0.6% when compared to the same nine month period in prior year. Slot revenuefor the nine months ended September 30, 2007 decreased approximately $3.6million when compared to the same nine month period in prior year. Slot handledeclined approximately 8.8%. Combined revenues from the race and sports book,poker and keno decreased by $0.3 million or 10.5% when compared to the ninemonth period ended September 30, 2006. The declines in casino revenue for thefirst six months of the year are attributed to the renovation project whichresulted in a temporary lack of amenities to attract gaming customers and theloss of foot traffic from Las Vegas Boulevard and mall entrances to theproperty.

 

Casino expenses decreased 3.6% to $49.8 million for the nine monthsended September 30, 2007, as compared to $51.7 million for the nine monthsended September 30, 2006. Operating margin was down slightly to 35.0% for thenine months ended September 30, 2007 compared to 35.9% for the nine monthsended September 30, 2006. Throughout the renovation period, we ran promotionaloffers and events geared toward maintaining business levels.

 

*Hotel*

 

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

 

Hotel revenues of $22.1 million for the three months ended September30, 2007 were 14.0% lower than the three months ended September 30, 2006. Hoteloccupancy decreased 1.7% to 96.6% of available rooms when compared to the samethree month period in the prior year. Available room inventory was reduced toaccommodate the room remodel project and was the primary reason for the revenuedeclines. Average daily room rates increased 4% for the three months endedSeptember 30, 2007 when compared to the three months ended September 30, 2006.

 

Hotel expenses were relatively flat when compared to the same threemonth period in prior year increasing 0.6% to $10.3 million for the threemonths ended September 30, 2007, as compared to $10.2 million for the threemonths ended September 30, 2006. The hotel operating margin declined to 53.6%for the three months ended September 30, 2007 compared to 60.3% for the threemonths ended September 30, 2006 resulting from the revenue declines related tothe remodel project.

 

Hotel revenues of $82.0 million for the nine months ended September 30,2007, were 1.9% lower than the nine months ended September 30, 2006. Hoteloccupancy of available rooms was flat at 97.6% for both nine month periods. Averagedaily room rates increased 4.8% for the nine months ended September 30, 2007when compared to the nine months ended September 2006. The renovation projectwhich accelerated during the third quarter was the primary reason for the yearto date revenue declines.

 

Hotel expenses increased 6.9% to $32.6 million for the nine monthsended September 30, 2007, as compared to $30.5 million for the nine monthsended September 30, 2006. Operating margin decreased 3.3 percentage points overthe same nine month period in previous year. Increased marketing andpromotional expenses have been necessary to maintain the average daily rate andoccupancy, particularly during the renovation period.

 

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*Food and Beverage*

 

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

 

Food and beverage revenues decreased 23.7% to $11.3 million for thethree months ended September 30, 2007, as compared to $14.8 million for thethree months ended September 30, 2006. Food revenue declined $4.0 million whencompared to the same three month period in the previous year as a result of theclosing of outlets for turnover to tenants. The PH Resort will operate thebuffet, room service and banquets with all remaining food outlets being leasedto third party operators. Beverage revenue increased $0.5 million when comparedto the same three month period in the previous year due to the temporarydisruption and relocation of bars during the renovation.

 

Food and beverage expenses decreased 23.6% to $8.8 million for thethree months ended September 30, 2007, as compared to $11.6 million for thethree months ended September 30, 2006. Operating margin was consistent at 21.8%for the three months ended September 30, 2007 compared to 21.9% for the threemonths ended September 30, 2006. The expense reduction and operating marginstability is consistent with the transition from in-house food operations toleased outlets operated by third parties.

 

Food and beverage revenues decreased 24.0% to $35.8 million for thenine months ended September 30, 2007, as compared to $47.1 million for the ninemonths ended September 30, 2006.

 

Food and beverage expenses decreased 23.4% to $27.1 million for thenine months ended September 30, 2007, as compared to $35.4 million for the ninemonths ended September 30, 2006. Food and beverage margins decreased 0.6percentage points in comparing the same nine month periods.

 

*Other*

 

Other revenue includes entertainment sales, retailsales, telephone and other miscellaneous income and is recognized at the timethe goods or services are provided to the guest.

 

Other revenues decreased 27.8% to $2.2 million for the three monthsended September 30, 2007, as compared to $3.1 million for the three monthsended September 30, 2006 and decreased 48.5% to $5.8 million for the ninemonths ended September 30, 2007, as compared to $11.2 million for the ninemonths ended September 30, 2006. The decline in other revenue is primarily dueto the transition of entertainment operations to a third party operator. Athird party operator is currently running the showroom and TPA operations.

 

Other expenses declined 52.1% to $0.3 million for the three monthsended September 30, 2007, as compared to $0.6 million for the three monthsended September 30, 2006 and decreased 80.7% to $0.9 million for the ninemonths ended September 30, 2007, as compared to $4.6 million for the ninemonths ended September 30, 2006. The decline in other expenses is also due tothe elimination of entertainment expense as a result of the transition of theoperation to a third party.

 

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

 

SG&A expenses increased 8.3% to $21.7 million for the three monthsended September 30, 2007, as compared to $20.1 million for the three monthsended September 30, 2006. As a percentage of revenue, SG&A expensesincreased to 35.1% for the three months ended September 30, 2007 as compared to29.2% for the three months ended September 30, 2006. SG&A expensesincreased 8.8% to $61.4 million for the nine months ended September 30, 2007,as compared to $56.5 million for the nine months ended September 30, 2006.SG&A expenses as a percentage of revenues increased 5.3% for the ninemonths ended September 30, 2007. The increase in SG&A expenses is mainly dueto the maintenance of marketing and fixed administrative expenses as wecomplete the transition of the property into the PH Resort.

 

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*Depreciation and Amortization*

 

Depreciation and amortization expense of $10.7 million for the threemonths ended September 30, 2007 increased compared to $5.6 million in expensefor the three months ended September 30, 2006. Depreciation and amortizationexpense of $26.6 million for the nine months ended September 30, 2007 increasedwhen compared to $16.9 million in expense for the nine months ended September30, 2006. The increase in depreciation expense is a direct result of theadditional assets placed in service as the areas of renovation are complete.

 

*Net Interest Expense*

 

Net interest expense increased to $18.9 million for the three monthsended September 30, 2007, as compared to $14.2 million for the three monthsended September 30, 2006. Net interest expense increased to $54.3 million forthe nine months ended September 30, 2007, as compared to $42.1 million for thenine months ended September 30, 2006. The increase in interest expense isdirectly related to the increased outstanding principal balance on our debt asdiscussed in the notes to the condensed consolidated financial statements.

 

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

######  

During the nine monthsended September 30, 2007, we utilized cash flows from operating activities ofapproximately $68.4 million and had a balance of $23.1 million in cash and cashequivalents as of September 30, 2007. We also had current restricted cash andcash equivalents of approximately $28.8 million and long-term restrictedcash and cash equivalents of approximately $60.2 million at September 30, 2007.The current restricted cash and cash equivalents are primarily reserve accountsthat have been established under the Loan Agreement to guarantee payment ofproperty taxes, insurance and furniture, fixtures and equipment replacement.Current restricted cash also includes the balance in the cash managementaccount. Under the terms of the Loan Agreement, all cash receipts are depositedinto a cash management account under Lender control which is used to fundreserves and operating expenses. The long-term cash and cash equivalentsinclude funds designated for the remaining costs associated with the renovationof the Aladdin to the PH Resort and the interest reserve account balance whichwill be released once certain debt service coverage rations are achieved. See “Descriptionof Certain Indebtedness” below.

 

Our primary remainingcash requirements for the remainder of 2007 are expected to include (i) upto approximately $40.8 million in capital expenditures related to therenovation project , (ii) approximately $8.5 million for maintenancecapital expenditures or replacement furniture, fixtures and equipment and(iii) up to approximately $19.8 million in interest payments on our debt.

 

We believe that cashgenerated from operations, cash held in reserve by the lenders under the LoanAgreement and available future financing under the Loan Agreement will beadequate to meet the anticipated working capital, capital expenditure,renovation and debt service obligations of OpBiz for at least the next twelvemonths of operations.

 

There can be no assurancethat we have accurately estimated our liquidity needs, or that we will notexperience 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 expect to experience areduction in cash generated by our operations during our continuing renovationsto the PH Resort and have negotiated the terms of the Loan Agreement to addressthose anticipated reductions. We believe that future funding under the LoanAgreement will adequately cover interest shortfalls and any operatingshortfalls experienced during the renovation period but we can not assure youthat we have accurately estimated those needs.

 

***Description of CertainIndebtedness***

 

*Loan Agreement*

* *

On November 30,2006, OpBiz and PH Fee Owner (collectively the “Borrower”) entered into theLoan Agreement (the “Loan Agreement”) with Column Financial, Inc. (the “Lender”)for a mortgage loan in the principal amount of up to $820 million. The LoanAgreement provided for an initial disbursement in the amount of $759.7 millionand a future funding facility in the amount of up to $60.3 million. On July 17,2007, the Borrower and the Lender entered into an amendment (the “Amendment”)to the Loan Agreement. The Amendment provided for the immediate funding toBorrower of the balance of future funding that was available under the LoanAgreement and established an additional future funding facility in the

 

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amount of up to $40 million (“Future Funding Tranche B”).Future Funding Tranche B has the same terms as the Loan Agreement for maturityand extension. The Loan Agreement, as amended by the Amendment, is referred toas the Loan. The Loan is secured by a deed of trust on the PH Resort and apledge, subject to approval by the Nevada gaming authorities, by MezzCo of itsmembership interest in OpBiz (as described below).

 

The term of the Loan istwenty four months with three one year extension options subject to payment ofa fee and the Borrower’s compliance with the requirements for an extensionoutlined in the Loan Agreement. Interest on the Loan is payable monthly andaccrues at a rate of LIBOR plus 3.25% (9.00% and 8.60% at September 30, 2007and December 31, 2006, respectively) with a .25% ticking fee on availablebut un-advanced future funding. Interest on Future Funding Tranche B is payablemonthly and accrues at a rate of LIBOR plus 7.50% (13.25% at September 30,2007) with a 1.50% ticking fee on available but un-advanced funds. The Loandoes not require amortization during the initial term or, provided certainEBITDA thresholds are met, during the extension periods. The Loan requires thatthe Borrower establish and maintain certain reserves including a reserve forcompletion of the renovation project as currently budgeted, a reserve forprojected interest shortfalls, a reserve for payment of property taxes andinsurance and a reserve for on-going furniture, fixture and equipment purchasesor property improvements. The Loan restricts the Borrower’s ability to spendexcess cash flow until certain debt service coverage ratios are met.

 

Using the proceeds fromthe Loan, all amounts outstanding under the Credit Agreement, datedAugust 31, 2004, among OpBiz, the lenders named therein (the “Lenders”)and The Bank of New York, Asset Solution Division (the “Senior Agent”) werepaid in full. Pursuant to the terms of the Credit Agreement, upon repayment ofall amounts due, the warrant to purchase 2.5% of the equity in EquityCo issuedto the Lenders at the closing of the Credit Agreement became exercisable. TheCompany compensated the holders of all unexercised warrants in accordance withthe terms of a letter agreement between the parties and the warrants were canceled.

 

In addition, in order topermit the Lender to foreclose on the hotel and casino separately and to allowOpBiz to continue to operate the casino after such a foreclosure (should theLender choose to do so), title to the real property comprising the hotel andcasino (the “Property”) was transferred from OpBiz to PH Fee Owner. OpBiz andPH Fee Owner then entered into a lease pursuant to which OpBiz agreed tocontinue to operate the hotel in the manner it had been and to pay monthly rentof approximately $916,000. OpBiz and PH Fee Owner also entered into a leasepursuant to which OpBiz agreed to continue to operate the casino in the mannerit had been and to pay monthly rent of approximately $1,160,000.

 

In connection with theLoan, the Lender required that Trophy Hunter Investments, Ltd., Bay Harbour 90-1,Ltd. and Bay Harbour Master Ltd., which are affiliates of Bay HarbourManagement, execute and deliver a certain Guaranty (as described below). Inexchange for Trophy Hunter Investments, Ltd. and Bay Harbour Master Ltd. (the “Guarantors”)executing the Guaranty, OpBiz and PH Fee Owner agreed to pay to Trophy HunterInvestments, Ltd. and Bay Harbour Master Ltd. a fee equal to $1,500,000 peryear. The fee is accrued and only payable when OpBiz meets certain debt servicecoverage ratios defined in the Loan Agreement.

 

In connection with theLoan, the Guarantors entered into a Guaranty, dated November 30, 2006 (the“Guaranty”), pursuant to which the Guarantors agreed to indemnify the Lenderagainst losses related to certain prohibited actions of the Borrower andguarantied full repayment of the Loan in the case of a voluntary or collusivebankruptcy of the Borrower, a transfer of the Property or interests in theBorrower in violation of the Loan Agreement and if the Borrower fails tomaintain its status as a bankruptcy remote entity and as a result sees itsassets consolidated with those of an affiliate in a bankruptcy.

 

The liability of the Guarantors is capped at$15,000,000 per entity and $30,000,000 in the aggregate, however this cap doesnot apply to (i) liability arising from events, acts or circumstancesactually committed or brought about by the willful acts of any of theGuarantors and (ii) the extent of any benefit received by any of the Guarantorsas a result of the acts giving rise to the liability under the Guaranty. Eachof Douglas Teitelbaum and Robert Earl executed and delivered guarantiessubstantially the same as that delivered by the Guarantors, however, theliability of each of them was limited to (i) the liability arising fromevents, acts or circumstances actually committed or brought about by willfulacts by him and (ii) the extent of any benefit received by him as a resultof the acts giving rise to the liability under the Guaranty.

 

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

 

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In addition, inconnection with the Loan Agreement, a refinancing of the Securities PurchaseAgreement, dated August 9, 2004, among MezzCo and the investors thereto(the “Investors”), pursuant to which MezzCo issued to the Investors(i) 16% senior subordinated secured Notes in the original aggregateprincipal amount of $87 million, and (ii) Warrants for the purchase(subject to certain adjustments as provided for therein) of membership interestsof MezzCo, representing 17.5% of its fully diluted equity was completed. Loanproceeds were used to redeem the Notes in full.

 

In connection with therefinancing of the Securities Purchase Agreement and redemption of the Notes,the restructuring parties entered into the Restructuring Agreement, datedNovember 30, 2006, pursuant to which the restructuring parties terminatedin full the Securities Purchase Agreement, the Subordination Agreement, datedas of August 31, 2004, among MezzCo, OpBiz, the Senior Agent and theInvestors, the Pledge Agreement, dated August 9, 2006, among MezzCo andthe Collateral Agent, and the Guaranty, dated August 9, 2004, made byOpBiz to the Investors, and amended certain other existing agreements, asdescribed below.

 

In accordance with theterms of the Restructuring Agreement, the Investors and EquityCo, MezzCo andOpBiz entered into a Release, Consent and Waiver Agreement, pursuant to whichthe Investors (i) released OpBiz from its guaranteed obligations, underthat certain Guaranty Agreement, dated as of August 9, 2004 and executedby OpBiz in favor of the Investors and the collateral agent; (ii) releasedMezzCo from its pledge of the collateral, under that certain Pledge Agreement,dated as of August 9, 2004, and executed by MezzCo in favor of thecollateral agent, the Investors released their security interest, as defined inthat certain Security Agreement, as amended by that certain Amendment toSecurity Agreement, in each case dated as of August 9, 2004 and executedby the Company in favor of the collateral agent; (iii) released andterminated the Deed of Trust, dated as of August 9, 2004 and executed byMezzCo in favor of the Trustee (as defined therein) for the benefit of thecollateral agent; (iv) released and terminated the Investors’ securityinterest in the securities account, provided for that certain SecuritiesAccount Control Agreement, dated as of August 9, 2004 and executed by theCompany, the collateral agent and Wells Fargo Bank, N.A.

 

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

 

Pursuant to theRestructuring Agreement, the Restructuring Parties agreed to amend the Warrantsby issuing Amended and Restated Warrants to Purchase Membership Interests ofMezzCo (the “A&R Warrants”) to the Investors. The A&R Warrants will beexercisable 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 17.5%of either voting or non-voting membership interests of MezzCo or a combinationthereof through the expiration date of December 9, 2012. In addition tocustomary anti-dilution protections, the number of units representing MezzComembership interests issuable upon exercise of the A&R Warrants may be increasedfrom time to time upon the occurrence of certain events as described in theA&R Warrants. Holders of the A&R Warrants and any securities issuedupon exercise thereof may require MezzCo to redeem such securities commencingon December 9, 2011 at a redemption price based upon a formula set forthin the A&R Warrants. These rights expire upon completion of a publicoffering by MezzCo or OpBiz. The A&R Investor Rights Agreement and theA&R Warrants were amended to permit the Company to incur the additionalFuture Funding Tranche B debt but provides that the number of unitsrepresenting MezzCo membership interests issuable upon exercise of the A&RWarrants may be increased from time to time upon the occurrence of certainadditional events surrounding the use of Tranche B Future Funding as describedin the Investor Rights Agreement.

 

In connection with theRestructuring Agreement, EquityCo entered into a Guaranty Agreement, datedNovember 30, 2006 (the “Guaranty Agreement”), in favor of the Investorsand the Collateral Agent, pursuant to which EquityCo has guaranteed theobligation of MezzCo to pay the redemption price under the A&R Warrantsprior to expiration and any indebtedness arising under the Put Note (as definedin the A&R Warrants).

 

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

 

On November 30,2006, BH/RE entered into an Indemnification Agreement with the Investors,pursuant to which we agreed to indemnify the Investors for any losses caused by(i) lack of gaming approvals for the issuance of the A&R

 

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Warrants, (ii) lack of gaming approval for thegranting of a lien by EquityCo in the equity interests in MezzCo, as describedin the Pledge Agreement, and (iii) the inability of the Investors toexercise the Warrants until July 1, 2007.

 

*Energy Services Agreement*

 

Northwind owns and operates a central utility plant onland leased from us. The plant supplies hot and cold water and emergency powerto the PH Resort under an energy services agreement between OpBiz and Northwind,which expires in 2018. 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 $0.4 million per month.

 

***Forward Looking Statements***

 

This quarterly report on Form 10-Q contains forward-lookingstatements within the meaning of Section 27A of the Securities Act of1933, as amended, and Section 21E of the Securities Exchange Act of 1934,as amended. When used in this report and elsewhere by management from time totime, the words “believe”, “anticipate”, “expect”, “intend”, “estimate”, “plan”,“may”, “seek”, “will”, and similar expressions are intended to identify forward-lookingstatements with respect to our financial condition, results of operations andour business including our planned and possible expansion plans, legalproceedings and employee matters. Certain important factors, including but notlimited to, competition from other gaming operations, factors affecting ourability to complete acquisitions and dispositions of gaming properties,leverage, construction risks, the inherent uncertainty and costs associatedwith litigation and governmental and regulatory investigations, and licensingand other regulatory risks, could cause our actual results to differ materiallyfrom those expressed in or implied by our forward-looking statements. Furtherinformation on potential factors which could affect our financial condition,results of operations and business including, without limitation, theexpansion, development and acquisition projects, legal proceedings and employeematters are included in “Item 1A—Risk Factors” of BH/RE’s Annual Report onForm 10-K filed with the Securities and Exchange Commission on April 2,2007. Readers are cautioned not to place undue reliance on any forward-lookingstatements, which speak only as of the date thereof. We undertake no obligationto publicly release any revisions to such forward-looking statements to reflectevents or circumstances after the date hereof.

 

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

##  

Market risk is the riskof loss arising from adverse changes in market rates and prices, such asinterest rates, foreign currency exchange rates and commodity prices. Ourprimary exposure to market risk is interest rate risk associated with ourlong-term debt. We pay interest on the amount outstanding under the LoanAgreement monthly, in cash, at the London Inter-Bank Offered Rate, or LIBOR,plus 3.25% with a .25% ticking fee on available but un-advanced Future Funding.We pay interest on the amount outstanding under the Future Funding Tranche Bmonthly, in cash, at the London Inter-Bank Offered Rate, or LIBOR, plus 7.50%with a 1.5% ticking fee on available but un-advanced Future Funding. Anincrease of one percentage point in the average interest rate applicable to thevariable rate debt outstanding at September 30, 2007 would increase theinterest cost for the remainder of 2007 by approximately $2.2 million.

 

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

##  

Our management, with theparticipation of our principal executive and chief financial officer, hasevaluated the effectiveness of our disclosure controls and procedures (as definedin Rules 13a-15(e) and 15d-15(e) under the Securities ExchangeAct of 1934, as amended (the “Exchange Act”)), as of September 30, 2007. Basedon their evaluation, our principal executive and principal financial officersconcluded that our disclosure controls and procedures were effective as ofSeptember 30, 2007.

 

There has been no change in our internal control over financialreporting (as defined in Rules 13a-15(f) and 15-d-15(f) underthe Exchange Act) that occurred during our fiscal quarter ended September 30,2007, that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

 

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# **PART II— OTHER INFORMATION**

#  

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

 
| 10.1   | Omnibus Amendment  of Loan Documents, dated July 17,2007, by and between OpBiz, PH Fee owner and  Column Financial, Inc. (Incorporated by reference to the Company's Current  Report on Form 8-K dated July 17, 2007)                                                                                                                                     |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                      |
| 10.2   | First  Amendment to Amended and Restated Investor Rights Agreement, dated July 17,  2007, by and among MezzCo. EquityCo and the Mezzanine Investors.  (Incorporated by reference to the Company's Current Report on Form 8-K dated  July 17, 2007)                                                                                                        |
|   |                                                                                                                                                                                                                                                                                                                                                      |
| 10.3   | Second  Amendment to Employment Agreement dated September 7, 2007 by and between  OpBiz and Donna Lehmann. (Incorporated by reference to Exhibit 10.1 to the  Company’s Current Report on Form 8-K dated September 14, 2007)                                                                                                                         |
|   |                                                                                                                                                                                                                                                                                                                                                      |
| 10.4   | Modification Agreement  Regarding Timeshare Purchase Agreement, dated September 19, 2007, by and  between OpBiz, L.L.C., PH Fee Owner, LLC, TSP Owner, LLC, Westgate Resorts,  Ltd. and Westgate Planet Hollywood Las Vegas, LLC. (Incorporated by reference  to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated September  27, 2007) |
|   |                                                                                                                                                                                                                                                                                                                                                      |
| 10.5   | Timeshare Maintenance and  Management Agreement, dated September 19, 2007, by and among Westgate Planet  Hollywood Las Vegas, LLC, CFI Resorts Management, Inc. and OpBiz, L.L.C.  (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on  Form 8-K dated September 27, 2007)                                                 |
|   |                                                                                                                                                                                                                                                                                                                                                      |
| 10.6   | Second  Amendment to Employment Agreement dated September 1, 2007 by and between  OpBiz and Mark S. Helm. (Incorporated by reference to Exhibit 10.1 to the  Company’s Current Report on Form 8-K dated November 13, 2007)                                                                                                                           |
|   |                                                                                                                                                                                                                                                                                                                                                      |
| 10.7   | Employment  Agreement dated September 26, 2007 by and between OpBiz and Scott Messinger.  (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on  Form 8-K dated November 13, 2007)                                                                                                                                           |
|   |                                                                                                                                                                                                                                                                                                                                                      |
| 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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**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
|               | BH/RE,  L.L.C. |
|--------------------|----------------|
|               |           |   |
|               |           |   |
| November 14,  2007 | By:            |  /S/ Donna Lehmann |
|               |           | Donna  Lehmann |
|               |           | Treasurer  and Chief Financial Officer |

 

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**EXHIBIT INDEX**

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                           |   |
|-----------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| 10.1            |       | Omnibus  Amendment of Loan Documents, dated July 17,2007, by and between OpBiz, PH Fee  owner and Column Financial, Inc. (Incorporated by reference to the Company's  Current Report on Form 8-K dated July 17, 2007)                                                                                                                                     |   |
|            |       |                                                                                                                                                                                                                                                                                                                                                      |   |
| 10.2            |       | First  Amendment to Amended and Restated Investor Rights Agreement, dated July 17,  2007, by and among MezzCo. EquityCo and the Mezzanine Investors.  (Incorporated by reference to the Company's Current Report on Form 8-K dated  July 17, 2007)                                                                                                        |   |
|            |       |                                                                                                                                                                                                                                                                                                                                                      |   |
| 10.3            |       | Second  Amendment to Employment Agreement dated September 7, 2007 by and between  OpBiz and Donna Lehmann. (Incorporated by reference to Exhibit 10.1 to the  Company’s Current Report on Form 8-K dated September 14, 2007)                                                                                                                         |   |
|            |       |                                                                                                                                                                                                                                                                                                                                                      |   |
| 10.4            |       | Modification Agreement  Regarding Timeshare Purchase Agreement, dated September 19, 2007, by and  between OpBiz, L.L.C., PH Fee Owner, LLC, TSP Owner, LLC, Westgate Resorts,  Ltd. and Westgate Planet Hollywood Las Vegas, LLC. (Incorporated by reference  to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated September  27, 2007) |
|            |       |                                                                                                                                                                                                                                                                                                                                                      |
| 10.5            |       | Timeshare Maintenance and  Management Agreement, dated September 19, 2007, by and among Westgate Planet  Hollywood Las Vegas, LLC, CFI Resorts Management, Inc. and OpBiz, L.L.C.  (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on  Form 8-K dated September 27, 2007)                                                 |
|            |       |                                                                                                                                                                                                                                                                                                                                                      |
| 10.6            |       | Second  Amendment to Employment Agreement dated September 1, 2007 by and between  OpBiz and Mark S. Helm. (Incorporated by reference to Exhibit 10.1 to the  Company’s Current Report on Form 8-K dated November 13, 2007)                                                                                                                           |   |
|            |       |                                                                                                                                                                                                                                                                                                                                                      |   |
| 10.7            |       | Employment  Agreement dated September 26, 2007 by and between OpBiz and Scott Messinger.  (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on  Form 8-K dated November 13, 2007)                                                                                                                                           |   |
|            |       |                                                                                                                                                                                                                                                                                                                                                      |   |
| 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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