AMERICAN REAL ESTATE PARTNERS L P - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-Q

(MARK ONE)

[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002

OR

[ ] 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 1-9516

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AMERICAN REAL ESTATE PARTNERS, L.P.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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DELAWARE 13-3398766
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

100 SOUTH BEDFORD ROAD, MT. KISCO, NY 10549
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

(914) 242-7700
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter 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 [ ]

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INDEX

1

AMERICAN REAL ESTATE PARTNERS, L.P.
FORM 10-Q SEPTEMBER 30, 2002

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

The financial information contained herein is unaudited; however, in the
opinion of management, all adjustments necessary for a fair presentation of such
financial information have been included. All such adjustments are of a normal
recurring nature.

CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

See notes to consolidated financial statements.

2

AMERICAN REAL ESTATE PARTNERS, L.P.
FORM 10-Q SEPTEMBER 30, 2002
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)

See notes to consolidated financial statements.

3

AMERICAN REAL ESTATE PARTNERS, L.P.
FORM 10-Q SEPTEMBER 30, 2002
CONSOLIDATED STATEMENTS OF EARNINGS -- (CONTINUED)
(UNAUDITED)

See notes to consolidated financial statements.

4

AMERICAN REAL ESTATE PARTNERS, L.P.
FORM 10-Q SEPTEMBER 30, 2002
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS'
EQUITY AND COMPREHENSIVE INCOME
NINE MONTHS ENDED SEPTEMBER 30, 2002 (UNAUDITED) (IN 000'S)

Accumulated other comprehensive losses at September 30, 2002 was ($206).

See notes to consolidated financial statements.

5

AMERICAN REAL ESTATE PARTNERS, L.P.
FORM 10-Q SEPTEMBER 30, 2002
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

See notes to consolidated financial statements.

6

AMERICAN REAL ESTATE PARTNERS, L.P.
FORM 10-Q SEPTEMBER 30, 2002
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. GENERAL

The accompanying consolidated financial statements and related footnotes
should be read in conjunction with the consolidated financial statements and
related footnotes contained in the Company's annual report on Form 10-K for the
year ended December 31, 2001.

The consolidated financial statements include the accounts of the Company
and its wholly-owned and majority owned subsidiaries. All material intercompany
accounts and transactions have been eliminated in consolidation. Certain amounts
in the 2001 consolidated financial statements have been reclassified to conform
to the 2002 presentation. These reclassifications had no effect on the Company's
net earnings.

The results of operations for the three and nine months ended September 30,
2002 are not necessarily indicative of the results to be expected for the full
year. Hotel, casino and resort operations are highly seasonal in nature and are
not necessarily indicative of results expected for the full year.

2. RELATED PARTY TRANSACTIONS

a. The Company entered into a license agreement with an affiliate of the
General Partner for a portion of office space at an annual rental of
approximately $135,000, plus its share of certain additional rent. Such
agreement was approved by the Audit Committee of the Board of Directors of the
General Partner (the 'Audit Committee'). For the three and nine months ended
September 30, 2002 the Company paid rent of approximately $42,000 and $116,000,
respectively and for the three and nine months ended September 30, 2001 the
Company paid rent of approximately $41,000 and $111,000 respectively.

b. Stratosphere Corp. ('Stratosphere') received approximately $400,000 and
$1,276,000 from affiliates of the General Partner as reimbursement for
administrative services performed by Stratosphere personnel during the three and
nine months ended September 30, 2002, respectively. For the three and nine
months ended September 30, 2001, Stratosphere received approximately $443,000
and $892,000 respectively.

Stratosphere recorded hotel revenue of approximately $22,000 and $118,000
for the three and nine months ended September 30, 2002, respectively, in
connection with a tour and travel agreement entered into with an affiliate of
the General Partner. For the three and nine months ended September 30, 2001,
Stratosphere recorded hotel revenue of approximately $175,000 and $484,000
respectively.

c. As of November 1, 2002 affiliates of Carl C. Icahn ('Icahn'), the
Chairman of the Board of the General Partner, owned 8,073,466 Preferred Units
and 39,706,836 Limited Partnership Units.

d. See Note 4 regarding Note Receivable -- Affiliate and Note 6 regarding
Equity Interest in GB Holdings, Inc.

3. COMMITMENTS AND CONTINGENCIES

a. On January 31, 2001, Stratosphere was named in an action styled Disabled
Rights Action Committee v. Stratosphere Gaming Corp., Case No. A430070, in the
Eighth Judicial District Court of the State of Nevada. The complaint alleges a
number of violations of the Americans with Disabilities Act ('ADA'), including
inadequate room selection, door widths and other similar items. Simultaneously
with the complaint, plaintiffs filed a Motion for Preliminary Injunction,
seeking to have construction halted on the new hotel tower until the property
fully complies with the ADA. Stratosphere removed the action to the United
States District Court in Nevada and it is now styled as Disabled Rights Action
Committee v. Stratosphere Gaming Corp., Case No. CV-S-01-0162-RLH (PAL).

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The federal district court held a hearing on plaintiffs' Motion for
Preliminary Injunction and denied the motion, focusing upon what the Court
believed to be the plaintiffs' lack of irreparable injury. The federal district
court also granted Stratosphere's Motion to Dismiss the plaintiffs' state law
claims, leaving in place only the ADA claims. Stratosphere and the Plaintiffs
then filed Motions for Summary Judgement. The District Court granted and denied
in part each of the parties respective motions. The Court ordered that
Stratosphere must make certain renovations to 532 rooms that were opened in
1996. The Court issued an injunction requiring that these renovations be
completed by August 9, 2002. Stratosphere has complied with the Court injunction
by completing these renovations in June 2002.

b. In January 2002, the Cape Cod Commission, (the 'Commission'), a regional
planning body created in 1989, concluded that the Company's New Seabury
development is within its jurisdiction (the 'Administrative Decision'). It is
the Company's position that the proposed residential and commercial development
is allowed under a special permit issued for the property in 1964 and is exempt
from the Commission's jurisdiction.

In February 2002, New Seabury Properties LLC, the Company's subsidiary and
owner of the property, filed a civil complaint in Barnstable County
Massachusetts Superior Court appealing the Administrative Decision by the
Commission. On October 21, 2002 the Court vacated the Administrative Decision on
the grounds that the Commission's criteria for exercising their jurisdiction
were not adopted in accordance with statutory regulations. The Court directed
that the Commission properly adopt appropriate criteria for exercising their
jurisdiction and reconsider New Seabury Properties LLC's claim that its proposed
development is exempt from Commission review. The Company has also raised
constitutional claims against the Commission which were not resolved by the
Court's October 21, 2002 decision. The Company may appeal certain aspects of the
Court's rulings and may continue to pursue its constitutional claims against the
Commission. The Company cannot predict the effect on the development process if
it loses any appeal or if the Commission is ultimately successful in asserting
jurisdiction over the proposed development.

c. Tiffiny Decorating Company ('Tiffiny'), a subcontractor to Great Western
Drywall ('Great Western'), filed a legal action against Stratosphere
Corporation, Stratosphere Development, LLC, American Real Estate Holdings
Limited Partnership (collectively referred to as the 'Stratosphere Parties'),
Great Western, Nevada Title and Safeco Insurance, Case No. A443926 in the Eighth
Judicial District Court of the State of Nevada. The legal action asserts claims
that include breach of contract, unjust enrichment and foreclosure of lien. The
Stratosphere Parties have filed a cross-claim against Great Western in that
action. Additionally, Great Western has filed a separate legal action against
the Stratosphere Parties setting forth the same disputed issues. That separate
action, Case No. A448299 in the Eighth Judicial Court of the State of Nevada,
has been consolidated with the case brought by Tiffiny.

The initial complaint brought by Tiffiny asserts that Tiffiny performed
certain construction services at the Stratosphere and was not fully paid for
those services. Tiffiny claims the sum of $521,562 against Great Western, the
Statosphere Parties, and the other defendants, which the Stratosphere Parties
contend has been paid to Great Western for payment to Tiffiny.

Great Western is alleging that it is owed payment from the Stratosphere
Parties for work performed and for delay and disruption damages. Great Western
is claiming damages in the sum of $3,935,438 plus interest, costs and legal fees
from the Stratosphere Parties. This amount apparently includes the Tiffiny
claim.

The Stratosphere Parties have evaluated the project and have determined that
the amount of $1,004,059 is properly due and payable to satisfy all claims for
the work performed, including the claim by Tiffiny. In October 2002,
Stratosphere paid Tiffiny and Great Western $195,953 and $371,973, respectively.
The remaining amount has been segregated in a separate interest bearing account.
The Stratosphere Parties intend to vigorously defend the action for claims in
excess of $1,004,059.

d. In addition, in the ordinary course of business, the Company, its
subsidiaries and other companies in which the Company has invested are parties
to various legal actions. In management's opinion, the ultimate outcome of such
legal actions will not have a material effect on the results of operations or
the financial position of the Company.

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e. In January 2002, Kmart Corp., a tenant leasing seven properties owned by
the Company which represent approximately $1,374,000 in annual rentals, filed a
voluntary petition for reorganization under Chapter 11 of the Federal Bankruptcy
Code. Pursuant to an order of the Bankruptcy Court, four leases have been
rejected representing approximately $713,000 in annual rents. The related
properties are being held for sale. The Company previously recorded a provision
for loss on real estate of approximately $1.9 million on these four properties
in the year ended December 31, 2001. As of November 1, 2002, the Company has not
been notified regarding the three remaining leases representing approximately
$661,000 in annual rents. The tenant is current in its rent payments on these
three leases. At September 30, 2002, the net book value of the seven properties
was approximately $6,807,000, which the Company believes is less than the
estimate of net realizable value.

f. In September 2001, Ames Department Stores, a tenant in a property owned
by the Company filed a voluntary petition for reorganization under Chapter 11 of
the Bankruptcy Code. The tenant rejected the lease effective March 15, 2002. The
annual rent for this property was approximately $327,000. At September 30, 2002,
the net book value of this property was approximately $2,158,000, which the
Company believes is less than the estimate of net realizable value.

4. NOTE RECEIVABLE-AFFILIATE

On December 27, 2001, the Company entered into a transaction with Carl C.
Icahn, Chairman of the Board of the General Partner, pursuant to which the
Company made a $250 million loan to Mr. Icahn due on or before December 27, 2003
and by law may not be renewed or extended. The loan is secured by securities
consisting of (i) approximately $250 million aggregate market value of the
Company's units owned by affiliates of Mr. Icahn (approximately 21.1 million
depositary units and 8.1 million preferred units) and (ii) shares of a private
company owned by Mr. Icahn, which shares have an aggregate book value of at
least $250 million, together with an irrevocable proxy on sufficient additional
shares of the private company so that the pledged shares and the shares covered
by the proxy equal in excess of 50% of the private company's shares. The private
company owns other Icahn investments and does not own the Company's units. The
loan bears interest, payable semi-annually at a per annum rate equal to the
greater of (i) 3.9% or (ii) 200 basis points over 90 day LIBOR to be reset each
calendar quarter. The applicable rates during the three months ended March 31,
2002, June 30, 2002 and September 30, 2002 were 3.9%, 4.03% and 3.9%,
respectively. The loan must be prepaid in an amount of up to $125 million to the
extent that the Company requests such funds for an investment opportunity and
may be prepaid at any time by Mr. Icahn. The Company entered into this
transaction to earn interest income on a secured investment. In the event of a
loan default, the Company would at its option, liquidate the shares of the
private company or reacquire its own units, or both, to satisfy the loan.
Accrued interest income of approximately $2.5 million and $7.5 million was
recorded on this loan in the three and nine months ended September 30, 2002,
respectively, and is included in 'Interest income on U.S. Government and Agency
obligations and other investments' in the Consolidated Statements of Earnings.
Pursuant to the loan agreement, on July 1, 2002, Mr. Icahn paid approximately
$5.1 million to the Company, representing accrued interest to June 30, 2002.

5. HOTEL, CASINO AND RESORT OPERATING PROPERTIES

a. Stratosphere Hotel and Casino

The Company owns approximately 51% of Stratosphere and consolidates
Stratosphere in its financial statements. Stratosphere owns and operates the
Stratosphere Tower Casino and Hotel located in Las Vegas, Nevada.

On February 1, 2002 the Company entered into a merger agreement with
Stratosphere under which the Company, subject to certain conditions, will
acquire the remaining shares of Stratosphere that the Company does not currently
own. The Company currently owns approximately 51% of Stratosphere and an Icahn
affiliate owns approximately 38.6%. The initial determination to engage in the
transaction at the prices set forth below was previously announced by the
Company in September 2000.

9

Under the agreement the stockholders who are unaffiliated with Mr. Icahn
will receive a cash price of $45.32 per share (approximately $9.6 million) and
the Icahn-related stockholders other than the Company will receive a cash price
of $44.33 per share (approximately $34.7 million). The Company will pay an
aggregate of approximately $44.3 million for the Stratosphere shares.
Stratosphere filed a Preliminary Proxy Statement with the Securities and
Exchange Commission on March 14, 2002. The Proxy Statement is in the process of
being finalized. Stratosphere has tentatively scheduled a shareholders meeting
for December 16, 2002. This transaction is expected to close shortly after the
meeting is held.

The acquisition by the Company of the minority shares will be accounted for
as a purchase in accordance with Financial Accounting Standards Board ('FASB')
Statement No. 141, 'Business Combinations.' The acquisition by the Company of
the common stock held by an Icahn affiliate will be recorded at historical cost.

Stratosphere's operations for the three and nine months ended September 30,
2002 and 2001 have been included in 'Hotel and casino operating income and
expenses' in the Consolidated Statements of Earnings. Hotel and casino operating
expenses include all expenses except for approximately $3,330,000 and $9,966,000
of depreciation and amortization for the three and nine months ended
September 30, 2002, respectively, and $2,349,000 and $7,001,000 of depreciation
and amortization for the three and nine months ended September 30, 2001,
respectively. Such amounts have been included in 'Depreciation and amortization
expense' in the Consolidated Statements of Earnings.

b. Hotel and Resort Operating Properties

Hotel and resort operations for the three and nine months ended
September 30, 2002 and 2001 have been included in 'Hotel and resort operating
income and expenses' in the Consolidated Statements of Earnings. Hotel and
resort operating expenses include all expenses except for approximately $639,000
and $1,560,000 of depreciation and amortization for the three and nine months
ended September 30, 2002, respectively and $524,000 and $1,172,000 of
depreciation and amortization for the three and nine months ended September 30,
2001, respectively. Such amounts have been included in 'Depreciation and
amortization expense' in the Consolidated Statements of Earnings.

6. EQUITY INTEREST IN GB HOLDINGS, INC. (SANDS HOTEL AND CASINO)

In May 2002, the Company was qualified as a holding company by the New
Jersey Casino Control Commission (the 'Casino Control Commission') and in
accordance with a prior agreement repurchased its interest in the Sands Hotel
and Casino (the 'Sands'), located in Atlantic City New Jersey, from affiliates
of the General Partner. As a result, the Company acquired approximately 3.6
million common shares (36%) of GB Holdings Inc. and $26.9 million face amount of
GB Property First Mortgage Notes. The Company paid approximately $69.1 million
to reacquire its interests representing the affiliates advances plus accrued
interest of approximately $11 million. In accordance with the agreement,
interest was accrued from March 2000 to May 2002 at an annual rate of 1 1/2%
over the prime rate. Interest expense of approximately $919,000 was recorded on
this obligation in the nine months ended September 30, 2002, and interest
expense was $1,315,000 and $3,734,000 in the three and nine months ended
September 30, 2001, respectively. As required by the New Jersey Casino Control
Act, (the 'Casino Control Act') the Partnership Agreement was amended to provide
that securities of the Company are held subject to the condition that if a
holder thereof is found to be disqualified by the Casino Control Commission,
pursuant to the provisions of the Casino Control Act, such holder shall dispose
of his interest in the Company in accordance with the Casino Control Act.

7. MARKETABLE EQUITY AND DEBT SECURITIES

The Company has equity and debt investments in Philip Services Corp.
('Philip') which were classified as available-for-sale investments at
December 31, 2001.

The market value of Philip's common stock has declined steadily since it was
acquired by the Company. In 2002, based on a review of Philip's financial
statements, management of the Company deemed the decrease in value to be other
than temporary. As a result, the Company wrote down its

10

investment in Philip's common stock by charges to earnings of $8,476,000 and
charges to other comprehensive income ('OCI') of $761,000 in the nine months
ended September 30, 2002. This investment had been previously written down by
approximately $6.8 million in charges to OCI. Such amount was removed from OCI
and is included in the above-mentioned charges to earnings. The Company's
adjusted carrying value of Philip's common stock is approximately $200,000 at
September 30, 2002.

The Company also has a participation in Philip's debt with an original cost
at the date of their acquisition of approximately $19.7 million. At
December 31, 2001, such notes were classified as available-for-sale securities
and were written down through charges to OCI, to an estimated fair market value
of approximately $13.2 million. In 2002, upon concluding its review of these
investments, management determined that such investments were more properly
classified as notes receivable. Approximately $6.6 million of charges to OCI
were reversed and the investments were re-classified at their original cost to
'Mortgages and notes receivable' at September 30, 2002. These adjustments had no
effect on the Company's reported earnings for the three and nine months ended
September 30, 2002.

8. MORTGAGES AND NOTES RECEIVABLE

The Company has provided development financing for certain real estate
projects. The security for these loans is a pledge of the developers' ownership
interest in the properties. Such loans are subordinate to construction financing
and are generally referred to as mezzanine loans. The Company's mezzanine loans
accrue interest at approximately 22% per annum. However interest is not paid
periodically and is due at maturity or earlier from unit sales or refinancing
proceeds. The Company defers recognition of interest income on mezzanine loans
pending receipt of principal and interest payments.

a. In May 2002, the Company received approximately $31.3 million for
prepayment of two mezzanine loans on a New York City condominium property. The
Company had advanced $23 million to the developer. The balance of the prepayment
$8.3 million represented accrued interest ($7.9 million) and exit fees ($.4
million) which amounts were recognized as 'interest income' and 'other income',
respectively, in the Consolidated Statements of Earnings for the nine months
ended September 30, 2002.

b. At September 30, 2002, the Company had funded two mezzanine loans for
approximately $23.2 million and had commitments to fund, under certain
conditions, additional advances of approximately $5 million. At September 30,
2002, accrued interest of approximately $2.6 million has been deferred, for
financial statement purposes, pending receipt of principal and interest
payments, in connection with these loans.

9. SIGNIFICANT PROPERTY TRANSACTIONS

In September 2002, the Company purchased an industrial building located in
Nashville, Tennessee for approximately $18.2 million. The building was
constructed in 2001 and is fully leased to two tenants, Alliance Healthcare and
Jet Equipment & Tools Inc., with leases expiring in 2011. The annual net
operating income is anticipated to be approximately $1.6 million increasing to
approximately $1.9 million by 2011.

In October 2002, the Company closed a $12.7 million non-recourse mortgage
loan on the Nashville, Tennessee property. The loan bears interest at 6.4% per
annum and matures in ten years. Required payments are interest only for the
first three years and then principal amortization will commence based on a
thirty-year amortization schedule.

10. PREFERRED UNITS

Pursuant to the terms of the Preferred Units, on February 22, 2002, the
Company declared its scheduled annual preferred unit distribution payable in
additional Preferred Units at the rate of 5% of the liquidation preference of
$10. The distribution was payable March 31, 2002 to holders of record as of
March 15, 2002. A total of 444,332 additional Preferred Units were issued. At
September 30, 2002, 9,330,963 Preferred Units are issued and outstanding.

11

11. EARNINGS PER SHARE

Basic earnings per share are based on earnings after the preferred
pay-in-kind distribution to Preferred Unitholders.

Diluted earnings per share uses net earnings attributable to limited partner
interests as the numerator with the denominator based on the weighted average
number of units and equivalent units outstanding. The Preferred Units are
considered to be equivalent units.

For the three and nine months ended September 30, 2002 and 2001, basic and
diluted earnings per weighted average limited partnership unit are as follows:

12. COMPREHENSIVE INCOME

The components of comprehensive income include net income and certain
amounts reported directly in equity.

Comprehensive income for the three and nine months ended September 30, 2002
and 2001 is as follows (in $000's):

12

13. SEGMENT REPORTING

The Company is engaged in five operating segments consisting of: (i) rental
real estate, (ii) hotel and resort operating properties, (iii) hotel and casino
operating properties, (iv) land sales, house and condominium development, and
(v) investment in securities including investment in other limited partnerships
and marketable equity and debt securities. The Company's reportable segments
offer different services and require different operating strategies and
management expertise. There have been no material changes in segment assets
since December 31, 2001.

The Company assesses and measures segment operating results based on segment
earnings from operations as disclosed below. Segment earnings from operations
are not necessarily indicative of cash available to fund cash requirements nor
synonymous with cash flow from operations.

The revenues and net earnings for each of the reportable segments are
summarized as follows for the three and nine months ended September 30, 2002 and
2001 (in $000's).

14. NEW ACCOUNTING PRONOUNCEMENTS

As of January 1, 2002 the Company has adopted the Statements of Financial
Accounting Standards Nos. 141, 142 and 144 (SFAS 141, SFAS 142 and SFAS 144)
'Business Combinations', 'Goodwill and Other Intangible Assets' and 'Accounting
for the Impairment or Disposal of Long-Lived Assets.' In April 2002, the FASB
issued SFAS No. 145 which rescinds SFAS's Nos. 4, 44 and 64 which, among other
things, required all gains and losses on extinguishment of debt to be classified
as an extraordinary item. The Company will adopt the provisions of SFAS No. 145
effective January 1, 2003. The adoption of SFAS 141, SFAS 142 and SFAS 144 has
not had any material impact on the Company's consolidated financial statements.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Statements included in Management's Discussion and Analysis of Financial
Condition and Results of Operations which are not historical in nature, are
intended to be, and are hereby identified as, 'forward looking statements' for
purposes of the safe harbor provided by Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934, as amended by
Public Law 104-67.

Forward-looking statements regarding management's present plans or
expectations involve risks and uncertainties and changing economic or
competitive conditions, as well as the negotiation of agreements with third
parties, which could cause actual results to differ from present plans or
expectations, and such differences could be material. Readers should consider
that such statements speak only as to the date hereof.

GENERAL

The Company is a master limited partnership primarily engaged in acquiring
and managing real estate investments with a primary focus on office, retail,
industrial, hotel, gaming and residential properties.

The Company believes that it will benefit from the diversification of its
portfolio of assets. To further its investment objectives, the Company may
consider the acquisition or seek effective control of land development companies
and other real estate operating companies which may have a significant inventory
of quality assets under development. In selecting future real estate
investments, the Company intends to focus on assets that it believes are
undervalued in the real estate market, which investments may require substantial
liquidity to maintain a competitive advantage. The Company believes that there
are still opportunities available to acquire investments that are undervalued.
These may include commercial properties, residential and commercial development
projects, land, assets in the gaming and entertainment industries,
non-performing loans, the securities of entities which own, manage or develop
significant real estate assets, including limited partnership units and
securities issued by real estate

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investment trusts and the acquisition of debt or equity securities of companies
which may be undergoing restructuring and under-performing properties that may
require active asset management and significant capital improvements. The
Company has made investments in the gaming industry and may consider additional
gaming industry investments and investments related to the entertainment
industry. Such investments may include additional casino properties and those in
the entertainment field, such as movie theater interests, and the financing and
investment in the movie production and distribution industry. Such investments
may include acquisitions from, or in joint venture or co-management with, Icahn,
the General Partner or their affiliates, provided that the terms thereof are
fair and reasonable to the Company. The Company believes there are still
opportunities available to acquire investments that are undervalued; however,
acquisition opportunities in the real estate market for value-added investors
have become more competitive to source and the increased competition may have
some impact on the spreads and the ability to find quality assets that provide
returns that are sought. These investments may not be readily financeable and
may not generate immediate positive cash flow for the Company. As such, they
require the Company to maintain a strong capital base in order to react quickly
to these market opportunities as well as to allow the Company the financial
strength to develop or reposition these assets. While this may impact cash flow
in the near term and there can be no assurance that any asset acquired by the
Company will increase in value or generate positive cash flow, the Company
intends to focus on assets that it believes may provide opportunities for
long-term growth and further its objective to diversify its portfolio.

Historically, substantially all of the Company's real estate assets have
been net leased to single corporate tenants under long-term leases. With certain
exceptions, these tenants are required to pay all expenses relating to the
leased property and therefore the Company is not typically responsible for
payment of expenses, such as maintenance, utilities, taxes and insurance
associated with such properties.

By the end of the year 2004, net leases representing approximately 12% of
the Company's net annual rentals from its real estate portfolio will be due for
renewal, and by the end of the year 2006, net leases representing approximately
30% of the Company's net annual rentals will be due for renewal. Since most of
the Company's properties are net-leased to single corporate tenants, it may be
difficult and time-consuming to re-let or sell those properties that existing
tenants decline to re-let or purchase, and therefore the Company may be required
to incur expenditures to renovate such properties for new tenants. In addition,
the Company may become responsible for the payment of certain operating
expenses, including maintenance, utilities, taxes, insurance and environmental
compliance costs associated with such properties, which are presently the
responsibility of the tenant. As a result, the Company could experience an
adverse impact on net cash flow in the future from such properties.

The Partnership Agreement permits the Company to invest in securities issued
by companies that are not necessarily engaged as one of their primary activities
in the ownership, development or management of real estate while remaining in
the real estate business and continuing to pursue suitable investments for the
Company in real estate and real estate related investments.

Expenses relating to environmental clean-up have not had a material effect
on the earnings, capital expenditures, or competitive position of the Company.
Management believes that substantially all such costs would be the
responsibility of the tenants pursuant to lease terms. While most tenants have
assumed responsibility for the environmental conditions existing on their leased
property, there can be no assurance that the Company will not be deemed to be a
responsible party or that the tenant will bear the costs of remediation. As
leases are rejected in bankruptcy, or properties are vacated by tenants, the
Company's exposure to environmental clean-up costs may increase. The Company
completed Phase I Environmental Site Assessments on most of its properties by
third-party consultants. Based on the results of these Phase I Environmental
Site Assessments, the environmental consultant has recommended that certain
sites may have environmental conditions that should be further reviewed.

The Company has notified each of the responsible tenants to attempt to
ensure that they cause any required investigation and/or remediation to be
performed and most tenants continue to take appropriate action. However, if the
tenants fail to perform responsibilities under their leases referred to above,
based solely upon the consultant's estimates resulting from its Phase I
Environmental Site Assessments referred to above, it is presently estimated that
the Company's exposure could amount to $2-3 million. However, as no Phase II
Environmental Site Assessments have been conducted by the

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consultants, there can be no accurate estimation of the need for or extent of
any required remediation, or the costs thereof. In addition, the Company has
notified all tenants of the Resource Conservation and Recovery Act's ('RCRA')
December 22, 1998 requirements for regulated underground storage tanks. The
Company may, at its own cost, have to cause compliance with RCRA's requirements
in connection with vacated properties, bankrupt tenants and new acquisitions.
Phase I Environmental Site Assessments will also be performed in connection with
new acquisitions and property refinancings.

The Company is in the process of updating its Phase I Site Assessments for
certain of its environmentally sensitive properties including properties with
open RCRA requirements. Approximately thirty-five updates are expected to be
completed in 2002 with another thirty-three scheduled for the year 2003.

RESULTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2001

Gross revenues decreased by $7,575,000 or 9.1%, during the three months
ended September 30, 2002 as compared to the same period in 2001. This decrease
reflects decreases of $6,371,000 in land, house and condominium sales,
$1,449,000 in equity in earnings of GB Holdings, Inc., $716,000 in interest
income on U.S. Government and Agency Obligations and other investments, $597,000
in dividend and other income, $506,000 in financing lease income and $117,000 in
rental income partially offset by increases of $1,662,000 in hotel and casino
operating income and $519,000 in hotel and resort operating income. The decrease
in land, house and condominium sales is primarily due to a decrease in the
number of units sold. The decrease in equity in earnings of GB Holdings, Inc. is
due to decreased casino revenue, primarily attributable to a reduction in the
number of table games as new slot machines were added, which was partially
offset by decreased promotional allowances and decreased casino expenses. The
decrease in interest income on U.S. Government and Agency obligations and other
investments is primarily attributable to a decline in interest rates on U.S.
Government and Agency obligations. The decrease in financing lease income is the
result of lease expirations, reclassifications of financing leases and normal
financing lease amortization. The increase in hotel and casino operating income
is primarily attributable to an increase in gaming and tower revenues. Gaming
revenues increased due to an increased win percentage and increased customer
play. The average daily rate ('ADR') decreased $1 to $45 and percentage
occupancy decreased approximately 1% to 93.7%. The increase in hotel and resort
operating income is primarily attributable to increased revenues at New Seabury
as prior period revenues were negatively impacted by construction activities.

Expenses decreased by $4,736,000, or 7.2%, during the three months ended
September 30, 2002 as compared to the same period in 2001. This decrease
reflects decreases of $4,908,000 in the cost of land, house and condominium
sales, $1,565,000 in interest expense and $373,000 in hotel and casino operating
expenses partially offset by increases of $1,184,000 in depreciation and
amortization, $527,000 in hotel and resort operating expenses, $209,000 in
general and administrative expenses and $190,000 in rental property expenses.
The decrease in the cost of land, house and condominium sales is due to the
decreased sales as discussed above. Costs as a percentage of sales increased
from 79% in 2001 to 81% in 2002 primarily due to lower margin sales in 2002. The
decrease in interest expense is primarily due to repayment of debt to affiliates
in May of 2002 in connection with the Sands repurchase obligation, as well as
decreased interest rates prior to repayment. The decrease in hotel and casino
operating expenses is primarily attributable to decreased general and
administrative expenses partially offset by increased payroll costs. Costs as a
percentage of sales declined from 91% in 2001 to 86% in 2002 as hotel and casino
revenues increased at a greater rate than hotel and casino expenses. The
increase in depreciation expense is primarily attributable to the expansion of
the Stratosphere hotel and casino which was completed in June 2001. The increase
in hotel and resort operating expenses is primarily due to increased costs
associated with increased revenue at New Seabury. The increase in rental
property expenses is primarily due to an increase in expenses related to
off-lease properties and expenses of the New Seabury development litigation.

Earnings from land, house and condominium operations decreased in the third
quarter of 2002 compared to the third quarter of 2001 due to a decline in
inventory of completed units available for

16

sale. Based on current information, sales may increase through the fourth
quarter of 2002. However, the decrease in land inventory in approved
sub-divisions is expected to negatively impact earnings from this business
segment unless mitigated by land purchases, obtaining sub-division approvals and
the development and sale of units in approved sub-divisions.

As a result of the completion of Stratosphere's additional 1,000 rooms and
related amenities in June 2001, hotel and casino operating revenues have
increased. Increased room capacity provided more hotel guests thereby increasing
revenues. Management anticipates that fourth quarter 2002 hotel and casino
operating revenues may improve, as compared to the fourth quarter of 2001 which
was severely impacted by the September 11, 2001 terrorist attacks. As a result
of a new collective bargaining agreement which is retroactive to June 1, 2002,
payroll and related expenses are expected to increase by $1 million in 2002.

Earnings before property and securities transactions and minority interest
decreased during the three months ended September 30, 2002 by $2,839,000 as
compared to the same period in 2001.

Gain on property transactions increased by $2,891,000 during the three
months ended September 30, 2002 as compared to the same period in 2001 as there
were no property dispositions in the quarter ended September 30, 2001.

Minority interest in the net earnings of Stratosphere Corporation increased
by $598,000 during the three months ended September 30, 2002 as compared to the
same period in 2001 due to an increase in Stratosphere's net income.

Net earnings for the three months ended September 30, 2002 decreased by
$546,000 as compared to the three months ended September 30, 2001 primarily due
to decreased earnings before property transactions ($2.8 million), as discussed
above and increased minority interest in the net earnings of Stratosphere Corp.
($.6 million) partially offset by increased earnings from property transactions
($2.9 million).

Diluted earnings per weighted average limited partnership unit outstanding
before property and security transactions were $.25 in the three months ended
September 30, 2002 compared to $.31 in the comparable period of 2001, and net
gain from property and securities transactions was $.05 in the three months
ended September 30, 2002 compared to no gain or loss in the comparable period of
2001. Diluted earnings per weighted average limited partnership unit outstanding
totalled $.30 in the three months ended September 30, 2002 compared to $.31 in
the comparable period of 2001.

NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2001

Gross revenues increased by $19,954,000, or 9.1%, during the nine months
ended September 30, 2002 as compared to the same period in 2001. This increase
reflects increases of $11,726,000 in hotel and casino operating income,
$7,162,000 in land, house and condominium sales, $1,546,000 in interest income
on U.S. Government and Agency Obligations and other investments, $1,489,000 in
hotel and resort operating income and $469,000 in rental income partially offset
by decreases of $1,435,000 in financing lease income, $736,000 in dividend and
other income and $267,000 in equity in earnings of GB Holdings, Inc. The
increase in hotel and casino operating income is primarily attributable to an
increase in gaming and hotel revenues as a result of increased room capacity
brought about by the hotel expansion. The average daily rate ('ADR') remained at
$48; however, percentage occupancy decreased approximately 7% to 90.1%. The
increase in land, house and condominium sales is primarily due to an increase in
the number of units sold. The increase in interest income on U.S. Government and
Agency obligations and other investments is primarily attributable to interest
earned on a mezzanine loan partially offset by a decline in interest rates on
U.S. Government and Agency obligations. The increase in hotel and resort
operating income is primarily attributable to increased revenues at New Seabury
as prior period revenues were negatively impacted by construction activities.
The increase in rental income is primarily attributable to reclassifications of
financing leases to operating leases. The decrease in financing lease income is
the result of lease expirations, reclassifications of financing leases and
normal financing lease amortization.

Expenses increased by $11,703,000 or 6.9%, during the nine months ended
September 30, 2002 as compared to the same period in 2001. This increase
reflects increases of $5,232,000 in hotel and casino

17

operating expenses, $4,348,000 in the cost of land, house and condominium sales,
$3,395,000 in depreciation and amortization, $1,494,000 in rental property
expenses, $1,140,000 in hotel and resort operating expenses and $107,000 in
general and administrative expenses partially offset by a decrease of $4,013,000
in interest expense. The increase in hotel and casino operating expenses is
primarily attributable to increased costs associated with increased revenues.
Costs as a percentage of sales declined from 90% in 2001 to 85% in 2002 as hotel
and casino revenues increased at a greater rate than hotel and casino expenses.
The increase in the cost of land, house and condominium sales is due to the
increased sales as discussed above. Costs as a percentage of sales decreased
from 76% in 2001 to 74% in 2002 primarily due to higher margin sales in 2002.
The increase in depreciation expense is primarily attributable to the expansion
of the Stratosphere Hotel and Casino. The increase in property expenses is
primarily due to an increase in expenses related to off-lease properties and
expenses of the New Seabury development litigation. The increase in hotel and
resort operating expenses is primarily due to increased costs associated with
increased revenue at New Seabury. The decrease in interest expense is primarily
due to repayment of debt to affiliates in May of 2002 in connection with the
Sands repurchase obligation, as well as decreased interest rates prior to
repayment.

Earnings from land, house and condominium operations increased in the nine
months ended September 30, 2002 as compared to the same period in 2001. Based on
current information, sales may increase through the early part of 2003. However,
the decrease in land inventory in approved sub-divisions is expected to
negatively impact earnings from this business seqment unless mitigated by land
purchases, obtaining sub-division approvals and the development and sale of
units in approved sub-divisions.

As a result of the completion of Stratosphere's additional 1,000 rooms and
related amenities in June 2001, hotel and casino operating revenues and expenses
have increased. Increased room capacity provided more hotel guests thereby
increasing revenues. Management anticipates that fourth quarter 2002 hotel and
casino operating revenues may improve, as compared to the fourth quarter of 2001
which was severely impacted by the September 11, 2001 terrorist attacks. As a
result of a new collective bargaining agreement, retroactive to June 1, 2002,
payroll and related expenses are expected to increase by $1 million in 2002.

Earnings before property and securities transactions and minority interest
increased during the nine months ended September 30, 2002 by $8,251,000 as
compared to the same period in 2001.

A provision for loss on real estate of $926,000 was recorded in the nine
months ended September 30, 2002. There was no such provision in the comparable
period of 2001.

Gain on property transactions increased by $3,168,000 during the nine months
ended September 30, 2002 as compared to the same period in 2001 due to the size
and number of transactions.

Gain on sale of marketable equity securities decreased by $1,334,000 during
the nine months ended September 30, 2002 as compared to the same period in 2001
as there were no such dispositions in 2002.

A write-down of equity securities available for sale of $8,476,000 was
recorded in the nine months ended September 30, 2002. No such write-down was
recorded in the comparable period in 2001.

Minority interest in the net earnings of Stratosphere Corporation increased
by $797,000 during the nine months ended September 30, 2002 as compared to the
same period in 2001 due to an increase in Stratosphere's net income.

Net earnings for the nine months ended September 30, 2002 decreased by
$114,000 as compared to the nine months ended September 30, 2001 primarily due
to a write-down of equity securities available for sale ($8.5 million),
decreased gain on marketable equity securities ($1.3 million), increased
provision for loss on real estate ($.9 million) and increased minority interest
in the net earnings of Stratosphere Corp. ($.8 million) partially offset by
increased earnings before property transactions ($8.3 million ) and increased
earnings from property transactions ($3.1 million).

Diluted earnings per weighted average limited partnership unit outstanding
before property and security transactions were $.95 in the nine months ended
September 30, 2002 compared to $.83 in the comparable period of 2001, and net
loss from property and securities transactions was $.08 in the nine months ended
September 30, 2002 compared to a net gain of $.05 in the comparable period of
2001.

18

Diluted earnings per weighted average limited partnership unit outstanding
totalled $.87 in the nine months ended September 30, 2002 compared to $.88 in
the comparable period of 2001.

CAPITAL RESOURCES AND LIQUIDITY

Generally, the cash needs of the Company for day-to-day operations have been
satisfied from cash flow generated from current operations. Cash flow from
day-to-day operations represents net cash provided by operating activities
(excluding working capital changes, non-recurring other income and the cash
flows from the operations of Bayswater and Stratosphere retained for their
operations) plus principal payments received on financing leases as well as
principal receipts on certain mortgages receivable reduced by periodic principal
payments on mortgage debt.

The following table reflects the Company's contractual cash obligations due
over the indicated periods and when they come due (in $ millions):

In 2002, fourteen leases covering fourteen properties and representing
approximately $2.1 million in annual rentals have expired. Seven leases,
originally representing approximately $916,000 in annual rental income, were
renewed for approximately $625,000 in annual rentals. Such renewals are
generally for a term of five years. Seven leases with annual rental income of
approximately $1,194,000 were not renewed and are currently being marketed for
sale or lease.

The Board of Directors of the General Partner announced that no
distributions on its Depositary Units are expected to be made in 2002. The
Company believes that it should continue to hold and invest, rather than
distribute, cash. In making its announcement, the Company noted it plans to
continue to apply available cash flow toward its operations, repayment of
maturing indebtedness, tenant requirements, other capital expenditures and cash
reserves for contingencies including environmental matters and scheduled lease
expirations. By the end of the year 2004, net leases representing approximately
12% of the Company's net annual rentals will be due for renewal, and by the end
of the year 2006, 30% of such rentals will be due for renewal. Another factor
that the Company took into consideration was that net leases representing
approximately 29% of the Company's annual rentals are with tenants in the retail
sector, some of which are currently experiencing cash flow difficulties and
restructurings.

During the nine months ended September 30, 2002, the Company generated
approximately $47.5 million in cash flow from day-to-day operations which
excludes approximately $37.6 million in cash flow from the operations of
Bayswater and Stratosphere which are being retained for their operations.

Capital expenditures for real estate, excluding hotel and casino operating
property, were approximately $1.9 million during the nine months ended
September 30, 2002.

During the nine months ended September 30, 2002, net cash flow after payment
of maturing debt obligations and capital expenditures was approximately
$45.7 million which was added to the Company's operating cash reserves. This
excludes cash flow from Bayswater and Stratosphere which is being retained for
their operations. The Company's operating cash reserves are approximately
$218 million at September 30, 2002, (not including the cash from capital
transactions). The current economic conditions may decrease the Company's cash
flow from rental and investment activities requiring the use of cash reserves
for (i) repayment of debt obligations, (ii) tenant and other capital
requirements and (iii) other contingencies including environmental matters. Cash
reserves may also be used for real estate acquisitions and for other investments
in order to further diversify the Company's portfolio of assets.

19

In February 2002, the Company entered into a merger agreement with
Stratosphere under which the Company, subject to certain conditions, will
acquire the remaining shares of Stratosphere that it does not currently own from
affiliates of Icahn and public shareholders for approximately $44.3 million.
Stratosphere has tentatively scheduled a shareholders meeting for December 16,
2002. The transaction is expected to close shortly after the meeting is held.

In May 2002, the Company was qualified as a holding company by the New
Jersey Casino Control Commission and repurchased its interests in the Sands from
affiliates of the General Partner, for approximately $69.1 million.

The Company's cash and cash equivalents and investment in U.S. Government
and Agency obligations increased by $3.3 million during the nine months ended
September 30, 2002, primarily due to net cash flow from operations
($45.7 million), net cash flow from Bayswater and Stratosphere operations
($37.6 million), mezzanine loan repayments ($23 million) and property
dispositions ($13.5 million) partially offset by the repurchase of Sands
interests ($69.1 million), mezzanine loan advances ($23.2 million), real estate
acquisitions ($18.2 million), additions to hotel, casino and resort operating
properties ($3.2 million) and miscellaneous other items ($2.8 million).

The United States Securities and Exchange Commission requires that
registrants include information about primary market risk exposures relating to
financial instruments. Through its operating and investment activities, the
Company is exposed to market, credit and related risks, including those
described elsewhere herein. As the Company may invest in debt or equity
securities of companies undergoing restructuring or undervalued by the market,
these securities are subject to inherent risks due to price fluctuations, and
risks relating to the issuer and its industry, and the market for these
securities may be less liquid and more volatile than that of higher rated or
more widely followed securities.

Other related risks include liquidity risks, which arise in the course of
the Company's general funding activities and the management of its balance
sheet. This includes both risks relating to the raising of funding with
appropriate maturity and interest rate characteristics and the risk of being
unable to liquidate an asset in a timely manner at an acceptable price. Real
estate investments by their nature are often difficult or time-consuming to
liquidate. Also, buyers of minority interests may be difficult to secure, while
transfers of large block positions may be subject to legal, contractual or
market restrictions. Other operating risks for the Company include lease
terminations, whether scheduled terminations or due to tenant defaults or
bankruptcies, development risks, and environmental and capital expenditure
matters, as described elsewhere herein.

The Company invests in U.S. Government and Agency obligations which are
subject to interest rate risk. As interest rates fluctuate, the Company will
experience changes in the fair value of these investments with maturities
greater than one year. If interest rates increased 100 basis points, the fair
value of these investments at September 30, 2002, would decline by approximately
$1.5 million.

Whenever practical, the Company employs internal strategies to mitigate
exposure to these and other risks. The Company, on a case by case basis with
respect to new investments, performs internal analyses of risk identification,
assessment and control. The Company reviews credit exposures, and seeks to
mitigate counterparty credit exposure through various techniques, including
obtaining and maintaining collateral, and assessing the creditworthiness of
counterparties and issuers. Where appropriate, an analysis is made of political,
economic and financial conditions, including those of foreign countries.
Operating risk is managed through the use of experienced personnel. The Company
seeks to achieve adequate returns commensurate with the risk it assumes. The
Company utilizes qualitative as well as quantitative information in managing
risk.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS

Response to this item is included in Item 2. 'Management's Discussion and
Analysis of Financial Condition and Results of Operations' above.

20

ITEM 4. CONTROLS AND PROCEDURES

a. Within 90 days prior to the date of this report, the Company's
management, including the Company's Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of the design and
operation of the Company's and its subsidiaries' disclosure controls and
procedures pursuant to the Exchange Act Rule 13a-14. Based upon that
evaluation, the Company's Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures
are effective in timely alerting them to material information relating
to the Company (including its consolidated subsidiaries) required to be
included in the Company's periodic Securities & Exchange Commission
filings.

b. There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect internal
controls subsequent to the evaluation date.

21

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

a. On January 31, 2001, Stratosphere was named in an action styled Disabled
Rights Action Committee v. Stratosphere Gaming Corp., Case No. A430070, in the
Eighth Judicial District Court of the State of Nevada. The complaint alleges a
number of violations of the Americans with Disabilities Act ('ADA'), including
inadequate room selection, door widths and other similar items. Simultaneously
with the complaint, plaintiffs filed a Motion for Preliminary Injunction,
seeking to have construction halted on the new hotel tower until the property
fully complies with the ADA. Stratosphere removed the action to the United
States District Court in Nevada and it is now styled as Disabled Rights Action
Committee v. Stratosphere Gaming Corp., Case No. CV-S-01-0162-RLH (PAL).

The federal district court held a hearing on plaintiffs' Motion for
Preliminary Injunction and denied the motion, focusing upon what the Court
believed to be the plaintiffs' lack of irreparable injury. The federal district
court also granted Stratosphere's Motion to Dismiss the plaintiffs' state law
claims, leaving in place only the ADA claims. Stratosphere and the Plaintiffs
then filed Motions for Summary Judgement. The District Court granted and denied
in part each of the parties respective motions. The Court ordered that
Stratosphere must make certain renovations to 532 rooms that were opened in
1996. The Court issued an injunction requiring that these renovations be
completed by August 9, 2002. Stratosphere has complied with the Court injunction
by completing these renovations in June 2002.

b. In January 2002, the Cape Cod Commission, (the 'Commission'), a regional
planning body created in 1989, concluded that the Company's New Seabury
development is within its jurisdiction (the 'Administrative Decision'). It is
the Company's position that the proposed residential and commercial development
is allowed under a special permit issued for the property in 1964 and is exempt
from the Commission's jurisdiction.

In February 2002, New Seabury Properties LLC, the Company's subsidiary and
owner of the property, filed a civil complaint in Barnstable County
Massachusetts Superior Court appealing the Administrative Decision by the
Commission. On October 21, 2002 the Court vacated the Administrative Decision on
the grounds that the Commission's criteria for exercising their jurisdiction
were not adopted in accordance with statutory regulations. The Court directed
that the Commission properly adopt appropriate criteria for exercising their
jurisdiction and reconsider New Seabury Properties LLC's claim that its proposed
development is exempt from Commission review. The Company has also raised
constitutional claims against the Commission which were not resolved by the
Court's October 21, 2002 decision. The Company may appeal certain aspects of the
Court's rulings and may continue to pursue its constitutional claims against the
Commission. The Company cannot predict the effect on the development process if
it loses any appeal or if the Commission is ultimately successful in asserting
jurisdiction over the proposed development.

c. Tiffiny Decorating Company ('Tiffiny'), a subcontractor to Great Western
Drywall ('Great Western'), filed a legal action against Stratosphere
Corporation, Stratosphere Development, LLC, American Real Estate Holdings
Limited Partnership (Stratosphere Corporation, Stratosphere Development, LLC and
American Real Estate Holding Limited Partnership are herein collectively
referred to as the 'Stratosphere Parties'), Great Western, Nevada Title and
Safeco Insurance, Case No. A443926 in the Eighth Judicial District Court of the
State of Nevada. The legal action asserts claims that include breach of
contract, unjust enrichment and foreclosure of lien. The Stratosphere Parties
have filed a cross-claim against Great Western in that action. Additionally,
Great Western has filed a separate legal action against the Stratosphere Parties
setting forth the same disputed issues. That separate action, Case No. A448299
in the Eighth Judicial Court of the State of Nevada, has been consolidated with
the case brought by Tiffiny.

The initial complaint brought by Tiffiny asserts that Tiffiny performed
certain services on construction at the Stratosphere and was not fully paid for
those services. Tiffiny claims the sum of $521,562 against Great Western, the
Statosphere Parties, and the other defendants, which the Stratosphere Parties
contend have been paid to Great Western for payment to Tiffiny.

22

Great Western is alleging that it is owed payment from the Stratosphere
Parties for work performed and for delay and disruption damages. Great Western
is claiming damages in the sum of $3,935,438 plus interest, costs and legal fees
from the Stratosphere Parties. This amount apparently includes the Tiffiny
claim.

The Stratosphere Parties have evaluated the project and have determined that
the amount of $1,004,059 is properly due and payable to satisfy all claims for
the work performed, including the claim by Tiffiny. In October 2002,
Stratosphere paid Tiffiny and Great Western $195,953 and $371,973, respectively.
The remaining amount has been segregated in a separate interest bearing account.
The Stratosphere Parties intend to vigorously defend the action for claims in
excess of $1,004,059.

d. In addition, in the ordinary course of business, the Company is party to
various legal actions. In management's opinion, the ultimate outcome of such
legal actions will not have a material effect on the results of operations or
the financial position of the Company.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits -- None

23

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

AMERICAN REAL ESTATE PARTNERS, L.P.

By: American Property Investors, Inc.

/s/ John P. Saldarelli
.....................................
JOHN P. SALDARELLI
TREASURER, CHIEF FINANCIAL OFFICER
AND PRINCIPAL ACCOUNTING OFFICER

Date: November 14, 2002

24

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. 1350
(SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002)

I, Albo J. Antenucci, Jr., President and Chief Executive Officer (Principal
Executive Officer) of American Property Investors, Inc., the General Partner of
American Real Estate Partners, L.P. (the 'Registrant'), certify that to the best
of my knowledge, based upon a review of the American Real Estate Partners, L.P.
Quarterly Report on Form 10-Q for the period ended September 30, 2002 of the
Registrant (the 'Report'):

(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Registrant.

/s/ ALBO J. ANTENUCCI, JR.
.....................................
ALBO J. ANTENUCCI, JR.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
OF AMERICAN PROPERTY INVESTORS, INC.,
THE GENERAL PARTNER OF
AMERICAN REAL ESTATE PARTNERS, L.P.

Date: November 14, 2002

25

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. 1350
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, John P. Saldarelli, Treasurer and Chief Financial Officer (Principal
Financial Officer) of American Property Investors, Inc., the General Partner of
American Real Estate Partners, L.P. (the 'Registrant'), certify that to the best
of my knowledge, based upon a review of the American Real Estate Partners, L.P.
Quarterly Report on Form 10-Q for the period ended September 30, 2002 of the
Registrant (the 'Report'):

(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Registrant.

/s/ JOHN P. SALDARELLI
.....................................
JOHN P. SALDARELLI
TREASURER AND CHIEF FINANCIAL OFFICER
AMERICAN PROPERTY INVESTORS, INC.,
THE GENERAL PARTNER OF
AMERICAN REAL ESTATE PARTNERS, L.P.

Date: November 14, 2002

26

FORM OF SARBANES-OXLEY ACT OF 2002
SECTION 302(a) CERTIFICATION

I, Albo J. Antenucci, Jr. certify that:

1. I have reviewed this quarterly report on Form 10-Q of American Real
Estate Partners, L.P.;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;

b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the 'Evaluation Date'); and

c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: November 14, 2002 /s/ ALBO J. ANTENUCCI, JR.
............................................
ALBO J. ANTENUCCI, JR.
PRESIDENT AND CHIEF EXECUTIVE OFFICER OF
AMERICAN PROPERTY INVESTORS, INC.,
THE GENERAL PARTNER OF
AMERICAN REAL ESTATE PARTNERS, L.P.

27

FORM OF SARBANES-OXLEY ACT OF 2002
SECTION 302(a) CERTIFICATION

I, John P. Saldarelli, certify that:

1. I have reviewed this quarterly report on Form 10-Q of American Real
Estate Partners, L.P.;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;

b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the 'Evaluation Date'); and

c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: November 14, 2002 /s/ JOHN P. SALDARELLI
............................................
JOHN P. SALDARELLI
TREASURER AND CHIEF FINANCIAL OFFICER OF
AMERICAN PROPERTY INVESTORS, INC.,
THE GENERAL PARTNER OF
AMERICAN REAL ESTATE PARTNERS, L.P.