In this Management's Discussion and Analysis of Financial Condition and Results of Operations, the words "we," "us," "our," "FXRE," and the "Company" collectively refer to FX Real Estate and Entertainment Inc., and its consolidated subsidiaries, FX Luxury Realty, LLC, BP Parent, LLC, Metroflag BP, LLC and Metroflag Cable, LLC. The words "Metroflag" or "Metroflag entities" refer to FX Luxury Realty and its predecessors, including BP Parent, LLC, Metroflag BP, LLC, Metroflag Cable, LLC, Metroflag Polo, LLC, CAP/TOR, LLC, Metroflag SW, LLC, Metroflag HD, LLC and Metroflag Management, LLC, the predecessor entities through which our historical business was conducted prior to September 27, 2007. The word "Park Central site" refers to the 17.72 contiguous acres of land located at the southeast corner of Las Vegas Boulevard and Harmon Avenue in Las Vegas, Nevada and owned by us. The word "CKX Distribution" refers to the distribution of 19,743,349 shares of our common stock to CKX, Inc.'s stockholders of record as of December 31, 2007 as a result of which we became a publicly traded company on January 10, 2008.

This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the historical financial statements and notes thereto and financial information of the Company and Metroflag, as predecessor, included in the Company's Annual Report on Form 10-K, as amended, for the year ended December 31, 2007. However, this Management's Discussion and Analysis of Financial Condition and Results of Operations and such historical financial statements and information should not be relied upon by you to evaluate our business and financial condition going forward because they are not representative of our planned business going forward or indicative of our future operating and financial results. For example, as described below and in the historical financial statements, our predecessor Metroflag derived revenue primarily from commercial leasing activities on the properties comprising the Park Central site. We intend to cease engaging in these commercial leasing activities as we implement our redevelopment of the Park Central site.

FX Real Estate and Entertainment Inc. was organized as a Delaware corporation in preparation for the CKX Distribution. On September 26, 2007, holders of common membership interests in FX Luxury Realty, LLC, a Delaware limited liability company, exchanged all of their common membership interests for shares of our common stock. Following this reorganization, FX Real Estate and Entertainment owns 100% of the outstanding common membership interests of FX Luxury Realty. We hold our assets and conduct our operations through our subsidiary FX Luxury Realty and its subsidiaries. All references to FX Real Estate and Entertainment for the periods prior to the date of the reorganization shall refer to FX Luxury Realty and its consolidated subsidiaries. For all periods as of and subsequent to the date of the reorganization, all references to FX Real Estate and Entertainment shall refer to FX Real Estate and Entertainment and its consolidated subsidiaries, including FX Luxury Realty.

FX Luxury Realty was formed on April 13, 2007. On May 11, 2007, Flag Luxury Properties, a privately owned real estate development company, contributed to FX Luxury Realty its 50% ownership interest in the Metroflag entities in exchange for all of the membership interests of FX Luxury Realty. On June 1, 2007, FX Luxury Realty acquired 100% of the outstanding membership interests of RH1, LLC and Flag Luxury Riv, LLC, which together own shares of common stock of Riviera Holdings Corporation, a publicly traded company which owns and operates the Riviera Hotel and Casino in Las Vegas, Nevada, and the Blackhawk Casino in Blackhawk, Colorado. On June 1, 2007, CKX contributed $100 million in cash to FX Luxury Realty in exchange for a 50% common membership interest therein. As a result of CKX's contribution, each of CKX and Flag Luxury Properties owned 50% of the common membership interests in FX Luxury Realty, while Flag Luxury Properties retained a $45 million preferred priority distribution in FX Luxury Realty.

On May 30, 2007, FX Luxury Realty entered into an agreement to acquire the remaining 50% ownership interest in the Metroflag entities from an unaffiliated third party for total consideration of $180 million in cash, $172.5 million of which was paid in cash at closing and $7.5 million of which was an advance payment made in May 2007 (funded by a $7.5 million loan from Flag Luxury Properties). The cash payment at closing on July 6, 2007 was funded from $92.5 million cash on hand and $105.0 million in additional borrowings under the Mortgage Loan, which amount was reduced by $21.3 million deposited into a restricted cash account to cover debt service commitments and $3.7 million in debt issuance costs. The $7.5 million loan from Flag Luxury Properties was repaid

on July 9, 2007. As a result of this purchase, FX Luxury Realty owns 100% of Metroflag, and therefore has consolidated the operations of Metroflag since July 6, 2007.

The following management's discussion and analysis of financial condition and results of operations is based on the historical financial condition and results of operations of Metroflag, as predecessor, rather than those of FX Luxury Realty, for the three and six months ended June 30, 2008.

FX Real Estate and Entertainment Consolidated Operating Results

Our results for the three months ended June 30, 2008 reflected $0.5 million in revenue and $5.8 million in operating expenses. Included in operating expenses is $2.5 million in license fees, representing the second quarter guaranteed annual minimum royalty payments under the license agreements with Elvis Presley Enterprises and Muhammad Ali Enterprises and $2.1 million in corporate expenses, including $0.4 million in non-cash compensation, $0.5 million in shared services charges provided by CKX pursuant to the shared services agreement and Flag pursuant to its arrangement with the Company and professional fees, including legal and accounting costs.

Our results for the six months ended June 30, 2008 reflected $1.0 million in revenue and $13.1 million in operating expenses. Included in operating expenses is $5.0 million in license fees, representing six months of guaranteed annual minimum royalty payments under the license agreements with Elvis Presley Enterprises and Muhammad Ali Enterprises and $5.8 million in corporate expenses, including $1.3 million in non-cash compensation, $1.0 million in shared services charges provided by CKX pursuant to the shared services agreement and Flag pursuant to its arrangement with the Company and professional fees, including legal and accounting costs.

For the three and six months ended June 30, 2008, we had net interest expense of $12.1 million and $26.3 million, respectively.

For the three and six months ended June 30, 2008, the Company did not record a provision for income taxes because the Company has incurred taxable losses since its formation in 2007. As it has no history of generating taxable income, the Company reduces any deferred tax assets by a full valuation allowance.

For the period from inception (May 11, 2007) to June 30, 2007, FX Luxury Realty accounted for its interest in Metroflag under the equity method of accounting because it did not have control with its then 50% ownership interest. For this period, FX Luxury Realty recorded $4.5 million equity in the loss of Metroflag. FX Luxury Realty also recorded $1.4 million in license fees, representing one month of the 2007 guaranteed annual minimum royalty payment under the license with Elvis Presley Enterprises and Muhammad Ali Enterprises.

The Company owns 1,410,363 shares of common stock of Riviera Holdings Corporation (the "Riv Shares"). For the three and six months ended June 30, 2008, the Company recorded to other expense an other than temporary impairment of $31.6 million related to the Riv Shares due to the decline in the stock price of Riviera Holdings Corporation. The Company has determined that the losses are other than temporary due to the Company's evaluation of the underlying reasons for the decline in stock price, including weakening conditions in the Las Vegas market where Riviera Holdings Corporation operates, and the Company's uncertain ability to hold the Riv Shares for a reasonable amount of time sufficient for an expected recovery of fair value.

Metroflag Operating Results

The Park Central site is occupied by a motel and several retail and commercial tenants with a mix of short and long-term leases. The historical business of Metroflag was to acquire the parcels and to engage in commercial leasing activities. All revenues are derived from these commercial leasing activities and include minimum rentals and percentage rentals on the retail space.

We are in the conceptual design stage of developing a hotel, casino, entertainment, retail, commercial and residential development project on the Park Central site.

In 2007, we adopted formal redevelopment plans covering certain of the parcels comprising the Park Central site which resulted in the operations related to these properties being reclassified as incidental operations in accordance with SFAS No. 67.

Given the significance of the Metroflag's operations to our current and future results of operations and financial condition, we believe that an understanding of Metroflag's reported results, trends and performance is enhanced by presenting its results of operations on a stand-alone basis for the three and six months ended June 30, 2008 and 2007 (Predecessor). This stand-alone financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place as of January 1, 2007.

Metroflag Results for the Three Months Ended June 30, 2008 and 2007


                                                             Period from         Period from
                                        Three Months        April 1, 2007        May 11, 2007         Three Months
                                           Ended               Through             Through               Ended
                                       June 30, 2008         May 10, 2007       June 30, 2007        June 30, 2007       Variance
                                                                        (Amounts in thousands)
Revenue                                $          486       $          732      $          847       $        1,579      $  (1,093 )
Operating expenses                              1,113                  254                 188                  442            671
Depreciation and amortization                       7                   39                  48                   87            (80 )

Income (loss) from operations                    (634 )                439                 611                1,050         (1,684 )
Interest expense, net                         (11,989 )             (3,531 )            (6,826 )            (10,357 )       (1,632 )
Loss from early retirement of debt                  -               (3,507 )                 -               (3,507 )        3,507
Loss from incidental operations                (4,968 )             (3,371 )            (2,694 )             (6,065 )        1,097

Net loss                               $      (17,591 )     $       (9,970 )    $       (8,909 )     $      (18,879 )    $   1,288

Revenue

Revenue decreased $1.1 million, or 69.2%, in the second quarter of 2008 as compared to the second quarter of 2007 due primarily to the classification of the operations of an additional property as incidental operations.

Operating Expenses

Operating expenses increased $0.7 million, or 151.8%, in the second quarter of 2008 as compared to the second quarter of 2007 due primarily to higher overhead costs associated with the redevelopment plan for the Park Central site, including the hiring of additional personnel.

Depreciation and Amortization Expense

Depreciation and amortization expense decreased $0.1 million, or 92.0%, in the second quarter of 2008 as compared to the second quarter of 2007 due primarily to the operations of an additional property being classified as incidental operations in the fourth quarter of 2007.

Interest Income/Expense

Interest expense, net, increased $1.6 million, or 15.8%, in the second quarter of 2008 as compared to the second quarter of 2007 due to borrowings of $475 million as of June 30, 2008 compared to $370 million as of June 30, 2007, offset in part by lower rates in 2008.

Loss from Early Retirement of Debt

Loss from early retirement of debt of approximately $3.5 million was recorded for the three months ended June 30, 2007 to reflect the prepayment of penalties and fees as a result of the refinancing of all the mortgage notes and other long-term obligation with two notes totaling $370 million from Credit Suisse.

Loss from Incidental Operations

Loss from incidental operations decreased $1.1 million, or 18.1%, in the second quarter of 2008 as compared to the second quarter of 2007 primarily due to a decrease in depreciation and amortization of $0.4 million in 2008 as a result of a change in the estimated remaining lives of the properties classified as incidental operations. Additionally, higher revenue of $0.5 million and lower operating expenses of $0.2 million are included in the results from incidental operations in the second quarter of 2008 primarily as the result of an additional property being classified as incidental operations in the 2008 period and certain non-recurring costs incurred in the 2007 period.

Metroflag Results for the Six Months Ended June 30, 2008 and 2007


                                                                Period from          Period from
                                         Six Months           January 1, 2007        May 11, 2007          Six Months
                                            Ended                 Through              Through                Ended
                                        June 30, 2008          May 10, 2007         June 30, 2007         June 30, 2007       Variance
                                                                            (Amounts in thousands)
Revenue                                $           971       $           2,079      $          847       $         2,926      $  (1,955 )
Operating expenses                               2,149                     839                 188                 1,027          1,122
Depreciation and amortization                       13                     128                  48                   176           (163 )

Income (loss) from operations                   (1,191 )                 1,112                 611                 1,723         (2,914 )
Interest expense, net                          (25,277 )               (14,444 )            (6,826 )             (21,270 )       (4,007 )
Loss from early retirement of debt                   -                  (3,507 )                 -                (3,507 )        3,507
Loss from incidental operations                 (9,021 )                (7,790 )            (2,694 )             (10,484 )        1,463

Net loss                               $       (35,489 )     $         (24,629 )    $       (8,909 )     $       (33,538 )    $  (1,951 )

Revenue

Revenue decreased $2.0 million, or 66.8%, in the first six months of 2008 as compared to the first six months of 2007 due primarily to the classification of the operations of an additional property as incidental operations.

Operating Expenses

Operating expenses increased $1.1 million, or 109.3%, in the six months ended June 30, 2008 as compared to the six months ended June 30, 2007 due primarily to higher overhead costs associated with the redevelopment plan for the Park Central site, including the hiring of additional personnel.

Depreciation and Amortization Expense

Depreciation and amortization expense decreased $0.2 million, or 92.6%, in the six months ended June 30, 2008 as compared to the six months ended June 30, 2007 due primarily to the operations of an additional property being classified as incidental operations in the fourth quarter of 2007.

Interest Income/Expense

Interest expense, net, increased $4.0 million, or 18.8%, in the six months ended June 30, 2008 as compared to the six months ended June 30, 2007 due to borrowings of $475 million as of June 30, 2008 compared to $370 million as of June 30, 2007, offset in part by lower rates in 2008.

Loss from Early Retirement of Debt

Loss from early retirement of debt of approximately $3.5 million was recorded for the six months ended June 30, 2007 to reflect the prepayment of penalties and fees as a result of the refinancing of all the mortgage notes and other long-term obligation with two notes totaling $370 million from Credit Suisse.

Loss from Incidental Operations

Loss from incidental operations decreased $1.5 million, or 14.0%, in the six months ended June 30, 2008 as compared to the six months ended June 30, 2007 due to higher revenue of $1.5 million in 2008 primarily as the result of an additional property being classified as incidental operations in the 2008 period. Higher operating expenses of $0.7 million in 2008 were offset by lower depreciation and amortization expenses of $0.7 million resulting from a change in the estimated remaining lives of the properties classified as incidental operations.

Liquidity and Capital Resources

Introduction - The historical financial statements and financial information of our predecessor, the Metroflag entities, included in this quarterly report are not representative of our planned business going forward or indicative of our future operating and financial results. We have substantial leverage and limited liquidity. Our current cash flow and cash on hand of $21.9 million at June 30, 2008 ($12.3 million as of July 31, 2008 after giving effect to the extension of the Mortgage Loan on July 6, 2008 and the private placement of units in July 2008) are not sufficient to fund our current operations or to pay obligations scheduled to come due over the ensuing six months, including our $475 million Mortgage Loan, which matures on January 6, 2009, subject to our conditional right to extend as described below and our license agreements with EPE and MAE.

In response to the ongoing difficulties in the U.S. financial markets and the economic downturn in Las Vegas, we are reviewing our previously adopted redevelopment plan for the Park Central site. The purpose of this review is to determine whether to alter our existing plan and the incurrence of certain expenditures in the current design and planning stage of the project. If we choose to delay such expenditures, we will likely need to revise the currently targeted commencement date and completion date for the project.

No assurance can be given that we will be successful in finding adequate capital to extend our $475 million Mortgage Loan, to fund our license agreements with EPE and MAE, to fund the Graceland based hotel(s) and to pay general corporate obligations. If we are unable to raise sufficient new capital by January 2009, we may be in default of our obligations under the Mortgage Loan and EPE and MAE license agreements. If we default on our obligations under the Mortgage Loan, we may be unable to pursue our current business plan as it relates to the development of the Park Central site. If we default on our obligation under the EPE and MAE license agreements, we may be unable to pursue our current business plan as it relates to the development of Graceland and the use of the intellectual property associated with Elvis Presley and Muhammad Ali in the development of other real estate projects.

Rights Offering - We generated aggregate gross proceeds of approximately $98.7 million from the rights offering and from sales under the related investment agreements, as amended, between us and Robert F.X. Sillerman, our Chairman and Chief Executive Officer, and The Huff Alternative Fund, L.P. and The Huff Alternative Parallel Fund, L.P. (collectively "Huff"). On March 13, 2008, we used $23 million of the proceeds from the rights offering to repay our $23 million Riv loan (as more fully described below). On April 1, 2008, we paid the guaranteed annual minimum royalty payments of $10 million (plus accrued interest of $0.35 million) for 2007 under the license agreements, as amended, with Elvis Presley Enterprises, Inc. and Muhammad Ali Enterprises, LLC, out of proceeds from the rights offering. On April 17, 2008, we used $7 million of the proceeds from the rights offering to repay in full and retire the Flag promissory note for $1.0 million principal amount and the CKX loan for $6.0 million principal amount (as more fully described below). On May 13, 2008, we used approximately $31 million of proceeds from sales under the investment agreements referenced above to pay Flag $30 million plus accrued return of approximately $1.0 million through the date of payment as partial satisfaction of its $45 million preferred priority distribution right (as described below). We used the remainder of the proceeds from the rights offering and the sales under the related investment agreements to satisfy certain capital requirements associated with extending the Mortgage Loan on July 6, 2008.

Shier Stock Purchase - In connection with and pursuant to the terms of his employment agreement, on January 3, 2008, Barry Shier, our Chief Operating Officer, purchased 500,000 shares of common stock at a price of $5.14 per share, for aggregate consideration of $2.57 million.

Private Placement of Units - Between July 15, 2008 and July 18, 2008, we sold in a private placement to Paul C. Kanavos, our President, Barry A. Shier, our Chief Operating Officer, an affiliate of Brett Torino, our

Chairman of the Las Vegas Division, Mitchell J. Nelson, our Executive Vice President and General Counsel, and an affiliate of Harvey Silverman, a director of our company, an aggregate of 2,264,289 units at a purchase price of $3.50 per unit. Each unit consisted of one share of our common stock, a warrant to purchase one share of our common stock at an exercise price of $4.50 per share and a warrant to purchase one share of our common stock at an exercise price of $5.50 per share. The warrants to purchase shares of our common stock for $4.50 per share are exercisable for a period of seven years, and the warrants to purchase shares of our common stock for $5.50 per share are exercisable for a period of ten years.

We generated aggregate proceeds from the sale of the units of approximately $7.9 million. We intend to use the proceeds to fund working capital requirements and for general corporate purposes.

For additional information regarding this private placement of units, reference is made to our Current Report on Form 8-K, dated July 15, 2008, as filed with the Securities and Exchange Commission on July 17, 2008.

Riv Loan - On June 1, 2007, FX Luxury Realty entered into a $23 million loan with an affiliate of Credit Suisse. Proceeds from this loan were used for:
(i) the purchase of the membership interests in RH1, LLC for $12.5 million from an affiliate of Flag Luxury Properties; (ii) payment of $8.1 million of the purchase price for the membership interests in Flag Luxury Riv, LLC; and
(iii) repayment of $1.2 million to Flag Luxury Properties for funds advanced for the purchase of the 50% economic interest in the option to purchase an additional 1,147,550 shares of Riviera Holdings Corporation at a price of $23 per share. The Riv loan was personally guaranteed by Robert F.X. Sillerman. The Riv loan, as amended on September 24, 2007, December 6, 2007 and February 27, 2008, was due and payable on March 15, 2008. We were also required to make mandatory pre-payments under the Riv loan out of certain proceeds from equity transactions as defined in the loan documents. The Riv loan bore interest at a rate of LIBOR plus 250 basis points. The interest rate on the Riv loan at March 13, 2008, the date of repayment, was 5.4%. Pursuant to the terms of the Riv loan, FX Luxury Realty was required to establish a segregated interest reserve account at closing. At March 13, 2008, the date of repayment, FX Luxury Realty had $0.1 million on deposit in this interest reserve fund which had been classified as restricted cash on the accompanying consolidated balance sheet as of December 31, 2007. As described above, on March 13, 2008, we repaid in full and retired the Riv loan with proceeds from the rights offering.

CKX Line of Credit - On September 26, 2007, CKX entered into a Line of Credit Agreement with us pursuant to which CKX agreed to loan up to $7.0 million to us, $6.0 million of which was drawn down on September 26, 2007 and was evidenced by a promissory note dated September 26, 2007. We used $5.5 million of the proceeds of the loan, together with proceeds from additional borrowings, to exercise our option to acquire an additional 573,775 shares of Riviera Holdings Corporation's common stock at a price of $23 per share. The loan bore interest at LIBOR plus 600 basis points and was payable upon the earlier of (i) two years and (ii) our consummation of an equity raise at or above $90.0 million. As described above, on April 17, 2008, we repaid this loan in full and retired the line of credit with proceeds from the rights offering.

On June 1, 2007, FX Luxury Realty signed a promissory note with Flag Luxury Properties for $1.0 million, representing amounts owed to Flag Luxury Properties related to funding for the purchase of the shares of Flag Luxury Riv. The note, included in related party debt on the accompanying audited consolidated balance sheet, accrued interest at 5% per annum through December 31, 2007 and 10% from January 1, 2008 through maturity. The Company discounted the note to fair value and recorded interest expense accordingly. As described above, on April 17, 2008, we repaid in full and retired this note with proceeds from the rights offering.

Our independent registered public accounting firm's report dated March 3, 2008 to our consolidated financial statements for the year ended December 31, 2007 includes an explanatory paragraph indicating substantial doubt as to our ability to continue as a going concern.

Most of our assets are encumbered by our debt obligations as described below.

Mortgage Loan - On May 11, 2007, an affiliate of Credit Suisse entered into a $370 million senior secured credit term loan facility relating to the Park Central site, the proceeds of which were used to repay the then-existing mortgages on the Park Central site. The borrowers were BP Parent, LLC, Metroflag BP, LLC and Metroflag Cable, LLC, subsidiaries of FX Luxury Realty. The loan was structured as a $250 million senior secured loan and a $120 million senior secured second lien loan. On July 6, 2007, simultaneously with FX Luxury Realty's acquisition

of the remaining 50% ownership interest in Metroflag, we amended the senior secured credit term loan facility, increasing the total amounts outstanding . . .