AMERICAN REAL ESTATE PARTNERS L P - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K

(MARK ONE)

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 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 (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

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

(914) 242-7700
(AREP'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None

Indicate by check mark whether AREP (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 and (2) has been subject to such filing requirements for the
past 90 days. Yes [x] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x]

Based upon the closing price of Depositary Units on March 14, 2003, as
reported on the New York Stock Exchange Composite Tape (as reported by The Wall
Street Journal), the aggregate market value of AREP's Depositary Units held by
nonaffiliates of AREP as of such date was $65,448,428.

Based upon the closing price of Preferred Units on March 14, 2003, as
reported on the New York Stock Exchange Composite Tape (as reported by The Wall
Street Journal), the aggregate market value of AREP's Preferred Units held by
nonaffiliates of AREP as of such date was $9,556,977.

Number of Depositary Units outstanding as of March 14, 2003: 46,098,284
Number of Preferred Units outstanding as of March 14, 2003: 9,330,963

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PART I

ITEM 1. BUSINESS.

INTRODUCTION

American Real Estate Partners, L.P. ('AREP' or the 'Company') was formed in
Delaware on February 17, 1987. Pursuant to an exchange offer (the 'Exchange
Offer') which was consummated on July 1, 1987, AREP acquired the real estate and
other assets, subject to the liabilities, of thirteen limited partnerships (the
'Predecessor Partnerships'). The Predecessor Partnerships acquired such assets
between 1972 and 1985. A registration statement on Form S-4 relating to the
Exchange Offer (Registration No. 33-13943) was filed with the Securities and
Exchange Commission (the 'SEC') and declared effective May 18, 1987.

AREP's general partner is American Property Investors, Inc. (the 'General
Partner'), a Delaware corporation, which is a wholly owned subsidiary of Becton
Corp., a Delaware corporation. All of the outstanding capital stock of Becton
Corp. is owned by Carl C. Icahn ('Icahn'). The General Partner's principal
business address is 100 South Bedford Road, Mt. Kisco, New York 10549, and its
telephone number is (914) 242-7700. AREP's business is conducted through a
subsidiary limited partnership, American Real Estate Holdings Limited
Partnership (the 'Subsidiary' or 'AREH'), in which AREP owns a 99% limited
partnership interest. The General Partner also acts as the general partner for
the Subsidiary. The General Partner has a 1% general partnership interest in
each of AREP and the Subsidiary. References to AREP herein include the
Subsidiary, unless the context otherwise requires. As of February 28, 2003,
affiliates of Icahn owned 39,706,836 units representing limited partner
interests (the 'Depositary Units'), representing approximately 86.1% of the
outstanding Depositary Units, and 8,073,466 cumulative pay in kind redeemable
preferred units representing limited partner interests (the 'Preferred Units'),
representing approximately 86.5% of the outstanding Preferred Units. See Item 12
-- 'Security Ownership of Certain Beneficial Owners and Management.'

As described below, AREP is primarily engaged in the business of acquiring
and managing real estate and activities related thereto. On August 16, 1996, an
amendment (the 'Amendment') to AREP's Amended and Restated Agreement of Limited
Partnership (the 'Partnership Agreement') became effective which permits AREP to
make non-real estate related investments. As described below, the Amendment
permits AREP 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 to further diversify its investments
while remaining in the real estate business and continuing to pursue suitable
investments in the real estate markets.

GENERAL DESCRIPTION OF BUSINESS

The Company and its consolidated subsidiaries are engaged in, among other
things described elsewhere herein, rental real estate operations, hotel, casino
and resort operations, land, house and condominium development and investment in
securities, including investment in other entities and in marketable equity and
debt securities. As described herein, the Company continues to focus on real
estate related investments and investments the Company makes in securities will
be made in such a manner that the Company will not be deemed to be an investment
company under the Investment Company Act of 1940, as amended (the '1940 Act').

AREP is primarily engaged in the business of acquiring and managing real
estate and activities related thereto. Such acquisitions may be accomplished by
purchasing assets outright or by acquiring securities of entities which hold
significant real estate related assets. Historically, the properties owned by
AREP have been primarily office, retail, industrial, residential and hotel
properties. Many of the real estate assets currently owned by AREP were acquired
from the Predecessor Partnerships and such assets generally are net-leased to
single, corporate tenants. As of February 28, 2003, AREP owned 136 separate real
estate assets primarily consisting of fee and leasehold interests in 31 states.
For additional information, see Item 2 -- 'Properties.'

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For each of the years ended December 31, 2002, 2001 and 2000, no single real
estate asset or series of assets leased to the same lessee accounted for more
than 10% of the gross revenues of AREP. However, at December 31, 2002, 2001 and
2000, Portland General Electric Company ('PGEC') occupied a property (the 'PGEC
Property') which represented approximately 13% of the carrying value of AREP's
total real estate assets leased to others. See Item 2 -- 'Properties.'

AREP believes that it will benefit from the diversification of its portfolio
of assets. By the end of the year 2005, net leases representing approximately
23% of AREP's net annual rentals from its real estate portfolio will be due for
renewal, and by the end of the year 2007, net leases representing approximately
35% of AREP's net annual rentals will be due for renewal. Since many of AREP's
properties are net-leased to single corporate tenants, it may be difficult and
time consuming to re-lease or sell those properties that existing tenants
decline to re-let or purchase and AREP may be required to incur expenditures to
renovate such properties for new tenants. In addition, AREP 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, AREP could experience an adverse impact on net cash flow
from such properties in the future.

AREP's primary investment strategy in recent periods has been to seek to
acquire undervalued assets including land parcels for future residential and
commercial development, commercial properties, assets in the gaming and
entertainment industries, non-performing loans and securities of entities which
own, manage or develop significant real estate assets, including limited
partnership units and securities issued by real estate investment trusts, debt
or equity securities of companies which may be undergoing restructuring and
sub-performing properties that may require active asset management and
significant capital improvements. These types of investments may involve debt
restructuring, capital improvements and active asset management, and by their
nature may not be readily financeable and may not generate immediate positive
cash flow. As such, they require AREP to maintain a strong capital base both to
react quickly to these market opportunities as well as to allow AREP to rework
the assets to enhance their turnaround performance.

In addition to holding real property, AREP 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 assets under
development, as well as experienced personnel.

As described herein, AREP 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 of, and investment in, the movie production and distribution
industries. With respect to gaming and entertainment industry investments, AREP
believes that there may be synergies between production companies for movies and
live entertainment and supplying entertainment content to hotels and casinos.
Such investments may be made in the form of 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 AREP.

Furthermore, AREP may originate or purchase mortgage or mezzanine loans
including non-performing loans. AREP will often acquire non-performing loans
with a view to acquiring title to or control over the underlying properties.
AREP also may retain purchase money mortgages in connection with its sale of
portfolio properties, on such terms as the General Partner deems appropriate at
the time of sale. Certain of AREP's investments may be owned by special purpose
subsidiaries formed by AREP or by joint ventures (including joint ventures with
affiliates of the General Partner).

In August 1996, AREP amended the Partnership Agreement to permit non-real
estate investments which, while AREP continues to seek undervalued investment
opportunities in the real estate market, will permit it to take advantage of
investment opportunities it believes exist outside of the real estate market in
order to seek to maximize Unitholder value and further diversify its assets.
Investments in non-real estate assets will consist of equity and debt securities
of domestic and foreign issuers that are not necessarily engaged as one of their
primary activities in the ownership, development or management of real estate,
and may include, for example, lower rated securities which may provide the
potential for higher yields and therefore may entail higher risk. AREP will
conduct these activities in

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such a manner so as not to be deemed an investment company under the 1940 Act.
Generally, this means that no more than 40% of AREP's total assets will be
invested in securities. In addition, AREP will structure its investments so as
to continue to be taxed as a partnership rather than as a corporation under the
applicable publicly-traded partnership rules of the Internal Revenue Code.

All decisions with respect to the improvement, expansion, acquisition,
disposition, development, management, financing or refinancing of properties or
other investments are at the sole discretion of the General Partner.

PARTNERSHIP DISTRIBUTIONS

On March 31, 2003, AREP announced that no distributions on its Depositary
Units are expected to be made in 2003. AREP continues to believe that it should
hold and invest, rather than distribute, cash. No distributions were made in
2002, 2001 or 2000. In making its announcement, AREP noted that it intends to
continue to apply available cash flow toward its operations, repayment of
maturing indebtedness, tenant requirements, investments, acquisitions and other
capital expenditures and cash reserves for Partnership contingencies, including
environmental matters and scheduled lease expirations. By the end of the year
2005, net leases representing approximately 23% of AREP's net annual rentals
from its real estate portfolio will be due for renewal, and by the end of the
year 2007, 35% of such rentals will be due for renewal. In making its decision,
AREP also considered the number of properties that are leased to retail tenants
(approximately 26% of AREP's net annual rentals from its portfolio), some of
which are experiencing cash flow difficulties and restructuring. See
Item 5 -- 'Market for AREP's Common Equity and Related Security Holder
Matters -- Distributions' and Item 7 -- 'Management's Discussion and Analysis of
the Financial Condition and Results of Operations -- Capital Resources and
Liquidity.'

On March 31, 2002, AREP distributed to holders of record of its Preferred
Units as of March 15, 2002, 444,332 additional Preferred Units. Pursuant to the
terms of the Preferred Units, on February 21, 2003, AREP declared its scheduled
annual preferred unit distribution payable in additional Preferred Units at the
rate of 5% of the liquidation preference of $10.00. The distribution is payable
March 31, 2003 to holders of record as of March 14, 2003.

The Preferred Units are subject to redemption at the option of AREP on any
payment date, and the Preferred Units must be redeemed by AREP on or before
March 31, 2010. The redemption price is payable, at the option of AREP, either
all in cash or by the issuance of Depositary Units, in either case, in an amount
equal to the liquidation preference of the Preferred Units plus any accrued but
unpaid distributions thereon.

REAL ESTATE INVESTMENTS

As mentioned above, in selecting future real estate investments, AREP
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. Despite the substantial capital pursuing real estate
opportunities, management believes that there are still opportunities available
to acquire investments that are undervalued. This may include commercial
properties, land parcels for future residential and commercial development,
non-performing loans and the securities of entities which own, manage or develop
significant real estate assets, including limited partnership units and
securities issued by real estate investment trusts ('REITS'), and debt or equity
securities of companies which may be undergoing restructuring and
underperforming properties that may require active asset management and
significant capital improvements. Management believes that, in the current
market, investments requiring some degree of active management or development
activity have the greatest potential for growth, both in terms of capital
appreciation and the generation of cash flow. In order to further these
investment objectives, AREP may consider the acquisition, or seek the effective
control, of land development companies and other real estate operating companies
that may have a significant inventory of assets under development, as well as
experienced personnel. This may enhance AREP's ability to further diversify its
portfolio of properties and gain access to additional operating and development
capabilities. Such acquisitions may include those from affiliates of the General
Partner, provided the

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terms thereof are fair and reasonable and are approved by the Audit Committee of
the Board of Directors of the General Partner, which is comprised of the General
Partner's independent directors (the 'Audit Committee').

Other real estate investment opportunities AREP may pursue include entering
into joint venture arrangements or providing financing to developers for the
purpose of developing single-family homes, luxury garden apartments or
commercial properties. Such financing may provide for a contractual rate of
interest to be paid as well as providing for a participation in the profits of
the development and/or an equity participation. Additionally, AREP will seek to
acquire underperforming properties through outright purchase or the purchase of
the debt or securities of such entities. For example, AREP may elect to
establish an ownership position by first acquiring debt secured by targeted
assets and then negotiate for the ownership or effective control of some or all
of the underlying equity in such assets. AREP may also seek to establish a
favorable economic and negotiating position through the acquisition of other
rights or interests that provide it with leverage in negotiating the acquisition
of targeted assets. AREP will also seek to acquire assets that are not in
financial distress but due to the particular circumstances of their ownership,
use or location, present substantial opportunities for development or long-term
growth. AREP may also consider acquiring additional net-leased properties at
appropriate yields or to effectuate tax-free exchanges.

AREP has invested and expects to continue to invest in undeveloped land and
development properties. Undeveloped land and development properties involve more
risk than properties on which development has been completed. Undeveloped land
and development properties do not generate any operating revenue, while costs
are incurred to develop the properties. In addition, undeveloped land and
development properties incur expenditures prior to completion, including
property taxes and development costs. Also, construction may not be completed
within budget or as scheduled and projected rental levels or sales prices may
not be achieved and other unpredictable contingencies beyond the control of AREP
could occur. AREP will not be able to recoup any of such costs until such time
as these properties, or parcels thereof, are either disposed of or developed
into income-producing assets. Accordingly, the greater the length of time it
takes to develop or dispose of these properties, or such parcels, the greater
will be the costs incurred by AREP without the benefit of income from these
properties, which may adversely affect the ability of AREP to successfully
develop such properties. Furthermore, the ultimate disposition price of these
properties may be less than the costs incurred by AREP with respect thereto.

AREP has made investments in assets related to the gaming industry and will
consider additional investment opportunities in the gaming industry and
investments in the entertainment industry. AREP, the General Partner, and the
directors and officers of the General Partner have obtained licenses from the
Nevada Gaming Authority and the New Jersey Casino Control Commission.
Investments in the gaming and entertainment industries involve significant
risks, including those relating to competitive pressures and political and
regulatory considerations. Recessionary pressures and international tensions
have decreased leisure travel which has negatively affected many casino
properties. Also, in recent years there have been several new gaming
establishments opened as well as facility expansions, providing increased supply
of competitive products and properties in the industry, which may adversely
affect the operating margins and investment returns. As new openings and
expansion projects have been completed, supply has grown more quickly than
demand in some areas, and competition has increased. Likewise, an increase in
supply often leads to increases in complimentary and promotional expenses in the
industry. AREP believes that these market conditions will lead some gaming and
entertainment properties to become available for restructuring or purchase and
will create potential investments for opportunistic buyers such as AREP, and
AREP intends to pursue such additional investments in the gaming and
entertainment industries.

While the increase in supply and competition in the gaming industry may
provide additional investment opportunities for investors such as AREP, such
investments may require additional capital expenditures and restructurings and
there can be no assurance that such investments will not be adversely affected
by such pressures or prove to be successful. Furthermore, federal, state and
local jurisdictions from time to time consider legislation regarding the gaming
industry which could adversely

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impact gaming operations. AREP believes, however, that investments in the gaming
industry provide AREP with opportunities for long term appreciation.

While AREP believes opportunities in real estate related acquisitions
continue to remain available, such acquisition opportunities for value-added
investors are 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 AREP. As such, they require
AREP to maintain a strong capital base in order to react quickly to these market
opportunities as well as to allow AREP 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 AREP will increase in value
or generate positive cash flow, AREP intends to focus on assets that it believes
may provide opportunities for long-term growth and further its objective to
diversify its portfolio.

NON-REAL ESTATE RELATED INVESTMENTS

In selecting future investments, AREP may, while remaining in the real
estate business and continuing to pursue suitable investments for AREP in the
real estate markets, invest a portion of its funds in securities of issuers that
are not necessarily engaged as one of their primary activities in the ownership,
development or management of real estate. Such investments will further
diversify AREP's portfolio of assets. AREP will also seek to purchase
undervalued securities, so as to maximize total returns consisting of current
income and/or capital appreciation. Undervalued securities are those which AREP
believes may have greater inherent value than indicated by their then current
trading price and/or may lend themselves to 'activist' shareholder involvement.
These securities may be undervalued due to market inefficiencies, may relate to
opportunities wherein economic or market trends have not been identified and
reflected in market value, or may include those in complex or not readily
followed securities. Less favorable financial reports, lowered credit ratings,
revised industry forecasts or sudden legal complications may result in market
inefficiencies and undervalued situations. As is the case with real estate
related investments, with regard to non-real estate related investments, AREP
may determine to establish an ownership position through the purchase of debt or
equity securities of such entities and then negotiate for the ownership or
effective control of some or all of the underlying equity in such assets.

The equity securities in which AREP may invest may include common stocks,
preferred stocks and securities convertible into common stocks, as well as
warrants to purchase such securities. The debt securities in which AREP may
invest may include bonds, debentures, notes, mortgage-related securities and
municipal obligations. Certain of such securities may include lower rated
securities which may provide the potential for higher yields and therefore may
entail higher risk. In addition, AREP may engage in various investment
techniques, such as options and futures transactions, foreign currency
transactions and leveraging for either hedging or other purposes.

AREP will conduct its investment activities in such a manner so as not to be
deemed an investment company under the 1940 Act. Generally, this means that AREP
does not intend to enter the business of investing in securities and that no
more than 40% of AREP's total assets will be invested in securities. The portion
of AREP's assets invested in each type of security or any single issuer or
industry will not be limited. Investments may be made directly by AREP or
indirectly through entities in which it has an interest.

RECENT DEVELOPMENTS

AREP's earnings from land, house and condominium operations have been strong
in recent years. However, due to sales, the Company's inventory of land approved
for development has decreased which is expected to negatively impact earnings
from this business segment. Earnings from hotel, casino and resort properties
are expected to be constrained by recessionary pressures, international tensions
and significantly increased competition from new hotels/casinos and expansion of
existing properties.

A slower national economy may increase tenant defaults thereby decreasing
rental income and increasing property expenses. Also, the Company may be
required to renovate vacant properties for

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new tenants. However, there can be no assurance that the Company will be able to
re-let the properties at equivalent rents.

AREP believes it has adequate cash reserves and a strong capital base which,
in a weaker economy, may provide for additional acquisition opportunities.

RECENT ACQUISITIONS/INVESTMENTS

NOTE RECEIVABLE -- AFFILIATE

On December 27, 2001, AREP entered into a transaction with Carl C. Icahn,
Chairman of the Board of the General Partner, pursuant to which AREP made a
two-year $250 million loan to Mr. Icahn, secured by securities consisting of
(i) approximately $250 million aggregate market value of AREP's units owned by
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 AREP units. The loan is due on or before December 27, 2003 and
by law may not be renewed or extended. The loan bears interest, payable
semi-annually, at a per annum rate equal to the greater of (i) 3.9% and
(ii) 200 basis points over 90 day LIBOR to be reset each calendar quarter. The
applicable rates in 2002 ranged from 3.9% to 4.03%. In 2002, pursuant to the
loan agreement Mr. Icahn paid approximately $10.1 million to the Company
representing interest due on the loan. The loan must be prepaid in an amount of
up to $125 million, to the extent that AREP requests such funds for an
investment opportunity, and may be prepaid at any time by Mr. Icahn. AREP
entered into this transaction to earn interest income on a secured investment.
In the event of a loan default, AREP would, at its option, liquidate the shares
of the private company or reacquire its own units, or both, to satisfy the loan.

HOTEL AND CASINO PROPERTIES

a. Stratosphere Tower Casino and Hotel

As of December 31, 2002, AREP owns 100% of Stratosphere Corporation
('Stratosphere') and consolidates Stratosphere in its financial
statements. Stratosphere owns and operates an integrated casino, hotel
and entertainment facility located in Las Vegas, Nevada. Stratosphere
accounted for approximately 48% and 49% of AREP's gross revenues in 2002
and 2001, respectively.

On December 19, 2002 AREP acquired the remaining 49% of Stratosphere
that AREP did not own. The initial determination to engage in the
transaction at the prices set forth below was previously announced by
AREP in September 2000. Under the merger agreement the stockholders who
were unaffiliated with Mr. Icahn received a cash price of $45.32 per
share (approximately $9.6 million) and the Icahn related stockholders
(other than AREP) received a cash price of $44.33 per share
(approximately $34.7 million). AREP paid an aggregate of approximately
$44.3 million for the Stratosphere shares.

Stratosphere owns and operates the Stratosphere Casino, Hotel & Tower
which is centered around the Stratosphere Tower (the 'Tower'), the
tallest free-standing observation tower in the United States. Standing
1,149 feet above the Las Vegas Strip, the Tower is visible from all
directions, including by visitors flying into Las Vegas. The Tower's Pod
(the 'Pod'), a 12-story building that begins at the 771-foot level,
features a 360-seat revolving restaurant, a 220-seat cocktail lounge,
indoor and outdoor observation decks and two amusement rides located over
900 feet in the air, a roller coaster and a simulated 'Big Shot'
(collectively the 'Thrill Rides').

Stratosphere operates, among other things, the Tower, a hotel with
2,444 rooms and suites, a 97,000 square foot casino featuring
approximately 1,474 slot machines, 48 table games, a race and sports
book, a keno lounge, a 160,000 square foot second level containing a
retail center

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(the 'Retail Center') of approximately 46 shops and a 650-seat Broadway
Showroom, a 3,600-seat Outdoor Events Center, a 120-seat entertainment
lounge and parking for approximately 4,000 cars. Stratosphere opened for
business on April 29, 1996.

THE TOWER

At 1,149 feet in height, the Tower is the tallest free-standing
observation tower in the United States and the tallest free-standing
structure west of the Mississippi River. From the indoor and outdoor
observation decks, lounge and restaurant, Tower visitors have dramatic
views of the Las Vegas Strip, downtown and the surrounding Las Vegas
Valley. Visitors travel to the observation decks in four high speed,
double-decked elevators, which travel at 1,800 feet per minute, and which
have an aggregate capacity of 128 visitors.

The Pod is a 12-story 105,000 square foot building that begins at the
771-foot level of the Tower. The Pod, which has a maximum capacity of
2,700 visitors at any one time, has an indoor and outdoor observation
deck and is currently open from 10:00 a.m. to 1:00 a.m. Sunday through
Thursday and 10:00 a.m. to 2:00 a.m. on Friday and Saturday.

The Pod's third and fourth levels contain conference and meeting
rooms that are rented out for business or social occasions. Level six
contains a 360-seat revolving restaurant. Levels seven, eight and nine
feature a 220-seat cocktail lounge, indoor and outdoor observation decks,
respectively. The indoor observation deck contains two gift shops,
free-standing vending featuring souvenirs and food products designed to
capitalize on the unique nature of the Tower and two virtual reality
games.

Level twelve is the staging area for the Thrill Rides. The first
ride, the 'Big Shot,' propels riders from the 921-foot level of the Pod
approximately 180 feet straight up the mast of the Tower, in a harnessed
seat, and allows for a controlled free fall back to the landing platform.
The second ride, a roller coaster, the 'High Roller,' begins at the
909-foot level and transports up to 36 passengers at a time along tracks
wrapped around the top portion of the Pod.

THE CASINO AREA

Stratosphere's casino contains approximately 97,000 square feet of
gaming space, with approximately 1,474 slot machines, 48 table games, a
race and sports book and keno lounge. Five themed restaurants, four bars,
two of which feature live entertainment and a deli are located adjacent
to the casino. These facilities have been designed for convenient access
to the casino.

Although the Company does not emphasize credit play, credit is
available to high-stakes wagerers on a discretionary basis. Slot and
table game customers are able to join frequent players' club, which
awards benefits including cash and complimentary room, food and beverage
based upon the customer's level of play.

RETAIL AND ENTERTAINMENT CENTER

The Retail Center, located on the second floor of the base building,
occupies approximately 160,000 square feet, of which 57,000 square feet
remains undeveloped. The Retail center offers various 'fast food'
restaurants and shops. Adjacent to the Retail Center is the 650-seat
showroom that currently offers afternoon and evening shows, which are
designed to appeal to the wide spectrum of value-minded visitors who come
to Las Vegas. In September 2001, Stratosphere completed construction of a
new 3,600-seat Outdoor Events Center which features mid-level mainstream
concert and boxing events.

HOTEL, FOOD AND BEVERAGE

The Hotel currently has 2,444 rooms and suites. The Hotel has seven
themed restaurants; 'The Top of The World' located in the Pod, the
480-seat 'Stratosphere Courtyard Buffet,' the 182-seat 'Crazy Armadillo'
featuring Tex-Mex cuisine and an oyster bar, 'Roxy's 50's Diner,'

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'Lucky's Cafe' coffee shop, 'Tower of Pasta,' a restaurant serving
Italian cuisine, and 'Hamada's', a restaurant serving Asian cuisine. In
addition, a New York style deli is located adjacent to the race and
sports book.

The ownership and operation of Stratosphere are subject to the Nevada
Gaming Control Act and regulations promulgated thereunder, various local
ordinances and regulations, and are subject to the licensing and
regulatory control of the Nevada Gaming Commission, the Nevada State
Gaming Control Board, and various other county and city regulatory
agencies, including the City of Las Vegas. Stratosphere's revenues and
expenses primarily consist of casino, hotel, food and beverage, tower and
retail revenues and expenses.

In 2000 and 2001, Stratosphere expended approximately $95 million for
construction of its 1,000 room expansion and related amenities.

b. 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 $68.8 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.

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.

The Sands is located in Atlantic City, New Jersey on approximately
6.1 acres of land one-half block from the Boardwalk at Brighton Park
between Indiana Avenue and Dr. Martin Luther King, Jr. Boulevard. The
Sands facility currently consists of a casino and simulcasting facility
with approximately 79,000 square feet of gaming space containing
approximately 2,322 slot machines and approximately 40 table games; a
hotel with 511 rooms (including 57 suites); six restaurants; one cocktail
lounge; two private lounges for invited guests; an 800-seat cabaret
theater; retail space; an adjacent nine-story office building with
approximately 77,000 square feet of office space for its executive,
financial and administrative personnel; an elevated, enclosed, one-way
moving sidewalk connecting the Sands to the Boardwalk using air rights
granted by an easement from the City of Atlantic City; and a garage and
surface parking for approximately 1,750 vehicles.

The Sands entered into a long-term lease of the Madison House Hotel
(the 'Madison House'). The initial lease period is from December 2000 to
December 2012 with lease payments ranging from $1.8 million per year to
$2.2 million per year. The Madison House is physically connected at two
floors to the existing Sands casino-hotel complex. The Sands recently
completed renovations to upgrade and combine the rooms of the Madison
House into a total of 113 suites and 13 single rooms. It is the intention
of the Sands to maintain and operate the Madison House at the same
quality level as the Sands.

DEVELOPMENT PROPERTIES

In March 2000, AREP acquired Bayswater from Icahn for approximately $84.35
million. Approximately $100 million of cash has been generated from this
acquisition, which is being held for investment. Bayswater, a real estate
investment, management and development company, focuses primarily on the
construction and sale of single-family homes, multi-family homes and residential
lots in subdivisions and in planned communities. Bayswater is a subsidiary of
AREP. Bayswater is currently developing seven residential subdivisions in New
York and Florida. In New York, Bayswater has two

I-8

residential subdivisions under development with approximately 28 units remaining
to be constructed and sold. Bayswater also has two subdivisions in New York that
are in the approval process, one for 50 townhouse units and the other for 35
single family homes. In Naples, Florida, Bayswater owns three properties
comprising land zoned for 212 residential condominium units. As previously
discussed, earnings from this business segment are expected to decline sharply
as land inventory is depleted and cannot be replenished cost effectively.

In addition, AREP expects to continue to pursue the approval and development
of its New Seabury property in Cape Cod Massachusetts. 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. However, a regional
planning body created in 1989, the Cape Cod Commission, concluded in January
2002 that the New Seabury development is within its jurisdiction (the
'Administrative Decision'). In February 2002, New Seabury Properties LLC, an
AREP subsidiary and owner of the property, filed a civil complaint in Barnstable
County Massachusetts Superior Court appealing the Administrative Decision by the
Cape Cod Commission. AREP cannot predict the effect on the development process
if the Cape Cod Commission is successful in asserting jurisdiction over the
proposed development. (See Item 3. -- 'Legal Proceedings.')

AREP's land, house and condominium sales accounted for approximately 23% and
19% of AREP's gross revenues in 2002 and 2001, respectively.

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
Corporation and WMH Tool Group, 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 borrowed
$12.7 million secured by the Nashville, Tennessee property. The loan is
non-recourse, 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.

In 2002, AREP recorded a provision for loss on real estate of $3.2 million
primarily related to vacant properties where leases were not renewed or were
rejected in bankruptcy.

MEZZANINE LOANS

AREP 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 was prepaid approximately $31.3 million for
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 year ended December 31, 2002.

b. At December 31, 2002, AREP had funded two mezzanine loans for
approximately $23.2 million and had commitments to fund, under certain
conditions, additional advances of approximately $5 million. One loan in the
amount of $12.2 million is for a Florida condominium development. The second
loan in the amount of $11 million is for a New York City hotel with
approximately 200 rooms. At December 31, 2002, accrued interest of
approximately $4.1 million has been deferred for financial statement
purposes, pending receipt of principal and interest payments. These loans
are due in 2005.

c. In February 2003, AREP funded a mezzanine loan for approximately $30
million on a Florida condominium development. The loan is due in February
2005. The Company has committed to fund an additional $15 million if
required by the borrower to complete the project.

I-9

OTHER INVESTMENTS

AREP has equity and debt investments in Philip Services Corp. ('Philips'),
which for accounting purposes were classified as available-for-sale investments
at December 31, 2001. The market value of Philips' common stock has declined
steadily since it was acquired by the Company. In 2002, based on the decline in
common stock trading prices and a review of Philips' financial statements,
management of the Company deemed the decrease in value to be other than
temporary. As a result, the Company wrote down its investment in Philips' common
stock by a charge to earnings of $8,476,000 and charges to other comprehensive
income ('OCI') of approximately $761,000 in the year ended December 31, 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
Philips' common stock is approximately $200,000 at December 31, 2002.

AREP also has a participation in Philips' 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
marked-to-market 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 December 31, 2002.

AREP invested $6 million in an unaffiliated biotechnology limited
partnership. Upon review of this investment in 2002, management of the Company
determined that the investment was impaired and wrote down its value by a charge
to earnings of approximately $3.8 million.

Management periodically reviews its investments for recoverability.

A committee of the Board of Directors of the General Partner is considering
the possible acquisition by the Company of interests in National Energy Group,
Inc. and related companies from entities owned by Carl C. Icahn. The committee,
in consultation with its advisors, has been engaged in evaluating the possible
acquisition. To date, such evaluation is continuing and no determination has
been made by the committee.

FINANCING ACTIVITIES

During 2002, AREP repaid approximately $460,000 of maturing debt obligations
and higher interest rate mortgages. In October, 2002, the Company borrowed $12.7
million mortgage secured by the Nashville, Tennessee property, which was
acquired in September, 2002.

With interest rates at historic lows, AREP is reviewing its real estate
portfolio for financing or refinancing opportunities.

LEASING ACTIVITIES

In 2002, fourteen leases covering fourteen properties and representing
approximately $2.1 million in annual rentals expired. Seven leases, originally
representing $916,000 in annual rental income, were renewed for $625,000 in
annual rentals. Such renewals are generally for a term of five years. One
property with an annual rental income of $173,000 was not renewed and
subsequently leased for $117,000 per annum. Another property with annual rents
of $167,000 was not renewed and was sold for approximately $1.6 million. Five
leases with annual rentals of $855,000 were not renewed and are currently being
marketed for sale or lease.

In 2003, seventeen leases covering seventeen properties and representing
approximately $2.2 million in annual rentals are scheduled to expire. Eight
leases originally representing $1.1 million in annual rental income were renewed
for $924,000 in annual rentals. Such renewals are generally for a term of five
years. Five properties with annual rental income of $613,000 were not renewed
and are currently being marketed for sale or lease. The Company has not yet been
notified by tenants whether they plan to renew leases on the remaining four
properties with annual rentals of $464,000.

I-10

By the end of the year 2005, net leases representing approximately 23% of
AREP's net annual rentals from its portfolio will be due for renewal, and by the
end of the year 2007, net leases representing approximately 35% of AREP's net
annual rentals will be due for renewal. In many of these leases, the tenant has
an option to renew at the same rents they are currently paying and in many of
the leases the tenant also has an option to purchase the property. AREP believes
that tenants acting in their best interests will renew those leases which are at
below market rents, and permit leases for properties that are less marketable
(either as a result of the condition of the property or its location) or are at
above-market rents to expire. AREP expects that it may be difficult and time
consuming to re-lease or sell those properties that existing tenants decline to
re-let or purchase and that AREP may be required to incur expenditures to
renovate such properties for new tenants. AREP also 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. In addition,
net leases representing approximately 26% of AREP's net annual rentals from its
portfolio are with tenants in the retail sector, some of which are currently
experiencing cash flow difficulties and a number of which are in bankruptcy. As
a result, operating expenses may be incurred with respect to the properties
underlying any such leases rejected in bankruptcy and those expenses, coupled
with the effects of a downturn in certain retail estate markets, may have an
adverse impact on AREP's net cash flow.

BANKRUPTCIES AND DEFAULTS

AREP is aware that 18 of its present and former tenants have been or are
currently involved in some type of bankruptcy or reorganization. Under the
Bankruptcy Code, a tenant may assume or reject its unexpired lease. In the event
a tenant rejects its lease, the Bankruptcy Code limits the amount of damages a
landlord, such as AREP, is permitted to claim in the bankruptcy proceeding as a
result of the lease termination. Generally, a claim resulting from a rejection
of an unexpired lease is a general unsecured claim. When a tenant rejects a
lease, there can be no assurance that AREP will be able to re-let the property
at an equivalent rental. As a result of tenant bankruptcies, AREP has incurred
and expects, at least in the near term, to continue to incur certain property
expenses and other related costs. Thus far, these costs have consisted largely
of legal fees, real estate taxes and property operating expenses. Of AREP's 18
present and former tenants known to be involved in bankruptcy proceedings or
reorganization, 14 have rejected their leases, affecting 37 properties, all of
which have been vacated. These rejections have had an adverse impact on annual
net cash flow (including both the decrease in revenues from lost rents, as well
as increased operating expenses). Active bankruptcy matters are as follows:

In January 2002, Kmart Corp., a tenant leasing seven properties owned by
AREP 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 $713,000 in annual rents. The rejected properties are
being held for sale or lease and AREP has recorded a provision for loss of
approximately $1.9 million on such properties in the year ended December 31,
2001. As of February 28, 2003 AREP has not been notified regarding the three
remaining leases representing $661,000 in annual rents. At December 31, 2002,
the carrying value of the seven properties was $6,529,000 which management
believes is less than the estimate of net realizable value.

In September 2001, Ames Department Stores, a tenant in a property owned by
AREP, 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 December 31, 2002,
the carrying value of this property was $2,158,000 which management believes is
less than the estimate of net realizable value.

INSURANCE

AREP carries customary insurance for its properties and business segments.
However AREP does not insure net lease properties where the tenant provides
appropriate amounts of insurance. AREP is determining on a property by property
basis whether or not to obtain terrorism insurance coverage.

I-11

ENVIRONMENTAL MATTERS

Under various federal, state and local laws, ordinances and regulations, an
owner or operator of real property may become liable for the costs of removal or
remediation of certain hazardous substances released on or in its property. Such
laws often impose such liability without regard to whether the owner or operator
knew of, or was responsible for, the release of such hazardous substances. If
any such substances were found in or on any property invested in by AREP, AREP
could be exposed to liability and be required to incur substantial remediation
costs. The presence of such substances or the failure to undertake proper
remediation may adversely affect the ability to finance, refinance or dispose of
such property. AREP will generally require that properties in which AREP invests
will be subject to a Phase I environmental site assessment, which involves
record review, visual site assessment and personnel interviews, but does not
involve invasive procedures such as air and soil sampling or groundwater
analysis. There can be no assurance, however, that these evaluations will reveal
all potential liabilities or that future property uses or conditions or changes
in applicable environmental laws and regulations or activities at nearby
properties will not result in the creation of environmental liabilities with
respect to a property.

Additionally, pursuant to the Resource Conservation and Recovery Act 42
U.S.C. 'SS'SS' 9601, et seq. and the regulations promulgated thereunder ('RCRA')
certain owners, operators and other parties in control of a property that has a
non-exempt underground storage tank ('UST') were required to remove, replace,
retrofit or take such tanks out of service by December 22, 1998. AREP notified
its tenants of the RCRA requirements. AREP believes that under the terms of its
net leases with its tenants, the cost of, and obligation to comply with, this
RCRA requirement generally would be the responsibility of its tenant.
Furthermore, with respect to vacated properties and prior lease terminations,
there cannot be any assurance that AREP would not be deemed responsible for this
RCRA requirement. However, there also can be no assurance that a tenant will
bear the costs of, or undertake compliance with, this RCRA requirement.

Most of AREP's properties continue to be net-leased to single corporate
tenants, and AREP believes these tenants would be responsible for any
environmental conditions existing on the properties they lease. Normally,
therefore, such conditions should not have a material adverse effect on the
financial statements or competitive position of AREP. Many of the properties
acquired by AREP in connection with the Exchange Offer were not subjected to any
type of environmental site assessment at the time of the acquisition.
Consequently, AREP undertook to have Phase I Environmental Site Assessments
completed on most of its properties. AREP believes that under the terms of its
net leases with its tenants, the costs of any environmental problems would be
the responsibility of such tenants. While most tenants have assumed
responsibility for the environmental conditions existing on their leased
property, there can be no assurance that AREP will not be deemed to be a
responsible party or that the tenant will bear the cost of remediation. Also as
AREP acquires more operating properties, its exposure to environmental cleanup
costs may increase.

The Phase I Environmental Assessments received on these properties
inconclusively indicate that certain sites may have environmental conditions
that should be further reviewed. AREP has notified 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 in respect of
such sites, based solely upon the consultant's preliminary estimates resulting
from its Phase I Environmental Site Assessments referred to above, it is
presently estimated that AREP's exposure could amount to approximately $2-3
million. However, as no Phase II Environmental Site Investigations have been
conducted by AREP, there can be no accurate estimation of the need for or extent
of any required remediation. AREP 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 40 updates were completed
in 2002 with another 33 scheduled for the year 2003.

In addition to conducting such Phase I Environmental Site Assessments, AREP
has developed a site inspection program. This program is being conducted by an
AREP employee (an experienced construction manager and registered architect) who
visits AREP's properties and visually inspects the premises to assess the
physical condition of the properties in an effort to determine whether there are

I-12

any obvious indications of environmental conditions which would potentially
expose AREP to liability and to ensure that the physical condition of the
property is being maintained properly. There is no assurance, however, that this
program will in fact minimize any potential environmental or other cost exposure
to AREP.

AREP could also become liable for environmental clean-up costs if a bankrupt
or insolvent tenant were unable to pay such costs. Environmental problems may
also delay or impair AREP's ability to sell, refinance or re-lease particular
properties, resulting in decreased income and increased cost to AREP.

OTHER PROPERTY MATTERS

Under Title III of the Americans with Disabilities Act of 1990 and the rules
promulgated thereunder (collectively, the 'ADA'), in order to protect
individuals with disabilities, owners and certain tenants of public
accommodations (such as hotels, casinos, resorts, offices and shopping centers)
must remove architectural and communication barriers which are structural in
nature from existing places of public accommodation to the extent 'readily
achievable' (as defined in the ADA). In addition, under the ADA, alterations to
a place of public accommodation or a commercial facility are to be made so that,
to the maximum extent feasible, such altered portions are readily accessible to
and usable by disabled individuals.

Except for certain properties operated by AREP, the General Partner believes
that the existing net leases require the tenants of many of AREP's properties to
comply with the ADA. If a tenant does not comply with the ADA or rejects its
lease in bankruptcy without complying with the ADA, AREP may ultimately have to
bear the expense of complying with the ADA.

As AREP acquires more operating properties, it may be required to make
expenditures to bring such properties into compliance with the ADA and other
applicable laws. (See Item 3. -- 'Legal Proceedings.')

EMPLOYEES

AREP and its consolidated subsidiaries have approximately 2,700 full and
part-time employees, which number of employees fluctuates due to the seasonal
nature of certain of its businesses. Most of the employees are employed by
AREP's consolidated subsidiaries. Approximately 1,200 employees of Stratosphere
are covered by three collective bargaining agreements. Management believes it
currently has sufficient staffing to operate effectively the day-to-day business
of AREP.

COMPETITION

Competition in leasing and buying and selling remains strong. As previously
discussed, many of AREP's tenants have rights to renew at prior rental rates.
AREP's experience is that tenants will renew below market leases and permit
leases that are less marketable or at above market rents to expire, making it
difficult for AREP to re-let or sell on favorable terms properties vacated by
tenants. The real estate market continues to be weak in certain areas of the
country, particularly in the retail and office categories. The economic
recession and ongoing corporate consolidations and layoffs have contributed to
increasing vacancy rates. AREP believes it is one of the largest real estate
entities of its kind and that it will continue to compete effectively with other
similar real estate companies, although there are real estate entities with
greater financial resources than AREP.

Investments in the gaming and entertainment industries involve significant
competitive pressures and political and regulatory considerations. In recent
years, there have been several new gaming establishments opened as well as
facility expansions, providing increased supply of competitive products and
properties in the industry, which may adversely affect the operating margins and
investment returns. The casino/hotel industry is highly competitive. Hotels
located on or near the Las Vegas Strip compete primarily with other Las Vegas
strip hotels and with a few major hotels in downtown Las Vegas. The Hotel and
Casino also competes with a large number of hotels and motels located in and
near Las Vegas. The Tower competes with all other forms of entertainment,
recreational activities

I-13

and other attractions in and near Las Vegas. Many of the Company's competitors
offer more products than the Company and have greater name recognition and may
have greater resources.

Competition for the acquisition of approved land for development has
intensified and AREP has not been able to replenish its approved land inventory.
Competition for the sale of developed land, houses and condominiums is also
strong in certain areas of the country. AREP and its consolidated subsidiaries
compete in these areas with many real estate developers, some of which have
greater financial resources than AREP.

Competition for investments of the types AREP intends to pursue has been
increasing in recent years, including that from a number of investment funds and
REITS that have raised capital for such investments, resulting in, among other
things, higher prices for such investments. Such investments have become
competitive to source and the increased competition may have an adverse impact
on the spreads and AREP's ability to find quality assets at appropriate yields.
While AREP believes its capital base may enable it to gain a competitive
advantage over certain other purchasers of real estate by allowing it to respond
quickly and make all cash transactions without financing contingencies where
appropriate, there can be no assurance that this will be the case.

ITEM 2. PROPERTIES.

As of February 28, 2003, AREP owned 136 separate real estate assets
(excluding Stratosphere, Bayswater and the Sands). These primarily consist of
fee and leasehold interests and, to a limited extent, interests in real estate
mortgages in 31 states. Most of these properties are net-leased to single
corporate tenants. Approximately 85% of these properties are currently
net-leased, 9% are operating properties and 6% are vacant and being marketed for
sale or lease.

The following table summarizes the type, number per type and average net
effective rent per square foot of such properties:

- ---------

(1) Based on net-lease rentals.

The following table summarizes the number of such properties in each region
specified below:

From January 1, 2002 through February 28, 2003, AREP sold or otherwise
disposed of 11 properties. In connection with such sales and dispositions, AREP
received an aggregate of approximately $23,000,000 in cash, net of closing costs
and amounts utilized to satisfy mortgage indebtedness which encumbered such
properties. As of December 31, 2002, AREP owned 8 properties that were being
marketed for sale. The aggregate net realizable value of such properties is
estimated to be approximately $4,300,000.

For each of the years ended December 31, 2002, 2001, and 2000, no single
real estate asset or series of assets leased to the same lessee accounted for
more than 10% of the gross revenues of AREP.

I-14

However, at December 31, 2002, 2001, and 2000, Portland General Electric Company
('PGEC') occupied a property, which represented approximately 13% of the
carrying value of AREP's total real estate assets leased to others. PGEC is an
electric utility engaged in the generation, purchase, transmission, distribution
and sale of electricity. All of PGEC's common stock is owned by Enron Corp.
which has filed for bankruptcy under Chapter 11 of the Federal Bankruptcy Code.
PGEC is not included in the filing. PGEC's management has stated in public
filings that it cannot predict with certainty what impact the Enron bankruptcy
may have on PGEC. However, PGEC does not believe that the assets and liabilities
of PGEC will become part of the Enron bankruptcy estate and therefore does not
expect the Enron bankruptcy proceedings to have a material effect on PGEC's
operations. At December 31, 2002 and February 28, 2003, PGEC is current in its
rents.

The PGEC Property is an office complex consisting of three buildings
containing an aggregate of approximately 803,000 square feet on an approximate
2.7 acre parcel of land located in Portland, Oregon.

The PGEC Property is net-leased to a wholly owned subsidiary of PGEC through
September 30, 2018, with two ten-year and one five-year renewal options. The
annual rental is $5,137,309 until 2003, $4,973,098 until 2018 and $2,486,549
during each renewal option. PGEC has guaranteed the performance of its
subsidiary's obligations under the lease. The lessee has an option to purchase
the PGEC Property in September of 2003, 2008, 2013 and 2018 at a price equal to
the fair market value of the PGEC Property determined in accordance with the
lease and is required to make a rejectable offer to purchase the PGEC Property
in September 2018 for a price of $15,000,000. A rejection of such offer will
have no effect on the lease obligations or the renewal and purchase options.

AREP owns 100% of Stratosphere. Stratosphere owns and operates the
Stratosphere Tower, Casino & Hotel; located in Las Vegas, Nevada, which is
centered around the Stratosphere Tower, the tallest free-standing observation
tower in the United States. The hotel and entertainment facility has 2,444 rooms
and suites, a 97,000 square foot casino and related amenities. See Item
1 -- 'Recent Acquisitions/Investments.'

AREP owns, primarily through its Bayswater subsidiary, residential
development properties. Bayswater, a real estate investment, management and
development company, focuses primarily on the construction and sale of
single-family houses, multi-family homes and residential lots in subdivisions
and in planned communities. See Item 1 -- 'Recent Acquisitions/Investments.'

Upon obtaining licenses from the New Jersey Casino Control Commission, AREP,
in accordance with a prior agreement, acquired a 36% equity interest in GB
Holdings, the parent company of the Sands. The Sands owns and operates the Sands
Hotel and Casino, located in Atlantic City, New Jersey, containing 511 rooms and
suites, a 79,000 square foot casino and related amenities. The Sands recently
leased and completed renovations to an adjacent property, providing an
additional 126 rooms and suites. See Item 1 -- 'Recent
Acquisitions/Investments.'

AREP owns a resort property in New Seabury, Massachusetts. The New Seabury
site is comprised of two golf courses, other recreational facilities,
condominium and time share units and land for future residential and commercial
development.

ITEM 3. 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 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

I-15

Dismiss the plaintiffs' state law claims, leaving in place only the ADA
claims. Stratosphere and the Plaintiffs then filed Motions for Summary
Judgment. 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 had already commenced these renovations prior to the Court's
Order and completed these renovations in June 2002. The renovations cost
approximately $765,000.

b. In January 2002, the Cape Cod Commission, (the 'Commission'), a
regional planning body created in 1989, concluded that AREP'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, an AREP 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, of which $195,953 and $371,973 were disbursed
to Tiffiny and Great Western in 2002, respectively, is properly due and
payable to satisfy all claims for the work performed, including the claim by
Tiffiny. 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, AREP, its
subsidiaries and other companies in which AREP 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 AREP.

I-16

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

No matters were submitted to a vote of Unitholders during 2002.

I-17

PART II

ITEM 5. MARKET FOR AREP'S COMMON EQUITY AND RELATED SECURITY HOLDER MATTERS.

MARKET INFORMATION

AREP's Depositary Units are traded on the New York Stock Exchange ('NYSE')
under the symbol 'ACP.' Trading on the NYSE commenced July 23, 1987, and the
range of high and low market prices for the Depositary Units on the New York
Stock Exchange Composite Tape (as reported by The Wall Street Journal) from
January 1, 2001 through December 31, 2002 is as follows:

On March 14, 2003 the last sales price of the Depositary Units, as reported
by the New York Stock Exchange Composite Tape (as reported by The Wall Street
Journal) was $10.24.

As of March 14, 2003, there were approximately 9,300 record holders of the
Depositary Units.

Since January 1, 1994, AREP has made no cash distributions with respect to
the Depositary Units.

DISTRIBUTIONS

On March 31, 2003, the Board of Directors of the General Partner announced
that no distributions on its Depositary Units are expected to be made in 2003.
AREP believes that it should continue to hold and invest, rather than
distribute, cash. In making its announcement, AREP noted it plans to continue to
apply available cash flow toward its operations, repayment of maturing
indebtedness, tenant requirements, investments, acquisitions and other capital
expenditures and cash reserves for Partnership contingencies, including
environmental matters and scheduled lease expirations. By the end of the year
2005 net leases representing approximately 23% of AREP's net annual rentals from
its portfolio will be due for renewal, and by the end of the year 2007, 35% of
such rentals will be due for renewal. Another factor that AREP took into
consideration was that net leases representing approximately 26% of AREP's net
annual rentals from its portfolio are with tenants in the retail sector, some of
which are currently experiencing cash flow difficulties and restructurings. See
Item 7 -- 'Management's Discussion and Analysis of the Financial Condition and
Results of Operations -- Capital Resources and Liquidity.'

As of February 28, 2003, there were 46,098,284 Depositary Units and
9,330,963 Preferred Units outstanding. Trading in the Preferred Units commenced
March 31, 1995 on the NYSE under the symbol 'ACP PR.' The Preferred Units
represent limited partner interests in AREP and have certain rights and
designations, generally as follows. Each Preferred Unit has a liquidation
preference of $10.00 and entitles the holder thereof to receive distributions
thereon, payable solely in additional Preferred Units, at a rate of 5% of the
liquidation preference thereof, payable annually on March 31, or the next
succeeding business day thereafter, of each year (each, a 'Payment Date'). On
any Payment Date, AREP, with the approval of the Audit Committee, may opt to
redeem all, but not less than all, of the Preferred Units for a price, payable
either in all cash or by issuance of additional Depositary Units, equal to the
liquidation preference of the Preferred Units, plus any accrued but unpaid
distributions thereon. On or before March 31, 2010, AREP must redeem all, but
not less than all, of the Preferred Units on the same terms as any optional
redemption. Holders of Preferred Units will have no voting rights except as
mentioned in Item 10 -- 'Directors and Executive Officers of AREP,' below.

On March 31, 2002, AREP distributed to holders of record of its Preferred
Units as of March 15, 2002, 444,332 additional Preferred Units. Pursuant to the
terms of the Preferred Units, on February 21,

II-1

2003, AREP declared its scheduled annual preferred unit distribution payable in
additional Preferred Units at the rate of 5% of the liquidation preference of
$10.00. The distribution is payable March 31, 2003 to holders of record as of
March 14, 2003. In February 2003, the number of authorized Preferred Units was
increased to 9,900,000.

Each Depositary Unitholder will be taxed on the Unitholder's allocable share
of AREP's taxable income and gains and, with respect to Preferred Unitholders,
accrued guaranteed payments, whether or not any cash is distributed to the
Unitholder.

REPURCHASE OF DEPOSITARY UNITS

AREP announced in 1987 its intention to purchase up to 1,000,000 Depositary
Units. On June 16, 1993, AREP increased the amount of shares authorized to be
repurchased to 1,250,000 Depositary Units. As of February 28, 2003, AREP had
purchased 1,137,200 Depositary Units at an aggregate cost of approximately
$11,921,000. Management recently has not been acquiring Depositary Units for
AREP, although AREP may from time to time acquire additional Depositary Units.

ITEM 6. SELECTED FINANCIAL DATA

(table continued on next page)

II-2

(table continued from previous page)

ITEM 7. 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

AREP believes that it will benefit from diversification of its portfolio of
assets. To further its investment objectives, AREP 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, as well as experienced personnel. Additionally, in selecting
future real estate investments, AREP 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. From time to time
AREP has discussed and in the future may discuss and may make such acquisitions
from Icahn, the General Partner or their affiliates, provided the terms thereof
are fair and reasonable to AREP. Despite the substantial capital pursuing real
estate opportunities, AREP believes that there are still opportunities available
to acquire investments that are undervalued. These may include commercial
properties, land, assets in the gaming and entertainment industries,

II-3

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 investment trusts and the acquisition of debt
or equity securities of companies which may be undergoing restructuring and
underperforming properties that may require active asset management and
significant capital improvements. As noted above, AREP 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 of, and investment in, the movie production
and distribution industries. With respect to gaming and entertainment industry
investments, AREP believes that there may be synergies between production
companies for movies and live entertainment and supplying entertainment content
to hotels and casinos. Such investments may be made in the form of 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
AREP.

AREP notes that while there are still opportunities available to acquire
investments that are undervalued, acquisition opportunities in the real estate
market for value-added investors have become 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
AREP. As such, they require AREP to maintain a strong capital base in order to
react quickly to these market opportunities as well as to allow AREP 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 AREP will increase in value or generate positive cash flow, AREP 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 AREP's real estate assets leased to
others 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 AREP 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 2005, net leases representing approximately 23% of
AREP's net annual rentals from its portfolio will be due for renewal, and by the
end of the year 2007, net leases representing approximately 35% of AREP's net
annual rentals will be due for renewal. Since most of AREP's properties are
net-leased to single, corporate tenants, it may be difficult and time-consuming
to re-lease or sell those properties that existing tenants decline to re-let or
purchase and AREP may be required to incur expenditures to renovate such
properties for new tenants. In addition, AREP 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, AREP could
experience an adverse impact on net cash flow in the future from such
properties.

The Amendment, which became effective in August, 1996, permits AREP 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 AREP in the real estate market.

AREP raised funds through a rights offering in September 1997 (the '1997
Offering') to increase its assets available for investment, take advantage of
investment opportunities, further diversify its portfolio of assets and mitigate
against the impact of potential lease expirations. The 1997 Offering was
successfully completed in September 1997 and net proceeds of approximately $267
million were raised for investment purposes.

Expenses relating to environmental clean-up have not had a material effect
on the earnings, capital expenditures, or competitive position of AREP.
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 AREP will not be deemed to be a
responsible party or that the tenant will bear the costs of remediation. Also,
as AREP acquires more operating properties, its exposure to environmental
clean-up costs may increase. AREP completed Phase I Environmental Site
Assessments on most of its

II-4

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.

AREP 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 AREP's exposure
could amount to $2 - 3 million, however, as no Phase II Environmental Site
Assessments have been conducted by the consultants, there can be no accurate
estimation of the need for or extent of any required remediation, or the costs
thereof. In addition, AREP notified all tenants of the Resource Conservation and
Recovery Act's ('RCRA') December 22, 1998 requirements for regulated underground
storage tanks. AREP 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 with such property refinancings as AREP may
deem necessary and appropriate. AREP 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 40 updates were
completed in 2002 with another 33 scheduled for the year 2003.

RESULTS OF OPERATIONS

CALENDAR YEAR 2002 COMPARED TO CALENDAR YEAR 2001

Gross revenues increased by $29,593,000, or 10.0%, during the year ended
December 31, 2002 as compared to the same period in 2001. This increase reflects
increases of $20,458,000 in land, house and condominium sales, $11,961,000 in
hotel and casino operating income, $2,179,000 in hotel and resort operating
income and $1,038,000 in rental income partially offset by decreases of
$2,305,000 in dividend and other income, $2,213,000 in financing lease income,
$1,502,000 in equity in earnings of GB Holdings, Inc. and $23,000 in interest
income on U.S. Government and Agency obligations and other investments. The
increase in land, house and condominium sales is primarily attributable to
higher selling prices and an increase in the number of units sold, due to a
strong residential housing market and low mortgage rates. The increase in hotel
and casino operating income is primarily attributable to an increase in gaming
and hotel revenues as a result of increased capacity brought about by the hotel
expansion. The average daily rate ('ADR') remained at $48 during the years ended
December 31, 2002 and 2001; however, percentage occupancy decreased 4% to 89.6%.
The increase in hotel and resort operating income is primarily attributable to
increased revenues at New Seabury as prior year's revenues were negatively
impacted by construction activities. The increase in rental income is primarily
attributable to a property acquisition, and reclassifications of financing
leases to operating leases. The decrease in dividend and other income is
primarily due to lease termination and deferred maintenance payments received
from tenants in 2001. The decrease in financing lease income is the result of
lease expirations, reclassification of financing leases and normal financing
lease amortization. The decrease in equity 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 in 2002, which was partially
offset by decreased promotional allowances and decreased casino expenses. In
addition, GB Holdings recorded an impairment loss on certain property expansion
costs determined to be unusable. Interest income on U.S. Government and Agency
obligations decreased by approximately $8 million due to a decline in interest
rates, however, the decrease was offset by interest earned on the prepayment of
a mezzanine loan in 2002.

Expenses increased by $19,433,000, or 8.3%, during the year ended
December 31, 2002 as compared to the same period in 2001. This increase reflects
increases of $12,041,000 in the cost of land, house and condominium sales,
$5,602,000 in hotel and casino operating expenses, $3,195,000 in depreciation
and amortization, $2,116,000 in rental property expenses and $1,574,000 in hotel
and resort operating expenses partially offset by decreases of $5,044,000 in
interest expense and $51,000 in general and administrative expenses. The
increase in the cost of land, house and condominium sales is due to

II-5

increased sales as explained above. Costs as a percentage of sales declined from
77% in 2001 to 72% in 2002 primarily due to higher margin sales in 2002. 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 89% in 2001 to 86% in 2002 as hotel and casino revenues
increased at a greater rate than hotel and casino expenses due to the hotel
expansion. The increase in depreciation and amortization 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 of
approximately $1 million. The increase in hotel and resort operating expenses is
primarily attributable to increased costs associated with increased revenues at
New Seabury. Costs as a percentage of sales decreased from 86% in 2001 to 84% in
2002. The decrease in interest expense is primarily due to the repayment of debt
to affiliates in May 2002 in connection with the Sands repurchase obligation, as
well as decreased interest rates prior to repayment of this debt.

Earnings from land, house and condominium operations increased in the year
ended December 31, 2002 as compared to the same period in 2001. However, the
decrease in land inventory in approved sub-divisions is expected to negatively
impact earnings from this business segment.

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. Earnings from hotel, casino and resort properties are
expected to be constrained by recessionary pressures, international tensions and
competition.

Earnings before property and securities transactions and minority interest
increased during the year ended December 31, 2002 by $10,160,000 as compared to
the same period in 2001.

Gain on sale of real estate increased by $7,253,000 during the year ended
December 31, 2002 as compared to the same period in 2001 due to the size and
number of transactions.

During the year ended December 31, 2002, AREP recorded a provision for loss
on real estate of $3,212,000 as compared to $3,184,000 in the same period in
2001. A substantial portion of the 2002 provision resulted from vacated
properties where leases were not renewed or were rejected by tenants in
bankruptcy.

A write-down of equity securities available for sale of $8,476,000 was
recorded in the year ended December 31, 2002. The market value of Philips'
common stock has declined steadily since it was acquired by the Company. In
2002, based on a review of Philips' financial statements, management of the
Company deemed the decrease in value to be other than temporary. As a result,
the Company wrote down its investment in Philips' common stock by a charge to
earnings. There was no such write-down in 2001.

Gain on sale of marketable equity and debt securities was $6,749,000 in the
year ended December 31, 2001. There was no such income in 2002.

A write-down of a limited partnership investment of $3,750,000 was recorded
in the year ended December 31, 2002. AREP invested $6.0 million in an
unaffiliated biotechnology partnership. Upon review of this investment in 2002,
management of the Company determined that the investment was impaired and wrote
down its value by a charge to earnings. There was no such write-down in 2001.

Minority interest in the net earnings of Stratosphere Corporation increased
by $1,493,000 during the year ended December 31, 2002 as compared to the same
period in 2001, due to an increase in Stratosphere's net hotel and casino
operating income. As a result of the acquistion of the minority interest in
December 2002, there will be no minority interest in net earnings of
Stratosphere Corporation in 2003 and thereafter.

Net earnings for the year ended December 31, 2002 decreased by $3,083,000 as
compared to the year ended December 31, 2001 primarily due to a write-down of
equity securities available for sale ($8.5 million), decreased gain on sale of
marketable equity securities ($6.7 million) and the write-down of a limited
partnership investment ($3.8 million) partially offset by increased earnings
from land house and condominium operations ($8.4 million) and increased gain on
sale of real estate ($7.3 million).

II-6

CALENDAR YEAR 2001 COMPARED TO CALENDAR YEAR 2000

Gross revenues decreased by $15,554,000, or 5.0%, during the year ended
December 31, 2001 as compared to the same period in 2000. This decrease reflects
decreases of $20,614,000 in land, house and condominium sales, $5,841,000 in
interest income on U.S. Government and Agency obligations and other investments,
$5,199,000 in hotel and resort operating income and $2,717,000 in financing
lease income partially offset by increases of $11,592,000 in hotel and casino
operating income, $3,910,000 in equity in earnings of GB Holdings, Inc.,
$3,271,000 in rental income and $44,000 in dividend and other income. The
decrease in land, house and condominium sales is primarily due to a decline in
inventory of completed units available for sale. The decrease in interest income
on U.S. Government and Agency obligations and other investments is primarily
attributable to a decrease in interest rates on short-term investments. The
decrease in hotel and resort operating income is primarily attributable to New
Seabury resort operations, including membership initiation fees, which were
negatively impacted by the construction of a new club house and golf course
improvements. The decrease in financing lease income is the result of lease
expirations and normal financing lease amortization. The increase in hotel and
casino operating income is primarily attributable to an increase in gaming and
hotel revenues. The equity in earnings of GB Holdings, Inc. is the result of
accounting for the Company's interest under the equity method effective October
1, 2000. In 2001, the Company included a full year of GB Holdings, Inc.'s
operations, whereas in 2000 only the fourth quarter of operations was included,
historically a seasonably weak quarter. The increase in rental income is
primarily attributable to operating lease rentals.

Expenses decreased by $9,212,000, or 3.8%, during the year ended
December 31, 2001 as compared to the same period in 2000. This decrease reflects
decreases of $15,894,000 in the cost of land, house and condominium sales,
$6,056,000 in hotel and resort operating expenses, $1,750,000 in Bayswater
acquisition costs and $395,000 in general and administrative expenses partially
offset by increases of $9,472,000 in hotel and casino operating expenses,
$2,936,000 in depreciation and amortization $1,320,000 in interest expense and
$1,155,000 in rental property expenses. The decrease in cost of land, house and
condominium sales is due to decreased sales as explained above. The decrease in
hotel and resort operating expenses is primarily attributable to cost controls
at the New Seabury resort to offset decreased revenues as explained above. The
increase in hotel and casino operating expenses is primarily attributable to
increased costs associated with increased revenues. The increase in interest
expense is primarily attributable to increased interest due affiliates in
connection with repurchase obligations.

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. These increases were partially offset by a $3 decrease in
the average daily rate per room and a 2.6% decrease in percentage occupancy.
Hotel and casino operating expenses increased due to additional operating costs
and increased marketing and advertising expenses.

The increase in hotel and casino revenues were muted by the September 11,
2001 terrorist attack. Management anticipates increased hotel and casino
operating revenues and expenses through the second quarter of 2002. However,
these increases are expected to be tempered by decreased air travel to Las Vegas
as a result of the terrorist threat, increased competition and the recent
economic recession.

Earnings before property and securities transactions and minority interest
decreased during the year ended December 31, 2001 by $6,342,000 as compared to
the same period in 2000.

Gain on property transactions decreased by $5,026,000 during the year ended
December 31, 2001 as compared to the same period in 2000 due to the size and
number of transactions.

During the year ended December 31, 2001, AREP recorded a provision for loss
on real estate of $3,184,000 as compared to $1,351,000 in the same period in
2000. A substantial portion of the 2001 provision resulted from tenant
bankruptcies.

Gain on sale of marketable equity and debt securities was $6,749,000 in the
year ended December 31, 2001. There was no such income in 2000.

In the year ended December 31, 2000, AREP recorded a gain on sale of limited
partnership units of $3,461,000. There was no such income in 2001.

II-7

Minority interest in the net earnings of Stratosphere Corporation decreased
by $2,297,000 during the year ended December 31, 2001 as compared to the same
period in 2000 due to a decrease in Stratosphere's net hotel and casino
operating income.

Net earnings for the year ended December 31, 2001 decreased by $7,616,000 as
compared to the year ended December 31, 2000 primarily due to decreased interest
income ($5.8 million), decreased earnings from land, house and condominium
operations ($4.7 million) and decreased gain on property and securities
transactions ($3.3 million) partially offset by increased equity in earnings of
GB Holdings, Inc. ($3.9 million) and decreased minority interest in earnings of
Stratosphere ($2.3 million). Earnings from land, house and condominium
operations decreased due to a decline in inventory of completed units available
for sale. Based on existing contracts, sales may increase during 2002 compared
to 2001. However, the decrease in land inventory in approved sub-divisions is
expected to negatively impact earnings from this business segment in the longer
term unless mitigated by the purchase of land, development and sale of units in
approved sub-divisions.

For accounting purposes Bayswater's earnings prior to the date of
acquisition (March 23, 2000) were allocated to the General Partner and therefore
excluded from the computation of basic and diluted earnings per limited
partnership unit.

CAPITAL RESOURCES AND LIQUIDITY

Cash provided by operating activities was $122.3 million for the year ended
December 31, 2002 as compared to $81.8 million in the comparable period of 2001.
This increase resulted primarily from an increase in the land, house and
condominium operations ($30.7 million) and an increase in cash flow from the
other operations ($9.8 million). The Company expects the decrease in land
inventory in approved sub-divisions to negatively impact cash flow from the
land, house and condominium operations.

The following table reflects the Company's contractual cash obligations, as
of December 31, 2002, due during the indicated periods (in $millions):

In 2002, fourteen leases covering fourteen properties and representing
approximately $2.1 million in annual rentals expired. Seven leases, originally
representing $916,000 in annual rental income, were renewed for $625,000 in
annual rentals. Such renewals are generally for a term of five years. One
property with an annual rental income of $173,000 was not renewed and
subsequently leased for $117,000 per annum. Another property with annual rents
of $167,000 was not renewed and was sold for approximately $1.6 million. Five
leases with annual rentals of $855,000 were not renewed and are currently being
marketed for sale or lease.

In 2003, seventeen leases covering seventeen properties and representing
approximately $2.2 million in annual rentals are scheduled to expire. Eight
leases originally representing $1.1 million in annual rental income were renewed
for $924,000 in annual rentals. Such renewals are generally for a term of five
years. Five properties with annual rental income of $613,000 were not renewed
and are currently being marketed for sale or lease. The Company has not yet been
notified by tenants whether they plan to renew leases on four properties with
annual rentals of $464,000.

On March 31, 2003, the Board of Directors of the General Partner announced
that no distributions on its Depositary Units are expected to be made in 2003.
AREP believes that it should continue to hold and invest, rather than
distribute, cash. In making its announcement, AREP noted it plans to continue to
apply available cash flow toward its operations, repayment of maturing
indebtedness, tenant requirements, investments, acquisitions and other capital
expenditures and cash reserves for Partnership contingencies including
environmental matters and scheduled lease expirations. By the end of the year
2005, net leases representing approximately 23% of AREP's net annual rentals
will be due for renewal,

II-8

and by the end of the year 2007, 35% of such rentals will be due for renewal.
Another factor that AREP took into consideration was that net leases
representing approximately 26% of AREP's net annual rentals from its portfolio
are with tenants in the retail sector, some of which are currently experiencing
cash flow difficulties and restructurings.

The types of investments AREP is pursuing, including assets that may not be
readily financeable or generating positive cash flow, such as development
properties, non-performing mortgage loans or securities of companies which may
be undergoing restructuring or require significant capital investments, require
AREP to maintain a strong capital base in order to own, develop and reposition
these assets.

Sales proceeds from the sale or disposal of portfolio properties totaled
approximately $20.5 million in 2002. During 2001, such sales proceeds totaled
approximately $3.7 million. AREP intends to use asset sales, financing and
refinancing proceeds for new investments.

In May 2002, the Company was qualified as a holding company by the New
Jersey Casino Control Commission and in accordance with a prior agreement
repurchased its interest in the Sands Hotel and Casino, 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 $68.8 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.

On December 19, 2002 AREP acquired the remaining 49% of Stratosphere that
AREP did not own. The initial determination to engage in the transaction at the
prices set forth below was previously announced by AREP in September 2000. Under
the merger agreement the stockholders who were unaffiliated with Mr. Icahn
received a cash price of $45.32 per share (approximately $9.6 million) and the
Icahn related stockholders (other than AREP) received a cash price of $44.33 per
share (approximately $34.7 million). AREP paid an aggregate of approximately
$44.3 million for the Stratosphere shares. In addition, approximately $400,000
of transaction costs were incurred. The acquisition by the Company of the
minority shares not owned by an Icahn affiliate has been 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 has been recorded at historical
cost. The excess of the historical cost over the amount of the cash disbursed,
which amounted to $21,151,000, has been accounted for as a net addition to the
General Partner's equity.

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
Corporation and WMH Tool Group, 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 borrowed
$12.7 million secured by the Nashville, Tennessee property. The loan is
non-recourse, 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.

Capital expenditures for real estate and hotel, casino and resort operations
were approximately $4.8 million during 2002. During 2001, such expenditures
totaled approximately $63.7 million. In 2003, capital expenditures are estimated
to be approximately $10 million.

During the year ended December 31, 2002, approximately $7.7 million of
principal payments were repaid. During the year ended December 31, 2001,
approximately $15.1 million of principal payments were repaid.

AREP may consider possible tender offers for real estate operating companies
and real estate limited partnership units. AREP may also consider indirect
investments in real estate by making loans secured by the indirect ownership
interests of certain real properties.

To further its investment objectives, AREP may consider the acquisition or
seek effective control of other land development companies and other real estate
operating companies which may have a

II-9

significant inventory of quality assets under development. This may enhance its
ability to further diversify its portfolio of properties and gain access to
additional operating and development capabilities.

AREP's cash and cash equivalents and investment in U.S. Government and
Agency obligations increased by $12.8 million during the year ended
December 31, 2002, primarily due to net cash flow from operations ($122.3
million), mezzanine loan repayments ($23 million), property dispositions ($20.5
million) and miscellaneous other items ($1.7 million) partially offset by the
repurchase of Sands interest ($68.8 million), acquisition of minority interest
in Stratosphere ($44.7 million), mezzanine loan advances ($23.2 million),
principal payments on mortgages payable ($7.7 million), property acquisitions
net of financing proceeds ($5.5 million) and capital expenditures for real
estate and hotel, casino and resort operating properties ($4.8 million).

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

AREP's consolidated financial statements have been prepared in accordance
with generally accepted accounting principals in the United States of America
('US GAAP'). The preparation of financial statements in conformity with US GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses and the disclosure of
contingent assets and liabilities. Among others, estimates are used when
accounting for valuation of investments, recognition of casino revenues and
promotional allowances and estimated costs to complete its land, house and
condominium developments. Estimates and assumptions are evaluated on an ongoing
basis and are based on historical and other factors believed to be reasonable
under the circumstances. The results of these estimates may form the basis of
the carrying value of certain assets and liabilities and may not be readily
apparent from other sources. Actual results, under conditions and circumstances
different from those assumed, may differ from estimates.

The Company believes the following accounting policies are critical to its
business operations and the understanding of results of operations and affect
the more significant judgments and estimates used in the preparation of its
consolidated financial statements.

Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of -- Long-lived assets held and used by the Company and
long-lived assets to be disposed of, are reviewed for impariment whenever events
or changes in circumstances, such as vacancies and rejected leases, indicate
that the carrying amount of an asset may not be recoverable.

In performing the review for recoverability, the Company estimates the
future cash flows expected to result from the use of the asset and its eventual
disposition. If the sum of the expected future cash flows (undiscounted and
without interest charges) is less than the carrying amount of the asset an
impairment loss is recognized. Measurement of an impairment loss for long-lived
assets that the Company expects to hold and use is based on the fair value of
the asset. Long-lived assets to be disposed of are reported at the lower of
carrying amount or fair value less cost to sell.

Commitments and Contingencies -- Litigation -- On an ongoing basis, the
Company assesses the potential liabilities related to any lawsuits or claims
brought against the Company. While it is typically very difficult to determine
the timing and ultimate outcome of such actions, the Company uses its best
judgment to determine if it is probable that it will incur an expense related to
the settlement or final adjudication of such matters and whether a reasonable
estimation of such probable loss, if any, can be made. In assessing probable
losses, the Company makes estimates of the amount of insurance recoveries, if
any. The Company accrues a liability when it believes a loss is probable and the
amount of loss can be reasonably estimated. Due to the inherent uncertainties
related to the eventual outcome of litigation and potential insurance recovery,
it is possible that certain matters may be resolved for amounts materially
different from any provisions or disclosures that the Company has previously
made.

Marketable Equity and Debt Securities and Investment in U.S. Government and
Agency Obligations -- Investments in equity and debt securities are classified
as either held-to-maturity or available for sale for accounting purposes.
Investment in U.S. Government and Agency Obligations are classified as available
for sale. Available for sale securities are carried at fair value on the balance
sheet of the Company. Unrealized holding gains and losses are excluded from
earnings and reported as a separate component of Partners' Equity.
Held-to-maturity securities are recorded at amortized cost.

II-10

A decline in the market value of any held-to-maturity security below cost
that is deemed to be other than temporary results in a reduction in carrying
amount to fair value. The impairment is charged to earnings and a new cost basis
for the security is established. Dividend income is recorded when declared and
interest income is recognized when earned.

Mortgages and Notes Receivable

a. The Company has generally not recognized any profit in connection with
the property sales in which certain purchase money mortgages receivable were
taken back. Such profits are being deferred and will be recognized when the
principal balances on the purchase money mortgages are received.

b. 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. Current 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.

Revenue Recognition

1. Revenue from real estate sales and related costs are recognized at the
time of closing primarily by specific identification. The Company follows the
guidelines for profit recognition set forth by Financial Accounting Standards
Board (FASB) Statement No. 66, 'Accounting for Sales of Real Estate.'

2. Casino revenues and promotional allowances -- The Company recognizes
revenues in accordance with industry practice. Casino revenue is the net win
from gaming activities (the difference between gaming wins and losses). Casino
revenues are net of accruals for anticipated payouts of progressive and certain
other slot machine jackpots. Revenues include the retail value of rooms, food
and beverage and other items that are provided to customers on a complimentary
basis. A corresponding amount is deducted as promotional allowances. The cost of
such complimentaries is included in 'Hotel and casino operating expenses'.

3. Sales, advertising and promotion -- These costs are expensed as incurred.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS

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, AREP is
exposed to market, credit and related risks, including those described elsewhere
herein. As AREP 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
AREP'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 AREP 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.
AREP's mortgages payable are primarily fixed-rate debt and, therefore, are not
subject to market risk.

AREP 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

II-11

with maturities greater than one year. If interest rates increased 100 basis
points, the fair value of these investments at December 31, 2002, would decline
by approximately $800,000.

Whenever practical, AREP employs internal strategies to mitigate exposure to
these and other risks. AREP's management, on a case by case basis with respect
to new investments, performs internal analyses of risk identification,
assessment and control. AREP 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. AREP seeks to achieve adequate
returns commensurate with the risk it assumes. AREP utilizes qualitative as well
as quantitative information in managing risk.

II-12

ITEM 8. FINANCIAL STATEMENTS.

INDEPENDENT AUDITORS' REPORT

The Partners
AMERICAN REAL ESTATE PARTNERS, L.P.:

We have audited the accompanying consolidated balance sheets of American
Real Estate Partners, L.P. and subsidiaries as of December 31, 2002 and 2001,
and the related consolidated statements of earnings, changes in partners' equity
and comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 2002. In connection with our audits of the
consolidated financial statements, we also have audited the 2002 financial
statement schedule as listed in the Index at Item 14(a)2. These consolidated
financial statements and the financial statement schedule are the responsibility
of the Partnership's management. Our responsibility is to express an opinion on
these consolidated financial statements and the financial statement schedule
based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosure in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, based on our audits, the consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of American Real Estate Partners, L.P. and subsidiaries as of
December 31, 2002 and 2001 and the results of their operations and their cash
flows for each of the years in the three-year period ended December 31, 2002 in
conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.

/s/ KPMG LLP

New York, New York
March 26, 2003

II-13

AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001

See notes to consolidated financial statements.

II-14

AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

See notes to consolidated financial statements.

II-15

AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS'
EQUITY AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (IN $000'S)

Accumulated other comprehensive loss at December 31, 2002, 2001 and 2000 was
$242, $17,178, and $7,548, respectively.

See notes to consolidated financial statements.

II-16

AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (IN $000'S)

See notes to consolidated financial statements.

II-17

AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000

1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

On July 1, 1987, American Real Estate Holdings Limited Partnership (the
'Subsidiary'), in connection with an exchange offer (the 'Exchange'), entered
into merger agreements with American Real Estate Partners, L.P. (the 'Company')
and each of thirteen separate limited partnerships (collectively, the
'Predecessor Partnerships'), pursuant to which the Subsidiary acquired all the
assets, subject to the liabilities of the Predecessor Partnerships.

By virtue of the Exchange, the Subsidiary owns the assets, subject to the
liabilities, of the Predecessor Partnerships. The Company owns a 99% limited
partner interest in the Subsidiary. American Property Investors, Inc. (the
'General Partner') owns a 1% general partner interest in both the Subsidiary and
the Company representing an aggregate 1.99% general partner interest in the
Company and the Subsidiary.

An amendment (the 'Amendment') to the Company's Partnership Agreement became
effective on August 16, 1996, which permits the Company to make non-real estate
investments. The Amendment 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 to further diversify its
investments while remaining in the real estate business and continuing to pursue
suitable investments in the real estate markets. Under the Amendment,
investments may include equity and debt securities of domestic and foreign
issuers. The portion of the Company's assets invested in any one type of
security or any single issuer will not be limited.

The Company will conduct its activities in such a manner so as not to be
deemed an investment company under the Investment Company Act of 1940.
Generally, this means that no more than 40% of the Company's total assets will
be invested in securities. In addition, the Company will structure its
investments to continue to be taxed as a partnership rather than as a
corporation under the applicable publicly traded partnership rules of the
Internal Revenue Code.

The Company and its consolidated subsidiaries are engaged in the following
operating businesses: (i) rental real estate, (ii) hotel, casino and resort
operations, (iii) land, house and condominium development and (iv) investment in
securities including investment in other entities and marketable equity and debt
securities.

In March 2000, the Company acquired from affiliates of the General Partner
the assets of Bayswater Realty & Capital Corp. and the ownership interests of
its affiliated entities ('Bayswater') for approximately $84.35 million.
Bayswater, a real estate investment, management and development company has
focused primarily on the construction and sale of single-family homes. The
assets acquired included interests in ten residential subdivisions in New York
and Florida.

In accordance with generally accepted accounting principles, assets and
liabilities transferred between entities under common control were accounted for
at historical costs similar to a pooling of interests, and the financial
statements of previously separate companies for periods prior to the acquisition
were restated on a combined basis.

The Bayswater assets acquired and the liabilities assumed have been
accounted for at historical cost. The excess of the historical cost of the net
assets over the amount of cash disbursed, which amounted to $1,541,000, has been
accounted for as a capital contribution by the General Partner. The Company's
costs of $1.75 million related to the Bayswater transaction have been included
as 'Bayswater acquisition costs' in the Consolidated Statements of Earnings in
the year ended December 31, 2000. Previously an increase of $49,568,000 was made
to the General Partner's equity at December 31, 1997 as a result of the
Bayswater acquisition. A reduction of $62,801,000 has been made to the General
Partner's equity as an adjustment for the Bayswater acquisition in the year
ended December 31, 2000. See Consolidated Statements of Changes in Partners'
Equity and Comprehensive Income.

II-18

In March 2000, the Company purchased an additional 50,000 shares of the
Stratosphere Corporation ('Stratosphere') from an affiliate of the General
Partner resulting in the Company owning approximately 51% of Stratosphere and
has included its accounts on a consolidated basis. In December 2002, the Company
purchased the remaining 49% minority interest. See Note 9.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Financial Statements and Principles of Consolidation -- The consolidated
financial statements are prepared in accordance with generally accepted
accounting principles and include only those assets, liabilities and results of
operations, which relate to the Company and its wholly owned and majority owned
subsidiaries. All material intercompany accounts and transactions have been
eliminated in consolidation. The Company accounts for its investments for
subsidiaries that are less than 50% owned under the equity method of accounting.

Net Earnings Per Limited Partnership Unit -- Basic earnings per share are
based on earnings after the preferred pay-in-kind distribution to Preferred
Unitholders. The resulting net earnings available for limited partners are
divided by the weighted average number of shares of limited partnership units
outstanding.

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 unit equivalents. The number of limited partnership units used
in the calculation of diluted income per limited partnership unit increased as
follows: 10,368,414, 9,500,828 and 10,058,795 limited partnership units for the
years ended December 31, 2002, 2001 and 2000, respectively, to reflect the
effects of the conversion of preferred units.

For accounting purposes, Bayswater's earnings and distributions/dividends
prior to the Bayswater acquisition in March 2000 have been allocated to the
General Partner and therefore excluded from the computation of basic and diluted
earnings per limited partnership unit.

Cash and Cash Equivalents -- The Company considers short-term investments,
which are highly liquid with original maturities of three months or less at date
of purchase, to be cash equivalents. Included in cash and cash equivalents at
December 31, 2002 and 2001 are investments in government backed securities of
approximately $5,467,000 and $5,967,000, respectively.

Marketable Equity and Debt Securities and Investment in U.S. Government and
Agency Obligations -- Investments in equity and debt securities are classified
as either held-to-maturity or available for sale for accounting purposes.
Investment in U.S. Government and Agency Obligations are classified as available
for sale. Available for sale securities are carried at fair value on the balance
sheet of the Company. Unrealized holding gains and losses are excluded from
earnings and reported as a separate component of Partners' Equity.
Held-to-maturity securities are recorded at amortized cost.

A decline in the market value of any held-to-maturity security below cost
that is deemed to be other than temporary results in a reduction in carrying
amount to fair value. The impairment is charged to earnings and a new cost basis
for the security is established. Dividend income is recorded when declared and
interest income is recognized when earned.

Mortgages and Notes Receivable --

a. The Company has generally not recognized any profit in connection with
the property sales in which certain purchase money mortgages receivable were
taken back. Such profits are being deferred and will be recognized when the
principal balances on the purchase money mortgages are received.

b. 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. Current 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.

II-19

Income Taxes -- No provision has been made for Federal, state or local
income taxes on the results of operations generated by partnership activities as
such taxes are the responsibility of the partners. Stratosphere accounts for its
income taxes under the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax credit
carry forwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. Stratosphere has made an
insignificant provision for income taxes which are included in 'Hotel and casino
operating expenses' in the Consolidated Statements of Earnings.

Leases -- The Company leases to others substantially all its real property
under long-term net leases and accounts for these leases in accordance with the
provisions of Financial Accounting Standards Board Statement No. 13, 'Accounting
for Leases,' as amended. This Statement sets forth specific criteria for
determining whether a lease is to be accounted for as a financing lease or an
operating lease.

a. Financing Method -- Under this method, minimum lease payments to be
received plus the estimated value of the property at the end of the lease are
considered the gross investment in the lease. Unearned income, representing the
difference between gross investment and actual cost of the leased property, is
amortized to income over the lease term so as to produce a constant periodic
rate of return on the net investment in the lease.

b. Operating Method -- Under this method, revenue is recognized as rentals
become due and expenses (including depreciation) are charged to operations as
incurred.

Properties -- Properties held for investment, other than those accounted for
under the financing method, are carried at cost less accumulated depreciation
unless declines in the values of the properties are considered other than
temporary at which time the property is written down to net realizable value.
Properties held for sale are included in 'Receivables and other assets' in the
consolidated financial statements and are carried at the lower of cost or net
realizable value.

Depreciation -- Depreciation is computed using the straight-line method over
the estimated useful life of the particular property or property components,
which range from 3 to 45 years.

Use of Estimates -- Management has made a number of estimates and
assumptions relating to the reporting of assets and liabilities, revenues and
expenses and the disclosure of contingent assets and liabilities to prepare
these financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates. The more
significant estimates include the valuation of (i) long-lived assets,
(ii) mortgages and notes receivable (iii) marketable equity and debt securities,
(iv) costs to complete for land, house and condominimum developments and
(v) gaming-related liability and loyalty programs.

Revenue Recognition

1. Revenue from real estate sales and related costs are recognized at the
time of closing primarily by specific identification. The Company follows the
guidelines for profit recognition set forth by Financial Accounting Standards
Board (FASB) Statement No. 66, 'Accounting for Sales of Real Estate.'

2. Casino revenues and promotional allowances -- The Company recognizes
revenues in accordance with industry practice. Casino revenue is the net win
from gaming activities (the difference between gaming wins and losses). Casino
revenues are net of accruals for anticipated payouts of progressive and certain
other slot machine jackpots. Revenues include the retail value of rooms, food
and beverage and other items that are provided to customers on a complimentary
basis. A corresponding amount is deducted as promotional allowances. The cost of
such complimentaries is included in 'Hotel and casino operating expenses'.

3. Sales, advertising and promotion -- These costs are expensed as incurred.

II-20

Land and Construction-in-Progress -- These costs are stated at the lower of
cost or net realizable value. Interest is capitalized on expenditures for
long-term projects until a salable condition is reached. The capitalization rate
is based on the interest rate on specific borrowings to fund the projects.

Accounting for Impairment of a Loan -- If it is probable that based upon
current information the Company will be unable to collect all amounts due
according to the contractual terms of a loan agreement, the Company considers
the asset to be 'impaired'. Reserves are established against impaired loans in
amounts equal to the difference between the recorded investment in the asset and
either the present value of the cash flows expected to be received, or the fair
value of the underlying collateral if foreclosure is deemed probable or if the
loan is considered collateral dependent.

Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of -- Long-lived assets held and used by the Company and
long-lived assets to be disposed of, are reviewed for impairment whenever events
or changes in circumstances, such as vacancies and rejected leases, indicate
that the carrying amount of an asset may not be recoverable.

In performing the review for recoverability, the Company estimates the
future cash flows expected to result from the use of the asset and its eventual
disposition. If the sum of the expected future cash flows (undiscounted and
without interest charges) is less than the carrying amount of the asset an
impairment loss is recognized. Measurement of an impairment loss for long-lived
assets that the Company expects to hold and use is based on the fair value of
the asset. Long-lived assets to be disposed of are reported at the lower of
carrying amount or fair value less cost to sell.

Recent Accounting Standards:

1. In July 2001, the Financial Accounting Standards Board (FASB) issued FASB
Statements Nos. 141 and 142 (SFAS 141 and SFAS 142): 'Business Combinations' and
'Goodwill and Other Intangible Assets.' SFAS 141 replaces APB 16 and eliminates
pooling-of-interests accounting prospectively. It also provides guidance on
purchase accounting related to the recognition of intangible assets and
accounting for negative goodwill. SFAS 142 changes the accounting for goodwill
from an amortization method to an impairment-only approach. Under SFAS 142,
goodwill will be tested annually and whenever events or circumstances occur
indicating that goodwill might be impaired. SFAS 141 and SFAS 142 are effective
for all business combinations completed after June 30, 2001. Upon adoption of
SFAS 142, amortization of goodwill recorded for business combinations
consummated prior to July 1, 2001 will cease, and intangible assets acquired
prior to July 1, 2001 that do not meet the criteria for recognition under
SFAS 141 will be reclassified to goodwill. As of January 1, 2002 the Company has
adopted SFAS 141 and 142. The adoption of SFAS 141 and 142 has not had any
material impact on the Company's consolidated financial statements.

2. In August 2001, the FASB issued SFAS No. 144, 'Accounting for the
Impairment or Disposal of Long-Lived Assets.' SFAS No. 144 is effective for
fiscal years beginning after December 15, 2001. This statement supersedes SFAS
No. 121 'Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of.' SFAS No. 144 retains the fundamental provisions of
SFAS No. 121 for (a) recognition and measurement of the impairment of long-lived
assets to be held and used and (b) measurement of long-lived assets to be
disposed of by sale. As of January 1, 2002 the Company has adopted SFAS 144.
Under SFAS No. 144, the properties sold by the Company to third parties are
considered to be discontinued operations. For the year ended December 31, 2002,
the Company is not reporting discontinued operations for the properties disposed
of to third properties, which excludes those grandfathered by the effective date
of SFAS 144, during the period as the effect of such presentation in the
Company's Consolidated Statements of Earnings is not material. The adoption of
SFAS 144 has not had any material impact on the Company's consolidated financial
statements.

3. 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 145 is not expected it to have any material effect on the
Company's consolidated financial statements.

II-21

3. RELATED PARTY TRANSACTIONS

a. The Company has a $250 million note receivable from Carl C. Icahn,
Chairman of the General Partner (See Note 11).

b. In addition, in 1997 the Company entered into a license agreement for a
portion of office space from an affiliate. The license agreement dated as of
February 1, 1997 expires May 22, 2004 unless sooner terminated in accordance
with the agreement. Pursuant to the license agreement, the Company has the
non-exclusive use of 3,547 square feet of office space and common areas (of an
aggregate 21,123 rentable square feet sublet by such affiliate) for which it
pays $17,068 per month, together with 16.79% of certain 'additional rent'. In
November 2000, the Company reduced its office size to approximately 2,275 square
feet, which decreased its monthly rental to $11,185 plus 10.77% of certain
additional rent. In 2002, 2001 and 2000, the Company paid such affiliate
approximately $153,000, $147,000 and $206,000 of rent, respectively, in
connection with this licensing agreement. The terms of such sublease were
reviewed and approved by the Audit Committee.

c. Stratosphere received as reimbursement from affiliates of the General
Partner approximately $2,872,000, $1,343,000, and $240,000 in the years ended
December 31, 2002, 2001 and 2000, respectively, for administrative services
performed by Stratosphere personnel.

d. The General Partner and its affiliates may realize substantial fees,
commissions and other income from transactions involving the purchase,
operation, management, financing and sale of the Company's properties, subject
to certain limitations relating to properties acquired from the Predecessor
Partnerships in the Exchange. Some of such amounts may be paid regardless of the
overall profitability of the Company and whether any distributions have been
made to Unitholders. As new properties are acquired, developed, constructed,
operated, leased, financed and sold, the General Partner or its affiliates may
perform acquisition functions, development and construction oversight and other
land development services, property management and leasing services, either on a
day-to-day basis or on an asset management basis, and other services and be
entitled to fees and reimbursement of expenses relating thereto, including
property management fees, real estate brokerage and leasing commissions, fees
for financing either provided or arranged by the General Partner and its
affiliates, development fees, general contracting fees and construction
management fees. The terms of any transactions between the Company and the
General Partner or its affiliates must be fair and reasonable to the Company and
customary to the industry. There were no significant fees paid in the years
ended December 31, 2002, 2001, and 2000.

Stratosphere also received hotel revenue of approximately $123,000, $600,000
and $500,000 in the years ended December 31, 2002, 2001 and 2000, respectively,
in connection with a tour and travel agreement entered into with an affiliate of
the General Partner.

4. REAL ESTATE LEASED TO OTHERS ACCOUNTED FOR UNDER THE FINANCING METHOD

Real estate leased to others accounted for under the financing method is
summarized as follows (in $000's):

II-22

The following is a summary of the anticipated future receipts of the minimum
lease payments receivable at December 31, 2002 in ($000's):

At December 31, 2002, approximately $116,023,000 of the net investment in
financing leases was pledged to collateralize the payment of nonrecourse
mortgages payable.

5. REAL ESTATE LEASED TO OTHERS ACCOUNTED FOR UNDER THE OPERATING METHOD

Real estate leased to others accounted for under the operating method is
summarized as follows (in $000's):

As of December 31, 2002 and 2001, accumulated depreciation on the hotel and
resort operating properties (not included above) amounted to approximately
$9,665,000 and $7,438,000, respectively (See Note 12).

The following is a summary of the anticipated future receipts of minimum
lease payments under noncancelable leases at December 31, 2002 (in $000's):

At December 31, 2002, approximately $138,297,000 of net real estate leased
to others was pledged to collateralize the payment of non-recourse mortgages
payable.

II-23

6. INVESTMENT IN U.S. GOVERNMENT AND AGENCY OBLIGATIONS

The Company has investments in U.S. Government and Agency Obligations whose
maturities range from January 2003 to January 2019 as follows (in $ millions):

7. MARKETABLE EQUITY AND DEBT SECURITIES (IN $ MILLIONS)

a. In 1998 and 1999, the Company acquired an interest in the Sands Hotel and
Casino (the 'Sands') located in Atlantic City, New Jersey by purchasing the
principal amount of approximately $31.4 million of First Mortgage Notes
('Notes') issued by GB Property Funding Corp. ('GB Property'). GB Property was
organized as a special purpose entity for the borrowing of funds by Greate Bay
Hotel and Casino, Inc. ('Greate Bay'). The purchase price for such notes was
approximately $25.3 million. An affiliate of the General Partner also made an
investment in the Notes of GB Property. A total of $185 million of such Notes
were issued.

Greate Bay owned and operated the Sands, a destination resort complex,
located in Atlantic City, New Jersey. On January 5, 1998, GB Property and Greate
Bay filed for bankruptcy protection under Chapter 11 of the Bankruptcy Code to
restructure its long term debt.

Furthermore, in 1998 and 1999, the Company acquired an interest in the
Claridge Hotel and Casino (the 'Claridge Hotel') located in Atlantic City, New
Jersey by purchasing the principal amount of $16.7 million of First Mortgage
Notes of the Claridge Hotel and Casino Corporation (the 'Claridge Corporation').
The purchase price of such notes was approximately $15.1 million. A total of $85
million of such notes were issued. An affiliate of the General Partner also made
an investment in the Notes of the Claridge Corporation. In August 1999, the
Claridge Corporation announced that it had filed a voluntary petition under
Chapter 11 of the U.S. Bankruptcy Code to facilitate a financial restructuring.

The Company, the General Partner, and the directors and officers of the
General Partner were in the process of pursuing gaming applications to obtain
licenses from the New Jersey Casino Control Commission. In March 2000, in an
effort to facilitate the consummation of the reorganization process of Greate
Bay and Claridge Hotel, the Company entered into separate agreements to transfer
its interests

II-24

in such entities to an affiliate of the General Partner for $40.5 million, which
is equal to the Company's cost for such Notes. The affiliate of the General
Partner was obligated to sell back to the Company, and the Company was obligated
to repurchase such interests at the same price (together with a commercially
reasonable interest factor), when the appropriate licenses were obtained by the
Company. The Company would also acquire its proportionate share of all sale
proceeds, stock rights, acquired shares and other benefits, if any, that may
have accreted to or obtained in connection with such interests while held by the
affiliate of the General Partner. Subsequent to the transfer, the affiliate of
the General Partner purchased $1.7 million of the Claridge Notes for
approximately $.9 million on the Company's behalf.

In July 2000, the U.S. Bankruptcy Court ruled in favor of the reorganization
plan proposed by affiliates of the General Partner which provided for an
additional investment of $65 million by the Icahn affiliates in exchange for a
46% equity interest, with bondholders (which also includes the Icahn affiliates)
to receive $110 million in new notes and a 54% ownership position. The plan,
which became effective September 29, 2000, provided the Icahn affiliates with a
controlling interest.

In February 2001, the Icahn affiliates sold their entire Claridge
Corporation portfolio ($37.1 million face amount of Claridge Notes) for the
following additional interest in GB Holdings, Inc. ('GB Holdings'): (i) 779,861
common shares of GB Holdings and (ii) $15.96 million face amount of GB Property
First Mortgage Notes ('GB Notes'), plus $21.56 million in cash. The Company
recognized a gain of approximately $1.3 million as a result of this sale in the
year ended December 31, 2001. As a result, affiliates of the General Partner
were, in effect, holding on behalf of the Company (i) approximately 3.6 million
common shares of GB Holdings and (ii) $26.9 million face amount of GB Notes, to
which the Company would become entitled and obligated to purchase when it was
fully licensed. As of February 2001, the Company no longer had any interests in
the Claridge.

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 the 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 $68.8 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, $5,306,000 and
$3,595,000 for the years ended December 31, 2002, 2001, and 2000, respectively,
has been included in 'Interest expense' in the Consolidated Statements of
Earnings. 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.

For accounting purposes, the Company reflects its interest in the GB Notes
as held to maturity. The Company's corresponding obligations to repurchase its
interests in the GB Property, including interest, was included in 'Due to
Affiliates' in the Consolidated Balance Sheets and totalled $68.8 million at
December 31, 2001.

The Company reflects it pro rata equity interest in Greate Bay as 'Equity
interest in GB Holdings, Inc.' in the Consolidated Balance Sheets (See Note 8).

b. At December 31, 2002 and 2001, the Company owned the following
approximate interests in Philip Service Corporation ('Philips'): (i) 1.8 million
common shares, (ii) $14.2 million in secured term debt, and (iii) $10.9 million
in accreted secured convertible payment-in-kind debt. The Company has an
approximate 7% equity interest in Philips and an Icahn affiliate has an
approximate 38% equity interest. Icahn affiliates also own term and
payment-in-kind debt.

The secured term debt matures March 31, 2005 and bears interest at 9% per
annum. Interest is payable quarterly, in arrears, beginning July 1, 2000. The
secured convertible payment-in-kind debt

II-25

matures March 31, 2005 and bears interest at 10% per annum. Interest is accreted
quarterly with interest on the accreted interest also calculated at the rate of
10% per annum.

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 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 year ended December 31, 2002.
This investment had been previously written down by approximately $6.8 million
in charges to earnings. The Company's adjusted carrying value of Philip's common
stock is approximately $200,000 at December 31, 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 reclassified at their original cost to
'Mortgages and notes receivable' at December 31, 2002. These adjustments had no
effect on the Company's reported earnings for the year ended December 31, 2002
(See Note 10).

8. EQUITY INTEREST IN GB HOLDINGS, INC.

The Company reflects its pro rata equity interest in GB Holdings, Inc.,
which is approximately 36%, under this caption in the Consolidated Balance
Sheets. 'Equity in the earnings (losses) of GB Holdings, Inc.' of $.3 million,
$1.8 million and ($2.1 million) have been recorded in the Consolidated
Statements of Earnings in the years ended December 31, 2002, 2001 and 2000,
respectively (See Note 7).

9. HOTEL AND CASINO OPERATING PROPERTY

In September 2000, Stratosphere Corp.'s Board of Directors approved a going
private transaction proposed by the Company and an affiliate of Icahn. On
February 1, 2001 the Company entered into a merger agreement with Stratosphere
Corp. ('Stratosphere') under which the Company would acquire the remaining
shares of Stratosphere that it did not currently own. The Company owned
approximately 51% of Stratosphere and Carl C. Icahn owned approximately 38.6%.
The Company, subject to certain conditions, agreed to pay approximately $44.3
million for the outstanding shares of Stratosphere not currently owned by it.
Stratosphere stockholders not affiliated with Icahn would receive a cash price
of $45.32 per share and Icahn related stockholders would receive a cash price of
$44.33 per share. This transaction was completed in December 2002 after
shareholders' approval.

The acquisition by the Company of the minority shares not owned by an Icahn
affiliate has been 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
has been recorded at historical cost. The excess of the historical cost over the
amount of the cash disbursed, which amounted to $21,151,000, has been accounted
for as a net addition to the General Partner's equity.

Stratosphere has invested approximately $95 million for the construction of
an additional 1,000 hotel rooms and related amenities and to purchase the
leasehold interest in the shopping center located on its premises. The
improvements were substantially completed in June 2001.

II-26

Stratosphere's property and equipment consist of the following as of
December 31, 2002 and 2001 (in $000's):

Included in property and equipment at December 31, 2001 are assets recorded
under capital leases of $17.2 million. Accumulated depreciation and amortization
at December 31, 2001 was $11.6 million.

Stratosphere's operations for the years ended December 31, 2002, 2001 and
2000 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 $13,328,000, $11,257,000 and
$8,582,000 of depreciation and amortization for the years ended December 31,
2002, 2001 and 2000, respectively. Such amounts have been included in
'Depreciation and amortization expense' in the Consolidated Statements of
Earnings.

10. 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. On November 30, 2000, the Company entered into a mezzanine loan agreement
to fund $23 million in two tranches to an unaffiliated borrower. The funds were
to be used for certain initial development costs associated with a 65 unit
condominium property located at 931 1st Avenue in New York City. The first
tranche of $10 million was funded on November 30, 2000 and provided for interest
accruing at a rate of 25% per annum, with principal and interest due at
maturity, May 29, 2003. Also, in November 2000, approximately $3.7 million of
the second tranche of the loan was funded. The balance of approximately $9.3
million was funded in installments during 2001. The second tranche provided for
interest accruing at a rate of 21.5% per annum with principal and interest due
at maturity, November 29, 2002. The loans were payable at anytime from the
proceeds of unit sales after satisfaction of senior debt of approximately $45
million. The loans were secured by the pledge of membership interests in the
entity that owns the real estate. In May 2002, the Company received
approximately $31.3 million for prepayment of the mezzanine loans. The balance
of the prepayment of $8.3 million represented accrued interest ($7.9 million)
and exit fees ($.4 million) which amounts were recognized as 'Interest income on
U.S. Government and Agency obligations and other investments' and 'Other

II-27

income' respectively, in the Consolidated Statements of Earnings for the year
ended December 31, 2002.

b. At December 31, 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. Both loans have an
interest rate of 22% per annum compounded monthly. The Peninsula loan, for a
Florida condominium development, has a term of 24 months from date of funding,
February 2002, with 2 six month extensions. The Alex Hotel loan, for a New York
City hotel with approximately 200 rooms, has a term of 36 months from the
closing date, April 2002 . At December 31, 2002, accrued interest of
approximately $4.1 million has been deferred for financial statement purposes
pending receipt of principal and interest payments in connection with these
loans. Origination fees of $3.0 million have been received in connection with
one of the mezzanine loans and approximately $1.1 million has been recognized as
'Other income' in the Consolidated Statements of Earnings in the year ended
December 31, 2002. In February 2003, the Company funded the Hampton mezzanine
loan for approximately $30 million on a Florida condominium development. The
loan is due in 18 months with 1 six month extension and has an interest rate of
22% per annum compounded monthly. The Company has committed to fund an
additional $15 million if required by the borrower to complete the project.

c. See Note 7.

11. NOTE RECEIVABLE DUE FROM 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 two-year $250 million loan to Mr. Icahn, secured by securities
consisting of (i) 21,136,044 and 8,073,466 of the Company's depositary units and
preferred units, respectively, owned by Mr. Icahn, such units having an
aggregate market value on that date of $250 million and (ii) shares of a private
company owned by Mr. Icahn, which shares were represented to 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 loan bears interest at a per annum rate equal to the
greater of (i) 3.9% and (ii) 200 basis points over 90 day LIBOR to be reset each
calendar quarter. Interest is payable semi-annually and is paid up to date. The
loan must be prepaid in an amount of up to $125 million to the extent that the
Company needs such funds for an investment opportunity and may be prepaid at any
time by Mr. Icahn. 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. The terms of this transaction were reviewed and
approved by the Audit Committee. Approximately $9,968,000 and $135,000 of
interest income was recorded in the years ended December 31, 2002 and 2001,
respectively, and is included in 'Interest income on U.S. Government and Agency
obligations and other investments' in the Consolidated Statements of Earnings.

12. HOTEL AND RESORT OPERATING PROPERTIES

a. The Company owns a hotel and resort property that is part of a master
planned community situated in the town of Mashpee located on Cape Cod in
Massachusetts. This property includes two golf courses, other recreational
facilities, condominium and time share units and land for future development.

Total initial costs of approximately $28 million were classified as follows:
approximately $17.4 million as 'Hotel and resort properties', $8.9 million as
'Land and construction-in-progress' and $1.7 million as 'Other assets' on the
Consolidated Balance Sheet.

Resort operations have been included in the 'Hotel and resort operating
income and expenses' in the Consolidated Statements of Earnings. Net hotel and
resort operations ('hotel and resort operating income' less 'hotel and resort
operating expenses') resulted in income of approximately $1,909,000, $712,000,
and $907,000 for the years ended December 31, 2002, 2001, and 2000,
respectively. Hotel and resort operating expenses include all expenses except
for approximately $1,833,000, $970,000, and $931,000 of depreciation and
amortization for each of the years ended December 31, 2002, 2001 and

II-28

2000, respectively, which is included in its respective captions in the
Consolidated Statements of Earnings.

In the year ended December 31, 2001, the Company made improvements to the
golf course and built a new clubhouse that totalled approximately $13.4 million.

Resort operations are highly seasonal in nature with peak activity occurring
from June to September.

b. The Company owns a hotel located in Miami, Florida which has a carrying
value of approximately $6.3 and $5.4 million at December 31, 2002 and 2001,
respectively, and is unencumbered by any mortgages. Approximately $1.3 million
of capital improvements were completed in the year ended December 31, 2002.

The Company has a management agreement for the operation of the hotel with a
national management organization. Net hotel and resort operations ('hotel and
resort operating revenues' less 'hotel and resort operating expenses') totaled
approximately $404,000, $770,000, and $614,000 for the years ended December 31,
2002, 2001 and 2000, respectively. The renovations incurred during 2002 had a
negative impact on the net operating income. Hotel and resort operating expenses
include all expenses except for approximately $374,000, $512,000 and $602,000 of
depreciation for the years ended December 31, 2002, 2001 and 2000, respectively.
These amounts are included in their respective captions in the Consolidated
Statements of Earnings.

13. SIGNIFICANT PROPERTY TRANSACTIONS

Information on significant property transactions during the three-year
period ended December 31, 2002 is as follows:

a. On March 30, 2000, the Company acquired a five-story multi-tenant
office building located in Alexandria, VA for approximately $27.5 million
cash. The building, which had been renovated, has approximately 140,000
square feet of rentable space and is 97.8% occupied. Lease terms range from
5 - 12 years with lease expirations ranging from December 2004 to March
2011. Annual net operating income has been approximately $2.8 million since
inception. See Note 14a for mortgage details.

b. On March 31, 2000, the Company entered into a lease cancellation and
termination agreement with the Grand Union Company, a tenant in a Mt. Kisco,
N.Y. distribution center owned by the Company. In accordance with the
agreement, the Company paid $1.15 million to the tenant to cancel the lease
(which had an annual rental of approximately $900,000) to obtain control of
the property. The lease cancellation payment has been capitalized in 'Real
estate leases accounted for under the operating method' in the Consolidated
Balance Sheets.

At December 31, 2002, the property, which is vacant, had a carrying
value of approximately $7,934,000. The mortgage balance of approximately
$4,137,000 was repaid in August 2000.

c. 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.

At December 31, 2002, the property had a carrying value of approximately
$16,166,000 and was encumbered by a non-recourse mortgage in the amount of
$12,700,000.

d. In October 2002, the Company sold a property located in North Palm
Beach, Florida for a selling price of $3.5 million. A gain of approximately
$2.4 million was recognized in the year ended December 31, 2002.

II-29

14. MORTGAGES PAYABLE

Mortgages payable, all of which are nonrecourse to the Company, are
summarized as follows (in $000's):

The following is a summary of the anticipated future principal payments of
the mortgages:

a. On August 22, 2000, the Company executed a mortgage loan and obtained
funding in the principal amount of $19.6 million, which is secured by a mortgage
on a five story multi-tenant office building located in Alexandria, VA. The loan
bears interest at 8.43% per annum and matures September 2012, at which time the
remaining principal balance of approximately $14.9 million will be due. Annual
debt service is approximately $1,883,000.

b. See Note 13 c.

15. RIGHTS OFFERINGS

a. A registration statement relating to the 1995 Rights Offering (the '1995
Offering') was filed with the Securities and Exchange Commission and declared
effective February 23, 1995.

On March 1, 1995, the Company issued to record holders of its Depositary
Units one transferable subscription right (a 'Right'), for each seven Depositary
Units of the Company held on February 24, 1995, the record date. The Rights
entitled the holders thereof (the 'Rights Holders') to acquire during the
subscription period at a subscription price of $55, six Depositary Units and one
5% cumulative pay-in-kind redeemable preferred unit representing a limited
partner interest ('Preferred Units'). The subscription period commenced on
March 1, 1995 and expired at the close of business on March 30, 1995.

The Preferred Units have certain rights and designations, generally as
follows. Each Preferred Unit has a liquidation preference of $10.00 and entitles
the holder thereof to receive distributions thereon, payable solely in
additional Preferred Units, at the rate of $.50 per Preferred Unit per annum
(which is equal to a rate of 5% of the liquidation preference thereof), payable
annually on March 31 of each year (each, a 'Payment Date'). On any Payment Date
commencing with the Payment Date on March 31, 2000, the Company with the
approval of the Audit Committee of the Board of Directors of the General Partner
may opt to redeem all, but not less than all, of the Preferred Units for a
price, payable either in all cash or by issuance of additional Depositary Units,
equal to the liquidation preference of the Preferred Units, plus any accrued but
unpaid distributions thereon. On March 31, 2010, the Company must redeem all,
but not less than all, of the Preferred Units on the same terms as any optional
redemption.

II-30

On April 12, 1995, the Company received approximately $108.7 million, the
gross proceeds of the 1995 Offering, from its subscription agent and a capital
contribution of approximately $2.2 million from its General Partner. The Company
issued 1,975,640 Preferred Units and an additional 11,853,840 Depositary Units.
Trading in the Preferred Units commenced March 31, 1995 on the New York Stock
Exchange ('NYSE') under the symbol 'ACP PR'. The Depositary Units trade on the
NYSE under the symbol 'ACP'.

b. In September 1997, the Company completed its 1997 Rights Offering (the
'1997 Offering') to holders of its Depositary Units. The aggregate amount raised
in the 1997 Rights Offering was approximately $267 million, which is expected to
be used primarily for additional investment opportunities. The Preferred and
Depositary Units issued under the 1997 Rights Offering carry the same rights and
designations as those issued in 1995.

On September 25, 1997 the Company received approximately $267 million, the
gross proceeds of the 1997 Offering, from its subscription agent and a capital
contribution of approximately $5.4 million from its General Partner. Expenses
incurred in connection with the 1997 Offering were approximately $400,000. The
Company issued an additional 5,132,911 Preferred Units and 20,531,644 Depositary
Units. The Preferred and Depositary Units trade on the New York Stock Exchange
under the symbols 'ACP PR' and 'ACP', respectively.

On March 31, 2002, the Company distributed 444,332 Preferred Units to
holders of record as of March 15, 2002. On March 31, 2001, the Company
distributed 423,172 Preferred Units to holders of record as of March 15, 2001.
As of December 31, 2002 and 2001, 9,330,963 and 8,886,631 Preferred Units,
respectively, are issued and outstanding.

At December 31, 2002, affiliates of the General Partner owned 8,073,466
Preferred Units and 39,706,836 Depositary Units.

16. INCOME TAXES (IN $000'S)

b. Stratosphere Corporation --

Stratosphere recorded a provision for income taxes of $2,412, $378 and
$2,772 in the years ended December 31, 2002, 2001 and 2000, respectively,
which has been included in 'Hotel and casino operating expenses' in the
Consolidated Statements of Earnings.

The tax effect of significant differences representing deferred tax
assets and liabilities (the difference between financial statement carrying
values and the tax basis of assets and liabilities) for the Company is as
follows at December 31:

Stratosphere recorded a valuation allowance at December 31, 2002 and
2001 relating to recorded tax benefits because of the significant
uncertainty as to whether such benefits will ever be realized.

II-31

SFAS 109 requires a 'more likely than not' criterion be applied when
evaluating the realizability of a deferred tax asset. Given Stratosphere's
history of losses for income tax purposes, the volatility of the industry
within which Stratosphere operates, and certain other factors, Stratosphere
has established a valuation allowance principally for the deductible
temporary differences, including the excess of the tax basis of
Stratosphere's assets over the basis of such assets for financial purposes,
which may not be realizable in future periods. After application of the
valuation allowance, Stratosphere's net deferred tax assets and liabilities
are zero. In the event that Stratosphere recognizes, in subsequent years,
the tax benefit of any deferred tax asset that existed on the date the
reorganization became effective, such tax benefit will be reported as a
direct addition to contributed capital.

17. QUARTERLY FINANCIAL DATA (UNAUDITED) (IN $000'S, EXCEPT PER UNIT DATA)

Net earnings per unit is computed separately for each period and, therefore,
the sum of such quarterly per unit amounts may differ from the total for the
year.

18. SEGMENT REPORTING

The Company is engaged in five operating segments consisting of the
ownership and operation of (i) rental real estate (ii) hotel and resort
operating properties (iii) hotel and casino operating property (iv) property
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.

Non-segment revenue to reconcile to total revenue consists primarily of
interest income on treasury bills and other investments. Non-segment assets to
reconcile to total assets includes investment in U.S. Government and Agency
obligations, cash and cash equivalents, receivables and other assets.

The accounting policies of the segments are the same as those described in
Note 2.

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

II-32

The revenues, net earnings, assets and real estate investment capital
expenditures for each of the reportable segments are summarized as follows for
the years ended and as of December 31, 2002, 2001, and 2000 (in $000's):

(table continued on next page)
- ---------

(1) Primarily interest income on U.S. Government and Agency obligations and
other short-term investments.

II-33

(table continued from previous page)

19. COMMITMENTS AND CONTINGENCIES

a. In October 2000, Stratosphere Corp. settled the litigation regarding
rental of its retail space and acquired the leasehold interest to the shopping
center located on its premises for approximately $12.5 million.

b. In January 2001, Stratosphere Gaming Corp. ('Stratosphere Gaming'), a
wholly-owned subsidiary of 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 tower until the property fully
complies with the ADA. Stratosphere Gaming 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 Gaming's Motion to Dismiss the plaintiffs' state
law claims, leaving in place only the ADA claims. Stratosphere Gaming 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 had already commenced these
renovations prior to the Court Order and completed these renovations in June
2002.

In May, 2001, Stratosphere was named in an action brought by Harrah's
Entertainment, Inc. alleging infringement of a purported patent covering a
business method allegedly developed by Harrah's. The use of an allegedly similar
business method by Stratosphere in its advertising and promotions is said by
plaintiff to infringe upon its patent rights. In January 2002, the parties
entered into a sealed Consent Judgement resolving the dispute which was the
subject matter of this action.

c. 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. Three of the
rejected properties have been classified as available for sale. The Company
recorded a provision for loss of approximately $1.9 million on the four
properties, whose leases were rejected, for the year ended December 31, 2001.
The Company has not been notified regarding the three remaining leases
representing approximately $661,000 in annual rents. At December 31, 2002, the
carrying value of the

II-34

seven properties was approximately $6,529,000 which management believes is less
than the estimate of net realizable value.

d. 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, of which $195,953 and $371,973 were disbursed to
Tiffiny and Great Western in 2002, respectively, is properly due and payable to
satisfy all claims for the work performed, including the claim by Tiffiny. 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.

The General Partner monitors all tenant bankruptcies and defaults and may,
when it deems it necessary or appropriate, establish additional reserves for
such contingencies.

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 Company's consolidated
financial statements taken as a whole.

20. FAIR VALUE OF FINANCIAL INSTRUMENTS

CASH AND CASH EQUIVALENTS, RECEIVABLES, NOTE RECEIVABLE DUE FROM AFFILIATE,
ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES

The carrying amount of cash and cash equivalents, receivables, note
receivable due from affiliate, and accounts payable, accrued expenses and other
liabilities are carried at cost, which approximates their fair value.

MORTGAGES AND NOTES RECEIVABLE

The fair values of the mortgages and notes receivable past due, in process
of foreclosure, or for which foreclosure proceedings are pending, are based on
the discounted cash flows of the underlying lease. The fair values of the
mortgages and notes receivable satisfied after year end are based on the amount
of the net proceeds received.

The fair values of the mortgages and notes receivable which are current are
based on the discounted cash flows of their respective payment streams.

II-35

The approximate estimated fair values of the mortgages and notes receivable
held as of December 31, 2002 and 2001 are summarized as follows (in $000's):

The net investment at December 31, 2002 and 2001 is equal to the carrying
amount of the mortgage receivable less any deferred income recorded.

MORTGAGES PAYABLE

The approximate estimated fair values of the mortgages payable as of
December 31, 2002 and 2001 are summarized as follows (in $000's):

LIMITATIONS

Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.

21. EMPLOYEE BENEFIT PLANS

a. Employees of the Company who are members of various unions are covered by
union-sponsored, collectively bargained, multi-employer health and welfare and
defined benefit pension plans. The Company recorded expenses for such plans of
approximately $6,500,000, $4,900,000 and $4,600,000 for the years ended December
31, 2002, 2001 and 2000, respectively. Sufficient information is not available
from the plans' sponsors to permit the Company to determine the adequacy of the
plans' funding status.

b. The Company has retirement savings plans under Section 401(k) of the
Internal Revenue Code covering its non-union employees. The plans allow
employees to defer, within prescribed limits, up to 15% of their income on a
pre-tax basis through contributions to the plans. The Company currently matches,
within prescribed limits, up to 6% of eligible employees' compensation at rates
ranging from 33 1/3% to 50%. The Company recorded charges for matching
contributions of approximately $433,000, $477,000, and $355,000 for the years
ended December 31, 2002, 2001 and 2000, respectively.

22. REPURCHASE OF DEPOSITARY UNITS

The Company has previously been authorized to repurchase up to 1,250,000
Depositary Units. As of December 31, 2002, the Company has purchased 1,137,200
Depositary Units at an aggregate cost of approximately $11,921,000.

23. SUBSEQUENT EVENTS

Pursuant to the terms of the Preferred Units, on February 21, 2003, 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 is payable March 31, 2003 to holders of record as of March
14, 2003. In addition, the Company increased the number of authorized Preferred
Units to 9,900,000.

ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.

None

II-36

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF AREP.

The names, offices held and the ages of the directors and executive officers
of the General Partner are as follows:

Carl C. Icahn has been Chairman of the Board of the General Partner since
November 15, 1990. He is also President and a Director of Starfire Holding
Corporation (formerly Icahn Holding Corporation), a Delaware corporation ('SHC')
and Chairman of the Board and a Director of various of SHC's subsidiaries,
including ACF Industries, Incorporated, a New Jersey corporation ('ACF'). SHC is
primarily engaged in the business of holding, either directly or through
subsidiaries, a majority of the common stock of ACF and its address is 100 South
Bedford Road, Mount Kisco, New York 10549. Mr. Icahn has also been Chairman of
the Board of Directors of ACF since October 29, 1984 and a Director of ACF since
June 29, 1984. ACF is a railroad freight and tank car leasing, sales and
manufacturing company. He has also been Chairman of the Board of Directors and
President of Icahn & Co., Inc. since 1968. Icahn & Co., Inc. is a registered
broker-dealer and a member of the National Association of Securities Dealers.
ACF and Icahn & Co., Inc. are deemed to be directly or indirectly owned and
controlled by Carl C. Icahn. In January 2003, Mr. Icahn became Chairman of the
Board and a Director of XO Communications Inc., a telecommunications company.
Mr. Icahn has been a Director of Cadus Pharmaceutical Corporation, a firm which
holds various biotechnology patents, since 1993. Since October 1998, Mr. Icahn
has been the President and a Director of Stratosphere Corporation which operates
the Stratosphere Hotel and Casino. Since September 29, 2000, Mr. Icahn has also
served as the Chairman of the Board of GB Holdings, Inc., GB Property Funding,
Inc. and Greate Bay Hotel & Casino, Inc. which owns and operates the Sands
Hotel. Mr. Icahn also has substantial equity interests in and controls various
partnerships and corporations that invest in publicly traded securities.

William A. Leidesdorf has served as Director of the General Partner since
March 26, 1991. Since June 1997, Mr. Leidesdorf has been an owner and a managing
director of Renaissance Housing, LLC, a company primarily engaged in acquiring
multifamily residential properties. From April 1995 through December 1997, Mr.
Leidesdorf acted as an independent real estate investment banker. From
January 1, 1994 through April 1995, Mr. Leidesdorf was Managing Director of RFG
Financial, Inc., a commercial mortgage company. From September 30, 1991 to
December 31, 1993, Mr. Leidesdorf was Senior Vice President of Palmieri Asset
Management Group. From May 1, 1990 to September 30, 1991, Mr. Leidesdorf was
Senior Vice President of Lowe Associates, Inc., a real estate development
company, where he was involved in the acquisition of real estate and the asset
management workout and disposition of business areas. He also acted as the
Northeast Regional Director for Lowe Associates, Inc. From June 1985 to
January 30, 1990, Mr. Leidesdorf was Senior Vice President and stockholder of
Eastdil Realty, Inc., a real estate company, where he was involved in the asset
management workout, disposition of business and financing areas. During the
interim period from January 30, 1990 through May 1, 1990, Mr. Leidesdorf was an
independent contractor for Eastdil Realty, Inc. on real estate matters.

III-1

On June 12, 2001, James L. Nelson, was elected to the Board of Directors of
the General Partner. Since March 1998, Mr. Nelson has been Chairman and Chief
Executive Officer of Orbit Aviation, Inc., a company engaged in the acquisition
and completion of Boeing 737 Business Jets for private and corporate clients.
From 1986 until the present, Mr. Nelson has been Chairman and Chief Executive
Officer of Eaglescliff Corporation, a specialty investment banking, consulting
and wealth management company. From August 1995 until July 1999 he was Chief
Executive Officer and Co-Chairman of Orbitex Management, Inc. and until
March 2001 he was on the Board of Orbitex Financial Services Group, a financial
services company in the mutual fund sector. From January 1994 until August 1995
Mr. Nelson and Eaglescliff Corporation were affiliated with Rosecliff Inc., a
leveraged buyout firm. From January 1992 until August 1994 Mr. Nelson was
President of AVIC, Inc., a company involved in financing and building telecom
systems in China and creating network connectivity devices.

Jack G. Wasserman has served as a Director of the General Partner since
December 3, 1993. Mr. Wasserman is an attorney and a member of the New York
State Bar and has been with the New York based law firm of Wasserman, Schneider
& Babb since 1966, where he is currently a senior partner. Mr. Wasserman also
serves as a director of Cadus Pharmaceutical Corporation, a public biotechnology
company. In addition, in 1998 Mr. Wasserman was appointed to the Board of
Directors of National Energy Group, Inc., an independent public energy company
primarily engaged in the acquisition, exploitation, development, exploration and
production of oil and natural gas. In addition, at the direction of the Nevada
State Gaming Control Board, Mr. Wasserman sits as a member of the Compliance
Committee of the Stratosphere Hotel and Casino, Inc. Mr. Wasserman is not a
member of the Board of Directors of Stratosphere Hotel and Casino, Inc.

Albo J. Antenucci, Jr has served as President and Chief Executive Officer of
the General Partner since August 30, 2002. Mr. Antenucci served as Executive
Vice President and Chief Operating Officer of the General Partner from
March 23, 2000 until August 29, 2002. Mr. Antenucci was Executive Vice President
of Bayswater Realty and Capital Corp. from January 1996 until March 22, 2000.
Mr. Antenucci was also Vice President of Bayswater from June, 1989 until
January, 1996.

Martin L. Hirsch has served as a Vice President of the General Partner since
1991, focusing on investment, management and disposition of real estate
properties and other assets. On March 23, 2000, Mr. Hirsch was elected to serve
as Executive Vice President and Director of Acquisitions and Development of the
General Partner. From January, 1986 to January, 1991, Mr. Hirsch was a Vice
President of Integrated Resources, Inc. where he was involved in the acquisition
of commercial real estate properties and asset management. In 1985 and 1986, Mr.
Hirsch was a Vice President of Hall Financial Group where he was involved in
acquiring and financing commercial and residential properties. Mr. Hirsch has
served as a Director of Stratosphere Corporation since October 14, 1998. In
1998, Mr. Hirsch was appointed to the Board of Directors of National Energy
Group, Inc., an independent public energy company primarily engaged in the
acquisition, exploitation, development, exploration and production of oil and
natural gas. Mr. Hirsch has served as Director of GB Holdings, Inc. and GB
Property Funding, Inc. since September 29, 2000 and Director of Greate Bay Hotel
& Casino, Inc., which owns and operates the Sands Hotel in Atlantic City, NJ,
since February 28, 2001.

John P. Saldarelli has served as Vice President, Secretary and Treasurer of
the General Partner since March 18, 1991 and in June 2000, Mr. Saldarelli was
given the additional title of Chief Financial Officer. Mr. Saldarelli was
President of Bayswater Realty Brokerage Corp. from June 1987 until November 19,
1993, and Vice President of Bayswater Realty & Capital Corp. from
September 1979 until April 15, 1993. Mr. Saldarelli has served as a Director of
Stratosphere since October 14, 1998. Since February 28, 2001, Mr. Saldarelli has
served as a Director of GB Holdings, Inc., GB Property Funding, Inc. and Greate
Bay Hotel & Casino, Inc., which owns and operates the Sands Hotel in Atlantic
City, NJ.

James L. Nelson, William A. Leidesdorf and Jack G. Wasserman are on the
Audit Committee of the Board of Directors of the General Partner. AREP believes
that the Audit Committee members are 'independent' as defined in the currently
applicable listing standards of the New York Stock Exchange.

Each executive officer and director will hold office until the next annual
meeting of the General Partner and until his or her successor is elected and
qualified. Directors who are also Audit Committee members receive quarterly fees
of $6,250 and may receive additional compensation for Special

III-2

Committee assignments. Messrs. Leidesdorf, Nelson and Wasserman each received
$40,000 of such fees in 2002.

Each of the executive officers of the General Partner may perform services
for other affiliates of the General Partner.

There are no family relationships between or among any of the directors
and/or executive officers of the General Partner.

If distributions (which are payable in kind) are not made to the holders of
Preferred Units on any two Payment Dates (which need not be consecutive), the
holders of more than 50% of all outstanding Preferred Units, including the
General Partner and its affiliates, voting as a class, will be entitled to
appoint two nominees for the Board of Directors of the General Partner. Holders
of Preferred Units owning at least 10% of all outstanding Preferred Units,
including the General Partner and its affiliates to the extent that they are
holders of Preferred Units, may call a meeting of the holders of Preferred Units
to elect such nominees. Once elected, the nominees will be appointed to the
Board of Directors of the General Partner by Icahn. As directors, the nominees
will, in addition to their other duties as directors, be specifically charged
with reviewing all future distributions to the holders of the Preferred Units.
Such additional directors shall serve until the full distributions accumulated
on all outstanding Preferred Units have been declared and paid or set apart for
payment. If and when all accumulated distributions on the Preferred Units have
been declared and paid or set aside for payment in full, the holders of
Preferred Units shall be divested of the special voting rights provided by the
failure to pay such distributions, subject to revesting in the event of each and
every subsequent default. Upon termination of such special voting rights
attributable to all holders of Preferred Units with respect to payment of
distributions, the term of office of each director nominated by the holders of
Preferred Units (the 'Preferred Unit Directors') pursuant to such special voting
rights shall terminate and the number of directors constituting the entire Board
of Directors shall be reduced by the number of Preferred Unit Directors. The
holders of the Preferred Units have no other rights to participate in the
management of AREP and are not entitled to vote on any matters submitted to a
vote of the holders of Depositary Units.

FILING OF REPORTS

To the best of AREP's knowledge, no director, executive officer or
beneficial owner of more than 10% of AREP's Depositary Units failed to file on a
timely basis reports required by 'SS'16(a) of the Securities Exchange Act of
1934, as amended, during the year ended December 31, 2002.

ITEM 11. EXECUTIVE COMPENSATION.(1)

The following table sets forth information in respect of the compensation of
the Chief Executive Officer and each of the other most highly compensated
executive officers of AREP for services in all capacities to AREP for the fiscal
years ended December 31, 2002, 2001, 2000.(2)

SUMMARY COMPENSATION TABLE

(footnotes on next page)

III-3

(footnotes from previous page)

(1) Pursuant to applicable regulations, certain columns of the Summary
Compensation Table and each of the remaining tables have been omitted, as
there has been no compensation awarded to, earned by or paid to any of the
named executive officers by AREP or by the General Partner, which was
subsequently reimbursed by AREP, required to be reported in those columns or
tables.

(2) Carl C. Icahn, the Chairman of the Board, received no compensation as such
for the periods indicated. In addition, other than Albo J. Antenucci, Jr.,
Martin L. Hirsch and John P. Saldarelli, no other executive officer received
compensation in excess of $100,000 from AREP for the applicable period.

(3) On March 18, 1991, John P. Saldarelli was elected Vice President, Secretary
and Treasurer of the General Partner, and in June 2000, John P. Saldarelli
was given the additional title of Chief Financial Officer. On March 23,
2000, Martin L. Hirsch was elected Executive Vice President and Director of
Acquisitions and Development of the General Partner. On August 30, 2002,
Albo J. Antenucci, Jr. was elected President and Chief Executive Officer of
the General Partner. Messrs. Saldarelli and Hirsch devote all of their time
to the performance of services for AREP and its investments and the General
Partner. Mr. Antenucci devotes a substantial portion of his time to the
performance of services for AREP and Bayswater. The directors of the General
Partner devote only a portion of their time to performance of service for
AREP. In February 1993, AREP adopted a 401K plan pursuant to which AREP will
make a matching contribution to an employee's individual plan account in the
amount of one-third (1/3) of the first six (6%) percent of gross salary
contributed by the employee.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

As of February 28, 2003, affiliates of Icahn, including High Coast Limited
Partnership, a Delaware limited partnership, owned 39,706,836 Depositary Units,
or approximately 86.1% of the outstanding Depositary Units, and 8,073,466
Preferred Units, or approximately 86.5% of the outstanding Preferred Units.

The affirmative vote of Unitholders holding more than 75% of the total
number of all Depositary Units then outstanding, including Depositary Units held
by the General Partner and its affiliates, is required to remove the General
Partner. Thus, since Icahn, through affiliates, holds approximately 86.1% of the
Depositary Units outstanding, the General Partner will not be able to be removed
pursuant to the terms of the Partnership Agreement without Icahn's consent.
Moreover, under the Partnership Agreement, the affirmative vote of the General
Partner and Unitholders owning more than 50% of the total number of all
outstanding Depositary Units then held by Unitholders, including affiliates of
Icahn, is required to approve, among other things, selling or otherwise
disposing of all or substantially all of AREP's assets in a single sale or in a
related series of multiple sales, dissolving AREP or electing to continue AREP
in certain instances, electing a successor general partner, making certain
amendments to the Partnership Agreement or causing AREP, in its capacity as sole
limited partner of the Subsidiary, to consent to certain proposals submitted for
the approval of the limited partners of the Subsidiary. Accordingly, as
affiliates of Icahn hold in excess of 50% of the Depositary Units outstanding,
Icahn, through affiliates, will have effective control over such approval
rights.

The following table provides information, as of February 28, 2003, as to the
beneficial ownership of the Depositary Units and Preferred Units of AREP for
each director of the General Partner, and all directors and executive officers
of the General Partner as a group.

(footnote on next page)

III-4

(footnote from previous page)

(1) Carl C. Icahn, through affiliates, is the beneficial owner of the 39,706,836
Depositary Units set forth above and may also be deemed to be the beneficial
owner of the 2,424 Depositary Units owned of record by API Nominee Corp.,
which in accordance with state law are in the process of being turned over
to the relevant state authorities as unclaimed property; however, Mr. Icahn
disclaims such beneficial ownership. The foregoing is exclusive of a 1.99%
ownership interest in AREP which the General Partner holds by virtue of its
1% General Partner interest in each of AREP and the Subsidiary. Furthermore,
pursuant to a registration rights agreement entered into by affiliates of
Icahn in connection with the 1997 Offering, AREP has agreed to pay any
expenses incurred in connection with two demand and unlimited piggy-back
registrations requested by affiliates of Icahn.

-------------------
As described above, affiliates of Icahn hold 86.1% of the Depositary Units
and 86.5% of the outstanding Preferred Units. Entities directly or indirectly
owned by Icahn that are members of a controlled group for purposes of the
Employee Retirement Income Security Act of 1974, as amended ('ERISA') and
Section 414 of the Internal Revenue Code of 1986, as amended (the 'Code'), which
in general terms includes entities in which there is at least 80% common
ownership, may have joint and several responsibility for various
benefits-related liabilities arising under ERISA and the Code. As a result of
the more than 80% ownership interest in AREP of Icahn and his affiliates, AREP
will be deemed to be included in the same controlled group that includes ACF and
Pichin Corp. ('Pichin'), an affiliate of ACF (the 'Controlled Group').

ERISA and the Code require, among other things, that a contributing sponsor
of a defined benefit pension plan make certain minimum funding contributions to
fund the benefits that participants accrue under the pension plan and make the
sponsor liable for any unfunded benefit liabilities that may exist at
termination. As a member of the Controlled Group, AREP would be jointly and
severally liable with the other members of the Controlled Group for such
potential pension plan minimum funding and termination liabilities. In addition,
upon the failure to make minimum funding contributions in excess of $1 million
when due or pay termination liabilities after demand by the Pension Benefit
Guaranty Corporation (the 'PBGC'), liens in favor of the relevant pension plans
or the PBGC, respectively, would attach to the assets of all members of the
sponsor's controlled group.

ACF and other members of the Controlled Group sponsor several pension plans
(the 'ACF Pension Plans') which (not including the 'TWA Plans,' as defined
below) are underfunded in the aggregate by approximately $14 million on an
ongoing actuarial basis and by approximately $102 million on a termination
basis, in each case as most recently determined by the plans' actuaries. The
liability upon plan termination could be more or less than this amount depending
on future changes in promised benefits, investment returns, the assumptions used
to calculate the liability and the outcome of any litigation relating to the
amount of liability. As a member of the Controlled Group, AREP is jointly and
severally liable for any failure of ACF or any other member of the Controlled
Group to make minimum funding contributions or pay termination liabilities with
respect to the ACF Pension Plans.

Pursuant to a settlement (the 'Settlement') entered into in 1993 by the PBGC
and Trans World Airlines, Inc. ('TWA'), among others, in connection with the
Chapter 11 bankruptcy case of TWA, as amended and revised to date, Pichin became
the sponsor directly liable for minimum funding obligations of the pension plans
for TWA employees (the 'TWA Plans'), which TWA Plans had theretofore been
frozen. As a member of the Controlled Group (which includes Pichin), AREP would
be jointly and severally liable, together with all the other entities in the
Controlled Group, for minimum funding obligations applicable with respect to the
TWA Plans. Effective as of January 1, 2001, pursuant to the Settlement, the
PBGC, at Pichin's request, terminated the TWA Plans. Upon termination of the TWA
Plans, the Settlement provides that termination payments are limited to $30
million per year for eight years commencing eighteen months after the
termination and the PBGC's recourse for those termination payments is limited to
collateral pledged to secure those payments. To date, $75 million of termination
payments have been made, none of which was paid by AREP.

The current underfunded status of the ACF Pension Plans requires ACF and
Pichin to notify the PBGC of certain corporate transactions that are deemed to
be 'reportable events' under ERISA. Such

III-5

reportable events include, among other things, any transaction which would
result in a Controlled Group member's leaving the Controlled Group, and certain
extraordinary dividends and stock redemptions. Thus, any transaction in which
AREP would cease to be a member of the Controlled Group and certain
extraordinary distributions and redemptions with respect to the Units would be
among those that would have to be reported to the PBGC.

Starfire Holding Corporation, a Delaware corporation ('Starfire'), which is
directly 100% owned by Icahn, has undertaken to indemnify AREP from losses
resulting from any imposition of termination or minimum funding liabilities on
AREP or its assets. The Starfire indemnity provides, among other things, that so
long as such contingent liabilities exist and could be imposed on AREP, Starfire
will not make any distributions to its stockholders that would reduce its net
worth to below $250 million.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

RELATED TRANSACTIONS WITH THE GENERAL PARTNER AND ITS AFFILIATES

On December 27, 2001, AREP entered into a transaction with Carl C. Icahn,
Chairman of the Board of the General Partner, pursuant to which AREP made a
two-year $250 million loan to Mr. Icahn, secured by securities consisting of
(i) approximately $250 million aggregate market value of AREP's units owned by
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 AREP units. The loan is due on or before December 27, 2003 and
by law may not be renewed or extended. The loan bears interest, payable
semi-annually, at a per annum rate equal to the greater of (i) 3.9% and
(ii) 200 basis points over 90 day LIBOR to be reset each calendar quarter. The
applicable rates in 2002 ranged from 3.9% to 4.03%. In 2002, pursuant to the
loan agreement Mr. Icahn paid approximately $10.1 million to the Company
representing accrued interest on the loan. The loan must be prepaid in an amount
of up to $125 million to the extent that AREP requests such funds for an
investment opportunity and may be prepaid at any time by Mr. Icahn. AREP entered
into this transaction to earn interest income on a secured investment. In the
event of a loan default, AREP would, at its option, liquidate the shares of the
private company or reacquire its own units, or both, to satisfy the loan. The
terms of this transaction were reviewed and approved by the Audit Committee. See
Item 1 -- 'Recent Acquisitions/Investments' for a discussion of this investment.

In May 2002, the Company was qualified as a holding company by the New
Jersey Casino Control Commission and in accordance with a prior agreement
repurchased its interest in the Sands Hotel and Casino 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 $68.8 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. The terms of this agreement
were reviewed and approved by the Audit Committee.

On December 19, 2002 AREP acquired the remaining 49% of Stratosphere that
AREP did not own. The initial determination to engage in the transaction at the
prices set forth below was previously announced by AREP in September 2000. Under
the merger agreement the stockholders who were unaffiliated with Mr. Icahn
received a cash price of $45.32 per share (approximately $9.6 million) and the
Icahn related stockholders (other than AREP) received a cash price of $44.33 per
share (approximately $34.7 million). AREP paid an aggregate of approximately
$44.3 million for the Stratosphere shares. The terms of the Stratosphere
purchase were reviewed and approved by the Audit Committee. See Item 1. 'Recent
Acquisitions/Investments' for a discussion of AREP's investment in Stratosphere.

A committee of the Board of Directors of the General Partner is considering
the possible acquisition by the Company of interests in National Energy Group,
Inc. and related companies from

III-6

entities owned by Carl C. Icahn. The committee, in consultation with its
advisors, has been engaged in evaluating the possible acquisition. To date, such
evaluation is continuing and no determination has been made by the committee.

Icahn, in his capacity as majority Unitholder, will not receive any
additional benefit with respect to distributions and allocations of profits and
losses not shared on a pro rata basis by all other Unitholders. In addition,
Icahn has confirmed to AREP that neither he nor any of his affiliates will
receive any fees from AREP in consideration for services rendered in connection
with non-real estate related investments by AREP such as advice to purchase and
sell RJR shares which generated approximately $29 million of profits for AREP in
each of 1997 and 1999. AREP may determine to make investments in which Icahn or
his affiliates have independent investments in such assets; in addition, AREP
may enter into other transactions with the General Partner and its affiliates,
including, without limitation, buying and selling assets from or to the General
Partner or its affiliates and participating in joint venture investments in
assets with the General Partner or its affiliates, whether real estate or
non-real estate related, provided the terms of all such transactions are fair
and reasonable to AREP. Furthermore, it should be noted that the Partnership
Agreement provides that the General Partner and its affiliates are permitted to
have other business interests and may engage in other business ventures of any
nature whatsoever, and may compete directly or indirectly with the business of
AREP. Icahn and his affiliates currently invest in and perform investment
management services with respect to assets that may be similar to those AREP may
invest in and intend to continue to do so; pursuant to the Partnership
Agreement, however, AREP shall not have any right to participate therein or
receive or share in any income or profits derived therefrom.

For the years ended December 31, 2002 and 2001, AREP made no payments with
respect to the Depositary Units owned by the General Partner. However, in 2002
and 2001 the General Partner was allocated approximately $1,283,000 and
approximately $1,344,000 respectively, of the net earnings of AREP as a result
of its 1.99% general partner interest in AREP.

On March 31, 2002, Icahn received 384,450 Preferred Units as part of AREP's
scheduled annual preferred unit distribution and is expected to receive an
additional 403,673 Preferred Units in March 2003 as part of such scheduled
annual preferred unit distribution.

In 1997 AREP entered into a license agreement for a portion of office space
from an affiliate of the General Partner. The license agreement dated as of
February 1, 1997 expires May 22, 2004 unless sooner terminated in accordance
with the agreement. Pursuant to the license agreement, AREP has the
non-exclusive use of approximately 3,547 square feet of office space and common
areas (of an aggregate 21,123 rentable square feet sublet by such affiliate) for
which it pays $17,436.20 per month, together with 16.79% of certain 'additional
rent.' In November, 2000, AREP reduced its office size to approximately 2,275
square feet, which decreased its monthly rental to $11,185 plus 10.77% of
certain 'additional rent.' For the years ended December 31, 2002, 2001 and 2000
AREP paid an affiliate of the General Partner approximately $153,000, $147,000
and $206,000, respectively, of rent in connection with this licensing agreement.
The terms of such license agreement were reviewed and approved by the Audit
Committee.

For the years ended December 31, 2002, 2001 and 2000 Stratosphere billed
affiliates of the General Partner approximately $2,872,000, $1,343,000 and
$240,000, respectively, for administrative services performed by Stratosphere
personnel. For the years ended December 31, 2002, 2001 and 2000 Stratosphere
also received hotel revenue of $123,000, $600,000 and $500,000, respectively,
in connection with a tour and travel agreement entered into with an affiliate
of the General Partner.

PROPERTY MANAGEMENT AND OTHER RELATED TRANSACTIONS

The General Partner and its affiliates may receive fees in connection with
the acquisition, sale, financing, development, construction, marketing and
management of new properties acquired by AREP. As development and other new
properties are acquired, developed, constructed, operated, leased and financed,
the General Partner or its affiliates may perform acquisition functions,
including the review, verification and analysis of data and documentation with
respect to potential acquisitions, and perform development and construction
oversight and other land development services, property management

III-7

and leasing services, either on a day-to-day basis or on an asset management
basis, and may perform other services and be entitled to fees and reimbursement
of expenses relating thereto, provided the terms of such transactions are fair
and reasonable to AREP in accordance with the Partnership Agreement and
customary to the industry. It is not possible to state precisely what role, if
any, the General Partner or any of its affiliates may have in the acquisition,
development or management of any new investments. Consequently, it is not
possible to state the amount of the income, fees or commissions the General
Partner or its affiliates might be paid in connection therewith since the amount
thereof is dependent upon the specific circumstances of each investment,
including the nature of the services provided, the location of the investment
and the amount customarily paid in such locality for such services. However,
Unitholders may expect that, subject to the specific circumstances surrounding
each transaction and the overall fairness and reasonableness thereof to AREP,
the fees charged by the General Partner and its affiliates for the services
described below generally will be within the ranges set forth below:

Property Management and Asset Management Services. To the extent that AREP
acquires any properties requiring active management (e.g., operating
properties that are not net-leased) or asset management services, including
on site services, it may enter into management or other arrangements with
the General Partner or its affiliates. Generally, it is contemplated that
under property management arrangements, the entity managing the property
would receive a property management fee (generally 3% to 6% of gross
rentals for direct management, depending upon the location) and under asset
management arrangements, the entity managing the asset would receive an
asset management fee (generally .5% to 1% of the appraised value of the
asset for asset management services, depending upon the location) in
payment for its services and reimbursement for costs incurred.

Brokerage and Leasing Commissions. AREP also may pay affiliates of the
General Partner real estate brokerage and leasing commissions (which
generally may range from 2% to 6% of the purchase price or rentals
depending on location; this range may be somewhat higher for problem
properties or lesser-valued properties).

Lending Arrangements. The General Partner or its affiliates may lend money
to, or arrange loans for, AREP. Fees payable to the General Partner or its
affiliates in connection with such activities include mortgage brokerage
fees (generally .5% to 3% of the loan amount), mortgage origination fees
(generally .5% to 1.5% of the loan amount) and loan servicing fees
(generally .10% to .12% of the loan amount), as well as interest on any
amounts loaned by the General Partner or its affiliates to AREP.

Development and Construction Services. The General Partner or its
affiliates may also receive fees for development services, generally 1% to
4% of development costs, and general contracting services or construction
management services, generally 4% to 6% of construction costs.

AREP may also enter into other transactions with the General Partner and its
affiliates, including, without limitation, buying and selling properties and
borrowing and lending funds from or to the General Partner or its affiliates,
joint venture developments and issuing securities to the General Partner or its
affiliates in exchange for, among other things, assets that they now own or may
acquire in the future, provided the terms of such transactions are fair and
reasonable to AREP. The General Partner is also entitled to reimbursement by
AREP for all allocable direct and indirect overhead expenses (including, but not
limited to, salaries and rent) incurred in connection with the conduct of AREP's
business.

In addition, employees of AREP may, from time to time, provide services to
affiliates of the General Partner, with AREP being reimbursed therefore.
Reimbursement to AREP by such affiliates in respect of such services is subject
to review and approval by the Audit Committee. In 2002, AREP received
approximately $47,000 for such services. Also, an affiliate of the General
Partner provided certain administrative services to AREP in the amount of
approximately $77,000, $73,000 and $5,000 in the years ended December 31, 2002,
2001, and 2000, respectively.

III-8

The Audit Committee meets on an annual basis, or more often if necessary, to
review any conflicts of interest which may arise, including the payment by AREP
of any fees to the General Partner or any of its affiliates. The General Partner
and its affiliates may not receive duplicative fees.

The functions of AREP's Audit Committee as set forth in the Partnership
Agreement include (i) the review of AREP's financial and accounting policies and
procedures, (ii) the review of the results of audits of the books and records of
AREP made by AREP's outside auditors, (iii) the review of allocations of
overhead expenses in connection with the reimbursement of expenses to the
General Partner and its affiliates, and (iv) the review and approval of related
party transactions and conflicts of interest in accordance with the terms of the
Partnership Agreement.

Pursuant to the Rules of the New York Stock Exchange ('NYSE'), on June 14,
2001, AREP approved and adopted its Audit Committee Charter. On June 12, 2001,
AREP appointed James L. Nelson as the independent director to the Board of
Directors of the General Partner who, along with Messrs. Leidesdorf and
Wasserman, comprise the Audit Committee.

The Audit Committee, has confirmed that: (i) the Audit Committee reviewed
and discussed AREP's 2002 audited financial statements with management,
(ii) the Audit Committee has discussed with AREP's independent auditors the
matters required to be discussed by SAS 61 (Codification of Statements on
Auditing Standards, AU 'SS'380), (iii) the Audit Committee has received the
written disclosures and the letter from the independent accountants required by
Independence Standards Board Standard No. 1, and (iv) based on the review and
discussions referred to in clauses (i), (ii) and (iii) above, the Audit
Committee recommended to the Board of Directors that AREP's 2002 audited
financial statements be included in this Annual Report on Form 10-K.

ITEM 14. 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 and 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.

III-9

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

(a)(1) Financial Statements:

The following financial statements of American Real Estate Partners, L.P.
are included in Part II, Item 8:

(a)(2) Financial Statement Schedules:

All other Financial Statement schedules have been omitted because the
required financial information is not applicable or the information is shown in
the Financial Statements or Notes thereto.

(a)(3) Exhibits:

3.1 -- Certificate of Limited Partnership of AREP, dated
February 17, 1987 (filed as Exhibit No. 3.1 to AREP's
Annual Report on Form 10-K for the year ended
December 31, 1987 and incorporated herein by reference).
3.2 -- Amended and Restated Agreement of Limited Partnership of
AREP, dated as of May 12, 1987 (filed as Exhibit No. 3.2
to AREP's Annual Report on Form 10-K for the year ended
December 31, 1987 and incorporated herein by reference).
3.3 -- Amendment No. 1 to the Amended and Restated Agreement of
Limited Partnership of AREP (filed as Exhibit 3.3 to
AREP's Annual Report on Form 10-K for the year ended
December 31, 1994 and incorporated herein by reference).
3.4 -- Certificate of Limited Partnership of American Real
Estate Holdings Limited Partnership (the 'Subsidiary'),
dated February 17, 1987, and amendment thereto, dated
March 12, 1987 (filed as Exhibit No. 3.3 to AREP's Annual
Report on Form 10-K for the year ended December 31, 1987
and incorporated herein by reference).
3.5 -- Amended and Restated Agreement of Limited Partnership of
the Subsidiary, dated as of July 1, 1987 (filed as Exhibit
No. 3.4 to AREP's Annual Report on Form 10-K for the year
ended December 31, 1987 and incorporated herein by
reference).
3.6 -- Amendment No. 2 to the Amended and Restated Agreement of
Limited Partnership of AREP dated as of August 16, 1996
and filed as Exhibit 10.1 to 8-K filed on August 16, 1996
and incorporated herein by reference.
3.7 -- Amendment No. 1 to the Amended and Restated Agreement of
Limited Partnership of the Subsidiary dated August 16,
1996 filed as Exhibit 10.2 to the 8-K dated August 16,
1996 and incorporated herein by reference.
3.8 -- Amendment No. 3. to the Amended and Restated Agreement of
Limited Partnership of AREP dated May 9, 2002. (attached
hereto as Exhibit No. 3.8)
3.9 -- Amendment No. 2 to the Amended and Restated Agreement of
Limited Partnership of the Subsidiary dated June 14, 2002.
(attached hereto as Exhibit No. 3.9)
4.1 -- Depositary Agreement among AREP, the General Partner and
Registrar and Transfer Company, dated as of July 1, 1987
(filed as Exhibit No. 4.1 to AREP's Annual Report on Form
10-K for the year ended December 31, 1987 and incorporated
herein by reference).

IV-1

4.2 -- Amendment No. 1 to the Depositary Agreement (filed as
Exhibit 4.2 to AREP's Annual Report on Form 10-K for the
year ended December 31, 1994 and incorporated herein by
reference).
4.3 -- Specimen Depositary Receipt (filed as Exhibit No. 4.2 to
AREP's Annual Report on Form 10-K for the year ended
December 31, 1987 and incorporated herein by reference).
4.4 -- Form of Transfer Application (filed as Exhibit No. 4.3 to
AREP's Annual Report on Form 10-K for the year ended
December 31, 1987 and incorporated herein by reference).
4.5 -- Specimen Certificate representing Preferred Units (filed
as Exhibit No. 4.9 to AREP's Registration Statement on
Form S-3 (Registration No. 33-54767) and incorporated
herein by reference).
10.1 -- Nonqualified Unit Option Plan (filed as Exhibit No. 10.1
to AREP's Annual Report on Form 10-K for the year ended
December 31, 1987 and incorporated herein by reference).
10.2 -- Distribution Reinvestment Plan (filed as Exhibit No. 10.3
to AREP's Annual Report on Form 10-K for the year ended
December 31, 1987 and incorporated herein by reference).
10.10 -- Subscription Guaranty Agreement between AREP and High
Coast Limited Partnership (the 'Guarantor') (filed as
Exhibit 4.10 to AREP's Registration Statement on Form S-3
(Registration No. 33-54767) and incorporated herein by
reference).
10.11 -- Registration Rights Agreement between AREP and the
Guarantor (filed as Exhibit 4.11 to AREP's Registration
Statement on Form S-3 (Registration No. 33-54767) and
incorporated herein by reference).
10.12 -- Amended and Restated Agency Agreement (filed as Exhibit
10.12 to AREP's Annual Report on Form 10-K for the year
ended December 31, 1994 and incorporated herein by
reference).
10.13 -- Subscription Agent Agreement (filed as Exhibit 10.13 to
AREP's Annual Report on Form 10-K for the year ended
December 31, 1994 and incorporated herein by reference).
10.14 -- Subscription Guaranty Agreement between AREP and the
Guarantor (filed as Exhibit 4.10 to Amendment No. 1 to
AREP's Registration Statement on Form S-3 (Registration
No. 333-31561) and incorporated herein by reference).
10.15 -- Registration Rights Agreement between AREP and the
Guarantor (filed as Exhibit 4.11 to Amendment No. 1 to
AREP's Registration Statement on Form S-3 (Registration
No. 333-31561) and incorporated herein by reference).
10.16 -- Subscription Agent Agreement filed as Exhibit 99.1 to
AREP's Registration Statement on Form S-3 (Registration
No. 333-31561) and incorporated herein by reference).
10.17 -- Note dated December 27, 2001 from Carl Icahn to American
Real Estate Holdings, L.P. in the amount of $250 million
and incorporated herein by reference.
10.18 -- Pledge Agreement dated December 27, 2001 between American
Real Estate Holdings, L.P. and Carl Icahn and incorporated
herein by reference.
10.19 -- Accommodation Pledge Agreement dated December 27, 2001,
between American Real Estate Holdings, L.P. and various
pledgors and incorporated herein by reference.
16 -- Letter dated September 27, 1991 of Deloitte & Touche
regarding change in accountants (filed as Exhibit No. A to
AREP's Current Report on Form 8-K dated October 3, 1991
and incorporated herein by reference).
22 -- List of Subsidiaries (filed as Exhibit No. 22 to AREP's
Annual Report on Form 10-K for the year ended
December 31, 1987 and incorporated herein by reference).
99.1 -- Audit Committee Charter filed with the NYSE on June 14,
2000 incorporated herein by reference.

(b) Reports on Form 8-K:

(1) A Form 8-K was filed on December 19, 2002 -- American Real Estate
Partners, L.P. Acquires Remaining Interest in Stratosphere Corporation

IV-2

SIGNATURES

Pursuant to the requirements of Section 13 or 15(a) of the Securities
Exchange Act of 1934, AREP has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on the 31st day of March,
2003.

AMERICAN REAL ESTATE PARTNERS, L.P.

By: AMERICAN PROPERTY INVESTORS, INC.
General Partner

By: /s/ ALBO J. ANTENUCCI, JR.
..................................
ALBO J. ANTENUCCI, JR.
PRESIDENT AND CHIEF EXECUTIVE
OFFICER

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of AREP and in
the capacities and on the dates indicated.

AMERICAN REAL ESTATE PARTNERS, L.P.
FORM 10K SIGNATURE PAGE

IV-3

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.,
annual report on Form 10-K for the period ended December 31, 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: March 31, 2003

IV-4

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.
annual report on Form 10-K for the period ended December 31, 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: March 31, 2003

IV-5

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

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

1. I have reviewed the annual report on Form 10-K of American Real Estate
Partners, L.P. for the period ended December 31, 2002, (the 'Report');

2. Based on my knowledge, the 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 the Report;

3. Based on my knowledge, the financial statements, and other financial
information included in the 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 the 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 the 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 the
Report (the 'Evaluation Date'); and

c) presented in the 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 the
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: March 31, 2003 /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.

IV-6

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

I, John P. Saldarelli, certify that:

1. I have reviewed the annual report on Form 10-K of American Real Estate
Partners, L.P. for the period ended December 31, 2002; (the 'Report');

2. Based on my knowledge, the 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 the Report;

3. Based on my knowledge, the financial statements, and other financial
information included in the 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 the 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 the 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 the
Report (the 'Evaluation Date'); and

c) presented in the 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 the
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: March 31, 2003 /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.

IV-7

SCHEDULE III

IV-8

AMERICAN REAL ESTATE PARTNERS, L.P.
A LIMITED PARTNERSHIP
SCHEDULE III
PAGE 1
REAL ESTATE OWNED AND REVENUES EARNED

IV-9

AMERICAN REAL ESTATE PARTNERS, L.P.
A LIMITED PARTNERSHIP
SCHEDULE III
PAGE 2

REAL ESTATE OWNED AND REVENUES EARNED

IV-10

AMERICAN REAL ESTATE PARTNERS, L.P.
A LIMITED PARTNERSHIP
SCHEDULE III
PAGE 3

REAL ESTATE OWNED AND REVENUES EARNED

- -------------------
(1) The Company owns a 70% interest in the joint venture which owns this
property.

IV-11

SCHEDULE III
PAGE 4

AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES
REAL ESTATE OWNED AND REVENUES EARNED
YEAR ENDED DECEMBER 31, 2002 (IN $000'S)

1a. A reconciliation of the total amount at which real estate owned,
accounted for under the operating method and hotel and resort
operating properties, was carried at the beginning of the period, with
the total at the close of the period, is shown below:

Balance -- January 1, 2002.............................. $273,887
Additions during period................................. 20,886
Reclassifications during period from financing leases... 13,503
Write downs............................................. (1,992)
Disposals during period................................. (2,824)
--------
Balance -- December 31, 2002............................ $303,460
--------
--------
b. A reconciliation of the total amount of accumulated depreciation at
the beginning of the period, with the total at the close of the
period, is shown below:
Balance -- January 1, 2002.............................. $ 48,057
Depreciation during period.............................. 7,105
Disposals during period................................. (184)
--------
Balance -- December 31, 2002............................ $ 54,978
--------
--------
Depreciation on properties accounted for under the operating method is
computed using the straight-line method over the estimated useful life
of the particular property or property components, which range from 7
to 45 years.

2. A reconciliation of the total amount at which real estate owned,
accounted for under the financing method, was carried at the beginning
of the period, with the total close of the period, is shown below:
Balance -- January 1, 2002.............................. $176,757
Reclassifications during period......................... (13,503)
Write downs............................................. (257)
Disposals during period................................. (1,560)
Amortization of unearned income......................... 14,722
Minimum lease rentals received.......................... (20,663)
Other................................................... (38)
--------
Balance -- December 31, 2002............................ $155,458
--------
--------
3. The aggregate cost of real estate owned for Federal income tax
purposes is $382,208 before accumulated depreciation.

IV-12

SCHEDULE III
PAGE 5

AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES
REAL ESTATE OWNED AND REVENUES EARNED -- (CONTINUED)
YEAR ENDED DECEMBER 31, 2002 (IN $000'S)

4. Net income applicable to the period in Schedule III is reconciled with
net earnings as follows:
Net income applicable to financing and operating leases
and hotel and resort operating properties............. $ 20,135
Net income applicable to Stratosphere hotel and
casino.................................................. 8,916(1)
Net income applicable to land, house and condominium
sales................................................... 20,384
Add:
Interest income on U.S. Government and Agency
Obligations and other investments................. 30,344
Dividend and unallocated other income............... 2,684
Equity in earnings of GB Holdings, Inc. ............ 305
--------
82,768
--------
Deduct expenses not allocated:
General and administrative expenses................. 7,029
Nonmortgage interest expense........................ 1,272
Other............................................... 1,625
--------
9,926
--------
Earnings before property and securities transactions and
minority interest..................................... 72,842
Provision for loss on real estate....................... (3,212)
Gain on sale of real estate............................. 8,990
Write down of securities................................ (12,226)
Minority interest in net earnings of Stratosphere
Corporation........................................... (1,943)
--------
Net earnings............................................ $ 64,451
--------
--------
----------

(1) Includes depreciation expense

IV-13

SCHEDULE III
PAGE 6

AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES
REAL ESTATE OWNED AND REVENUES EARNED
YEAR ENDED DECEMBER 31, 2001 (IN $000'S)

1a. A reconciliation of the total amount at which real estate owned,
accounted for under the operating method and hotel and resort
operating properties, was carried at the beginning of the period, with
the total at the close of the period, is shown below:

Balance -- January 1, 2001.............................. $262,356
Additions during period................................. 14,586
Reclassifications during period from financing leases... 9,755
Write downs............................................. (3,184)
Reclassifications during period to assets held for
sale.................................................... (8,072)
Other reclassifications................................. (1,130)
Disposals during period................................. (424)
--------
Balance -- December 31, 2001............................ $273,887
--------
--------
b. A reconciliation of the total amount of accumulated depreciation at
the beginning of the period, with the total at the close of the
period, is shown below:
Balance -- January 1, 2001.............................. $ 43,471
Depreciation during period.............................. 6,252
Disposals during period................................. (266)
Reclassifications during period to assets held for
sale.................................................... (1,400)
--------
Balance -- December 31, 2001............................ $ 48,057
--------
--------
Depreciation on properties accounted for under the operating method is
computed using the straight-line method over the estimated life of the
particular property or property components, which range from 5 to 45
years.

2. A reconciliation of the total amount at which real estate owned,
accounted for under the financing method, was carried at the beginning
of the period, with the total at the close of the period, is shown
below:
Balance -- January 1, 2001.............................. $193,428
Reclassifications during period to operating
properties.............................................. (9,755)
Disposals during period................................. (71)
Amortization of unearned income......................... 16,935
Minimum lease rentals received.......................... (23,780)
--------
Balance -- December 31, 2001............................ $176,757
--------
--------
3. The aggregate cost of real estate owned for Federal income tax
purposes is $399,813 before accumulated depreciation.

IV-14

SCHEDULE III
PAGE 7

AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES
REAL ESTATE OWNED AND REVENUES EARNED -- (CONTINUED)
YEAR ENDED DECEMBER 31, 2001 (IN $000'S)

4. Net income applicable to the period in Schedule III is reconciled with
net earnings as follows:
Net income applicable to financing and operating leases
and hotel and resort operating properties............. $ 21,850
Net income applicable to Stratosphere hotel and
casino................................................ 4,628(1)
Net income applicable to land, house and condominium
sales................................................. 12,967
Add:
Interest income on U.S. Government and Agency
Obligations and other investments................. 30,367
Dividend and unallocated other income............... 4,989
Equity in earnings of GB Holdings, Inc. ............ 1,807
--------
76,608
--------
Deduct expenses not allocated:
General and administrative expenses................. 7,080
Non-mortgage interest expense....................... 6,227
Other............................................... 619
--------
13,926
--------
Earnings before gain on property and securities
transactions and minority interest.................... 62,682
Provision for loss on real estate....................... (3,184)
Gain on sale of marketable equity and debt securities... 6,749
Gain on sale of real estate............................. 1,737
Minority interest in net earnings of Stratosphere
Corporation............................................. (450)
--------
Net earnings............................................ $ 67,534
--------
--------

- -----------
(1) Includes depreciation expense

IV-15

SCHEDULE III
PAGE 8

AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES
REAL ESTATE OWNED AND REVENUES EARNED
YEAR ENDED DECEMBER 31, 2000 (IN $000'S)

1a. A reconciliation of the total amount at which real estate owned,
accounted for under the operating method and hotel and resort
operating properties and development properties, was carried at the
beginning of the period, with the total at the close of the period, is
shown below:

Balance -- January 1, 2000.............................. $239,237
Additions during period................................. 32,782
Reclassifications during period from financing leases... 17,274
Less development properties............................. (11,942)
Reclassifications during period to assets held for
sale.................................................. (6,781)
Disposals during period................................. (8,214)
--------
Balance -- December 31, 2000............................ $262,356
--------
--------
b. A reconciliation of the total amount of accumulated depreciation at
the beginning of the period, with the total at the close of the
period, is shown below:

Balance -- January 1, 2000.............................. $ 44,740
Depreciation during period.............................. 6,137
Disposals during period................................. (4,636)
Reclassifications during period to assets held for
sale.................................................. (2,770)
--------
Balance -- December 31, 2000............................ $ 43,471
--------
Depreciation on properties accounted for under the operating method is
computed using the straight-line method over the estimated useful life
of the particular property or property components, which range from 5
to 45 years.

2. A reconciliation of the total amount at which real estate owned,
accounted for under the financing method, was carried at the beginning
of the period, with the total close of the period, is shown below:
Balance -- January 1, 2000.............................. $223,391
Reclassifications during period to operating
properties............................................ (17,274)
Write downs............................................. (232)
Disposals during period................................. (3,647)
Amortization of unearned income......................... 19,652
Minimum lease rentals received.......................... (27,212)
Reclassifications during period to assets held for
sale.................................................... (1,286)
Additions during period................................. 36
--------
Balance -- December 31, 2000............................ $193,428
--------
--------
3. The aggregate cost of real estate owned for Federal income tax
purposes is $371,227 before accumulated depreciation.

IV-16

SCHEDULE III
PAGE 9

AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES
REAL ESTATE OWNED AND REVENUES EARNED -- (CONTINUED)
YEAR ENDED DECEMBER 31, 2000 (IN $000'S)

4. Net income applicable to the period in Schedule III is reconciled with
net earnings as follows:
Net income applicable to financing and operating leases
and hotel and resort operating properties............. $ 20,909
Net income applicable to Stratosphere hotel and
casino................................................ 5,501(1)
Net income applicable to land, house and condominium
sales................................................... 17,687
Add:
Interest income on U.S. Government and Agency
Obligations and other investments................. 36,208
Dividend and unallocated other income............... 4,627
--------
84,932
--------
Deduct expenses not allocated:
General and administrative expenses................. 7,475
Nonmortgage interest expense........................ 3,792
Bayswater acquisition costs......................... 1,750
Equity in losses of GB Holdings, Inc. .............. 2,103
Other............................................... 788
--------
15,908
--------
Earnings before property and securities transactions and
minority interest..................................... 69,024
Provision for loss on real estate....................... (1,351)
Gain on sale of real estate............................. 6,763
Gain on sale of limited partnership interests........... 3,461
Minority interest in net earnings of Stratosphere
Corporation........................................... (2,747)
--------
Net earnings............................................ $ 75,150
--------
--------
- ---------
(1) Includes depreciation expense

IV-17

SCHEDULE III
PAGE 10

AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES
REAL ESTATE OWNED AND RESERVE FOR DEPRECIATION BY STATE
(ACCOUNTED FOR UNDER THE OPERATING METHOD)
DECEMBER 31, 2002 (IN $000'S)

IV-18

SCHEDULE III
PAGE 11

AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES
REAL ESTATE OWNED BY STATE
(ACCOUNTED FOR UNDER THE FINANCING METHOD)
DECEMBER 31, 2002 (IN $000'S)

IV-19

EXHIBITS

IV-20

STATEMENT OF DIFFERENCES

The section symbol shall be expressed as ...........'SS'