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, 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 (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]

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

Based upon the closing price of Depositary Units on March 1, 2004, 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 $92,277,546.

Based upon the closing price of Preferred Units on March 1, 2004, 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 $11,545,345.

Number of Depositary Units outstanding as of March 1, 2004: 46,098,284
Number of Preferred Units outstanding as of March 1, 2004: 9,796,607

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PART I

ITEM 1. BUSINESS.

INTRODUCTION

American Real Estate Partners, L.P. ('AREP' or the 'Company') is a master
limited partnership 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 March 1, 2004,
affiliates of Icahn owned 39,896,836 units representing AREP limited partner
interests (the 'Depositary Units'), representing approximately 86.5% of the
outstanding Depositary Units, and 8,477,139 cumulative pay in kind redeemable
preferred units representing AREP 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.'

GENERAL DESCRIPTION OF BUSINESS

The Company and its consolidated subsidiaries are engaged in, rental real
estate operations; hotel, casino and resort operations; land, house and
condominium development; participation in and management of oil and gas
properties; and investment in securities, including investment in equity and
debt securities. As of March 1, 2004, AREP owned 121 separate real estate assets
primarily consisting of fee and leasehold interests in 28 states. For additional
information, see Item 2 -- 'Properties.' The Company intends to operate its
business 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's primary business strategy in recent years 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.
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 noted below, AREP is attempting to market its
rental real estate portfolio. It intends to use the proceeds from real estate
asset sales to attempt to further diversify its business operations outside of
real estate, including but not limited to sectors such as insurance and oil and
gas and gaming, as well as in real estate if opportunities to do so at favorable
prices are found. No assurance can be given that either the attempt to market
the real estate portfolio will be successful or that, if successful, the
proceeds from such asset sales can be used to acquire businesses and investments
at prices or at projected returns which are deemed favorable.

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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.

Due to favorable real estate market conditions and the mature nature of the
Company's real estate portfolio, AREP has engaged CB Richard Ellis, Inc., a
national real estate brokerage company, to assist it in obtaining offers for its
rental real estate portfolio. In total, the Company is currently marketing for
sale properties with a book value aggregating approximately $340 million, which
are individually encumbered by mortgage debt which in the aggregate totals
approximately $180 million. There can be no assurances that the Company will be
successful in obtaining purchase offers at acceptable prices or that sales will
be concluded. By the end of the year 2006, net leases representing approximately
22% of AREP's net annual rentals from its real estate portfolio or approximately
2.1% of AREP's total revenues for 2003 will be due for renewal, and by the end
of the year 2008, net leases representing approximately 31% of AREP's net annual
rentals or approximately 3% of AREP's total revenues for 2003 will be due for
renewal. Since many of AREP's properties are net-leased to single corporate
tenants, it may be difficult to sell those properties that existing tenants
decline to re-let.

Depending upon the tax basis of any properties being sold by the Company and
their sales price, the Company may recognize substantial taxable gain in the
year in which such properties are sold. Each Depositary Unitholder will be taxed
on the Unitholder's allocable gain from such sales (as adjusted for such
Unitholder's particular circumstances including the price paid and the purchase
date of the units). AREP believes there will be favorable opportunities to
utilize the proceeds from such sales. Therefore, it is AREP's intention not to
distribute any portion of the sales proceeds to the Unitholder.

For each of the years ended December 31, 2003, 2002 and 2001, 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, 2003, 2002 and
2001, Portland General Electric Company ('PGEC') occupied a property (the 'PGEC
Property') which represented approximately 14% of the carrying value of AREP's
total real estate assets leased to others. The PGEC property is currently under
contract of sale. The sale is subject to purchaser being satisfied with its due
diligence and to other conditions, and, as a result, may never be consummated.
See Item 2 -- 'Properties.'

Management believes 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. There can be no assurance that any asset acquired by AREP, whether in the
real estate sector or otherwise, 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.

AREP has in recent years made investments in the gaming industry through its
ownership of Stratosphere Hotel and Casino in Las Vegas, Nevada and through its
purchase of securities of the entity which owns the Sands Hotel in Atlantic
City, New Jersey. A subsidiary of AREP, formed for this purpose, entered into an
agreement in January 2004 to acquire two Las Vegas casino/hotels, Arizona
Charlie's Decatur and Arizona Charlie's Boulder from Carl C. Icahn and an entity
affiliated with Mr. Icahn, for an aggregate consideration of $125.9 million. The
closing of the acquisition is subject to certain conditions, including among
other things, obtaining all approvals necessary under the gaming laws. That
subsidiary issued and sold debt securities aggregating $215 million in principal
amount to finance the acquisition and the proceeds of such sale remain in escrow
pending completion of such acquisition. The amount raised in excess of the
acquisition cost and expenses will be used to repay intercompany debt and for
general business purposes by AREP and its subsidiaries. AREP is considering
additional gaming industry investments. 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.

The Company made an investment in the oil and gas industry and may consider
additional energy related investments. In October 2003, AREP acquired and
presently holds approximately 50.1% of the outstanding equity and all of the
outstanding debt securities of National Energy Group. Inc. which it

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acquired from an affiliate of Carl C. Icahn. (See Item 1 'Recent
Acquisitions/Investments -- National Energy Group, Inc.').

In furtherance of its effort to diversify its holdings, AREP intends to seek
other business opportunities which would include acquiring or starting
businesses in sectors such, as insurance in which AREP has had no experience to
date but which would be identified as potential growth areas.

Furthermore, AREP may continue to acquire real estate based assets and may
continue to originate or purchase mortgage or mezzanine loans including
non-performing loans. AREP may seek to 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.

In August 1996, AREP amended the Partnership Agreement ('the Amendment') to
permit non-real estate related acquisitions and investments which has allowed
and continues to permit AREP to take advantage of investment opportunities it
believes exist outside of the real estate market in order to seek to enhance
Unitholder value and further diversify its 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 intends to conduct its 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 invest in securities as its primary business and
that no more than 40% of AREP's total assets will be invested in investment
securities as such term is defined in the 1940 Act. In addition, AREP intends to
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 15, 2004, AREP announced that no distributions on its Depositary
Units are expected to be made in 2004. AREP continues to believe that it should
hold and utilize in its business, rather than distribute, cash. No distributions
were made in 2003, 2002 or 2001. AREP intends to continue to apply available
cash flow toward its operations, repayment of maturing indebtedness, tenant
requirements, investments, acquisitions and other capital expenditures. Proceeds
from real estate asset sales will be utilized to attempt to further diversify
its business operations outside of real estate, including but not limited to
sectors such as insurance and oil and gas and gaming, as well as in real estate
if opportunities to do so at favorable prices are found. AREP will seek
investments that provide rates of return in excess of AREP's cost of capital.
Obviously, making such acquisitions or achieving such returns cannot be assured.
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, 2003, AREP distributed to holders of record of its Preferred
Units as of March 14, 2003, 466,548 additional Preferred Units. Pursuant to the
terms of the Preferred Units, on February 23, 2004, 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, 2004 to holders of record as of March 12, 2004. In February 2004, the
number of authorized Preferred Units was increased to 10,400,000.

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,

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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 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.

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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
New Jersey Casino Control Commission and Nevada Gaming Commission with the
exception of Keith A. Meister whose application is currently on file with the
Nevada Gaming Commission. Investments in the gaming and entertainment industries
involve significant risks, including those relating to competitive pressures and
political and regulatory considerations. 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 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
attractive returns. 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 business.

NON-REAL ESTATE RELATED INVESTMENTS

In addition to real estate investments, AREP will also invest in securities
of companies 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 assets and may include other business
opportunities through majority owned subsidiaries. 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

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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 ACQUISITIONS/INVESTMENTS

NOTE RECEIVABLE -- AFFILIATE

On October 17, 2003, Carl C. Icahn ('Icahn') Chairman of the Board of the
General Partner, repaid the $250 million loan which had been made to him by AREP
on December 27, 2001. AREP made the 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 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. AREP
returned the collateral on October 17, 2003, the date the loan was repaid. The
interest on the loan was 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 rate in 2003 was 3.9% and in 2002 ranged from
3.9% to 4.03%. Interest income of approximately $7.9 million and $9.9 million
was earned by AREP on this loan in 2003 and 2002, respectively. AREP entered
into this transaction to earn interest income on a secured investment. The terms
of this transaction were reviewed and approved by the Audit Committee.

NATIONAL ENERGY GROUP, INC.

In October 2003, pursuant to a Purchase Agreement dated as of May 16, 2003,
AREP acquired certain debt and equity securities of National Energy Group, Inc.
('NEG') from entities affiliated with Carl C. Icahn for an aggregate
consideration of approximately $148.1 million plus approximately $6.7 million of
accrued interest on the debt securities. The agreement was reviewed and approved
by the Audit Committee which was advised by its independent financial advisor
and legal counsel. The securities acquired were $148,637,000 in principal amount
of outstanding 10 3/4% Senior Notes due 2006 of NEG (representing all of NEG's
outstanding debt securities) and 5,584,044 shares of common stock of NEG. As a
result of the foregoing transaction and the acquisition by AREP of additional
securities of NEG prior to the closing, AREP beneficially owns in excess of 50%
of the outstanding common stock of NEG.

NEG owns a 50% interest in NEG Holding LLC ('Holding LLC'). The other 50%
interest in Holdings is held by an Icahn affiliate who is the managing member.
Holdings owns NEG Operating LLC ('NEG Operating') which is engaged in the
business of oil and gas exploration and production with properties located
on-shore in Texas, Louisiana, Oklahoma and Arkansas. NEG Operating owns
operating oil and gas properties managed by NEG. Under the Holdings operating
agreement NEG is to receive guaranteed payments of approximately $47.9 million
and a priority distribution of approximately $148.6 million before the Icahn
affiliate receives any monies. Due to the substantial uncertainty that NEG will
receive any distribution above the priority and guaranteed payments amounts, NEG
accounts for its investment in Holdings as a preferred investment. AREP
consolidates NEG in its financial statements. 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

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interests. In August 2003, NEG entered into an agreement to manage Trans Texas
Gas Corporation, an Icahn affiliate, for a fee of $312,500 per month.

HOTEL AND CASINO PROPERTIES

On January 5, 2004, American Casino & Entertainment Properties LLC
('American Casino'), an indirect wholly-owned subsidiary of the Company, entered
into an agreement to acquire two Las Vegas casino/hotels, Arizona Charlie's
Decatur and Arizona Charlie's Boulder from Carl C. Icahn and an entity
affiliated with Mr. Icahn, for an aggregate consideration of $125.9 million. The
closing of the acquisition is subject to certain conditions, including among
other things, obtaining all approvals necessary under the gaming laws. The terms
of the transaction were approved by the Audit Committee. Upon receiving all
approvals necessary under gaming laws and upon closing of the acquisition, AREH
will transfer 100% of the common stock of Stratosphere Corporation
('Stratosphere') to American Casino. As a result, following the acquisition and
contribution, American Casino will own and operate three gaming and
entertainment properties in the Las Vegas metropolitan area.

Also, in January 2004, American Casino closed on its offering of Senior
Secured Notes Due 2012. The Notes, in the aggregate principal amount of $215
million, bear interest at the rate of 7.85% per annum. The proceeds will be held
in escrow pending receipt of all approvals necessary under gaming laws and
certain other conditions in connection with the acquisition of Arizona Charlie's
Decatur and Boulder. American Casino intends to use the proceeds of the offering
for the acquisition and to repay intercompany indebtedness and for general
business purposes by AREP and its subsidiaries. See Item 1. 'Financing
Activities.'

a. Stratosphere Tower Casino and Hotel

The Stratosphere, which offers the tallest free-standing observation
tower in the United States, is situated on approximately 31 acres of land
located at the northern end of the Las Vegas Strip. The facility is a
tourist-oriented gaming and entertainment destination property, which has
approximately 80,000 square feet of gaming space, 2,444 hotel rooms,
eight restaurants and approximately 110,000 square feet of developed
retail space. The Stratosphere features three of the most visable
amusement rides in Las Vegas. In 2003, Stratosphere's revenues were
approximately $163.7 million.

b. Properties Under Contract

Arizona Charlie's Decatur

Arizona Charlie's Decatur is located on approximately 17 acres of
land, four miles west of the Las Vegas strip. An estimated 500,000 people
live within a five-mile radius of the property. The property is easily
accessible from Route 95, a major highway in Las Vegas. Arizona Charlie's
Decatur contains approximately 52,000 square feet of gaming space, 258
hotel rooms, four restaurants and three bars. The property targets repeat
customers from the surrounding communities. In 2003, Arizona Charlie's
Decatur's revenues were approximately $67.9 million.

Arizona Charlie's Boulder

Arizona Charlie's Boulder is located on approximately 24 acres of
land, seven miles east of the Las Vegas strip, near an I-515 interchange.
The I-515 is the most heavily traveled east/west highway in Las Vegas. An
estimated 423,000 people live within a five-mile radius of the property.
Arizona Charlie's Boulder contains approximately 41,000 square feet of
gaming space, 303 hotel rooms, four restaurants and a 202-space
recreational vehicle park. As with the Arizona Charlie's Decatur
property, the property targets repeat customers from the surrounding
communities. In 2003, Arizona Charlie's Boulder's revenues were
approximately $31.2 million.

The ownership and operation of the Las Vegas casinos 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.

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c. Sands Hotel and Casino

The Company owns approximately 3.6 million shares of GB Holdings,
Inc. ('GBH'). GBH is the holding company for the Sands Hotel and Casino
(the 'Sands').

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, a hotel with 637
rooms, and related amenities.

In July 2003, GBH announced that its Board of Directors, acting
through a special committee, approved an exchange offer for the Sands
debt. 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 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 Mr. Icahn intend to support the proposed transaction.

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 indirect subsidiary of GBH, Atlantic Coast
Entertainment Holdings, Inc. ('Atlantic Holdings').

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 plus accrued interest on the existing notes.

The holders of a majority of the new notes will have an option to
convert all such notes into 72.5% of the Atlantic Holdings 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 Atlantic Holdings (on a fully diluted basis).

In connection with the foregoing, Atlantic Holdings has filed with
the Securities and Exchange Commission a Registration Statement on Form
S-4 (which contains a preliminary prospectus), under the Securities Act
of 1933, as amended (the 'Securities Act'), to transfer substantially all
of the assets of GBH to Atlantic Holdings and the registration of certain
securities to be issued to the stockholders of GBH; and, also on such
date, Atlantic Holdings and ACE Gaming, LLC, a newly formed wholly owned
subsidiary of Atlantic Holdings, filed with the SEC, a Registration
Statement on Form S-4 under the Securities Act, with respect to a consent
solicitation and exchange offer with respect to the existing notes.
Neither of such Registration Statements has been declared effective. GBH,
Atlantic Holdings, Carl Icahn, AREP and others also filed with the SEC a
Schedule 13e-3, under the Securities and Exchange Act of 1934, with
respect to such transactions.

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

I-8

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 four residential subdivisions in New
York and Florida. In New York, Bayswater has three residential subdivisions
under development with approximately 60 high end units remaining to be
constructed and sold. Bayswater also has one subdivision in New York that is in
the approval process for 50 townhouse units. In Naples, Florida, Bayswater owns
one property comprising land zoned for 191 residential condominium units. As
previously discussed, earnings from this business segment have declined sharply
in 2003 as land inventory is depleted and cannot be replenished cost
effectively. In 2004 sales are expected to increase moderately, however,
favorable economic conditions, municipal approvals of land inventory or the
purchase of approved land are required to continue this upward trend into 2005
and beyond.

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, commercial and recreational development
is in substantial compliance with a special permit issued for the property in
1964. However, a regional Massachusetts planning body created in 1989, the Cape
Cod Commission, concluded in January 2002 that the New Seabury development is
within its jurisdiction for review and approval (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.

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
with the Special Permit and therefore exempt from the Cape Cod Commission's
jurisdiction (the Court 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. In March 2004,
New Seabury moved for Summary Judgment to dispose of remaining claims under all
three complaints and to obtain a final judgment from the Court. 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 Cape Cod Commission is ultimately successful in asserting jurisdiction
over any of the development proposals. See Item 3. 'Legal Proceedings.'

PROPERTY TRANSACTIONS

Due to favorable real estate market conditions and the mature nature of the
Company's real estate portfolio, AREP has engaged C.B. Richard Ellis, Inc. to
assist it in obtaining offers for its rental real estate portfolio. AREP intends
to utilize proceeds from any asset sales to continue to diversify its operations
through acquisition and investment in the casino and entertainment sectors and
energy industry as well as other businesses possibly including insurance, and
additional real estate opportunities seeking to achieve higher rates of return
than the current portfolio. In total, the Company is marketing for sale
properties with a book value of approximately $340 million individually
encumbered by mortgage debt which in the aggregate is approximately $180
million. There can be no assurances that offers satisfactory to AREP will be
received and if received that the properties will ultimately be sold at prices
acceptable to AREP.

At March 1, 2004, the Company had 31 properties under contract or as to
which letters of intent had been executed by the potential purchaser, all of
which contracts or letters of intent are subject to purchaser's due diligence
and other closing conditions. Selling prices for the properties covered by the
contracts or letters of intent would total approximately $277 but the properties
are encumbered by aggregate mortgage debt of approximately $144 million which
would have to be repaid out of the proceeds of the sales. At December 31, 2003,
the carrying value of these properties is approximately

I-9

$207 million. In 2003, net income from these properties totalled approximately
$4.7 million; interest expense was approximately $11 million; and depreciation
and amortization expense was approximately $3.4 million. In accordance with
generally accepted accounting principles, only the real estate operating
properties under contract or letter of intent, but not the financing lease
properties were reclassified to 'Properties Held for Sale' and the related
income and expense reclassified to 'Income from Discontinued Operations.'

In October 2003, AREP sold a property located in Columbia, Maryland to its
tenant for approximately $11 million, recognizing a gain of approximately $5.8
million.

In January 2004, the Company sold five properties tenanted by Alabama Power
to its tenant for approximately $10.9 million, recognizing a gain of
approximately $6.0 million. Also in January 2004, AREP sold a grocery-anchored
shopping center located in Audubon, New Jersey for approximately $7.3 million,
recognizing a gain of approximately $6.8 million.

In conjunction with AREP's reinvestment program, in January 2004, the
Company purchased a 34,422 square foot commercial condominium unit located in
New York City for approximately $14.5 million. The unit contains a Citibank
branch, a furniture store and a restaurant. The annual net operating income is
anticipated to be approximately $1 million. AREP is seeking financing for this
property.

MEZZANINE LOANS

AREP has provided and continues to seek to provide 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 the fourth quarter of 2003, the Company received approximately $19
million of condominium sales proceeds from a mezzanine loan on a Florida
condominium property. The Company had advanced $12.2 million to the
developer. The balance of the payment represents accrued interest of
approximately $6.8 million which was recognized as interest income in the
year ended December 31, 2003.

b. At December 31, 2003, AREP had funded two mezzanine loans for
approximately $42 million and had commitments to fund, under certain
conditions, additional advances of approximately $20 million. One loan in
the amount of $31 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 which was completed in November, 2003. At December
31, 2003, accrued interest of approximately $11 million has been deferred
for financial statement purposes, pending receipt of principal and interest
payments. These loans are due in 2005.

OTHER INVESTMENTS

The Company owned equity and debt securities of Philip Services Corp.
('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 2003, prior to the bankruptcy filing, management of the Company
determined that it was appropriate to write-off the balance of its investment in
Philip common stock by a charge to earnings of approximately $961,000.

The Company also owned Philip Term and Payment-in-kind notes in the
principal amount of approximately $32.7 million; the cost basis of the notes was
approximately $22.1 million. For the second quarter of 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

I-10

approximately $3.3 million; therefore, the Company recorded a write-down of
approximately $18.8 million by a charge to earnings in the second quarter of
2003. In December 2003, the Company sold to an unaffiliated third party,
approximately $20 million in principal amount of the Notes for approximately
$2.6 million recognizing a gain on sale of approximately $438,000. Philip
emerged from bankruptcy on December 31, 2003 as a private company controlled by
an Icahn affiliate. AREP's remaining interest in the notes will be delivered and
exchanged for approximately 443,000 common shares representing a 4.4% equity
interest in the new Philip valued at the carrying value of the debt at
December 31, 2003 of approximately $1.1 million.

At December 31, 2003, AREP had investments of approximately $80.5 million in
marketable equity and debt securities, including approximately $24.7 million of
Sands notes and $51.6 million of corporate bonds. At March 3, 2004,
approximately $23 million cost basis of the corporate bonds were sold for
approximately $38 million representing a gain of approximately $15 million which
will be recognized in the first quarter of 2004.

FINANCING ACTIVITIES

In January 2004, American Casino closed on its offering of Senior Secured
Notes Due 2012. The Notes, in the aggregate principal amount of $215 million,
bears interest at the rate of 7.85% per annum. The proceeds will be held in
escrow pending receipt of all approvals necessary under gaming laws and certain
other conditions in connection with the acquisition of Arizona Charlie's Decatur
and Boulder. If the acquisition is not consummated by August 31, 2004, then the
notes will be redeemed at a price equal to 100% of the aggregate principal
amount of the notes, plus accrued interest to the date of redemption.

The notes will be recourse only to, and will be secured by a lien on the
assets of, American Casino and its subsidiaries. The Notes will restrict the
ability of those companies, subject to the exceptions set forth in the notes,
to: incur additional debt; pay dividends and make distributions; make certain
investments; repurchase stock; create liens; enter into transactions with
affiliates; enter into sale and leaseback transactions; merge or consolidate;
and transfer, lease or sell assets.

In May 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.

LEASING ACTIVITIES

In 2003, seventeen leases covering seventeen properties and representing
approximately $2.2 million in annual rentals expired. 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.

In 2004, eleven leases covering eleven properties representing approximately
$1.8 million in annual rentals are scheduled to expire. Eight leases
representing approximately 1.5 million in annual rentals were renewed for
approximately $1,458,000. Such renewals are generally for a term of five years.
Three properties with annual rentals of approximately $320,000 have not been
renewed.

By the end of the year 2006, net leases representing approximately 22% of
AREP's net annual rentals from its real estate portfolio or approximately 2.1%
of AREP's total revenues for 2003 will be due for renewal, and by the end of the
year 2008, net leases representing approximately 31% of AREP's net annual
rentals or approximately 3% of AREP's total revenues for 2003 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,

I-11

taxes, insurance and environmental compliance costs associated with such
properties which are presently the responsibility of the tenant.

BANKRUPTCIES AND DEFAULTS

AREP is aware that 19 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 19
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).

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 determines on a property by property
basis whether or not to obtain terrorism insurance coverage.

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

I-12

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 75 updates were completed
in 2003. No additional environmental conditions were uncovered.

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
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.

EMPLOYEES

AREP and its consolidated subsidiaries have approximately 3,000 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 1,300 employees of

I-13

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 real property 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.

Investments in the gaming and entertainment industries involve significant
competitive pressures and political and regulatory considerations. In recent
years, there have been many 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 Company's 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. Stratosphere
also competes with a large number of hotels and motels located in and near Las
Vegas. Stratosphere's Tower competes with all other forms of entertainment,
recreational activities and other attractions in and near Las Vegas and
elsewhere. Many of AREP'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 national 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 December 31, 2003, AREP owned 128 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 28 states. Most of these properties are net-leased to single
corporate tenants. Approximately 81% of these properties are currently
net-leased, 9% are operating properties and 10% are vacant.

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.

I-14

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

From January 1, 2004 through March 1, 2004, AREP sold or otherwise disposed
of 7 properties. In connection with such sales and dispositions, AREP received
an aggregate of approximately $18,242,000 in cash, net of closing costs and
amounts utilized to satisfy mortgage indebtedness which encumbered such
properties.

As previously discussed, AREP is marketing for sale its rental real estate
portfolio. At March 1, 2004, the Company had 31 properties under contract or
letter of intent which are subject to purchaser's due diligence and other
closing conditions. Selling prices for these properties total approximately $277
million and the properties are individually encumbered by mortgage debt
aggregating approximately $144 million which would have to be paid by AREP out
of the sale proceeds. At December 31, 2003, the carrying value of these
properties is approximately $207 million. In 2003, net income from these
properties totalled approximately $4.7 million; interest expense was
approximately $11 million; and depreciation and amortization expense was
approximately $3.4 million. In accordance with generally accepted accounting
principles, only the real estate operating properties under contract or letter
of intent, but not the financing lease properties were reclassified to
'Properties Held for Sale' and the related income and expense reclassified to
'Income from Discontinued Operations.'

For each of the years ended December 31, 2003, 2002, and 2001, 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, 2003,
2002, and 2001, Portland General Electric Company ('PGEC') occupied a property,
which represented approximately 14% 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. ('Enron') which has filed for
bankruptcy under Chapter 11 of the Federal Bankruptcy Code. PGEC is not included
in the filing. In November 2003, Enron agreed to sell PGEC to a newly created
company called Oregon Electric Utility Company, LLC. In February 2004, the
Bankruptcy Court approved the sale, which will require certain regulatory
approvals. AREP is not aware of any conditions of the sale that will affect
PGEC's lease obligation. At December 31, 2003 and February 28, 2004, PGEC was
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
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 has entered into a contract to sell the PGEC property which is subject
to the purchaser's due diligence and other conditions. The PGEC property is
encumbered by mortgage debt of approximately $33.6 million which will be due on
sale.

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

I-15

tallest free-standing observation tower in the United States. The hotel and
entertainment facility has 2,444 rooms and suites, a 80,000 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.'

AREP, owns 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 637 rooms and suites, a 79,000 square foot
casino and related amenities. See Item 1 -- 'Recent Acquisition/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. See Item 3. 'Legal Proceedings.'

ITEM 3. LEGAL PROCEEDINGS.

a. In January 2002, the Cape Cod Commission, (the 'Commission'), a
Massachusetts regional planning body created in 1989, concluded that AREP's
New Seabury development 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 therefore exempt from the Commission's jurisdiction and that
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, an AREP subsidiary and
owner of the property, filed in Barnstable County Massachusetts Superior
Court, a civil complaint appealing the Administrative Decision by the
Commission, and a separate civil 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 (the Second Administrative Decision). In August 2003, New
Seabury filed in Barnstable County Massachusetts Superior Court another
civil complaint appealing the Second Administrative Decision 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 with the Special Permit and therefore exempt from the
Commission's jurisdiction (the Court 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. In February 2004, New Seabury and the Commission jointly
moved to consolidate the three complaints into one proceeding. The Court
subsequently consolidated the three complaints into one proceeding. In March
2004 New Seabury moved for Summary Judgment to dispose of remaining claims
under all three complaints and to obtain a final judgment from the Court.
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 (collectively referred to as the 'Stratosphere

I-16

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, 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.

c. 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.

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

No matters were submitted to a vote of Unitholders during 2003.

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, 2002 through December 31, 2003 is as follows:

On March 1, 2004, 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 $14.88.

As of March 1, 2004, there were approximately 8,400 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 15, 2004, AREP announced that no distributions on its Depositary
Units are expected to be made in 2004. AREP continues to believe that it should
hold and utilize in its business, rather than distribute, cash. No distributions
were made in 2003, 2002, or 2001. AREP intends to continue to apply available
cash flow toward its operations, repayment of maturing indebtedness, tenant
requirements, investments, acquisitions and other capital expenditures. Proceeds
from real estate asset sales will be utilized to attempt to further diversify
its business operations outside of real estate, including but not limited to
sectors such as insurance and oil and gas and gaming as well as in real estate
if opportunities to do so at favorable prices are found. AREP will seek
investments that provides rates of return in excess of AREP's cost of capital.
Obviously, making such acquisitions or achieving such returns cannot be assured.
See Item 7 -- 'Management's Discussion and Analysis of the Financial Condition
and Results of Operations -- Capital Resources and Liquidity.'

As of March 1, 2004, there were 46,098,284 Depositary Units and 9,796,607
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, 2003, AREP distributed to holders of record of its Preferred
Units as of March 14, 2003, 466,548 additional Preferred Units. Pursuant to the
terms of the Preferred Units, on February 23, 2004, 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
on March 31,

II-1

2004 to holders of record as of March 12, 2004. In February 2004, the number of
authorized Preferred Units was increased to 10,400,000.

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 number of units authorized to be
repurchased to 1,250,000 Depositary Units. As of February 17, 2004, AREP had
purchased 1,137,200 Depositary Units at an aggregate cost of approximately
$11,921,000. AREP recently has not been acquiring Depositary Units, 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)

(1) The Company's consolidated financial statements have been restated in
connection with the acquisition of NEG, Inc.

II-3

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.

The Company and its consolidated subsidiaries are engaged in rental real
estate operations; hotel, casino and resort operations; land, house and
condominium development; participation in and management of oil and gas
properties; and investment in securities, including investment in equity and
debt securities. As of March 1, 2004, AREP owned 121 separate real estate assets
primarily consisting of fee and leasehold interests in 28 states. For additional
information, see Item 2 -- 'Properties.' The Company intends to operate its
business 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's primary business strategy in recent years 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.
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 noted below, AREP is currently attempting to
market for sale its rental real estate portfolio. It intends to use the proceeds
from real estate asset sales thereof to further diversify its business
operations outside of real estate, including but not limited to areas such as
insurance and oil and gas and gaming, as well as in real estate if opportunities
to do so at favorable prices are found. No assurance can be given that either
the attempt to market the real estate portfolio will be successful or that, if
successful, the proceeds thereof can be used to acquire businesses and
investments at prices or at projected returns which are deemed favorable.

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.

GENERAL

Due to favorable real estate market conditions and the mature nature of the
Company's real estate portfolio, AREP has engaged CB Richard Ellis, Inc., a
national real estate brokerage company, to assist it in obtaining offers for its
rental real estate portfolio. In total, the Company is currently marketing for
sale properties with a book value of approximately $340 million, individually
encumbered by mortgage debt which, in the aggregate, is approximately $180
million. AREP intends to utilize proceeds from real estate asset sales to
further diversify its business operations outside of real estate including but
not limited to sectors such as insurance and oil and gas and gaming as well as
in real estate if opportunities to do so at favorable prices are found. There
can be no assurances that the Company will be successful in obtaining purchase
offers at acceptable prices.

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

II-4

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,
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
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 2006, net leases representing approximately 22% of
AREP's net annual rentals from its real estate portfolio (or approximately 2.1%
of AREP's total revenues for 2003) will be due for renewal, and by the end of
the year 2008, net leases representing approximately 31% of AREP's net annual
rentals (or approximately 3% of AREP's total revenues for 2003) 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 sell those properties that
existing tenants decline to re-let 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.

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 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.

II-5

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 75 updates were
completed in 2003; no additional environment conditions were discovered.

RESULTS OF OPERATIONS

CALENDAR YEAR 2003 COMPARED TO CALENDAR YEAR 2002

Gross revenues decreased by $69,729,000, or 19.7%, during the year ended
December 31, 2003 as compared to the same period in 2002. This decrease reflects
decreases of $62,759,000 in land, house and condominium sales, $7,801,000 in
interest income on U.S. Government and Agency Obligations and other investments,
$3,771,000 in equity in earnings of GB Holdings, Inc., $2,737,000 in accretion
of investment in NEG Holding LLC, $1,607,000 in financing lease income and
$93,000 in hotel and resort operating income partially offset by increases of
$7,386,000 in hotel and casino operating income, $982,000 in rental income,
$341,000 in dividend and other income and $330,000 in NEG management fee. 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 the Icahn loan
in 2003 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 had a negative effect on casino operations and was
changed in 2003 to focus on the mid to high-end slot customer with a balanced
table game business. The decrease in accretion of investment in NEG Holding LLC
is primarily attributable to priority distributions received from NEG Holding
LLC in 2003. 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
and percentage occupancy increased approximately 0.2% to 89.8%. The increase in
rental income is primarily attributable to a property acquisition and
reclassifications of financing leases to operating leases.

Expenses decreased by $49,139,000 or 18.4%, during the year ended
December 31, 2003 as compared to the same period in 2002. This decrease reflects
decreases of $45,511,000 in the cost of land, house and condominium sales,
$6,729,000 in interest expense, $1,284,000 in hotel and resort operating
expenses and $53,000 in general and administrative expenses partially offset by
increases of $3,770,000 in hotel and casino operating expenses, $566,000 in
rental property expenses and $102,000 in depreciation and amortization. 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 72% in
2002 to 69% in 2003. The decrease in interest expense is primarily due to
repayment of debt by NEG and the purchase by AREP of the NEG notes in October
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

II-6

operating expenses is primarily attributable to increased costs associated with
increased revenues. Costs as a percentage of sales decreased from 84% in 2002 to
83% in 2003.

Operating income decreased during the year ended December 31, 2003 by
$20,590,000 compared to the same period in 2002 as detailed above.

Earnings from land, house and condominium operations decreased significantly
in the year ended December 31, 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 increase moderately during 2004, however municipal
approval of land inventory or the purchase of approved land is required to
continue this upward trend into 2005 and beyond.

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
$1,869,000 during the year ended December 31, 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 $750,000 was recorded in the year
ended December 31, 2003 as compared to $3,212,000 in 2002. In 2002, there were
more properties vacated due to tenant bankruptcies than in 2003.

A write-down of marketable equity securities available for sale of $961,000
was recorded in the year ended December 31, 2003 as compared to a write-down of
$8,476,000 in 2002. These write-downs relate to the Company's investment in
Philip which filed for bankruptcy protection in June 2003.

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 year ended
December 31, 2003. There was no such write-down in the comparable period of
2002. In 2003, management of the Company reviewed Philip's financial statements
and other data and determined this investment to be impaired.

A write-down of a limited partnership investment in a biotechnology
partnership of $3,750,000 was recorded in the year ended December 31, 2002.
There was no such write-down in 2003.

A gain on sale of marketable equity securities of $2,607,000 was recorded in
the year ended December 31, 2003. There was no such gain in the comparable
period of 2002.

Minority interest in the net earnings of Stratosphere Corporation was
$1,943,000 during the year ended December 31, 2002. As a result of the
acquisition of the minority interest in December 2002, there was no minority
interest in Stratosphere in 2003 and none thereafter.

Income from continuing operations before income taxes decreased by
$22,980,000 in the year ended December 31, 2003 as compared to the same period
in 2002 as detailed above.

An income tax benefit of $6,495,000 was recorded in the year ended
December 31, 2003 as compared to an expense of $7,480,000 in the comparable
period of 2002. The effective tax rate on earnings of taxable subsidiaries was
positively affected in 2003 by a reduction in the valuation allowance in
deferred tax assets. The Company expects its effective tax rate to increase
significantly in 2004.

Income from continuing operations decreased by $9,005,000 in the year ended
December 31, 2003 as compared to the same period in 2002 as detailed above.

Income from discontinued operations increased by $3,236,000 in the year
ended December 31, 2003 as compared to the same period in 2002 due to gains on
property dispositions.

Net earnings for the year ended December 31, 2003 decreased by $5,769,000 as
compared to the year ended December 31, 2002 primarily due to a write-down of
mortgages and notes receivable ($18.8 million), decreased earnings from land,
house and condominium operations ($17.2 million), decreased interest income
($7.8 million) and decreased equity in earnings of GB Holdings ($3.5 million),
partially offset by decreased income tax expense ($14.0 million), a decrease in
write-down of equity securities available for sale ($7.5 million), decreased
interest expense ($6.7 million), decreased write-down of limited partnership
interests ($3.8 million), increased earnings from hotel and casino operations
($3.6 million), increased gain on the sale of marketable equity securities ($2.6
million) and an increase in income from discontinued operations ($3.2 million).

II-7

CALENDAR YEAR 2002 COMPARED TO CALENDAR YEAR 2001

Gross revenues increased by $23,975,000, or 7.3%, during the year ended
December 31, 2002 as compared to the same period in 2001. This increase reflects
increases of $23,045,000 in accretion of investment in NEG Holding LLC,
$20,458,000 in land, house and condominium sales, $11,961,000 in hotel and
casino operating income, $4,938,000 in NEG management fee, $2,179,000 in hotel
and resort operating income and $465,000 in rental income partially offset by
decreases of $33,176,000 in oil and gas operating income, $2,213,000 in
financing lease income, $2,157,000 in dividend and other 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
accretion of investment in NEG Holding LLC and the management fee are due to the
partial year of 2001 which began May 1 as a result of the bankruptcy
reorganization. Prior to that time, NEG directly owned and operated oil and
natural gas properties. 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
decrease in financing lease income is the result of lease expirations,
reclassification of financing leases and normal financing lease amortization.
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
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.

Expenses increased by $3,997,000, or 1.5%, 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,
$3,703,000 in hotel and casino operating expenses, $1,692,000 in rental property
expenses, $1,574,000 in hotel and resort operating expenses and $1,123,000 in
general and administrative expenses partially offset by decreases of $7,400,000
in interest expense, $5,569,000 in oil and gas operating expenses and $3,167,000
in depreciation and amortization. The increase in the cost of land, house and
condominium sales is due to 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 84% 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 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 85% 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. The decrease in oil and gas operating
expenses is due to the partial year of 2001 as explained above. The decrease in
depreciation and amortization expense is primarily attributable to NEG
contributing its operating properties to NEG Holdings in May 2001.

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

II-8

properties are expected to be constrained by recessionary pressures,
international tensions and competition.

Operating income increased during the year ended December 31, 2002 by
$19,978,000 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 acquisition of the minority interest in
December 2002, there will be no minority interest in net earnings of
Stratosphere Corporation in 2003 and thereafter.

Income from operations before income taxes increased by $6,735,000 in the
year ended December 31, 2002 as compared to the same period in 2001 as detailed
above.

The income tax expense was $7,480,000 for the year ended December 31, 2002
as compared to an income tax benefit of $30,077,000 for the comparable period of
2001.

Income from continuing operations decreased by $30,822,000 in the year ended
December 31, 2002 as compared to the same period of 2001.

Income from discontinued operations decreased by $146,000 for the year ended
December 31, 2002 as compared to the same period of 2001.

Net earnings for the year ended December 31, 2002 decreased by $30,968,000
as compared to the year ended December 31, 2001 primarily due to increased
income tax expense ($37.6 million), 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) increased earnings from hotel and casino operations
($8.3 million) and increased gain on sale of real estate ($7.3 million).

CAPITAL RESOURCES AND LIQUIDITY

Net cash provided by operating activities was $18.5 million for the
year ended December 31, 2003 as compared to $100.1 million in the comparable
period of 2002. This decrease resulted primarily from a decrease in the land,
house and condominium operations ($45.6 million) and the payment of accrued
interest on senior notes ($41.7 million) and an increase in cash flow from other
operations ($5.7 million).

II-9

The following table reflects the Company's contractual cash obligations, as
of December 31, 2003, due during the indicated periods (in $millions):

In 2003, seventeen leases covering seventeen properties and representing
approximately $2.2 million in annual rentals expired. 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.

In 2004, eleven leases covering eleven properties and representing
approximately $1.8 million in annual rentals are scheduled to expire. Eight
leases representing $1.5 million in annual rental income were renewed for
$1,458,000 in annual rentals. Such renewals are generally for a term of five
years. Three properties with annual rentals of $320,000 were not renewed.

On March 15, 2004, AREP announced that no distributions on its Depositary
Units are expected to be made in 2004. AREP continues to believe that it should
continue to hold and invest, rather than distribute, cash. AREP intends to
continue to apply available cash flow toward its operations, repayment of
maturing indebtedness, tenant requirements, investments, acquisitions and other
capital expenditures. Proceeds from real estate asset sales will be utilized to
further diversify its business operations outside of real estate, including but
not limited to sectors such as insurance and oil and gas and gaming as well as
in real estate if opportunities to do so at favorable prices are found. AREP
will seek investments that provide returns in excess of AREP's cost of capital.
Obviously, achieving such returns can not be assured.

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 $20.6 million in 2003. During 2002, such sales proceeds totaled
approximately $20.5 million. In May 2003, AREP obtained mortgage financing in
the principal amount of $20 million on a distribution facility located in
Windsor Locks, Connecticut. In 2002 mortgage financing proceeds were $12.7
million.

In October 2003, pursuant to a Purchase Agreement dated as of May 16, 2003,
AREP acquired all of the debt and 50% of the equity securities of National
Energy Group, Inc. from entities affiliated with Carl C. Icahn for an aggregate
consideration of approximately $148.1 million plus approximately $6.7 million of
accrued interest on the debt securities.

Capital expenditures for real estate and hotel, casino and resort operations
were approximately $20.1 million during 2003. During 2002, such expenditures
totaled approximately $4.8 million. In 2004, capital expenditures are estimated
to be approximately $13 million.

During the year ended December 31, 2003, approximately $10.3 million of
principal payments were repaid. During the year ended December 31, 2002,
approximately $7.6 million of principal payments were repaid.

AREP's cash and cash equivalents and investment in U.S. Government and
Agency obligations increased by $138.3 million during the year ended
December 31, 2003, primarily due to affiliate loan repayment ($250 million),
property sales and refinancing proceeds ($40.6 million), priority distribution
from NEG Holding LLC ($40.5 million), net cash flow from operations ($18.5
million), guaranteed payment from NEG Holding LLC ($18.2 million) and other
items ($14.9 million) partially offset by the purchase of NEG interests ($148.1
million), purchase of debt securities ($45.1 million), increase in

II-10

mezzanine loans ($31.1 million) and capital expenditures for real estate and
hotel, casino and resort operating properties ($20.1 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.

AREP accounted for its acquisition of NEG as assets transferred between
entities under common control which requires that they be accounted for at
historical costs similar to a pooling of interests. NEG's investment in Holding
LLC constitutes a variable interest entity. In accordance with generally
accepted accounting principles, AREP has determined that NEG is not the primary
beneficiary of Holding LLC and therefore does not consolidate Holding LLC in its
Consolidated Financial Statements.

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.

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

II-11

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.

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 and NEG, the
Company's corporate subsidiaries, account for their 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 assts 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.

Management periodically evaluates all evidence, both positive and negative,
in determining whether a valuation allowance to reduce the carrying value of
deferred tax assets is still needed. In 2003, it concluded, based on the
projected allocations of taxable income, the Company's corporate subsidiaries,
National Energy Group, Inc. and Stratosphere Corporation, more likely than not
will realize a partial benefit from its deferred tax assets and loss
carryforwards. Ultimate realization of the deferred tax asset is dependent upon,
among other factors, the Company's Corporate Subsidiaries' ability to generate
sufficient taxable income within the carryforward periods and is subject to
change depending on the tax laws in effect in the years in which the
carryforwards are used.

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 value of the properties are considered other than
temporary at which time the property is written down to net realizable value. A
property is classified as held for sale at the time management determines that
the criteria in SFAS 144 have been met. Properties held for sale are carried at
the lower of cost or net realizable value. Such properties are no longer
depreciated and their operations are included in discontinued operations.

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

II-12

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 with maturities greater than one
year. If interest rates increased 100 basis points, the fair value of these
investments at December 31, 2003, would decline by approximately $200,000.

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-13

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, 2003 and 2002,
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, 2003. In connection with our audits of the
consolidated financial statements, we also have audited the financial statement
schedule as listed in the Index at Item 15(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, 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, 2003 and 2002 and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 2003 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 12, 2004

II-14

AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 AND 2002

See notes to consolidated financial statements.

II-15

AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 (IN $000'S EXCEPT PER UNIT AMOUNTS)

See notes to consolidated financial statements.

II-16

AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS'
EQUITY AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 (IN $000'S)

Accumulated other comprehensive gain (loss) at December 31, 2003, 2002 and
2001 was $9,174, ($242) and ($17,178), respectively.

See notes to consolidated financial statements.

II-17

AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 (IN $000'S)

(table continued on next page)

See notes to consolidated financial statements.

II-18

AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 (IN $000'S)

(table continued from previous page)

See notes to consolidated financial statements.

II-19

AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001

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. The General Partner is owned and controlled by
Mr. Carl C. Icahn ('Icahn').

On August 16, 1996 the Company amended its Partnership Agreement to permit
non-real estate related acquisitions and investments which has allowed and
continues to permit the Company to take advantage of investment opportunities it
believes exist outside of the real estate market in order to seek to enhance
unitholder value and further diversify its assets. 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 (the '1940
Act'). Generally, this means that no more than 40% of the Company's total assets
will be invested in investment securities as such is defined in the 1940 Act. In
addition, the Company does not intend to invest in securities as its primary
business and 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, (iv) participation
and management of oil and gas operating properties and (v) investment in
securities including investment in other entities and marketable equity and debt
securities.

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.

In October 2003, the Company acquired certain debt and equity securities of
National Energy Group, Inc. ('NEG') from entities affiliated with Icahn for an
aggregate consideration of $148.1 million. NEG owns a 50% interest in NEG
Holding LLC ('Holding LLC') which owns oil and gas properties managed by NEG.
The other 50% interest in Holding LLC is held by an Icahn affiliate and managing
member. In connection with the acquisition of stock in NEG, the excess of cash
disbursed over the historical cost which amounted to $2.8 million was charged to
the General Partner's equity.

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, and the financial statements
of previously separate companies for periods prior to the acquisition are
restated on a combined basis. There is no minority interest allocated to the
other NEG stockholders because of NEG's negative equity. See Note 10.

II-20

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Financial Statements and Principles of Consolidation -- The consolidated
financial statements are prepared in accordance with accounting principles
generally accepted in the United States 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 in 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: 8,391,659, 10,368,414 and 9,500,828 limited partnership units for the
years ended December 31, 2003, 2002 and 2001, respectively, to reflect the
effects of the conversion of preferred units.

For accounting purposes, NEG's earnings prior to the NEG acquisition in
October 2003 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, 2003 and 2002 are investments in government backed securities of
approximately $378,000,000 and $5,467,000, 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.
Investments 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 or available for sale
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. Generally interest is not paid
periodically but 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.

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 and NEG, the
Company's corporate subsidiaries, account for their 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

II-21

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.

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. A
property is classified as held for sale at the time management determines that
the criteria in SFAS 144 have been met. Properties held for sale are carried at
the lower of cost or net realizable value. Such properties are no longer
depreciated and their operations are included in discontinued operations.

Depreciation -- Depreciation is computed using the straight-line method over
the estimated useful life of the particular property or property components,
which range from three 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,
(v) gaming-related liability and loyalty programs and (vi) deferred tax assets.

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.

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.

Investment in NEG Holding LLC -- Due to the substantial uncertainty that the
Company will receive any distribution above the priority and guaranteed payment
amounts, the Company accounts for its investment in Holding LLC as a preferred
investment whereby guaranteed payment amounts received and receipts of the
priority distribution amount are recorded as reductions in the investment and
income is recognized from accretion of the investment up to the priority
distribution amount, including the guaranteed payments (based on the interest
method) (see Note 10). Following receipt of the guaranteed payments and priority
distributions, the residual interest in the investment will be valued at zero.

II-22

The Company periodically evaluates the propriety of the carrying amount of
its investment in Holding LLC to determine whether current events or
circumstances warrant adjustments to the carrying value and/or revisions to
accretion of income. The Company currently believes that no such impairment has
occurred and that no revision to the accretion of income is warranted.

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 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 18.

2. In January 2003, the FASB issued FASB Interpretation 46 (revised December
2003), Consolidation of Variable Interest Entities, which addresses how a
business enterprise should evaluate whether it has a controlling financial
interest in an entity through means other than voting rights and accordingly
should consolidate the entity. FIN 46R, issued in December 2003 as a revision to
the original interpretation, clarifies the application of ARB 51, Consolidated
Financial Statements, to certain entities in which the equity investors do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support.

The Company is required to apply FIN 46R to variable interests created after
January 2003. For variable interest entities created prior to January 2003, for
which FIN 46 has not been applied prior to December 24, 2003, the interpretation
will be applied in reporting periods ending after March 15, 2004.

The Company has an investment in a variable interest entity, which owns oil
and natural gas operating properties. The variable interest entity has net
assets of $161 million. The Company has determined that it is not the primary
beneficiary of the variable interest entity. The maximum exposure to losses as a
result of its involvement with the variable interest entity is $69 million.

3. RELATED PARTY TRANSACTIONS

a. At December 31, 2002, the Company had a $250 million note receivable from
Carl C. Icahn, Chairman of the General Partner, which was repaid in October
2003. (See Note 12).

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
paid $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 2003, 2002 and 2001, the Company paid such affiliate
approximately $159,000, $153,000 and $147,000

II-23

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 $2,993,000, $1,675,000 and $1,343,000 in the years ended
December 31, 2003, 2002 and 2001, respectively, for administrative services
performed by Stratosphere personnel.

Stratosphere received hotel revenue of approximately $3,000, $123,000 and
$600,000 in the years ended December 31, 2003, 2002 and 2001, respectively, in
connection with a tour and travel agreement entered into with an affiliate of
the General Partner. Stratosphere also received approximately $101,000 in hotel
and food revenue from an affiliate of the General Partner in the year ended
December 31, 2003 in connection with a conference held at Stratosphere.

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, 2003, 2002, and 2001.

e. NEG received management fees from an affiliate of approximately
$7,967,000, $7,637,000 and $2,699,000 in the years ended December 31, 2003, 2002
and 2001, respectively.

f. NEG entered into an agreement to manage Trans Texas Gas Corporation, an
Icahn affiliate, for a fee of $312,500 per month.

g. For the year ended December 31, 2003, the Company paid approximately
$81,000 to an affiliate of the General Partner for telecommunication services.

h. See Note 26 in connection with the acquisition of Arizona Charlie's
Decatur and Arizona Charlies Boulder from Icahn and an entity affiliated with
Icahn.

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-24

The following is a summary of the anticipated future receipts of the minimum
lease payments receivable at December 31, 2003 in ($000's):

At December 31, 2003, approximately $107,543,000 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

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

As of December 31, 2003 and 2002, accumulated depreciation on the hotel and
resort operating properties (not included above) amounted to approximately
$12,341,000 and $9,665,000, respectively (See Note 13).

The following is a summary of the anticipated future receipts of minimum
lease payments under non-cancelable leases at December 31, 2003 (in $000's):

At December 31, 2003, approximately $15,630,000 of net real estate leased to
others was pledged to collateralize the payment of non-recourse mortgages
payable.

b. Real estate held for sale (in $000's):

II-25

The following is a summary of income from discontinued operations:

At December 31, 2003, approximately $105,984,000 of real estate held for
sale was pledged to collateralize the payment of non-recourse mortgages payable.

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

The Company has investments in U.S. Government and Agency Obligations whose
maturities range from 2004 to December 2008 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.

II-26

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 in such entities to an affiliate of the General Partner for $40.5
million, which was 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 ('GBH') 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 GBH 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,
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
GBH and $26.9 million face amount of GB 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, and
$5,306,000 for the years ended December 31, 2002 and 2001, 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.

In July 2003, GBH announced that its Board of Directors, acting through a
special committee, approved an exchange offer for the GB Notes. The proposed
transaction is subject to the consent of the holders of a majority in principal
amount of the GB 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

II-27

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 Mr. Icahn intend to support the proposed transaction. The
GB Notes in the face amount of $110 million are due in September 2005 and 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
indirect subsidiary of GBH, Atlantic Coast Entertainment Holdings, Inc.
('Atlantic Holdings').

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 Atlantic Holdings 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 Atlantic
Holdings (on a fully diluted basis).

As the exchange will be accounted for as a modification of debt for
accounting purposes, this transaction is not expected to have a significant
impact on the Company's consolidated financial statements.

For accounting purposes, the Company reflects its interest in the GB Notes
as held to maturity.

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, the Company owned the following approximate
interests in Philip Service Corporation ('Philip'): (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 had an
approximate 7% equity interest in Philip and an Icahn affiliate had an
approximate 38% equity interest. Icahn affiliates also owned term and
payment-in-kind debt.

The secured term debt matures March 31, 2005 and bears interest at 9% per
annum. Interest was payable quarterly, in arrears, beginning July 1, 2000. The
secured convertible payment-in-kind debt matures March 31, 2005 and bears
interest at 10% per annum. Interest was 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 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 was approximately $200,000 at December 31, 2002.

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 year ended December 31, 2003, management of the Company determined
that it was appropriate to write-off the balance of its investment in the
Philip's 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.

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.

II-28

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.

In 2003, the cost basis of the debt 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 debt and
determined this investment to be impaired. Based upon this review, management
concluded the fair value of the debt to be approximately $3.3 million;
therefore, the Company recorded a write-down of approximately $18.8 million by a
charge to earnings which was included in 'Write-down of mortgages and notes
receivable' in the Consolidated Statements of Earnings in the year ended
December 31, 2003. In December 2003, the Company sold two-thirds of its term and
PIK debt with a basis of $2.2 million for $2.6 million generating a gain of $.4
million.

Philip emerged from bankruptcy on December 31, 2003 as a private company
controlled by an Icahn affiliate. The Company's remaining interest in the notes
will be delivered and exchanged for approximately 443,000 common shares
representing a 4.4% equity interest in the new Philip valued at the carrying
value of the debt at December 31, 2003 of $1.1 million.

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 ($3.4
million), $.3 million and $1.8 million have been recorded in the Consolidated
Statements of Earnings in the years ended December 31, 2003, 2002 and 2001,
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-29

Stratosphere's property and equipment consist of the following as of
December 31, 2003 and 2002 (in $000's):

Included in property and equipment at December 31, 2002 are assets recorded
under capital leases of $1.9 million.

Stratosphere's operations for the years ended December 31, 2003, 2002 and
2001 have been included in 'Hotel and casino operating income and expenses' in
the consolidated Statements of Earnings. Hotel and casino operating expenses
include all expenses except for approximately $12,276,000, $13,328,000 and
$11,257,000 of depreciation and amortization for the years ended December 31,
2003, 2002 and 2001, respectively and $2,259,000, $2,412,000 and $513,000 of
income tax provision for the years ended December 31, 2003, 2002 and 2001
respectively. Such amounts have been included in 'Depreciation and amortization
expense' and 'Income tax benefit (expense)' in the Consolidated Statements of
Earnings.

10. NATIONAL ENERGY GROUP

a. National Energy Group, Inc.

In October 2003, pursuant to Purchase Agreement dated as of May 16, 2003,
the Company acquired certain debt and equity securities of National Energy
Group, Inc. ('NEG') from entities affiliated with Carl C. Icahn for an aggregate
consideration of approximately $148.1 million plus approximately $6.7 million of
accrued interest on the debt securities. The agreement was reviewed and approved
by the Audit Committee who were advised by its independent financial advisor and
legal counsel. The securities acquired were $148,637,000 in principal amount of
outstanding 10 3/4% Senior Notes due 2006 of NEG and 5,584,044 shares of common
stock of NEG. As a result of the foregoing transaction and the acquisition by
the Company of additional securities of NEG prior to the closing, the Company
beneficially owns in excess of 50% of the outstanding common stock of NEG.

NEG owns a 50% interest in NEG Holding LLC ('Holding LLC'), the other 50%
interest in Holding LLC is held by Gascon Partners ('Gascon') an Icahn affiliate
and managing member. Holding LLC owns NEG Operating LLC ('Operating LLC') which
owns operating oil and gas properties managed by NEG. Under the Holding LLC
operating agreement NEG is to receive guaranteed payments in addition to a
priority distribution before the Icahn affiliate receives any monies. Due to the
substantial uncertainty that NEG will receive any distribution above the
priority and guaranteed payments amounts, NEG accounts for its investment in
Holding LLC as a preferred investment. The Company consolidates NEG in its
financial statements.

In connection with a credit facility obtained by Holding LLC, NEG and
Gascon have pledged as security their respective interests in Holding LLC.

b. Investment in NEG Holding LLC

As explained below, NEG's investment in Holding LLC is recorded as a
preferred investment. The initial investment was recorded at historical carrying
value of the net assets contributed with no gain or loss recognized on the
transfer.

II-30

Summarized financial information for Holding LLC as of and for the years
ended December 31, is as follows:

- ---------

(1) Primarily oil and gas properties

Under Holding LLC Operating Agreement, NEG is to receive guaranteed payments
in addition to a priority distribution amount of $202.2 million before Gascon
receives any monies. The priority distribution is to be made on or before
November 1, 2006. Guaranteed payments are to be paid, on a semi annual basis,
based on an annual interest rate of 10.75% of the outstanding priority
distribution amount. After the payments to NEG, Gascon is to receive
distributions equivalent to the priority distribution amount and guaranteed
payments plus other amounts as defined. Following the above distributions to NEG
and Gascon, additional distributions, if any, are to be made in accordance with
their respective capital accounts. The order of distributions is listed below.
Because of the substantial uncertainty that NEG will receive any distributions
above the priority and guaranteed payment amounts, NEG accounts for its
investment in Holding LLC as a preferred investment.

Prior to September 2001, NEG owned and operated certain oil and gas
properties. At inception (September 12, 2001), NEG recorded the investment in
Holding LLC at the historical cost of the oil and gas properties that NEG
contributed into the partnership (in exchange for Holding LLC obligation to pay
NEG the priority distribution and guaranteed payments). Subsequently, NEG
accretes its investment in Holding LLC from the initial investment recorded up
to the priority distribution amount, including the guaranteed payments, at the
implicit rate of interest, recognizing the accretion income in earnings.
Accretion income is periodically adjusted for changes in the timing of cash
flows, if necessary due to unscheduled cash distributions. Receipt of guaranteed
payments and the priority distribution are recorded as reductions in the
preferred investment. The preferred investment is evaluated quarterly for other
than temporary impairment.

Because of the substantial uncertainty that NEG will receive any
distributions in excess of the priority distribution and the guaranteed payments
('residual interest'), the residual interest attributable to the investment in
Holding LLC is valued at zero. Upon payment of the priority distribution in
2006, NEG's investment in Holding LLC will be zero. Cash receipts, if any, after
the priority distribution and the guaranteed payments will be reported in income
as earned.

II-31

The following is a roll forward of the Investment in Holding LLC as of
December 31, 2003:

NEG received a guaranteed payment of $10.9 million from Holding LLC in
November 2001.

Holding LLC Operating Agreement requires that distributions shall be made to
both NEG and Gascon as follows:

1. Guaranteed payments are to be paid to NEG, calculated on an annual
interest rate of 10.75% on the outstanding priority distribution amount. The
priority distribution amount includes all outstanding debt owed to entities
owned or controlled by Carl C. Icahn, including the amount of NEG's 10.75%
Senior Notes. As of December 31, 2003, the priority distribution amount was
$148.6 million. The guaranteed payments will be made on a semi-annual basis.

2. The priority distribution amount is to be paid to NEG. Such payment
is to occur by November 6, 2006.

3. An amount equal to the priority distribution amount and all
guaranteed payments paid to NEG, plus any additional capital contributions
made by Gascon, less any distribution previously made by NEG to Gascon, is
to be paid to Gascon.

4. An amount equal to the aggregate annual interest (calculated at prime
plus 1/2% on the sum of the guaranteed payments), plus any unpaid interest
for prior years (calculated at prime plus 1/2% on the sum of the guaranteed
payments), less any distributions previously made by NEG to Gascon, is to be
paid to Gascon.

5. After the above distributions have been made, any additional
distributions will be made in accordance with the ratio of NEG's and
Gascon's respective capital accounts.

In addition, the Holding LLC Operating Agreement contains a provision
that allows Gascon at any time, in its sole discretion, to redeem the NEG
membership interest in Holding LLC at a price equal to the fair market value
of such interest determined as if Holding LLC had sold all of its assets for
fair market value and liquidated. Since all of the NEG's operating assets
and oil and natural gas properties have been contributed to Holding LLC, as
noted above, following such a redemption, NEG's principal assets would
consist solely of its cash balances.

11. 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.

II-32

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 any time 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 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, which had a term of 24 months from the date of
funding, February 2002, was repaid in full in 2003. Approximately $6.8 million
of interest income was recorded and is included in 'interest income' in the
Consolidated Statements of Earnings. 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, 2003, accrued interest of approximately $4.4
million has been deferred for financial statement purposes pending receipt of
principal and interest payments in connection with this loan. Origination fees
of $3.0 million have been received in connection with one of the mezzanine loans
and approximately $1.5 million and $1.1 million has been recognized as 'Other
income' in the Consolidated Statements of Earnings in the years ended December
31, 2003 and 2002 respectively. 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 one 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. At December 31, 2003 accrued interest of approximately $6.7 million has
been deferred for financial statement purposes pending receipt of principal and
interest payments in connection with this loan.

c. See Note 7 with respect to Philip debt.

12. NOTE RECEIVABLE DUE FROM AFFILIATE

On October 17, 2003 Carl C. Icahn ('Icahn'), Chairman of the Board of the
General Partner, repaid the $250 million loan which had been made to him by the
Company on December 27, 2001. The Company made the 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 interest on the loan
was 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 rate in 2003 was 3.9% and in 2002 ranged from 3.9% to 4.03%.
Interest income of approximately $7.9 million, $9.9 million and $.1 million was
earned on this loan in the years ended December 31, 2003, 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.

The Company entered into this transaction to earn interest income on a
secured investment. The terms of this transaction were reviewed and approved by
the Audit Committee.

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13. 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 $3,033,000, $1,909,000
and $712,000 for the years ended December 31, 2003, 2002, and 2001,
respectively. Hotel and resort operating expenses include all expenses except
for approximately $2,451,000, $1,833,000 and $970,000 of depreciation and
amortization for each of the years ended December 31, 2003, 2002 and 2001,
respectively, which is included in its respective caption in the Consolidated
Statements of Earnings.

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 $6.4 and $6.3 million at December 31, 2003 and 2002,
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 $596,000, $404,000 and $770,000 for the years ended December 31,
2003, 2002 and 2001, 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 $210,000, $374,000 and $512,000 of
depreciation for the years ended December 31, 2003, 2002 and 2001, respectively.
These amounts are included in their respective captions in the Consolidated
Statements of Earnings.

14. SIGNIFICANT PROPERTY TRANSACTIONS

Information on significant property transactions during the three-year
period ended December 31, 2003 is as follows:

a. 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, 2003 and 2002, the property had a carrying value of
approximately $17,584,000 and $18,066,000 respectively, and was encumbered
by a non-recourse mortgage in the amount of $12,700,000.

b. 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.

c. 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 was recognized in the year ended December 31,
2003.

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d. The Company has retained CB Richard Ellis, Inc. to assist it in
obtaining offers for the Company's rental real estate portfolio. In total,
the Company is currently marketing for sale properties with a book value of
approximately $340 million, encumbered by mortgage debt of approximately
$180 million, a portion of which portfolio meets the criteria as held for
sale under SFAS 144 at December 31, 2003. There can be no assurance that the
Company will be successful in obtaining purchase offers at acceptable
prices.

The Company intends to utilize proceeds from real estate asset sales to
continue to diversify its business operations outside of real estate,
including but not limited to such sectors as insurance, oil and gas and
gaming as well as other real estate opportunities.

15. 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. See Note 14a for Mid-South Logistics financing in October 2002.

b. 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.

16. SENIOR NOTES AND CREDIT FACILITY DUE AFFILIATES

a. The Senior Notes of National Energy Group, Inc. ('Notes') were held
in their entirety by affiliates of Icahn at December 31, 2002. The Notes
bear interest at an annual rate of 10 3/4%, payable semiannually in arrears
on May 1 and November 1 of each year. The Notes are senior, unsecured
obligations of NEG, ranking pari passu with all existing and future senior
indebtedness of NEG, and senior in right of payment to all future subordinated
indebtedness of NEG. Subject to certain limitations set forth in the indenture
covering the Senior Notes (the 'Indenture'), NEG and its subsidiaries may
incur additional senior indebtedness and other indebtedness.

The Indenture contains certain covenants limiting NEG with respect to the
following: (i) asset sales; (ii) restricted payments; (iii) the incurrence of
additional indebtedness and the issuance of certain redeemable preferred stock;
(iv) liens; (v) sale and leaseback transactions; (vi) lines of business;
(vii) dividend and other payment restrictions affecting subsidiaries;
(viii) mergers and consolidations; and (ix) transactions with affiliates.

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NEG was unable to reasonably determine the fair value of the Notes at
December 31, 2002, due to a lack of available market quotations, credit ratings
and inability to determine an appropriate discount rate.

In August 2001, NEG redeemed both $16.4 million of principal outstanding
under the notes and $4.8 million of Reinstated Interest for a cash consideration
of $10.5 million. NEG paid two Icahn affiliates approximately $.4 million in
current interest on the redeemed senior note obligations at the date of
redemption related to interest owed from the last semi-annual interest payment
date of May 1, 2001, to the date of redemption. As this was a partial redemption
of the Notes, it has been accounted for as a modification of terms that changes
the amounts of future cash payments. Accordingly, the excess of redeemed
principal and interest over the redemption payment of $10.5 million is being
amortized as a reduction to interest expense over the remaining life of the
bonds. In connection with this transaction, NEG borrowed $10.9 million under its
existing credit facility with an Icahn affiliate.

In October 2003, the Company acquired these Notes. At December 31, 2003,
these Notes were eliminated in consolidation (See Note 10).

b. At December 31, 2002, NEG had $10.9 million outstanding under its
existing $100 million credit facility with Arnos, an Icahn affiliate. Arnos
continued to be the holder of the credit facility; however, the $10.9 million
note outstanding under the credit facility was contributed to Holding LLC as
part of Gascon's contribution to Holding LLC on September 12, 2001. In December
2001, the maturity date of the credit facility was extended to December 31, 2003
and NEG was given a waiver of compliance with respect to any and all covenant
violations. NEG was not in compliance with the minimum interest coverage ratio
at September 30, 2002; and December 31, 2002 and the current ratio at
December 31, 2002, however, in December 2001 NEG was given a waiver of
compliance with respect to any and all covenant violations through December 31,
2003.

On March 26, 2003, Holding LLC distributed the $10.9 million note
outstanding under NEG's revolving credit facility as a priority distribution to
NEG, thereby canceling the note. Also, on March 26, 2003 NEG, Arnos and
Operating LLC entered into an agreement to assign the credit facility to
Operating LLC. Effective with this assignment, Arnos amended the credit facility
to increase the revolving commitment to $150 million, increase the borrowing
base to $75 million and extend the revolving due date until June 30, 2004.
Concurrently, Arnos extended a $42.8 million loan to Operating LLC under the
amended credit facility. Operating LLC then distributed $42.8 million to Holding
LLC who, thereafter, made a $40.5 million priority distribution and a $2.3
million guaranteed payment to NEG. NEG utilized these funds to pay the entire
amount of the long-term interest payable on the Notes and interest accrued
thereon outstanding on March 27, 2003. The Arnos facility was canceled on
December 29, 2003 in conjunction with a third party bank financing.

17. 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

II-36

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.

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. 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.

At December 31, 2003, affiliates of the General Partner owned 8,477,139
Preferred Units and 39,896,836 Depositary Units.

18. 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 a 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
December 31, 2003 and 2002, 9,796,607 and 9,330,963 Preferred Units are issued
and outstanding, respectively.

Pursuant to the terms of the Preferred Units, on February 25, 2004, 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 on March 31, 2004 to holders of record as of
March 12, 2004. In addition, the Company increased the number of authorized
Preferred Units to 10,400,000.

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
period from July 1, 2003 to December 31, 2003 of $2,449,000 and all future
distributions have been and will be recorded as 'Interest expense' in the
Consolidated Statements of Operations.

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19. INCOME TAXES (IN $000'S)

b. Corporate income taxes

(i) The Company's corporations recorded the following income tax
(expense) benefit attributable to continuing operations for
Stratosphere and NEG for the years ended December 31, (in $000's):

(ii) The tax effect of significant differences representing net deferred
tax assets (the difference between financial statement carrying
values and the tax basis of assets and liabilities) for the Company
is as follows at December 31, (in $000's):

At December 31, 2003, Stratosphere had net operating loss carryforwards
available for federal income tax purposes of approximately $28.5 million which
begin expiring in 2019.

SFAS 109 requires a 'more likely than not' criterion be applied when
evaluating the realizability of a deferred tax asset. As of December 31, 2002,
given Stratosphere's history of losses for income tax purposes, the volatility
of the industry within which the Stratosphere operates, and certain other
factors, Stratosphere had established a valuation allowance for the deductible
temporary differences, including the excess of the tax basis of the
Stratosphere's assets over the basis of such assets for financial statement
purposes and the tax carryforwards. However, at December 31, 2003, based on
various factors including the current earnings trend and future taxable income
projections, Stratosphere determined that it was more likely than not that the
deferred tax assets will be realized and removed the valuation allowance.

In accordance with SFAS 109, the tax benefit of any deferred tax asset that
existed on the effective date of a reorganization should be reported as a direct
addition to contributed capital. Stratosphere has deferred tax assets relating
to both before and after Stratosphere emerged from bankruptcy in September of
1998. The net decrease in the valuation allowance was $79.3 million of which a
net amount of $47.5 million was credited to partners' capital in the year ended
December 31, 2003.

At December 31, 2003, NEG had net operating loss carryforwards available for
federal income tax purposes of approximately $58 million which begin expiring in
2009. Utilization of approximately $.2 million of the net operating loss
carryforwards is subject to various limitations because of previous changes in
control of ownership (as defined in the Internal Revenue Code) of NEG.
Additional net

II-38

operating loss limitations may be imposed as a result of subsequent changes in
stock ownership of NEG. Prior to the formation of Holding LLC, the income tax
benefit associated with the loss carryforwards had not been recognized since, in
the opinion of management, there was not sufficient positive evidence of future
taxable income to justify recognition of a benefit. Upon the formation of
Holding LLC, management again evaluated all evidence, both positive and
negative, in determining whether a valuation allowance to reduce the carrying
value of deferred tax assets was still needed and concluded, based on the
projected allocations of taxable income by Holding LLC, NEG more likely than not
will realize a partial benefit from the loss carryforwards. In accordance with
SFAS 109, NEG recorded a deferred tax asset of $31.9 million in September 2001,
$25.5 million as of December 31, 2002 and $25.9 million as of December 31, 2003.
Ultimate realization of the deferred tax asset is dependent upon, among other
factors, NEG's ability to generate sufficient taxable income within the
carryforward periods and is subject to change depending on the tax laws in
effect in the years in which the carryforwards are used. As a result of the
recognition of expected future income tax benefits, subsequent periods will
reflect a full effective tax rate provision.

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

(1) All quarterly amounts have been restated for the effects of the acquisition
of NEG and the reporting of discontinued operations.

(2) Net earnings (loss) 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.

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21. SEGMENT REPORTING

The Company is engaged in six 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,
(v) investment in securities including investment in other limited partnerships
and marketable equity and debt securities and (vi) investment in oil and gas
operating properties. 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-41

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, 2003, 2002, and 2001 (in $000's):

(table continued on next page)
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(1) Primarily interest income on U.S. Government and Agency obligations and
other short-term investments and Icahn note receivable.

II-42

(table continued from previous page)

22. COMMITMENTS AND CONTINGENCIES

a. 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, 2003 and
2002, the carrying value of the seven properties was approximately $5,482,000
and $6,529,000, respectively, which management believes is less than the
estimate of net realizable value.

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
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.

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c. In January 2002, the Cape Cod Commission, (the 'Commission'), a
Massachusetts regional planning body created in 1989, concluded that AREP's New
Seabury development 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
therefore exempt from the Commission's jurisdiction and that 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, an AREP subsidiary and owner
of the property, filed in Barnstable County Massachusetts Superior Court, a
civil complaint appealing the Administrative Decision by the Commission, and a
separate civil 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 (the Second Administrative Decision). In August 2003, New Seabury
filed in Barnstable County Massachusetts Superior Court another civil complaint
appealing the Second Administrative Decision 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
with the Special Permit and therefore exempt from the Commission's jurisdiction
(the Court 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 fee of commercial space. In March 2004 New Seabury
moved for Summary Judgment to dispose of remaining claims under all three
complaints and to obtain a final judgment from the Court. 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 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, 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 Company's consolidated
financial statements taken as a whole.

23. FAIR VALUE OF FINANCIAL INSTRUMENTS

CASH AND CASH EQUIVALENTS, RECEIVABLES, NOTE RECEIVABLE DUE FROM AFFILIATE,
ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES AND THE PREFERRED
LIMITED PARTNERSHIP UNITS LIABILITY

The carrying amount of cash and cash equivalents, receivables, note
receivable due from affiliate, and accounts payable, accrued expenses and other
liabilities and the Preferred Limited Partnership Units Liability 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-44

The approximate estimated fair values of the mortgages and notes receivable
held as of December 31, 2003 and 2002 are summarized as follows (in $000's):

The net investment at December 31, 2002 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, 2003 and 2002 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.

24. 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 $7,600,000, $6,500,000 and $4,900,000 for the years ended
December 31, 2003, 2002 and 2001, 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 $422,000, $433,000 and $477,000, for the years
ended December 31, 2003, 2002 and 2001, respectively.

25. REPURCHASE OF DEPOSITARY UNITS

The Company has previously been authorized to repurchase up to 1,250,000
Depositary Units. As of December 31, 2003, the Company has purchased 1,137,200
Depositary Units at an aggregate cost of approximately $11,921,000.

26. SUBSEQUENT EVENTS

On January 5, 2004, American Casino & Entertainment Properties LLC
('American Casino'), an indirect wholly-owned subsidiary of the Company, entered
into an agreement to acquire two Las Vegas casino/hotels, Arizona Charlie's
Decatur and Arizona Charlie's Boulder from Carl C. Icahn and an entity
affiliated with Mr. Icahn, for an aggregate consideration of $125.9 million. The
closing of the acquisition is subject to certain conditions, including among
other things, obtaining all approvals necessary under the gaming laws. The terms
of the transaction were approved by the Audit Committee, who received an opinion
from its financial advisor as to the fairness of the consideration to be paid
from

II-45

a financial point of view. Upon receiving all approvals necessary under gaming
laws and upon closing of the acquisition, the AREH will transfer 100% of the
common stock of Stratosphere Corporation ('Stratosphere') to American Casino. As
a result, following the acquisition and contribution, American Casino will own
and operate three gaming and entertainment properties in the Las Vegas
metropolitan area.

Also, in January 2004, American Casino closed on its offering of Senior
Secured Notes Due 2012. The Notes, in the aggregate principal amount of $215
million, bear interest at the rate of 7.85% per annum. The proceeds will be held
in escrow pending receipt of all approvals necessary under gaming laws and
certain other conditions in connection with the acquisition of Arizona Charlie's
Decatur and Boulder. The amount raised in excess of the acquisition cost and
expenses will be used to repay intercompany debt and for general business
purposes by the Company and its subsidiaries.

Arizona Charlie's Decatur is located on approximately 17 acres of land, four
miles west of the Las Vegas strip. An estimated 500,000 people live within a
five-mile radius of the property. The property is easily accessible from Route
95, a major highway in Las Vegas. Arizona Charlie's Decatur contains
approximately 52,000 square feet of gaming space, 258 hotel rooms, four
restaurants and three bars. The property targets repeat customers from the
surrounding communities. In 2003, revenues were $67.9 million.

Arizona Charlie's Boulder is located on approximately 24 acres of land,
seven miles east of the Las Vegas strip, near an I-515 interchange. The I-515 is
the most heavily traveled east/west highway in Las Vegas. An estimated 423,000
people live within a five-mile radius of the property. Arizona Charlie's Boulder
contains approximately 41,000 square feet of gaming space, 303 hotel rooms, four
restaurants and a 202-space recreational vehicle park. As with the Arizona
Charlie's Decatur property, the property targets repeat customers from the
surrounding communities. In 2003, revenues were $31.2 million.

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

None

ITEM 9A. CONTROLS AND PROCEDURES

a. As of December 31, 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 December 31, 2003, there have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect internal controls over financial reporting.

II-46

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 Chairman of the Board of Directors 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. SHC is primarily engaged in the business of holding, either
directly or through subsidiaries, various businesses and investments 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 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. Mr. Leidesdorf is also a Director of Renco Group, Inc. and its
subsidiary, WCI Steel Inc., a steel producer which filed for Chapter 11
bankruptcy protection in September 2003. 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. Since December 29, 2003, Mr. Leidesdorf has served as a
Director of American Entertainment Properties Corp. and American Casino &
Entertainment Properties Finance Corp. which are indirect subsidiaries of AREP.
Mr. Leidesdorf has been licensed by the New Jersey State Casino Control
Commission and the Nevada State Gaming Control Commission.

James L. Nelson has served as a Director of the General Partner since
June 12, 2001. 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 March 1998 through 2003,
Mr. Nelson was Chairman and Chief Executive Officer of Orbit Aviation, Inc. a
company engaged in the acquisition and completion of Boeing Business Jets for
private and corporate clients. From August 1995 until July 1999, he was Chief
Executive Officer and Co-Chairman of Orbitex Management, Inc. Mr. Nelson
currently serves as a Director of Viskase Corporation, a closely-held supplier
for the meat and poultry business, and TransTexas Gas Corporation, a company
that is 85%

III-1

owned by various Icahn entities and managed by National Energy Group, Inc., a
subsidiary of AREH. Until March 2001, he was on the Board of Orbitex Financial
Services Group, a financial services company in the mutual fund sector. Since
December 29, 2003, Mr. Nelson has served as a Director of American Entertainment
Properties Corp. and American Casino & Entertainment Properties Finance Corp.,
which are indirect subsidiaries of AREP. Mr. Nelson has been licensed by the New
Jersey State Casino Control Commission and the Nevada State Gaming Control
Commission.

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 Bars of New
York, Florida and the District of Columbia. From 1966 until 2001, he was a
senior partner of Wasserman, Schneider, Babb & Reed, a New York-based law firm
and its predecessors. Since September 2001, Mr. Wasserman has been engaged in
the practice of law as a sole practitioner. Mr. Wasserman has been licensed by
the New Jersey State Casino Control Commission and the Nevada State Gaming
Control Commission and, at the latter's direction, is an independent member and
Chairman of the Stratosphere Compliance Committee.

Since December 29, 2003, Mr. Wasserman has served as a Director of American
Entertainment Properties Corp. and American Casino & Entertainment Properties
Finance Corp., which are indirect subsidiaries of AREP. Mr. Wasserman is not a
member of the Stratosphere's Board of Directors. Since December 1, 1998,
Mr. Wasserman has been a director of National Energy Group, Inc. which, on
December 4, 1998, sought protection under the federal bankruptcy laws. A Plan of
Reorganization became effective on August 4, 2000, and a final decree closing
the case and settling all matters relating to the bankruptcy proceeding became
effective on December 13, 2001. In 2003, as noted above, National Energy Group
Inc. became a subsidiary of AREH. Mr. Wasserman is also a director of Cadus
Corporation and, on March 11, 2004, was appointed a member of the Board of
Directors of Triarc Companies, Inc. effective March 15, 2004. Since
December 29, 2003, Mr. Wasserman has served as a Director of American
Entertainment Properties Corp. and American Casino & Entertainment Properties
Finance Corp., which are indirect subsidiaries of AREP.

Keith A. Meister has served as President and Chief Executive Officer of the
General Partner since August 2003. He also continues to serve as a senior
investment analyst of High River Limited Partnership ('High River'), a company
owned and controlled by Mr. Icahn, a position he has held since June 2002. Mr.
Meister devotes approximately 50% of his time to the performance of services for
AREP and its subsidiaries and the remaining 50% to the performance of services
to High River and other affiliates of Mr. Icahn. From March 2000 through 2001,
Mr. Meister co-founded and served as co-president of J Net Ventures, a venture
capital fund focused on investments in information technology and enterprise
software businesses. From 1997 through 1999, Mr. Meister served as an investment
professional at Northstar Capital Partners, an opportunistic real estate
investment partnership. Prior to Northstar, Mr. Meister served as an investment
analyst in the investment banking group at Lazard Freres. He also serves on the
Boards of Directors of the following companies: XO Communications, Inc., a
company that is majority-owned by various Icahn entities; TransTexas Gas
Corporation, a company that is 85% owned by various Icahn entities and managed
by National Energy Group, Inc. a subsidiary of AREH; and Scientia Corporation, a
private health care venture company in which AREH holds less than a 10% equity
interest. Since December 2003, Mr. Meister has served as a Director of American
Entertainment Properties Corp. and American Casino & Entertainment Properties
Finance Corp., which are indirect subsidiaries of AREP.

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 AREH subsidiary. Mr. Hirsch has served as Director of GB
Holdings, Inc. and GB Property Funding, Inc. since

III-2

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 as Chief Financial Officer since
June 2000. 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.

James L. Nelson, William A. Leidesdorf and Carl C. Icahn are the members of
the Compensation Committee of the Board of Directors of the General Partner.

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 Committee
assignments. In 2003, Messrs. Leidesdorf, Nelson and Wasserman received audit
and special committee fees of $34,120, $44,040 and $54,130, respectively.

Each of the executive officers of the General Partner may perform services
for other affiliates of the General Partner which are reimbursed to AREP.
However, Mr. Meister is paid by AREP a base salary for the 50% of his time which
is spent on the business of AREP and its subsidiaries and he is compensated by
affiliates of Mr. Icahn for the time he spends on their business. His
compensation from such affiliates includes an equivalent amount of base salary.
He may also receive a bonus from such affiliates.

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.

CODE OF ETHICS

On March 12, 2004, the General Partner's Board of Directors adopted a Code
of Ethics applicable to AREP's principal executive officer, principal financial
officer and principal accounting officer. A copy

III-3

of the Code of Ethics may be obtained without charge by writing to American Real
Estate Partners, L.P., 100 South Bedford Road, Mount Kisco, NY 10549, attention:
John Saldarelli, and is included in this Annual Report on Form 10-K as
Exhibit 99.2.

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, 2003.

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, 2003, 2002, 2001.(2)

SUMMARY COMPENSATION TABLE

(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 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 August 18, 2003, Keith Meister was elected President and Chief Executive
Officer. On August 15, 2003, Albo J. Antenucci, Jr. resigned as President
and Chief Executive Officer of the General Partner. Mr. Antenucci will
continue as a part time consultant to AREP through May 2004.

Messrs. Saldarelli and Hirsch devote all of their time to the performance of
services for AREP and its investments. (Mr. Meister devotes approximately
50% of his time to the performance of services for AREP and its
subsidiaries.) 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 March 1, 2004, affiliates of Icahn, including High Coast Limited
Partnership, a Delaware limited partnership, owned 39,896,836 Depositary Units,
or approximately 86.5% of the outstanding Depositary Units, and 8,477,139
Preferred Units, or approximately 86.5% of the outstanding Preferred Units. In
light of this ownership position, the Board of Directors has determined that
AREP is a

III-4

'controlled company' for the purposes of the New York Stock Exchange's listing
standards and is, therefore, not required to have a majority of independent
directors or to have compensation and nominating committees consisting entirely
of independent directors. The Board of Directors of the General Partner
presently consists of a majority of independent Directors and the Audit
Committee consists entirely of independent directors.

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 86.5% 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 March 1, 2004, 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.

(1) Carl C. Icahn, through affiliates, is the beneficial owner of the 39,896,836
Depositary Units set forth above and may also be deemed to be the beneficial
owner of the 700 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.

-------------------
Mr. Icahn, through certain affiliates, currently owns 100% of the General
Partner and over 86% of the Depositary Units and Preferred Units. Applicable
pension and tax laws make each member of a 'controlled group' of entities,
generally defined as entities in which there is at least an 80% common ownership
interest, jointly and severally liable for certain pension plan obligations of
any member of the controlled group. These pension obligations include ongoing
contributions to fund the plan, as well as liability for any unfunded
liabilities that may exist at the time the plan is terminated. In addition, the
failure to pay these pension obligations when due may result in the creation of
liens in favor of the pension plan or the Pension Benefit Guaranty Corporation,
or the PBGC, against the assets of each member of the controlled group.

As a result of the more than 80% ownership interest in AREP by Mr. Icahn's
affiliates, AREP and its subsidiaries are subject to the pension liabilities of
all entities in which Mr. Icahn has a direct or indirect ownership interest of
at least 80%. One such entity, ACF Industries LLC, or ACF, is the sponsor of
several pension plans that are underfunded by a total of approximately $31
million on an ongoing actuarial basis and $134 million if those plans were
terminated, as most recently reported for the 2003 plan year by the plans'
actuaries. These liabilities could increase or decrease, depending on a

III-5

number of factors, including future changes in promised benefits, investment
returns, and the assumptions used to calculate the liability. As a member of the
ACF controlled group, AREP would be liable for any failure of ACF to make
ongoing pension contributions or to pay the unfunded liabilities upon a
termination of the ACF pension plans. In addition, other entities now or in the
future within the controlled group that includes AREP may have pension plan
obligations that are, or may become, underfunded and AREP would be liable for
any failure of such entities to make ongoing pension contributions or to pay the
unfunded liabilities upon a termination of such plans.

The current underfunded status of the ACF pension plans requires ACF to
notify the PBGC thirty days in advance of certain 'reportable events,' such as
if AREP ceases to be a member of the ACF controlled group, or if AREP makes
certain extraordinary dividends or stock redemptions. This reporting obligation
could cause us to seek to delay or reconsider the occurrence of such reportable
events.

Starfire Holding Corporation, or Starfire, which is 100% owned by Mr. Icahn,
has undertaken to indemnify AREP and its subsidiaries from losses resulting from
any imposition of pension funding or termination liabilities that may be imposed
on AREP and its subsidiaries or their assets as a result of being a member of
the Icahn controlled group. 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 October 17, 2003, Carl C. Icahn, Chairman of the Board of the General
Partners, repaid the $250 million loan which had been made to him on December
27, 2001. AREP made the 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 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. AREP returned the
collateral on October 17, 2003, the date the loan was repaid. The interest on
the loan was 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 rate in 2003 was 3.9% and in 2002 ranged from 3.9% to
4.03%. Interest income of approximately $7.9 million and $9.9 million was earned
on this loan in 2003 and 2002, respectively. AREP entered into this transaction
to earn interest income on a secured investment. See Item 1 -- 'Recent
Acquisitions/Investments' for a discussion of this investment.

In October 2003, pursuant to a Purchase Agreement dated as of May 16, 2003,
AREP acquired certain debt and equity securities of National Energy Group, Inc.
('NEG') from entities affiliated with Carl C. Icahn for an aggregate
consideration of approximately $148.1 million plus approximately $6.7 million of
accrued interest on the debt securities. The agreement was reviewed and approved
by the Audit Committee who were advised by its independent financial advisor and
legal counsel. The securities acquired were $148,637,000 in principal amount of
outstanding 10 3/4% Senior Notes due 2006 of NEG (representing all of NEG's
outstanding debt securities) and 5,584,044 shares of common stock of NEG. As a
result of the foregoing transaction and the acquisition by AREP of additional
securities of NEG prior to the closing, AREP beneficially owns in excess of 50%
of the outstanding common stock of NEG. See Item 1 -- 'Recent
Acquisition/Investments' for a discussion of this investment.

On January 5, 2004, American Casino & Entertainment Properties LLC
('American Casino'), a wholly-owned subsidiary of AREH, entered into an
agreement to acquire two Las Vegas casino/hotels, Arizona Charlie's Decatur and
Arizona Charlie's Boulder from Carl C. Icahn and an entity affiliated with Mr.
Icahn, for an aggregate consideration of $125.9 million. The closing of the
acquisition is subject to certain conditions, including among other things,
obtaining all approvals necessary under the gaming laws. The terms of the
transactions were approved by the Audit Committtee, who received an opinion from
its financial advisor, Morgan Joseph & Co. Inc., as to the fairness of the
consideration to be paid from a financial point of view. Upon receiving all
approvals necessary under gaming laws and upon

III-6

closing of the acquisition, the subsidiary, AREH will transfer 100% of the
common stock of Stratosphere Corporation to American Casino. As a result,
following the acquisition and contribution, American Casino will own and operate
three gaming and entertainment properties in the Las Vegas metropolitan area.
See Item 1 -- 'Recent Acquisition/Investments' for a discussion of this
investment.

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, 2003 and 2002, AREP made no payments with
respect to the Depositary Units owned by the General Partner. However, in 2003
and 2002 the General Partner was allocated approximately $1,205,000 and
approximately $1,283,000 respectively, of the net earnings of AREP as a result
of its 1.99% general partner interest in AREP.

On March 31, 2003, Icahn received 403,673 Preferred Units as part of AREP's
scheduled annual preferred unit distribution and is expected to receive an
additional 423,856 Preferred Units in March 2004 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 2,275 square feet for which it pays monthly
rent of $11,185 plus 10.77% of certain 'additional rent.' For the years ended
December 31, 2003, 2002 and 2001 AREP paid an affiliate of the General Partner
approximately $159,000, $153,000 and $147,000, 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, 2003, 2002 and 2001, Stratosphere billed
affiliates of the General Partner approximately $2,993,000, $1,675,000 and
$1,338,000, respectively, for administrative services performed by Stratosphere
personnel. For the years ended December 31, 2003, 2002 and 2001 Stratosphere
also received hotel revenue of $4,000, $123,000 and $600,000, respectively, in
connection with a tour and travel agreement entered into with an affiliate of
the General Partner. Stratosphere also received approximately $101,000 in hotel
and food revenue from an affiliate of the General Partner in the year ended
December 31, 2003 in connection with a conference held at Stratosphere.

For the year ended December 31, 2003, the Company paid approximately $81,000
to an affiliate of the General Partner for telecommunication services.

NEG received management fees from an affiliate of approximately $7,967,000,
$7,637,000 and $2,699,000 in the years ended December 31, 2003, 2002 and 2001,
respectively.

NEG entered into an agreement to manage Trans Texas Gas Corporation, an
Icahn-affiliate, for a fee of $312,500 per month.

III-7

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 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.

III-8

In addition, employees of AREP may, from time to time, provide services to
affiliates of the General Partner, with AREP being reimbursed therefor.
Reimbursement to AREP by such affiliates in respect of such services is subject
to review and approval by the Audit Committee. In 2003 and 2002, AREP received
approximately $68,000 and $47,000, respectively, for such services. Also, an
affiliate of the General Partner provided certain administrative services to
AREP in the amount of approximately $78,000, $77,000 and $73,000 in the years
ended December 31, 2003, 2002, and 2001, respectively.

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 March 12,
2004, AREP approved and adopted its Amended and Restated Audit Committee Charter
which is included in this Annual Report on Form 10-K as Exhibit 99.1.

The Audit Committee, has confirmed that: (i) the Audit Committee reviewed
and discussed AREP's 2003 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 2003 audited
financial statements be included in this Annual Report on Form 10-K.

The Board of Directors of the General Partner has determined that AREP does
not have an 'audit committee financial expert,' within the meaning of Item
401(h) of Regulation S-K, serving on the Audit Committee. AREP believes that
each member of the Audit Committee is financially literate and possesses
sufficient experience, both professionally and by virtue of his service as a
Director and member of the Audit Committee of the General Partner, to be fully
capable of discharging his duties as a member of the Audit Committee. However,
none of the members of the Audit Committee has a professional background in
accounting or 'preparing, auditing, analyzing or evaluating financial
statements'. If the Audit Committee determines that it requires additional
financial expertise, it will either engage professional advisers or seek to
recruit a member who would qualify as an 'audit committee financial expert'
within the meaning of Item 401(h) of Regulation S-K.

III-9

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

The following table summarizes KPMG LLP Fees For Professional Services
Rendered for AREP and its consolidated subsidiaries and GB Holdings:

SUMMARY OF KPMG LLP FEES FOR PROFESSIONAL SERVICES RENDERED FOR THE
YEARS ENDED DECEMBER 31, 2003 AND 2002

Audit fees(1)............................................. $ 713,300 $ 407,300
Audit related fees(2)..................................... $ 474,500 $ 276,000
Tax fees(3)............................................... $ 180,400 $ 102,200
Other fees................................................ -- --
---------- ----------
Total fees............................................ $1,368,200 $ 785,500
---------- ----------
---------- ----------

(1) Services relating to audit of the annual consolidated financial statements,
review of quarterly financial statements and limited reviews,
consents, assistance with the review of documents filed with the SEC and
other services.

(2) Services relating primarily to audit and limited reviews, of GB Holdings
financial statements; audits of employee benefit plans; regulatory
compliance procedures and other services to AREP and its consolidated
subsidiaries.

(3) Services relating to review and preparation of federal and state tax
returns.

-------------------
In accordance with AREP's Amended and Restated Audit Committee Charter
adopted on March 12, 2004, the Audit Committee is required to approve in advance
any and all audit services and permitted non-audit services provided to AREP and
its consolidated subsidiaries by its independent auditors (subject to the de
minimis exception of Section 10A (i) (1) (B) of the Exchange Act), all as
required by applicable law or listing standards. All of the fees in 2003 were
pre-approved by the Audit Committee. For the fiscal years ended December 31,
2003 and 2002, none of the services described above under the captions
'Audited Related Fees,' 'Tax Fees' or 'Other Fees' was covered by the
de minimus exception.

III-10

PART IV

ITEM 15. 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:

Schedule III -- Real Estate Owned and Revenues Earned (by tenant or
guarantor, as applicable)................................. IV-4-15

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. (Included in
the annual report on 10-K for the year ended December 31, 2002
and incorporated herein by reference).
3.9 -- Amendment No. 2 to the Amended and Restated Agreement of
Limited Partnership of the Subsidiary dated June 14, 2002.
(Included in the annual report on 10-K for the year ended
December 31, 2002 and incorporated herein by reference).
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).
31 -- Certification of Chief Executive Officer included herein.
31.1 -- Certification of Chief Financial Officer included herein.
32 -- Certification of Principal Executive Officer included herein.
32.1 -- Certification of Principal Financial Officer included herein.
99.1 -- Audit Committee Charter was adopted on March 12, 2004 and
is incorporated herein as Exhibit 99.1.
99.2 -- Code of Ethics for Principal Executive Officer and Senior
Financial Officers of American Property Investors, Inc.
and American Real Estate Partners, L.P. is incorporated
herein as Exhibit 99.2.

IV-2

(b) Reports on Form 8-K:

(1) A Form 8-K was filed on October 2, 2003 -- American Real Estate
Partners, L.P. Acquires Certain Securities of NEG Inc.

(2) A Form 8-K was filed on November 14, 2003 -- American Real Estate
Partners, L.P. reports Third Quarter and Nine Months Results.

(3) A Form 8-K was filed on November 19, 2003 -- American Real Estate
Partners, L.P. Comments on Trading Activity.

IV-3

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 15th day of March,
2004.

AMERICAN REAL ESTATE PARTNERS, L.P.

By: AMERICAN PROPERTY INVESTORS, INC.
General Partner

By: /s/ KEITH A. MEISTER
..................................
KEITH A. MEISTER, 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-4

SCHEDULE III

IV-5

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

IV-6

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

REAL ESTATE OWNED AND REVENUES EARNED

IV-7

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.

(2) Such properties are being classified as held for sale at 12/31/03.

(3) Sold in 2003 and included in discontinued ops.

IV-8

SCHEDULE III
PAGE 4

AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES
REAL ESTATE OWNED AND REVENUES EARNED
YEAR ENDED DECEMBER 31, 2003 (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, 2003.............................. $303,460
Additions during period................................. 1,675
Reclassifications during period from financing leases... 5,065
Reclassifications during period to held for sale........ (146,416)
Disposals during period................................. (2,626)
--------
Balance -- December 31, 2003............................ $161,158
--------
--------

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, 2003.............................. $ 54,978
Depreciation during period.............................. 8,605
Reclassifications during period to held for sale........ (20,153)
Disposals during period................................. (241)
--------
Balance -- December 31, 2003............................ $ 43,189
--------
--------

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, 2003.............................. $155,458
Reclassifications during period to operating
properties.............................................. (5,065)
Disposals during period................................. (7,708)
Amortization of unearned income......................... 13,115
Minimum lease rentals received.......................... (18,444)
--------
Balance -- December 31, 2003............................ $137,356
--------
--------

3. The aggregate cost of real estate owned for Federal income tax
purposes is $377,539 before accumulated depreciation.

IV-9

SCHEDULE III
PAGE 5

AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES
REAL ESTATE OWNED AND REVENUES EARNED -- (CONTINUED)
YEAR ENDED DECEMBER 31, 2003 (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............. $ 16,635
Net income applicable to Stratosphere hotel and
casino.................................................. 13,737(1)
Net income applicable to land, house and condominium
sales................................................... 4,136
Net income applicable to NEG, Inc....................... 19,522(2)
Add:
Interest income on U.S. Government and Agency
Obligations and other investments................. 22,543
Dividend and unallocated other income............... 3,027
--------
79,600
--------
Deduct expenses not allocated:
General and administrative expenses................. 6,850
Nonmortgage interest expense........................ 2,449
Equity in losses of GB Holdings, Inc................ 3,466
Other............................................... 3,704
--------
16,469
--------
Operating income after income taxes..................... 63,131
Provision for loss on real estate....................... (750)
Gain on sale of real estate............................. 7,121
Loss on sale of securities.............................. (961)
Write-down of securities................................ (18,798)
Write-down of mortgages and notes receivable............ 2,607
--------
Income from continuing operations....................... 52,350
--------
Discontinued Operations:
Income from discontinued operations................. 3,415
Net gain on property transactions................... 3,353
--------
Earnings from discontinued operations................... 6,768
--------
Net earnings........................................ $ 59,118
--------
--------
- ------------
(1) Includes depreciation expense of $12,276 and income tax expense of $2,259.

(2) Includes income tax expense of $225.

IV-10

SCHEDULE III
PAGE 6

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-11

SCHEDULE III
PAGE 7

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............. $ 16,603
Net income applicable to Stratosphere hotel and
casino................................................ 8,916(1)
Net income applicable to land, house and condominium
sales................................................. 20,384
Net income applicable to NEG Inc........................ 9,415(2)
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
--------
88,651
--------
Deduct expenses not allocated:
General and administrative expenses................. 7,029
Non-mortgage interest expense....................... 1,272
Other............................................... 1,625
--------
9,926
--------
Operating income after income taxes..................... 78,725
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)
--------
Income from continuing operations....................... 70,334
--------
Discontinued Operations:
Income from discontinued operations................. 3,532
--------
Net earnings........................................ $ 73,866
--------
--------
- ------------

(1) Includes depreciation expense of $13,328 and income tax expense of $2,412.
(2) Includes income tax expense of $5,068.

IV-12

SCHEDULE III
PAGE 8

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-13

SCHEDULE III
PAGE 9

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............. $18,307
Net income applicable to Stratosphere hotel and
casino.................................................. 4,628(1)
Net income applicable to land, house and condominium
sales................................................... 12,967
Net income applicable to NEG, Inc....................... 37,300(2)
Add:
Interest income on U.S. Government and Agency
Obligations and other investments................. 30,367
Dividend and unallocated other income............... 4,877
Equity in earnings of GB Holdings, Inc.............. 1,807
--------
110,253
--------
Deduct expenses not allocated:
General and administrative expenses................. 7,080
Non-mortgage interest expense....................... 6,227
Other............................................... 642
--------
13,949
--------
Operating income after income taxes..................... 96,304
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)
--------
Income from continuing operations....................... 101,156
--------
Discontinued Operations:
Income from discontinued operations................. 3,678
--------
Net Earnings............................................ $104,834
--------
--------
- ------------

(1) Includes depreciation expense of $11,257 and income tax expense of $513.

(2) Includes depreciation expense of $6,163 and income tax benefit of $30,590.

IV-14

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, 2003 (IN $000'S)

IV-15

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, 2003 (IN $000'S)

IV-16

EXHIBITS

IV-17

STATEMENT OF DIFFERENCES

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