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

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-Q

(MARK ONE)

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003

OR

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

FOR THE TRANSITION PERIOD FROM __________TO __________

COMMISSION FILE NUMBER 1-9516

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

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

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

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

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

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2) Yes [x] No [ ]

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INDEX

1

AMERICAN REAL ESTATE PARTNERS, L.P.
FORM 10-Q SEPTEMBER 30, 2003

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

See notes to consolidated financial statements.

2

AMERICAN REAL ESTATE PARTNERS, L.P.
FORM 10-Q SEPTEMBER 30, 2003
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

See notes to consolidated financial statements.

3

AMERICAN REAL ESTATE PARTNERS, L.P.
FORM 10-Q SEPTEMBER 30, 2003
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

See notes to consolidated financial statements.

4

AMERICAN REAL ESTATE PARTNERS, L.P.
FORM 10-Q SEPTEMBER 30, 2003
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS'
EQUITY AND COMPREHENSIVE INCOME
NINE MONTHS ENDED SEPTEMBER 30, 2003 (IN $000'S)
(UNAUDITED)

Accumulated other comprehensive income at September 30, 2003 was $1,866.

See notes to consolidated financial statements.

5

AMERICAN REAL ESTATE PARTNERS, L.P.
FORM 10-Q SEPTEMBER 30, 2003
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

6

AMERICAN REAL ESTATE PARTNERS, L.P.
FORM 10-Q SEPTEMBER 30, 2003
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
(UNAUDITED)

See notes to consolidated financial statements.

7

AMERICAN REAL ESTATE PARTNERS, L.P.
FORM 10-Q SEPTEMBER 30, 2003
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. GENERAL

The accompanying consolidated financial statements and related footnotes
should be read in conjunction with the consolidated financial statements and
related footnotes contained in the Company's annual report on Form 10-K for the
year ended December 31, 2002.

The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All material intercompany accounts and
transactions have been eliminated in consolidation.

The results of operations for the three and nine months ended September 30,
2003 are not necessarily indicative of the results to be expected for the full
year. Hotel, casino and resort operations are highly seasonal in nature and are
not necessarily indicative of results expected for the full year.

2. RELATED PARTY TRANSACTIONS

a. In May 2003, the Company entered into an agreement to acquire certain
debt and equity securities of National Energy Group, Inc. ('NEG') and a 100%
interest in an entity owning part of such debt and equity securities from
entities affiliated with and indirectly wholly owned by Carl C. Icahn ('Icahn'),
the Chairman of the Board of the General Partner. The agreement was reviewed and
approved by the Audit Committee of the Board of Directors of the General Partner
(the 'Audit Committee'). Prior to approving the agreement, the Audit Committee
was advised by its independent financial advisor and legal counsel.

NEG owns an interest in entities primarily involved in owning and operating
oil and gas properties and manages the oil and gas operations of such entities.

This acquisition was completed on October 2, 2003. The aggregate
consideration paid was approximately $148.1 million, plus approximately $6.7
million of accrued interest on the debt securities. The Company beneficially
owns in excess of 50% of the issued and outstanding common stock of NEG and 100%
of its outstanding 10 3/4% Senior Notes, due November 1, 2006, in the aggregate
principal amount of $148,637,000. Interest is payable semi-annually on May 1,
and November 1.

In accordance with generally accepted accounting principles, assets
transferred between entities under common control are accounted for at
historical costs similar to a pooling of interests. The Company will account for
the acquisition of NEG as indicated above in the fourth quarter of 2003.

b. The Company is a party to a license agreement with an affiliate of the
General Partner for a portion of office space at an annual rental of
approximately $135,000, plus its share of certain additional rent. Such
agreement was approved by the Audit Committee. For the three and nine months
ended September 30, 2003 the Company paid rent of approximately $43,000 and
$119,000, respectively and for the three and nine months ended September 30,
2002 the Company paid rent of approximately $42,000 and $116,000, respectively.

c. Stratosphere Corporation ('Stratosphere'), a wholly owned subsidiary,
billed affiliates of the General Partner approximately $855,000 and $2,182,000
for administrative services performed by Stratosphere personnel during the three
and nine months ended September 30, 2003, respectively. For the three and nine
months ended September 30, 2002, Stratosphere billed approximately $400,000 and
$1,276,000, respectively.

d. As of November 1, 2003 affiliates of Icahn owned 8,477,139 Preferred
Units and 39,896,836 Depositary Units.

e. See Note 4 regarding Note Receivable -- Affiliate, which was repaid on
October 17, 2003.

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3. COMMITMENTS AND CONTINGENCIES

a. In January 2002, the Cape Cod Commission (the 'Commission'), a
Massachusetts regional planning body created in 1989, concluded that the
Company's New Seabury development proposal is within its jurisdiction for review
and approval (the 'Administrative Decision'). It is the Company's position that
the proposed residential, commercial and recreational development is in
substantial compliance with a special permit issued for the property in 1964 and
is exempt from the Commission's jurisdiction and that the Commission is barred
from exercising jurisdiction pursuant to a 1993 settlement agreement between the
Commission and a prior owner of the New Seabury property (the 'Settlement
Agreement').

In February 2002, New Seabury Properties LLC ('New Seabury'), the Company's
subsidiary and owner of the property, filed a civil complaint in Barnstable
County, Massachusetts, Superior Court appealing the Administrative Decision by
the Commission and a separate complaint to find the Commission in contempt of
the Settlement Agreement. The Court subsequently consolidated the two complaints
into one proceeding. In July 2003, New Seabury and the Commission filed cross
motions for summary judgment.

Also, in July 2003, in accordance with a Court ruling, the Commission
reconsidered the question of its jurisdiction over the initial development
proposal and over a modified development proposal that New Seabury filed in
March 2003. The Commission concluded that both proposals are within its
jurisdiction. In August 2003, New Seabury filed another complaint appealing this
decision and again petitioned the Court to find the Commission in contempt of
the Settlement Agreement.

In November 2003, the Court ruled in New Seabury's favor on its July 2003
motion for partial summary judgment, finding that the special permit remains
valid and that the modified development proposal is in substantial compliance
(it did not yet rule on the initial proposal). Under the modified development
proposal New Seabury could potentially develop up to 278 residential units and
145,000 square feet of commercial space. Under the initial proposal, New Seabury
could potentially build up to 675 residential/hotel units and 80,000 square feet
of commercial space. 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 any of the development proposals.

The carrying value of New Seabury's development assets at September 30, 2003
is approximately $9.2 million.

b. 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
Stratosphere 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 $371,873 were disbursed to
Tiffiny and Great Western, respectively) is properly due and payable to satisfy
all claims for the work performed, including the claim by Tiffiny.

9

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.

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

d. In January 2002, Kmart Corp. ('Kmart'), a tenant leasing seven properties
owned by the Company which represented 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 were rejected representing approximately $713,000 in annual rents. Three
of the rejected properties are being held for sale. The Company previously
recorded a provision for loss on real estate of approximately $1.9 million, on
the four properties whose leases were rejected, in the year ended December 31,
2001. In April 2003, one of the leases representing approximately $242,000 in
annual rentals was assumed by Kmart and assigned to Home Depot, who purchased
the property for $3.2 million in June 2003. A gain of approximately $1.7 million
was recorded in 'Income from discontinued operations' in the nine months ended
September 30, 2003. Kmart emerged from bankruptcy in May 2003 and affirmed the
two remaining leases representing approximately $418,000 in annual rentals.

4. NOTE RECEIVABLE -- AFFILIATE

On December 27, 2001, the Company entered into a transaction with Carl C.
Icahn, Chairman of the Board of the General Partner, pursuant to which the
Company made a $250 million loan to Mr. Icahn. The agreement provides for
maintenance of collateral for the loan comprised of $250 million in aggregate
market value of the Company's depositary and preferred units and $250 million
(in book value) of shares of a private company owned by Mr. Icahn. Adjustments
to the number of pledged securities are made periodically in accordance with the
terms of the respective pledge agreements. Subject to such adjustments, at
September 30, 2003 the loan was secured by securities consisting of
(i) approximately $245 million aggregate market value at September 30, 2003 of
the Company's units owned by affiliates of Mr. Icahn (approximately 16.6 million
depositary units and 5.6 million preferred units) and (ii) shares of a private
company owned by Mr. Icahn, which shares have an aggregate book value of at
least $250 million, together with an irrevocable proxy on sufficient additional
shares of the private company so that the pledged shares and the shares covered
by the proxy equal in excess of 50% of the private company's shares. The private
company owns other Icahn investments and does not own the Company's units. The
loan is due on or before December 27, 2003 and by law may not be renewed or
extended. The loan bears interest at a per annum rate equal to the greater of
(i) 3.9% or (ii) 200 basis points over 90 day LIBOR to be reset each calendar
quarter. The applicable rate during the three months ended March 31, 2003, June
30, 2003 and September 30, 2003 was 3.9%. The applicable rates were 3.9%, 4.03%
and 3.9% for the three months ended March 31, 2002, June 30, 2002 and September
30, 2003, respectively. The loan must be prepaid in an amount of up to $125
million to the extent that the Company requests such funds for an investment
opportunity and may be prepaid at any time by Mr. Icahn. The Company entered
into this transaction to earn interest income on a secured investment. In the
event of a loan default, the Company would at its option, liquidate the shares
of the private company or reacquire its own units, or both, to satisfy the loan.
Interest income of approximately $2.5 million and $7.5 million was recorded on
this loan in the three months and nine months ended September 30, 2003,
respectively, and also in the three and nine months ended September 30, 2002,
respectively, and is included in 'Interest income on U.S. Government and Agency
obligations and other investments' in the Consolidated Statements of Operations.
Interest is payable semi-annually and has been paid through June 30, 2003. The
terms of this transaction were reviewed and approved by the Audit Committee.

On October 17, 2003, Mr. Icahn repaid the $250 million loan plus accrued
interest of $2,925,000.

10

5. HOTEL, CASINO AND RESORT OPERATING PROPERTIES

a. Stratosphere Hotel and Casino

The Company owns 100% of Stratosphere and consolidates Stratosphere in its
financial statements.

Stratosphere owns and operates the Stratosphere Casino, Hotel & Tower,
located in Las Vegas, Nevada, which is centered around the Stratosphere Tower
(the 'Tower'), the tallest freestanding observation tower in the United States.

Stratosphere operates, among other things, the Tower, a hotel with 2,444
rooms and suites, a 97,000 square foot casino featuring 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 of 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. The hotel has seven themed restaurants and a New
York style delicatessen.

Stratosphere's operations for the three and nine months ended September 30,
2003 and 2002 have been included in 'Hotel and casino operating income and
expenses' in the Consolidated Statements of Operations. Hotel and casino
operating expenses include all expenses except for approximately $2,967,000 and
$9,213,000 of depreciation and amortization for the three and nine months ended
September 30, 2003, respectively and $3,330,000 and $9,966,000 for the three and
nine months ended September 30, 2002, respectively. Such amounts have been
included in 'Depreciation and amortization expense' in the Consolidated
Statements of Operations. Included in Hotel and casino operating expenses is a
provision for income taxes of approximately $1,200,000 and $3,500,000 for the
three and nine months ended September 30, 2003, respectively and $700,000 and
$1,775,000 for the three and nine months ended September 30, 2002, respectively.
Stratosphere accounted for approximately 63% and 49% of the Company's revenues
in the nine months ended September 30, 2003 and 2002, respectively, and
approximately 19% and 13% of the Company's operating income in the nine months
ended September 30, 2003 and 2002, respectively.

b. Hotel and Resort Operating Properties

Hotel and resort operations for the three and nine months ended September
30, 2003 and 2002 have been included in 'Hotel and resort operating income and
expenses' in the Consolidated Statements of Operations. Hotel and resort
operating expenses include all expenses except for approximately $630,000 and
$1,372,000 of depreciation and amortization for the three and nine months ended
September 30, 2003, respectively and $639,000 and $1,560,000 of depreciation and
amortization for the three and nine months ended September 30, 2002,
respectively. Such amounts have been included in 'Depreciation and amortization
expense' in the Consolidated Statements of Operations.

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

The Company reflects its pro-rata equity interest in GB Holdings, Inc.
('GBH') under this caption in the Consolidated Balance Sheets. The Company owns
approximately 3.6 million shares, 36%, of GBH. GBH is the holding company for
the Sands Hotel and Casino (the 'Sands') located in Atlantic City, New Jersey.
The Sands operates a casino facility with approximately 79,000 square feet of
gaming space, a hotel with 511 rooms (including 57 suites) and related
amenities.

'Equity in earnings (losses) of GB Holdings, Inc.' of ($428,000) and
($641,000) have been recorded in the Consolidated Statements of Operations for
the three and nine months ended September 30, 2003, respectively. 'Equity in
earnings (losses) of GB Holdings, Inc.' were $411,000 and $2,268,000 for the
three and nine months ended September 30, 2002, respectively.

In July 2003, GBH announced that its Board of Directors, acting through a
special committee, approved an exchange offer for the Sands debt. The proposed
transaction is subject to the consent of the holders of a majority in principal
amount of the existing notes, the approval of stockholders owning a majority of
the common stock of GBH, the effectiveness of required filings under applicable
securities laws and the receipt of all required governmental and third party
approvals. Mr. Icahn and his affiliated companies hold in excess of 77% of the
GBH stock and 58% of the existing debt, of which the Company owns approximately
36% of the common stock and 24% of the debt. The Company and

11

Mr. Icahn intend to support the proposed transaction. A wholly owned subsidiary
of GBH currently has outstanding $110 million in secured notes due in September
2005, which bear interest at 11% per annum.

The proposed transaction would involve the following:

An amendment to the existing note indenture to remove certain provisions
and covenants and release the liens on the Sands assets; thereby allowing
the transfer of these assets and those now held at GBH to a wholly-owned
subsidiary of GBH ('Newco').

The solicitation of an exchange of the existing notes for new notes due
September 2008, which will bear interest at 3% per annum payable at
maturity.

The payment of $100 per $1,000 in principal amount of the existing notes
exchanged.

The holders of a majority of the new notes will have an option to convert
into 72.5% of the Newco stock if all of the existing notes participate in
the exchange.

The distribution to the GBH common stockholders of warrants (following the
occurrence of certain events) for 27.5% of the common stock of Newco (on a
fully diluted basis).

This transaction is not expected to have a significant impact on the
Company's consolidated financial statements.

7. MARKETABLE EQUITY AND DEBT SECURITIES

The Company owns equity and debt securities of Philip Services Corporation.
('Philip'). In June 2003, Philip announced that it and most of its wholly owned
U.S. subsidiaries filed voluntary petitions under Chapter 11 of the Federal
Bankruptcy Code.

In the nine months ended September 30, 2003, management of the Company
determined that it was appropriate to write-off the balance of its investment in
the Philip common stock by a charge to earnings of approximately $961,000; of
this amount $761,000 was previously charged to other comprehensive income in
2002, which was reversed in 2003, and included in the $961,000 charge to
earnings.

8. MORTGAGES AND NOTES RECEIVABLE

a. The Company owns Philip Term and Payment-in-kind ('PIK') notes (the
'Notes') in the principal amount of approximately $32.7 million; the cost basis
of the Notes was approximately $22.1 million. As previously mentioned, Philip
filed for bankruptcy protection in June 2003. Management of the Company reviewed
Philip's financial statements, bankruptcy documents and the prices of recent
purchases and sales of the Notes and determined this investment to be impaired.
Based upon this review, management concluded the fair value of the Notes to be
approximately $3.3 million; therefore, the Company recorded a write-down of
approximately $18.8 million by a charge to earnings in the nine months ended
September 30, 2003.

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. 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 or construction completion
and the achievement of certain pre-sales levels. Upon construction completion,
anticipated in the fourth quarter of 2003, the Company will review the status of
each loan to determine whether or not recognition of interest income in the
financial statements is appropriate. At September 30, 2003, the Company had
funded three mezzanine loans in the principal amount of approximately $54.2
million (of which approximately $31 million was funded in the nine months ended
September 30, 2003) and had deferred approximately $13.7 million of accrued
interest income for financial statement purposes.

12

9. MORTGAGES PAYABLE

a. On May 16, 2003, the Company executed a mortgage note secured by a
distribution facility located in Windsor Locks, Connecticut and obtained funding
in the principal amount of $20 million. The loan bears interest at 5.63% per
annum and matures on June 1, 2013. Annual debt service is approximately
$1,382,000 per annum based on a 30 year amortization schedule.

b. The Company has engaged an investment banking firm to help it obtain
financing on certain of its unencumbered properties. They have advised the
Company that the $150 million of financing being sought may not be achievable
because a substantial portion of the properties have short terms remaining on
their respective leases. This factor combined with favorable real estate market
conditions has led the Company to seek purchase offers for certain of its
real estate properties. See Note 15 -- Subsequent Events.

10. PREFERRED UNITS

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 was payable March 31, 2003 to holders of record as of
March 14, 2003. A total of 466,548 additional Preferred Units were issued. At
September 30, 2003, 9,797,511 Preferred Units are issued and outstanding.

On July 1, 2003, the Company adopted Statement of Financial Accounting
Standards No. 150 (SFAS 150) 'Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity'. SFAS 150 requires that a
financial instrument, which is an unconditional obligation, be classified as a
liability. Previous guidance required an entity to include in equity financial
instruments that the entity could redeem in either cash or stock. Pursuant to
SFAS 150 the Company's Preferred Units, which are an unconditional obligation,
have been reclassified from 'Partners' equity' to a liability account in the
Consolidated Balance Sheets and the preferred pay-in-kind distribution for the
three months ended September 30, 2003, and going forward, has been and will be
recorded as 'Interest expense' in the Consolidated Statements of Operations. See
Note 14.

11. EARNINGS PER SHARE

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

Diluted earnings per share is based on earnings before the preferred
pay-in-kind distribution, which was $1.2 million and $3.6 million in the three
and nine months ended September 30, 2003, respectively, as the numerator with
the denominator based on the weighted average number of units and equivalent
units outstanding. The Preferred Units are considered to be equivalent units.
The number of limited partnership units used in the calculation of diluted
income per limited partnership unit increased by 8,546,329 and 8,718,241 in the
three and nine months ended September 30, 2003, respectively and by 10,509,458
and 10,161,592 in the three and nine months ended September 30, 2002,
respectively, to reflect the potential conversion of preferred units. In the
nine months ended September 30, 2003, the effect of the computation of diluted
income from continuing operations per LP unit is anti-dilutive and therefore is
not shown.

12. COMPREHENSIVE INCOME

The components of comprehensive income (loss) include net income and certain
other amounts reported directly in the Consolidated Statements of Changes in
Partners' Equity and Comprehensive Income.

13

Comprehensive income (loss) for the three and nine months ended September
30, 2003 and 2002 is as follows (in $000's):

13. SEGMENT REPORTING

The Company is currently engaged in five operating segments consisting of:
(i) rental real estate, (ii) hotel and resort operating properties, (iii) hotel
and casino operating properties, (iv) land sales, house and condominium
development, and (v) investment in securities including investment in other
limited partnerships and marketable equity and debt securities. The Company's
reportable segments offer different services and require different operating
strategies and management expertise. There have been no material changes in
segment assets since December 31, 2002.

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

During 2003, the Company realigned the management of its hotel and casino
investments. Previously, the Company's investment in GB Holdings, Inc. and the
results of its operations were considered as part of the Company's 'other
investments' segment. For the three and nine months ended September 30, 2002,
$411,000 and $2,268,000, respectively, representing the Company's equity in GB
Holdings, Inc.'s net income for the periods, has been reclassified below from
other investments to hotel and casino operating income and earnings to conform
to the 2003 presentation.

14

The revenues and net earnings for each of the reportable segments are
summarized as follows for the three and nine months ended September 30, 2003
and 2002 (in $000's):

15

14. NEW ACCOUNTING PRONOUNCEMENTS

As of January 1, 2002 the Company has adopted the Statement of Financial
Accounting Standards No. 144 (SFAS 144) 'Accounting for the Impairment or
Disposal of Long-Lived Assets.' Under SFAS No. 144, the properties sold by the
Company to third parties are considered to be discontinued operations. For the
three and nine months ended September 30, 2003 and 2002 the Company has reported
discontinued operations in the Consolidated Statements of Operations for the
properties disposed of to third parties, which excludes those grandfathered by
the effective date of SFAS 144. The three and nine months' results for the
periods ended September 30, 2002 have been restated to conform to the 2003
presentation.

In May 2003, the FASB issued SFAS 150 'Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity'. SFAS 150 is
effective at the beginning of the first interim period beginning after June 15,
2003. The Company adopted SFAS 150 on July 1, 2003 and has reclassified its
preferred units to a liability account. See Note 10.

In January 2003, the FASB issued Interpretation No. 46, 'Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51' (FIN #46). This
Interpretation addresses the consolidation by business enterprises of variable
interest entities. The Company is currently evaluating the effects of this
Interpretation on its financial statements.

15. SUBSEQUENT EVENTS

a. In October 2003, the Company sold a property located in Columbia,
Maryland to its tenant for a selling price of $11 million. A gain of
approximately $5.8 million will be recognized in the quarter ended December 31,
2003.

b. The Company has retained CB Richard Ellis, Inc. to assist it in obtaining
offers for the Company's real estate portfolio. In total, the Company will
market for sale properties with a book value of approximately $340 million,
encumbered by mortgage debt of approximately $180 million. The properties will
be marketed individually and/or as several separate portfolios. There can be no
assurances that the Company will be successful in obtaining purchase offers at
acceptable prices.

The Company intends to utilize proceeds from any asset sales to continue to
diversify its operations. In accordance with its previous disclosure, the
Company intends to further explore investments in the casino and entertainment
sectors and the energy industry as well as other real estate opportunities.
Management is currently in preliminary discussions with an unaffiliated third
party regarding the possible acquisition of a casino hotel with approximately
3,000 rooms, located in Las Vegas, Nevada.

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

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

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

GENERAL

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

The Company believes that it will benefit from further diversification of
its portfolio of assets. To accomplish its investment objectives, the Company
will consider additional investments in the casino and entertainment sectors and
the energy industry as well as other real estate opportunities. In selecting

16

future investments, the Company intends to focus on assets that it believes are
undervalued, which investments may require substantial liquidity to maintain a
competitive advantage.

The Company has made investments in the gaming industry and may consider
additional gaming industry investments and investments related to the
entertainment industry. Such investments may include additional casino
properties and those in the entertainment field, such as movie theater
interests, and the financing and investment in the movie production and
distribution industry. Such investments may include acquisitions from, or in
joint venture or co-management with, Icahn, the General Partner or their
affiliates, provided that the terms thereof are fair and reasonable to the
Company. The Audit Committee is in the preliminary stages of considering the
acquisition of two Las Vegas Casinos from affiliates of Icahn. The Company may
consider high-yield bond or other debt financing in connection with this
potential acquisition. In addition, management is currently in preliminary
discussions with an unaffiliated third party regarding the possible acquisition
of a casino hotel with approximately 3,000 rooms, located in Las Vegas, Nevada.

The Company has made an investment in the oil and gas industry and may
consider additional energy related investments. In October 2003, the Company
acquired certain debt and equity securities of National Energy Group, Inc. and a
100% interest in an entity owning part of such debt and equity securities from
entities affiliated with and indirectly wholly owned by Carl C. Icahn, the
Chairman of the Board of the General Partner. The aggregate consideration paid
was approximately $148.1 million plus approximately $6.7 million of accrued
interest on the debt securities. See Note 2 to the Consolidated Financial
Statements.

Due to favorable real estate market conditions and the mature nature of the
Company's real estate portfolio, the Company will seek purchase offers for
certain of its real estate properties.

The Company believes that there are still opportunities available to acquire
real estate investments that are undervalued. These may include commercial
properties, undeveloped land, assets in the gaming and entertainment industries,
non-performing loans, the securities of entities which own, manage or develop
significant real estate assets, including limited partnership units and
securities issued by real estate investment trusts and the acquisition of debt
or equity securities of companies which may be undergoing restructuring and
under-performing properties that may require active asset management and
significant capital improvements.

Acquisition opportunities in the real estate market for value-added
investors have become more competitive to source and the increased competition
may have some impact on the spreads and the ability to find quality assets that
provide returns that are sought. These investments may not be readily
financeable and may not generate immediate positive cash flow for the Company.
As such, they require the Company to maintain a strong capital base in order to
react quickly to these market opportunities as well as to allow the Company the
financial strength to develop or reposition these assets. While this may impact
cash flow in the near term and there can be no assurance that any asset acquired
by the Company will increase in value or generate positive cash flow, the
Company intends to focus on assets that it believes may provide opportunities
for long-term growth and further its objective to diversify its portfolio.

Historically, substantially all of the Company's real estate assets 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 the Company is not typically
responsible for payment of expenses, such as maintenance, utilities, taxes and
insurance associated with such properties.

By the end of the year 2005, net leases representing approximately 18% of
the Company'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
32% of the Company's net annual rentals will be due for renewal. Since most of
the Company's properties are net-leased to single corporate tenants, it may be
difficult and time-consuming to re-let or sell those properties that existing
tenants decline to re-let or purchase, and therefore the Company may be required
to incur expenditures to renovate such properties for new tenants. In addition,
the Company may become responsible for the payment of certain operating
expenses, including maintenance, utilities, taxes, insurance and environmental
compliance costs associated with such properties, which are presently the
responsibility of the tenant. As a result, the Company could experience an
adverse impact on net cash flow in the future from such properties.

17

Earnings from land, house and condominium operations have decreased
significantly in 2003 due to a decline in inventory of completed units available
for sale. This trend is expected to continue as land inventory is depleted and
cannot be replenished cost effectively. The Company has three sub-divisions,
including New Seabury, at varying stages of the municipal approval process,
which, if successful, may mitigate the down-trend.

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

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

The Company has notified each of the responsible tenants to attempt to
ensure that they cause any required investigation and/or remediation to be
performed and most tenants continue to take appropriate action. However, if the
tenants fail to perform responsibilities under their leases referred to above,
based solely upon the consultant's estimates resulting from its Phase I
Environmental Site Assessments referred to above, it is presently estimated that
the Company's exposure could amount to $2-3 million. However, as no Phase II
Environmental Site Assessments have been conducted by the consultants, there can
be no accurate estimation of the need for or extent of any required remediation,
or the costs thereof. In addition, the Company has notified all tenants of the
Resource Conservation and Recovery Act's ('RCRA') December 22, 1998 requirements
for regulated underground storage tanks. The Company may, at its own cost, have
to cause compliance with RCRA's requirements in connection with vacated
properties, bankrupt tenants and new acquisitions. Phase I Environmental Site
Assessments will also be performed in connection with new acquisitions and
property refinancings.

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

RESULTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2002

Gross revenues decreased by $7,967,000, or 10.5%, during the three months
ended September 30, 2003 as compared to the same period in 2002. This decrease
reflects decreases of $6,831,000 in land, house and condominium sales,
$1,606,000 in interest income on U.S. Government and Agency Obligations and
other investments, $839,000, in equity in earnings of GB Holdings, Inc. $546,000
in hotel and resort operating income and $406,000 in financing lease income
partially offset by increases of $1,367,000 in hotel and casino operating
income, $749,000 in rental income, and $145,000 in dividend and other income.
The decrease in land, house and condominium sales is primarily due to a decrease
in the number of units sold as approved land inventory has been depleted by
sales. The decrease in interest income on U.S. Government and Agency obligations
and other investments is primarily attributable to a decline in interest rates
on U.S. Agency obligations as higher rate bonds were called in 2002. The
decrease in equity in earnings of GB Holdings, Inc. is primarily due to
decreased slot machine revenue partially offset by increased revenue from table
games and decreased casino expenses. The decrease in hotel and resort operating
income is primarily due to decreased club dues which is being recognized monthly
rather than seasonally as in 2002. The decrease in financing lease income is the

18

result of lease expirations, reclassifications of financing leases and normal
financing lease amortization. The increase in hotel and casino operating income
is primarily attributable to an increase in hotel, food and beverage revenues
and a decrease in promotional allowance. The average daily rate ('ADR')
increased $5 to $50, however, percentage occupancy decreased approximately 1.4%
to 92.1%. The increase in rental income is primarily attributable to a property
acquisition and reclassifications of financing leases to operating leases.

Expenses decreased by $4,280,000, or 7.0%, during the three months ended
September 30, 2003 as compared to the same period in 2002. This decrease
reflects decreases of $6,149,000 in the cost of land, house and condominium
sales, $646,000 in hotel and resort operating expenses and $62,000 in
depreciation and amortization partially offset by increases of $1,467,000 in
interest expense, $843,000 in hotel and casino operating expenses, $217,000 in
rental property expenses and $50,000 in general and administrative expense. The
decrease in the cost of land, house and condominium sales is due to decreased
sales as discussed above. Costs as a percentage of sales decreased from 81% in
2002 to 66% in 2003 primarily due to higher margin sales in 2003. The decrease
in hotel and resort operating expenses is due to a decrease in payroll and
related expenses. The increase in interest expense is primarily due to preferred
distributions being expensed in accordance with SFAS 150. The increase in hotel
and casino operating expenses is primarily attributable to increased costs
associated with increased revenues. Costs as a percentage of sales decreased
from 86% in 2002 to 85% in 2003.

Operating income decreased during the three months ended September 30, 2003
by $3,687,000 as compared to the same period in 2002 as detailed above.

Earnings from land, house and condominium operations decreased in three
months ended September 30, 2003 compared to the same period in 2002 due to a
decline in inventory of completed units available for sale. Based on current
information, sales will decline significantly during the rest of 2003 as
compared to 2002. The decrease in land inventory in approved sub-divisions is
expected to continue to have a negative impact on earnings from this business
segment.

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

Gain on property transactions from continuing operations decreased by
$2,390,000 during the three months ended September 30, 2003 as compared to the
same period in 2002.

A provision for loss on real estate of $100,000 was recorded in the three
months ended September 30, 2003. No such provision was recorded in 2002.

A gain on sale of marketable equity securities of $2,168,000 was recorded in
the three months ended September 30, 2003. There were no such gains in the
comparable period of 2002.

Minority interest in the net earnings of Stratosphere Corporation was
$612,000 during the three months ended September 30, 2002. As a result of the
acquisition of the minority interest in December 2002, there will be no minority
interest in Stratosphere in 2003 and thereafter.

Income from continuing operations decreased by $3,397,000 in the three
months ended September 30, 2003 as compared to the same period in 2002 as
detailed above.

Income from discontinued operations increased by $1,335,000 in the three
months ended September 30, 2003 as compared to the same period in 2002 due to
gains on property dispositions.

Net earnings for the three months ended September 30, 2003 decreased by
$2,062,000 as compared to the three months ended September 30, 2003 primarily
due to decreased interest income ($1.6 million) and increased interest expense
($1.5 million) partially offset by an increase in income from discontinued
operations ($1.3 million).

NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2002

Gross revenues decreased by $42,526,000, or 17.8%, during the nine months
ended September 30, 2003 as compared to the same period in 2002. This decrease
reflects decreases of $34,880,000 in land, house and condominium sales,
$12,402,000 in interest income on U.S. Government and Agency Obligations and
other investments, $2,909,000 in equity in earnings of GB Holdings, Inc.,
$1,373,000 in

19

financing lease income and $60,000 in hotel and resort operating income
partially offset by increases of $6,722,000 in hotel and casino operating
income, $2,270,000 in rental income and $106,000 in dividend and other income.
The decrease in land, house and condominium sales is primarily due to a decrease
in the number of units sold, as approved land inventory has been depleted by
sales. The decrease in interest income on U.S. Government and Agency obligations
and other investments is primarily attributable to the prepayment of a mezzanine
loan in 2002 and a decline in interest rates on U.S. Agency obligations as
higher rate bonds were called in 2002. The decrease in equity in earnings of GB
Holdings, Inc. is due to decreased casino revenue primarily attributable to a
reduction in the number of table games as new slot machines were added in 2002.
This business strategy was changed in 2003 to focus on the mid to high-end slot
customer with a balanced table game business. The decrease in financing lease
income is the result of lease expirations, reclassifications of financing leases
and normal financing lease amortization. The increase in hotel and casino
operating income is primarily attributable to an increase in hotel, food and
beverage revenues and a decrease in promotional allowances. The average daily
rate ('ADR') increased $3 to $51, however, percentage occupancy decreased
approximately 0.3% to 89.7%. The increase in rental income is primarily
attributable to a property acquisition and reclassifications of financing leases
to operating leases.

Expenses decreased by $20,342,000, or 11.1%, during the nine months ended
September 30, 2003 as compared to the same period in 2002. This decrease
reflects decreases of $25,817,000 in the cost of land, house and condominium
sales, $932,000 in hotel and resort operating expenses and $218,000 in general
and administrative expenses partially offset by increases of $5,257,000 in hotel
and casino operating expenses, $697,000 in depreciation and amortization,
$289,000 in rental property expenses and $382,000 in interest expense. The
decrease in the cost of land, house and condominium sales is due to decreased
sales as discussed above. Costs as a percentage of sales decreased from 74% in
2002 to 73% in 2003. The decrease in hotel and resort operating expenses is due
to a decrease in payroll and related expenses. The increase in hotel and casino
operating expenses is primarily attributable to increased costs associated with
increased revenues. Costs as a percentage of sales was 85% in 2003 and 2002. The
increase in depreciation expense is primarily attributable to an increase in
rental real estate and resort properties.

Operating income decreased during the nine months ended September 30, 2003
by $22,184,000 as compared to the same period in 2002 as detailed above.

Earnings from land, house and condominium operations decreased in nine
months ended September 30, 2003 compared to the same period in 2002 due to a
decline in inventory of completed units available for sale. Based on current
information, sales will decline significantly during the rest of 2003 as
compared to 2002. The decrease in land inventory in approved sub-divisions is
expected to continue to have a negative impact on earnings from this business
segment.

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

Gain on property transactions from continuing operations decreased by
$3,163,000 during the nine months ended September 30, 2003 as compared to the
same period in 2002 due to the size and number of transactions.

A provision for loss on real estate of $300,000 was recorded in the nine
months ended September 30, 2003 as compared to $926,000 in 2002.

A write-down of marketable equity securities available for sale of $961,000
was recorded in the nine months ended September 30, 2003 as compared to a
write-down of $8,476,000 in 2002.

A write-down of mortgages and notes receivable of $18,798,000, pertaining to
the Company's investment in the Philip Notes, was recorded in the nine months
ended September 30, 2003. There was no such write-down in the comparable period
of 2002.

A gain on sale of marketable equity securities of $2,168,000 was recorded in
the nine months ended September 30, 2003. There was no such gain in the
comparable period of 2002.

20

Minority interest in the net earnings of Stratosphere Corporation was
$1,608,000 during the nine months ended September 30, 2002. As a result of the
acquisition of the minority interest in December 2002, there will be no minority
interest in Stratosphere in 2003 and thereafter.

Income from continuing operations decreased by $32,228,000 in the nine
months ended September 30, 2003 as compared to the same period in 2002 as
detailed above.

Income from discontinued operations increased by $3,222,000 in the nine
months ended September 30, 2003 as compared to the same period in 2002 due to
gains on property dispositions.

Net earnings for the nine months ended September 30, 2003 decreased by
$29,006,000 as compared to the nine months ended September 30, 2002 primarily
due to a write-down of mortgages and notes receivable ($18.8 million), decreased
earnings from land, house and condominium operations ($9.1 million) and
decreased interest income ($12.4 million) partially offset by a decrease in
write-down of equity securities available for sale ($7.5 million) and an
increase in income from discontinued operations ($3.2 million).

CAPITAL RESOURCES AND LIQUIDITY

Net cash provided by operating activities was $55.1 million for the nine
months ended September 30, 2003 as compared to $84.1 million in the comparable
period of 2002. This decrease resulted primarily from a decrease in interest
income ($12.4 million), an increase in land and construction in progress ($9.9.
million) and a decrease in land, house and condominium operations ($9.1 million)
partially offset by an increase in cash flow from the other operations ($2.4
million). The Company expects the decrease in land inventory in approved
sub-divisions to continue to negatively impact cash flow from land, house and
condominium operations.

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

In October 2003, the Company acquired debt and equity securities of National
Energy Group, Inc. ('NEG'), from entities affiliated with and indirectly wholly
owned by Carl C. Icahn, the Chairman of the Board of the General Partner. The
aggregate consideration paid was approximately $148.1 million, plus
approximately $6.7 million of accrued interest on the debt securities. The
Company beneficially owns in excess of 50% of the issued and outstanding common
stock of NEG and 100% of its outstanding 10 3/4% Senior Notes, due 11/1/06, in
the aggregate principal amount of $148,637,000.

On October 17, 2003 Mr. Icahn prepaid the $250 million loan which would have
been due on December 27, 2003.

In 2003, seventeen leases covering seventeen properties and representing
approximately $2.2 million in annual rentals have expired or are scheduled to
expire. Twelve leases originally representing $1.6 million in annual rental
income were renewed for $1,388,000 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.

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.
The Company believes that it should continue to hold and invest, rather than
distribute, cash. In making its announcement, the Company noted it plans to
continue to apply available cash flow toward its operations, repayment of
maturing indebtedness, tenant requirements, investments, acquisitions and other
capital expenditures and cash

21

reserves for Partnership contingencies including environmental matters and
scheduled lease expirations. By the end of the year 2005, net leases
representing approximately 18% of the Company's net annual rentals will be due
for renewal, and by the end of the year 2007, 32% of such rentals will be due
for renewal. Another factor that the Company took into consideration was that
net leases representing approximately 26% of the Company's annual rentals are
with tenants in the retail sector, some of which are currently experiencing cash
flow difficulties and restructurings.

The types of investments the Company 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
the Company 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 $9.7 million in the nine months ended September 30, 2003. During
the comparable period of 2002, sales proceeds totaled approximately $13.5
million. The Company intends to use asset sales, financing and refinancing
proceeds for new investments.

Capital expenditures for real estate, and hotel, casino and resort
operations were approximately $8.7 million and $3.3 million during the nine
months ended September 30, 2003 and 2002, respectively. In 2003, capital
expenditures are currently expected to be approximately $12 million.

During the nine months ended September 30, 2003 and 2002, approximately $5.3
million and $5.6 million, respectively, of mortgage principal payments were
repaid. In addition, in the nine months ended September 30, 2003, approximately
$16.2 million of net refinancing proceeds were received.

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

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

The Company's cash and cash equivalents and investment in U.S. Government
and Agency obligations increased by $43.3 million during the nine months ended
September 30, 2003 primarily due to net cash flow from operations ($55.0
million), net refinancing proceeds ($16.2 million), property sales proceeds
($9.7 million) and marketable equity securities proceeds ($3.6 million)
partially offset by mezzanine loan advances ($31.1 million), capital
expenditures ($8.4 million) and miscellaneous other items ($1.7 million).

ITEM 3. 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, the
Company is exposed to market, credit and related risks, including those
described elsewhere herein. As the Company may invest in debt or equity
securities of companies undergoing restructuring or undervalued by the market,
these securities are subject to inherent risks due to price fluctuations, and
risks relating to the issuer and its industry, and the market for these
securities may be less liquid and more volatile than that of higher rated or
more widely followed securities.

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

22

terminations or due to tenant defaults or bankruptcies, development risks, and
environmental and capital expenditure matters, as described elsewhere herein.

The Company invests in U.S. Government and Agency obligations which are
subject to interest rate risk. As interest rates fluctuate, the Company will
experience changes in the fair value of these investments with maturities
greater than one year. If interest rates increased 200 basis points, the fair
value of these investments at September 30, 2003, would decline by approximately
$500,000.

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

ITEM 4. CONTROLS AND PROCEDURES

a. As of September 30, 2003, 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-15(e)
and 15d-15(e). 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. During the three months ended September 30, 2003, there have been no
significant changes in the Company's internal controls over financial reporting
or in other factors that could significantly affect internal controls over
financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

a. In January 2002, the Cape Cod Commission (the 'Commission'), a
Massachusetts regional planning body created in 1989, concluded that the
Company's New Seabury development proposal is within its jurisdiction for review
and approval (the 'Administrative Decision'). It is the Company's position that
the proposed residential, commercial and recreational development is in
substantial compliance with a special permit issued for the property in 1964 and
is exempt from the Commission's jurisdiction and that the Commission is barred
from exercising jurisdiction pursuant to a 1993 settlement agreement between the
Commission and a prior owner of the New Seabury property (the 'Settlement
Agreement').

In February 2002, New Seabury Properties LLC ('New Seabury'), the Company's
subsidiary and owner of the property, filed a civil complaint in Barnstable
County, Massachusetts, Superior Court appealing the Administrative Decision by
the Commission and a separate complaint to find the Commission in contempt of
the 1993 Settlement Agreement. The Court subsequently consolidated the two
complaints into one proceeding. In July 2003, New Seabury and the Commission
filed cross motions for summary judgment.

Also, in July 2003, in accordance with a Court ruling, the Commission
reconsidered the question of its jurisdiction over the initial development
proposal and over a modified development proposal that New Seabury filed in
March 2003. The Commission concluded that both proposals are within its
jurisdiction. In August 2003, New Seabury filed another complaint appealing this
decision and again petitioned the Court to find the commission in contempt of
the Settlement Agreement.

In November 2003, the Court ruled in New Seabury's favor on its July 2003
motion for partial summary judgment, finding that the special permit remains
valid and that the modified development proposal is in substantial compliance
(it did not yet rule on the initial proposal). Under the modified development
proposal New Seabury could potentially develop up to 278 residential units and
145,000 square feet of commercial space. Under the initial proposal New Seabury
could potentially build up to 675 residential/hotel units and 80,000 square feet
of commercial space. 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 any of the development proposals.

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

The initial complaint brought by Tiffiny asserts that Tiffiny performed
certain 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 have 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 $371,873 were disbursed to
Tiffiny and Great Western, respectively) is properly due and payable to satisfy
all claims for the work performed, including the claim by Tiffiny.

24

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.

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

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) 8K dated August 14, 2003 -- American Real Estate Partners, L.P. Reports
Second Quarter and Six Months Results

(b) 8-K dated August 19, 2003 -- American Real Estate Partners, L.P.
Announces Executive Changes

EXHIBITS:

31 Certification of Chief Executive Officer -- Sarbanes-Oxley Act of
2002 -- Section 302(a)

31.1 Certification of Chief Financial Officer -- Sarbanes-Oxley Act of
2002 -- Section 302(a)

32 Certification of Principal Executive Officer -- Sarbanes-Oxley Act of
2002 -- Section 906

32.1 Certification of Principal Financial Officer -- Sarbanes-Oxley Act of
2002 -- Section 906

25

SIGNATURES

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

AMERICAN REAL ESTATE PARTNERS, L.P.

By: American Property Investors, Inc.

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

Date: November 14, 2003

26