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

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

FORM 10-Q

(MARK ONE)

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

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004

OR

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

FOR THE TRANSITION PERIOD FROM __________TO __________

COMMISSION FILE NUMBER 1-9516

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AMERICAN REAL ESTATE PARTNERS, L.P.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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

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

(914) 242-7700

(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

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

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

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INDEX

PAGE NO.
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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Consolidated Balance Sheets
June 30, 2004 and December 31, 2003 ............................................................ 1

Consolidated Statements of Earnings
Three Months Ended June 30, 2004 and 2003 ...................................................... 2

Consolidated Statements of Earnings
Six Months Ended June 30, 2004 and 2003 ........................................................ 3

Consolidated Statements of Changes In Partners' Equity and Comprehensive Income
Six Months Ended June 30, 2004.................................................................. 4

Consolidated Statements of Cash Flows Six Months Ended June 30, 2004 and 2003 .................. 5

Notes to Consolidated Financial Statements...................................................... 7

ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.... 20

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.............................. 31

ITEM 4. CONTROLS AND PROCEDURES................................................................. 31

PART II. OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K........................................................ II-1

AMERICAN REAL ESTATE PARTNERS, L.P.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS

JUNE 30, DECEMBER 31,
2004 2003
----------- ------------
(UNAUDITED) (RESTATED)
(IN $000'S)

ASSETS

Real estate leased to others:
Accounted for under the financing method ................................... $ 98,372 $ 137,356
Accounted for under the operating method, net of accumulated depreciation .. 65,253 76,443
Properties held for sale ..................................................... 49,193 128,813
Investment in U.S. Government and Agency obligations ......................... 113,141 61,573
Cash and cash equivalents .................................................... 1,080,261 500,593
Marketable equity and debt securities ........................................ 29,975 80,522
Other investments ............................................................ 138,739 50,328
Investment in NEG Holding LLC ................................................ 77,481 69,346
Equity interest in GB Holdings, Inc. ......................................... 28,811 30,854
Hotel, casino and resort operating properties net of accumulated depreciation:
American Casino and Entertainment Properties LLC ........................... 295,080 298,703
Hotel and resort ........................................................... 34,689 41,526
Land and construction-in-progress ............................................ 40,797 43,459
Deferred tax asset ........................................................... 86,754 82,607
Receivables and other assets ................................................. 62,478 49,897
----------- -----------
Total ..................................................................... $ 2,201,024 $ 1,652,020
=========== ===========
LIABILITIES AND PARTNERS' EQUITY
Mortgages payable:
Real estate leased to others ............................................... $ 79,023 $ 98,128
Properties held for sale ................................................... 15,142 82,861
----------- -----------
94,165 180,989
Senior secured notes payable ................................................. 215,000 --
Senior unsecured notes payable--net of unamortized discount of $2,569,000 .... 350,431 --
Liability for purchased securities ........................................... 59,853 --
Accounts payable, accrued expenses and other liabilities ..................... 77,760 98,888
Preferred limited partnership units:
Preferred units, $10 liquidation preference, 5% cumulative pay-in-kind;
10,400,000 authorized; 10,286,264 and 9,796,607 issued and outstanding as of
June 30, 2004 and December 31, 2003 ........................................ 104,099 101,649
----------- -----------
901,308 381,526
----------- -----------
Commitments and contingencies (Notes 2 and 3)

Limited partners:
Depositary units; 47,850,000 authorized; 47,235,484 outstanding ............. 1,315,577 1,184,870
General partner .............................................................. (3,940) 97,545
Treasury units at cost:
1,137,200 depositary units .................................................. (11,921) (11,921)
----------- -----------
Partners' equity ............................................................. 1,299,716 1,270,494
----------- -----------
Total ..................................................................... $ 2,201,024 $ 1,652,020
=========== ===========

See notes to consolidated financial statements.

- 1 -

AMERICAN REAL ESTATE PARTNERS, L.P.

CONSOLIDATED STATEMENTS OF EARNINGS

THREE MONTHS ENDED
-------------------------------
JUNE 30,
2004 2003
------------ ------------
(RESTATED)
(UNAUDITED)
(IN $000'S EXCEPT PER UNIT DATA)

Revenues:
Hotel and casino operating income ................................................... $ 73,360 $ 64,823
Land, house and condominium sales ................................................... 12,443 1,551
Interest income on financing leases ................................................. 2,490 3,341
Interest income on U.S. Government and Agency obligations and other investments ..... 11,092 3,826
Rental income ....................................................................... 1,962 2,410
Hotel and resort operating income ................................................... 3,439 4,525
Accretion of investment in NEG Holding LLC .......................................... 8,219 6,701
NEG management fee .................................................................. 2,860 2,006
Dividend and other income ........................................................... 2,251 818
Equity in earnings (losses) of GB Holdings, Inc. .................................... (215) 644
------------ ------------
117,901 90,645
------------ ------------
Expenses:
Hotel and casino operating expenses ................................................. 55,884 54,560
Cost of land, house and condominium sales ........................................... 7,705 898
Hotel and resort operating expenses ................................................. 2,872 3,077
Interest expense .................................................................... 11,612 5,697
Depreciation and amortization ....................................................... 7,977 6,278
General and administrative expenses ................................................. 4,666 3,452
Property expenses ................................................................... 1,351 1,142
------------ ------------
92,067 75,104
------------ ------------
Operating income ...................................................................... 25,834 15,541
Other gains and (losses):
Write-down of other investments ..................................................... -- (18,798)
Gain on sales of marketable debt securities ......................................... 8,310 --
Loss on sales and disposition of real estate ........................................ (226) (272)
------------ ------------
Income from continuing operations before income taxes ................................. 33,918 (3,529)
Income tax expense .................................................................. (3,088) (3,167)
------------ ------------
Income (loss) from continuing operations ............................................ 30,830 (6,696)
------------ ------------
Discontinued operations:
Income from discontinued operations ................................................. 2,699 1,985
Gain on sales and disposition of real estate ........................................ 48,257 1,924
------------ ------------
Income from discontinued operations ................................................... 50,956 3,909
------------ ------------
Net earnings (loss) ................................................................... $ 81,786 $ (2,787)
============ ============
Net earnings (loss) attributable to (Note 11):
Limited partners .................................................................... $ 79,054 $ (4,851)
General partners .................................................................... 2,732 2,064
------------ ------------
$ 81,786 $ (2,787)
============ ============
Net earnings (loss) per limited partnership unit:
Basic earnings (loss):
Income (loss) from continuing operations .......................................... $ 0.63 $ (0.21)
Income from discontinued operations ................................................ 1.08 0.08
------------ ------------
Basic earnings (loss) per LP unit ................................................... $ 1.71 $ (0.13)
============ ============
Weighted average limited partnership units outstanding ................................ 46,098,284 46,098,284
============ ============
Diluted earnings (loss):
Income (loss) from continuing operations ........................................... $ 0.58 $ (0.21)
Income from discontinued operations ................................................ 0.96 0.08
------------ ------------
Diluted earnings (loss) per LP unit ................................................. $ 1.54 $ (0.13)
============ ============
Weighted average limited partnership units and equivalent partnership units outstanding 51,938,033 46,098,284
============ ============

See notes to consolidated financial statements.

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AMERICAN REAL ESTATE PARTNERS, L.P.

CONSOLIDATED STATEMENTS OF EARNINGS

SIX MONTHS ENDED
------------------------------
JUNE 30,
2004 2003
------------ ------------
(RESTATED)
(UNAUDITED)
(IN $000'S EXCEPT PER UNIT DATA)

Revenues:
Hotel and casino operating income ................................................... $ 148,369 $ 130,553
Land, house and condominium sales ................................................... 17,457 6,411
Interest income on financing leases ................................................. 5,426 6,759
Interest income on U.S. Government and Agency obligations and other investments ..... 15,981 8,395
Rental income ....................................................................... 5,123 4,703
Hotel and resort operating income ................................................... 5,543 6,597
Accretion of investment in NEG Holding LLC .......................................... 16,124 15,451
NEG management fee .................................................................. 5,479 3,879
Dividend and other income ........................................................... 3,084 1,710
Equity in losses of GB Holdings, Inc. ............................................... (563) (213)
------------ ------------
222,023 184,245
------------ ------------
Expenses:
Hotel and casino operating expenses ................................................. 110,131 108,051
Cost of land, house and condominium sales ........................................... 11,063 5,001
Hotel and resort operating expenses ................................................. 4,969 5,342
Interest expense .................................................................... 17,971 12,330
Depreciation and amortization ....................................................... 15,592 12,688
General and administrative expenses ................................................. 9,030 6,825
Property expenses ................................................................... 2,535 2,136
------------ ------------
171,291 152,373
------------ ------------
Operating income ...................................................................... 50,732 31,872
Other gains and (losses):
Provision for loss on real estate ................................................... -- (200)
Write-down of equity securities available for sale .................................. -- (961)
Write-down of other investments ..................................................... -- (18,798)
Gain on sales of marketable debt securities ......................................... 37,167 --
Gain on sales and disposition of real estate ........................................ 5,821 866
------------ ------------
Income from continuing operations before income taxes ................................. 93,720 12,779
Income tax expense .................................................................. (9,257) (7,059)
------------ ------------
Income from continuing operations ................................................... 84,463 5,720
------------ ------------
Discontinued operations:
Income from discontinued operations ................................................. 5,157 3,961
Gain on sales and disposition of real estate ........................................ 55,186 1,924
------------ ------------
Income from discontinued operations ................................................... 60,343 5,885
------------ ------------
Net earnings .......................................................................... $ 144,806 $ 11,605
============ ============
Net earnings attributable to (Note 11):
Limited partners .................................................................... $ 136,662 $ 5,424
General partners .................................................................... 8,144 6,181
------------ ------------
$ 144,806 $ 11,605
============ ============
Net earnings (loss) per limited partnership unit:
Basic earnings (loss):
Income (loss) from continuing operations .......................................... $ 1.68 $ (0.06)
Income from discontinued operations ................................................ 1.28 0.13
------------ ------------
Basic earnings per LP unit .......................................................... $ 2.96 $ 0.07
============ ============
Weighted average limited partnership units outstanding ................................ 46,098,284 46,098,284
============ ============
Diluted earnings (loss):
Income (loss) from continuing operations ........................................... $ 1.53 $ (0.06)
Income from discontinued operations ................................................ 1.13 0.13
------------ ------------
Diluted earnings per LP unit ........................................................ $ 2.66 $ 0.07
============ ============
Weighted average limited partnership units and equivalent partnership units outstanding 52,218,668 46,098,284
============ ============

See notes to consolidated financial statements.

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AMERICAN REAL ESTATE PARTNERS, L.P.

CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS'
EQUITY AND COMPREHENSIVE INCOME

SIX MONTHS ENDED JUNE 30, 2004 (UNAUDITED) (IN $000'S)
----------------------------------------------------------------------
LIMITED
GENERAL PARTNERS'
PARTNER'S EQUITY HELD IN TREASURY TOTAL
EQUITY DEPOSITARY -------------------------- PARTNERS'
(DEFICIT) UNITS AMOUNTS UNITS EQUITY
----------- ----------- ----------- ----------- -----------

Balance, December 31, 2003 (as previously reported) ...... $ (19,501) $ 1,184,870 $ (11,921) 1,137 $ 1,153,448
Arizona Charlie's acquisition ............................ 117,046 -- -- -- 117,046
----------- ----------- ----------- ----------- -----------

Balance, December 31, 2003 (restated) .................... 97,545 1,184,870 (11,921) 1,137 1,270,494
Comprehensive income:
Net earnings ............................................. 8,144 136,662 -- -- 144,806
Unrealized losses on securities available for sale ....... (1) (69) -- -- (70)
Reversal of unrealized gains on marketable debt
securities sold ........................................ (128) (6,297) -- -- (6,425)
Net unrealized gains on securities available for sale .... 8 411 -- -- 419
----------- ----------- ----------- ----------- -----------
Comprehensive income ..................................... 8,023 130,707 -- -- 138,730
----------- ----------- ----------- ----------- -----------
Capital distribution ..................................... (17,916) -- -- -- (17,916)
Capital contribution ..................................... 22,800 -- -- -- 22,800
Arizona Charlies acquisition ............................. (125,900) -- -- -- (125,900)
Arizona Charlies acquisition adjustment .................. (1,213) -- -- -- (1,213)
Change in deferred tax asset re acquisition of Arizona
Charlies ............................................... 12,721 -- -- -- 12,721
----------- ----------- ----------- ----------- -----------
Balance, June 30, 2004 ................................... $ (3,940) $ 1,315,577 $ (11,921) 1,137 $ 1,299,716
=========== =========== =========== =========== ===========

Accumulated other comprehensive income at June 30, 2004 was $349.

See notes to consolidated financial statements.

- 4 -

AMERICAN REAL ESTATE PARTNERS, L.P.

CONSOLIDATED STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED
JUNE 30,
----------------------
2004 2003
--------- ---------
(RESTATED)
(UNAUDITED)
(IN $000'S)

Cash flows from operating activities:
Income from continuing operations ............................................ $ 84,463 $ 5,720
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization ............................................... 15,592 12,688
Preferred LP unit interest expense .......................................... 2,450 --
Gain on sales and disposition of real estate ................................ (5,821) (866)
Provision for loss on real estate ........................................... -- 200
Write-down of equity securities available for sale .......................... -- 961
Write-down of other investments ............................................. -- 18,798
Gain on sales of marketable equity securities ............................... (37,167) --
Equity in losses of GB Holdings, Inc. ....................................... 563 213
Deferred gain amortization .................................................. (1,019) (1,019)
Accretion of investment in NEG Holding LLC .................................. (16,124) (15,451)
Deferred income tax expense ................................................. 5,995 2,665
Changes in operating assets and liabilities:
Decrease in land and construction-in-progress ............................. 2,181 146
Decrease in accounts payable, accrued expenses and other liabilities ...... (852) (35,227)
(Increase) decrease in receivables and other assets ....................... (3,612) 19
--------- ---------
Net cash provided by (used in) continuing operations ...................... 46,649 (11,153)
--------- ---------
Income from discontinued operations .......................................... 60,343 5,885
Depreciation and amortization ............................................... 414 2,231
Net gain from property transactions ......................................... (55,186) (1,924)
--------- ---------
Net cash provided by discontinued operations ............................... 5,571 6,192
--------- ---------
Net cash provided by (used in) operating activities ........................ 52,220 (4,961)
--------- ---------
Cash flows from investing activities:
Decrease (increase) in other investments ..................................... 351 (30,909)
Repayments of mezzanine loans included in other investments .................. 25,861 --
Purchase of debt securities .................................................. (54,775) --
Net proceeds from the sales and disposition of real estate ................... 16,635 3,259
Principal payments received on leases accounted for under the financing method 2,168 2,737
Acquisition of Arizona Charlies .............................................. (125,900) --
Acquisitions of rental real estate ........................................... (14,583) --
Additions to hotel, casino and resort operating property ..................... (11,264) (4,483)
Additions to rental real estate .............................................. (299) (281)
Increase in investment in U.S. Government and Agency Obligations ............. (51,568) (16,717)
Proceeds from sale of marketable equity & debt securities .................... 86,507 --
Guaranteed payment from NEG Holding LLC ...................................... 7,989 10,239
Priority distribution from NEG Holding LLC ................................... -- 40,506
Increase in restricted cash .................................................. (447) 173
Other ........................................................................ (98) (53)
--------- ---------
(119,423) 4,471

Cash flows from discontinued operations:

Net proceeds from the sales and disposition of real estate ................. 101,452 3,518
--------- ---------
Net cash (used in) provided by investing activities ........................ (17,971) 7,989
--------- ---------

Continued.......

- 5 -

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

CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)

SIX MONTHS ENDED JUNE 30,
--------------------------
2004 2003
----------- -----------
(RESTATED)
(UNAUDITED)
(IN $000'S)

CASH FLOWS FROM FINANCING ACTIVITIES:
Partners' equity:
Distributions to members .................................................... (17,916) --
Member's contribution ....................................................... 15,894 --
Debt:
Proceeds from Senior Notes Payable .......................................... 565,409 --
Decrease in due to affiliates ............................................... (25,000) --
Proceeds from mortgages payable ............................................. 10,000 20,000
Payments on mortgages payable ............................................... -- (3,837)
Periodic principal payments ................................................. (2,968) (3,468)
----------- -----------
Net cash provided by financing activities ......................... 545,419 12,695
----------- -----------
Net increase in cash and cash equivalents ....................................... 579,668 15,723
Cash and cash equivalents, beginning of period .................................. 500,593 79,540
----------- -----------
Cash and cash equivalents at end of period ...................................... $ 1,080,261 $ 95,263
=========== ===========
Supplemental information:
Cash payments for interest .................................................... $ 8,748 $ 58,598
=========== ===========
Supplemental schedule of noncash investing and financing activities:
Reclassification of real estate from operating lease ............................ $ (24,849) $ --
Reclassification from hotel and resort operating properties ..................... (6,428) --
Reclassification to property held for sale ...................................... 31,277 --
Reclassification of real estate to operating lease .............................. -- 2,158
Reclassification of real estate from financing lease ............................ -- (2,158)
Reclassification from receivables and other assets .............................. -- (1,631)
Reclassification to mortgages and notes receivable included in other investments -- 1,631
Decrease in mortgages and notes receivables included in other investments ....... -- (3,453)
Decrease in deferred income ..................................................... -- 2,565
Increase in real estate accounted for under the operating method ................ -- 888
----------- -----------
$ -- $ --
=========== ===========
Net unrealized gains on securities available for sale ........................... $ 349 $ 2,342
=========== ===========
Increase in equity and debt securities .......................................... $ 600 $ 600
=========== ===========
Purchase of debt securities ..................................................... $ 59,853 $ --
=========== ===========
Contribution of note from NEG Holding LLC ....................................... $ -- $ 10,940
=========== ===========
Member's capital contribution ................................................... $ 6,906 $ --
=========== ===========
Change in tax asset related to acquisition ...................................... $ 12,721 $ --
=========== ===========
Change in deferred tax asset valuation allowance ................................ $ -- $ 2,412
=========== ===========
Net assets contributed by parent ................................................ $ -- $ 233
=========== ===========

See notes to consolidated financial statements

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AMERICAN REAL ESTATE PARTNERS, L.P.
FORM 10-Q JUNE 30, 2004
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. GENERAL

American Real Estate Partners, L.P. ("AREP" or the "Company") is a master
limited partnership formed in Delaware on February 17, 1987. The accompanying
consolidated financial statements and related footnotes should be read in
conjunction with the consolidated financial statements and related footnotes
contained in the Company's annual report on Form 10-K for the year ended
December 31, 2003.

The financial statements have been prepared in accordance with the rules
and regulations of the Securities and Exchange Commission related to interim
financial statements. All adjustments which, in the opinion of management, are
necessary to fairly present the results for the interim periods have been made.
Certain prior year amounts have been reclassified in order to conform to the
current year presentation.

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

The results of operations for the three and six months ended June 30,
2004 are not necessarily indicative of the results to be expected for the full
year. Hotel, casino and resort operations are highly seasonal in nature and are
not necessarily indicative of results expected for the full year.

2. RELATED PARTY TRANSACTIONS

a. 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 ("Mr. Icahn") and an
entity affiliated with Mr. Icahn, for an aggregate consideration of $125.9
million. Mr. Icahn is Chairman of the Board of American Property Investors,
Inc., AREP's general partner ("API" or the "General Partner"). The acquisition
was completed on May 26, 2004 upon obtaining all approvals necessary under the
gaming laws. The terms of the transactions were approved by the Audit Committee
of the Board of Directors of the General Partner ("Audit Committee") which was
advised by its independent financial advisor and by counsel. See Note 4. - Notes
to Consolidated Financial Statements.

b. In 1997 the Company entered into a license agreement with an affiliate
of the General Partner for office space. Pursuant to the license agreement, the
Company 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." The
terms of such license agreement were reviewed and approved by the Audit
Committee. The agreement which expired in May 2004, has been extended on a
month-to-month basis. For the three and six months ended June 30, 2004, the
Company paid rent of approximately $26,000 and $65,000, respectively. For the
three and six months ended June 30, 2003, the Company paid rent of $40,000 and
$77,000, respectively.

c. American Casino billed the Sands Hotel and Casino (the "Sands")
approximately $67,000 and $116,000 for administrative services performed by
Stratosphere personnel during the three and six months ended June 30, 2004.
respectively. For the three and six months ended June 30, 2003, American Casino
billed the Sands approximately $97,000 for administrative services. See Note 6 -
Notes to Consolidated Financial Statements.

d. National Energy Group, Inc. ("NEG") received management fees from
affiliates of the General Partner of approximately $2.9 million and $5.5 million
in the three and six months ended June 30, 2004, respectively, and received
management fees from affiliates of approximately $2 million and $3.9 million in
the three and six months ended June 30, 2003, respectively. See Note 5 - Notes
to Consolidated Financial Statements.

e. In the three and six months ended June 30, 2004, the Company paid
approximately $60,000 and $120,000 to an affiliate of the General Partner for
telecommunication services and paid approximately $40,000 and $84,000 to the
affiliate for such services in the three and six months ended June 30, 2003,
respectively.

f. An affiliate of the General Partner provided certain administrative
services to the Company which paid such affiliate approximately $20,000 and
$40,000 in both the three and six months ended June 30, 2004 and 2003,
respectively.

-7-

g. The Company provided certain administrative services to affiliates of
the General Partner and was paid $27,000 in the three and six months ended June
30, 2004, and $40,000 for such services in the three and six months ended June
30, 2003.

h. As of August 1, 2004 affiliates of Mr. Icahn owned 8,900,995 Preferred
Units and 39,896,836 Depositary Units.

3. COMMITMENTS AND CONTINGENCIES

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

In February 2002, New Seabury Properties L.L.C. ("New Seabury"), the
Company's 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 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 has not yet ruled 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. Also in March 2004, the Commission cross-moved for Summary Judgment
on certain claims under each complaint. The Court heard arguments in June 2004
and took the matter under advisement. Under the initial proposal, New Seabury
could potentially build up to 675 residential/hotel units and 80,000 square feet
of commercial space. The Company cannot predict the effect on the development
process if it loses any appeal or if the Commission is ultimately successful in
asserting jurisdiction over any of the development proposals.

The carrying value of New Seabury's development assets at June 30, 2004
is approximately $9.9 million.

b. Tiffiny Decorating Company ("Tiffiny"), a subcontractor to Great
Western Drywall ("Great Western"), filed a legal action against Stratosphere
Corporation, Stratosphere Development, LLC, American Real Estate Holdings
Limited Partnership (collectively referred to as the "Stratosphere Parties"),
Great Western, Nevada Title and Safeco Insurance, Case No. A443926 in the Eighth
Judicial District Court of the State of Nevada. The legal action asserts claims
that include breach of contract, unjust enrichment and foreclosure of lien. The
Stratosphere Parties have filed a cross-claim against Great Western in that
action. Additionally, Great Western has filed a separate legal action against
the Stratosphere Parties setting forth the same disputed issues and claiming
additional damages. 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 approximately $0.5 million against

-8-

Great Western, the Stratosphere Parties, and the other defendants, which the
Stratosphere Parties contend has been paid to Great Western for payment to
Tiffiny.

Great Western is alleging that it is owed payment from the Stratosphere
Parties for work performed and for delay and disruption damages. Great Western
is claiming damages in the sum of approximately $3.9 million 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 $1.0 million, of which $0.2 million and $0.4 million 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 $1.0 million.

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

4. HOTEL, CASINO AND RESORT OPERATING PROPERTIES

a. HOTEL AND CASINO OPERATING PROPERTIES

On January 5, 2004, 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. Upon obtaining all approvals necessary under
gaming laws, the acquisition was completed on May 26, 2004. The terms of the
transactions were approved by the Audit Committee which was advised by its
independent financial advisor and by counsel. As previously contemplated upon
closing, American Real Estate Holdings Limited Partnership ("AREH"), the
Company's direct subsidiary, transferred 100% of the common stock of
Stratosphere to American Casino. As a result, following the acquisition and
contribution, American Casino owns and operates three gaming and entertainment
properties in the Las Vegas metropolitan area. The Company consolidates American
Casino and its subsidiaries in the Company's 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 interests, and the financial statements of previously separate
companies for periods prior to the acquisition are restated on a combined basis.
The Company's June 30, 2003 consolidated financial statements have been restated
to reflect the acquisition of Arizona Charlie's Decatur and Arizona Charlie's
Boulder.

Earnings, capital contributions and distributions prior to the
acquisition have been allocated to the General Partner. In accordance with the
purchase agreement, prior to the acquisition, capital contributions of $22.8
million were received from and capital distributions of $17.9 million were paid
to affiliates of Mr. Icahn. The purchase price of $125.9 million was charged to
the General Partner as was $1.2 million, representing the excess of the purchase
price over historical cost.

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 were 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 Arizona Charlie's Boulder. Upon satisfaction of all closing conditions on
May 26, 2004, the proceeds of the offering were released from escrow. American
Casino used the proceeds of the offering for the acquisition and to repay
intercompany indebtedness and for distributions to AREH.

American Casino's operations for the three and six months ended June 30,
2004 and 2003 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 depreciation and amortization and
income tax provision. Such expenses have been included in "Depreciation and
amortization expense" and "Income tax expense" in the Consolidated Statements of
Earnings. American Casino's depreciation and amortization expense was $6.4
million and $12.3 million in the three and six months ended June 30, 2004,
respectively, and $5.0 million and $10.3 million in the three and six months
ended June 30, 2003, respectively. American Casino's income tax provision was
$1.4 million and $5.9 million in the three and six months ended June 30, 2004,
respectively, and $2.0 million and $4.4 million in the three and six months
ended June 30, 2003, respectively. American Casino accounted for approximately
67% and 71% of the Company's revenues in the six months ended June 30, 2004 and
2003, respectively, and approximately 75% and 71% of the Company's operating
income in the six months ended June 30, 2004 and 2003, respectively.

-9-

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 visible amusement rides in Las Vegas.

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 seeks to attract repeat customers from
the surrounding communities.

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 seeks to attract repeat customers from
the surrounding communities.

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.

b. HOTEL AND RESORT OPERATING PROPERTIES

Hotel and resort operations for the three and six months ended June 30,
2004 and 2003 have been included in "Hotel and resort operating income and
expenses" in the Consolidated Statements of Earnings. Hotel and resort operating
expenses include all expenses except for approximately $0.7 million and $1.4
million of depreciation and amortization for the three and six months ended June
30, 2004, respectively, and $0.7 million and $1.4 million in the three and six
months ended June 30, 2003, respectively. Such amounts have been included in
"Depreciation and amortization expense" in the Consolidated Statements of
Earnings.

5. NATIONAL ENERGY GROUP, INC.

a. NATIONAL ENERGY GROUP, INC.

In October 2003, pursuant to a 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 Mr. 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 by legal counsel. The securities acquired were $148.6 million in principal
amount of outstanding 10 3/4% Senior Notes due 2006 of NEG, representing all of
NEG's outstanding debt securities, and approximately 5.6 million shares of
common stock of NEG. As a result of the foregoing transaction and the
acquisition by the Company of additional NEG common stock in the open market
prior to the closing, the Company beneficially owns in excess of 50% of the
outstanding common stock of NEG. 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 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 based on book value. In
addition, the NEG Holding Operating Agreement contains a provision that allows
Gascon at any time, in its sole discretion, to redeem the NEG membership
interest in NEG Holding at a price equal to the fair market value of such
interest determined as if NEG Holding had sold all of its assets for fair market
value and

-10-

liquidated. Since all of NEG's operating assets and oil and natural gas
properties have been contributed to NEG Holding, as noted above, following such
a redemption, NEG's principal assets would consist solely of its cash balances.
The Company's June 30, 2003 consolidated financial statements have been restated
to reflect the acquisition of NEG.

NEG owns a 50% interest in NEG Holding LLC ("NEG Holding"); the other 50%
interest in NEG Holding is held by Gascon Partners ("Gascon"), an affiliate of
Mr. Icahn. Gascon is the managing member of NEG Holding. NEG Holding owns NEG
Operating LLC ("NEG Operating"), which is engaged in the business of oil and gas
exploration and production. Under the NEG Holding operating agreement, NEG is to
receive guaranteed payments of approximately $39.9 million and a priority
distribution of approximately $148.6 million before Gascon receives any
distributions. Due to the substantial uncertainty that NEG will receive any
distribution above the priority and guaranteed payments amounts, NEG accounts
for its investment in NEG Holding as a preferred investment.

NEG Holding is a variable interest entity. As of June 30, 2004, it has
net assets of approximately $162 million. The Company has determined that the
Company is not the primary beneficiary of the variable interest entity. The
maximum exposure to losses as a result of the Company's interest in NEG Holding
is $77 million.

In the three and six months ended June 30, 2004, NEG recorded income tax
provisions of $1.7 million and $3.3 million, respectively, and for the three and
six months ended June 30, 2003, $1.2 million and $2.7 million, respectively,
based on taxable income and applying an effective tax rate of approximately 35%.

In connection with a credit facility obtained by NEG Holding on December
29, 2003, NEG and Gascon have pledged as security their respective interests in
NEG Holding.

b. INVESTMENT IN NEG HOLDING LLC

As explained below, NEG's investment in NEG Holding 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.

Balance sheets for NEG Holding as of June 30, 2004 and December 31, 2003
are as follows:

2004 2003
--------- ----------
(IN $000'S)

Current assets................................ $ 26,249 $ 33,415
Noncurrent assets(1) ......................... 212,365 190,389
--------- ----------
Total assets............................... $ 238,614 $ 223,804
========= ==========
Current liabilities........................... $ 20,412 $ 14,253
Noncurrent liabilities........................ 56,129 48,514
--------- ----------
Total liabilities.......................... 76,541 62,767
Members' equity............................... 162,073 161,037
--------- ----------
Total liabilities and members' equity...... $ 238,614 $ 223,804
========= ==========

- --------------
(1) Primarily oil and gas properties

-11-

Summary income statements for NEG Holding for the six months ended June
30, 2004 and 2003 are as follows:

2004 2003
--------- ----------
(IN $000'S)

Total revenues................................ $ 32,366 $ 33,135
Costs and expenses............................ 22,393 23,624
--------- ----------
Operating income........................... 9,973 9,511
Other income (expense)........................ (948) (1,040)
--------- ----------
Income before cumulative effect of
change in accounting principle............ 9,025 8,471
Cumulative effect of change in
accounting principle ..................... -- 1,912
--------- ----------
Net Income.................................... $ 9,025 $ 10,383
========= ==========

Prior to September 2001, NEG owned and operated certain oil and gas
properties. Effective as of May 1, 2001, NEG contributed all of its oil and gas
properties to NEG Holding. NEG recorded its investment in NEG Holding at the
historical cost of the oil and gas properties that NEG contributed into the
partnership (in exchange for NEG Holding's obligation to pay NEG the priority
distribution and guaranteed payments). NEG accretes its investment in NEG
Holding 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
NEG Holding is valued at zero. Upon payment of the priority distribution in
2006, NEG's investment in NEG Holding will be zero. Cash receipts, if any, after
the priority distribution and the guaranteed payments will be reported in income
as earned. The following is a roll forward of the investment in NEG Holding as
of June 30, 2004:

(IN $000'S)
----------

Investment in NEG Holding at December 31, 2003......................... $ 69,346
Accretion of investment in NEG Holding................................. 16,124
Guaranteed payment from NEG Holding.................................... (7,989)
---------
Investment in NEG Holding at June 30, 2004............................. $ 77,481
=========

The NEG Holding 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. At June
30, 2004, the priority distribution amount was $148.6 million which equals the
principal amount of NEG's 10.75% Senior Notes that the Company owns. The
guaranteed payments will be made on a semi-annual basis. The priority
distribution amount is to be paid to NEG by November 6, 2006.

2. 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.

-12-

3. An amount equal to the aggregate annual interest (calculated at the
prime rate plus 1/2% on the sum of the guaranteed payments), plus any unpaid
interest for prior years (calculated at the prime rate 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.

4. 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.

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

The Company reflects its equity interest in GB Holdings, Inc. ("GBH")
under this caption in the Consolidated Balance Sheets. The Company owns
approximately 3.6 million shares, or 36.3%, of GBH. GBH is the holding company
for the Sands Hotel and Casino (the "Sands") located in Atlantic City, New
Jersey. The Sands 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.

"Equity in earnings (losses) of GB Holdings, Inc." of ($0.2 million) and
($0.6 million) respectively, have been recorded in the Consolidated Statements
of Earnings for the three and six months ended June 30, 2004, respectively.
Equity in earnings (losses) of GB Holdings, Inc. were $0.6 million and ($0.2
million) for the three and six months ended June 30, 2003, respectively.

On June 30, 2004, GBH announced that its stockholders approved the
transfer of the Sands to its wholly owned indirect subsidiary Atlantic Coast
Entertainment Holdings, Inc. ("Atlantic Holdings") in connection with the
restructuring of its debt.

On July 22, 2004, Atlantic Holdings announced that its Consent
Solicitation and Offer to Exchange, in which it offered to exchange its 3% Notes
due 2008 for the 11% Notes due 2005, expired and approximately $66 million
principal amount of the 11% notes (approximately 60% of the outstanding 11%
notes) were tendered to Atlantic Holdings for exchange. On July 23, 2004, 10
million warrants were distributed on a pro rata basis to stockholders. The
warrants, under certain conditions, will allow the holders to purchase common
stock of Atlantic Holdings at a purchase price of $.01 per share, representing
27.5% of the outstanding common stock of Atlantic Holdings on a fully diluted
basis. Mr. Icahn and his affiliated companies, including the Company, held
approximately 58.2% of the debt; the Company held approximately 24.5% of the
debt. The Company and Mr. Icahn tendered in the exchange all of the 11% notes
due 2005 owned by them.

The Company received:

- $26,914,500 principal amount of the new notes due September 2008,
which bear interest at 3% per annum, payable at maturity. The
original debt is included in "Marketable Equity and Debt
Securities" in the Consolidated Balance Sheets. The carrying value
of the debt at June 30, 2004 is approximately $25.3 million.

- $3,620,753 in cash; representing accrued interest on the 11% Notes
and $100 per $1,000 in principal amount of the 11% Notes.

- Warrants, which, under certain conditions, will allow the Company
to purchase 997,621 shares of common stock at $.01 per share of
Atlantic Holdings representing approximately 10% of the
outstanding common stock of Atlantic Holdings, at July 22, 2004,
on a fully diluted basis.

After the exchange, Mr. Icahn and affiliates, including the Company, own
approximately 77.5% of the stock of GBH, the sole shareholder of Atlantic
Holdings, which owns and operates the Sands Hotel and Casino. Mr. Icahn and
affiliates, including the Company, own approximately 96.5% of the debt of
Atlantic Holdings. Mr. Icahn and his affiliates, other than the Company, own
approximately 41.2% of the common stock of GBH and 55.9% of the debt of
Atlantic Holdings. AREP owns approximately 36.3% of the common stock of GBH and
40.6% of the debt of Atlantic Holdings.

-13-

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

7. MARKETABLE EQUITY AND DEBT SECURITIES

In December 2003, the Company acquired approximately $86.9 million
principal amount of corporate debt securities for approximately $45.1 million.
These securities were classified as available for sale securities. In the six
months ended June 30, 2004, the Company sold the debt securities for
approximately $82.3 million recognizing a gain of $8.3 million and $37.2 million
in the three and six months ended June 30, 2004, respectively.

8. OTHER INVESTMENTS

a. In April, 2004, the Company purchased approximately $63.5 million
principal amount of secured bank debt of a bankrupt company for a purchase price
of approximately $54.7 million. At June 30, 2004, the Company had entered into a
trade confirmation to purchase an additional $21 million principal amount of
secured bank debt of the same company for approximately $14.7 million and had
entered into trade confirmations to purchase other secured bank debt in the
principal amount of approximately $76 million for approximately $45.2 million.
At June 30, 2004, the Company reflected its purchase liability of approximately
$59.9 million in "Liability for purchased securities" on the Consolidated
Balance Sheets.

b. The Company has provided development financing for certain real estate
projects. The security for these loans is a pledge of the developers' ownership
interest in the properties. Such loans are subordinate to construction financing
and are generally referred to as mezzanine loans. The Company's mezzanine loans
accrue interest at approximately 22% per annum. However, interest generally 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.

On April 30, 2004, the Company received approximately $16.2 million for
the prepayment of a mezzanine loan. The principal amount of the loan was $11
million. The prepayment included approximately $5.2 million of accrued interest
which was recognized as interest income in the three and six months ended June
30, 2004.

At June 30, 2004, the Company had one outstanding mezzanine loan in the
principal amount of $16.3 million. The Company has deferred recognition of
approximately $11 million of accrued interest income for financial statement
purposes in connection with this loan. The loan and accrued interest were repaid
in the third quarter of 2004. In accordance with the Company's accounting
policy, interest income on this loan will be recognized in the three and nine
months ended September 30, 2004.

c. At June 30, 2004, the Company had one second mortgage loan in the
principal amount of $7 million which bears interest at 20% per annum, payable
monthly.

9. SENIOR SECURED NOTES PAYABLE

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 were 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. Upon satisfaction of all closing conditions on May 26, 2004, the
proceeds of the offering were released from escrow. American Casino used the
proceeds of the offering for the acquisition of Arizona Charlie's Decatur and
Boulder, to repay intercompany indebtedness and for distributions to AREH. The
notes are recourse only to, and will be secured by a lien on the assets of,
American Casino and certain of its subsidiaries. The notes restrict the ability
of American Casino and its restricted subsidiaries subject to certain
exceptions, 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. The notes were issued in an
offering not registered under the Securities Act of 1933. At the time American
Casino issued the notes, it entered into a registration rights agreement in
which it agreed to exchange the notes for new notes which have been registered
under the Securities Act of 1933. If the registration statement is not declared
effective by the SEC on or prior to December 2, 2004 or if American Casino fails
to consummate an exchange offer in which it issues notes registered under the
Securities Act of 1933 for the privately issued notes within 30 business days
after December 2, 2004, then American Casino will pay, as liquidated damages,
$.05 per week per $1,000 principal amount for the first 90 day

-14-

period following such failure, increasing by an additional $.05 per week of
$1,000 principal amount for each subsequent 90 period, until all failures are
cured.

10. SENIOR UNSECURED NOTES PAYABLE

On May 12, 2004, AREP closed on its offering of senior notes due 2012.
The notes, in the aggregate principal amount of $353 million, were priced at
99.266%. The notes will have a fixed annual interest rate of 8 1/8%, which will
be paid every six months on June 1 and December 1, commencing December 1, 2004.
The notes will mature on June 1, 2012. AREH is a guarantor of the debt; however,
no other subsidiaries guarantee payment on the notes. AREP intends to use the
proceeds of this offering for general business purposes, including to pursue our
primary business strategy of acquiring undervalued assets in our existing lines
of business or other businesses and to provide additional capital to grow our
existing businesses. The notes restrict the ability of AREP and AREH, subject to
certain exceptions, to, among other things; incur additional debt; pay dividends
or make distributions; repurchase stock; create liens; and enter into
transactions with affiliates. The notes were issued in an offering not
registered under the Securities Act of 1933. At the time we issued the notes, we
entered into a registration rights agreement in which we agreed to exchange the
notes for new notes which have been registered under the Securities Act of 1933.
If the registration statement is not declared effective by the SEC on or prior
to November 18, 2004 or if we fail to consummate an exchange offer in which we
issue notes registered under the Securities Act of 1933 for the privately issued
notes within 30 business days after November 18, 2004, then we will pay, as
liquidated damages, $.05 per week per $1,000 principal amount for the first 90
day period following such failure, increasing by an additional $.05 per week of
$1,000 principal amount for each subsequent 90 period, until all failures are
cured.

11. PREFERRED UNITS

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 was payable March 31, 2004 to holders of record as of
March 12, 2004. A total of 489,657 additional Preferred Units were issued. At
June 30, 2004, 10,286,264 Preferred Units are issued and outstanding. In
February 2004, the number of authorized Preferred Units were increased to
10,400,000.

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, the Company, with the approval of the Audit Committee of the Board of
Directors of the General Partner, may opt to redeem all, but not less than all,
of the Preferred Units for a price, payable either in all cash or by issuance of
additional Depositary Units, equal to the liquidation preference of the
Preferred Units, plus any accrued but unpaid distributions thereon. On March 31,
2010, the Company must redeem all, but not less than all, of the Preferred Units
on the same terms as any optional redemption.

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 from July 1, 2003, the preferred pay-in-kind
distribution has been recorded as "Interest expense" in the Consolidated
Statements of Earnings.

12. EARNINGS PER SHARE

Basic earnings per share are based on earnings which is net of 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 is based on earnings before the preferred
pay-in-kind distribution as the numerator with the denominator based on the
weighted average number of units and equivalent units outstanding. The Preferred
Units are considered to be equivalent units. The number of limited partnership
units used in the

-15-

calculation of diluted income per limited partnership unit increased by
5,839,749 and 6,120,384 in the three and six months ended June 30, 2004,
respectively, to reflect the potential conversion of preferred units. There was
no increase in the number of limited partnership units used in the calculation
of diluted income per limited partnership unit for the three and six months
ended June 30, 2003 as such increase would be anti-dilutive.

Net Income Per Unit

Basic net income per American Real Estate Partners, L.P. Unit is derived
by dividing net income by the basic weighted average number of American Real
Estate Partners, L.P. Units outstanding for each period. Diluted earnings per
American Real Estate Partners, L.P. Unit is derived by adjusting net income for
the assumed dilutive effect of the redemption of the Preferred LP Units
("Diluted Earnings") and dividing diluted earnings by the diluted weighted
average number of American Real Estate Partners, L.P. Units outstanding for each
period.

13. COMPREHENSIVE INCOME

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

-16-

Comprehensive income for the three and six months ended June 30, 2004 and
2003 is as follows (in $000's):

THREE MONTHS ENDED
JUNE 30,
----------------------
2004 2003
-------- ----------
(RESTATED)

Net income................................................................. $ 81,786 $ (2,787)
Net unrealized gains on securities available for sale...................... (7,084) 1,177
Reversal of unrealized (losses) gains on marketable securities sold........ (1,525) --
-------- ----------
Comprehensive income....................................................... $ 73,177 $ (1,610)
======== ==========

SIX MONTHS ENDED
JUNE 30,
----------------------
2004 2003
-------- ----------
(RESTATED)

Net income................................................................. $144,806 $ 11,605
Net unrealized gains on securities available for sale...................... 349 2,342
Reversal of unrealized (losses) gains on marketable securities sold........ (6,425) 761
-------- ----------
Comprehensive income....................................................... $138,730 $ 14,708
======== ==========

14. SEGMENT REPORTING

The Company has six operating segments consisting of: (i) hotel and
casino operating properties, (ii) land, house and condominium development, (iii)
rental real estate, (iv) hotel and resort operating properties, (v) investment
in oil and gas operating properties and (vi) investment in securities including
investment in other limited partnerships and marketable equity and debt
securities. The Company's reportable segments offer different services and
require different operating strategies and management expertise.

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

The revenues and net earnings for each of the reportable segments are
summarized as follows for the three and six months ended June 30, 2004 and 2003
(in $000's):

-17-

THREE MONTHS ENDED
JUNE 30,
----------------------
2004 2003
-------- ----------
(RESTATED)

Revenues:
Hotel and casino operating income.................................................. $ 73,145 $ 65,467
Land, house and condominium sales.................................................. 12,443 1,551
Rental real estate................................................................. 4,452 5,751
Hotel and resort operating income.................................................. 3,439 4,525
Oil and gas operating properties................................................... 11,079 8,707
Other investments.................................................................. 11,453 1,407
-------- ----------
Subtotal................................................................... 116,011 87,408
Reconciling items--primarily interest income on U.S. Government obligations............. 1,890 3,237
-------- ----------
Total revenues............................................................. $117,901 $ 90,645
======== ==========
Net earnings (loss):
Segment earnings:

Hotel and casino operating properties.......................................... $ 17,261 $ 10,907
Land, house and condominium development........................................ 4,738 653
Rental real estate............................................................. 3,101 4,609
Hotel and resort operating properties.......................................... 567 1,448
Oil and gas operating properties............................................... 11,079 8,707
Other investments.............................................................. 11,453 1,407
-------- ----------
Total segment earnings..................................................... 48,199 27,731
Gain on sale of marketable equity securities............................................ 8,310 --
Income from discontinued operations..................................................... 50,956 3,909
Other expenses, net..................................................................... (25,679) (34,427)
General partner's share of net income................................................... (2,732) (2,064)
-------- ----------
Net earnings limited partner unitholders................................... $ 79,054 $ (4,851)
======== ==========

SIX MONTHS ENDED
JUNE 30,
----------------------
2004 2003
-------- ----------
(RESTATED)

Revenues:
Hotel and casino operating income.................................................. $147,806 $ 130,340
Land, house and condominium sales.................................................. 17,457 6,411
Rental real estate................................................................. 10,549 11,462
Hotel and resort operating income.................................................. 5,543 6,597
Oil and gas operating properties................................................... 21,602 19,330
Other investments.................................................................. 16,013 3,305
-------- ----------
Subtotal................................................................... 218,970 177,445
Reconciling items--primarily interest income on U.S. Government obligations.............. 3,053 6,800
-------- ----------
Total revenues............................................................. $222,023 $ 184,245
======== ==========
Net earnings (loss):
Segment earnings:
Hotel and casino operating properties.......................................... $ 37,675 $ 22,289
Land, house and condominium development........................................ 6,394 1,410
Rental real estate............................................................. 8,014 9,326
Hotel and resort operating properties.......................................... 574 1,255
Oil and gas operating properties............................................... 21,602 19,330
Other investments.............................................................. 16,013 3,305
-------- ----------
Total segment earnings..................................................... 90,272 56,915
Gain on sale of marketable equity securities............................................ 37,167 --
Gains on sales and disposition of real estate........................................... 5,821 866
Income from discontinued operations..................................................... 60,343 5,885
Other expenses, net..................................................................... (48,797) (52,061)
General partner's share of net income................................................... (8,144) (6,181)
-------- ----------
Net earnings limited partner unitholders................................... $136,662 $ 5,424
======== ==========

-18-

15. INCOME TAXES (in $000's)

Corporate income taxes

(i) The Company's corporations recorded the following income tax (expense)
benefit attributable to continuing operations for American Casino and NEG
for the three and six months ended June 30, 2004 and 2003 (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 June
30, 2004 and December 31, 2003 (in $000's):

16. SIGNIFICANT PROPERTY TRANSACTIONS

Due to favorable real estate market conditions and the mature nature of
the Company's real estate portfolio, AREP has solicited offers of its rental
real estate portfolio. AREP intends to utilize proceeds from any asset sales to
continue to invest in our core businesses, including real estate, gaming and
entertainment and oil and gas. We may also seek opportunities in other sectors
including industrial, manufacturing and insurance and asset management. In
total, the Company is marketing for sale properties with a book value of
approximately $198 million at June 30, 2004, including financing lease property
($98 million), operating lease property ($51 million) and property held for sale
($49 million), which are individually encumbered by mortgage debt which in the
aggregate is approximately $84 million. There can be no assurance that offers
satisfactory to AREP will be received and, if received, that the properties will
ultimately be sold at prices acceptable to AREP.

In the six months ended June 30, 2004, the Company sold seven financing
lease properties for approximately $43.4 million. The properties were encumbered
by mortgage debt of approximately $26.8 million which was repaid from the sales
proceeds. The carrying value of these properties was approximately $37.6
million; therefore, the Company recognized a gain on sale of approximately $5.8
million in the six months ended June 30, 2004, which is included in income from
continuing operations.

In the six months ended June 30, 2004, the Company sold 25 operating
properties for approximately $168 million. The properties were encumbered by
mortgage debt of approximately $67 million which was repaid from the sales
proceeds. The carrying value of these properties was approximately $113 million.
The Company recognized a gain on sale of approximately $55 million in the six
months ended June 30, 2004, which is included in income from discontinued
operations.

At June 30, 2004, the Company had 29 properties under contract or as to
which letters of intent had been executed by potential purchasers, 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

-19-

total approximately $87.3 million but the properties are encumbered by aggregate
mortgage debt of approximately $15.3 million which would have to be repaid out
of the proceeds of the sales or assumed by the purchaser. At June 30, 2004, the
carrying value of these properties is approximately $44 million. In 2003, net
income from these properties totaled approximately $4.2 million; interest
expense was approximately $1.2 million; and depreciation and amortization
expense was approximately $1.1 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 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. AREP obtained mortgage financing of
$10 million for this property in April 2004.

17. SUBSEQUENT EVENTS

a. In July 2004, AREP purchased two Vero Beach, Florida waterfront
communities, Grand Harbor and Oak Harbor, including their respective golf
courses, tennis complex, fitness center, beach club and clubhouses. The
acquisition also included properties in various stages of development including
land for future residential development, improved lots and finished residential
units ready for sale. The purchase price was approximately $75 million. AREP
plans to invest in the further development of these properties and the
enhancement of the existing infrastructure.

b. In July 2004, the Company sold eight properties for approximately $9.7
million. The carrying value of the properties was approximately $3.9 million;
therefore, the Company will recognize a gain with respect to these properties of
approximately $5.8 million in discontinued operations in the three and nine
months ended September 30, 2004.

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

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

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

We are a diversified holding company engaged in a variety of businesses.
Our primary business strategy is to seek to acquire undervalued assets and
companies that are distressed or out of favor. Our businesses currently include
rental real estate; real estate development; hotel and resort operations; hotel
and casino operations; investments in equity and debt securities; and oil and
gas exploration and production. We intend to continue to invest in our core
businesses, including real estate, gaming and entertainment, and oil and gas. We
may also seek opportunities in other sectors, including energy, industrial
manufacturing and insurance and asset management.

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.

In October 2003, the Company acquired certain debt and equity securities
of National Energy Group, Inc. ("NEG") from entities affiliated with Mr. Icahn
and purchased additional NEG common stock in the open market. As a result of the
foregoing acquisitions, AREP beneficially owns in excess of 50% of the
outstanding common stock of NEG. AREP consolidates NEG in its financial
statements and prior period financial statements have been restated to include
the accounts of NEG. Earnings prior to the acquisition have been
allocated to the General Partner.

In May 2004, American Casino, an indirect wholly-owned subsidiary of AREP,
acquired Arizona Charlie's Decatur and Arizona Charlie's Boulder, two Las Vegas
hotel/casinos, from Mr. Icahn and an affiliate. The Company's June 30, 2004,
Consolidated Financial Statements include the accounts of Arizona Charlie's
Decatur and Arizona Charlie's Boulder and prior period financial statements have
been restated to include the accounts of Arizona Charlie's Decatur and Arizona
Charlie's Boulder. Earnings prior to the acquisition have been allocated to the
General Partner.

RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO THREE MONTHS ENDED JUNE 30, 2003

Gross revenues increased by $27.3 million, or 30.1%, during the three
months ended June 30, 2004 as compared to the same period in 2003. This increase
reflects increases of $10.9 million in land, house and condominium sales, $8.5
million in hotel and casino operating income, $7.3 million in interest income on
U.S. government and agency obligations and other investments, $1.5 million in
accretion of investment in NEG Holding LLC, $1.4 million in dividend and other
income and $0.9 million in NEG management fees partially offset by decreases of
$1.1 million in hotel and resort operating income, $.9 million in equity in
earnings of GB Holdings, $0.8 million in interest income on financing leases and
$0.4 million in rental income. The increase in land, house and condominium sales
is primarily due to an increase in the number of units sold. The increase in
hotel and casino

-20-

operating income is primarily due to an increase in casino, hotel and food and
beverage revenues. The increase in interest income on U.S. government and agency
obligations and other investments is primarily due to the repayment of a
mezzanine loan and increased interest income from other investments. Hotel and
resort operating income decreased primarily due to the deferral of certain
membership initiation fees.

Expenses increased by $17.0 million, or 22.6%, during the three months
ended June 30, 2004 as compared to the same period in 2003. This increase
reflects increases of $6.8 million in cost of land, house and condominium sales,
$5.9 million in interest expense, $1.7 million in depreciation and amortization,
$1.3 million in hotel and casino operating expenses, $1.2 million in general and
administrative expenses, and $0.2 million in property expenses partially offset
by a decrease of $0.1 million in hotel and resort operating expenses. The
increase in the cost of land, house and condominium sales is primarily
attributable to increased sales as discussed above. The increase in interest
expense is primarily attributable to the increased interest expense on the
senior notes issued by American Casino in January 2004 and by the Company in May
2004 and the preferred limited partnership units. The increase in depreciation
and amortization is primarily due to increased depreciation and amortization of
American Casino. The increase in hotel and casino operating expenses is
primarily attributable to increased costs associated with increased revenues.
The increase in general and administrative expenses is primarily attributable to
expenses incurred in connection with the increase in NEG management fees.

Operating income increased during the three months ended June 30, 2004 by
$10.3 million as compared to the same period in 2003 as detailed above.

Earnings from land, house and condominium operations increased in the
three months ended June 30, 2004 compared to the same period in 2003 due to an
increase in the number of units sold. Based on current information, sales are
expected to increase moderately during the remainder of 2004 as compared to
2003. 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 increased during the
three months ended June 30, 2004 due to increased revenues throughout the
property.

There were no significant gains or losses on property transactions from
continuing operations in the three months ended June 30, 2004 or 2003.

A gain on sale of marketable equity securities of $8.3 million was
recorded in the three months ended June 30, 2004. There were no such gains in
the comparable period of 2003.

A write-down of other investments of $18.8 million was recorded in the
three months ended June 30, 2003. There was no such write-down in 2004.

Income from continuing operations before income taxes increased by $37.4
million in the three months ended June 30, 2004 as compared to the same period
in 2003 as detailed above.

Income tax expense of $3.1 million was recorded in the three months ended
June 30, 2004 as compared to $3.2 million in 2003. Income tax expense was
recorded by our corporate subsidiaries NEG and American Casino.

Income from continuing operations increased by $37.5 million in the three
months ended June 30, 2004 as compared to the same period in 2003 as detailed
above.

Income from discontinued operations increased by $47.0 million in the
three months ended June 30, 2004 as compared to the same period in 2003 due to
gains on property dispositions.

Net earnings for the three months ended June 30, 2004 increased by $84.5
million as compared to the three months ended June 30, 2003, primarily due to
increased income from discontinued operations ($47.1 million), a write-down of
other investments in 2003 ($18.8 million), a gain on sale of marketable debt
securities ($8.3 million), increased net hotel and casino operating income ($7.2
million), and increased net income from land, house and condominium operations
($4.1 million).

SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO SIX MONTHS ENDED JUNE 30, 2003

Gross revenues increased by $37.8 million, or 20.5%, during the six
months ended June 30, 2004 as compared to the same period in 2003. This increase
reflects increases of $17.8 million on hotel and casino operating revenues,

-21-

$11.0 million in land, house and condominium sales, $7.6 million in interest
income on U.S. government and agency obligations, $1.6 million in NEG management
fees, $1.4 million in dividend and other income, $.7 million in accretion of
investment in NEG Holding LLC and $.4 million in rental income partially offset
by decreases of $1.3 million in interest income on financing leases, $1.1
million in hotel and resort operating income and $.3 million in equity in
earnings of GB Holdings. The increase in hotel and casino operating income is
primarily due to an increase in casino, hotel, and food and beverage revenues.
The increase in land, house and condominium sales is primarily due to sales of
higher priced units. The increase in interest income on U.S. government and
agency obligations is primarily due to the repayment of a mezzanine loan and
increased interest income from other investments. The increase in NEG management
fees is primarily due to management fees received from the Trans Texas Gas
Corporation.

Expenses increased by $18.9 million, or 12.4%, during the six months
ended June 30, 2004, as compared to the same period in 2003. This increase
reflects increases of $6.1 million in cost of land, house and condominium
sales, $5.6 million in interest expense, $2.9 million in depreciation
and amortization, $2.2 million in general and administrative expenses,
$2.1 million hotel and casino operating expenses and $.4 million in property
expenses partially offset by a decrease of $.4 million in hotel and
resort operating expenses. The increase in the cost of land, house and
condominium sales is primarily attributable to increased sales, as discussed
above. The increase in interest expense is primarily attributable to the
increased interest expense on the senior notes payable and preferred limited
partnership units. The increase in depreciation and amortization is primarily
due to increased depreciation and amortization with respect to American Casino.
The increase in general and administrative expenses is primarily attributable to
expenses incurred in connection with the increase in NEG management fees. The
increase in hotel and casino operating expenses is primarily attributable to
increased costs associated with increased revenues.

Operating income increased during the six months ended June 30, 2004 by
$18.9 million as compared to the same period in 2003, as detailed above.

Earnings from land, house and condominium operations increased in the six
months ended June 30, 2004 compared to the same period in 2003 due to sales of
higher priced units. Based on current information, sales are expected to
increase moderately during the remainder of 2004 as compared to 2003. 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 increased during the
six months ended June 30, 2004 due to increased revenues throughout the
property.

Gain on property transactions from continuing operations increased by
$4.9 million during the six months ended June 30, 2004 as compared to the same
period in 2003.

A provision for loss on real estate of $0.2 million was recorded in the
six months ended June 30, 2003. No such provision was recorded in 2004.

A gain on sale of marketable equity securities of $37.2 million was
recorded in the six months ended June 30, 2004. There were no such gains in the
comparable period of 2003.

A write-down of other investments of $18.8 million was recorded in the
six months ended June 30, 2003. There was no such write-down in 2004.

A write-down of equity securities available for sale of $0.9 million was
recorded in the six months ended June 30, 2003. There was no such write-down in
2004.

Income from continuing operations before income taxes increased by $80.9
million in the six months ended June 30, 2004 as compared to the same period in
2003, as detailed above.

Income tax expense of $9.3 million was recorded in the six months ended
June 30, 2004 as compared to $7.1 million in 2003. Income tax expense was
recorded by our corporate subsidiaries NEG and American Casino.

Income from continuing operations increased by $78.7 million in the six
months ended June 30, 2004 as compared to the same period in 2003, as detailed
above.

Income from discontinued operations increased by $54.5 million in the six
months ended June 30, 2004 as compared to the same period in 2003 due to gains
on property dispositions.

-22-

Net earnings for the six months ended June 30, 2004 increased by $133.2
million as compared to the six months ended June 30, 2003, primarily due to
increased income from discontinued operations ($54.5 million), gain on
marketable equity securities ($37.2 million), a write-down of other investments
in 2003 ($18.8 million), increased net hotel and casino operating income ($15.4
million) and increased gain on property dispositions from continuing operations
($4.9 million).

CAPITAL RESOURCES AND LIQUIDITY

Net cash provided by operating activities was $52.2 million for the six
months ended June 30, 2004 as compared to $5.0 million used in operating
activities in the comparable period of 2003. This increase was primarily due to
a repayment of accounts payable and accrued expenses in 2003, ($34.4 million),
an increase in hotel and casino operations ($15.4 million), increased interest
income ($7.6 million), an increase in land, house and condominium operations
($5.0 million) partially offset by an increase in interest expense ($5.6
million), an increase in receivables and other assets ($3.6 million), and an
increase in cash flow from other operations ($1.0 million).

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

LESS
THAN 1-3 4-5 AFTER
1 YEAR YEARS YEARS 5 YEARS TOTAL(1)
------- ------- ------- -------- --------

Mortgages payable............................... $ 4.4 $ 10.1 $ 34.5 $ 45.2 $ 94.2
Purchase of debt securities .................... 59.9 -- -- -- 59.9
Property acquisition............................ 75.0 -- -- -- 75.0
Senior secured notes payable.................... -- -- -- 215.0 215.0
Senior unsecured notes payable.................. -- -- -- 353.0 353.0
Construction and development obligations........ 30.0 -- -- -- 30.0
------- ------- ------- -------- --------
Total...................................... $ 169.3 $ 10.1 $ 34.5 $ 613.2 $ 827.1
======= ======= ======= ======== ========

----------------------
(1) In addition, see Note 11 for preferred limited partnership redemption.

On May 26, 2004, American Casino, an indirect wholly-owned subsidiary of
the Company, completed the acquisition of two Las Vegas casino/hotels, Arizona
Charlie's Decatur and Arizona Charlie's Boulder, from Carl C. Icahn and an
entity affiliated with Icahn, for aggregate consideration of $125.9 million. The
terms of the transaction were approved by the Audit Committee. AREH transferred
100% of the common stock of Stratosphere to American Casino. As a result,
American Casino owns and operates three gaming and entertainment properties in
the Las Vegas metropolitan area.

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 were 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. Upon satisfaction of all closing conditions, the proceeds of the
offering were released from escrow. American Casino used the proceeds for the
acquisition and to repay intercompany indebtedness and for distributions to
AREH.

On May 12, 2004, AREP closed on its offering of senior notes due 2012.
The notes in the aggregate of $353 million bear interest at the rate of 8.125%
per annum. AREP intends to use the proceeds for general business purposes,
including to pursue our primary business strategy of acquiring undervalued
assets in our existing lines of business or other businesses and to provide
additional capital to grow our existing businesses.

At June 30, 2004, we had 29 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 $87.3 million but the
properties are encumbered by aggregate mortgage debt of approximately $15.3
million which would have to be repaid out of the proceeds of the sales or would
be assumed by purchasers.

On March 15, 2004, we announced that no distributions on our depositary
units are expected to be made in 2004. We continue to believe that we should
continue to hold and invest, rather than distribute, cash. We intend to

-23-

continue to apply available cash flow toward our operations, repayment of
maturing indebtedness, tenant requirements, investments, acquisitions and other
capital expenditures.

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

Net proceeds from the sale or disposal of portfolio properties totaled
approximately $118.1 million in the six months ended June 30, 2004. During the
comparable period of 2003, sales proceeds totaled approximately $6.8 million.
The Company intends to use asset sales, financing and refinancing proceeds for
new investments.

Capital expenditures for real estate, and hotel, casino and resort
operations were approximately $11.6 million and $4.8 million during the six
months ended June 30, 2004 and 2003, respectively. In 2004, capital expenditures
are currently expected to be approximately $20 million. In the six months ended
June 30, 2004, we acquired a property for approximately $14.6 million.

During the six months ended June 30, 2004 and 2003, approximately $3.0
million and $7.3 million, respectively, of mortgage principal payments were
repaid. These amounts do not include mortgage debt repaid in connection with
sales of real estate.

Our cash and cash equivalents and investment in U.S. government and
agency obligations increased by $631.2 million during the six months ended June
30, 2004 primarily due to proceeds from the issuance of our 8.125% senior notes
due 2012 and by American Casino's 7.85% senior secured notes due 2012 ($565.4
million), property sales proceeds ($118.1 million), proceeds from the sale of
marketable equity and debt securities ($86.5 million), cash provided by
operations ($52.2 million), repayment of mezzanine loans ($25.9 million),
proceeds from mortgages payable ($10.0 million), and guaranteed payment from NEG
Holdings ($8.0 million) partially offset by the purchase of Arizona Charlies
($125.9 million), purchase of debt securities ($54.8 million), repayment of
affiliate debt ($25.0 million), rental real estate acquisitions ($14.6 million),
capital expenditures ($11.6 million) and miscellaneous other items ($3.0
million).

OFF BALANCE SHEET ARRANGEMENTS

We do not maintain any off-balance sheet transactions, arrangements,
obligations or other relationships with unconsolidated entities or others that
are reasonably likely to have a material current or future effect on our
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources which are not
disclosed in the notes to the consolidated financial statements.

CERTAIN TRENDS AND UNCERTAINTIES

In addition to certain trends and uncertainties described elsewhere in
this report, we are subject to the trends and uncertainties set forth below.

RISKS RELATING TO OUR BUSINESS

REAL ESTATE

OUR INVESTMENT IN PROPERTY DEVELOPMENT MAY BE MORE COSTLY THAN ANTICIPATED.

We have invested and expect to continue to invest in unentitled land,
undeveloped land and distressed development properties. These properties involve
more risk than properties on which development has been completed. Unentitled
land may not be approved for development. Undeveloped land and distressed
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 our control could
occur. We 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.

-24-

COMPETITION FOR ACQUISITIONS COULD ADVERSELY AFFECT US AND NEW ACQUISITIONS
MAY FAIL TO PERFORM AS EXPECTED.

We seek 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 negatively affect the
spreads and the ability to find quality assets that provide returns that we
seek. These investments may not be readily financeable and may not generate
immediate positive cash flow for us. There can be no assurance that any asset we
acquire, whether in the real estate sector or otherwise, will increase in value
or generate positive cash flow.

WE MAY NOT BE ABLE TO SELL OUR RENTAL PROPERTIES, WHICH WOULD REDUCE CASH
AVAILABLE FOR OTHER PURPOSES.

We are currently marketing for sale properties with a book value
aggregating approximately $198 million at June 30, 2004, which are encumbered by
mortgage debt which, in the aggregate, totals approximately $84 million. We may
not be successful in obtaining purchase offers at acceptable prices and sales
may not be consummated. If we do not sell this real estate, we will not pay off
the mortgages associated with these properties which would reduce the amount we
could borrow for other purposes. Many of our properties are net-leased to single
corporate tenants, it may be difficult to sell those properties that existing
tenants decline to re-let. Our attempt to market the real estate portfolio may
not be successful. Even if our efforts are successful, we cannot be certain that
the proceeds from the sales can be used to acquire businesses and investments at
prices or at projected returns which are deemed favorable.

WE FACE POTENTIAL ADVERSE EFFECTS FROM TENANT BANKRUPTCIES OR INSOLVENCIES.

The bankruptcy or insolvency of our tenants may adversely affect the
income produced by our properties. If a tenant defaults, we may experience
delays and incur substantial costs in enforcing our rights as landlord. If a
tenant files for bankruptcy, we cannot evict the tenant solely because of such
bankruptcy. A court, however, may authorize a tenant to reject or terminate its
lease with us.

THE DEVELOPMENT OF OUR NEW SEABURY PROPERTY MAY BE LIMITED BY GOVERNMENT
AUTHORITIES.

We continue to pursue the approval and development of our New Seabury
property in Cape Cod, Massachusetts. The development plans have been opposed by
the Cape Cod Commission. We have appealed its administrative decision asserting
jurisdiction over the development and a Massachusetts Superior Court ruled that
a development proposal for up to 278 residential units was exempt from the
Commission's jurisdiction. However, the Court has not ruled with respect to our
initial proposal to build up to 675 residential/hotel units. We cannot predict
the effect on our development of the property if we lose any appeal from the
Court's decision or if the Commission is ultimately successful in asserting
jurisdiction over any of the development proposals.

WE MAY BE SUBJECT TO ENVIRONMENTAL LIABILITY.

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, pollutants and contaminants
released on, under or in its property. These laws often impose liability without
regard to whether the owner or operator knew of, or was responsible for, the
release of such substances. To the extent any such substances are found in or on
any property invested in by us, we 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. We generally conduct a Phase I
environmental site assessment on properties in which we are considering
investing. A Phase I environmental site assessment involves record review,
visual site assessment and personnel interviews, but does not typically include
invasive testing procedures such as air, soil or groundwater sampling or other
tests performed as part of a Phase II environmental site assessment.
Accordingly, there can be no assurance that these assessments will disclose 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.

-25-

HOTEL AND CASINO OPERATIONS

THE GAMING INDUSTRY IS HIGHLY REGULATED. THE GAMING AUTHORITIES AND STATE
AND MUNICIPAL LICENSING AUTHORITIES HAVE SIGNIFICANT CONTROL OVER OUR
OPERATIONS.

Our properties currently conduct licensed gaming operations in Nevada and
New Jersey. Various regulatory authorities, including the Nevada State Gaming
Control Board, Nevada Gaming Commission and the New Jersey Casino Control
Commission, require our properties to hold various licenses and registrations,
findings of suitability, permits and approvals to engage in gaming operations
and to meet requirements of suitability. These gaming authorities also control
approval of ownership interests in gaming operations. These gaming authorities
may deny, limit, condition, suspend or revoke our gaming licenses,
registrations, findings of suitability or the approval of any of our ownership
interests in any of the licensed gaming operations conducted in Nevada and New
Jersey, any of which could have a significant adverse effect on our business,
financial condition and results of operations, for any cause they may deem
reasonable. If we violate gaming laws or regulations that are applicable to us,
we may have to pay substantial fines or forfeit assets. If, in the future, we
operate or have an ownership interest in casino gaming facilities located
outside of Nevada or New Jersey, we may also be subject to the gaming laws and
regulations of those other jurisdictions.

The sale of alcoholic beverages at our Nevada properties is subject to
licensing and regulation by the City of Las Vegas and Clark County, Nevada. The
City of Las Vegas and Clark County have full power to limit, condition, suspend
or revoke any such license, and any such disciplinary action may, and revocation
would, reduce the number of visitors to our Nevada casinos to the extent the
availability of alcoholic beverages is important to them. Changes in ownership
arising from the acquisition by American Casino of the Arizona Charlie's casinos
will require the approval of the City of Las Vegas and Clark County, Nevada in
order for the applicable alcoholic beverage license to remain in effect. The
acquisition may not receive the required approvals. If our alcohol licenses
become in any way impaired, it would reduce the number of visitors. Any
reduction in our number of visitors will reduce our revenue and cash flow.

RISING OPERATING COSTS FOR OUR GAMING AND ENTERTAINMENT PROPERTIES COULD
HAVE A NEGATIVE IMPACT ON OUR PROFITABILITY.

The operating expenses associated with our gaming and entertainment
properties could increase due to some of the following factors:

- Potential changes in the tax or regulatory environment which impose
additional restrictions or increase operating costs;

- Our properties use significant amounts of electricity, natural gas
and other forms of energy, and energy price increases may reduce our
working capital;

- Our properties use significant amounts of water and a water shortage
may adversely affect our operations;

- An increase in the cost of health care benefits for our employees
could have a negative impact on our profitability;

- Some of our employees are covered by collective bargaining agreements
and we may incur higher costs or work slow-downs or stoppages due to
union activities;

- Our reliance on slot machine revenues and the concentration of
manufacturing of slot machines in certain companies could impose
additional costs on us; and

- Our insurance coverage may not be adequate to cover all possible
losses and our insurance costs may increase.

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WE FACE SUBSTANTIAL COMPETITION IN THE HOTEL AND CASINO INDUSTRY.

The hotel and casino industry in general, and the markets in which we
compete in particular, are highly competitive.

- We compete with many world class destination resorts with greater
name recognition, different attractions, amenities and entertainment
options.

- We compete with the continued growth of gaming on Native American
tribal lands, particularly in California.

- The existence of legalized gambling in other jurisdictions may reduce
the number of visitors to our properties.

- Certain states have legalized, and others may legalize, casino gaming
in specific venues, including race tracks and/or in specific areas,
including metropolitan areas from which we traditionally attract
customers, including Los Angeles, San Francisco and New York.

- Our properties also compete and will in the future compete with all
forms of legalized gambling.

Many of our competitors have greater financial, selling and marketing,
technical and other resources than we do. We may not be able to compete
effectively with our competitors and we may lose market share, which could
reduce our revenue and cash flow.

ECONOMIC DOWNTURNS, TERRORISM AND THE UNCERTAINTY OF WAR, AS WELL AS OTHER
FACTORS AFFECTING DISCRETIONARY CONSUMER SPENDING, COULD REDUCE THE NUMBER OF
OUR VISITORS OR THE AMOUNT OF MONEY VISITORS SPEND AT OUR CASINOS.

The strength and profitability of our hotel and casino business depends
on consumer demand for hotel-casino resorts and gaming in general and for the
type of amenities we offer. Changes in consumer preferences or discretionary
consumer spending could harm our business.

During periods of economic contraction, our hotel and casino revenues may
decrease while some of our costs remain fixed, resulting in decreased earnings.
This is because the gaming and other leisure activities we offer at our
properties are discretionary expenditures, and participation in these activities
may decline during economic downturns because consumers have less disposable
income. Even an uncertain economic outlook may adversely affect consumer
spending in our gaming operations and related facilities, as consumers spend
less in anticipation of a potential economic downturn. Additionally, rising gas
prices could deter non-local visitors from traveling to our properties.

The terrorist attacks which occurred on September 11, 2001, the potential
for future terrorist attacks and wars in Afghanistan and Iraq have had a
negative impact on travel and leisure expenditures, including lodging, gaming
and tourism. Leisure and business travel, especially travel by air, remain
particularly susceptible to global geopolitical events. Many of the customers of
our properties travel by air, and the cost and availability of air service can
affect our business. Furthermore, insurance coverage against loss or business
interruption resulting from war and some forms of terrorism may be unavailable
or not available on terms that we consider reasonable. We cannot predict the
extent to which war, future security alerts or additional terrorist attacks may
interfere with our operations.

INVESTMENTS

WE MAY NOT BE ABLE TO IDENTIFY SUITABLE INVESTMENTS.

Our partnership agreement allows us to take advantage of investment
opportunities we believe exist outside of the real estate market. The equity
securities in which we may invest may include common stocks, preferred stocks
and securities convertible into common stocks, as well as warrants to purchase
these securities. The debt securities

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in which we may invest may include bonds, debentures, notes, or non-rated
mortgage-related securities, municipal obligations, bank debt and mezzanine
loans. Certain of these securities may include lower rated or non-rated
securities which may provide the potential for higher yields and therefore may
entail higher risk and may include the securities of bankrupt or distressed
companies. In addition, we may engage in various investment techniques,
including derivatives, options and futures transactions, foreign currency
transactions, "short" sales and leveraging for either hedging or other purposes.
We may concentrate our activities by owning one or a few businesses or holdings,
which would increase our risk. We may not be successful in finding suitable
opportunities to invest our cash and our strategy of investing in undervalued
assets may expose us to numerous risks.

OUR INVESTMENTS MAY BE SUBJECT TO SIGNIFICANT UNCERTAINTIES.

Our investments may not be successful for many reasons including, but not
limited to:

- Fluctuation of interest rates;

- Lack of control in minority investments;

- Worsening of general economic and market conditions;

- Lack of diversification;

- Inexperience with non-real estate areas;

- Fluctuation of U.S. dollar exchange rates; and

- Adverse legal and regulatory developments that may affect particular
businesses.

OIL AND GAS

WE FACE SUBSTANTIAL RISKS IN THE OIL AND GAS INDUSTRY.

The exploration for and production of oil and gas involves numerous
risks. The cost of drilling, completing and operating wells for oil or gas is
often uncertain, and a number of factors can delay or prevent drilling
operations or production, including:

- unexpected drilling conditions;

- pressure or irregularities in formation;

- equipment failures or repairs;

- fires or other accidents;

- adverse weather conditions;

- pipeline ruptures or spills; and

- shortages or delays in the availability of drilling rigs and the
delivery of equipment.

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THE OIL AND GAS INDUSTRY IS HIGHLY REGULATED AND FEDERAL, STATE AND
MUNICIPAL LICENSING AUTHORITIES HAVE SIGNIFICANT CONTROL OVER OUR OPERATIONS.

The oil and gas industry is subject to extensive legislation and
regulation, which is under constant review for amendment or expansion. Any
changes may affect, among other things, the pricing or marketing of oil and gas
production. State and local authorities regulate various aspects of oil and gas
exploration and production activities, including the drilling of wells, the
spacing of wells, the unitization or pooling of oil and gas properties,
environmental matters, safety standards, market sharing and well site
restoration.

The oil and gas industry is subject to laws, regulations and other legal
requirements enacted or adopted by federal, state and local, as well as foreign,
authorities relating to protection of the environment and health and safety
matters, including those legal requirements that govern discharges of substances
into the air and water, the management and disposal of hazardous substances and
wastes, the cleanup of contaminated sites, groundwater quality and availability,
and plant and wildlife protection.

RISKS RELATING TO OUR STRUCTURE

OUR GENERAL PARTNER AND ITS CONTROL PERSON COULD EXERCISE THEIR INFLUENCE
OVER US TO YOUR DETRIMENT.

Mr. Icahn, through affiliates, currently owns 100% of API, our general
partner, and approximately 86.5% of our outstanding depositary units and
preferred units and, as a result, has and will have the ability to influence
many aspects of our operations and affairs. API also is the general partner of
AREH. In addition, an affiliate of Mr. Icahn owns a 50% interest and is the
managing member of NEG Holding LLC. The other 50% interest is owned by National
Energy Group, Inc., of which we own a majority of the common stock. Mr. Icahn
and affiliates, including AREP, own approximately 77.5% of the stock of GB
Holdings, Inc., the sole shareholder of Atlantic Coast Entertainment Holdings,
Inc., or Atlantic Holdings, which owns and operates the Sands Hotel and Casino.
Mr. Icahn and affiliates, including AREP, own approximately 96.5% of the debt of
Atlantic Holdings. Mr. Icahn and his affiliates, other than AREP, own
approximately 41.2% of the common stock of GB Holdings and 55.9% of the debt of
Atlantic Holdings. AREP owns approximately 36.3% of the common stock of GB
Holdings and 40.6% of the debt of Atlantic Holdings. We may invest in entities
in which Mr. Icahn also invests or purchase investments from him or his
affiliates. Although API has never received fees in connection with our
investments, our partnership agreement allows for the payment of these fees. Mr.
Icahn may pursue other business opportunities in the real estate or other
industries in which we compete and there is no requirement that any additional
business opportunities be presented to us.

The interests of Mr. Icahn, including his interests in entities in which
he and we have invested or may invest in the future, may differ from AREP's
interests or its security holders interests and, as such, he may take actions
that may not be in AREP's interest.

CERTAIN OF OUR MANAGEMENT ARE COMMITTED TO THE MANAGEMENT OF OTHER
BUSINESSES.

Certain of the individuals who conduct the affairs of API are and will in
the future be committed to the management of other businesses owned by Mr. Icahn
and his affiliates. Accordingly, these individuals will not be devoting all of
their professional time to our management, and conflicts may arise between our
interests and the other entities or business activities in which such
individuals are involved. Conflicts of interest may arise in the future as such
affiliates and we may compete for the same assets, purchasers and sellers of
assets, lessees or financings.

WE MAY BE SUBJECT TO THE PENSION LIABILITIES OF OUR AFFILIATES.

Mr. Icahn, through certain affiliates, currently owns 100% of API and
approximately 86.5% of our outstanding 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

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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 us by Mr. Icahn's
affiliates, we and our 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 which are underfunded by a total of approximately $28
million on an ongoing actuarial basis and $131 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 number
of factors, including future changes in promised benefits, investment returns,
and the assumptions used to calculate the liability. As members of the ACF
controlled group, we 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 us may have pension plan obligations that
are, or may become, underfunded and we 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 of certain "reportable events," such as if we cease to be a
member of the ACF controlled group, or if we make certain extraordinary
dividends or stock redemptions. The obligation to report could cause us to seek
to delay or reconsider the occurrence of such reportable events.

Starfire Holding Corporation, which is 100% owned by Mr. Icahn, has
undertaken to indemnify us and our subsidiaries from losses resulting from any
imposition of pension funding or termination liabilities that may be imposed on
us and our subsidiaries or our 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 us, Starfire
will not make any distributions to its stockholders that would reduce its net
worth to below $250 million. Nonetheless, Starfire may not be able to fund its
indemnification obligations to us.

WE ARE SUBJECT TO THE RISK OF POSSIBLY BECOMING AN INVESTMENT COMPANY.

Because we are a holding company and a significant portion of our assets
consists of investments in companies in which we own less than a 50% interest,
we run the risk of inadvertently becoming an investment company that is required
to register under the Investment Company Act of 1940. Registered investment
companies are subject to extensive, restrictive and potentially adverse
regulation relating to, among other things, operating methods, management,
capital structure, dividends and transactions with affiliates. Registered
investment companies are not permitted to operate their business in the manner
in which we operate our business, nor are registered investment companies
permitted to have many of the relationships that we have with our affiliated
companies.

To avoid becoming an investment company, we monitor the value of our
investments and structure transactions with an eye toward the Investment Company
Act. As a result, we may structure transactions in a less advantageous manner
than if we did not have Investment Company Act concerns, or we may avoid
otherwise economically desirable transactions due to those concerns. In
addition, events beyond our control, including significant appreciation or
depreciation in the market value of certain of our publicly traded holdings,
could result in our inadvertently becoming an investment company.

If it were established that we were an investment company, there would be
a risk, among other material adverse consequences, that we could become subject
to monetary penalties or injunctive relief, or both, in an action brought by the
SEC, that we would be unable to enforce contracts with third parties or that
third parties could seek to obtain rescission of transactions with us undertaken
during the period it was established that we were an unregistered investment
company.

WE MAY BECOME TAXABLE AS A CORPORATION.

We operate as a partnership for federal income tax purposes. This allows
us to pass through our income and deductions to our partners. We believe that we
have been and are properly treated as a partnership for federal income tax
purposes. However, the Internal Revenue Service, or IRS, could challenge our
partnership status and we

-30-

could fail to qualify as a partnership for past years as well as future years.
Qualification as a partnership involves the application of highly technical and
complex provisions of the Internal Revenue Code of 1986, as amended. For
example, a publicly traded partnership is generally taxable as a corporation
unless 90% or more of its gross income is "qualifying" income, which includes
interest, dividends, real property rents, gains from the sale or other
disposition of real property, gain from the sale or other disposition of capital
assets held for the production of interest or dividends, and certain other
items. We believe that in all prior years of our existence at least 90% of our
gross income was qualifying income and we intend to structure our business in a
manner such that at least 90% of our gross income will constitute qualifying
income this year and in the future. However, there can be no assurance that such
structuring will be effective in all events to avoid the receipt of more than
10% of non-qualifying income. If less than 90% of our gross income constitutes
qualifying income, we may be subject to corporate tax on our net income at
regular corporate tax rates. Further, if less than 90% of our gross income
constituted qualifying income for past years, we may be subject to corporate
level tax plus interest and possibly penalties. In addition, if we register
under the Investment Company Act of 1940, it is likely that we would be treated
as a corporation for U.S. federal income tax purposes and subject to corporate
tax on our net income at regular corporate tax rates. The cost of paying federal
and possibly state income tax, either for past years or going forward, would be
a significant liability.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Other related risks include liquidity risks, which arise in the course of
our general funding activities and the management of our 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. Our other
operating risks 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.

We invest in U.S. government and agency obligations which are subject to
interest rate risk. As interest rates fluctuate, we 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 June 30, 2004, would decline by approximately $200,000.

We employ internal strategies intended to mitigate exposure to these and
other risks. We, on a case by case basis with respect to new investments,
perform internal analyses of risk identification, assessment and control. We
review 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. We seek to achieve adequate returns commensurate with the
risk it assumes. We utilize qualitative as well as quantitative information in
managing risk.

ITEM 4. CONTROLS AND PROCEDURES

a. As of June 30, 2004, our management, including our Chief Executive
Officer and Chief Financial Officer, evaluated the effectiveness of the design
and operation and our subsidiaries' disclosure controls and procedures pursuant
to the Exchange Act Rule 13a-15(e) and 15d-15(e). Based upon that evaluation,
our Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures are effective to ensure that information
required to be disclosed by us in reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in Securities and Exchange Commission rules and forms, and
include controls and procedures designed to ensure that information required to
be disclosed by us in such reports is accumulated and communicated to our
management, including our principal

-31-

executive officer and principal financial officer, as appropriate to allow
timely decisions regarding required disclosure.

b. During the three months ended June 30, 2004, no change in our internal
control over financial reporting occurred that has materially affected, or is
reasonably likely to materially affect, such internal control over financial
reporting, including any corrective actions with regard to significant
deficiencies and material weaknesses.

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PART II. OTHER INFORMATION

ITEM 6.

(a) Exhibits filed as part of this Report

3.6 Certificate of Incorporation of American Real Estate Finance Corp.
(incorporated by reference to American Real Estate Partners, L.P.'s
Exhibit 3.6 to Form S-4 (SEC File No. 333-118021), filed on August 6,
2004).

3.7 By-Laws of American Real Estate Finance Corp. (incorporated by
reference to American Real Estate Partners, L.P.'s Exhibit 3.7 to
Form S-4 (SEC File No. 333-118021), filed on August 6, 2004).

4.8 Indenture, dated as of May 12, 2004, among American Real Estate
Partners, L.P., American Real Estate Finance Corp., American Real
Estate Holdings Limited Partnership, the guarantors from time to time
party thereto and Wilmington Trust Company, as Trustee ("Trustee").
(incorporated by reference to American Real Estate Partners, L.P.'s
Exhibit 4.1 to Form S-4 (SEC File No. 333-118021), filed on August 6,
2004).

4.9 Form of 8 1/8% Senior Notes due 2012 of American Real Estate
Partners, L.P. and American Real Estate Finance Corp. (incorporated
by reference to American Real Estate Partners, L.P.'s Exhibit 4.2 to
Form S-4 (SEC File No. 333-118021), filed on August 6, 2004).

4.10 Form of 7.85% Senior Secured Note due 2012 of American Casino &
Entertainment Properties LLC and American Casino & Entertainment
Properties Finance Corp.

4.11 Registration Rights Agreement, dated as of May 12, 2004, by and among
American Real Estate Partners, L.P., American Real Estate Finance
Corp., American Real Estate Holdings Limited Partnership and Bear,
Stearns & Co. Inc. (incorporated by reference to American Real Estate
Partners, L.P.'s Exhibit 4.3 to Form S-4 (SEC File No. 333-118021),
filed on August 6, 2004).

31.1 Certification of Chief Executive Officer-pursuant to Section 302(a)
of the Sarbanes-Oxley Act of 2002.

31.2 Certification of Chief Financial Officer-pursuant to Section 302(a)
of the Sarbanes-Oxley Act of 2002.

32.1 Certification of Principal Executive Officer-pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.

32.2 Certification of Principal Financial Officer-pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K

We filed the following Current Reports on Form 8-K during the quarter
ended June 30, 2004:

(1) A report filed April 6, 2004, which included, under Item 4 and Item 7, a
letter from KPMG, dated April 6, 2004, in accordance with Item 304(a)(3)
of Regulation S-K.

(2) A report filed April 27, 2004, which included, under Item 5 and Item 7,
our press release announcing an offering of senior notes.

(3) A report filed April 28, 2004, which included, under Item 4, a change in
our certifying accountant.

(4) A report filed May 7, 2004, which included, under Item 5 and Item 7, our
press release announcing the pricing of debt offering.

II-1

(5) A report filed May 27, 2004, which included, under Item 5 and Item 7, a
press release announcing American Casino & Entertainment Properties
closing on acquisition of Arizona Charlie's Casinos in Las Vegas.

We did furnish the following information required to be furnished under
Item 9 or Item 12 during the quarter ended June 30, 2004:

(1) A report filed April 23, 2004, which included, under Item 9 and Item 12,
(a) a press release issued by American Casino & Entertainment Properties,
LLP announcing its 2003 fall year and estimated 2004 first quarter
results, (b) ACEP's 2003 audited combined financial statements, and (c)
ACEP's 2003 Management Discussion and Analysis of Results of Operations
and Financial Condition.

(2) A report filed May 11, 2004, which included, under Item 12, a press
release announcing our first quarter results.

II-2

SIGNATURES

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

AMERICAN REAL ESTATE PARTNERS, L.P.
By: American Property Investors, Inc., the
general partner of American Real Estate Partners,
L.P.

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

Date: August 9, 2004

II-3

EXHIBIT INDEX

3.6 Certificate of Incorporation of American Real Estate Finance Corp.
(incorporated by reference to American Real Estate Partners, L.P.'s
Exhibit 3.6 to Form S-4 (SEC File No. 333-118021), filed on August 6,
2004).

3.7 By-Laws of American Real Estate Finance Corp. (incorporated by
reference to American Real Estate Partners, L.P.'s Exhibit 3.7 to
Form S-4 (SEC File No. 333-118021), filed on August 6, 2004).

4.8 Indenture, dated as of May 12, 2004, among American Real Estate
Partners, L.P., American Real Estate Finance Corp., American Real
Estate Holdings Limited Partnership, the guarantors from time to time
party thereto and Wilmington Trust Company, as Trustee ("Trustee").
(incorporated by reference to American Real Estate Partners, L.P.'s
Exhibit 4.1 to Form S-4 (SEC File No. 333-118021), filed on August 6,
2004).

4.9 Form of 8 1/8% Senior Notes due 2012 of American Real Estate
Partners, L.P. and American Real Estate Finance Corp. (incorporated
by reference to American Real Estate Partners, L.P.'s Exhibit 4.2 to
Form S-4 (SEC File No. 333-118021), filed on August 6, 2004).

4.10 Form of 7.85% Senior Secured Note due 2012 of American Casino &
Entertainment Properties LLC and American Casino & Entertainment
Properties Finance Corp.

4.11 Registration Rights Agreement, dated as of May 12, 2004, by and among
American Real Estate Partners, L.P., American Real Estate Finance
Corp., American Real Estate Holdings Limited Partnership and Bear,
Stearns & Co. Inc. (incorporated by reference to American Real Estate
Partners, L.P.'s Exhibit 4.3 to Form S-4 (SEC File No. 333-118021),
filed on August 6, 2004).

31.1 Certification of Chief Executive Officer-pursuant to Section 302(a)
of the Sarbanes-Oxley Act of 2002.

31.2 Certification of Chief Financial Officer-pursuant to Section 302(a)
of the Sarbanes-Oxley Act of 2002.

32.1 Certification of Principal Executive Officer-pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.

32.2 Certification of Principal Financial Officer-pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.