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. In August 2008, FX Luxury Realty, LLC changed its name to FX Luxury, LLC, BP Parent, LLC changed its name to FX Luxury Las Vegas Parent, LLC, Metroflag BP, LLC changed its name to FX Luxury Las Vegas I, LLC and Metroflag Cable, LLC changed its name to FX Luxury Las Vegas II, 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 subsidiaries" refer to Metroflag BP, LLC and Metroflag Cable, LLC, each as renamed as indicated above. 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 through the Park Central subsidiaries. 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. As a result of the disruption in the capital markets and the economic downturn in the United States, and Las Vegas in particular, we have determined not to proceed with our originally proposed plan for the redevelopment plan of the Park Central site. We intend to consider alternative plans with respect to the redevelopment of the site. Until such time as an alternative development plan, if any, is adopted, we intend to continue the site's current commercial leasing activities.

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 nine months ended September 30, 2008.

FX Real Estate and Entertainment Consolidated Operating Results

Our results for the three and nine months ended September 30, 2008 reflected revenue of $0.5 million and $1.5 million, respectively, and operating expenses of $16.8 million and $29.9 million, respectively. Included in operating expenses are license fees for the three and nine months ended September 30, 2008 of $2.5 million and $7.5 million, respectively, representing the guaranteed annual minimum royalty payments under the license agreements with Elvis Presley Enterprises and Muhammad Ali Enterprises. The Company incurred corporate overhead expenses of $2.1 million and $7.9 million for the three and nine months ended September 30, 2008, respectively.. Included in corporate overhead expenses for the three months ended September 30, 2008 are $0.7 million in non-cash compensation and $0.4 million in shared services charges provided by CKX pursuant to the shared services agreement and Flag pursuant to its arrangement with the Company. Included in corporate overhead expenses for the nine months ended September 30, 2008 are $2.0 million in non-cash compensation, $1.5 million in shared services charges and professional fees, including legal and accounting costs. Our operating expenses for the three and nine months ended September 30, 2008 also included an impairment charge of $10.7 million related to the write-off of capitalized development costs as a result of the Company's determination not to proceed with our originally proposed plan for the redevelopment plan of the Park Central site as a result of the disruption in the capital markets and the economic downturn in the United States in general and Las Vegas in particular. We intend to consider alternative plans with respect to the redevelopment of the site. Until such time as an alternative development plan, if any, is adopted, we intend to continue the site's current commercial leasing activities.

The Company owns 1,410,363 shares of common stock of Riviera Holdings Corporation (the "Riv Shares"), 161,758 of which were put into trust for the benefit of the Company in October 2008. For the three and nine months ended September 30, 2008, the Company recorded to other expense other than temporary impairments of $4.0 million and $35.5 million, respectively, 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. Prior to the impairment recorded as of June 30, 2008, the Company did not consider the losses to be other than temporary and reported unrealized gains and losses in other comprehensive income as a separate component of stockholders' equity.

For the three and nine months ended September 30, 2008, we had net interest expense of $9.6 million and $35.9 million, respectively.

For the three and nine months ended September 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.

Our results for the period from inception (May 11, 2007) to September 30, 2007 reflects our accounting for our investment in Metroflag as an equity method investment from May 11, 2007 through July 5, 2007 because we did not maintain control, and on a consolidated basis from July 6, 2007 through September 30, 2007 due to the acquisition of the remaining 50% of Metroflag that we did not already own on July 6, 2007.

On September 26, 2007, we exercised the Riviera option, acquiring 573,775 shares in Riviera for $13.2 million. We recorded a $6.4 million loss on the exercise, reflecting a decline in the price of Riviera Holding Corporation's common stock from the date the option was acquired. The loss was recorded in other expense in the consolidated statements of operations.

Our results for the period from May 11, 2007 to September 30, 2007 reflected $1.3 million in revenue and $9.7 million in operating expenses. Included in operating expenses was $5.7 million in license fees, representing four months (June-September) of the 2007 guaranteed annual minimum royalty payments under the license agreements with Elvis Presley Enterprises and Muhammad Ali Enterprises.

For the period from May 11, 2007 to September 30, 2007, we had $15.3 million in net interest expense, including $15.1 million for Metroflag which was included in our consolidated results commencing July 6, 2007.

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.

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. In late September 2008, the Company determined not to proceed with its originally proposed plan for the redevelopment of the Park Central site and to continue the site's current commercial leasing activities until such time as an alternative development plan, if any, is adopted. As a result, effective October 2008, the Company will no longer classify these operations of Metroflag as incidental operations. Therefore, all operations will be included as part of income (loss) from operations.

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 nine months ended September 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 September 30, 2008 and 2007


                                                    Three Months              Three Months
                                                       Ended                     Ended
                                                 September 30, 2008        September 30, 2007       Variance
                                                                   (Amounts in thousands)

Revenue                                         $                482      $              1,440      $    (958 )
Operating expenses                                           (11,470 )                    (489 )      (10,981 )
Depreciation and amortization                                     (7 )                     (92 )           85

Income (loss) from operations                                (10,995 )                     859        (11,854 )
Interest expense, net                                         (9,541 )                 (15,854 )        6,313
Loss from incidental operations                               (3,860 )                  (5,418 )        1,558

Net loss                                        $            (24,396 )    $            (20,413 )    $  (3,983 )

Revenue

Revenue decreased $1.0 million, or 66.5%, in the third quarter of 2008 as compared to the third quarter of 2007 due primarily to the classification of the operations of an additional property as incidental operations.

Operating Expenses

Operating expenses increased in the third quarter of 2008 primarily due to an impairment charge of $10.7 million related to the write-off of capitalized development costs as a result of the Company's determination not to continue the redevelopment plan for the Park Central site as originally proposed.

Depreciation and Amortization Expense

Depreciation and amortization expense decreased $0.1 million, or 92.4%, in the third quarter of 2008 as compared to the third 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, decreased $6.3 million, or 39.8%, in the third quarter of 2008 as compared to the third quarter of 2007 due to a decrease in amortization related to deferred financing costs and lower interest rates in the 2008 period.

Loss from Incidental Operations

Loss from incidental operations decreased $1.6 million, or 28.8%, in the third quarter of 2008 as compared to the third quarter of 2007 primarily due to a decrease in depreciation and amortization of $0.7 million in 2008 as a result of a change in the estimated remaining lives of the properties classified as incidental operations due to the projected timing of the Company's redevelopment plans. Additionally, higher revenue of $0.8 million and lower operating expenses of $0.1 million are included in the results from incidental operations in the third quarter of 2008 primarily as the result of an additional property being classified as incidental operations in the 2008 period and additional professional fees incurred in the 2007 period.

Metroflag Results for the Nine Months Ended September 30, 2008 and 2007


                                                                       Period from
                                                                     January 1, 2007          Period from            Nine Months
                                              Nine Months                Through             May 11, 2007               Ended
                                                 Ended                   May 10,                Through             September 30,
                                          September 30, 2008              2007            September 30, 2007             2007          Variance
                                                                                (Amounts in thousands)
Revenue                                   $             1,453       $           2,079     $             2,287       $        4,366     $  (2,913 )
Operating expenses                                    (13,619 )                  (839 )                  (677 )             (1,516 )     (12,103 )
Depreciation and amortization                             (20 )                  (128 )                  (140 )               (268 )         248

Income (loss) from operations                         (12,186 )                 1,112                   1,470                2,582       (14,768 )
Interest expense, net                                 (34,817 )               (14,444 )               (22,680 )            (37,124 )       2,307
Loss from early retirement of debt                          -                  (3,507 )                     -               (3,507 )       3,507
Loss from incidental operations                       (12,881 )                (7,790 )                (8,112 )            (15,902 )       3,021

Net loss                                  $           (59,884 )     $         (24,629 )   $           (29,322 )     $      (53,951 )   $  (5,933 )

Revenue

Revenue decreased $2.9 million, or 66.7%, in the nine months ended September 30, 2008 as compared to nine months ended September 30, 2007 due primarily to the classification of the operations of an additional property as incidental operations.

Operating Expenses

Operating expenses increased $12.1 million, or 798%, in the nine months ended September 30, 2008 as compared to the nine months ended September 30, 2007 due primarily to an impairment charge of $10.7 million

related to the write-off of capitalized development costs as a result of the Company's determination not to continue the redevelopment plan for the Park Central site as originally proposed.

Depreciation and Amortization Expense

Depreciation and amortization expense decreased $0.2 million, or 92.5%, in the nine months ended September 30, 2008 as compared to the nine months ended September 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, decreased $2.3 million, or 6.2%, in the nine months ended September 30, 2008 as compared to the nine months ended September 30, 2007 due to lower interest rates in 2008.

Loss from Early Retirement of Debt

Loss from early retirement of debt of approximately $3.5 million was recorded for the nine months ended September 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 $3.0 million, or 19.0%, in the nine months ended September 30, 2008 as compared to the nine months ended September 30, 2007 primarily due to a decrease in depreciation and amortization of $1.4 million in 2008 as a result of a change in the estimated remaining lives of the properties classified as incidental operations due to the projected timing of the Company's redevelopment plans. Additionally, higher revenue of $2.3 million and higher operating expenses of $0.7 million are included in the results from incidental operations in the nine months ended September 30, 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.

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 $9.5 million at September 30, 2008 are not sufficient to fund our current operations or to pay obligations scheduled to come due over the ensuing three months as described below.

In response to the ongoing difficulties in the U.S. financial markets and the economic downturn in Las Vegas, we have reviewed our previously adopted redevelopment plan for the Park Central site. The Company has determined not to continue with the program originally proposed. As a result of this decision, the Company recorded an impairment charge related to the write-off of $10.7 million for capitalized development costs that were deemed not to be recoverable. The Company intends to consider alternative plans with respect to the redevelopment of the site. Until such time as an alternative development plan, if any, is adopted, the Company intends to continue the site's current commercial leasing activities.

As of September 30, 2008, the Park Central subsidiaries were in default under the Mortgage Loan secured by the Park Central site by reason of being out of compliance with the debt-to-loan value ratio covenant set forth in the Mortgage Loan prescribed by the governing amended and restated credit agreements. In order to cure the default, we are seeking from the lenders a waiver of noncompliance with, or modifications of, these financial covenants. Unless and until we can obtain such a waiver or modifications, the lenders may exercise their remedies under the credit agreements, which could include accelerating repayment of the Mortgage Loan and foreclosing on the Park Central site. There is no assurance that we will be able to obtain such a waiver or modification before the lenders exercise any of their remedies. Neither we nor our Park Central subsidiaries have adequate capital to repay the Mortgage Loan if accelerated and we cannot assure you that we can refinance the Mortgage Loan in a timely

manner and on commercially reasonable terms or at all. Even if a cure or waiver can be obtained, the Mortgage Loan becomes due and payable on January 6, 2009, subject to the Company's conditional right to extend the maturity date for one six (6) month period. Therefore, aside from curing the above-referenced default, the Company's ability to extend or refinance the Mortgage Loan and fund other working capital needs on or before January 6, 2009 is subject to its ability to raise substantial additional cash prior to January 6, 2009. The Company's ability to extend or refinance the Mortgage Loan and the valuation of the property could also be affected by its determination not to continue with the Park Central site redevelopment plan as originally proposed and to continue the site's commercial leasing activities until an alternative redevelopment plan, if any, is adopted. The Company also has an obligation to pay license fees and satisfy certain funding obligations in accordance with the EPE and MAE license agreements. The failure to pay future royalties or satisfy other funding obligations could result in the termination of the EPE and MAE license agreements and the loss of all rights with respect to the Elvis Presley and Muhammad Ali intellectual property assets.

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.

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. The Company generated aggregate proceeds from the sale of the units of approximately $7.9 million

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 . . .