Filed Pursuant to Rule 424(b)(3)
Registration No. 333-118021

PROSPECTUS        

$353,000,000

AMERICAN REAL ESTATE PARTNERS, L.P.

AMERICAN REAL ESTATE FINANCE CORP.

OFFER TO EXCHANGE OUR 8-1/8% SENIOR NOTES DUE
2012, WHICH HAVE BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, FOR ANY AND ALL OF OUR
OUTSTANDING 8-1/8% SENIOR NOTES DUE 2012

MATERIAL TERMS OF THE EXCHANGE OFFER

-   The terms of the new notes are substantially identical to the
outstanding notes, except that the transfer restrictions and
registration rights relating to the outstanding notes will not apply
to the new notes and the new notes will not provide for the payment
of liquidated damages under circumstances related to the timing and
completion of the exchange offer.

-   Expires 5:00 p.m., New York City time, on December 15, 2004, unless
extended.

-   We will exchange your validly tendered unregistered notes for an
equal principal amount of a new series of notes which have been
registered under the Securities Act of 1933.

-   The exchange offer is not subject to any condition other than that
the exchange offer not violate applicable law or any applicable
interpretation of the staff of the Securities and Exchange
Commission and other customary conditions.

-   You may withdraw your tender of notes at any time before the
exchange offer expires.

-   The exchange of notes should not be a taxable exchange for U.S.
federal income tax purposes.

-   We will not receive any proceeds from the exchange offer.

-   The new notes will not be traded on any national securities exchange
and, therefore, we do not anticipate that an active public market in
the new notes will develop.

PLEASE REFER TO "RISK FACTORS" BEGINNING ON PAGE 10 OF THIS DOCUMENT FOR CERTAIN
IMPORTANT INFORMATION.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE NOTES TO BE ISSUED IN THE EXCHANGE
OFFER OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

THE DATE OF THIS PROSPECTUS NOVEMBER 8, 2004

TABLE OF CONTENTS

Page
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PROSPECTUS.................................................................................................       1
RISK FACTORS...............................................................................................      10
FORWARD-LOOKING STATEMENTS.................................................................................      22
INDUSTRY DATA..............................................................................................      22
USE OF PROCEEDS............................................................................................      23
THE EXCHANGE OFFER.........................................................................................      24
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA OF AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES....      33
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA............................................................      38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS......................      39
BUSINESS...................................................................................................      50
REGULATION.................................................................................................      63
MANAGEMENT.................................................................................................      74
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............................................................      80
DESCRIPTION OF PREFERRED UNITS AND OF CERTAIN INDEBTEDNESS AND OTHER OBLIGATIONS...........................      83
DESCRIPTION OF NOTES.......................................................................................      85
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES...............................................................     118
PLAN OF DISTRIBUTION.......................................................................................     123
LEGAL MATTERS..............................................................................................     124
EXPERTS....................................................................................................     124
WHERE YOU CAN FIND MORE INFORMATION........................................................................     124
INCORPORATION OF DOCUMENTS BY REFERENCE....................................................................     125
INDEX TO FINANCIAL STATEMENTS..............................................................................     F-1

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We have not authorized any dealer, salesperson or other person to give
any information or to make any representations to you other than the information
contained in this prospectus. You must not rely on any information or
representations not contained in this prospectus as if we had authorized it.
This prospectus does not offer to sell or solicit any offer to buy any
securities other than the registered notes to which it relates, nor does it
offer to buy any of these notes in any jurisdiction to any person to whom it is
unlawful to make such offer or solicitation in such jurisdiction.

The information contained in this prospectus is current only as of the
date on the cover page of this prospectus, and may change after that date. We do
not imply that there has been no change in the information contained in this
prospectus or in our affairs since that date by delivering this prospectus.

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PROSPECTUS

You should read the entire prospectus, including "Risk Factors" and the
financial statements and related notes, before making an investment decision.
Unless the context indicates otherwise, all references to "American Real Estate
Partners, L.P.," "AREP," "we," "our," "ours" and "us" refer to American Real
Estate Partners, L.P. and, unless the context otherwise indicates, include our
subsidiaries. Our general partner is American Property Investors, Inc., or API.
Carl C. Icahn, through affiliates, owns approximately 86.5% of our depositary
units and preferred units and all of the capital stock of API. Substantially all
of our businesses and assets are held through a limited partnership, American
Real Estate Holdings Limited Partnership, or AREH, in which we own a 99% limited
partnership interest. API also acts as the general partner for AREH. API has a
1% general partnership interest in each of us and AREH.

OUR COMPANY

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.

RENTAL REAL ESTATE. Our rental real estate operations consist primarily of
retail, office and industrial properties leased to single corporate tenants. As
of December 31, 2003, we owned 128 rental properties with a book value of
approximately $340 million, individually encumbered by mortgage debt which, in
the aggregate, was approximately $181 million. To capitalize on favorable real
estate market conditions and the mature nature of our commercial real estate
portfolio, we are offering for sale our rental real estate portfolio. As of
June 30, 2004, we had sold 34 properties for an aggregate sales price of
approximately $211.4 million, after expenses and closing costs.

REAL ESTATE DEVELOPMENT. Our real estate development operations focus
primarily on the acquisition, development, construction and sale of
single-family homes, custom-built homes, multi-family homes and lots in
subdivisions and planned communities. We currently are developing five
residential subdivisions, of which two are in Westchester County, New York, one
in Putnam County, New York and one in Naples, Florida. In addition, we are
pursuing the development of our New Seabury property, a luxury second-home
waterfront community in Cape Cod, Massachusetts, and Grand Harbor and Oak
Harbor, our two waterfront communities in Vero Beach, Florida.

HOTEL AND RESORT OPERATIONS. Our hotel and resort operations primarily
consist of the New Seabury resort located in Cape Cod, Massachusetts. The
property currently includes a golf club with two 18 hole championship golf
courses, the Popponesset Inn, a casual waterfront dining and wedding facility, a
villa rental program, a waterfront freshwater swimming pool, a private beach, a
fitness center and a 16 court tennis facility.

HOTEL AND CASINO OPERATIONS. Our hotel and casino operations currently
consist of the Stratosphere Casino Hotel & Tower, Arizona Charlie's Decatur and
Arizona Charlie's Boulder, all in Las Vegas, Nevada. We also own approximately
36.3% of the common stock and approximately 40.6% of the public debt of the
holding company that owns and operates the Sands Hotel and Casino in Atlantic
City, New Jersey and its financing affiliate, respectively. Other affiliates of
Mr. Icahn own approximately 41.2% of the common stock and approximately 55.9% of
the public debt of the holding company that owns and operates the Sands Hotel
and Casino and its financing affiliate, respectively.

INVESTMENTS. We seek to purchase undervalued securities. Undervalued
securities are those which we believe may have greater inherent value than
indicated by their then current trading price and may present the opportunity
for "activist" bondholders or shareholders to act as catalysts to realize value.
Additionally, we engage in real estate lending, including making second mortgage
or secured mezzanine loans to developers for the purpose of developing
single-family homes, luxury garden apartments or commercial properties. These
loans are subordinate to construction financing and we target an interest rate
in excess of 20% per annum. As of June 30, 2004, we had approximately $23.3
million principal amount of these loans outstanding. We also purchase mortgage
loans, including non-performing loans.

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OIL AND GAS. Our oil and gas operations involve the exploration,
development, production and acquisition of oil and gas properties. We own, as of
June 30, 2004, 50.01% of the outstanding equity of National Energy Group, Inc.,
or NEG, and all of its approximately $148.6 million principal amount of 10 3/4%
senior notes due 2006. NEG manages approximately 700 properties in Arkansas,
Louisiana, Oklahoma and Texas. TransTexas Gas Corporation, an affiliate of Mr.
Icahn, is also managed by NEG.

BUSINESS STRATEGY

We believe that our core strengths include:

-   identifying and acquiring undervalued assets and businesses, often
through the purchase of distressed securities;

-   increasing value through management, financial or other operational
changes;

-   and managing complex legal, regulatory or financial issues which may
include bankruptcy or insolvency, environmental, zoning, permitting
and licensing issues.

We also believe that we have developed significant management strength,
industry relationships and expertise in our core real estate, gaming and
entertainment and oil and gas businesses. The key elements of our business
strategy include the following.

CONTINUE TO INVEST IN AND GROW OUR EXISTING OPERATING BUSINESSES. We believe
that we have developed a strong portfolio of businesses with experienced
management teams. We may expand our existing businesses if appropriate
opportunities are identified as well as use our established businesses as a
platform for additional acquisitions in the same or other areas.

SEEK TO ACQUIRE UNDERVALUED ASSETS. We intend to continue to make
investments in real estate and in companies or their securities which are
undervalued. These may be undervalued due to market inefficiencies, may relate
to opportunities in which economic or market trends have not been identified and
reflected in market value, or may include investments in complex or not readily
followed businesses or securities. Market inefficiencies and undervalued
situations may arise from disappointing financial results, liquidity or capital
needs, lowered credit ratings, revised industry forecasts or legal
complications. We may acquire businesses or assets directly or we may establish
an ownership position through the purchase of debt or equity securities of
troubled entities and may then negotiate for the ownership or effective control
of their assets.

ACTIVELY MANAGE OUR INVESTMENTS AND BUSINESSES. We seek investments for
which we can identify specific areas for financial or operational improvement
and where we can act as a catalyst for change. Change may include, but not be
limited to, replacing or supplementing management, restructuring the balance
sheet, increasing liquidity, disposing assets or cutting costs. We believe that
we can leverage off of our core businesses to better assess and increase the
value of our acquisitions. For instance, our homebuilding expertise allows us to
appropriately assess the risks of a real estate development prior to making a
mezzanine loan and also to complete a development if it is necessary or
profitable to do so.

DEPLOY OPERATING AND TRANSACTION STRUCTURING EXPERTISE OF EXISTING
MANAGEMENT TEAM INTO RELATED FIELDS. Our senior management team has extensive
experience in real estate and in identifying undervalued assets in general. We
believe there is significant opportunity to use this experience by acquiring or
starting businesses in asset-intensive sectors, including other real estate
development activities, industrial manufacturing, energy and insurance and asset
management, in which we have had no or limited experience to date, but which may
be undervalued and have RECENT DEVELOPMENTS potential for growth.

2

SUMMARY OF THE EXCHANGE OFFER

The Offering of the Private Notes.......         On May 12, 2004, we issued $353 million aggregate principal amount
of our private notes in an offering not registered under the
Securities Act of 1933.  At the time we issued the private notes,
we entered into a registration rights agreement in which we agreed
to offer to exchange the private notes for new notes which have
been registered under the Securities Act of 1933.  This exchange
offer is intended to satisfy that obligation.

The Exchange Offer......................         We are offering to exchange the new notes which have been
registered under the Securities Act of 1933 for the private notes.

As of this date, there is $353 million aggregate principal amount
of private notes outstanding.

Required Representations................         In order to participate in this exchange offer, you will be
required to make certain representations to us in a letter of
transmittal, including that:

-   any new notes will be acquired by you in the ordinary
course of your business;

-   you have not engaged in, do not intend to engage in, and
do not have an arrangement or understanding with any person to
participate in a distribution of the new notes; and

-   you are not an affiliate of our company.

Resale of New Notes.....................         We believe that, subject to limited exceptions, the new notes may
be freely traded by you without compliance with the registration
and prospectus delivery provisions of the Securities Act of 1933,
provided that:

-   you are acquiring new notes in the ordinary course of your
business;

-   you are not participating, do not intend to participate
and have no arrangement or understanding with any person to
participate in the distribution of the new notes; and

-   you are not an affiliate of our company.

If our belief is inaccurate and you transfer any new note issued to
you in the exchange offer without delivering a prospectus meeting
the requirements of the Securities Act of 1933 or
without an exemption from registration of your new notes
from such requirements, you may incur liability under the
Securities Act of 1933. We do not assume, or indemnify you against, such liability.

Each broker-dealer that is issued new notes for its own account
in exchange for private notes which were acquired by such
broker-dealer as a result of market-making or other trading
activities also must acknowledge that it has not entered into
any arrangement or understanding with us or any of our
affiliates to distribute the new notes and will deliver a
prospectus meeting the requirements of the Securities Act of
1933 in connection with any resale of the new notes issued in
the exchange offer.

-3-

We have agreed in the registration rights agreement that a
broker-dealer may use this prospectus for an offer to resell,
resale or other retransfer of the new notes issued to it in the
exchange offer.

Expiration Date.........................         The exchange offer will expire at 5:00 p.m., New York City time, on
December 15, 2004, unless extended, in which case the term
"expiration date" shall mean the latest date and time to which we
extend the exchange offer.

Conditions to the Exchange Offer........         The exchange offer is subject to certain customary conditions,
which may be waived by us.  The exchange offer is not conditioned
upon any minimum principal amount of private notes being tendered.

Procedures for Tendering
Private Notes...........................         If you wish to tender your private notes for exchange, you must
transmit to Wilmington Trust Company, as exchange agent, at the
address set forth in this prospectus under the heading "The
Exchange Offer - Exchange Agent," and on the front cover of the
letter of transmittal, on or before the expiration date, a
properly completed and duly executed letter of transmittal,
which accompanies this prospectus, or a facsimile of the letter
of transmittal and either:

the private notes and any other required documentation, to the
exchange agent; or

a computer generated message transmitted by means of The
Depository Trust Company's Automated Tender Offer Program system
and received by the exchange agent and forming a part of a
confirmation of book entry transfer in which you acknowledge and
agree to be bound by the terms of the letter of transmittal.

If either of these procedures cannot be satisfied on a timely basis,
then you should comply with the guaranteed delivery procedures
described below. By executing the letter of transmittal, each holder
of private notes will make certain representations to us described
under "The Exchange Offer - Procedures for Tendering."

Special Procedures for Beneficial
Owners..................................         If you are a beneficial owner whose private notes are registered in
the name of a broker, dealer, commercial bank, trust company or
other nominee and you wish to tender your private notes in the
exchange offer, you should contact such registered holder promptly
and instruct such registered holder to tender on your behalf.  If
you wish to tender on your own behalf, you must, prior to
completing and executing the letter of transmittal and delivering
your private notes, either make appropriate arrangements to
register ownership of the private notes in your name or obtain a
properly completed bond power from the registered holder.  The
transfer of registered ownership may take considerable time and may
not be able to be completed prior to the expiration date.

4

Guaranteed Delivery Procedures..........         If you wish to tender private notes and time will not permit the
documents required by the letter of transmittal to reach the
exchange agent prior to the expiration date, or the procedure for
book-entry transfer cannot be completed on a timely basis, you must
tender your private notes according to the guaranteed delivery
procedures described under "The Exchange Offer - Guaranteed
Delivery Procedures."

Acceptance of Private Notes and
Delivery of New Notes...................         Subject to the conditions described under "The Exchange Offer -
Conditions," we will accept for exchange any and all private notes
which are validly tendered in the exchange offer and not withdrawn,
prior to 5:00 p.m., New York City time, on the expiration date.

Withdrawal Rights.......................         You may withdraw your tender of private notes at any time prior to
5:00 p.m., New York City time, on the expiration date, subject to
compliance with the procedures for withdrawal described in this
prospectus under heading "The Exchange Offer - Withdrawal of
Tenders."

Federal Income Tax Considerations.......         For a discussion of the material federal income tax considerations
relating to the exchange of private notes for the new notes as well
as the ownership of the new notes, see "Certain U.S. Federal Income
Tax Consequences."

Exchange Agent..........................         The Wilmington Trust Company is serving as the exchange agent.  The
address, telephone number and facsimile number of the exchange
agent are set forth in this prospectus under the heading "The
Exchange Offer - Exchange Agent."

Consequences of Failure to Exchange
Private Notes...........................         If you do not exchange private notes for new notes, you will
continue to be subject to the restrictions on transfer provided in
the private notes and in the indenture governing the private
notes. In general, the unregistered private notes may not be offered
or sold, unless they are registered under the Securities Act of
1933, except pursuant to an exemption from, or in a transaction not
subject to, the Securities Act of 1933 and applicable state
securities laws.

5

THE NEW NOTES

The terms of the new notes we are issuing in this exchange offer and the
private notes that are outstanding are identical in all material respects
except:

-   The new notes will be registered under the Securities Act of 1933;

-   The new notes will not contain transfer restrictions and registration
rights that relate to the private notes.

The new notes will evidence the same debt as the old notes and will be
governed by the same indenture. References to notes include both private notes
and new notes.

Issuer..................................    American Real Estate Partners, L.P. is a holding company.  Its operations
are conducted through its subsidiaries and substantially all of its assets
consist of a 99% limited partnership interest in its subsidiary, American
Real Estate Holdings Limited Partnership, or AREH, which is a holding
company for its operating subsidiaries and investments. The new notes will
be guaranteed by AREH.

Co-Issuer...............................    American Real Estate Finance Corp. is a wholly-owned subsidiary of
American Real Estate Partners, L.P. It was formed solely for the purpose
of serving as a co-issuer of debt securities of American Real Estate
Partners, L.P. in order to facilitate offerings of the debt securities.
Other than as a co-issuer of the notes, American Real Estate Finance Corp.
does not and will not have any operations or assets and will not have any
revenues. As a result, holders of the notes should not expect American
Real Estate Finance Corp. to participate in servicing any obligations on
the new notes.

Notes Offered...........................    $353.0 million in aggregate principal amount of 8-1/8% senior notes due
2012.

Maturity................................    June 1, 2012.

Interest Payment Dates..................    June 1 and December 1 of each year, commencing December 1, 2004.

Ranking.................................    The new notes and the guarantee will rank equally with all of
our and the guarantor's existing and future senior unsecured
indebtedness, and will rank senior to all of our and the
guarantor's existing and future subordinated indebtedness. The
new notes and the guarantee will be effectively subordinated to
all of our and the guarantor's existing and future secured
indebtedness, to the extent of the collateral securing such
indebtedness. The new notes and the guarantee also will be
effectively subordinated to all indebtedness and other
liabilities, including trade payables, of all our subsidiaries
other than AREH. As of June 30, 2004, the new notes and the
guarantee would have been effectively subordinated to an
aggregate of $309.2 million of AREH's secured debt and our
subsidiaries' debt, excluding trade payables.

Guarantee...............................    If we cannot make payments on the new notes when they are due,
AREH must make them instead. Other than AREH, none of our
subsidiaries will guarantee payments on the new notes.

Optional Redemption.....................    We may, at our option, redeem some or all of the new notes at
any time on or after June 1, 2008, at the redemption prices
listed under "Description of Notes -- Optional Redemption."

In addition, prior to June 1, 2007, we may, at our option,
redeem up to 35% of the new notes with the proceeds of certain
sales of our equity at the redemption price listed under
"Description of Notes -- Optional

-6-

Redemption." We may make the redemption only if, after the
redemption, at least 65% of the aggregate principal amount of
the notes issued remains outstanding.

Redemption Based on Gaming Laws.........   The new notes are subject to mandatory disposition and
redemption requirements following certain determinations by
applicable gaming authorities.

Certain Covenants.......................   We will issue the new notes under an indenture with 
Wilmington Trust Company, as trustee acting on your behalf. The
indenture will, among other things, restrict our and AREH's
ability to:

-   Incur additional debt;

-   Pay dividends and make distributions;

-   Repurchase equity securities;

-   Create liens;

-   Enter into transactions with affiliates; and

-   Merge or consolidate.

Our subsidiaries other than AREH will not be restricted in their
ability to incur debt, create liens or merge or consolidate.

Absence of Established
Market for Notes........................   The new notes will be new securities for which there is
currently no market. We cannot assure you that a liquid market
for the new notes will develop or be maintained.

7

AREP INFORMATION

American Real Estate Partners, L.P. is a publicly traded master limited
partnership formed in Delaware on February 17, 1987. Carl C. Icahn, through
affiliates, owns approximately 86.5% of our depositary units and preferred
units. Our general partner is American Property Investors, Inc., a Delaware
corporation, which is a wholly-owned subsidiary of Beckton Corp., a Delaware
corporation. All of the outstanding capital stock of Beckton is owned by Mr.
Icahn. Affiliates of Mr. Icahn acquired API in 1990. Substantially all of our
businesses and assets are held through a limited partnership, American Real
Estate Holdings Limited Partnership, or AREH, in which we own a 99% limited
partnership interest. API also acts as the general partner for AREH. API has a
1% general partnership interest in each of us and AREH. Our, AREH's and API's
principal business address is 100 South Bedford Road, Mt. Kisco, New York 10549,
and our, AREH's and API's telephone number is (914) 242-7700.

American Real Estate Finance Corp., a Delaware corporation, is a
wholly-owned subsidiary of AREP. American Real Estate Finance Corp. was
incorporated on April 19, 2004 and was formed solely for the purpose of serving
as a co-issuer of debt securities of American Real Estate Partners, L.P. in
order to facilitate offerings of the debt securities. Other than as a co-issuer
of the notes, American Real Estate Finance Corp. will not have any operations or
assets and will not have any revenues. As a result, prospective holders of the
notes should not expect American Real Estate Finance Corp. to participate in
servicing any obligations on the notes. American Real Estate Finance Corp.'s
principal business address is 100 South Bedford Road, Mt. Kisco, New York 10549
and its telephone number is (914) 242-7700.

STRUCTURE CHART

The following is a chart of our ownership and the structure of the entities
through which we conduct our operations.

[STRUCTURE CHART]

8

----------

(1)  Our partnership units consist of depositary units, representing limited
partnership interests, and preferred units, representing preferred limited
partnership interests. Mr. Icahn owns approximately 86.5% of each class of
these units. As of June 30, 2004, there were 46,098,284 depositary units
and 10,286,264 preferred units outstanding.

(2)  National Energy Group, Inc. is a publicly held company, the stock of which
currently trades on the OTC Bulletin Board. National Energy Group, Inc.'s
assets principally consist of a 50% membership interest in NEG Holding LLC.
The other 50% membership interest in NEG Holding LLC is held by Gascon
Partners, an affiliate of Mr. Icahn, which is the managing member of NEG
Holding LLC. The assets of NEG Holding LLC consist of the membership
interests of National Energy Group, Inc. Operating LLC, which owns oil and
natural gas assets. The operating agreement of NEG Operating LLC provides
for its management by Gascon Partners, which engaged National Energy Group,
Inc. to manage the operations.

(3)  New Seabury Properties L.L.C., directly and through its single purpose
subsidiaries, owns a 381 acre resort community in Cape Cod, Massachusetts.

(4)  On May 26, 2004, American Casino & Entertainment Properties LLC, or ACEP,
acquired Arizona Charlie's Decatur and Arizona Charlie's Boulder from Mr.
Icahn and one of his affiliates. On May 26, 2004, AREH transferred 100% of
the common stock of Stratosphere Corporation to ACEP.

(5)  The Bayswater Group, LLC, directly and through its and AREH's single
purpose subsidiaries, is engaged in real estate investment, management and
development, focused primarily on the acquisition, development,
construction and sale of single-family homes, custom-built homes,
multi-family homes and lots in subdivisions and planned communities.

(6)  As of July 22, 2004, we owned approximately 36.3% of the common stock of GB
Holdings, Inc. and approximately 40.6% of the public debt of Atlantic Coast
Entertainment Holdings, Inc. which owns the entity which operates the Sands
Hotel and Casino. Mr. Icahn and his affiliates hold approximately an
additional 41.2% of GB Holdings common stock and 55.9% of the debt of
Atlantic Coast.

9

RISK FACTORS

You should consider carefully each of the following risks and all other
information contained in this prospectus before deciding to invest in the notes.

RISKS RELATING TO OUR STRUCTURE AND INDEBTEDNESS

WE AND AREH ARE HOLDING COMPANIES AND WILL DEPEND ON THE BUSINESSES OF OUR
SUBSIDIARIES TO SATISFY OUR OBLIGATIONS UNDER THE NOTES.

We and AREH are holding companies. In addition to cash and cash
equivalents, U.S. government and agency obligations and marketable equity and
debt securities, our assets consist primarily of investments in our
subsidiaries. Moreover, if we make significant investments in operating
businesses, it is likely that we will reduce the liquid assets at AREP and AREH
in order to fund those investments and ongoing operations. Consequently, our
cash flow and our ability to meet our debt service obligations likely will
depend on the cash flow of our subsidiaries and the payment of funds to us by
our subsidiaries in the form of loans, dividends, distributions or otherwise. If
we invest our cash, we may become dependent on our subsidiaries to provide cash
to us to service our debt.

The operating results of our subsidiaries may not be sufficient to make
distributions to us. In addition, our subsidiaries are not obligated to make
funds available to us for payment on the notes or otherwise, and distributions
and intercompany transfers from our subsidiaries to us may be restricted by
applicable law or covenants contained in debt agreements and other agreements to
which these subsidiaries may be subject or enter into in the future. The terms
of any borrowings of our subsidiaries or other entities in which we own equity
may restrict dividends, distributions or loans to us. For example, the ACEP
notes contain restrictions on dividends and distributions and loans to us, as
well as other transactions with us. These likely will preclude our receiving
payments from the operations of our principal hotel and gaming properties. To
the degree any distributions and transfers are impaired or prohibited, our
ability to make payments on the notes will be limited.

WE, AREH OR OUR SUBSIDIARIES MAY BE ABLE TO INCUR SUBSTANTIALLY MORE DEBT.

We, AREH or our subsidiaries may be able to incur substantial additional
indebtedness in the future. The terms of the indenture do not prohibit us or our
subsidiaries from doing so. We and AREH may incur additional pari passu
indebtedness if we comply with certain financial tests contained in the
indenture. As of June 30, 2004, based upon these tests, we and AREH could have
incurred up to approximately $1.8 billion of additional indebtedness. Our
subsidiaries other than AREH are not subject to the covenant restricting debt
incurrence contained in the indenture. If new debt is added to our, AREH's and
our subsidiaries' current debt levels, the related risks that we, AREH and they
now face could intensify. In addition, certain important corporate events, such
as leveraged recapitalizations that would increase the level of our
indebtedness, would not constitute a "Change of Control" under the indenture.

THE NOTES WILL BE EFFECTIVELY SUBORDINATED TO ANY SECURED INDEBTEDNESS, AND THE
INDEBTEDNESS AND LIABILITIES OF OUR SUBSIDIARIES OTHER THAN AREH.

The notes also will be effectively subordinated to any of our and AREH's
indebtedness secured by our or AREH's assets. We and AREH may be able to incur
substantial additional secured indebtedness in the future. The terms of the
indenture permit us and AREH to do so. The notes will be effectively
subordinated to our and AREH's existing and future secured indebtedness to the
extent of the collateral securing such indebtedness. The notes will also be
effectively subordinated to all the indebtedness and liabilities, including
trade payables, of all of our subsidiaries, other than AREH. In the event of a
bankruptcy, liquidation or reorganization of any of our subsidiaries, other than
AREH, holders of their indebtedness and their trade creditors will generally be
entitled to payment of their claims from the assets of those subsidiaries before
any assets are made available for distribution to us.

10

OUR SUBSIDIARIES, OTHER THAN AREH, WILL NOT BE SUBJECT TO ANY OF THE COVENANTS
IN THE INDENTURE FOR THE NOTES AND ONLY AREH WILL GUARANTEE THE NOTES. WE MAY
NOT BE ABLE TO RELY ON THE CASH FLOW OR ASSETS OF OUR SUBSIDIARIES TO PAY OUR
INDEBTEDNESS.

Our subsidiaries, other than AREH, will not be subject to the covenants
under the indenture for the notes. We may form additional subsidiaries in the
future which will not be subject to the covenants under the indenture for the
notes. Of our existing and future subsidiaries, only AREH is required to
guarantee the notes. Our existing and future non-guarantor subsidiaries may
enter into financing arrangements that limit their ability to make dividends,
distributions, loans or other payments to fund payments in respect of the notes.
Accordingly, we may not be able to rely on the cash flow or assets of our
subsidiaries to pay the notes.

RISKS RELATING TO THE NOTES

OUR FAILURE TO COMPLY WITH THE COVENANTS CONTAINED UNDER ONE OF OUR DEBT
INSTRUMENTS OR THE INDENTURE GOVERNING THE NOTES, INCLUDING OUR FAILURE AS A
RESULT OF EVENTS BEYOND OUR CONTROL, COULD RESULT IN AN EVENT OF DEFAULT WHICH
WOULD MATERIALLY AND ADVERSELY AFFECT OUR FINANCIAL CONDITION.

If there were an event of default under one of our debt instruments, the
holders of the defaulted debt could cause all amounts outstanding with respect
to that debt to be due and payable immediately. In addition, any event of
default or declaration of acceleration under one debt instrument could result in
an event of default under one or more of our other debt instruments, including
the notes. It is possible that, if the defaulted debt is accelerated, our assets
and cash flow may not be sufficient to fully repay borrowings under our
outstanding debt instruments and we cannot assure you that we would be able to
refinance or restructure the payments on those debt securities.

TO SERVICE OUR INDEBTEDNESS, WE WILL REQUIRE A SIGNIFICANT AMOUNT OF CASH. OUR
ABILITY TO MAINTAIN OUR CURRENT CASH POSITION OR GENERATE CASH DEPENDS ON MANY
FACTORS BEYOND OUR CONTROL.

Our ability to make payments on and to refinance our indebtedness,
including these notes, and to fund operations will depend on existing cash
balances and our ability to generate cash in the future. This, to a certain
extent, is subject to general economic, financial, competitive, regulatory and
other factors that are beyond our control.

We may use our cash and the proceeds of the offering of the private notes
in our business activities. The businesses or assets we acquire may not generate
sufficient cash to service our debt, including the notes. In addition, we may
not generate sufficient cash flow from operations or investments and future
borrowings may not be available to us in an amount sufficient to enable us to
service our indebtedness, including these notes, or to fund our other liquidity
needs. We may need to refinance all or a portion of our indebtedness, including
these notes, on or before maturity. We cannot assure you that we will be able to
refinance any of our indebtedness, including these notes, on commercially
reasonable terms or at all.

THE INDENTURE DOES NOT RESTRICT OUR ABILITY TO CHANGE OUR LINES OF BUSINESS OR
INVEST THE PROCEEDS OF ASSET SALES AND ALLOWS FOR THE SALE OF ALL OR
SUBSTANTIALLY ALL OF OUR AND AREH'S ASSETS WITHOUT THE NOTES BEING ASSUMED BY
THE ACQUIRERS.

The indenture does not restrict in any way the businesses in which we may
engage and if we were to change our current lines of business, in whole or in
part, you would not be entitled to accelerated repayment of the notes. We also
are not required to offer to purchase notes with the proceeds from asset sales,
including in the event of the sale of all or substantially all of our assets or
AREH's assets, and may reinvest the proceeds without the approval of
noteholders. In addition, we and AREH may sell all or substantially all of our
and its assets without the notes being assumed by the acquirers.

WE MAY NOT HAVE SUFFICIENT FUNDS NECESSARY TO FINANCE THE CHANGE OF CONTROL
OFFER REQUIRED BY THE INDENTURE.

Upon the occurrence of certain specific kinds of change of control events,
we will be required to offer to repurchase all outstanding notes at 101% of
their principal amount plus accrued and unpaid interest and liquidated damages,
if any, to the date of repurchase. Mr. Icahn, through affiliates, currently owns
100% of API and

11

approximately 86.5% of our outstanding depositary units and preferred units, and
if he were to sell or otherwise transfer some or all of his interests in us to
unrelated parties, a change of control could be deemed to have occurred under
the terms of the indenture governing the notes. However, it is possible that we
will not have sufficient funds at the time of the change of control to make the
required repurchase of notes.

FEDERAL AND STATE STATUTES ALLOW COURTS, UNDER SPECIFIC CIRCUMSTANCES, TO VOID
GUARANTEES AND REQUIRE NOTEHOLDERS TO RETURN PAYMENTS RECEIVED FROM THE
GUARANTOR.

Under the federal bankruptcy law and comparable provisions of state
fraudulent transfer laws, a guarantee could be voided, or claims in respect of a
guarantee could be subordinated to all other debts of that guarantor if, among
other things, the guarantor, at the time it incurred the indebtedness evidenced
by its guarantee:

-     received less than reasonably equivalent value or fair consideration
for the incurrence of such guarantee; and

-     was insolvent or rendered insolvent by reason of such incurrence; or

-     was engaged in a business or transaction for which the guarantor's
remaining assets constituted unreasonably small capital; or

-     intended to incur, or believed that it would incur, debts beyond its
ability to pay such debts as they mature.

In addition, any payment by that guarantor pursuant to its guarantee could
be voided and required to be returned to the guarantor, or to a fund for the
benefit of the creditors of the guarantor.

The measures of insolvency for purposes of these fraudulent transfer laws
will vary depending upon the law applied in any proceeding to determine whether
a fraudulent transfer has occurred. Generally, however, a guarantor would be
considered insolvent if:

-     the sum of its debts, including contingent liabilities, was greater
than the fair saleable value of all of its assets; or

-     if the present fair saleable value of its assets was less than the
amount that would be required to pay its probable liability on its
existing debts, including contingent liabilities, as they become
absolute and mature; or

-     it could not pay its debts as they become due.

On the basis of historical financial information, recent operating history
and other factors, we believe that AREH, after giving effect to its guarantee of
these notes, will not be insolvent, will not have unreasonably small capital for
the business in which it is engaged and will not have incurred debts beyond its
ability to pay such debts as they mature. We cannot assure you, however, as to
what standard a court would apply in making these determinations or that a court
would agree with our conclusions in this regard.

AS A NOTEHOLDER YOU MAY BE REQUIRED TO COMPLY WITH LICENSING, QUALIFICATION OR
OTHER REQUIREMENTS UNDER GAMING LAWS AND COULD BE REQUIRED TO DISPOSE OF THE
NOTES.

We may be required to disclose the identities of the holders of the notes
to the New Jersey and Nevada gaming authorities upon request. The New Jersey
Casino Control Act, or NJCCA, imposes substantial restrictions on the ownership
of securities of AREP and its subsidiaries. A holder of the notes may be
required to meet the qualification provisions of the NJCCA relating to financial
sources and/or security holders. The indenture governing the notes provide that
if the New Jersey Casino Control Commission, or New Jersey Commission, requires
a holder of the notes (whether the record or beneficial owner) to qualify under
the NJCCA and the holder does not so qualify, then the holder must dispose of
his interest in the notes within 30 days after receipt by AREP of notice of the
finding that the holder does not so qualify, or AREP may redeem the notes at the
lower of the outstanding principal amount or the notes' value calculated as if
the investment had been made on the date of disqualification of the holder (or
such

12

lesser amount as may be required by the New Jersey Commission). If a holder is
found unqualified by the New Jersey Commission, it is unlawful for the holder:

-     to exercise, directly or through any trustee or nominee, any right
conferred by such securities or

-     to receive any dividends or interest upon such securities or any
remuneration, in any form, from its affiliated casino licensee for
services rendered or otherwise.

The Nevada Gaming Commission may, in its discretion, require a holder of
the notes to file an application, be investigated and be found suitable to hold
the notes. In addition, the Nevada Gaming Commission may, in its discretion,
require the holder of any debt security of a company registered by the Nevada
Gaming Commission as a publicly-traded corporation to file an application, be
investigated and be found suitable to own such debt security.

If a record or beneficial holder of a note is required by the Nevada
Gaming Commission to be found suitable, such owner will be required to apply for
a finding of suitability within 30 days after request of such gaming authority
or within such earlier time prescribed by such gaming authority. The applicant
for a finding of suitability must pay all costs of the application and
investigation for such finding of suitability. If the Nevada Gaming Commission
determines that a person is unsuitable to own such security, then, pursuant to
the Nevada Gaming Control Act, we can be sanctioned, including the loss of our
approvals, if, without the prior approval of the Nevada Gaming Commission, we:

-     pay to the unsuitable person any dividend, interest, or any
distribution whatsoever;

-     recognize any voting right of the unsuitable person with respect to
such securities;

-     pay the unsuitable person remuneration in any form; or

-     make any payment to the unsuitable person by way of principal,
redemption, conversion, exchange, liquidation or similar
transaction.

Each holder of the notes will be deemed to have agreed, to the extent
permitted by law, that if the Nevada gaming authorities determine that a holder
or beneficial owner of the notes must be found suitable, and if that holder or
beneficial owner either refuses to file an application or is found unsuitable,
that holder shall, upon our request, dispose of its notes within 30 days after
receipt of our request, or earlier as may be ordered by the Nevada gaming
authorities. We will also have the right to call for the redemption of notes of
any holder at any time to prevent the loss or material impairment of a gaming
license or an application for a gaming license at a redemption price equal to:

-     the lesser of the cost paid by the holder or the fair market value
of the notes, in each case, plus accrued and unpaid interest and
liquidated damages, if any, to the earlier of the date of
redemption, or earlier as may be required by the Nevada gaming
authorities or the finding of unsuitability by the Nevada gaming
authorities; or

-     such other lesser amount as may be ordered by the Nevada gaming
authorities.

We will notify the trustee under the indenture in writing of any
redemption as soon as practicable. We will not be responsible for any costs or
expenses you may incur in connection with your application for a license,
qualification or a finding of suitability, or your compliance with any other
requirement of a gaming authority. The indenture also provides that as soon as a
gaming authority requires you to sell your notes, you will, to the extent
required by applicable gaming laws, have no further right:

-     to exercise, directly or indirectly, any right conferred by the
notes or the indenture; or

-     to receive from us any interest, dividends or any other
distributions or payments, or any remuneration in any form, relating
to the notes, except the redemption price we refer to above.

13

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 your
interests as a noteholder and, as such, he may take actions that may not be in
your interest. For example, if we encounter financial difficulties or are unable
to pay our debts as they mature, Mr. Icahn's interests might conflict with your
interests as a noteholder.

In addition, if Mr. Icahn were to sell, or otherwise transfer, some or all
of his interests in us to an unrelated party or group, a change of control could
be deemed to have occurred under the terms of the indenture governing the notes
which would require us to offer to repurchase all outstanding notes at 101% of
their principal amount plus accrued and unpaid interest and liquidated damages,
if any, to the date of repurchase. However, it is possible that we will not have
sufficient funds at the time of the change of control to make the required
repurchase of notes.

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 the management of us, 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.

SINCE WE ARE A LIMITED PARTNERSHIP, YOU MAY NOT BE ABLE TO PURSUE LEGAL CLAIMS
AGAINST US IN U.S. FEDERAL COURTS.

We are a limited partnership organized under the laws of the state of
Delaware. Under the rules of federal civil procedure, you may not be able to sue
us in federal court on claims other than those based solely on federal law,
because of lack of complete diversity. Case law applying diversity jurisdiction
deems us to have the citizenship of each of our limited partners. Because we are
a publicly traded limited partnership, it may not be possible for you to attempt
to sue us in a federal court because we have citizenship in all 50 U.S. states
and operations in many states. Accordingly, you will be limited to bring any
claims in state court. Furthermore, American Real Estate Finance Corp., our
corporate co-issuer for the notes, has only nominal assets and no operations.
While you may be able to sue the corporate co-issuer in federal court, you are
not likely to be able to realize on any judgment rendered against it.

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

Mr. Icahn, through certain affiliates, currently owns 100% of API and
approximately 86% 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 when due may result in
the creation of liens in favor of the pension plan or the Pension Benefit
Guaranty Corporation, or the PBGC,

14

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, 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 regulation under the Investment Company Act, 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 could fail to qualify as a partnership for past years
as well as future years. Qualification as a partnership involves the

15

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 and would reduce our funds
available to make interest and principal payments on the notes.

RISKS RELATING TO THE EXCHANGE OFFER

HOLDERS WHO FAIL TO EXCHANGE THEIR PRIVATE NOTES WILL CONTINUE TO BE SUBJECT TO
RESTRICTIONS ON TRANSFER.

If you do not exchange your private notes for new notes in the exchange
offer, you will continue to be subject to the restrictions on transfer of your
private notes described in the legend on your private notes. The restrictions on
transfer of your private notes arise because we issued the private notes under
exemptions from, or in transactions not subject to, the registration
requirements of the Securities Act of 1933 and applicable state securities laws.
In general, you may only offer or sell the private notes if they are registered
under the Securities Act and applicable state securities laws, or are offered
and sold under an exemption from these requirements. We do not plan to register
the private notes under the Securities Act.

BROKER-DEALERS OR HOLDERS OF NOTES MAY BE COME SUBJECT TO THE REGISTRATION AND
PROSPECTUS DELIVERY REQUIREMENTS OF THE SECURITIES ACT.

Any broker-dealer that:

-  exchanges its private notes in the exchange offer for the purpose of
participating in a distribution of the new notes, or

-  resells new notes that were received by it for its own account in the
exchange offer,

may be deemed to have received restricted securities and may be required to
comply with the registration and prospectus delivery requirements of the
Securities Act of 1933 in connection with any resale transaction by that
broker-dealer. Any profit on the resale of the new notes and any commission or
concessions received by a broker-dealer may be deemed to be underwriting
compensation under the Securities Act. In addition to broker-dealers, any holder
of notes that exchanges its private notes in the exchange offer for the purpose
of participating in a distribution of the new notes may be deemed to have
received restricted securities and may be required to comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction by that holder.

WE CANNOT GUARANTEE THAT THERE WILL BE A TRADING MARKET FOR THE NEW NOTES.

The new notes are a new issue of securities and currently there is no
market for them. We do not intend to apply to have the new notes listed or
quoted on any exchange or quotation system. Accordingly, we cannot assure you
that a liquid market will develop for the new notes.

The liquidity of any market for the new notes will depend on a variety of
factors, including:

16

-  the number of holders of the new notes;

-  our performance; and

-  the market for similar securities and the interest of securities dealers
in making a market in the new notes.

A liquid trading market may not develop for the new notes.

Historically, the market for non-investment grade debt has been subject to
disruptions that have caused substantial volatility in the prices of securities
similar to the new notes. The market, if any, for the new notes may experience
similar disruptions may adversely affect the prices at which you may sell your
new notes. If our active trading market does not develop or is not maintained,
the market price and liquidity of the new notes may be adversely affected.

To the extent private notes are tendered and accepted in the exchange
offer, the trading market, if any, for the private notes that are not so
tendered would be adversely affected.

RISKS RELATING TO OUR BUSINESS

REAL ESTATE OPERATIONS

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.

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 impact 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 our rental real estate portfolio.
During the six months ended June 30, 2004 we sold 34 properties for an aggregate
sale price of approximately $211.4 million, after expenses and closing costs. As
of June 30, 2004, we had conditional sales contracts or letters of intent for 29
additional properties, with an aggregate book value as of June 30, 2004 of
approximately $44 million, for an aggregate sales price of approximately $87.3
million. Generally, these contracts and letters of intent may be terminated by
the buyer with little or no penalty. We may not be successful in obtaining
purchase offers for our remaining properties 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 under the indenture. Many of our properties are
net-leased to single corporate tenants, it may be difficult to sell those
properties that existing tenants decline to

17

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.

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.

18

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 ACEP 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 Nevada 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.

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.

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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 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 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 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;

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-     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.

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.

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FORWARD-LOOKING STATEMENTS

Some statements in this prospectus and the documents incorporated by
reference are known as "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements may
relate to, among other things, future performance generally, business
development activities, future capital expenditures, financing sources and
availability and the effects of regulation and competition.

When we use the words "believe," "intend," "expect," "may," "will,"
"should," "anticipate," "could," "estimate," "plan," "predict," "project," or
their negatives, or other similar expressions, the statements which include
those words are usually forward-looking statements. When we describe strategy
that involves risks or uncertainties, we are making forward-looking statements.

We warn you that forward-looking statements are only predictions. Actual
events or results may differ as a result of risks that we face, including those
set forth in the section of this prospectus called "Risk Factors." Those risks
are representative of factors that could affect the outcome of the
forward-looking statements. These and the other factors discussed elsewhere in
this prospectus and the documents incorporated by reference herein are not
necessarily all of the important factors that could cause our results to differ
materially from those expressed in our forward-looking statements.
Forward-looking statements speak only as of the date they were made and we
undertake no obligation to update them.

INDUSTRY DATA

We refer to market and industry data throughout this prospectus that we
have obtained from publicly available information and industry publications and
other data that is based on the good faith estimates of our management, which
estimates are based upon their review of internal surveys, independent industry
publications and other publicly available information. Although we believe that
these sources are reliable, we have not verified the accuracy or completeness of
this information. We are not aware of any misstatements regarding the market and
industry data presented in this prospectus, however, our estimates involve risks
and uncertainties and are subject to change based on various factors, including
those discussed under the heading "Risk Factors."

22

USE OF PROCEEDS

We will not receive any proceeds from the exchange of the new notes for
the private notes pursuant to the exchange offer. On May 12, 2004, we issued and
sold the private notes in a private offering, receiving net proceeds of
approximately $342.4 million, after deducting selling and offering expenses.

We intend to use the net proceeds of the private offering for general
business purposes, including to pursue our primary business strategy of
acquiring undervalued assets in either our existing lines of business or other
businesses and to provide additional capital to grow our existing business.

We will use the net proceeds of the private offering and conduct our
activities in a manner so as not to be deemed an investment company under the
Investment Company Act. Generally this means that we do not intend to enter the
business of investing in securities and that no more than 40% of our total
assets will be invested in securities. The portion of our assets invested in
each type of security or any single issuer or industry will not be limited.

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THE EXCHANGE OFFER

PURPOSE OF THE EXCHANGE OFFER

In connection with the sale of the private notes, we and the initial
purchaser entered into a registration rights agreement in which we and AREH
agreed to:

-     file a registration statement with the Securities and Exchange
Commission with respect to the exchange of the private notes for new
notes, or the exchange offer registration statement, no later than
90 days after the date we issued the private notes;

-     use all commercially reasonable efforts to have the exchange offer
registration statement declared effective by the SEC on or prior to
180 days after the issuance date; and

-     commence the offer to exchange new notes for the private notes and
use all commercially reasonable efforts to issue on or prior to 30
business days, or longer if required by the federal securities laws,
after the date on which the exchange offer registration statement
was declared effective by the SEC, new notes in exchange for all
private notes tendered prior to that date in the exchange offer.

We are making the exchange offer to satisfy certain of our obligations
under the registration rights agreement. We filed a copy of the registration
rights agreement as an exhibit to the exchange offer registration statement.

RESALE OF EXCHANGE NOTES

Under existing interpretations of the Securities Act of 1933 by the staff
of the SEC contained in several no-action letters to third parties, we believe
that the new notes will generally be freely transferable by holders who have
validly participated in the exchange offer without further registration under
the Securities Act of 1933 (assuming the truth of certain representations
required to be made by each holder of notes, as set forth below). For additional
information on the staff's position, we refer you to the following no-action
letters: Exxon Capital Holdings Corporation, available April 13, 1988; Morgan
Stanley & Co. Incorporated, available June 5, 1991; and Shearman & Sterling,
available July 2, 1993. However, any purchaser of private notes who is one of
our "affiliates" or who intends to participate in the exchange offer for the
purpose of distributing the new notes or who is a broker-dealer who purchased
private notes from us to resell pursuant to Rule 144A or any other available
exemption under the Securities Act of 1933:

-     will not be able to tender its private notes in the exchange offer;

-     will not be able to rely on the interpretations of the staff of the
SEC; and

-     must comply with the registration and prospectus delivery
requirements of the Securities Act of 1933 in connection with any
sale or transfer of the private notes unless such sale or transfer
is made pursuant to an exemption from these requirements.

If you wish to exchange private notes for new notes in the exchange offer,
you will be required to make representations in a letter of transmittal which
accompanies this prospectus, including that:

-     you are not our "affiliate" (as defined in Rule 405 under the
Securities Act of 1933);

-     any new notes to be received by you will be acquired in the ordinary
course of your business;

-     you have no arrangement or understanding with any person to
participate in the distribution of the new notes in violation of the
provisions of the Securities Act of 1933;

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-     if you are not a broker-dealer, you are not engaged in, and do not
intend to engage in, a distribution of new notes; and

-     if you are a broker-dealer, you acquired the private notes for your
own account as a result of market-making or other trading activities
(and as such, you are a "participating broker-dealer"), you have not
entered into any arrangement or understanding with American Real
Estate Partners, L.P. or an affiliate of American Real Estate
Partners, L.P. to distribute the new notes and you will deliver a
prospectus meeting the requirements of the Securities Act of 1933 in
connection with any resale of the new notes.

Rule 405 under the Securities Act of 1933 provides that an "affiliate" of,
or person "affiliated" with, a specified person, is a person that directly, or
indirectly through one or more intermediaries, controls or is controlled by, or
is under common control with the person specified.

The SEC has taken the position that participating broker-dealers may be
deemed to be "underwriters" within the meaning of the Securities Act of 1933,
and accordingly may fulfill their prospectus delivery requirements with respect
to the new notes, other than a resale of an unsold allotment from the original
sale of the notes, with the prospectus contained in the exchange offer
registration statement. Under the registration rights agreement, we have agreed
to use commercially reasonable efforts to allow participating broker-dealers and
other persons, if any, subject to similar prospectus delivery requirements, to
use the prospectus contained in the exchange offer registration statement in
connection with the resale of the new notes for a period of 270 days from the
issuance of the new notes.

TERMS OF THE EXCHANGE OFFER

This prospectus and the accompanying letter of transmittal contain the
terms and conditions of the exchange offer. Upon the terms and subject to the
conditions set forth in this prospectus and in the accompanying letter of
transmittal, we will accept for exchange all private notes which are properly
tendered and not withdrawn on or prior to 5:00 p.m., New York City time, on the
expiration date. After authentication of the new notes by the trustee or an
authentication agent, we will issue and deliver $1,000 principal amount of new
notes in exchange for each $1,000 principal amount of outstanding private notes
accepted in the exchange offer. Holders may tender some or all of their private
notes in the exchange offer in denominations of $1,000 and integral multiples
thereof.

The form and terms of the new notes are identical in all material respects
to the form and terms of the private notes, except that:

(1) the offering of the new notes has been registered under the Securities
Act of 1933;

(2) the new notes generally will not be subject to transfer restrictions
or have registration rights; and

(3) certain provisions relating to liquidated damages on the private notes
provided for under certain circumstances will be eliminated.

The new notes will evidence the same debt as the private notes. The new
notes will be issued under and entitled to the benefits of the indenture.

As of the date of this prospectus, $353 million aggregate principal amount
of the private notes is outstanding. In connection with the issuance of the
private notes, we made arrangements for the private notes to be issued and
transferable in book-entry form through the facilities of the Depository Trust
Company acting as a depositary. The new notes will also be issuable and
transferable in book-entry form through the Depository Trust Company.

The exchange offer is not conditioned upon any minimum aggregate principal
amount of private notes being tendered. However, our obligation to accept
private notes for exchange pursuant to the exchange offer is subject to certain
customary conditions that we describe under "-- Conditions" below.

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Holders who tender private notes in the exchange offer will not be
required to pay brokerage commissions or fees or, subject to the instructions in
the letter of transmittal, transfer taxes with respect to the exchange of
private notes pursuant to the exchange offer. We will pay all charges and
expenses, other than certain applicable taxes, in connection with the exchange
offer. See "-- Solicitation of Tenders; Fees and Expenses" for more detailed
information regarding the expenses of the exchange offer.

By executing or otherwise becoming bound by the letter of transmittal, you
will be making the representations described under "--Procedures for Tendering"
below.

EXPIRATION DATE; EXTENSIONS; AMENDMENTS

The term "expiration date" will mean 5:00 p.m., New York City time, on
December 15, 2004, unless we, in our sole discretion, extend the exchange 
offer, in which case the term "expiration date" will mean the latest date and 
time to which we extend the exchange offer.

To extend the exchange offer, we will:

-     notify the exchange agent of any extension orally or in writing; and

-     notify the registered holders of the private notes by means of a
press release or other public announcement, each before 9:00 a.m.,
New York City time, on the next business day after the previously
scheduled expiration date.

We reserve the right, in our reasonable discretion:

-     to delay accepting any private notes;

-     to extend the exchange offer; or

-     if any conditions listed below under "--Conditions" are not
satisfied, to terminate the exchange offer by giving oral or written
notice of the delay, extension or termination to the exchange agent.

We will follow any delay in acceptance, extension or termination as
promptly as practicable by oral or written notice to the registered holders. If
we amend the exchange offer in a manner we determine constitutes a material
change, we will promptly disclose the amendment in a prospectus supplement that
we will distribute to the registered holders.

INTEREST ON THE NEW NOTES

Interest on the new notes will accrue from the last interest payment date
on which interest was paid on the private notes surrendered in exchange for new
notes or, if no interest has been paid on the private notes, from the issue date
of the private notes, May 12, 2004. Interest on the new notes will be payable
semi-annually on June 1 and December 1 of each year, commencing December 1,
2004.

PROCEDURES FOR TENDERING

You may tender your private notes in the exchange offer only if you are a
registered holder of private notes. To tender in the exchange offer, you must:

-     complete, sign and date the letter of transmittal or a facsimile the
letter of transmittal;

-     have the signatures thereof guaranteed if required by the letter of
transmittal; and

-     mail or otherwise deliver the letter of transmittal or such
facsimile to the exchange agent, at the

26

address listed below under " -- Exchange Agent" for receipt prior to
the expiration date.

In addition, either:

-     the exchange agent must receive certificates for the private notes
along with the letter of transmittal into its account at the
Depository Trust Company pursuant to the procedure described under "
-- Book-Entry Transfer" before the expiration date;

-     the exchange agent must receive a timely confirmation of a
book-entry transfer, if the procedure is available, into its account
at the Depository Trust Company pursuant to the procedure described
under " -- Book-Entry Transfer" before the expiration date; or

-     you must comply with the procedures described under "Guaranteed
Delivery Procedures."

Your tender, if not withdrawn before the expiration date, will constitute
an agreement between you and us in accordance with the terms and subject to the
conditions described in this prospectus and in the letter of transmittal.

The method of delivery of private notes and the letter of transmittal and
all other required documents to the exchange agent is at your election and risk.
We recommend that, instead of delivery by mail, you use an overnight or hand
delivery service. In all cases, you should allow sufficient time to ensure
delivery to the exchange agent prior to the expiration date. You should not send
letters of transmittal or private notes to us. You may request that your
respective brokers, dealers, commercial banks, trust companies or nominees
effect the transactions described above for you.

If you are a beneficial owner whose private notes are registered in the
name of a broker, dealer, commercial bank, trust company or other nominee and
you wish to tender your private notes, you should contact such registered holder
promptly and instruct such registered holder to tender on your behalf. If you
wish to tender on your own behalf, prior to completing and executing the letter
of transmittal and delivering your private notes, you must either:

-     make appropriate arrangements to register ownership of your private
notes in your name; or

-     obtain a properly completed bond power from the registered holder.

The transfer of record ownership may take considerable time unless private
notes are tendered

-     by a registered holder who has not completed the box entitled
"Special Registration Instructions" or "Special Delivery
Instruction" on the letter of transmittal; or

-     for the account of an "Eligible Institution" which is either:

-     a member firm of a registered national securities exchange or
of the National Association of Securities Dealers, Inc.;

-     a commercial bank or trust company located or having an office
or correspondent in the United States; or

-     otherwise an "eligible guarantor institution" within meaning
of Rule 17Ad-15 under the Securities Exchange Act of 1934,

an Eligible Institution must guarantee the signatures on a letter of transmittal
or a notice of withdrawal described below under " -- Withdrawal of Tenders."

If the letter of transmittal is signed by a person other than the
registered holder, such private notes must be

27

endorsed or accompanied by appropriate bond powers which authorize such person
to tender the private notes on behalf of the registered holder, in either case
signed as the name of the registered holder or holders appears on the private
notes.

If the letter of transmittal or any private notes or bond powers are
signed or endorsed by trustees, executors, administrators, guardians,
attorneys-in-fact, officers of corporations or others acting in a fiduciary or
representative capacity, such persons should so indicate when signing, and
unless waived by us, they must submit evidence satisfactory to us of their
authority to so act with the letter of transmittal.

The letter of transmittal will include representations to us as set forth
under "Resale of Exchange Notes."

You should note that:

-     All questions as to the validity, form, eligibility, including time
of receipt, acceptance and withdrawal of the tendered private notes
will be determined by us in our sole discretion, which determination
will be final and binding;

-     We reserve the absolute right to reject any and all private notes
not properly tendered or any private notes the acceptance of which
would, in our judgment or the judgment of our counsel, be unlawful;

-     We also reserve the absolute right to waive any irregularities or
conditions of tender as to particular private notes. Our
interpretation of the terms and conditions of the exchange offer,
including the instructions in the letter of transmittal, will be
final and binding on all parties. Unless waived, any defects or
irregularities in connection with tenders of private notes must be
cured within such time as we shall determine;

-     Although we intend to notify holders of defects or irregularities
with respect to any tender of private notes, neither we, the
exchange agent nor any other person shall be under any duty to give
notification of any defect or irregularity with respect to tenders
of private notes, nor shall any of them incur any liability for
failure to give such notification; and

-     Tenders of private notes will not be deemed to have been made until
such irregularities have been cured or waived. Any private notes
received by the exchange agent that we determine are not properly
tendered or the tender of which is otherwise rejected by us and as
to which the defects or irregularities have not been cured or waived
by us will be returned by the exchange agent to the tendering holder
unless otherwise provided in the letter of transmittal, as soon as
practicable following the expiration date.

BOOK-ENTRY TRANSFER

The exchange agent will make a request promptly after the date of this
prospectus to establish accounts with respect to the private notes at the
Depository Trust Company for the purpose of facilitating the exchange offer. Any
financial institution that is a participant in the Depository Trust Company's
system may make book-entry delivery of private notes by causing the Depository
Trust Company to transfer such private notes into the exchange agent's account
with respect to the private notes in accordance with the Depository Trust
Company's Automated Tender Offer Program procedures for such transfer. However,
the exchange for the private notes so tendered will only be made after timely
confirmation of such book-entry transfer of private notes into the exchange
agent's account, and timely receipt by the exchange agent of an agent's message
and any other documents required by the letter of transmittal. The term "agent's
message" means a message, transmitted by the Depository Trust Company and
received by the exchange agent and forming a part of the confirmation of a
book-entry transfer, which states that the Depository Trust Company has received
an express acknowledgment from a participant that is tendering private notes
that such participant has received the letter of transmittal and agrees to be
bound by the terms of the letter of transmittal, and that we may enforce such
agreement against the participant.

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Although delivery of private notes may be effected through book-entry
transfer into the exchange agent's account at the Depository Trust Company, you
must transmit and the exchange agent must receive, the letter of transmittal (or
facsimile thereof) properly completed and duly executed with any required
signature guarantee and all other required documents prior to the expiration
date, or you must comply with the guaranteed delivery procedures described
below. Delivery of documents to the Depository Trust Company does not constitute
delivery to the exchange agent.

GUARANTEED DELIVERY PROCEDURES

If you wish to tender your private notes but your private notes are not
immediately available, or time will not permit your private notes or other
required documents to reach the exchange agent before the expiration date, or
the procedure for book-entry transfer cannot be completed on a timely basis, you
may effect a tender if:

(1)   the tender is made through an Eligible Institution;

(2)   prior to the expiration date, the exchange agent receives from such
Eligible Institution a properly completed and duly executed notice
of guaranteed delivery, by facsimile transmittal, mail or hand
delivery

-     stating the name and address of the holder, the certificate
number or numbers of such holder's private notes and the
principal amount of such private notes tendered;

-     stating that the tender is being made thereby; and

-     guaranteeing that, within three New York Stock Exchange
trading days after the expiration date, the letter of
transmittal, or a facsimile thereof, together with the
certificate(s) representing the private notes to be tendered
in proper form for transfer, or confirmation of a book-entry
transfer into the exchange agent's account at the Depository
Trust Company of private notes delivered electronically, and
any other documents required by the letter of transmittal,
will be deposited by the Eligible Institution with the
exchange agent; and

(3)   such properly completed and executed letter of transmittal, or a
facsimile thereof, together with the certificate(s) representing all
tendered private notes in proper form for transfer, or confirmation
of a book-entry transfer into the exchange agent's account at the
Depository Trust Company of private notes delivered electronically
and all other documents required by the letter of transmittal are
received by the exchange agent within three New York Stock Exchange
trading days after the expiration date.

Upon request, the exchange agent will send to you a notice of guaranteed
delivery if you wish to tender your private notes according to the guaranteed
delivery procedures described above.

WITHDRAWAL OF TENDERS

Except as otherwise provided in this prospectus, you may withdraw tenders
of private notes at any time prior to the expiration date.

For a withdrawal to be effective, the exchange agent must receive a
written or facsimile transmission notice of withdrawal at its address set forth
this prospectus prior to the expiration date. Any such notice of withdrawal
must:

-     specify the name of the person who deposited the private notes to be
withdrawn;

-     identify the private notes to be withdrawn, including the
certificate number or number and principal amount of such private
notes or, in the case of private notes transferred by book-entry
transfer, the name and number of the account at the Depository Trust
Company to be credited; and

29

-     be signed in the same manner as the original signature on the letter
of transmittal by which such private notes were tendered, including
any required signature guarantee.

We will determine in our sole discretion all questions as to the validity,
form and eligibility, including time of receipt, of such withdrawal notices, and
our determination shall be final and binding on all parties. We will not deem
any properly withdrawn private notes to have been validly tendered for purposes
of the exchange offer, and we will not issue new notes with respect those
private notes unless you validly retender the withdrawn private notes. You may
retender properly withdrawn private notes following one of the procedures
described above under "--Procedures for Tendering" at any time prior to the
expiration date.

CONDITIONS

Notwithstanding any other term of the exchange offer, we will not be
required to accept for exchange, or exchange the new notes for, any private
notes, and may terminate the exchange offer as provided in this prospectus
before the acceptance of the private notes, if:

the exchange offer violates applicable law, rules or regulations or an
applicable interpretation of the staff of the SEC;

an action or proceeding has been instituted or threatened in any court or by any
governmental agency which might materially impair our ability to proceed with
the exchange offer;

there has been proposed, adopted or enacted any law, rule or regulation that, in
our reasonable judgment would impair materially our ability to consummate the
exchange offer; or

all governmental approvals which we deem necessary for the completion of the
exchange offer have not been obtained.

If we determine in our reasonable discretion that any of these conditions
are not satisfied, we may:

-     refuse to accept any private notes and return all tendered private
notes to you;

-     extend the exchange offer and retain all private notes tendered
before the exchange offer expires, subject, however, to your rights
to withdraw the private notes; or

-     waive the unsatisfied conditions with respect to the exchange offer
and accept all properly tendered private notes that have not been
withdrawn.

If the waiver constitutes a material change to the exchange offer, we will
promptly disclose the waiver by means of a prospectus supplement that we will
distribute to the registered holders of the private notes.

EXCHANGE AGENT

We have appointed Wilmington Trust Company, the trustee under the
indenture, as exchange agent for the exchange offer. You should send all
executed letters of transmittal to the exchange agent at one of the addresses
set forth below. In such capacity, the exchange agent has no fiduciary duties
and will be acting solely on the basis of directions of our company. You should
direct questions, requests for assistance and requests for additional copies of
this prospectus or of the letter of transmittal and requests for a notice of
guaranteed delivery to the exchange agent addressed as follows:

30

BY CERTIFIED OR REGISTERED MAIL:
Wilmington Trust Company
DC-1626 Processing Unit
P.O. Box 8861
Wilmington, DE 19899-8861

BY OVERNIGHT COURIER OR HAND DELIVERY:
Wilmington Trust Company
Corporate Capital Markets
1100 North Market Street
Wilmington, DE 19890-1626

BY FACSIMILE:
(302) 636-4145

CONFIRM BY TELEPHONE:
(302) 636-6470

Delivery to an address or facsimile number other than those listed above
will not constitute a valid delivery.

The trustee does not assume any responsibility for and makes no
representation as to the validity or adequacy of this prospectus or the notes.

SOLICITATION OF TENDERS; FEES AND EXPENSES

We will pay all expenses of soliciting tenders pursuant to the exchange
offer. We are making the principal solicitation by mail. Our officers and
regular employees may make additional solicitations in person or by telephone or
telecopier.

We have not retained any dealer-manager in connection with the exchange
offer and will not make any payments to brokers, dealers or other persons
soliciting acceptances of the exchange offer. We will, however, pay the exchange
agent reasonable and customary fees for its services and will reimburse the
exchange agent for its reasonable out-of-pocket costs and expenses in connection
therewith.

We also may pay brokerage houses and other custodians, nominees and
fiduciaries the reasonable out-of-pocket expenses incurred by them in forwarding
copies of this prospectus, letters of transmittal and related documents to the
beneficial owners of the private notes and in handling or forwarding tenders for
exchange.

We will pay the expenses to be incurred in connection with the exchange
offer, including fees and expenses of the exchange agent and trustee and
accounting and legal fees and printing costs.

We will pay all transfer taxes, if any, applicable to the exchange of
private notes for new notes pursuant to the exchange offer. If, however,
certificates representing new notes or private notes for principal amounts not
tendered or accepted for exchange are to be delivered to, or are to be
registered or issued in the name of, any person other than the registered holder
of the private notes tendered, or if tendered private notes are registered in
the name of any person other than the person signing the letter of transmittal,
or if a transfer tax is imposed for any reason other than the exchange of
private notes pursuant to the exchange offer, then the amount of any such
transfer taxes, whether imposed on the registered holder or any other persons,
will be payable by the tendering holder. If satisfactory evidence of payment of
such taxes or exemption therefrom is not submitted with the letter of
transmittal, the amount of such transfer taxes will be billed by us directly to
such tendering holder.

CONSEQUENCES OF FAILURE TO EXCHANGE

Participation in the exchange offer is voluntary. We urge you to consult
your financial and tax advisors in making your decisions on what action to take.
Private notes that are not exchanged for new notes pursuant to the exchange
offer will remain restricted securities. Accordingly, those private notes may be
resold only:

31

-     to a person whom the seller reasonably believes is a qualified
institutional buyer in a transaction meeting the requirements of
Rule 144A under the Securities Act of 1933;

-     in a transaction meeting the requirements of Rule 144 under the
Securities Act of 1933;

-     outside the United States to a foreign person in a transaction
meeting the requirements of Rule 903 or 904 of Regulation S under
the Securities Act of 1933;

-     in accordance with another exemption from the registration
requirements of the Securities Act of 1933 and based upon an opinion
of counsel if we so request;

-     to us; or

-     pursuant to an effective registration statement.

In each case, the private notes may be resold only in accordance with any
applicable securities laws of any state of the United States or any other
applicable jurisdiction.

32

UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA OF
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES

The unaudited pro forma consolidated statements of earnings for the
year ended December 31, 2003 and for the six months ended June 30, 2004 of
American Real Estate Partners, L.P. and Subsidiaries reflect an adjustment
column for the issuance of 8 1/8% Senior Notes due 2012 in the principal amount
of $353 million, less discount of $2.6 million and financing costs of $8.0
million, on May 12, 2004, and has been prepared from the historical consolidated
financial statements of American Real Estate Partners, as adjusted to give
effect to the pro forma adjustments as if such pro forma adjustments had
occurred at the beginning of each of the periods presented. The unaudited pro
forma financial data does not purport to be indicative of what the results of
American Real Estate Partners, L.P. would have been had the transaction been
completed on the dates assumed, nor is such financial data indicative of
future results of operations of American Real Estate Partners, L.P. The
unaudited pro forma financial data must be read in conjunction with the
notes thereto and our historical consolidated financial statements and the
related notes.

33

AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES

UNAUDITED PROFORMA CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
YEAR ENDED DECEMBER 31, 2003
(IN $000'S, EXCEPT UNIT AND PER UNIT AMOUNTS)

PRO FORMA
ADJUSTMENTS
-----------  
HISTORICAL          (1)          PRO FORMA
2003           OFFERING          2003
----           --------          ----

Revenues:
Hotel and casino operating income ..................   $    262,811       $      --    $    262,811
Other ..............................................        110,648              --         110,648
------------       ---------    ------------
373,459              --         373,459
------------       ---------    ------------
Expenses:

Hotel and casino operating expenses ................        216,857              --         216,857
Interest expense ...................................         22,064          29,992          52,056
Depreciation and amortization ......................         25,424              --          25,424
General and administrative expenses ................         14,081              --          14,081
Other ..............................................         26,392              --          26,392
------------       ---------    ------------
304,818          29,992         334,810
------------       ---------    ------------
Operating income .....................................         68,641         (29,992)         38,649
Other gains and (losses):
Write-down of mortgages and notes receivable .......        (18,798)             --         (18,798)
Gain on sales and disposition of real estate .......          7,121              --           7,121
Other gains and losses (net) .......................            143              --             143
------------       ---------    ------------
Income from continuing operations before income taxes          57,107         (29,992)         27,115
Income tax benefit .................................          1,573              --           1,573
------------       ---------    ------------
Income from continuing operations ..................         58,680         (29,992)         28,688
Income from discontinued operations ..................         11,344              --          11,344
------------       ---------    ------------
Net earnings .........................................   $     70,024       $ (29,992)   $     40,032
============       =========    ============
Net earnings attributable to:
Limited partners ...................................   $     59,360       $ (29,395)   $     29,965
General partner ....................................         10,664            (597)         10,067
------------       ---------    ------------
$     70,024       $ (29,992)   $     40,032
============       =========    ============
Net earnings per limited partnership unit:
Basic earnings:
Income from continuing operations .................   $       0.99       $   (0.64)   $       0.35
Income from discontinued operations ...............           0.24              --            0.24
------------       ---------    ------------
Basic earnings per LP unit .........................   $       1.23       $   (0.64)   $       0.59
============       =========    ============
Weighted average limited partnership units outstanding     46,098,284              --      46,098,284
============       =========    ============
Diluted earnings:
Income from continuing operations .................   $       0.93       $   (0.54)   $       0.39 
Income from discontinued operations ...............           0.20              --            0.20
------------       ---------    ------------
Diluted earnings per LP unit .......................   $       1.13       $   (0.54)   $       0.59
============       =========    ============
Weighted average limited partnership units and
equivalent partnership units outstanding ...........     54,489,943              --      54,489,943
============       =========    ============

See accompanying notes to unaudited proforma consolidated financial data.

34

AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES

UNAUDITED PROFORMA CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
SIX MONTHS ENDED JUNE 30, 2004 (UNAUDITED)
(IN $000'S, EXCEPT UNIT AND PER UNIT AMOUNTS)

PRO FORMA
ADJUSTMENTS
-----------
(1)
HISTORICAL       OFFERING         PRO FORMA
----------       --------         ---------

Revenues:
Hotel and casino operating income......................   $    148,369         $    --    $    148,369
Other..................................................         73,654              --          73,654
------------    ------------    ------------
222,023              --         222,023
------------    ------------    ------------
Expenses:

Hotel and casino operating expenses....................        110,131              --         110,131
Interest expense.......................................         17,971          10,846          28,817
Depreciation and amortization..........................         15,592              --          15,592
General and administrative expenses....................          9,030              --           9,030
Other..................................................         18,567              --          18,567
------------    ------------    ------------
171,291          10,846         182,137
------------    ------------    ------------
Operating income.........................................         50,732         (10,846)         39,886
Other gains and (losses):
Gain on sale of marketable equity and debt securities..         37,167              --          37,167
Gain on sales and disposition of real estate...........          5,821              --           5,821
------------    ------------    ------------
Income from continuing operations before income taxes....         93,720         (10,846)         82,874
Income tax expense.....................................         (9,257)             --          (9,257)
------------    ------------    ------------
Income from continuing operations......................         84,463         (10,846)         73,617
Income from discontinued operations......................         60,343              --          60,343 
------------    ------------    ------------
Net earnings.............................................   $    144,806    $    (10,846)   $    133,960
============    ============    ============

Net earnings attributable to:
Limited partners.......................................   $    136,662    $    (10,630)   $    126,032
General partners.......................................          8,144            (216)          7,928
------------    ------------    ------------
$    144,806    $    (10,846)   $    133,960 
============    ============    ============
Net earnings per limited partnership unit:
Basic earnings:
Income from continuing operations.....................   $       1.68    $      (0.23)   $       1.45
Income from discontinued operations...................           1.28              --            1.28
------------    ------------    ------------
Basic earnings per LP unit.............................   $       2.96    $      (0.23)   $       2.73
============    ============    ============
Weighted average limited partnership units outstanding...     46,098,284              --      46,098,284
============    ============    ============
Diluted earnings:

Income from continuing operations.....................   $       1.53    $      (0.20)   $       1.33
Income from discontinued operations...................           1.13              --            1.13
------------    ------------    ------------
Diluted earnings per LP unit...........................   $       2.66    $      (0.20)   $       2.46
============    ============    ============
Weighted average limited partnership units and
equivalent partnership units outstanding...............     52,218,668              --      52,218,668
============    ============    ============

See accompanying notes to unaudited proforma consolidated financial data.

35

NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA

(1)   For the full year period:

Interest expense on $353,000,000 note payable at 8.125% per annum      $     28,681,000
Amortization of debt placement costs                                            990,000
Amortization of discount                                                        321,000
----------------
Interest expense                                       $     29,992,000
================

(2)   Interest and amortization for the period January 1 through May 12,2004.

36

SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

The following table summarizes certain selected historical consolidated
financial data of American Real Estate Partners, L.P., which you should read in
conjunction with the financial statements and the related notes contained in
this prospectus and "Management's Discussion and Analysis of Financial Condition
and Results of Operations." On May 26, 2004, we completed the acquisition of two
Las Vegas casino/hotels, Arizona Charlie's Decatur and Arizona Charlie's Boulder
from Mr. Icahn and an entity affiliated with Mr. Icahn. This transaction
represents a combination of entities under the common control of Mr. Icahn.
Accordingly the historical cost basis of the underlying net assets were retained
in the combination for all periods prior to May 26, 2004.  The selected
historical consolidated financial data as of December 31, 2003 and 2002, and for
the years ended December 31, 2003, 2002 and 2001, have each been derived from
our audited consolidated financial statements at those dates and for those
periods, contained elsewhere in this prospectus. The selected historical
consolidated financial data as of December 31, 2001, 2000 and 1999, and for the
years ended December 31, 2000 and 1999, have each been derived from our audited
consolidated financial statements at those dates and for those periods, not
contained in this prospectus. In addition, certain amounts have been
reclassified as discontinued operations in accordance with Statement of
Financial Accounting Standards No. 144. The selected historical consolidated
financial data as of June 30, 2004 and for the six months ended June 30, 2004
and 2003 are unaudited. For the six month periods ended June 30, 2004 and 2003,
all adjustments, consisting only of normal recurring adjustments, which are, in
our opinion, necessary for a fair presentation of the interim combined financial
statements, have been included. Results for the six months ended June 30, 2004
are not necessarily indicative of the results for the full year.

SIX MONTHS
ENDED JUNE 30,                        YEAR ENDED DECEMBER 31,
--------------------- ---------------------------------------------------------------
2004       2003        2003         2002         2001         2000         1999
----       ----        ----         ----         ----         ----         ----
(restated)    (restated)   (restated)   (restated)   (restated)
(IN THOUSANDS)

OPERATING DATA:
Total revenues .............................   $  222,023  $184,245  $   373,459  $   438,500  $   419,325  $   381,578  $  328,949
==========  ========  ===========  ===========  ===========  ===========  ==========
Operating income ...........................   $   50,732  $ 31,672  $    68,641  $    79,053  $    64,452  $    65,294  $   67,974
Other gains and (losses):
Gain on sale of marketable equity and debt
securities ..............................       37,167        --        2,607           --        6,749           --      28,590
(Loss) gain on sale of other assets                    --        --       (1,503)        (353)          27           --          59
Write-down of equity securities available
for sale .................................           --      (961)        (961)      (8,476)          --           --          --
Write-down of mortgages and notes
receivable ...............................           --   (18,798)     (18,798)          --           --           --          --
Gain on sales and disposition of real
estate ..................................        5,821       866        7,121        8,990        1,737        6,763      13,971
(Loss) gain on limited partnership
interests ...............................           --        --           --       (3,750)          --        3,461          --
Minority interest in net earnings of       
Stratosphere Corporation ................           --        --           --       (1,943)        (450)      (2,747)     (1,002)
----------  --------  -----------  -----------  -----------  -----------  ----------
Income from continuing operations before
income taxes .............................       93,720    12,779       57,107       73,521       72,515       72,771     109,592
Income tax benefit (expense) ...............       (9,257)   (7,059)       1,573      (10,096)      25,664          379       1,239
----------  --------  -----------  -----------  -----------  -----------  ----------
Income from continuing operations ..........       84,463     5,720       58,680       63,425       98,179       73,150     110,831
Discontinued operations:
Income from discontinued operations ......        5,157     3,961        7,991        7,271        7,430        7,322       4,913
Gain on sales and disposition of real
estate ..................................       55,186     1,924        3,353           --           --           --          --
----------  --------  -----------  -----------  -----------  -----------  ----------
Income from discontinued operations ........       60,343     5,885       11,344        7,271        7,430        7,322       4,913
----------  --------  -----------  -----------  -----------  -----------  ----------
Net earnings ...............................   $  144,806  $ 11,605  $    70,024  $    70,696  $   105,609  $    80,472  $  115,747
==========  ========  ===========  ===========  ===========  ===========  ==========

Net earnings per limited partnership unit:
Basic earnings:
Income from continuing operations..........         1.68     (0.06)        0.99         1.12         1.18         1.32        1.85
Income from discontinued operations........         1.28      0.13         0.24         0.15         0.16         0.16        0.10
----------  --------  -----------  -----------  -----------  -----------  ----------
Basic earnings per LP unit..................         2.96      0.07         1.23         1.27         1.34         1.48        1.95
==========  ========  ===========  ===========  ===========  ===========  ==========
Diluted earnings
Income from continuing operations..........         1.53     (0.06)        0.93         0.99         1.06         1.16        1.58
Income from discontinued operations........         1.13      0.13         0.20         0.13         0.13         0.13        0.09
----------  --------  -----------  -----------  -----------  -----------  ----------
Diluted earnings per LP unit................         2.66      0.07         1.13         1.12         1.19         1.29        1.67
==========  ========  ===========  ===========  ===========  ===========  ==========

Cash and cash equivalents                      $1,080,261            $   500,593  $    79,540  $    83,975  $   172,621  $  154,305
U.S. government and agency obligations            113,144                 61,573      336,051      313,641      475,267     468,529 
Marketable equity and debt securities              29,975                 80,522       26,728       35,253       54,736      67,397
Total assets                                    2,201,024              1,652,020    1,709,636    1,721,100    1,566,597   1,439,260
Mortgages payable                                  94,165                180,989      171,848      166,808      182,049     179,387
Senior secured notes payable                      215,000                     --           --           --           --          --
Senior unsecured notes payable                    350,431                     --           --           --           --          --
Credit facilities due affiliates                       --                 25,000       31,064       18,844       17,904      17,904
Senior notes due affiliates                            --                     --      148,637      148,637      165,000     165,000
Interest payable - senior notes                        --                     --       44,360       42,894       45,822          --
Liability for preferred limited partnership
units(1)                                          104,099                101,649           --           --           --          --
Partners' equity                                1,299,716              1,270,494    1,245,717    1,136,452    1,154,400   1,079,269

----------

(1)   On July 1, 2003, we 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, our preferred units, which are an
unconditional obligation, have been reclassified from "Partners' equity"
to a liability account in the consolidated balance sheets and the
preferred pay-in-kind distribution for the period from July 1, 2003 to
December 31, 2003 of $2.4 million and all future distributions have been
and will be recorded as "Interest expense" in the consolidated statements
of operations. 

37

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

OVERVIEW

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.

Substantially all of our businesses and assets are held through AREH, in
which we own a 99% limited partnership interest. For that reason, no separate
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for AREH is provided.

To capitalize on favorable real estate market conditions and the mature
nature of our commercial real estate portfolio, we are offering for sale our
rental real estate portfolio. As of June 30, 2004, we had sold 34 of these
properties for an aggregate sales price of approximately $211.4 million, after
expenses and closing costs. No assurance can be given that either the attempt to
market our real estate portfolio will be successful or that, if successful, the
proceeds thereof can be used to acquire businesses and investments at prices or
at projected returns which are deemed favorable.

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

Expenses relating to environmental clean-up have not had a material effect
on our earnings, capital expenditures, or competitive position. We believe that
substantially all such costs would be the responsibility of the tenants pursuant
to lease terms. While most tenants have assumed responsibility for the
environmental conditions existing on their leased property, there can be no
assurance that we will not be deemed to be a responsible party or that the
tenant will bear the costs of remediation. Also, as we acquire more operating
properties, our exposure to environmental clean-up costs may increase. We have
completed Phase I environmental site assessments on most of our properties
through third-party consultants. Based on the results of these Phase I
environmental site assessments, the environmental consultant has recommended
that certain sites may have environmental conditions that should be further
reviewed. We have notified each of the responsible tenants to attempt to ensure
that they cause any required investigation and/or remediation to be performed
and most tenants continue to take appropriate action. However, if the tenants
fail to perform responsibilities under their leases referred to above, we could
potentially be liable for these costs. Based on the limited number of Phase II
environmental site assessments that have been conducted by the consultants,
there can be no accurate estimation of the need for or extent of any required
remediation, or the costs thereof. In addition, we have notified all tenants of
the Resource Conservation and Recovery Act's, or RCRA, December 22, 1998
requirements for regulated underground storage tanks. We may, at our own cost,
have to cause compliance with RCRA's requirements in connection with vacated
properties, bankrupt tenants and new acquisitions. Phase I environmental site
assessments will also be performed in connection with new acquisitions and with
such property refinancings as we may deem necessary and appropriate. We are in
the process of updating our Phase I site assessments for certain of our
environmentally sensitive properties including properties with open RCRA
requirements. Approximately 75 updates were completed in 2003. No additional
material environmental conditions were discovered.

38

We have in recent years made investments in the gaming industry through
our ownership of Stratosphere Casino Hotel & Tower in Las Vegas, Nevada and
through our purchase of securities of the entity which owns the Sands Hotel in
Atlantic City, New Jersey. One of our subsidiaries, formed for this purpose,
entered into an agreement in January 2004 to acquire two Las Vegas
casino/hotels, Arizona Charlie's Decatur and Arizona Charlie's Boulder from Mr.
Icahn and an entity affiliated with Mr. Icahn, for an aggregate consideration of
$125.9 million. Upon obtaining all approvals necessary under the gaming laws,
the acquisition was completed in May 2004. Our subsidiary issued and sold debt
securities aggregating $215.0 million in principal amount to finance the
acquisition and the proceeds of this sale remained in escrow pending completion
of the acquisition. The amount raised in excess of the acquisition cost and
expenses was used to repay intercompany debt and make a distribution to us. We
are considering additional gaming industry investments. These investments may
include acquisitions from, or be made in conjunction with, our affiliates,
provided that the terms thereof are fair and reasonable to us.

We recently made an investment in the oil and gas industry. In October
2003, we acquired and presently hold 50.01% of the outstanding equity and all of
the outstanding debt securities of National Energy Group, Inc. which we acquired
from an affiliate of Mr. Icahn.

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 acquisitions are
restated on a combined basis.

RESULTS OF OPERATIONS

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 in hotel and casino operating revenues,
$11.0 million in land, house and condominium sales, $7.6 million in interest
income on U.S. government and agency obligations and other investments, $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 applications and other investments 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 $18.7 million, or 12.3%, 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 in hotel and casino
operating expenses and $.4 million in property expenses, partially offset by a
decrease of $0.4 million in hotel and resort operating expenses and a decrease
of $0.2 million in provision for loss on real estate. 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
issued in 2004 and preferred limited partnership units reclassified in the
financial statements as of July 2003. 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
$19.1 million as compared to the same period in 2003, as detailed above.

39

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 the 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 due to the number and size of the transactions.

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 $1.0 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.

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
during the six months ended June 30, 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).

CALENDAR YEAR 2003 COMPARED TO CALENDAR YEAR 2002

Gross revenues decreased by $65.0 million, or 14.8%, during the year ended
December 31, 2003 as compared to the year ended December 31, 2002. This decrease
reflects decreases of (1) $62.8 million in land, house and condominium sales,
(2) $8.0 million in interest income on U.S. government and agency obligations
and other investments, (3) $3.8 million in equity in earnings of GB Holdings,
Inc., (4) $2.7 million in accretion of investment in NEG Holding LLC, (5) $1.6
million in financing lease income and (6) $0.3 million in hotel and resort
operating income, partially offset by increases of $12.8 million in hotel and
casino operating income, $0.7 million in rental income, $0.3 million in dividend
and other income and $0.3 million in NEG management fee. The decrease in land,
house and condominium sales is primarily due to a decrease in the number of
units sold, as the Grassy Hollow, Gracewood and Stone Ridge properties were
depleted by sales. During 2003, Hammond Ridge received necessary approvals and,
along with Penwood, commenced lot sales. As a result, we expect land, house
and condominium sales to moderately increase in 2004 and additional increased
sales in 2005. The decrease in interest income on U.S. government and agency
obligations and other investments is primarily attributable to the prepayment of
a loan to Mr. Icahn in 2003 and a decline in interest rates on U.S. government
and agency obligations as higher rate bonds were called in 2002. The decrease in
equity in earnings of GB Holdings, Inc. is due to decreased casino revenue
primarily attributable to a reduction in the number of table games as new slot
machines 

40

were added in 2002. This business strategy had a negative effect on casino
operations and was changed in 2003 to focus on the mid to high-end slot customer
with a balanced table game business. The decrease in accretion of investment in
NEG Holding is primarily attributable to priority distributions received from
NEG Holding in 2003. The decrease in financing lease income is the result of
lease expirations, reclassifications of financing leases and normal financing
lease amortization. The increase in hotel and casino operating income is
primarily attributable to an increase in hotel, food and beverage revenues and a
decrease in promotional allowances. The average daily room rate, or ADR, at the
Stratosphere increased $3 to $51 and percentage occupancy increased
approximately 0.2% to 89.8%. The ADR at Arizona Charlie's Decatur decreased $1
to $43 and percentage occupancy increased 10.9% to 85.3%. The ADR at Arizona
Charlie's Boulder increased less than $1 to $43 and percentage occupancy
increased 0.5% to 55.7%.  The increase in rental income is primarily
attributable to a property acquisition and reclassifications of financing leases
to operating leases.

Expenses decreased by $54.6 million, or 15.2%, during the year ended
December 31, 2003 as compared to the same period in 2002. This decrease reflects
decreases of $45.5 million in the cost of land, house and condominium sales,
$6.3 million in interest expense, $1.4 million in hotel and resort operating
expenses, $0.1 million in general and administrative expenses, $1.1 million in
hotel and casino operating expenses and $2.4 million in provision for loss on
real estate, partially offset by $1.0 million in rental property expenses and 
$1.2 million in depreciation and amortization. The decrease in the cost of 
land, house and condominium sales is due to decreased sales. Costs as a 
percentage of sales decreased from 72% in 2002 to 69% in 2003. The decrease in 
interest expense is primarily due to repayment of debt by NEG and our purchase 
of the NEG notes in October 2003. The decrease in hotel and resort operating 
expenses is due to a decrease in payroll and related expenses. The decrease in 
hotel and casino operating expenses is primarily attributable to a decrease in 
selling, general and administrator expenses. Costs as a percentage of sales 
decreased from 87% in 2002 to 83% in 2003. A provision for loss on real estate 
of $0.8 million was recorded in the year ended December 31, 2003 as compared to
$3.2 million in 2002. In 2002, there were more properties vacated due to tenant
bankruptcies than in 2003.

Operating income decreased during the year ended December 31, 2003 by
$10.4 million compared to 2002 as detailed above.

Earnings from land, house and condominium operations decreased
significantly in the year ended December 31, 2003 compared to 2002 due to a
decline in inventory of completed units available for sale. Based on current
information, sales will increase moderately during 2004. However, municipal
approval of land inventory or the purchase of approved land is required to
continue this upward trend into 2005 and beyond.

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

Gain on property transactions from continuing operations decreased by $1.9
million during the year ended December 31, 2003 as compared to 2002 due to the
size and number of transactions.
A write-down of marketable equity securities available for sale of $1.0
million was recorded in the year ended December 31, 2003 as compared to a
write-down of $8.5 million in 2002. These write-downs relate to our investment
in Philip Services Corp. which filed for bankruptcy protection in June 2003.

A write-down of mortgages and notes receivable of $18.8 million,
pertaining to our investment in the Philip notes, was recorded in the year ended
December 31, 2003. There was no such write-down in 2002. In 2003, we reviewed
Philip's financial statements and other data and determined this investment to
be impaired.

A write-down of a limited partnership investment of $3.8 million was
recorded in the year ended December 31, 2002. There was no such write-down in
2003.

A gain on sale of marketable equity securities of $2.6 million was
recorded in the year ended December 31, 2003. There was no such gain in 2002.

Minority interest in the net earnings of Stratosphere Corporation was $1.9
million during the year ended 

41

December 31, 2002. As a result of the acquisition of the minority interest in
December 2002, there was no minority interest in Stratosphere in 2003 and none
thereafter.

Income from continuing operations before income taxes decreased by $16.4
million in the year ended December 31, 2003 as compared to 2002 as detailed
above.

An income tax benefit of $1.6 million was recorded in the year ended
December 31, 2003 as compared to an expense of $10.1 million in 2002. The
effective tax rate on earnings of taxable subsidiaries was positively affected
in 2003 by a reduction in the valuation allowance in deferred tax assets. We
expect our effective tax rate on earnings of taxable subsidiaries to increase
significantly in 2004.

Income from continuing operations decreased by $4.7 million in the year
ended December 31, 2003 as compared to 2002 primarily as detailed above.

Income from discontinued operations increased by $4.1 million in the year
ended December 31, 2003 as compared to 2002 primarily due to gains on property
dispositions.

Net earnings for the year ended December 31, 2003 decreased by $0.7
million as compared to the year ended December 31, 2002 primarily due to a
write-down of mortgages and notes receivable of $18.8 million, decreased
earnings from land, house and condominium operations of $17.2 million, decreased
interest income of $8.0 million and decreased equity in earnings of GB Holdings
of $3.8 million, partially offset by decreased income tax expense of $11.7
million, a decrease in write-down of equity securities available for sale of
$7.5 million, decreased interest expense of $6.3 million, decreased write-down
of limited partnership interests of $3.8 million, increased earnings from hotel
and casino operations of $13.9 million, increased gain on the sale of marketable
equity securities of $2.6 million and an increase in income from discontinued
operations of $4.1 million.

CALENDAR YEAR 2002 COMPARED TO CALENDAR YEAR 2001

Gross revenues increased by $19.2 million, or 4.6%, during the year ended
December 31, 2002 as compared to 2001. This increase reflects increases of $23.0
million in accretion of investment in NEG Holding, $20.5 million in land, house
and condominium sales, $7.6 million in hotel and casino operating income, $4.9
million in NEG management fee, $2.6 million in hotel and resort operating income
and $0.1 million in rental income, partially offset by decreases of $33.2
million in oil and gas operating income, $2.2 million in financing lease income,
$2.2 million in dividend and other income, $1.5 million in equity in earnings of
GB Holdings and $0.5 million in interest income on U.S. government and agency
obligations and other investments. The increase in accretion of investment in
NEG Holding and the management fee are due to the partial year of 2001 which
began May 1 as a result of the bankruptcy reorganization. Prior to that time,
NEG directly owned and operated oil and natural gas properties. The increase in
land, house and condominium sales is primarily attributable to higher selling
prices and an increase in the number of units sold, due to a strong residential
housing market and low mortgage rates. The increase in hotel and casino
operating income is primarily attributable to an increase in gaming and hotel
revenues as a result of increased capacity brought about by the hotel expansion.
ADR remained at $48 during the years ended December 31, 2002 and 2001; however,
percentage occupancy decreased 4% to 89.6%. The increase in hotel and resort
operating income is primarily attributable to increased revenues at New Seabury
as 2001 revenues were negatively impacted by construction activities. The
decrease in financing lease income is the result of lease expirations,
reclassification of financing leases and normal financing lease amortization.
The decrease in dividend and other income is primarily due to lease termination
and deferred maintenance payments received from tenants in 2001. The decrease in
equity earnings of GB Holdings is due to decreased casino revenue, primarily
attributable to a reduction in the number of table games as new slot machines
were added in 2002, which was partially offset by decreased promotional
allowances and decreased casino expenses. In addition, GB Holdings recorded an
impairment loss on certain property expansion costs determined to be unusable.

Expenses increased by $4.6 million, or 1.3%, during the year ended
December 31, 2002 as compared to 2001. This increase reflects increases of $12.0
million in the cost of land, house and condominium sales, $4.1 million in hotel
and casino operating expenses, $1.6 million in rental property expenses, $1.8
million in hotel and resort operating expenses and $1.2 million in general and
administrative expenses partially offset by decreases of $8.2 million in
interest expense, $5.6 million in oil and gas operating expenses and $2.3
million in depreciation

42

and amortization. The increase in the cost of land, house and condominium
sales is due to increased sales as explained above. Costs as a percentage of
sales declined from 77% in 2001 to 72% in 2002 primarily due to higher margin
sales in 2002. The increase in hotel and casino operating expenses is primarily
attributable to increased costs associated with increased revenues. Costs as a
percentage of sales declined from 88% in 2001 to 87% in 2002 as hotel and casino
revenues increased at a greater rate than hotel and casino expenses due to the
hotel expansion. The increase in property expenses is primarily due to an
increase in expenses related to off-lease properties and expenses of the New
Seabury development litigation of approximately $1 million. The increase in
hotel and resort operating expenses is primarily attributable to increased costs
associated with increased revenues at New Seabury. Costs as a percentage of
sales decreased from 88% in 2001 to 84% in 2002. The decrease in interest
expense is primarily due to the repayment of debt to affiliates in May 2002 in
connection with the Sands repurchase obligation, as well as decreased interest
rates prior to repayment of this debt. The decrease in oil and gas operating
expenses is due to the partial year of 2001. The decrease in depreciation and
amortization expense is primarily attributable to NEG contributing its operating
properties to NEG Holding in May 2001. During the years ended December 31, 2002
and 2001, we recorded a provision for loss on real estate of $3.2 million. A
substantial portion of the 2002 and 2001 provision resulted from vacated
properties where leases were not renewed or were rejected by tenants in
bankruptcy.

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

As a result of the completion of Stratosphere's additional 1,000 rooms and
related amenities in June 2001, hotel and casino operating revenues and expenses
have increased. Increased room capacity provided more hotel guests thereby
increasing revenues. Earnings from hotel, casino and resort properties are
expected to be constrained by recessionary pressures, international tensions and
competition.

Operating income increased during the year ended December 31, 2002 by
$14.6 million as compared to 2001.

Gain on sale of real estate increased by $7.3 million, during the year
ended December 31, 2002 as compared to the same period in 2001 due to the size
and number of transactions,.
A write-down of equity securities available for sale of $8.5 million was
recorded in the year ended December 31, 2002. The market value of Philip's
common stock has declined steadily since it was acquired by us. In 2002, based
on a review of Philip's financial statements, we deemed the decrease in value to
be other than temporary. As a result, we wrote down our investment in Philips'
common stock by a charge to earnings. There was no such write-down in 2001.

Gain on sale of marketable equity and debt securities was $6.8 million, in
the year ended December 31, 2001. There was no such income in 2002.

A write-down of a limited partnership investment of $3.8 million was
recorded in the year ended December 31, 2002. We invested $6.0 million in an
unaffiliated limited partnership. Upon review of this investment in 2002, we
determined that the investment was impaired and wrote down its value by a charge
to earnings. There was no such write-down in 2001.

Minority interest in the net earnings of Stratosphere increased by $1.5
million during the year ended December 31, 2002 as compared to 2001, due to an
increase in Stratosphere's net hotel and casino operating income. As a result of
the acquisition of the minority interest in December 2002, there will be no
minority interest in net earnings of Stratosphere in 2003 and thereafter.

Income from continuing operations before income taxes increased by $1.4
million in the year ended December 31, 2002 as compared to 2001 as detailed
above.

The income tax expense was $10.1 million for the year ended December 31,
2002 as compared to an income tax 

43

benefit of $25.7 million for 2001.

Income from continuing operations decreased by $34.8 million in the year
ended December 31, 2002 as compared to 2001, primarily as detailed above.

Income from discontinued operations decreased by $0.2 million for the year
ended December 31, 2002 as compared to 2001.

Net earnings for the year ended December 31, 2002 decreased by $34.9
million as compared to the year ended December 31, 2001 primarily due to
increased income tax expense of $35.8 million, a write-down of equity securities
available for sale of $8.5 million, decreased gain on sale of marketable equity
securities of $6.7 million and the write-down of a limited partnership
investment of $3.8 million partially offset by increased earnings from land
house and condominium operations of $8.4 million, increased earnings from hotel
and casino operations of $3.5 million and increased gain on sale of real estate
of $7.3 million.

LIQUIDITY AND CAPITAL RESOURCES

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 expense in 2003 ($34.4 million) an
increase in hotel and casino operations ($15.4 million), an increase in interest
income ($7.6 million), an increase in land, house and condominium operations
($5.0 million) partially offset 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, as of June
30, 2004, due during the indicated periods (dollars in millions):

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

Mortgages payable ......................   $    4.4    $  10.1    $  34.5    $   45.2    $     94.2
Purchase of debt securities ............       59.9         --         --          --          59.9
Properly acquisition ...................       75.0         --         --          --          75.0
Senior secured notes payable 2012 ......         --         --         --       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 20 of notes to AREP consolidated financial statements
for preferred limited partnership redemption.

On May 26, 2004, American Casino, our indirect wholly-owned subsidiary,
acquired 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 aggregate consideration of $125.9 million. At the closing of those
acquisitions, 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.

On May 12, 2004, we issued senior notes due 2012 in a private placement
transaction. The notes, in the aggregate principal amount of $353 million, and
priced at 99.266%, bear interest at a rate of 8-1/8% per annum. Net proceeds
from the offering will be used for general business purposes, including to
pursue our primary business strategy of acquiring undervalued assets in either
our existing lines of business or other businesses and to provide additional
capital to grow our existing businesses.

During the six months ended June 30, 2004, we had sold 34 rental
properties for an aggregate sales price of $211.4 million, after expenses and 
closing costs. As of June 30, 2004, we have 29 additional 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.

44

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

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. American Casino used the proceeds
of the offering for the Arizona Charlie's acquisitions to repay intercompany
indebtedness and for distributions to AREH.

Aggregate sales proceeds after expenses and closing costs from the sale or
disposal of portfolio properties totaled approximately $211.4 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.

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 the issuance of our 8.125% Senior notes due 2012 and to
American Casino's issuance of 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 payments 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). The indenture governing American Casino's 7.85% senior secured notes
due 2012 restricts dividend payments, loans and other payments to us.

In 2003, 17 leases covering 17 properties and representing approximately
$2.2 million in annual rentals expired. Twelve leases originally representing
$1.6 million in annual rental income were renewed for $1.4 million in annual
rentals. Such renewals are generally for a term of five years. Five properties
with annual rental income of $0.6 million were not renewed.

In 2004, 11 leases covering 11 properties and representing approximately
$1.8 million in annual rentals are scheduled to expire. Eight leases
representing $1.5 million in annual rental income were renewed for $1.5 million
in annual rentals. Such renewals are generally for a term of five years. Three
properties with annual rentals of $0.3 million were not renewed.

On March 31, 2003, we distributed to holders of record of our preferred
units as of March 14, 2003, 466,548 additional preferred units. Pursuant to the
terms of the preferred units, on February 23, 2004, we declared our scheduled
annual preferred unit distribution payable in additional preferred units at the
rate of 5% of the liquidation preference of $10.00. The distribution of 489,657
preferred units was paid on March 31, 2004 to holders of record as of March 12,
2004. In February 2004, the number of authorized preferred units was increased
to 10,400,000.

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

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

Sales proceeds from the sale or disposal of portfolio properties totaled
approximately $20.6 million in 2003. During 2002, such sales proceeds totaled
approximately $20.5 million. In May 2003, we obtained mortgage

45

financing in the principal amount of $20 million on a distribution facility
located in Windsor Locks, Connecticut. In 2002, mortgage financing proceeds were
$12.7 million.

In October 2003, pursuant to a purchase agreement dated as of May 16,
2003, we acquired all of the debt and 50% of the equity securities of 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.

Capital expenditures for real estate and hotel, casino and resort
operations were approximately $33.3 million during 2003. During 2002, such
expenditures totaled approximately $21.9 million. In 2004, capital expenditures
are estimated to be approximately $13 million.

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

Our cash and cash equivalents and investment in U.S. government and agency
obligations increased by $146.6 million during the year ended December 31, 2003,
primarily due to affiliate loan repayment of $250 million, property sales and
refinancing proceeds of $40.6 million, priority distribution from NEG Holding of
$40.5 million, net cash flow from operations of $35.0 million, guaranteed
payment from NEG Holding of $18.2 million and other items of $14.9 million
partially offset by the purchase of NEG interests of $148.1 million, purchase of
debt securities of $45.1 million, increase in mezzanine loans of $31.1 million
and capital expenditures for real estate and hotel, casino and resort operating
properties of $33.3 million.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

We accounted for our acquisitions of NEG and the Arizona Charlies' as 
assets transferred between entities under common control which requires that
they be accounted for at historical costs similar to a pooling of interests.
NEG's investment in NEG Holding constitutes a variable interest entity. In
accordance with generally accepted accounting principles, we have determined
that NEG is not the primary beneficiary of NEG Holding and therefore we do not
consolidate NEG Holding in our consolidated financial statements.

We believe the following accounting policies are critical to our business
operations and the understanding of results of operations and affect the more
significant judgments and estimates used in the preparation of our consolidated
financial statements.

ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS 
TO BE DISPOSED OF

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

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

46

COMMITMENTS AND CONTINGENCIES-LITIGATION

On an ongoing basis, we assess the potential liabilities related to any
lawsuits or claims brought against us. While it is typically very difficult to
determine the timing and ultimate outcome of such actions, we use our best
judgment to determine if it is probable that we will incur an expense related to
the settlement or final adjudication of such matters and whether a reasonable
estimation of such probable loss, if any, can be made. In assessing probable
losses, we make estimates of the amount of insurance recoveries, if any. We
accrue a liability when we believe a loss is probable and the amount of loss can
be reasonably estimated. Due to the inherent uncertainties related to the
eventual outcome of litigation and potential insurance recovery, it is possible
that certain matters may be resolved for amounts materially different from any
provisions or disclosures that we have previously made.

MARKETABLE EQUITY AND DEBT SECURITIES AND INVESTMENT IN U.S. GOVERNMENT AND
AGENCY OBLIGATIONS

Investments in equity and debt securities are classified as either
held-to-maturity or available for sale for accounting purposes. Investment in
U.S. government and agency obligations are classified as available for sale.
Available for sale securities are carried at fair value on our balance sheet.
Unrealized holding gains and losses are excluded from earnings and reported as a
separate component of partners' equity. Held-to-maturity securities are recorded
at amortized cost.

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

MORTGAGES AND NOTES RECEIVABLE

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

We engage in real estate lending, including making second mortgage or
secured mezzanine loans to developers for the purpose of developing
single-family homes, luxury garden apartments or commercial properties. These
loans are subordinate to construction financing and we target an interest rate
in excess of 20% per annum. However interest is not paid periodically and is due
at maturity or earlier from unit sales or refinancing proceeds. We defer
recognition of interest income on mezzanine loans pending receipt of principal
and interest payments.

REVENUE RECOGNITION

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

CASINO REVENUES AND PROMOTIONAL ALLOWANCES

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

INCOME TAXES

No provision has been made for Federal, state or local income taxes on the
results of operations generated by partnership activities as such taxes are the
responsibility of the partners. Stratosphere and NEG, our corporate

47

subsidiaries, account for their income taxes under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry forwards.

Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.

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

PROPERTIES

Properties held for investment, other than those accounted for under the
financing method, are carried at cost less accumulated depreciation unless
declines in the value of the properties are considered other than temporary at
which time the property is written down to net realizable value. A property is
classified as held for sale at the time we determine that the criteria in SFAS
144 have been met. Properties held for sale are carried at the lower of cost or
net realizable value. Such properties are no longer depreciated and their
operations are included in discontinued operations.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The SEC 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 in this prospectus. 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. Other
operating risks for us include lease terminations, whether scheduled
terminations or due to tenant defaults or bankruptcies, development risks, and
environmental and capital expenditure matters, as described elsewhere in this
prospectus. Our mortgages payable are primarily fixed-rate debt and, therefore,
are not subject to market risk.

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
as of December 31, 2003, would decline by approximately $200,000.

Whenever practical, we employ internal strategies 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 seek 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

48

commensurate with the risk we assume. We use qualitative as well as quantitative
information in managing risk.

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BUSINESS

OUR COMPANY

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.

BUSINESS STRATEGY

We believe that our core strengths include: identifying and acquiring
undervalued assets and businesses, often through the purchase of distressed
securities; increasing value through management, financial or other operational
changes; and managing complex legal, regulatory or financial issues which may
include bankruptcy or insolvency, environmental, zoning, permitting and
licensing issues. We also believe that we have developed significant management
strength, industry relationships and expertise in our core real estate, gaming
and entertainment and oil and gas businesses. The key elements of our business
strategy include the following.

CONTINUE TO INVEST IN AND GROW OUR EXISTING OPERATING BUSINESSES. We
believe that we have developed a strong portfolio of businesses with experienced
management teams. We may expand our existing businesses if appropriate
opportunities are identified as well as use our established businesses as a
platform for additional acquisitions in the same or other areas.

SEEK TO ACQUIRE UNDERVALUED ASSETS. We intend to continue to make
investments in real estate and in companies or their securities which are
undervalued. These may be undervalued due to market inefficiencies, may relate
to opportunities in which economic or market trends have not been identified and
reflected in market value, or may include investments in complex or not readily
followed businesses or securities. Market inefficiencies and undervalued
situations may arise from disappointing financial results, liquidity or capital
needs, lowered credit ratings, revised industry forecasts or legal
complications. We may acquire businesses or assets directly or we may establish
an ownership position through the purchase of debt or equity securities of
troubled entities and may then negotiate for the ownership or effective control
of their assets.

ACTIVELY MANAGE OUR INVESTMENTS AND BUSINESSES. We seek investments for
which we can identify specific areas for financial or operational improvement
and where we can act as a catalyst for change. Change may include, but not be
limited to, replacing or supplementing management, restructuring the balance
sheet, increasing liquidity, disposing assets or cutting costs. We believe that
we can leverage off of our core businesses to better assess and increase the
value of our acquisitions. For instance, our homebuilding expertise allows us to
appropriately assess the risks of a real estate development prior to making a
mezzanine loan and also to complete a development if it is necessary or
profitable to do so.

DEPLOY OPERATING AND TRANSACTION STRUCTURING EXPERTISE OF EXISTING
MANAGEMENT TEAM INTO RELATED FIELDS. Our senior management team has extensive
experience in real estate and in identifying undervalued assets in general. We
believe there is significant opportunity to use this experience by acquiring or
starting businesses in asset-intensive sectors, including other real estate
development activities, industrial manufacturing, energy and insurance and asset
management, in which we have had no or limited experience to date, but which may
be undervalued and have potential for growth.

RENTAL REAL ESTATE

Our rental real estate operations consist primarily of retail, office and
industrial properties leased to single corporate tenants. As of June 30, 2004,
we owned 94 separate real estate assets, primarily consisting of fee and
leasehold interests in 27 states. Historically substantially all of our real
estate assets leased to others have been net-leased under long-term leases. With
certain exceptions, these tenants are required to pay all expenses relating to

50

the leased property and, therefore, we are not typically responsible for payment
of expenses, including maintenance, utilities, taxes, insurance or any capital
items associated with such properties.

To capitalize on favorable real estate market conditions and the mature
nature of our commercial real estate portfolio, we are offering for sale our
rental real estate portfolio.

During the six months ended June 30, 2004 we sold 34 properties for an
aggregate sales price of approximately $211.4 million, after expenses and 
closing costs. As of June 30, 2004, we had 29 additional properties under
conditional sales contracts or letters of intent for an aggregate sales price of
approximately $87.3 million. Mortgages with respect to these 29 properties
aggregate approximately $15.3 million, which we would pay from the sales
proceeds or would be assumed by the purchasers. There can be no assurances that
offers satisfactory to us will be received and if received that the properties
will ultimately be sold at prices acceptable to us.

While we believe opportunities in real estate related acquisitions
continue to remain available, there is increasing competition for these
opportunities and the increased competition affects price and the ability to
find quality assets that provide attractive returns. We will continue to invest
in real estate assets if opportunities to do so at favorable prices are found.

REAL ESTATE DEVELOPMENT

Our residential home development operations focus primarily on the
construction and sale of single-family homes, custom-built homes, multi-family
homes and residential lots in subdivisions and in planned communities. Our home
building business is managed by Bayswater Development L.L.C., our wholly owned
subsidiary. Our long-term investment horizon and operational expertise allow us
to acquire properties with limited current income and complex entitlement and
development issues. We acquired Bayswater from Mr. Icahn in March 2000 for
approximately $84.4 million. Approximately $100 million of cash has been
generated from the sale of homes and lots to date from this acquisition.

Between 1993 and 1997, we and Bayswater acquired five residential
subdivisions in New York that aggregated 864 acres and comprised 272 units. By
2003, we developed this land and built and sold 213 units. In addition, in April
1999, Bayswater acquired over 500 acres of land in San Antonio, Florida, which
consisted of a 27-hole golf course, seven acres of commercial land and 1,161
condominium unit lots. By the end of 2002, we had sold all of the residential
land we owned in San Antonio.

Bayswater is currently developing five residential subdivisions in New
York, Florida and Massachusetts. In New York, Bayswater is developing two
high-end residential subdivisions in Westchester County: Penwood, located in
Bedford, and Hammond Ridge, located in Armonk and New Castle. Bayswater is also
seeking approval to develop Pondview Estates which is located in Patterson and
Kent in Putnam County, New York. In Naples, Florida, Bayswater is building,
developing and selling Falling Waters, a condominium development. In addition,
we are pursuing the development of our New Seabury property, a proposed luxury
second-home waterfront community in Cape Cod, Massachusetts.

Penwood. Located in Bedford, New York, Penwood consists of 44 lots
situated on 297 acres. The development is approximately one hour from Manhattan.
Homes are situated on lots that range from 2.1 acres to 14.5 acres and range in
size from 5,400 square feet to 9,600 square feet. The average selling price of a
Penwood home is $2.4 million, with a range of sales prices between $2.0 million
and $3.4 million. As of June 30, 2004, we have sold 31 of the 44 units and 3
units are under contract.

Hammond Ridge. Located in Armonk and New Castle, New York, Hammond Ridge
consists of 37 single-family lots situated on 220 acres. The development is
approximately 40 minutes from Manhattan. We acquired the land through the
purchase and foreclosure of a bank loan. At the time of acquisition, the land
was unentitled. Purchasers of Hammond Ridge units are able to select one of many
home designs with the capability of adding options and upgrades, as well as
controlled customization. The average selling price of a Hammond Ridge home is
$2.1 million, with a range of prices between $1.6 million and $2.8 million. From
January 2004 when sales commenced through June 30, 2004, we have executed
contracts for 12 of the 37 homes.

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Pondview Estates. Located in Patterson and Kent, New York, Pondview
Estates is a townhouse condominium development on a 91-acre wooded hillside
overlooking an on-site pond. We expect to build a 50-townhouse condominium once
final approvals are granted. Sales are expected to begin in 2005. A two-bedroom
townhouse condominium in Pondview Estates is expected to be priced at
approximately $450,000.

Falling Waters. Located in Naples, Florida, Falling Waters is a 793 unit
condominium development on 158 acres located approximately 10 minutes from
downtown Naples, Florida. It is a gated community with 24-hour security. The
average selling price is $200,000. As of June 30, 2004, there were 191 units
remaining to be constructed, of which 41 remain to be sold, and we had pre-sold
150 units.

Grand Harbor and Oak Harbor. On July 22, 2004, we completed an acquisition
of two exclusive, gated waterfront communities, including three golf courses, a
tennis complex, fitness center, beach club and clubhouses totaling approximately
960 acres in Vero Beach, Florida. Grand Harbor and Oak Harbor include properties
in various stages of development, including vacant land for future commercial
and residential development, approximately 360 improved lots and 33 finished 
residential units ready for sale. Approximately 400 acres of raw land with the 
potential to yield 700 additional residential units was included in the 
acquisition.

New Seabury. Located in Cape Cod, Massachusetts, New Seabury is a 381 acre
resort community overlooking Nantucket Sound and Martha's Vineyard. The property
originally was approved for development in the early 1960's, but development was
delayed by the inability to service its debt. We acquired all of the first
mortgages in 1998 and subsequently gained control of the property in bankruptcy,
after community members voted in favor of our involvement. We believe we have
the approval to develop up to 278 residential units and 145,000 square feet of
commercial space in New Seabury.

In January 2002, the Cape Cod Commission, a Massachusetts regional
planning body created in 1989, concluded that our New Seabury development is
within its jurisdiction for review and approval. We believe that the proposed
residential, commercial and recreational development is in substantial
compliance with a special permit issued for the property in 1964 and is
therefore exempt from the commission's jurisdiction and that 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.

In February 2002, New Seabury Properties L.L.C., our subsidiary and owner
of the property, filed in Barnstable County Massachusetts Superior Court, a
civil complaint appealing the decision by the commission, and a separate civil
complaint to find the commission in contempt of the settlement agreement. The
court subsequently consolidated the two complaints into one proceeding. In July
2003, New Seabury and the commission filed cross motions for summary judgment.

Also, in July 2003, in accordance with a court ruling, the commission
reconsidered the question of its jurisdiction over the initial development
proposal and over a modified development proposal that New Seabury filed in
March 2003. The commission concluded that both proposals are within its
jurisdiction. In August 2003, New Seabury filed in Barnstable County
Massachusetts Superior Court another civil complaint appealing the commission's
second 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. Under the initial proposal, New Seabury could
potentially build up to 675 residential/hotel units and 80,000 square feet of
commercial space. We are currently in settlement negotiations with the Cape Cod
Commission but these discussions may not be successful. We cannot predict the
effect on the development process if we lose any appeal or if the commission is
ultimately successful in asserting jurisdiction over any of the development
proposals.

We have invested and expect to continue to invest in undeveloped land and
development properties. We are highly selective in making investments in
residential home development. Currently we are reviewing a wide variety of
potential developments in New York and Florida.

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HOTEL AND RESORT OPERATIONS

NEW SEABURY

New Seabury is a resort community overlooking Nantucket Sound and Martha's
Vineyard in Cape Cod, Massachusetts. In addition to our residential development
at New Seabury, we operate a full-service resort. The property currently
includes a golf club with two 18 hole championship golf courses, the Popponesset
Inn, a well known casual waterfront dining and wedding facility, a waterfront 
freshwater swimming pool, a private beach, a fitness center and a 16 court 
tennis facility.

We invested a total of $27 million to acquire our interest in New Seabury
and have invested an additional $30 million in improvements to date. We have
replaced an outdated clubhouse with a 42,000 square foot state of the art
facility which includes indoor and outdoor dining, a clubroom, banquet
facilities, conference capability, a pro shop, locker rooms, a snack bar and
indoor cart storage. We have constructed a 300,000 gallon per day wastewater
treatment plant for resort facilities and future development. We have built a
new 2,500 square foot state of the art poolside fitness center. We have
reconfigured and reconstructed the Dunes Golf Course. We have invested capital
to reconfigure our two championship golf courses and maintain their status as a
high-end private facility.

HOTEL AND CASINO OPERATIONS

Our primary hotel, casino and resort operations consist of our ownership
of Stratosphere Casino Hotel & Tower, Arizona Charlie's Decatur and Arizona
Charlie's Boulder in Las Vegas, Nevada. Since we acquired the Stratosphere in
1998, we have invested approximately an additional $118 million to among other
things build a 1,000-room hotel tower. We acquired Arizona Charlie's Decatur and
Arizona Charlie's Boulder from Mr. Icahn and his affiliates for approximately
$125.9 million in May 2004. We also own approximately 36.3% of the common stock
of the holding company that owns and operates the Sands Hotel and Casino in
Atlantic City, New Jersey.

STRATOSPHERE

The Stratosphere is situated on approximately 31 acres of land located at
the northern end of the Las Vegas Strip. We believe the Stratosphere is one of
the most recognized landmarks in Las Vegas. The Stratosphere offers the tallest
free-standing observation tower in the United States and, at 1,149 feet, it is
the tallest building west of the Mississippi River. The Tower boasts some of the
most unique amenities in Las Vegas, including an award-winning 380-seat
revolving restaurant with unparalleled views of Las Vegas, known as the Top of
the World, and the highest indoor/outdoor observation deck in Las Vegas. The
Tower also features the three highest amusement rides in the world, for which we
charge a price of $5 to $9 per ride. In Spring 2005, we expect to launch a
fourth thrill ride designed to spin passengers in a centrifugal motion at
40-miles per hour over the edge of the Tower. In addition, the Tower has a
175-seat cocktail lounge, a wedding chapel and event space.

The Stratosphere's casino contains approximately 80,000 square feet of
gaming space, with approximately 1,416 slot machines, 50 table games and a
125-seat race and sports book. Eight themed restaurants and four bars, two of
which feature live entertainment, are all located adjacent to the casino. These
facilities have been designed to enable convenient access to the casino. For the
years ended December 31, 2001, 2002 and 2003 and the six months ended June 30,
2004, approximately 71.0%, 72.4%, 70% and 69.2%, respectively, of the
Stratosphere's gaming revenue was generated by slot machine play and 26.9%,
26.8%, 27.9% and 27.9%, respectively, by table games. The Stratosphere derives
its other gaming revenue from the race and sports book, which primarily serves
to attract customers for slot machines and table games.

The hotel has 2,444 rooms, including 120 suites. The hotel amenities
include a 67,000 square foot pool and a recreation area with a new snack and
cocktail bar, private cabana and a fitness center with views of the Las Vegas
Strip.

The retail center, located on the second floor of the base building,
occupies approximately 110,000 square feet of developed retail space. The retail
center contains 43 shops, six of which are food venues, and 13 merchant kiosks.
Adjacent to the retail center is the 640-seat showroom that currently offers
afternoon and evening shows, which are designed to appeal to the wide spectrum
of value-minded visitors who come to Las Vegas. The Stratosphere's entertainment
includes American Superstars, a celebrity tribute featuring today's and
yesterday's hottest stars, and

53

Viva Las Vegas, Las Vegas' longest-running daytime show now in its twelfth year,
featuring singing, dancing, comedy and specialty acts. The retail center also
includes a full-service salon. The parking facility accommodates approximately
4,000 cars.

The Stratosphere utilizes the unique amenities of its Tower to attract
visitors. Gaming products, hotel rooms, entertainment and food and beverage
products are priced to appeal to the value-conscious middle- market Las Vegas
visitor. The Top of the World restaurant, however, caters to higher-end
customers. Stratosphere offers competitive payout ratios for its slot machines
and video poker machines and competitive odds for its table games and sports
book products. Stratosphere offers attractive and often unique table games,
including Single Zero Roulette and Ten Times Odds Craps, that provide patrons
with odds that are better than the standard odds at other Las Vegas casinos. The
Stratosphere participates in our Ultimate Rewards Club which provides members
with cash or complimentaries which can be used at the Stratosphere, Arizona
Charlie's Decatur or Arizona Charlie's Boulder. Advertising and promotional
campaigns are designed to maximize hotel room occupancy, visits to the Tower and
attract and retain players on property.

ARIZONA CHARLIE'S DECATUR

Arizona Charlie's Decatur opened in April 1988 as a full-service casino
and hotel geared toward residents of Las Vegas and surrounding communities.
Arizona Charlie's Decatur is located on approximately 17 acres of land four
miles west of the Las Vegas Strip in the heavily populated west Las Vegas area.
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 with 1,516 slot machines, 14 table games, a 120-seat race and
sports book, a 486-seat 24-hour bingo parlor, a 16-seat Keno lounge and a
16-seat poker lounge. Approximately 72% of the slot machines at Arizona
Charlie's Decatur are video poker games. Arizona Charlie's Decatur emphasizes
video poker because it is popular with local players and generates, as a result,
high volumes of play and casino revenue. For the years ended December 31, 2001,
2002 and 2003 and the six months ended June 30, 2004, approximately 87.9%,
91.3%, 90.7% and 89.6%, respectively, of the property's gaming revenue was
generated by slot machine play and 6.7%, 5.7%, 5.0% and 5.1% respectively, by
table games. Arizona Charlie's Decatur derives its other gaming revenue from
bingo and the race and sports book, which primarily serve to attract customers
for slot machines and table games.

Arizona Charlie's Decatur currently has 258 rooms, including eight suites.
Hotel customers include local residents and their out-of-town guests, as well as
those business and leisure travelers who, because of location and cost
considerations, choose not to stay on the Las Vegas Strip or at other hotels in
Las Vegas.

Arizona Charlie's Decatur provides complimentary entertainment as a
component of its overall customer appeal. The Naughty Ladies Saloon, a 111-seat
facility, features a variety of entertainment, including live bands, musician
showcase nights and jam sessions. Arizona Charlie's Decatur has focused on the
appeal of its entertainment programming in order to retain its customers and
increase the play at its casino.

Arizona Charlie's Decatur markets its hotel and casino primarily to local
residents of Las Vegas and the surrounding communities. We believe that the
property's pricing and gaming odds make it one of the best values in the gaming
industry and that its gaming products, hotel rooms, restaurants and other
amenities attract local customers in search of reasonable prices, smaller
casinos and more attentive service. Arizona Charlie's Decatur also tailors its
selection of slot machines, including many diverse video poker machines, and
table games, including double-deck hand-dealt blackjack, to local casino
patrons. In addition, the casino features a selection of games that invite
personal interaction and which we believe are set for higher payout rates than
those at other Las Vegas casinos generally.

ARIZONA CHARLIE'S BOULDER

Arizona Charlie's Boulder opened in 1988 as a stand-alone hotel and RV
park. The full-service casino opened in May 2000. Arizona Charlie's Boulder is
situated on approximately 24 acres of land located on Boulder Highway, in an
established retail and residential neighborhood in the eastern metropolitan area
of Las Vegas. The property is easily accessible from I-515, the most heavily
traveled east/west highway in Las Vegas.

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Arizona Charlie's Boulder contains approximately 41,000 square feet of
gaming space with 835 slot machines, 13 table games, a 43-seat race and sports
book and a 500-seat 24-hour bingo parlor. Approximately 66% of the slot machines
at Arizona Charlie's Boulder are video poker games. Arizona Charlie's Boulder
emphasizes video poker because it is popular with local players and generates,
as a result, high volumes of play and casino revenue. For the years ended
December 31, 2001, 2002 and 2003 and the six months ended June 30, 2004,
approximately 87.2%, 92.9%, 87.2% and 88.6%, respectively, of gaming revenue was
generated by slot machine play and 11.4%, 10.4%, 9.2% and 7.5%, respectively, by
table games. Arizona Charlie's Boulder derives its other gaming revenue from
bingo and the race and sports book, which primarily serve to attract customers
for slot machines and table games.

Arizona Charlie's Boulder currently has 303 rooms, including 219 suites.
Hotel customers include local residents and their out-of-town guests, as well as
those business and leisure travelers who, because of location and cost
considerations, choose not to stay on the Las Vegas Strip or at other hotels in
Las Vegas. We recently renovated our hotel room interiors.

Arizona Charlie's Boulder provides complimentary entertainment as a
component of its overall customer appeal. Palace Grand, a 112-seat facility,
features live bands at no charge.

Arizona Charlie's Boulder also has an RV park. With 30- to 70-foot pull
through stations and over 200 spaces, it is one of the largest short-term RV
parks on the Boulder Strip. The RV park offers a range of services, including
laundry facilities, game and exercise rooms, swimming pool, whirlpool and shower
facilities, which are included in the nightly, weekly or monthly rates.

Arizona Charlie's Boulder markets its hotel and casino primarily to
residents of Las Vegas and the surrounding communities. We believe that its
pricing and gaming odds make it one of the best values in the gaming industry
and that its gaming products, hotel rooms, restaurants, and other amenities
attract local customers in search of reasonable prices, smaller casinos and more
attentive service. Arizona Charlie's Boulder also tailors its selection of slot
machines, including many diverse video poker machines, and table games,
including double-deck hand-dealt blackjack, to local casino patrons. In
addition, the casino features a selection of games that invite personal
interaction and which we believe are set for higher payout rates than those at
other Las Vegas casinos generally.

SANDS HOTEL AND CASINO

We own approximately 3.6 million shares of common stock of GB Holdings,
Inc., or GBH. GBH is a holding company of the Sands Hotel and Casino.

The Sands is located in Atlantic City, New Jersey on approximately 6.1
acres of land one-half block from the Boardwalk at Brighton Park between Indiana
Avenue and Dr. Martin Luther King, Jr. Boulevard. The Sands facility currently
consists of a casino and simulcasting facility with approximately 79,000 square
feet of gaming space, a hotel with 637 rooms, and related amenities.

Pursuant to an intercompany services agreement, American Casino personnel
provide management and consulting services to the Sands.

On July 22, 2004, GBH, along with its wholly-owned indirect subsidiary,
Atlantic Coast Entertainment Holdings, Inc., or Atlantic Holdings, consummated
an exchange offer in which Atlantic Holdings exchanged its secured notes due
September 2008 with an interest rate of 3% per annum payable at maturity, for
$110 million principal amount of 11% secured notes due September 2005 of GB
Property Funding, Inc., a wholly-owned subsidiary of GBH. In the exchange offer,
holders of 60.2% of the outstanding principal amount of the 11% secured notes
due September 2005, including the 58.2% held by Mr. Icahn and affiliated
companies, including AREP, exchanged those notes. The 3% notes due September
2008 may be paid in full, at the option of the holders of a majority of their
principal amount, with common stock of Atlantic Holdings. The transaction also
included the following:

-     The indenture for the 11% secured notes due September 2005 was
amended to remove certain provisions and covenants and release the
liens on the Sands' assets;

-     The Sands' assets were transferred to a wholly-owned subsidiary of
Atlantic Holdings, ACE Gaming, LLC; and

55

-     The 3% notes due September 2008 were secured by a pledge of all of
the assets of ACE Gaming, LLC, including the Sands.

The GBH common stockholders received warrants (that are exercisable
following the occurrence of certain events) for 27.5% of the common stock of
Atlantic Holdings (on a fully diluted basis) outstanding at the date of the
issuance of the warrants.

INVESTMENTS

We also seek to purchase undervalued securities to maximize our returns.
Undervalued securities are those which we believe may have greater inherent
value than indicated by their then current trading price and may present the
opportunity for "activist" bondholders or shareholders to act as catalysts to
realize value. 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 and obligations in
which we may invest include bonds, debentures, notes, mortgage-related
securities and municipal obligations. Certain of these securities may include
lower rated securities which may provide the potential for higher yields and
therefore may entail higher risks. In addition, we may engage in various
investment techniques, including options and futures transactions, foreign
currency transactions and leveraging for either hedging or other purposes.

The undervalued securities in which we invest may be undervalued due to
market inefficiencies, may relate to opportunities in which economic or market
trends have not been identified and reflected in market value, or may include
complex or not readily followed securities. Less favorable financial reports,
lowered credit ratings, revised industry forecasts or sudden legal complications
may result in market inefficiencies and undervalued situations. We may determine
to establish an ownership position through the purchase of debt or equity
securities of such entities and then negotiate for the ownership or effective
control of some or all of the underlying equity in such assets.

As of June 30, 2004, we had investments of approximately $30.0 million in
marketable equity and debt securities, including approximately $25.3 million of
the $110 million outstanding principal amount of Sands notes, that subsequently 
were exchanged for notes of Atlantic Holdings.

In April 2004, we purchased approximately $63.5 million principal amount of
secured bank indebtedness of a bankrupt company for a purchase price of
approximately $54.7 million. At June 30, 2004, we entered into a trade
confirmation to purchase an additional $21.0 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 $76.0 million for approximately $45.2 million. The trade settled on
April 30, 2004.

We owned equity and debt securities of Philip Services Corp. In June 2003,
Philip announced that it and most of its wholly-owned U.S. subsidiaries filed
voluntary petitions under Chapter 11 of the U.S. Bankruptcy Code.

In 2003, prior to the bankruptcy filing, we determined that it was
appropriate to write-off the balance of our investment in Philip common stock by
a charge to earnings of approximately $1.0 million.

We also owned Philip term and payment-in-kind notes in the principal amount
of approximately $32.7 million; the cost basis of the notes was approximately
$22.1 million. For the second quarter of 2003, we reviewed Philip's financial
statements, bankruptcy documents and the prices of recent purchases and sales of
the notes and determined this investment to be impaired. Based upon this review,
we concluded the fair value of the notes to be approximately $3.3 million;
therefore, we recorded a write-down of approximately $18.8 million by a charge
to earnings in the second quarter of 2003. In December 2003, we sold to an
unaffiliated third party approximately $20 million in principal amount of the
notes for approximately $2.6 million recognizing a gain on sale of approximately
$0.4 million. Philip emerged from bankruptcy on December 31, 2003 as a private
company controlled by an Icahn affiliate. Effective as of December 31, 2003, our
remaining interest in the notes was exchanged for approximately 443,000 common
shares representing a 4.4% equity interest in the new Philip valued at the
carrying value of the debt as of December 31, 2003 of approximately $1.1
million.

Our real estate lending operations consist of making second mortgage or
secured mezzanine loans to developers and existing property owners for the
purpose of developing single-family homes, luxury garden apartments or
commercial properties. This financing may provide for a contractual rate of
interest to be paid as well as providing for a participation in the profits of
the development. The security for these loans is a pledge of the developers'

56

ownership interest in the properties and may also include a second mortgage on
the property. These loans are subordinate to construction financing and are
generally referred to as mezzanine loans. Our mezzanine loans accrue interest at
approximately 22% per annum. Bayswater's home building infrastructure and
expertise allow us to evaluate financing opportunities relating to residential
properties and complete developments when necessary.

As of June 30, 2004, we had a second mortgage and a mezzanine loan for
approximately $23.3 million of principal amount, consisting of $16.3 million,
excluding accrued interest, for a Florida condominium development and $7
million for Ocean Place Resort and Conference Center, located in Long Branch,
New Jersey. As of June 30, 2004, accrued interest of approximately $11 million
has been deferred for financial statement purposes, pending receipt of principal
and interest payments. These loans mature at various dates between 2004 and
2006. In April 2004, we received approximately $16.2 million for the prepayment
of a mezzanine loan. The principal amount of the loan was $11.0 million. The
prepayment included approximately $5.2 million of accrued interest which was
recognized as interest income. In addition, as of June 30, 2004, we had
commitments to fund, under certain conditions, additional loans of approximately
$15 million.

On October 17, 2003, Mr. Icahn, the chairman of our board of directors,
repaid the $250 million loan which we made to him on December 27, 2001. We made
the two-year $250 million loan to Mr. Icahn, secured by securities consisting of
approximately $250 million aggregate market value of our units owned by Icahn
and shares of a private company owned by Mr. Icahn, which shares had an
aggregate book value of at least $250 million, together with an irrevocable
proxy on sufficient additional shares of the private company so that the pledged
shares and the shares covered by the proxy equaled in excess of 50% of the
private company's shares. We returned the collateral on October 17, 2003, the
date the loan was repaid. The interest on the loan was payable semi-annually, at
a per annum rate equal to the greater of 3.9% and 200 basis points over 90-day
LIBOR to be reset each calendar quarter. The applicable rate in 2003 was 3.9%
and in 2002 ranged from 3.9% to 4.03%. Interest income of approximately $7.9
million and $9.9 million was earned by us on this loan in 2003 and 2002,
respectively. We entered into this transaction to earn interest income on a
secured investment. The terms of this transaction were reviewed and approved by
our audit committee.

We conduct our activities in a manner so as not to be deemed an investment
company under the Investment Company Act. Generally, this means that we do not
intend to invest in securities as our primary business and that no more than 40%
of our total assets will be invested in investment securities as such term is
defined in the Investment Company Act. In addition, we intend to structure our
investments so as to continue to be taxed as a partnership rather than as a
corporation under the applicable publicly traded partnership rules of the
Internal Revenue Code of 1986, as amended.

OIL AND GAS

In October 2003, pursuant to a purchase agreement dated as of May 16, 2003,
we acquired certain debt and equity securities of National Energy Group, Inc.,
or 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 our
audit committee which was advised by its independent financial advisor and legal
counsel. The securities acquired were $148,637,000 in principal amount of
outstanding 10-3/4% senior notes due 2006 of NEG, representing all of NEG's
outstanding debt securities, and 5,584,044 shares of common stock of NEG. As a
result of the foregoing transaction and the acquisition by us of additional
securities of NEG prior to the closing, we beneficially own 50.01% of the
outstanding common stock of NEG.

NEG owns a 50% interest in NEG Holding LLC. The other 50% interest in NEG
Holding is held by Gascon Partners, an affiliate of Mr. Icahn, Gascon is the
managing member of NEG Holding. NEG Holding owns NEG Operating LLC which is
engaged in the business of oil and gas exploration and production with
properties located on-shore in Texas, Louisiana, Oklahoma and Arkansas. NEG
Operating owns operating oil and gas properties managed by NEG. Under the NEG
Holding operating agreement, NEG is to receive guaranteed payments of
approximately $47.9 million and a priority distribution of approximately $148.6
million before Gascon receives any distributions. The NEG Holding operating
agreement contains a provision that allows Gascon, or its successor, at any
time, in its sole discretion, to redeem NEG's membership interest in NEG Holding
at a price equal to the fair market value of the interest determined as if NEG
Holding had sold all of its assets for fair market values and liquidated. A
determination of the fair market value of such assets shall be made by an
independent third party jointly engaged by Gascon and NEG. Due to the
substantial uncertainty that NEG will receive any distribution 

57

above the priority and guaranteed payments amounts, NEG accounts for its
investment in NEG Holding as a preferred investment. We consolidate NEG in our
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. In August
2003, NEG entered into an agreement to manage TransTexas Gas Corporation, an
affiliate of Mr. Icahn, for a fee of $312,500 per month.

REAL ESTATE LEASING ACTIVITIES

In 2003, 17 leases covering 17 properties and representing approximately
$2.2 million in annual rentals expired. Twelve leases originally representing
$1.6 million in annual rental income were renewed for $1.4 million in annual
rentals. Such renewals are generally for a term of five years. Five properties
with annual rental income of $0.6 million were not renewed.

In 2004, 11 leases covering 11 properties representing approximately $1.8
million in annual rentals are scheduled to expire. Eight leases representing
approximately $1.5 million in annual rentals were renewed for approximately $1.5
million. Such renewals are generally for a term of five years. Three properties
with annual rentals of approximately $0.3 million have not been renewed.

In many of our leases, the tenant has an option to renew at the same
rents it is currently paying and in many of the leases the tenant also has an
option to purchase the property. We believe that tenants acting in their best
interests will renew those leases which are at below market rents, and permit
leases for properties that are less marketable, either as a result of the
condition of the property or its location, or are at above-market rents to
expire. We expect that it may be difficult and time consuming to re-lease or
sell those properties that existing tenants decline to re-let or purchase and
that we may be required to incur expenditures to renovate such properties for
new tenants. We also may become responsible for the payment of certain operating
expenses, including maintenance, utilities, taxes, insurance and environmental
compliance costs associated with such properties which are presently the
responsibility of the tenant.

BANKRUPTCIES AND DEFAULTS

We are aware that 19 of our present and former tenants have been or are
currently involved in some type of bankruptcy or reorganization. Under the U.S.
Bankruptcy Code, a tenant may assume or reject its unexpired lease. In the event
a tenant rejects its lease, the U.S. Bankruptcy Code limits the amount of
damages a landlord is permitted to claim in the bankruptcy proceeding as a
result of the lease termination. Generally, a claim resulting from a rejection
of an unexpired lease is a general unsecured claim. When a tenant rejects a
lease, there can be no assurance that we will be able to relet the property at
an equivalent rental. As a result of tenant bankruptcies, we have incurred and
expect, at least in the near term, to continue to incur certain property
expenses and other related costs. Thus far, these costs have consisted largely
of legal fees, real estate taxes and property operating expenses. Of our 19
present and former tenants known to be involved in bankruptcy proceedings or
reorganization, 14 have rejected their leases, affecting 37 properties, all of
which have been vacated. These rejections have had an adverse impact on annual
net cash flow, including both the decrease in revenues from lost rents, as well
as increased operating expenses.

INSURANCE

We carry customary insurance for our properties and business segments.
However, we do not insure net lease properties where the tenant provides
appropriate amounts of insurance. We determine on a property by property basis
whether or not to obtain terrorism insurance coverage.

EMPLOYEES

At December 31, 2003, we had approximately 3,000 full and part-time
employees, which number of employees fluctuates due to the seasonal nature of
certain of our businesses. Most of the employees are employed by our
consolidated subsidiaries. Approximately 1,300 employees of Stratosphere are
covered by three collective 

58

bargaining agreements. We believe we currently have sufficient staffing to
operate effectively our day-to-day business.

COMPETITION

REAL ESTATE

Competition in leasing and buying and selling real property remains strong.
Many of our tenants have rights to renew at prior rental rates. Our experience
is that tenants will renew below market leases and permit leases that are less
marketable or at above market rents to expire, making it difficult for us to
re-let or sell on favorable terms properties vacated by tenants.

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

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

HOTEL, CASINO AND RESORT OPERATIONS

Investments in the gaming and entertainment industries involve significant
competitive pressures and political and regulatory considerations. In recent
years, there have been many new gaming establishments opened as well as facility
expansions, providing increased supply of competitive products and properties in
the industry, which may adversely affect our operating margins and investment
returns. The casino/hotel industry is highly competitive. Hotels located on or
near the Las Vegas Strip compete primarily with other Las Vegas Strip hotels and
with a few major hotels in downtown Las Vegas. Stratosphere also competes with a
large number of hotels and motels located in and near Las Vegas. Stratosphere's
Tower competes with all other forms of entertainment, recreational activities
and other attractions in and near Las Vegas and elsewhere. Many of our
competitors offer more products than us and have greater name recognition and
may have greater resources.

PROPERTIES

As of June 30, 2004, we owned 94 separate real estate assets, excluding
Stratosphere, Bayswater and the Sands. These primarily consist of fee and
leasehold interests and, to a limited extent, interests in real estate mortgages
in 27 states. Most of these properties are net-leased to single corporate
tenants. Approximately 91% of these properties are currently net-leased, 3% are
operating properties and 6% are vacant.

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

NUMBER OF    AVERAGE NET EFFECTIVE
TYPE OF PROPERTY      PROPERTIES   RENT PER SQUARE FOOT(1)
------------------     ----------   -----------------------

Retail...........           35              $  3.95
Industrial.......           15              $  1.93
Office...........           18              $  9.93
Supermarkets.....           11              $  3.39
Banks............            4              $  3.59
Other............           11                  N/A

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----------
(1) Based on net-lease rentals.

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

NUMBER OF
LOCATION OF PROPERTY     PROPERTIES
---------------------    ----------

Southeast............         40
Northeast............         25
South Central........          3
Southwest............          2
North Central........         23
Northwest............          1

From January 1, 2004 through June 30, 2004, we sold or otherwise disposed of
34 properties. In connection with such sales and dispositions, we received an
aggregate of approximately $211.4 million in cash, after expenses and closing
costs.

As previously discussed, we are marketing for sale our rental real estate
portfolio. As of June 30, 2004, we had 29 properties under conditional sales
contracts or letters of intent which are subject to purchaser's due diligence
and other closing conditions. Selling prices for these properties total
approximately $87.3 million. The properties are individually encumbered by
mortgage debt aggregating approximately $15.3 million which would have to be
paid by us out of the sale proceeds or would be assumed by the purchasers. In
accordance with generally accepted accounting principles, only the real estate
operating properties under contract or letter of intent, but not the financing
lease properties were reclassified to "Properties Held for Sale" and the related
income and expense reclassified to "Income from Discontinued Operations."

For each of the years ended December 31, 2003, 2002, and 2001, no single
real estate asset or series of assets leased to the same lessee accounted for
more than 10% of our gross revenues. However, as of December 31, 2003, 2002, and
2001, PGEC occupied a property, which represented approximately 14% of the
carrying value of our total real estate assets leased to others. PGEC is an
electric utility engaged in the generation, purchase, transmission, distribution
and sale of electricity. All of PGEC's common stock was owned by Enron Corp.
which has filed for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code.
PGEC was not included in the filing. In November 2003, Enron agreed to sell PGEC
to a newly created company named Oregon Electric Utility Company, LLC. In
February 2004, the Bankruptcy Court approved the sale, subject to certain
regulatory approvals. We are not aware of any conditions of the sale that will
affect PGEC's lease obligation.

PGEC's property is an office complex consisting of three buildings
containing an aggregate of approximately 803,000 square feet on an approximate
2.7 acre parcel of land located in Portland, Oregon. PGEC's property is
net-leased to a wholly-owned subsidiary of PGEC through September 30, 2018, with
two ten-year and one five-year renewal options. The annual rental is $4.9
million until 2018 and $2.5 million during each renewal option. PGEC has
guaranteed the performance of its subsidiary's obligations under the lease. The
lessee has an option to purchase PGEC's property in September 2008, 2013 and
2018 at a price equal to the fair market value of PGEC's property determined in
accordance with the lease and is required to make a rejectable offer to purchase
PGEC's property in September 2018 for a price of $15 million. A rejection of
such offer will have no effect on the lease obligations or the renewal and
purchase options.

We own 100% of Stratosphere. Stratosphere owns and operates the Stratosphere
Casino Hotel & Tower, located in Las Vegas, Nevada, which is centered around the
Stratosphere Tower, the tallest free-standing observation tower in the United
States. The hotel and entertainment facility has 2,444 rooms and suites, a
80,000 square foot casino and related amenities.

We own Arizona Charlie's Decatur and Arizona Charlie's Boulder. Arizona
Charlie's Decatur has 258 hotel rooms and a 52,000 square foot casino and
related amenities. Arizona Charlie's Boulder has 303 hotel rooms and a 41,000
square foot casino and related amenities.

We own, primarily through our Bayswater subsidiary, residential development
properties. Bayswater focuses primarily on the acquisition, development,
construction and sale of single-family homes, custom-built homes, multi-family

60

homes and lots in subdivisions and planned communities and entitling raw
subdivisions and planned communities.

We own a resort property in New Seabury, Massachusetts. In addition to
residential development, New Seabury currently includes a golf club with two 18
hole championship golf courses, the Popponesset Inn, a casual waterfront dining
and wedding facility, a villa rental program, a waterfront freshwater swimming
pool, a private beach, a fitness center and a 16 court tennis facility.

We own a 36.3% equity interest in GB Holdings, the parent company of the
Sands. The Sands, located in Atlantic City, New Jersey, contains 637 rooms and
suites, a 79,000 square foot casino and related amenities.

LEGAL PROCEEDINGS

We are from time to time parties to various legal proceedings arising out of
our businesses. We believe, however, that, other than the proceedings discussed
below, there are no proceedings pending or threatened against us which, if
determined adversely, would have a material adverse effect on our business,
financial condition, results of operations or liquidity.

NEW SEABURY

In January 2002, the Cape Cod Commission, a Massachusetts regional planning
body created in 1989, concluded that our New Seabury development is within its
jurisdiction for review and approval. We believe that the proposed residential,
commercial and recreational development is in substantial compliance with a
special permit issued for the property in 1964 and is therefore exempt from the
commission's jurisdiction and that 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.

In February 2002, New Seabury Properties L.L.C., our subsidiary and owner of
the property, filed in Barnstable County Massachusetts Superior Court, a civil
complaint appealing the decision by the commission, and a separate civil
complaint to find the commission in contempt of the settlement agreement. The
court subsequently consolidated the two complaints into one proceeding. In July
2003, New Seabury and the commission filed cross motions for summary judgment.

Also, in July 2003, in accordance with a court ruling, the commission
reconsidered the question of its jurisdiction over the initial development
proposal and over a modified development proposal that New Seabury filed in
March 2003. The commission concluded that both proposals are within its
jurisdiction. In August 2003, New Seabury filed in Barnstable County
Massachusetts Superior Court another civil complaint appealing the commission's
second 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. Under the initial proposal, New Seabury could
potentially build up to 675 residential/hotel units and 80,000 square feet of
commercial space. We cannot predict the effect on the development process if we
lose any appeal or if the commission is ultimately successful in asserting
jurisdiction over any of the development proposals.

STRATOSPHERE

In December 2001, Tiffiny Decorating Company, a subcontractor to Great
Western Drywall, Inc. commenced an action against Stratosphere Corporation,
Stratosphere Development, LLC, AREH, Great Western, Nevada Title and Safeco
Insurance in the Eighth Judicial District Court of the State of Nevada. The
action asserts claims that include 

61

breach of contract, unjust enrichment and foreclosure of lien. We 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,
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
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. The amount apparently
includes the Tiffiny claim.

The Stratosphere parties have evaluated the project and have determined that
the amount of approximately $1.0 million, of which approximately $0.2 million
and $0.4 million were disbursed to Tiffiny and Great Western in 2002,
respectively, is properly due and payable to satisfy all claims for the work
performed, including the claim by Tiffiny. The remaining amount has been
segregated in a separate interest bearing account. The Stratosphere parties
intend to vigorously defend the action for claims in excess of approximately
$1.0 million.

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REGULATION

RENTAL REAL ESTATE AND REAL ESTATE DEVELOPMENT

ENVIRONMENTAL MATTERS

Under various federal, state and local laws, ordinances and regulations, an
owner or operator of real property may become liable for the costs of removal or
remediation of certain hazardous substances, 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.

Most of our properties continue to be net-leased to single corporate
tenants, and we believe that in most cases these tenants would be responsible
for the cost of any environmental conditions existing on the properties they
lease. Therefore, such conditions should not have a material adverse effect on
the financial statements or our competitive position. Many of the properties
acquired by us in connection with our initial acquisition of property in 1987
were not subjected to any type of environmental site assessment at the time of
the acquisition. Subsequently, we undertook to have Phase I environmental site
assessments completed on most of our properties. We believe that under the terms
of our net leases with our tenants, the costs of environmental problems that
occur during the tenancy would be the responsibility of such tenants, including
compliance with any obligations to perform site remediation activities or to
comply with applicable laws and regulations. While most tenants have assumed
responsibility for the environmental conditions existing on their leased
property, there can be no assurance that we will not be deemed to be a
responsible party or that the tenant will bear the cost of remediation. Also, as
we acquire more operating properties, our exposure to environmental cleanup
costs may increase.

In some cases, the Phase I environmental site assessments completed on
certain properties indicate that they may have environmental conditions that
should be further reviewed. We have notified the responsible tenants to attempt
to ensure that they cause any required investigation and/or remediation to be
performed and most tenants continue to take appropriate action. However, if the
tenants fail to perform responsibilities under their leases in respect of such
sites, we may be liable for investigation or remediation costs. However, as a
limited number of Phase II environmental site assessments have been conducted by
us, there can be no accurate estimate of the need for or extent of any required
remediation. We are in the process of updating our Phase I environmental site
assessments for certain of our environmentally sensitive properties.
Approximately 75 updates were completed in 2003. No additional material
environmental conditions were discovered.

We could also become liable for environmental clean-up costs if a bankrupt
or insolvent tenant were unable to pay such costs. Environmental problems may
also delay or impair our ability to sell, refinance or re-lease particular
properties, resulting in decreased income and increased cost to us. While we
attempt to sell properties "as is" and transfer any environmental liability to
the purchaser, we could incur environmental liability based on our past
ownership or operation of divested properties.

OTHER PROPERTY MATTERS

Under Title III of the Americans with Disabilities Act of 1990 and its
rules, or ADA, in order to protect individuals with disabilities, owners and
certain tenants of public accommodations, including hotels, casinos, resorts,
offices and shopping centers, must remove architectural and communication
barriers which are structural in 

63

nature from existing places of public accommodation to the extent "readily
achievable," as defined in the ADA. In addition, under the ADA, alterations to a
place of public accommodation or a commercial facility are to be made so that,
to the maximum extent feasible, such altered portions are readily accessible to
and usable by disabled individuals.

Except for certain properties operated by us, we believe that the existing
net leases require the tenants of many of our properties to comply with the ADA.
If a tenant does not comply with the ADA or rejects its lease in bankruptcy
without complying with the ADA, we may ultimately have to bear the expense of
complying with the ADA.

As we acquire more operating properties, we may be required to make
expenditures to bring such properties into compliance with the ADA and other
applicable laws.

HOTEL AND CASINO OPERATIONS

NEVADA

Introduction

The ownership and operation of casino gaming facilities in the State of
Nevada are subject to the Nevada Gaming Control Act and the regulations made
under such Act, as well as various local ordinances. The gaming operations of
our casinos are subject to the licensing and regulatory control of the Nevada
Gaming Commission and the Nevada State Gaming Control Board. Our casinos'
operations are also subject to regulation by the Clark County Liquor and Gaming
Licensing Board and the City of Las Vegas. These agencies are referred to herein
collectively as the Nevada Gaming Authorities.

Policy Concerns of Gaming Laws

The laws, regulations and supervisory procedures of the Nevada Gaming
Authorities are based upon declarations of public policy. These public policy
concerns include, among other things:

-   preventing unsavory or unsuitable persons from being directly or
indirectly involved with gaming at any time or in any capacity;

-   establishing and maintaining responsible accounting practices and
procedures;

-   maintaining effective controls over the financial practices of
licensees, including establishing minimum procedures for internal fiscal
affairs, and safeguarding assets and revenue, providing reliable
recordkeeping and requiring the filing of periodic reports with the
Nevada Gaming Authorities;

-   preventing cheating and fraudulent practices; and

-   providing a source of state and local revenue through taxation and
licensing fees.

Changes in these laws, regulations and procedures could have significant
negative effects on our gaming operations and our financial condition and
results of operations.

Owner and Operator Licensing Requirements

Our casinos are licensed by the Nevada Gaming Authorities as corporate
licensees, which we refer to herein as company licensees. Under their gaming
licenses, our casinos are required to pay periodic fees and taxes. The gaming
licenses are not transferable.

64

To date, our casino properties, including the properties to be acquired by
ACEP, have obtained all gaming licenses necessary for the operation of their
existing gaming operations; however, gaming licenses and related approvals are
privileges under Nevada law, and we cannot assure you that any new gaming
license or related approvals that may be required in the future will be granted,
or that any existing gaming licenses or related approvals will not be limited,
conditioned, suspended or revoked or will be renewed.

Our Registration Requirements

We have been registered by the Nevada Gaming Commission as a publicly traded
corporation, which we refer to herein as a registered company for the purposes
of the Nevada Gaming Control Act. API, AREH and Beckton Corporation have been
registered by the Nevada Gaming Commission as holding companies. AREH's direct
and indirect subsidiaries American Entertainment Properties Corp., or AEP, ACEP
and Charlie's Holding, LLC have also been registered by the Nevada Gaming
Commission as holding companies.

Periodically, we will be required to submit detailed financial and operating
reports to the Nevada Gaming Commission and to provide any other information
that the Nevada Gaming Commission may require. Substantially all of our material
loans, leases, sales of securities and similar financing transactions must be
reported to, or approved by, the Nevada Gaming Commission.

Individual Licensing Requirements

No person may become a stockholder or member of, or receive any percentage
of the profits of, a non-publicly traded holding or intermediary company or
company licensee without first obtaining licenses and approvals from the Nevada
Gaming Authorities. The Nevada Gaming Authorities may investigate any individual
who has a material relationship to or material involvement with us to determine
whether the individual is suitable or should be licensed as a business associate
of a gaming licensee. Key employees of a company licensee may also be required
to file such applications. The Nevada Gaming Authorities may deny an application
for licensing for any cause which they deem reasonable. A finding of suitability
is comparable to licensing, and both require submission of detailed personal and
financial information followed by a thorough investigation. An applicant for
licensing or an applicant for a finding of suitability must pay or must cause to
be paid all the costs of the investigation. Changes in licensed positions must
be reported to the Nevada Gaming Authorities and, in addition to their authority
to deny an application for a finding of suitability or licensing, the Nevada
Gaming Authorities have the jurisdiction to disapprove a change in a corporate
position.

If the Nevada Gaming Authorities were to find an officer, director or key
employee unsuitable for licensing or unsuitable to continue having a
relationship with us, we would have to sever all relationships with that person.
In addition, the Nevada Gaming Commission may require us to terminate the
employment of any person who refuses to file appropriate applications.
Determinations of suitability or questions pertaining to licensing are not
subject to judicial review in Nevada.

Consequences of Violating Gaming Laws

If the Nevada Gaming Commission decides that we have violated the Nevada
Gaming Control Act or any of its regulations, it could limit, condition, suspend
or revoke our registrations and gaming licenses. In addition, we and the persons
involved could be subject to substantial fines for each separate violation of
the Nevada Gaming Control Act, or of the regulations of the Nevada Gaming
Commission, at the discretion of the Nevada Gaming Commission. Further, the
Nevada Gaming Commission could appoint a supervisor to conduct the operations of
our casinos and, under specified circumstances, earnings generated during the
supervisor's appointment (except for the reasonable rental value of the
premises) could be forfeited to the State of Nevada. Limitation, conditioning or
suspension of any of our gaming licenses and the appointment of a supervisor
could, and revocation of any gaming license would, have a significant negative
effect on our gaming operations.

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Requirements for Beneficial Securities Holders

Regardless of the number of shares held, any beneficial holder of our voting
securities may be required to file an application, be investigated and have that
person's suitability as a beneficial holder of voting securities determined if
the Nevada Gaming Commission has reason to believe that the ownership would
otherwise be inconsistent with the declared policies of the State of Nevada. If
the beneficial holder of the voting securities who must be found suitable is a
corporation, partnership, limited partnership, limited liability company or
trust, it must submit detailed business and financial information including a
list of its beneficial owners. The applicant must pay all costs of the
investigation incurred by the Nevada Gaming Authorities in conducting any
investigation.

The Nevada Gaming Control Act requires any person who acquires more than 5%
of the voting securities of a registered company to report the acquisition to
the Nevada Gaming Commission. The Nevada Gaming Control Act requires beneficial
owners of more than 10% of a registered company's voting securities to apply to
the Nevada Gaming Commission for a finding of suitability within 30 days after
the Chairman of the Nevada State Gaming Control Board mails the written notice
requiring such filing. Under certain circumstances, an "institutional investor,"
as defined in the Nevada Gaming Control Act, which acquires more than 10%, but
not more than 15%, of the registered company's voting securities may apply to
the Nevada Gaming Commission for a waiver of a finding of suitability if the
institutional investor holds the voting securities for investment purposes only.
In certain circumstances, an institutional investor that has obtained a waiver
can hold up to 19% of a registered company's voting securities for a limited
period of time and maintain the waiver. An institutional investor will not be
deemed to hold voting securities for investment purposes unless the voting
securities were acquired and are held in the ordinary course of business as an
institutional investor and not for the purpose of causing, directly or
indirectly, the election of a majority of the members of the board at directors
of the registered company, a change in the corporate charter, bylaws,
management, policies or operations of the registered company, or any of its
gaming affiliates, or any other action which the Nevada Gaming Commission finds
to be inconsistent with holding the registered company's voting securities for
investment purposes only. Activities which are not deemed to be inconsistent
with holding voting securities for investment purposes only include:

-   voting on all matters voted on by stockholders or interest holders;

-   making financial and other inquiries of management of the type normally
made by securities analysts for informational purposes and not to cause
a change in its management, policies or operations; and

-   other activities that the Nevada Gaming Commission may determine to be
consistent with such investment intent.

Consequences of Being Found Unsuitable

Any person who fails or refuses to apply for a finding of suitability or a
license within 30 days after being ordered to do so by the Nevada Gaming
Commission or by the Chairman of the Nevada State Gaming Control Board, or who
refuses or fails to pay the investigative costs incurred by the Nevada Gaming
Authorities in connection with the investigation of its application, may be
found unsuitable. The same restrictions apply to a record owner if the record
owner, after request, fails to identify the beneficial owner. Any person found
unsuitable and who holds, directly or indirectly, any beneficial ownership of
any voting security or debt security of a registered company beyond the period
of time as may be prescribed by the Nevada Gaming Commission may be guilty of a
criminal offense. We will be subject to disciplinary action if, after we receive
notice that a person is unsuitable to hold an equity interest or to have any
other relationship with, we:

-   pay that person any dividend or interest upon any voting securities;

-   allow that person to exercise, directly or indirectly, any voting right
held by that person;

-   pay remuneration in any form to that person for services rendered or
otherwise; or

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-   fail to pursue all lawful efforts to require the unsuitable person to
relinquish such person's voting securities including, if necessary, the
immediate purchase of the voting securities for cash at fair market
value.

Gaming Laws Relating to Securities Ownership

The Nevada Gaming Commission may, in its discretion, require the holder of
any debt or similar securities of a registered company to file applications, be
investigated and be found suitable to own the debt or other security of the
registered company if the Nevada Gaming Commission has reason to believe that
such ownership would otherwise be inconsistent with the declared policies of the
State of Nevada. If the Nevada Gaming Commission decides that a person is
unsuitable to own the security, then under the Nevada Gaming Control Act, the
registered company can be sanctioned, including the loss of its approvals if,
without the prior approval of the Nevada Gaming Commission, it:

-   pays to the unsuitable person any dividend, interest or any distribution
whatsoever;

-   recognizes any voting right by the unsuitable person in connection with
the securities;

-   pays the unsuitable person remuneration in any form; or

-   makes any payment to the unsuitable person by way of principal,
redemption, conversion, exchange, liquidation or similar transaction.

We are required to maintain a current stock ledger in Nevada which may be
examined by the Nevada Gaming Authorities at any time. If any securities are
held in trust by an agent or by a nominee, the record holder may be required to
disclose the identity of the beneficial owner to the Nevada Gaming Authorities.
A failure to make the disclosure may be grounds for finding the record holder
unsuitable. We will be required to render maximum assistance in determining the
identity of the beneficial owner of any of our voting securities. The Nevada
Gaming Commission has the power to require the stock certificates of any
registered company to bear a legend indicating that the securities are subject
to the Nevada Gaming Control Act and certain subject to restrictions imposed by
applicable gaming laws. To date, this requirement has not been imposed on us.

Approval of Public Offerings

Neither we nor any of our affiliates may make a public offering of our
securities without the prior approval of the Nevada Gaming Commission if the
proceeds from the offering are intended to be used to construct, acquire or
finance gaming facilities in Nevada, or to retire or extend obligations incurred
for those purposes or for similar transactions. Any offer by us to exchange the
notes for publicly registered notes will require the review of, and prior
approval by, the Nevada Gaming Authorities. The Nevada Commission has granted us
prior approval to make public offerings for a period of two years expiring in
May 2006, subject to certain conditions. This approval, the shelf approval,
may be rescinded for good cause without prior notice upon the issuance of an
interlocutory stop order by the Chairman of the Nevada Board and must be renewed
at the end of the two-year approval period. The shelf approval applies to any
affiliated company wholly owned by us, or an affiliate, which is a publicly
traded corporation or would thereby become a publicly traded corporation
pursuant to a public offering. The shelf approval includes approval for
Stratosphere Gaming Corp. to guarantee any security issued by, or to hypothecate
its assets to secure the payment or performance of any obligations evidenced by
a security issued by, us or an affiliate in a public offering under the shelf
approval. The shelf approval also includes approval for us to place restrictions
upon the transfer of, and to enter into agreements not to encumber the equity
securities of our subsidiaries licensed or registered in Nevada, as applicable,
in conjunction with public offerings made under the shelf approval. The shelf
approval does not constitute a finding, recommendation or approval by the Nevada
Commission or the Nevada Board as to the accuracy or adequacy of the prospectus
or the investment merits of the securities offered. Any representation to the
contrary is unlawful.

Approval of Changes in Control

As a registered company, we must obtain prior approval of the Nevada Gaming
Commission with respect to a change in control through:

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-   merger;

-   consolidation;

-   stock or asset acquisitions;

-   management or consulting agreements; or

-   any act or conduct by a person by which the person obtains control of
us.

Entities seeking to acquire control of a registered company must satisfy the
Nevada State Gaming Control Board and Nevada Gaming Commission with respect to a
variety of stringent standards before assuming control of the registered
company. The Nevada Gaming Commission may also require controlling stockholders,
officers, directors and other persons having a material relationship or
involvement with the entity proposing to acquire control to be investigated and
licensed as part of the approval process relating to the transaction.

Approval of Defensive Tactics

The Nevada legislature has declared that some corporate acquisitions opposed
by management, repurchases of voting securities and corporate defense tactics
affecting Nevada gaming licenses or affecting registered companies that are
affiliated with the operations permitted by Nevada gaming licenses may be
harmful to stable and productive corporate gaming. The Nevada Gaming Commission
has established a regulatory scheme to reduce the potentially adverse effects of
these business practices upon Nevada's gaming industry and to further Nevada's
policy to:

-   assure the financial stability of corporate gaming operators and their
affiliates;

-   preserve the beneficial aspects of conducting business in the corporate
form; and

-   promote a neutral environment for the orderly governance of corporate
affairs.

As a registered company, we may need to obtain approvals from the Nevada
Gaming Commission before we can make exceptional repurchases of voting
securities above our current market price and before a corporate acquisition
opposed by management can be consummated. The Nevada Gaming Control Act also
requires prior approval of a plan of recapitalization proposed by a registered
company's board of directors in response to a tender offer made directly to its
stockholders for the purpose of acquiring control.

Fees and Taxes

License fees and taxes, computed in various ways depending on the type of
gaming or activity involved, are payable to the State of Nevada and to the
counties and cities in which the licensed subsidiaries respective operations are
conducted. Depending upon the particular fee or tax involved, these fees and
taxes are payable either monthly, quarterly or annually and are based upon:

-   a percentage of gross revenues received;

-   the number of gaming devices operated; or

-   the number of table games operated.

Our casinos are also subject to a state payroll tax based on the wages paid
to its employees.

Foreign Gaming Investigations

Any person who is licensed, required to be licensed, registered, required to
be registered, or is under common control with those persons (collectively,
"licensees"), and who proposes to become involved in a gaming venture

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outside of Nevada, is required to deposit with the Nevada State Gaming Control
Board, and thereafter maintain, a revolving fund in the amount of $10,000 to pay
the expenses of investigation of the Nevada State Gaming Control Board of the
licensee's or registrant's participation in such foreign gaming. The revolving
fund is subject to increase or decrease in the discretion of the Nevada Gaming
Commission. Licensees and registrants are required to comply with the reporting
requirements imposed by the Nevada Gaming Control Act. A licensee or registrant
is also subject to disciplinary action by the Nevada Gaming Commission if it:

-   knowingly violates any laws of the foreign jurisdiction pertaining to
the foreign gaming operation;

-   fails to conduct the foreign gaming operation in accordance with the
standards of honesty and integrity required of Nevada gaming operations;

-   engages in any activity or enters into any association that is
unsuitable because it poses an unreasonable threat to the control of
gaming in Nevada, reflects or tends to reflect, discredit or disrepute
upon the State of Nevada or gaming in Nevada, or is contrary to the
gaming policies of Nevada;

-   engages in activities or enters into associations that are harmful to
the State of Nevada or its ability to collect gaming taxes and fees; or

-   employs, contracts with or associates with a person in the foreign
operation who has been denied a license or finding of suitability in
Nevada on the ground of unsuitability.

License for Conduct of Gaming and Sale of Alcoholic Beverages

The conduct of gaming activities and the service and sale of alcoholic
beverages by our casinos are subject to licensing, control and regulation by the
Clark County Liquor and Gaming Licensing Board and the City of Las Vegas. In
addition to approving our casinos, the Clark County Liquor and Gaming License
Board and the City of Las Vegas have the authority to approve all persons owning
or controlling the stock of any corporation controlling a gaming license. All
licenses are revocable and are not transferable. The county and city agencies
have full power to limit, condition, suspend or revoke any license. Any
disciplinary action could, and revocation would, have a substantial negative
impact upon our operations.

NEW JERSEY

Introduction

Casino gaming is strictly regulated in Atlantic City under the New Jersey
Casino Control Act, or NJCCA, and the regulations of the New Jersey Casino
Control Commission, or New Jersey Commission, which affect virtually all aspects
of the operations of The Sands. The NJCCA and regulations affecting Atlantic
City casino licensees concern primarily the financial stability, integrity and
character of casino operators, their employees, their debt and equity security
holders and others financially interested in casino operations; the nature of
casino/hotel facilities; the operation methods (including rules of games and
credit granting procedures); and financial and accounting practices used in
connection with casino operations. A number of these regulations require
practices that are different from those in casinos in Nevada and elsewhere, and
some of these regulations result in casino operating costs greater than those in
comparable facilities in Nevada and elsewhere. The following is only a summary
of the applicable provisions of the NJCCA. It does not purport to be a full
description and is qualified in its entirety by reference to the NJCCA and such
other applicable laws and regulations.

New Jersey Gaming Regulations

In general, the NJCCA and the regulations promulgated thereunder contain
detailed provisions concerning, among other things:

-   the granting and renewal of casino licenses;

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-   the suitability of the approved hotel facility, and the amount of
authorized casino space and gaming units permitted therein;

-   the qualification of natural persons and entities related to the casino
licensee;

-   the licensing of certain employees and vendors of casino licensees;

-   the rules of the games;

-   the selling and redeeming of gaming chips;

-   the granting and duration of credit and the enforceability of gaming
debts;

-   management control procedures, accounting and cash control methods and
reports to gaming agencies;

-   the security standards;

-   the manufacture and distribution of gaming equipment; and

-   the simulcasting of horse races by casino licensees, advertising,
entertainment and alcoholic beverages.

Casino Control Commission

The ownership and operation of casino/hotel facilities in Atlantic City are
the subject of strict state regulation under the NJCCA. The New Jersey
Commission is empowered to regulate a wide spectrum of gaming and non-gaming
related activities and to approve the form of ownership and financial structure
of not only a casino licensee, but also its entity qualifiers and intermediary
and holding companies and any other related entity required to be qualified.

Casino License

No casino hotel facility may operate unless the appropriate license and
approvals are obtained from the New Jersey Commission, which has broad
discretion with regard to the issuance, renewal, revocation and suspension of
such licenses and approvals, which are non-transferable. The qualification
criteria with respect to the holder of a casino license include its financial
stability, integrity and responsibility; the integrity and adequacy of its
financial resources which bear any relation to the casino project; its good
character, honesty and integrity; and the sufficiency of its business ability
and casino experience to establish the likelihood of a successful, efficient
casino operation. A plenary license authorizes the operation of a casino with
the games authorized in an operation certificate issued by the New Jersey
Commission, and the operation certificate may be issued only on a finding that
the casino conforms to the requirements of the NJCCA and applicable regulations
that the casino is prepared to entertain the public. Under such determination,
Atlantic Casino Entertainment, LLC, trading as The Sands Casino Hotel, has been
issued a plenary casino license. The plenary license issued to The Sands was
renewed by the New Jersey Commission on September 29, 2004 for four years
through September 2008. The New Jersey Commission may reopen license hearings at
any time, and must reopen a licensing hearing at the request of the New Jersey
Division of Gaming Enforcement.

To be considered financially stable, a licensee must demonstrate the
following abilities: to pay winning wagers when due; to achieve an annual gross
operating profit; to pay all local, state and federal taxes when due; to make
necessary capital and maintenance expenditures to insure that it has a superior
first-class facility; and to pay, exchange, refinance or extend debts which will
mature or become due and payable during the license term.

In the event a licensee fails to demonstrate financial stability, the New
Jersey Commission may take such action as it deems necessary to fulfill the
purposes of the NJCCA and protect the public interest, including: issuing
conditional licenses, approvals or determinations; establishing an appropriate
cure period; imposing reporting

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requirements; placing restrictions on the transfer of cash or the assumption of
liabilities; requiring reasonable reserves or trust accounts; denying licensure;
or appointing a conservator. See " -- Conservatorship."

Pursuant to the NJCCA and the regulations and precedent of the New Jersey
Commission, no entity may hold a casino license unless each officer, director,
principal employee, person who directly or indirectly holds any beneficial
interest or ownership in the licensee, each person who in the opinion of the New
Jersey Commission has the ability to control or elect a majority of the board of
directors of the licensee (other than a banking or other licensed lending
institution which makes a loan or holds a mortgage or other lien acquired in the
ordinary course of business) and any lender, underwriter, agent or employee of
the licensee or other person whom the New Jersey Commission may consider
appropriate, obtains and maintains qualification approval from the New Jersey
Commission. Qualification approval means that such person must, but for
residence, individually meet the qualification requirements as a casino key
employee.

Control Persons

Any entity qualifier or intermediary of holding company, such as AREP is
required to register with the New Jersey Commission and meet the same basic
standards for approval as a casino licensee; provided, however, that the New
Jersey Commission, with the concurrence of the Director of the Division of
Gaming Enforcement, may waive compliance by a publicly-traded corporate holding
company with the requirement that an officer, director, lender, underwriter,
agent or employee thereof, or person directly or indirectly holding a beneficial
interest or ownership of the securities thereof, individually qualify for
approval under casino key employee standards so long as the New Jersey
Commission and the Director of the Division of Gaming Enforcement are, and
remain, satisfied that such officer, director, lender, underwriter, agent or
employee is not significantly involved in the activities of the casino licensee,
or that such security holder does not have the ability to control the
publicly-traded corporate holding company or elect one or more of its directors.
Persons holding 5.0% or more of the equity securities of such holding company
are presumed to have the ability to control the company or elect one or more of
its directors and will, unless this presumption is rebutted, be required to
individually qualify. Equity securities are defined as any voting stock or any
security similar to or convertible into or carrying a right to acquire any
security having a direct or indirect participation in the profits of the issuer.

Financial Sources

The New Jersey Commission may require all financial backers, investors,
mortgagees, bond holders and holders of notes or other evidence of indebtedness,
either in effect or proposed, which bear any relation to any casino project,
including holders of publicly-traded securities of an entity which holds a
casino license or is an entity qualifier, subsidiary or holding company of a
casino licensee, to qualify as financial sources. In the past, the New Jersey
Commission has waived the qualification requirement for holders of less than
15.0% of a series of publicly-traded mortgage bonds so long as the bonds
remained widely distributed and freely traded in the public market and the
holder had no ability to control the casino licensee. The New Jersey Commission
may require holders of less than 15.0% of a series of debt to qualify as
financial sources even if not active in the management of the issuer or casino
licensee.

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Institutional Investors

An institutional investor is defined by the NJCCA as any retirement fund
administered by a public agency for the exclusive benefit of federal, state or
local public employees; any investment company registered under the Investment
Company Act of 1940, as amended; any collective investment trust organized by
banks under Part Nine of the Rules of the Comptroller of the Currency; any
closed end investment trust; any chartered or licensed life insurance company or
property and casualty insurance company; any banking and other chartered or
licensed lending institution; any investment advisor registered under the
Investment Advisers Act of 1940, as amended; and such other persons as the New
Jersey Commission may determine for reasons consistent with the policies of the
NJCCA.

An institutional investor may be granted a waiver by the New Jersey
Commission from financial source or other qualification requirements applicable
to a holder of publicly-traded securities, in the absence of a prima facie
showing by the Division of Gaming Enforcement that there is any cause to believe
that the holder may be found unqualified, on the basis of New Jersey Commission
findings that: (1) its holdings were purchased for investment purposes only and,
upon request by the New Jersey Commission, it files a certified statement to the
effect that it has no intention of influencing or affecting the affairs of the
issuer, the casino licensee or its holding or intermediary companies; provided,
however, that the institutional investor will be permitted to vote on matters
put to the vote of the outstanding security holders; and (2) if (x) the
securities are debt securities of a casino licensee's holding or intermediary
companies or another subsidiary company of the casino licensee's holding or
intermediary companies which is related in any way to the financing of the
casino licensee and represent either (A) 20.0% or less of the total outstanding
debt of the company or (B) 50.0% or less of any issue of outstanding debt of the
company, (y) the securities are equity securities and represent less than 10.0%
of the equity securities of a casino licensee's holding or intermediary
companies or (z) the securities so held exceed such percentages, upon a showing
of good cause. There can be no assurance, however, that the New Jersey
Commission will make such findings or grant such waiver and, in any event, an
institutional investor may be required to produce for the New Jersey Commission
or the Antitrust Division of the Department of Justice upon request, any
document or information which bears any relation to such debt or equity
securities.

Ownership and Transfer of Securities

The NJCCA imposes certain restrictions upon the issuance, ownership and
transfer of securities of a regulated company and defines the term "security" to
include instruments which evidence a direct or indirect beneficial ownership or
creditor interest in a regulated company including, but not limited to
mortgages, debentures, security agreements, notes and warrants. AREP is deemed
to be a regulated company, and instruments evidencing a beneficial ownership or
creditor interest therein, including the notes or a partnership interest, are
deemed to be the securities of a regulated company.

If the New Jersey Commission finds that a holder of such securities is not
qualified under the NJCCA, it has the right to take any remedial action it may
deem appropriate, including the right to force divestiture by such disqualified
holder of such securities. In the event that certain disqualified holders fail
to divest themselves of such securities, the New Jersey Commission has the power
to revoke or suspend the casino license affiliated with the regulated company
which issued the securities. If a holder is found unqualified, it is unlawful
for the holder (i) to exercise, directly or through any trustee or nominee, any
right conferred by such securities or (ii) to receive any dividends or interest
upon such securities or any remuneration, in any form, from its affiliated
casino licensee for services rendered or otherwise.

With respect to non-publicly-traded securities, the NJCCA and regulations of
the New Jersey Commission require that the corporate charter or partnership
agreement of a regulated company establish a right in the New Jersey Commission
of prior approval with regard to transfers of securities, shares and other
interests and an absolute right in the regulated company to repurchase at the
market price or the purchase price, whichever is the lesser, any such security,
share or other interest in the event that the New Jersey Commission disapproves
a transfer. With respect to publicly-traded securities, such corporate charter
or partnership agreement is required to establish that any such securities of
the entity are held subject to the condition that if a holder thereof is found
to be disqualified by the New Jersey Commission, such holder shall dispose of
such securities.

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Under the terms of the indenture governing the notes, if a holder of the
notes does not qualify under the NJCCA when required to do so, such holder must
dispose of its interest in such securities, and the issuer of such securities
may redeem the securities at the lesser of the outstanding amount or fair market
value.

Conservatorship

If, at any time, it is determined that The Sands, AREP or any other holding
company, intermediary company or entity qualifier has violated the NJCCA or that
any of such entities cannot meet the qualification requirements of the NJCCA,
such entity could be subject to fines or the suspension or revocation of its
license or qualification. If a casino license is suspended for a period in
excess of 120 days or is revoked, or if the New Jersey Commission fails or
refuses to renew such casino license, the New Jersey Commission could appoint a
conservator to operate and dispose of such licensee's casino hotel facilities. A
conservator would be vested with title to all property of such licensee relating
to the casino and the approved hotel subject to valid liens and/or encumbrances.
The conservator would be required to act under the direct supervision of the New
Jersey Commission and would be charged with the duty of conserving, preserving
and, if permitted, continuing the operation of the casino hotel. During the
period of the conservatorship, a former or suspended casino licensee is entitled
to a fair rate of return out of net earnings, if any, on the property retained
by the conservator. The New Jersey Commission may also discontinue any
conservatorship action and direct the conservator to take such steps as are
necessary to effect an orderly transfer of the property of a former or suspended
casino licensee. Such events could result in an event of default under the terms
of the indenture governing the notes.

OIL AND GAS

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,
plant and wildlife protection, reclamation and restoration of properties after
drilling is completed.

The incurrence of significant environmental compliance or remediation costs
by NEG could adversely affect the cash flow available to AREP to service the
indebtedness under the notes.

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MANAGEMENT

The following table sets forth certain information as of June 30, 2004
concerning the directors and executive officers of API and American Real Estate
Finance Corp.:

NAME                 AGE                     POSITION
-------------------------      ----   -----------------------------------------

Carl C. Icahn............       68    Chairman of the Board
William A. Leidesdorf....       59    Director
James L. Nelson..........       54    Director
Jack G. Wasserman........       67    Director
Keith A. Meister.........       31    President and Chief Executive Officer
Martin L. Hirsch.........       49    Executive Vice President and Director of
Acquisitions and Development
John P. Saldarelli.......       62    Vice President, Chief Financial Officer,
Secretary and Treasurer

Carl C. Icahn has been Chairman of the Board of API since November 15,
1990 and Chairman of the Board of American Real Estate Finance Corp. since
inception. He is also Chairman of the Board of Directors and a Director of
Starfire Holding Corporation (formerly Icahn Holding Corporation), a Delaware
corporation, or SHC, and Chairman of the Board and a Director of various of
SHC's subsidiaries. SHC is primarily engaged in the business of holding, either
directly or through subsidiaries, various businesses and investments and its
address is 100 South Bedford Road, Mount Kisco, New York 10549. Mr. Icahn was
Chairman of the Board of Directors of ACF Industries, Inc., or ACF, from October
29, 1984 and a Director of ACF from June 29, 1984 until April 30, 2003. Mr.
Icahn has been a member of the Executive Committee of ACF Industries, LLC, the
successor to ACF, since May 1, 2003. ACF Industries, LLC is a railroad freight
and tank car leasing, sales and manufacturing company. He has also been Chairman
of the Board of Directors and President of Icahn & Co., Inc. since 1968. Icahn &
Co., Inc. is a registered broker-dealer and a member of the National Association
of Securities Dealers. ACF and Icahn & Co., Inc. are deemed to be directly or
indirectly owned and controlled by Mr. Icahn. In January 2003, Mr. Icahn became
Chairman of the Board and a Director of XO Communications Inc., a
telecommunications company. Mr. Icahn has been a Director of Cadus Corporation,
a firm which holds various biotechnology patents, since 1993. Since October
1998, Mr. Icahn has been the President and a Director of Stratosphere
Corporation which operates the Stratosphere Hotel Casino & Tower. Since
September 29, 2000, Mr. Icahn has also served as the Chairman of the Board of GB
Holdings, Inc., GB Property Funding, Inc. and Greate Bay Hotel & Casino, Inc.,
which owns and operates the Sands Hotel. Mr. Icahn also has substantial equity
interests in and controls various partnerships and corporations that invest in
publicly traded securities. Mr. Icahn has been licensed by the New Jersey State
Casino Control Commission and the Nevada State Gaming Control Commission.

William A. Leidesdorf has served as a Director of API since March 26, 1991
and as a Director of American Real Estate Finance Corp. since inception. Mr.
Leidesdorf is also a Director of Renco Steel Group, Inc. and its subsidiary, WCI
Steel, Inc., a steel producer which filed for Chapter 11 bankruptcy protection
in September 2003. Since June 1997, Mr. Leidesdorf has been an owner and a
managing director of Renaissance Housing, LLC, a company primarily engaged in
acquiring multifamily residential properties. From April 1995 through December
1997, Mr. Leidesdorf acted as an independent real estate investment banker.
Since December 29, 2003, Mr. Leidesdorf has served as a Director of American
Entertainment Properties Corp. and American Casino & Entertainment Properties
Finance Corp. which are our indirect subsidiaries. Mr. Leidesdorf has been
licensed by the New Jersey State Casino Control Commission and the Nevada State
Gaming Control Commission.

James L. Nelson has served as a Director of API since June 12, 2001 and as
a Director of American Real Estate Finance Corp. since inception. From 1986
until the present, Mr. Nelson has been Chairman and Chief Executive Officer of
Eaglescliff Corporation, a specialty investment banking, consulting and wealth
management company. From March 1998 through 2003, Mr. Nelson was Chairman and
Chief Executive Officer of Orbit Aviation, Inc. a company engaged in the
acquisition and completion of Boeing Business Jets for private and corporate
clients. From August 1995 until July 1999, he was Chief Executive Officer and
Co-Chairman of Orbitex Management, Inc. Mr. Nelson currently serves as a
Director of Viskase Corporation, a closely-held supplier for the meat and
poultry business, and TransTexas Gas Corporation, a company that is 85% owned by
various entities affiliated with Mr. Icahn and managed by National Energy Group,
Inc. Until March 2001, he was on the Board of Orbitex Financial

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Services Group, a financial services company in the mutual fund sector. Since
December 29, 2003, Mr. Nelson has served as a Director of American Entertainment
Properties Corp. and American Casino & Entertainment Properties Finance Corp.,
which are our indirect subsidiaries. Mr. Nelson has been licensed by the New
Jersey State Casino Control Commission and the Nevada State Gaming Control
Commission.

Jack G. Wasserman has served as a Director of API since December 3, 1993 and
as a Director of American Real Estate Finance Corp. since inception. Mr.
Wasserman is an attorney and a member of the Bars of New York, Florida and the
District of Columbia. From 1966 until 2001, he was a senior partner of
Wasserman, Schneider, Babb & Reed, a New York-based law firm and its
predecessors. Since September 2001, Mr. Wasserman has been engaged in the
practice of law as a sole practitioner. Mr. Wasserman has been licensed by the
New Jersey State Casino Control Commission and the Nevada State Gaming Control
Commission and, at the latter's direction, is an independent member and Chairman
of the Stratosphere Compliance Committee. Since December 29, 2003, Mr. Wasserman
has served as a Director of American Entertainment Properties Corp. and American
Casino & Entertainment Properties Finance Corp., which are our indirect
subsidiaries. Mr. Wasserman is not a member of the Stratosphere's Board of
Directors. Since December 1, 1998, Mr. Wasserman has been a Director of National
Energy Group, Inc. which, on December 4, 1998, sought protection under the
federal bankruptcy laws. A Plan of Reorganization became effective on August 4,
2000, and a final decree closing the case and settling all matters relating to
the bankruptcy proceeding became effective on December 13, 2001. In 2003,
National Energy Group, Inc. became our subsidiary. Mr. Wasserman is also a
Director of Cadus Corporation, a publicly traded biotechnology company.
Affiliates of Mr. Icahn are controlling shareholders of each of these companies.
On March 11, 2004, Mr. Wasserman was appointed, and in June 2004, elected, to
the Board of Directors of Triarc Companies, Inc. a publicly traded diversified
holding company.

Keith A. Meister has served as President and Chief Executive Officer of
API since August 2003 and of American Real Estate Finance Corp. since inception.
He also continues to serve as a senior investment analyst of High River Limited
Partnership, a company owned and controlled by Mr. Icahn, a position he has held
since June 2002. From March 2000 through 2001, Mr. Meister co-founded and served
as co-president of J Net Ventures, a venture capital fund focused on investments
in information technology and enterprise software businesses. From 1997 through
1999, Mr. Meister served as an investment professional at Northstar Capital
Partners, an opportunistic real estate investment partnership. Prior to
Northstar, Mr. Meister served as an investment analyst in the investment banking
group at Lazard Freres. He also serves on the Boards of Directors of the
following companies: XO Communications, Inc., a company that is majority-owned
by various entities controlled by Mr. Icahn; TransTexas Gas Corporation, a
company that is 85% owned by various entities controlled by Mr. Icahn and
managed by National Energy Group, Inc.; and Scientia Corporation, a private
health care venture company in which we hold less than a 10% equity interest.
Since December 29, 2003, Mr. Meister has served as a Director of American
Entertainment Properties Corp. and American Casino & Entertainment Properties
Finance Corp., which are our indirect subsidiaries.

Martin L. Hirsch has served as a Vice President of API since 1991 and of
American Real Estate Finance Corp. since inception. Mr. Hirsch focuses on
investment, management and disposition of real estate properties and other
assets. On March 23, 2000, Mr. Hirsch was elected to serve as Executive Vice
President and Director of Acquisitions and Development of API. From January 1986
to January 1991, Mr. Hirsch was a Vice President of Integrated Resources, Inc.
where he was involved in the acquisition of commercial real estate properties
and asset management. In 1985 and 1986, Mr. Hirsch was a Vice President of Hall
Financial Group where he was involved in acquiring and financing commercial and
residential properties. Mr. Hirsch has served as a Director of Stratosphere
since October 14, 1998. In 1998, Mr. Hirsch was appointed to the Board of
Directors of National Energy Group, Inc. Mr. Hirsch has served as a Director of
GB Holdings, Inc. and GB Property Funding, Inc. since September 29, 2000 and as
a Director of Greate Bay Hotel & Casino, Inc., which owns and operates the Sands
Hotel in Atlantic City, NJ, since February 28, 2001.

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

75

James L. Nelson, William A. Leidesdorf and Jack G. Wasserman are on our
audit committee. We believe that the audit committee members are "independent"
as defined in the currently applicable listing standards of the New York Stock
Exchange.

James L. Nelson, William A. Leidesdorf and Carl C. Icahn are on our
compensation committee.

Each executive officer and director will hold office until our next annual
meeting and until his or her successor is elected and qualified. Directors who
are also audit committee members received quarterly fees of $6,250 in 2003
(increased to $7,500 in 2004) and may receive additional compensation for
special committee assignments. In 2003, Messrs. Leidesdorf, Nelson and Wasserman
received audit and special committee fees of $34,120, $44,040 and $54,130,
respectively.

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

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

On January 5, 2001, Reliance Group Holdings, Inc. commenced an action in
the United States District Court for the Southern District of New York against
Carl C. Icahn, Icahn Associates Corp. and High River alleging that High River's
tender offer for Reliance 9% senior notes violated Section 14(e) of the
Securities Exchange Act of 1934. Reliance sought a temporary restraining order
and preliminary and permanent injunctive relief to prevent defendants from
purchasing the notes. The court initially imposed a temporary restraining order.
Defendants then supplemented the tender offer disclosures. The court conducted a
hearing on the disclosures and other matters raised by Reliance. The court then
denied Reliance's motion for a preliminary injunction and ordered dissolution of
the temporary restraining order following dissemination of the supplement.
Reliance took an immediate appeal to the United States Court of Appeals for the
Second Circuit and sought a stay to restrain defendants from purchasing notes
during the pendency of the appeal. On January 30, 2001, the Court of Appeals
denied plaintiffs' stay application. On January 30, Reliance also sought a
further temporary restraining order from the District Court. The court
considered the matter and reimposed its original restraint until noon the next
day, at which time the restraint against Mr. Icahn and his affiliates was
dissolved. On March 22, 2001, the Court of Appeals ruled in favor of Mr. Icahn
by affirming the judgment of the District Court.

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

EXECUTIVE COMPENSATION(1)

The following table sets forth information in respect of the compensation
of our Chief Executive Officer and each of our other most highly compensated
executive officers for services in all capacities to us for the fiscal years

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ended December 31, 2003, 2002 and 2001.

SUMMARY COMPENSATION TABLE (2)

ANNUAL
COMPENSATION
NAME AND PRINCIPAL POSITION                                                       YEAR      SALARY($)
---------------------------                                                       ----      ---------

Keith A. Meister(3)........................................................       2003        73,150
President and Chief Executive Officer

Albo J. Antenucci, Jr.(3)..................................................       2003       327,663
President and Chief Executive Officer                                            2002       349,442
2001       323,750

Martin L. Hirsch(3)........................................................       2003       319,923
Executive Vice President and Director of Acquisitions and Development            2002       255,500
2001       255,000

John P. Saldarelli(3)......................................................       2003       200,200
Vice President, Chief Financial Officer, Secretary and Treasurer                 2002       190,400
2001       182,000

----------

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

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

(3) On August 18, 2003, Keith A. Meister was elected President and Chief
Executive Officer. On August 15, 2003, Albo J. Antenucci, Jr. resigned as
President and Chief Executive Officer of API. Mr. Antenucci continued as a
part time consultant to us through May 2004. Messrs. Saldarelli and Hirsch
devote all of their time to the performance of services for us and our
investments. Mr. Meister devotes approximately 50% of his time to the
performance of services for us. The directors of API devote only a portion
of their time to performance of service for us. In February 1993, we adopted
a 401(k) plan pursuant to which we will make a matching contribution to an
employee's individual plan account in the amount of one-third (1/3) of the
first six (6%) percent of gross salary contributed by the employee.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

As of June 30, 2004, affiliates of Mr. Icahn, including High Coast Limited
Partnership, a Delaware limited partnership, owned 39,896,836 depositary units,
or approximately 86.5% of the outstanding depositary units, and 8,900,995
preferred units, or approximately 86.5% of the outstanding preferred units. In
light of this ownership position, the Board of Directors has determined that we
are a "controlled company" for the purposes of the New York Stock Exchange's
listing standards and are, therefore, not required to have a majority of
independent directors or to have compensation and nominating committees
consisting entirely of independent directors. API's Board of Directors presently
consists of a majority of independent directors and the audit committee consists
entirely of independent directors.

The affirmative vote of unitholders holding more than 75% of the total
number of all depositary units then outstanding, including depositary units held
by API and its affiliates, is required to remove API. Thus, since Mr. Icahn,
through affiliates, holds approximately 86.5% of the depositary units
outstanding, API will not be able to be removed pursuant to the terms of our
partnership agreement without Mr. Icahn's consent. Moreover, under the

77

partnership agreement, the affirmative vote of API and unitholders owning more
than 50% of the total number of all outstanding depositary units then held by
unitholders, including affiliates of Mr. Icahn, is required to approve, among
other things, selling or otherwise disposing of all or substantially all of our
assets in a single sale or in a related series of multiple sales, our
dissolution or electing to continue our partnership in certain instances,
electing a successor general partner, making certain amendments to the
partnership agreement or causing us, in our capacity as sole limited partner of
AREH, to consent to certain proposals submitted for the approval of the limited
partners of AREH. Accordingly, as affiliates of Mr. Icahn hold in excess of 50%
of the depositary units outstanding, Mr. Icahn, through affiliates, will have
effective control over such approval rights.

The following table provides information, as of March 1, 2004, as to the
beneficial ownership of our depositary units and preferred units for each
director of API, and all directors and executive officers of API as a group.

BENEFICIAL                  BENEFICIAL
OWNERSHIP                  OWNERSHIP OF   PERCENT
OF DEPOSITARY     PERCENT     PREFERRED        OF
NAME OF BENEFICIAL OWNER                                                  UNITS         OF CLASS      UNITS        CLASS
------------------------                                                  -----         --------      -----        -----

Carl C. Icahn(1)..............................................            39,896,836      86.5%      8,900,995      86.5%
All directors and executive officers as a group (7 persons)...            39,896,836      86.5%      8,900,995      86.5%

----------

(1) Carl C. Icahn, through affiliates, is the beneficial owner of the 39,896,836
depositary units set forth above and may also be deemed to be the beneficial
owner of the 700 depositary units owned of record by API Nominee Corp.,
which in accordance with state law are in the process of being turned over
to the relevant state authorities as unclaimed property; however, Mr. Icahn
disclaims such beneficial ownership. The foregoing is exclusive of a 1.99%
ownership interest which API holds by virtue of its 1% general partner
interest in each of us and AREH. Furthermore, pursuant to a registration
rights agreement entered into by affiliates of Mr. Icahn, we have agreed to
pay any expenses incurred in connection with two demand and unlimited
piggy-back registrations requested by affiliates of Mr. Icahn.

Mr. Icahn, through certain affiliates, currently owns 100% of API and over
86% 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 when due may result in the creation of liens in favor of the
pension plan or the Pension Benefit Guaranty Corporation, or 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 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, is the sponsor of several pension plans that 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 a
member 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 include 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. This reporting obligation could cause us to seek
to delay or reconsider the occurrence of such reportable events.

Starfire, 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

78

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.

79

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

RELATED TRANSACTIONS WITH THE GENERAL PARTNER AND ITS AFFILIATES
On October 17, 2003, Carl C. Icahn, Chairman of the Board of API, repaid the
$250 million loan which had been made to him on December 27, 2001. We made the
two-year $250 million loan to Mr. Icahn, secured by securities consisting of
approximately $250 million aggregate market value of our units owned by Mr.
Icahn and shares of a private company owned by Mr. Icahn. The shares of the
private company had an aggregate book value of at least $250 million. In
connection with the pledge, we also received an irrevocable proxy on sufficient
additional shares of the private company so that the pledged shares and the
shares covered by the proxy equaled in excess of 50% of the private company's
shares. We returned the collateral on October 17, 2003, the date the loan was
repaid. The interest on the loan was payable semi-annually, at a per annum rate
equal to the greater of 3.9% and 200 basis points over 90-day LIBOR to be reset
each calendar quarter. The applicable rate in 2003 was 3.9% and in 2002 ranged
from 3.9% to 4.03%. Interest income of approximately $7.9 million and $9.9
million was earned on this loan in 2003 and 2002, respectively. We entered into
this transaction to earn interest income on a secured investment.

In October 2003, pursuant to a purchase agreement dated as of May 16, 2003,
we acquired certain debt and equity securities of 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 our audit committee who were advised by
its independent financial advisor and legal counsel. The securities acquired
were approximately $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 our acquisition of additional securities
of NEG prior to the closing, we own 50.01% of the outstanding common stock of
NEG.

NEG owns a 50% interest in NEG Holding LLC. The other 50% interest in NEG
Holding is held by Gascon Partners, an affiliate of Mr. Icahn. Gascon is the
managing member of NEG Holding. NEG Holding owns NEG Operating LLC which is
engaged in the business of oil and gas exploration and production with
properties located on-shore in Texas, Louisiana, Oklahoma and Arkansas. NEG
Operating owns operating oil and gas properties managed by NEG. Under the NEG
Holding operating agreement, NEG is to receive guaranteed payments of
approximately $47.9 million and a priority distribution of approximately $148.6
million before Gascon receives any distributions. The NEG Holding operating
agreement contains a provision that allows Gascon, or its successor, at any
time, in its sole discretion, to redeem NEG's membership interest in NEG Holding
at a price equal to the fair market value of the interest determined as if NEG
Holding had sold all of its assets for fair market value and liquidated. A
determination of the fair market value of such assets shall be made by an
independent third party jointly engaged by Gascon and NEG. NEG entered into an
agreement to manage TransTexas Gas Corporation, an affiliate of Mr. Icahn, for a
fee of $312,500 per month.

On January 5, 2004, ACEP, our wholly-owned subsidiary, entered into an
agreement to acquire two Las Vegas casino/hotels, Arizona Charlie's Decatur and
Arizona Charlie's Boulder from Mr. Icahn and an entity affiliated with Mr.
Icahn, for aggregate consideration of $125.9 million. The closing of the
acquisition occurred on May 26, 2004. The terms of the transactions were
approved by our audit committee, who received an opinion from its financial
advisor as to the fairness of the consideration to be paid from a financial
point of view. On May 26, 2004, AREH transferred 100% of the common stock of
Stratosphere Corporation to ACEP. As a result, following the acquisition and
contribution, ACEP owns and operates three gaming and entertainment properties
in the Las Vegas metropolitan area.

Mr. Icahn, in his capacity as majority unitholder, will not receive any
additional benefit with respect to distributions and allocations of profits and
losses not shared on a pro rata basis by all other unitholders. In addition, Mr.
Icahn has confirmed to us that neither he nor any of his affiliates will receive
any fees from us in consideration for services rendered in connection with
non-real estate related investments by us. We may determine to make investments
in which Mr. Icahn or his affiliates have independent investments in such
assets. We may enter into other transactions with API and its affiliates,
including, without limitation, buying and selling assets from or to API or its
affiliates and participating in joint venture investments in assets with API or
its affiliates, whether real estate or non-real estate related, provided the
terms of all such transactions are fair and reasonable to us. Furthermore, it
should be noted that our partnership agreement provides that API and its
affiliates are permitted to have other

80

business interests and may engage in other business ventures of any nature
whatsoever, and may compete directly or indirectly with our business. Mr. Icahn
and his affiliates currently invest in and perform investment management
services with respect to assets that may be similar to those we may invest in
and intend to continue to do so; pursuant to the partnership agreement, however,
we shall not have any right to participate therein or receive or share in any
income or profits derived therefrom.

For the years ended December 31, 2003 and 2002, we made no payments with
respect to the depositary units owned by API. However, in 2003 and 2002, API was
allocated approximately $1.2 million and approximately $1.3 million,
respectively, of our net earnings (exclusive of the earnings of NEG allocated to
API prior to the acquisition of NEG) as a result of its 1.99% general partner
interest in us.

On March 31, 2003, Mr. Icahn received 403,673 preferred units as part of our
scheduled annual preferred unit distribution and received an additional 423,856
preferred units on March 31, 2004 as part of such scheduled annual preferred
unit distribution.

In 1997, we entered into a license agreement for a portion of office space
from an affiliate of API. The license agreement dated as of February 1, 1997
expires May 22, 2004 unless sooner terminated in accordance with the agreement.
Pursuant to the license agreement, we have the non-exclusive use of
approximately 2,275 square feet for which we pay monthly rent of $11,185 plus
10.77% of certain "additional rent." The agreement has been extended on a
month-to-month basis. For the six months ended June 30, 2004 and the years ended
December 31, 2003, 2002 and 2001, we paid an affiliate of API approximately
$65,000, $159,000, $153,000 and $147,000, respectively, of rent in connection
with this licensing agreement. The terms of such license agreement were reviewed
and approved by our audit committee.
As of May 26, 2004, American Casino has entered into an intercompany
services agreement with GB Holdings, Inc. pursuant to which it provides
management and consulting services. American Casino is compensated based upon an
allocation of salaries plus a 15% overhead charged based upon the salary
allocation and reimbursed for reasonable out-of-pocket expenses. During 2002 and
2003 and the six months ended June 30, 2004, American Casino received payments
from the company that owns the Sands in Atlantic City, New Jersey, which is
controlled by affiliates of Mr. Icahn, for services provided by certain of its
employees in an amount equal to approximately $27,900 and $190,600 and $116,200,
respectively.

For the six months ended June 30, 2004 and for the year ended December 31,
2003, Stratosphere billed affiliates of API approximately $0.1 million and $0.2
million, respectively, for administrative services performed by Stratosphere
personnel. For the years ended December 31, 2003, 2002 and 2001, Stratosphere
also received hotel revenue of $3,000, $123,000 and $600,000, respectively, in
connection with a tour and travel agreement entered into with an affiliate of
API. Stratosphere also received approximately $101,000 in hotel and food revenue
from an affiliate of API in the year ended December 31, 2003 in connection with
a conference held at Stratosphere.

For the six months ended June 30, 2004 and the year ended December 31,
2003, we paid approximately $120,000 and $81,000 to an affiliate of API for
telecommunication services.

NEG received management fees from an affiliate of approximately $5.5
million in the six months ended June 30, 2004 and $7,967,000, $7,637,000 and
$2,699,000 in the years ended December 31, 2003, 2002 and 2001.

PROPERTY MANAGEMENT AND OTHER RELATED TRANSACTIONS

API and its affiliates may receive fees in connection with the acquisition,
sale, financing, development, construction, marketing and management of new
properties acquired by us. As development and other new properties are acquired,
developed, constructed, operated, leased and financed, API or its affiliates may
perform acquisition functions, including the review, verification and analysis
of data and documentation with respect to potential acquisitions, and perform
development and construction oversight and other land development services,
property management and leasing services, either on a day-to-day basis or on an
asset management basis, and may perform other services and be entitled to fees
and reimbursement of expenses relating thereto, provided the terms of such
transactions are fair and reasonable to us in accordance with our partnership
agreement and customary to the industry. It is not possible to state precisely
what role, if any, API or any of its affiliates may have in the acquisition,
development or management of any new investments. Consequently, it is not
possible to state the amount of the income, fees or commissions API or its
affiliates might be paid in connection therewith since the amount thereof is
dependent upon the specific circumstances of each investment, including the
nature of the services provided, the location of the investment and the amount
customarily paid in such locality for such services. Subject to the specific
circumstances surrounding each transaction and the overall fairness and
reasonableness thereof to us, the fees charged by API and its affiliates for the
services described below generally will be within the ranges set forth below:

81

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

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

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

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

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

In addition, our employees may, from time to time, provide services to
affiliates of API, with us being reimbursed therefor. Reimbursement to us by
such affiliates in respect of such services is subject to review and approval by
our audit committee. For the six months ended June 30, 2004 and the years ended
December 31, 2003 and 2002, we received approximately $27,000, $68,000 and
$47,000, respectively, for such services. Also, an affiliate of API provided
certain administrative services to us in the amount of approximately $40,000 in
the six months ended June 30, 2004 and approximately $78,000, $77,000 and
$73,000 in the years ended December 31, 2003, 2002 and 2001, respectively.

82

DESCRIPTION OF PREFERRED UNITS AND OF
CERTAIN INDEBTEDNESS AND OTHER OBLIGATIONS

PREFERRED UNITS

Each preferred unit has a liquidation preference of $10.00 and entitles the
holder to receive distributions, 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 of the unit), payable annually on March 31 of each
year, each referred to as a payment date. On any payment date, we, with the
approval of our audit committee, may opt to redeem all, but not less than all,
of the preferred units for a price, payable either in all cash or by issuance of
additional depositary units, equal to the liquidation preference of the
preferred units, plus any accrued but unpaid distributions thereon. On March 31,
2010, we must redeem all, but not less than all, of the preferred units on the
same terms as any optional redemption. As of June 30, 2004, there were
10,286,264 preferred units outstanding, including 489,657 units issued on March
31, 2004 as a dividend on the previously outstanding preferred units.

In March 2004, we increased the number of authorized preferred units to
10,400,000.

AMERICAN CASINO & ENTERTAINMENT PROPERTIES LLC 7.85% SENIOR SECURED NOTES DUE
2012

In January 2004, our subsidiary, ACEP, and its subsidiary American Casino &
Entertainment Finance Corp. consummated the 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 notes are guaranteed by the
subsidiaries of ACEP and the notes and guarantees are secured by a
second-priority security interest, subject to certain customary exceptions, in
substantially all of ACEP's and the guarantors' assets, including the capital
stock or other equity interests of the subsidiaries that own the Stratosphere,
Arizona Charlie's Decatur and Arizona Charlie's Boulder.

The notes restrict the ability of ACEP, subject to certain exceptions, to
incur additional debt; pay dividends and make contributions; 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 restrictions, among other things, limit
dividends, distributions and other transfers by ACEP and its subsidiaries to us,
as well as loans and other transactions between us and ACEP and its
subsidiaries.

AMERICAN CASINO & ENTERTAINMENT PROPERTIES LLC BANK CREDIT FACILITY

In January 2004, in connection with the $215 million senior secured note
offering, a syndicate of lenders provided a non-amortizing $20.0 million
revolving credit facility to ACEP. The commitments are available to ACEP and its
subsidiaries in the form of revolving loans, and include a letter of credit
facility (subject to a $10.0 million sublimit). Loans made under the senior
secured revolving credit facility will mature and the commitments under them
will terminate on January 29, 2008.

The senior secured revolving credit facility is jointly, severally and
unconditionally guaranteed by the subsidiaries of ACEP that also guarantee the
notes. This indebtedness is ACEP's and the guarantors' senior secured debt and
ranks equally with all of ACEP's and the guarantors' existing and future senior
secured debt. However, the senior secured revolving credit facility and the
guarantees in respect thereof are secured by a first-priority security interest
in the note collateral, while the notes issued by ACEP are secured by a
second-priority security interest in the note collateral.

The loans under the senior secured revolving credit facility will bear
interest, at ACEP's option, at a rate per annum equal to (a) a LIBOR rate plus a
spread payable monthly, bi-monthly or quarterly, or (b) a base rate plus a
spread, payable quarterly. ACEP will pay administration fees, commitment fees,
letter of credit fees and certain expenses and provide certain indemnities that
are customary for a financing of this type.

The senior secured revolving credit facility contains customary affirmative
covenants. The negative covenants are similar to those contained in the
indenture with respect to ACEP's notes. However, certain of those covenants are
more restrictive than those contained in the indenture, including certain
financial covenants with which ACEP must comply on an ongoing basis and
limitations on liens.

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MORTGAGE LOANS

Properties owned by AREP and its subsidiaries are subject to mortgages in an
aggregate principal amount of approximately $94.2 million as of June 30, 2004.
Maturities of the mortgage loans range from October 2007 through September 30,
2018. Contractual future principal payments are as follows: 2004, $2.2 million;
2005, $4.7 million; 2006, $5.0 million; 2007, $11.7 million; 2008, $24.3
million; 2009-2013, $30.6 million; and 2014, 15.7 million. The mortgages relate
to our rental real estate portfolio, which we are offering for sale, and we will
pay mortgages with respect to properties that we sell from the related sale
proceeds or the mortgages will be assumed by the purchasers. All mortgages are
non-recourse to us and AREH, except for indemnification obligations customary
for non-recourse financing. Interest rates range from 5.630% per annum to 8.250%
per annum.

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DESCRIPTION OF NOTES

GENERAL

You can find the definitions of certain terms used in this description under
the subheading "Certain Definitions." In this description, the word "AREP"
refers only to American Real Estate Partners, L.P., the words "AREP Finance"
refer only to American Real Estate Finance Corp., the word "AREH" refers only to
American Real Estate Holdings Limited Partnership, and the word "API" refers
only to American Property Investors, Inc. and not to any of their respective
Subsidiaries. For the avoidance of doubt, AREH will be deemed to be a Subsidiary
of AREP for so long as AREH remains a Guarantor. The term "Issuers" refers to
AREP and AREP Finance, collectively.

The issuers issued the notes under an indenture among the issuers, AREH and
Wilmington Trust Company, as trustee, in a private transaction that was not
subject to the registration requirements under the Securities Act. See "Notice
to Investors." The terms of the notes include those stated in the indenture and
those made part of the indenture by reference to the Trust Indenture Act of
1939.

The following description is a summary of the material provisions of the
indenture and the registration rights agreement. It does not restate those
agreements in their entirety. We urge you to read the indenture and the
registration rights agreement because they, and not this description, define
your rights as holders of the notes. Copies of the indenture and the
registration rights agreement are available as set forth below under " --
Additional Information." Certain defined terms used in this description but not
defined below under " -- Certain Definitions" have the meanings assigned to them
in the indenture and the registration rights agreement.

For the avoidance of doubt, the inclusion of exceptions to the provisions
(including covenants and definitions) set forth herein will not be interpreted
to imply that the matters permitted by the exception would be limited by the
terms of such provisions but for such exceptions.

The registered holder of a note will be treated as the owner of it for all
purposes. Only registered holders will have rights under the indenture.

BRIEF DESCRIPTION OF THE NOTES AND THE NOTE GUARANTEE

THE NOTES

The notes:

-   are the general unsecured obligation of each of the issuers;

-   are pari passu in right of payment to all existing and future senior
Indebtedness of each of the issuers;

-   are senior in right of payment to any future subordinated Indebtedness
of each of the issuers; and

-   are effectively subordinated to the secured Indebtedness of the issuers
to the extent of the value of the collateral securing such Indebtedness.
As of June 30, 2004, the issuers did not have any secured Indebtedness.

THE NOTE GUARANTEE

The Guarantee of the notes:

-   are the general unsecured obligation of AREH;

-   are pari passu in right of payment to all existing and future senior
Indebtedness of AREH;

-   are senior in right of payment to any future subordinated Indebtedness
of AREH; and

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-   are effectively subordinated to the secured Indebtedness of AREH to the
extent of the value of the collateral securing such Indebtedness. As of
June 30, 2004, AREH had $309.2 million of secured Indebtedness.

The operations of AREP are conducted through its Subsidiaries (including
AREH) and, therefore, AREP depends on the cash flow of AREP's Subsidiaries and
AREH to meet its obligations, including its obligations under the notes. The
notes will not be guaranteed by any of AREP's Subsidiaries other than AREH. The
notes and the guarantee will be effectively subordinated in right of payment to
all Indebtedness and other liabilities and commitments (including trade payables
and lease obligations) of AREP's Subsidiaries (other than AREH). Any right of
the issuers or AREH to receive assets of any of their Subsidiaries (other than
AREH) upon that Subsidiary's liquidation or reorganization (and the consequent
right of the holders of the notes to participate in those assets) will be
effectively subordinated to the claims of that Subsidiary's creditors, except to
the extent that any of the issuers or AREH is itself recognized as a creditor of
that Subsidiary, in which case the claims of the issuers and AREH would still be
subordinate in right of payment to any security in the assets of the Subsidiary
and any Indebtedness of the Subsidiary senior to that held by the issuers or
AREH. The covenants of the notes do not restrict the ability of AREP's
Subsidiaries, other than AREH, from incurring additional Indebtedness or
creating liens, nor do the covenants of the notes restrict the ability of AREH,
AREP or its Subsidiaries from making investments or entering into sale and
leaseback transactions.

PRINCIPAL, MATURITY AND INTEREST

The issuers issued $353.0 million in aggregate principal amount of notes in
the private offering. The issuers may issue additional notes ("Additional
Notes") from time to time. Any offering of Additional Notes is subject to the
covenant " -- Certain Covenants -- Incurrence of Indebtedness and Issuance of
Preferred Stock." In the case of each series, the notes and any Additional Notes
subsequently issued under the indenture will be treated as a single class for
all purposes under the indenture, including, without limitation, waivers,
amendments, redemption and offers to purchase. The issuers will issue notes in
denominations of $1,000 and integral multiples of $1,000. The notes will mature
on June 1, 2012.

Interest on the notes accrues at the rate of 8 1/8% per annum and is payable
semi-annually in arrears on June 1 and December 1, commencing on December 1,
2004. Interest on overdue principal and interest and Liquidated Damages, if any,
will accrue at a rate that is 1% higher than the then applicable interest rate
on the notes. The issuers will make each interest payment to the holders of
record on the immediately preceding May 15 and November 15.

Interest on the notes accrues from the date of original issuance or, if
interest has already been paid, from the date it was most recently paid.
Interest will be computed on the basis of a 360-day year comprised of twelve
30-day months.

METHODS OF RECEIVING PAYMENTS ON THE NOTES

If a noteholder holds at least $2.0 million aggregate principal amount of
notes, such holder may give wire transfer instructions to AREP and the issuers
will instruct the trustee to pay all principal, interest and premium and
Liquidated Damages, if any, on that holder's notes in accordance with those
instructions. All other payments on the notes will be made at the office or
agency of the paying agent and registrar within the City and State of New York
unless the issuers elect to make interest payments by check mailed to the
noteholders at their address set forth in the register of holders. In addition,
all payments will be subject to the applicable rules and procedures of the
settlement systems (including, if applicable, those of Euroclear and
Clearstream), which may change from time to time.

PAYING AGENT AND REGISTRAR FOR THE NOTES

The trustee will initially act as paying agent and registrar. The issuers
may change the paying agent or registrar without prior notice to the holders of
the notes, and the issuers or any of their Subsidiaries (including AREH) may act
as paying agent or registrar.

TRANSFER AND EXCHANGE

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A holder may transfer or exchange notes in accordance with the provisions of
the indenture. The registrar and the trustee may require a holder, among other
things, to furnish appropriate endorsements and transfer documents in connection
with a transfer of notes. Holders will be required to pay all taxes due on
transfer. The issuers will not be required to transfer or exchange any note
selected for redemption. Also, the issuers will not be required to transfer or
exchange any note for a period of 15 days before a selection of notes to be
redeemed.

NOTE GUARANTEE

The notes are guaranteed by AREH. AREP may, at its option, add subsidiary
Guarantors to the notes. Each Guarantor's obligations under its Note Guarantee
will be limited as necessary to prevent the Note Guarantee from constituting a
fraudulent conveyance under applicable law. See "Risk Factors -- Federal and
state statutes allow courts, under specific circumstances, to void guarantees
and require noteholders to return payments received from the guarantor."

Any Guarantor's Note Guarantee will be released:

(1) upon the substitution of a successor to AREH or other release as
described under the heading "Certain Covenants -- Merger, Consolidation or
Sale of Assets"; and

(2) upon legal defeasance or satisfaction and discharge of the indenture
as provided below under the captions " -- Covenant Defeasance" and " --
Satisfaction and Discharge."

OPTIONAL REDEMPTION

At any time prior to June 1, 2007, the issuers may on one or more occasions
redeem up to 35% of the aggregate principal amount of notes (including
Additional Notes) issued under the indenture at a redemption price of 108.125%
of the principal amount thereof, plus accrued and unpaid interest and Liquidated
Damages, if any, to the redemption date, with the net cash proceeds of one or
more Equity Offerings; provided, however, that:

(1) at least 65% of the aggregate principal amount of notes issued under
the indenture remains outstanding immediately after the occurrence of such
redemption (excluding notes held by AREP and its Subsidiaries (including any
Guarantor)); and

(2) the redemption occurs within 60 days of the date of the closing of
such Equity Offering.

Except pursuant to the preceding paragraph, the notes will not be redeemable
at the issuers' option prior to June 1, 2008.

On or after June 1, 2008, the issuers may redeem all or a part of the notes
upon not less than 15 nor more than 60 days' notice, at the redemption prices
(expressed as percentages of principal amount) set forth below plus accrued and
unpaid interest and Liquidated Damages, if any, on the notes redeemed, to the
applicable redemption date, if redeemed during the twelve-month period beginning
on one of the years indicated below:

YEAR               PERCENTAGE
----------------------      ----------

2008..................      104.063%
2009..................      102.031%
2010 and thereafter...      100.000%

MANDATORY DISPOSITION PURSUANT TO GAMING LAWS

If any Gaming Authority requires that a holder or Beneficial Owner of notes
be licensed, qualified or found suitable under any applicable Gaming Law and
such holder or Beneficial Owner:

(1) fails to apply for a license, qualification or a finding of
suitability within 30 days (or such shorter period as may be required by the
applicable Gaming Authority) after being requested to do so by the Gaming
Authority; or

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(2) is denied such license or qualification or not found suitable;

AREP shall then have the right, at its option:

(1) to require each such holder or Beneficial Owner to dispose of its
notes within 30 days (or such earlier date as may be required by the
applicable Gaming Authority) of the occurrence of the event described in
clause (1) or (2) above, or

(2) to redeem the notes of each such holder or Beneficial Owner, in
accordance with Rule 14e-1 of the Exchange Act, if applicable, at a
redemption price equal to the lowest of:

(a) the principal amount thereof, together with accrued and unpaid
interest and Liquidated Damages, if any, to the earlier of the date of
redemption, the date 30 days after such holder or Beneficial Owner is
required to apply for a license, qualification or finding of suitability
(or such shorter period that may be required by any applicable Gaming
Authority) if such holder or Beneficial Owner fails to do so
("Application Date") or of the date of denial of license or
qualification or of the finding of unsuitability by such Gaming
Authority;

(b) the price at which such holder or Beneficial Owner acquired the
notes, together with accrued and unpaid interest and Liquidated Damages,
if any, to the earlier of the date of redemption, the Application Date
or the date of the denial of license or qualification or of the finding
of unsuitability by such Gaming Authority; and

(c) such other lesser amount as may be required by any Gaming
Authority.

Immediately upon a determination by a Gaming Authority that a holder or
Beneficial Owner of the notes will not be licensed, qualified or found suitable
and must dispose of the notes, the holder or Beneficial Owner will, to the
extent required by applicable Gaming Laws, have no further right:

(1) to exercise, directly or indirectly, through any trustee or nominee
or any other person or entity, any right conferred by the notes, the Note
Guarantee or the indenture; or

(2) to receive any interest, Liquidated Damages, dividend, economic
interests or any other distributions or payments with respect to the notes
and the Note Guarantee or any remuneration in any form with respect to the
notes and the Note Guarantee from the issuers, any Note Guarantor or the
trustee, except the redemption price referred to above.

AREP shall notify the trustee in writing of any such redemption as soon as
practicable. Any holder or Beneficial Owner that is required to apply for a
license, qualification or a finding of suitability will be responsible for all
fees and costs of applying for and obtaining the license, qualification or
finding of suitability and of any investigation by the applicable Gaming
Authorities and the issuers and any Note Guarantor will not reimburse any holder
or Beneficial Owner for such expense.

MANDATORY REDEMPTION

The issuers are not required to make mandatory redemption or sinking fund
payments with respect to the notes.

REPURCHASE AT THE OPTION OF HOLDERS

CHANGE OF CONTROL

If a Change of Control occurs, each holder of notes will have the right to
require the issuers to repurchase all or any part (equal to $1,000 or an
integral multiple of $1,000) of that holder's notes pursuant to a Change of
Control offer on the terms set forth in the indenture. In the Change of Control
offer, the issuers will offer a Change of Control payment in cash equal to 101%
of the aggregate principal amount of notes repurchased plus accrued and

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unpaid interest and Liquidated Damages, if any, on the notes repurchased, to the
date of purchase. Within 30 days following any Change of Control, the issuers
will mail a notice to each holder describing the transaction or transactions
that constitute the Change of Control and offering to repurchase notes on the
Change of Control payment date specified in the notice, which date will be no
earlier than 30 days and no later than 60 days from the date such notice is
mailed, pursuant to the procedures required by the indenture and described in
such notice.

On the Change of Control payment date, the issuers will, to the extent
lawful:

(1) accept for payment all notes or portions of notes properly tendered
and not withdrawn pursuant to the Change of Control offer;

(2) deposit with the paying agent an amount equal to the Change of
Control payment in respect of all notes or portions of notes properly
tendered; and

(3) deliver or cause to be delivered to the trustee the notes properly
accepted together with an Officers' Certificate stating the aggregate
principal amount of notes or portions of notes being purchased by the
issuers.

The paying agent will promptly mail to each holder of notes properly
tendered the Change of Control payment for such notes, and the trustee will
promptly authenticate and mail (or cause to be transferred by book entry) to
each holder a new note equal in principal amount to any unpurchased portion of
the notes surrendered, if any; provided that each new note will be in a
principal amount of $1,000 or an integral multiple of $1,000. The issuers will
publicly announce the results of the Change of Control offer on or as soon as
practicable after the Change of Control payment date.

The provisions described above that require the issuers to make a Change of
Control offer following a Change of Control will be applicable whether or not
any other provisions of the indenture are applicable. Except as described above
with respect to a Change of Control, the indenture does not contain provisions
that permit the holders of the notes to require that the issuers repurchase or
redeem the notes in the event of a takeover, recapitalization or similar
transaction.

The issuers will not be required to make a Change of Control offer upon a
Change of Control if a third party makes the Change of Control offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the indenture applicable to a Change of Control offer made by the issuers and
purchases all notes properly tendered and not withdrawn under the Change of
Control offer.

The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition by AREP or AREH of "all or
substantially all" of its properties or assets. Although there is a limited body
of case law interpreting the phrase "substantially all," there is no precise
established definition of the phrase under applicable law. Accordingly, the
ability of a holder of notes to require the issuers to repurchase its notes as a
result of a sale, lease, transfer, conveyance or other disposition of less than
all of the assets of AREP or AREH to another Person or group may be uncertain.
In addition, under certain circumstances the definition of Change of Control
excludes certain sales, leases transfers, conveyances or other dispositions even
if they constitute "all or substantially all" of the properties or assets of
AREP or AREH.

CERTAIN COVENANTS

RESTRICTED PAYMENTS

AREP will not, and will not permit any of its Subsidiaries (including any
Guarantor) to:

(1) declare or pay any dividend or make any other distribution on
account of AREP's or any of its Subsidiaries' (including any Guarantor's)
Equity Interests or to the holders of AREP's or any of its Subsidiaries'
(including AREH's) Equity Interests in their capacity as such (other than
dividends or distributions payable in Equity Interests (other than
Disqualified Stock) of AREP or to AREP or a Subsidiary of AREP (including
AREH));

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(2) purchase, redeem or otherwise acquire or retire for value
(including, without limitation, in connection with any merger or
consolidation involving AREP) any Equity Interests of AREP; or

(3) make any payment on or with respect to, or purchase, redeem, defease
or otherwise acquire or retire for value any Indebtedness of AREP or any
Guarantor that is contractually subordinated to the notes or to any Note
Guarantee (excluding any intercompany Indebtedness between or among AREP and
any of its Subsidiaries (including any Guarantor)), except a payment of
interest, Other Liquidated Damages or principal at the Stated Maturity on
such subordinated Indebtedness (all such payments and other actions set
forth in these clauses (1) through (3) (except as excluded therein) above
being collectively referred to as "Restricted Payments"),

unless, at the time of and after giving effect to such Restricted Payment:

(1) no Default or Event of Default has occurred and is continuing or
would occur as a consequence of such Restricted Payment;

(2) AREP or any Guarantor would, at the time of such Restricted Payment
and after giving pro forma effect thereto as if such Restricted Payment had
been made at the beginning of the most recently ended four-quarter period
for which financial statements are available, have been permitted to incur
at least $1.00 of additional Indebtedness pursuant to the first paragraph of
the covenant described below under the caption " -- Incurrence of
Indebtedness and Issuance of Preferred Stock"; and

(3) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by AREP and its Subsidiaries (including any
Guarantor) after the Issuance Date (excluding Restricted Payments permitted
by clauses (2), (3), (4), (6) and (8) of the next succeeding paragraph) is
less than the sum, without duplication, of:

(a) 50% of the Consolidated Net Income of AREP for the period (taken
as one accounting period) from July 1, 2006 to the end of AREP's most
recently ended fiscal quarter for which financial statements are
available at the time of such Restricted Payment (or, if such
Consolidated Net Income for such period is a deficit, less 100% of such
deficit); provided, however, that to the extent any payments of Tax
Amounts were not deducted in the calculation of Consolidated Net Income
during the applicable period, for purposes of this clause (a), such
payments of Tax Amounts will be deducted from Consolidated Net Income,
plus

(b) 100% of the aggregate net cash proceeds received by AREP since
the date of the indenture as a contribution to its equity capital or
from the issue or sale of Equity Interests of AREP (excluding
Disqualified Stock) or from the issue or sale of convertible or
exchangeable Disqualified Stock or convertible or exchangeable debt
securities of AREP that have been converted into or exchanged for such
Equity Interests (other than Equity Interests or Disqualified Stock or
debt securities sold to a Subsidiary of AREP (including AREH)).

So long as no Default or Event of Default has occurred and is continuing or
would be caused thereby (except with respect to clauses (6) and (8), which
payments will be permitted notwithstanding an Event of Default), the preceding
provisions will not prohibit:

(1) the payment of any dividend or the consummation of any irrevocable
redemption or payment within 60 days after the date of declaration of the
dividend or giving of the redemption notice or becoming irrevocably
obligated to make such payment, as the case may be, if at the date of
declaration or notice or becoming irrevocably obligated to make such
payment, the dividend or payment would have complied with the provisions of
the indenture;

(2) the making of any Restricted Payment in exchange for, or out of the
net cash proceeds of the substantially concurrent sale (other than to a
Subsidiary of AREP (including any Guarantor)) of, Equity Interests (other
than Disqualified Stock) or from the substantially concurrent contribution
of equity capital to AREP (including any contribution of equity capital by
or to, or sale of Equity Interests of a successor or substitute entity
pursuant to the covenant "Mergers, Consolidations or Sales of Assets";
provided, however, that the amount of any such net cash proceeds that are
utilized for any such redemption, repurchase, retirement, defeasance or
other acquisition

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will be excluded from clause (3)(b) of the preceding paragraph;

(3) the repurchase, redemption, defeasance or other acquisition or
retirement for value of Indebtedness of AREP or any Guarantor that is
contractually subordinated to the notes with the net cash proceeds from a
substantially concurrent incurrence of Permitted Refinancing Indebtedness;

(4) the declaration or payment of any dividend or distribution by a
Subsidiary of AREP (including any Guarantor) to the holders of its Equity
Interests; provided, that if any such dividend or distribution is paid to an
Affiliate of the Principal (other than AREP or any of its Subsidiaries
(including any Guarantor)), that any such dividend or distribution is paid
on a pro rata basis to all holders (including AREP or any of its
Subsidiaries (including any Guarantor)) that hold securities whose terms
(either contractually or by law) entitle them to the same distribution upon
which such dividend or distribution is paid;

(5) the repurchase, redemption or other acquisition or retirement for
value of any Equity Interests of AREP or any Subsidiary of AREP (including
any Guarantor) held by any member of AREP's (or any of its Subsidiaries'
(including any Guarantors)) management pursuant to any management equity
subscription agreement, stock option agreement or similar agreement;
provided that the aggregate price paid for all such repurchased, redeemed,
acquired or retired Equity Interests shall not exceed $2.0 million;

(6) for so long as AREP is a partnership or otherwise a pass-through
entity for federal income tax purposes for any period, AREP may make cash
distributions to its equity holders or partners in an amount not to exceed
the Tax Amount for such period; provided that a distribution of the Tax
Amount shall be made no earlier than 20 days prior to the due date for such
tax (or the date that quarterly estimated taxes are required to be paid)
that would be payable by AREP if it were a Delaware corporation;

(7) the purchase, redemption or retirement for value of Capital Stock of
AREP not owned by the Principal or any Affiliate of the Principal, provided
that (a) AREP would, at the time of such Restricted Payment and after giving
pro forma effect thereto as if such Restricted Payment had been made at the
beginning of the most recently ended four-quarter period for which financial
statements are available, have been permitted to incur at least $1.00 of
additional Indebtedness pursuant to the first paragraph of the covenant
described below under the caption " -- Incurrence of Indebtedness and
Issuance of Preferred Stock" and (b) after giving effect to such purchase,
redemption or retirement, the Partners' Equity is at least $1.0 billion;

(8) the payment of dividends on the Preferred Units in the form of
additional Preferred Units or other Capital Stock of AREP (that is not
Disqualified Stock) or the payment of cash dividends on the Preferred Units
in lieu of fractional Preferred Units; provided that the aggregate amount of
cash under this clause (8) does not exceed $100,000 in any calendar year;

(9) the purchase, redemption or retirement for value of the Preferred
Units on or before March 31, 2010, provided that (a) AREP would, at the time
of such Restricted Payment and after giving pro forma effect thereto as if
such Restricted Payment had been made at the beginning of the most recently
ended four-quarter period for which financial statements are available, have
been permitted to incur at least $1.00 of additional Indebtedness pursuant
to the first paragraph of the covenant described below under the caption "
-- Incurrence of Indebtedness and Issuance of Preferred Stock" and (b) after
giving effect to such purchase, redemption or retirement, the Partners'
Equity is at least $1.0 billion; and

(10) other Restricted Payments in an aggregate amount not to exceed
$50.0 million since the date of the indenture.

For purposes of determining compliance with this covenant, in the event that
a proposed Restricted Payment meets the criteria of more than one of the
categories of Restricted Payments described in clauses (1) through (10) above,
or is permitted to be made pursuant to the first paragraph of this covenant,
AREP shall, in its sole discretion, classify (or later reclassify, in whole or
in part, in its sole discretion) such Restricted Payment in any manner that
complies with this covenant.

The amount of all Restricted Payments (other than cash) will be the Fair
Market Value on the date of the

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Restricted Payment of the assets, property or securities proposed to be
transferred or issued by AREP or such Subsidiary (including AREH), as the case
may be, pursuant to the Restricted Payment.

INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK

Neither AREP nor any Guarantor will create, incur, issue, assume, guarantee
or otherwise become liable, contingently or otherwise, with respect to
(collectively, "incur") any Indebtedness (including Acquired Debt), and neither
AREP nor any Guarantor will issue any Disqualified Stock; provided, however,
that AREP or any Guarantor may incur Indebtedness (including Acquired Debt) or
issue Disqualified Stock, if immediately after giving effect to the incurrence
of additional Indebtedness (including Acquired Debt) or issuance of Disqualified
Stock (including a pro forma application of the net proceeds therefrom), the
ratio of the aggregate principal amount of all outstanding Indebtedness
(excluding Indebtedness incurred pursuant to clauses (4), (7) and (8) of the
following paragraph and any Hedging Obligations of AREP's Subsidiaries that are
not Guarantors) of AREP and its Subsidiaries (including any Guarantor) on a
consolidated basis determined in accordance with GAAP (including an amount of
Indebtedness equal to the principal amount of any Guarantees by AREP or its
Subsidiaries (including any Guarantor) of any Indebtedness of a Person (that is
not AREP or a Subsidiary) to the extent such Guarantees were not included in
computing AREP's or its Subsidiaries' (including any Guarantor's) outstanding
Indebtedness) to the Tangible Net Worth of AREP and its Subsidiaries (including
any Guarantor) on a consolidated basis, would have been less than 1.75 to 1.

The preceding paragraph of this covenant will not prohibit the incurrence of
any of the following items of Indebtedness (collectively, "Permitted Debt"):

(1) the incurrence by AREP or any Guarantor of Indebtedness represented
by the notes to be issued on the date of the indenture and the exchange
notes to be issued pursuant to the registration rights agreement;

(2) the incurrence by AREP or any Guarantor of Permitted Refinancing
Indebtedness in exchange for, or the net proceeds of which are used to
refund, refinance or replace Indebtedness (other than intercompany
Indebtedness) that was incurred under the first paragraph of this covenant
or clauses (1), (2) or (9) of this paragraph or any Existing Indebtedness;

(3) the incurrence by AREP or any Guarantor of intercompany Indebtedness
between or among AREP and any of its Subsidiaries (including AREH) or the
issuance of Disqualified Stock by any Guarantor to AREP;

(4) the incurrence by AREP or any Guarantor of Hedging Obligations that
are incurred in the normal course of business;

(5) the incurrence by AREP or any Guarantor of Indebtedness arising from
the honoring by a bank or other financial institution of a check, draft or
similar instrument inadvertently drawn against insufficient funds, so long
as such Indebtedness is covered within five business days;

(6) the incurrence by AREP or any Guarantor of the Existing
Indebtedness;

(7) Indebtedness arising from any agreement entered into by AREP or AREH
providing for indemnification, purchase price adjustment or similar
obligations, in each case, incurred or assumed in connection with an asset
sale;

(8) Indebtedness of AREP or any Guarantor attributable to Bad Boy
Guarantees; and

(9) the incurrence by AREP or any Guarantor of additional Indebtedness
in an aggregate principal amount at any time outstanding, including all
Permitted Refinancing Indebtedness incurred to refund, refinance or replace
any Indebtedness incurred pursuant to this clause (9), not to exceed $10.0
million at any one time outstanding.

Neither AREP nor any Guarantor will incur any Indebtedness (including
Permitted Debt) that is contractually subordinated in right of payment to any
other Indebtedness of AREP or any Guarantor unless such Indebtedness is also
contractually subordinated in right of payment to the notes and the Note
Guarantee, as applicable, on

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substantially identical terms; provided, however, that no Indebtedness of AREP
or any Guarantor shall be deemed to be contractually subordinated in right of
payment to any other Indebtedness of AREP or any Guarantor for purposes of this
paragraph solely by virtue of being unsecured or secured to a lesser extent or
on a junior Lien basis.

To the extent AREP or any Guarantor incurs any intercompany Indebtedness,
(a) if AREP or any Guarantor is the obligor on such Indebtedness, such
Indebtedness (other than intercompany Indebtedness of any Guarantor to or from
AREP or another Guarantor) must be expressly subordinated to the prior payment
in full in cash of all Obligations with respect to the notes and (b)(1) any
subsequent issuance or transfer of Equity Interests that results in any such
Indebtedness being held by a Person other than AREP or a Subsidiary of AREP
(including any Guarantor) and (2) any sale or other transfer of any such
Indebtedness to a Person that is not either AREP or a Subsidiary of AREP
(including any Guarantor) shall be deemed, in each case, to constitute an
incurrence of such Indebtedness by AREP or any Guarantor, that is not
intercompany Indebtedness; provided that in the case of clause (a), that no
restriction on the payment of principal, interest or other obligations in
connection with such intercompany Indebtedness shall be required by such
subordinated terms except during the occurrence and continuation of a Default or
Event of Default.

For purposes of determining compliance with this covenant, in the event that
an item of Indebtedness meets the criteria of more than one of the categories of
Permitted Debt described in clauses (1) through (9) above or is entitled to be
incurred pursuant to the first paragraph of this covenant, in each case, as of
the date of incurrence thereof, AREP shall, in its sole discretion, classify (or
later reclassify in whole or in part, in its sole discretion) such item of
Indebtedness in any manner that complies with this covenant and such
Indebtedness will be treated as having been incurred pursuant to such clauses or
the first paragraph hereof, as the case may be, designated by AREP.

The accrual of interest, the accretion or amortization of original issue
discount, the payment of interest or Other Liquidated Damages on any
Indebtedness in the form of additional Indebtedness with the same terms, the
reclassification of preferred stock as Indebtedness due to a change in
accounting principles, and the payment of dividends on Disqualified Stock in the
form of additional shares of the same class of Disqualified Stock will not be
deemed to be an incurrence of Indebtedness or an issuance of Disqualified Stock
for purposes of this covenant. Notwithstanding any other provision of this
covenant, the maximum amount of Indebtedness that AREP or any Guarantor may
incur pursuant to this covenant shall not be deemed to be exceeded solely as a
result of fluctuations in exchange rates or currency values.

The amount of any Indebtedness outstanding as of any date will be:

(1) the accreted value of the Indebtedness, in the case of any
Indebtedness issued with original issue discount;

(2) the principal amount of the Indebtedness, in the case of any other
Indebtedness; and

(3) in respect of Indebtedness of another Person secured by a Lien on
the assets of the specified Person, the lesser of:

(a) the Fair Market Value of such assets at the date of
determination; and

(b) the amount of the Indebtedness of the other Person.

LIMITATION ON LIENS

Neither AREP nor any Guarantor will, (a) issue, assume or guarantee any
Indebtedness if such Indebtedness is secured by a Lien upon, or (b) secure any
then outstanding Indebtedness by granting a Lien upon, any Principal Property of
AREP or any Guarantor, now owned or hereafter acquired by AREP or any Guarantor,
without effectively providing that the notes and the Note Guarantee shall be
secured equally and ratably with such Indebtedness, except that the foregoing
restrictions shall not apply to:

(1) Liens on any Principal Property acquired after the Issuance Date to
secure or provide for the payment of the purchase price or acquisition cost
thereof;

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(2) Liens on Principal Property acquired after the Issuance Date
existing at the time such Principal Property is acquired;

(3) Liens on any Principal Property acquired from a corporation merged
with or into AREP or any Guarantor;

(4) Liens in favor of AREP or any Guarantor;

(5) Liens in existence on any Principal Property on the Issuance Date;

(6) Liens on any Principal Property constituting unimproved real
property constructed or improved after the Issuance Date to secure or
provide for the payment or cost of such construction or improvement;

(7) Liens in favor of, or required by, governmental authorities;

(8) pledges or deposits in connection with workers' compensation,
unemployment insurance and other social security legislation and deposits
securing liability to insure carriers under insurance arrangements;

(9) Liens for taxes, assessments or governmental charges or statutory
liens of landlords, carriers, warehousemen, mechanics, suppliers,
materialmen, repairmen or other similar Liens arising in the ordinary course
of business or in the improvement or repair of any Principal Property not
yet due or which are being contested in good faith by appropriate
proceedings;

(10) any judgment attachment or judgment Lien not constituting an Event
of Default;

(11) Liens to secure the performance of statutory obligations, surety or
appeal bonds, performance bonds or other obligations of a like nature
incurred in the ordinary course of business and in the improvement or repair
of any Principal Property and which obligations are not expressly prohibited
by the indenture;

(12) Liens to secure Indebtedness of AREP or any Guarantor attributable
to Bad Boy Guarantees;

(13) Liens in favor of the trustee and required by the covenant
"Maintenance of Interest Coverage";

(14) Liens to secure margin Indebtedness; provided that such Liens are
secured solely by the applicable margin securities; or

(15) any extension, renewal, substitution or replacement (or successive
extensions, renewals, substitutions or replacements), in whole or in part,
of any Lien referred to in the foregoing clauses (1) through (14),
inclusive; provided that in the case of clauses (1), (2) and (3) such Liens
shall only extend to the Principal Property so acquired (including through
any merger or consolidation) and not to any other Principal Property of AREP
or any Guarantor.

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MAINTENANCE OF INTEREST COVERAGE

On each Quarterly Determination Date, the Fixed Charge Coverage Ratio of
AREP and the Guarantors will be at least 1.5 to 1.0 for the four consecutive
fiscal quarters most recently completed prior to such Quarterly Determination
Date; provided that, in the event that the Fixed Charge Coverage Ratio of AREP
and the Guarantors is less than 1.5 to 1.0 for such four consecutive fiscal
quarters, the issuers shall be deemed to have satisfied this maintenance test if
there is deposited, within 2 Business Days of such Quarterly Determination Date,
an amount in cash such that the deposited funds, together with any funds
previously deposited pursuant to this covenant (and that have not been paid out
or otherwise released) are in an amount equal to the issuers' obligations to pay
interest on the notes for one year; provided further, that the issuers shall
grant to the trustee, on behalf of the holders of the notes, a first priority
security interest in such deposited funds. At any subsequent Quarterly
Determination Date, if the Fixed Charge Coverage Ratio of AREP and the
Guarantors is at least 1.5 to 1.0 for the four consecutive fiscal quarters most
recently completed prior to such Quarterly Determination Date, such deposited
funds will be released from the security interest granted to the trustee and
paid to or at the direction of AREP.

MAINTENANCE OF TOTAL UNENCUMBERED ASSETS

On each Quarterly Determination Date, the ratio of Total Unencumbered Assets
to the then outstanding principal amount of the Unsecured Indebtedness will be
greater than 1.5 to 1.0 as of the last day of the fiscal quarter most recently
completed.

COMPLIANCE WITH LAW

AREP will, and will cause its Subsidiaries (including any Guarantor) to,
comply in all material respects with all applicable laws, rules and regulations.

NO INVESTMENT COMPANY

Neither AREP nor any Guarantor will register as an "investment company" as
such term is defined in the Investment Company Act of 1940, as amended.

MERGER, CONSOLIDATION OR SALE OF ASSETS

AREP will not: (1) consolidate or merge with or into another Person (whether
or not AREP, is the surviving entity) or (2) sell, assign, transfer, convey or
otherwise dispose of all or substantially all of the properties or assets of
AREP in one or more related transactions, to another Person; unless:

(1) either: (a) AREP is the surviving entity, or (b) the Person formed
by or surviving any such consolidation or merger (if other than AREP) or to
which such sale, assignment, transfer, conveyance or other disposition has
been made is a corporation, limited liability company or limited partnership
entity organized or existing under the laws of the United States, any state
of the United States or the District of Columbia;

(2) the Person formed by or surviving any such consolidation or merger
(if other than AREP) or the Person to which such sale, assignment, transfer,
conveyance or other disposition has been made assumes all the obligations of
AREP under the notes, the indenture and the registration rights agreement
and upon such assumption such Person will become the successor to, and be
substituted for, AREP thereunder and all references to AREP in each thereof
shall then become references to such Person and such Person shall thereafter
be able to exercise every right and power of AREP thereunder;

(3) immediately after such transaction no Default or Event of Default
exists;

(4) AREP or the Person formed by or surviving any such consolidation or
merger (if other than AREP), or to which such sale, assignment, transfer,
conveyance or other disposition has been made would, on the date of such
transaction after giving pro forma effect thereto and any related financing
transactions as if the same had occurred at the last day of the immediately
preceding quarter, be permitted to incur at least $1.00 of additional
Indebtedness pursuant to the first paragraph of the covenant described above
under the caption " -- Incurrence of

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Indebtedness and Issuance of Preferred Stock;" and

(5) AREP has delivered to the trustee an Officers' Certificate and
opinion of counsel, which may be an opinion of in-house counsel of AREP or
an Affiliate, each stating that such transaction complies with the terms of
the indenture.

Clauses (1), (2) or (4) above will not apply to or be required to be
complied with in connection with any merger or consolidation or the sale,
assignment, transfer, conveyance or other disposition of all or substantially
all of AREP's properties or assets to:

(1) an Affiliate that has no material assets or liabilities where the
primary purpose of such transaction is to change AREP into a corporation or
other form of business entity or to change the jurisdiction of formation of
AREP and such transaction does not cause the realization of any material
federal or state tax liability that will be paid by AREP or any of its
Subsidiaries (including AREH). For purposes of this paragraph, the term
material refers to any assets, liabilities or tax liabilities that are
greater than 5.0% of the Tangible Net Worth of AREP and its Subsidiaries
(including AREH) on a consolidated basis; or

(2) any Person; provided that AREP receives consideration in Cash
Equivalents and marketable securities with an aggregate Fair Market Value
determined at the time of the execution of such relevant agreement of at
least $1.0 billion for such merger or consolidation or the sale, assignment,
transfer, conveyance or other disposition of all or substantially all of
AREP's properties or assets. In any transaction referred to in this clause
(2), and subject to the terms and conditions thereof, the trustee shall,
without the need of any action by the noteholders, (x) confirm that such
Person shall not be liable for and release such Person from, any obligation
of AREP's under the indenture and the notes and (y) release any Guarantor
from all obligations under its Note Guarantee if such Guarantor was directly
or indirectly sold, assigned, transferred, conveyed or otherwise disposed of
to such Person in such transaction.

AREP or the Person formed by or surviving any merger or consolidation will
not have to comply with clause (4) above in connection with any merger or
consolidation if the effect of the merger or consolidation is to cause the
Capital Stock of AREP not owned by the Principal or any Affiliate of the
Principal to be retired or extinguished for consideration that was provided by
the Principal or an Affiliate of the Principal (other than AREP or its
Subsidiaries (including AREH) or the Person formed by or surviving any merger or
consolidation) and the Partners' Equity immediately after giving effect to the
merger or consolidation is not less than the Partners' Equity immediately prior
to such merger or consolidation.

In addition, AREP may not lease all or substantially all of its properties
or assets, in one or more related transactions, to any other Person. In the case
of a lease of all or substantially all of the assets of AREP, AREP will not be
released from its obligations under the notes or the indenture, as applicable.

AREH will not: (1) consolidate or merge with or into another Person (whether
or not AREH, is the surviving entity) or (2) sell, assign, transfer, convey or
otherwise dispose of all or substantially all of the properties or assets of
AREH in one or more related transactions, to another Person; unless:

(1) either: (a) AREH is the surviving entity, or (b) the Person formed
by or surviving any such consolidation or merger (if other than AREH) or to
which such sale, assignment, transfer, conveyance or other disposition has
been made is a corporation, limited liability company or limited partnership
entity organized or existing under the laws of the United States, any state
of the United States or the District of Columbia;

(2) the Person formed by or surviving any such consolidation or merger
(if other than AREH) or the Person to which such sale, assignment, transfer,
conveyance or other disposition has been made assumes all the obligations of
AREH under the Note Guarantee (and becomes a Guarantor), the notes, the
indenture and the registration rights agreement, and upon such assumption
such Person will become the successor to, and be substituted for, AREH
thereunder, and all references to AREH in each thereof shall than become
references to such Person and such Person shall thereafter be able to
exercise every right and power of AREH thereunder;

(3) immediately after such transaction no Default or Event of Default
exists;

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(4) AREH or the Person formed by or surviving any such consolidation or
merger (if other than AREP), or to which such sale, assignment, transfer,
conveyance or other disposition has been made would, on the date of such
transaction after giving pro forma effect thereto and any related financing
transactions as if the same had occurred at the beginning of the applicable
four-quarter period, be permitted to incur at least $1.00 of additional
Indebtedness pursuant to the first paragraph of the covenant described above
under the caption " -- Incurrence of Indebtedness and Issuance of Preferred
Stock; and

(5) AREH has delivered to the trustee an Officers' Certificate and
opinion of counsel which may be an opinion of in-house counsel of AREP or an
Affiliate, each stating that such transaction complies with the terms of the
indenture.

Clauses (1), (2) or (4) above will not apply to or be required to be
complied with in connection with any merger or consolidation or the sale,
assignment, transfer, conveyance or other disposition of all or substantially
all of AREH's properties or assets to:

(1) an Affiliate that has no material assets or liabilities where the
primary purpose of such transaction is to change AREH into a corporation or
other form of business entity or to change the jurisdiction of formation of
AREH and such transaction does not cause the realization of any material
federal or state tax liability that will be paid by AREH or any of its
Subsidiaries. For purposes of this paragraph, the term material refers to
any assets, liabilities or tax liabilities that are greater than 5.0% of the
Tangible Net Worth of AREP and its Subsidiaries (including AREH) on a
consolidated basis;

(2) any Person; provided that AREP receives consideration in Cash
Equivalents and marketable securities with an aggregate Fair Market Value
determined at the time of the execution of such relevant agreement of at
least $1.0 billion for such merger or consolidation or the sale, assignment,
transfer, conveyance or other disposition of all or substantially all of
AREH's properties or assets; or

(3) any Person; provided that AREH receives consideration in Cash
Equivalents and marketable securities with an aggregate Fair Market Value
determined at the time of the execution of such relevant agreement of at
least $1.0 billion for such merger or consolidation or the sale, assignment,
transfer, conveyance or other disposition of all or substantially all of
AREH's properties or assets and AREH remains a Subsidiary of AREP.

In any transaction referred to in clause (2) or (3) above, and subject to
the terms and conditions thereof, the trustee shall, without the need of any
action by the noteholders, (x) confirm that such other Person shall not be
liable for and shall be released from any obligation of AREP's or AREH's under
the indenture, the notes and the Note Guarantees, and (y) release any Guarantor
from all obligations under its Note Guarantee if such Guarantor was directly or
indirectly sold, assigned, transferred, conveyed or otherwise disposed of to
such Person in such transaction.

This "Merger, Consolidation or Sale of Assets" covenant will not apply to:

(1) any consolidation or merger, or any sale, assignment, transfer,
conveyance, lease or other disposition of assets between or among AREP, AREH
or any one or more Guarantors; or

(2) any sale, assignment, transfer, conveyance or other disposition of
Cash Equivalents, including, without limitation, any investment or capital
contribution of Cash Equivalents, or any purchase of property and assets,
including, without limitation, securities, debt obligations or Capital
Stock, with Cash Equivalents.

TRANSACTIONS WITH AFFILIATES

AREP will not, and will not permit any of its Subsidiaries (including any
Guarantor) to, make any payment to, or sell, lease, transfer or otherwise
dispose of any of its properties or assets to, or purchase any property or
assets from, or enter into or make or amend any transaction, contract,
agreement, understanding, loan, advance or guarantee with, any Affiliate of AREP
(each, an "Affiliate Transaction"), unless:

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(1) the Affiliate Transaction is on terms that are not materially less
favorable to AREP or the relevant Subsidiary (including any Guarantor) than
those that would have been obtained in a comparable transaction by AREP or
such Subsidiary (including any Guarantor) with an unrelated Person as
determined in good faith by the Board of Directors of AREP; and

(2)AREP delivers to the trustee:

(a) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of
$2.0 million, a resolution of the Board of Directors of AREP set forth
in an Officers' Certificate certifying that such Affiliate Transaction
complies with this covenant and that such Affiliate Transaction has been
approved by a majority of the disinterested members of the Board of
Directors of AREP; and

(b) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of
$10.0 million, an opinion as to the fairness to AREP or such Subsidiary
(including any Guarantor) of such Affiliate Transaction from a financial
point of view issued by an accounting, appraisal or investment banking
firm of recognized standing.

The following items will not be deemed to be Affiliate Transactions and,
therefore, will not be subject to the provisions of the prior paragraph:

(1) any employment agreement, employee benefit plan, officer or director
indemnification agreement or any similar arrangement entered into by AREP or
any of its Subsidiaries (including any Guarantor) in the ordinary course of
business and payments pursuant thereto including payments or reimbursement
of payments by API with respect to any such agreement, plan or arrangement
entered into by API with respect to or for the benefit of officers or
directors of API (other than any such agreements, plans or arrangements
entered into by AREP or any of its Subsidiaries (including AREH) with Carl
Icahn (other than employee benefit plans and officer or director
indemnification agreements generally applicable to officers and directors of
API, AREP or its Subsidiaries (including AREH)));

(2) transactions between or among AREP, any Guarantor and/or their
respective Subsidiaries (except any Subsidiaries of which Carl Icahn or
Affiliates of Carl Icahn (other then AREP, AREH or their Subsidiaries) own
more than 10% of the Voting Stock);

(3) payment (or reimbursement of payments by API) of directors' fees to
Persons who are not otherwise Affiliates of AREP;

(4) any issuance of Equity Interests (other than Disqualified Stock) and
Preferred Unit Distributions of AREP to Affiliates of AREP;

(5) Restricted Payments that do not violate the provisions of the
indenture described above under the caption " -- Restricted Payments";

(6) the acquisition of the membership interests of Charlie's Holding LLC
pursuant to the membership interest purchase agreement, dated as of January
5, 2004, by and among American Casino and Entertainment Properties LLC,
Starfire Holding Corporation and Carl Icahn, as amended, and the other
transactions contemplated thereby;

(7) transactions between AREP and/or any of its Subsidiaries (including
any Guarantor), on the one hand, and other Affiliates, on the other hand,
for the provision of goods or services in the ordinary course of business by
such other Affiliates; provided that such other Affiliate is in the business
of providing such goods or services in the ordinary course of business to
unaffiliated third parties and the terms and pricing for such goods and
services overall are not less favorable to AREP and/or its Subsidiaries
(including AREH) than the terms and pricing upon which such goods and
services are provided to unaffiliated third parties;

(8) the provision or receipt of accounting, financial, management,
information technology and other ancillary services to or from Affiliates,
provided that AREP or its Subsidiaries (including any Guarantor) in the case
of the

98

provision of such services, are paid a fee not less than its out of
pocket costs and allocated overhead (including a portion of salaries and
benefits) and in the case of the receipt of such services, paid a fee not
more than such Person's out-of-pocket costs and allocated overhead
(including a portion of salaries and benefits), in each case, as determined
by AREP in its reasonable judgment;

(9) the license of a portion of office space pursuant to a license
agreement, dated as of February 1, 1997, between AREP and an Affiliate of
API and any renewal thereof;

(10) the payment to API and reimbursements of payments made by API of
expenses relating to AREP's, AREH's or any Guarantors' status as a public
company;

(11) services provided and payments received by NEG from NEG Operating
LLC and TransTexas Gas Corporation pursuant to the NEG Management
Agreements;

(12) the pledge by NEG of its interest in the Capital Stock of NEG
Holding LLC pursuant to the NEG Credit Agreement;

(13) the exchange by AREH of its GB Securities for other securities of
GB Holdings, Inc.; provided that such exchange is on terms no less favorable
to AREH as the exchange of GB Securities offered to other non-Affiliated
Persons; and

(14) payments by AREH, AREP or any Subsidiary to API in connection with
services provided to AREH, AREP or any Subsidiary in accordance with the
AREP Partnership Agreement.

REPORTS

Whether or not required by the rules and regulations of the SEC, so long as
any notes are outstanding, the issuers will furnish to the holders of notes or
cause the trustee to furnish to the holders of notes, within the time periods
specified in the SEC's rules and regulations:

(1) all quarterly and annual reports that would be required to be filed
with the SEC on Forms 10-Q and 10-K if the issuers were required to file
such reports; and

(2) all current reports that would be required to be filed with the SEC
on Form 8-K if the issuers were required to file such reports.

All such reports will be prepared in all material respects in accordance
with all of the rules and regulations applicable to such reports. Each annual
report on Form 10-K will include a report on the issuers' consolidated financial
statements by the issuers' certified independent accountants. In addition, the
issuers will file a copy of each of the reports referred to in clauses (1) and
(2) above with the SEC for public availability within the time periods specified
in the rules and regulations applicable to such reports (unless the SEC will not
accept such a filing) and, if the SEC will not accept such a filing, will post
the reports on its website within those time periods.

If, at any time, the issuers are no longer subject to the periodic reporting
requirements of the Exchange Act for any reason, the issuers will nevertheless
continue filing the reports specified in the preceding paragraphs of this
covenant with the SEC within the time periods specified above unless the SEC
will not accept such a filing. The issuers will not take any action for the
purpose of causing the SEC not to accept any such filings. If, notwithstanding
the foregoing, the SEC will not accept the issuers' filings for any reason, the
issuers will post the reports referred to in the preceding paragraphs on its
website within the time periods that would apply if the issuers were required to
file those reports with the SEC.

In addition, the issuers agree that, for so long as any notes remain
outstanding, if at any time they are not required to file with the SEC the
reports required by the preceding paragraphs, they will furnish to the holders
of notes and to securities analysts and prospective investors, upon their
request, the information required to be delivered pursuant to Rule 144A(d)(4)
under the Securities Act.

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EVENTS OF DEFAULT AND REMEDIES

The following constitutes an Event of Default:

(1) default in payment when due and payable, upon redemption or
otherwise, of principal or premium, if any, on the notes;

(2) default for 30 days or more in the payment when due of interest or
Liquidated Damages on the notes;

(3) failure by the issuers to call or cause to be called for redemption
or to purchase or cause to be called any notes, in each case when required
under the indenture;

(4) failure by AREP or any Guarantor for 30 days after written notice
from the trustee to comply with the provisions described under the captions
" -- Restricted Payments" or " -- Incurrence of Indebtedness and Issuance of
Preferred Stock";

(5) failure by AREP or any Guarantor for 30 days after written notice
from the trustee to comply with the provisions described under the captions
" -- Maintenance of Interest Coverage" or " -- Maintenance of Total
Unencumbered Assets";

(6) failure by the issuers for 60 days after receipt of written notice
from the trustee to comply with any of its other agreements in the indenture
or the notes;

(7) default under any mortgage, indenture or instrument under which
there is issued or by which there is secured or evidenced any Indebtedness
for money borrowed by the issuers or any Guarantor or default on any
Guarantee by the issuers or AREH of Indebtedness, whether such Indebtedness
or Guarantee now exists or is created after the Issuance Date, which default
(a) is caused by a failure to pay when due at final maturity (giving effect
to any grace period or waiver related thereto) the principal of such
Indebtedness (a "Payment Default") or (b) results in the acceleration of
such Indebtedness prior to its express maturity and, in each case, the
principal amount of any such Indebtedness as to which AREP or any Guarantor
is obligated to pay, together with the principal amount of any other such
Indebtedness under which a Payment Default then exists or with respect to
which the maturity thereof has been so accelerated or which has not been
paid at maturity as to which AREP or any Guarantor is obligated to pay,
aggregates $10.0 million or more;

(8) failure by the issuers or any Guarantor to pay final judgments
aggregating in excess of $10.0 million, which final judgments remain unpaid,
undischarged or unstayed for a period of more than 60 days after such
judgment becomes a final judgment;

(9) except as permitted by the indenture, any Note Guarantee is held in
any judicial proceeding to be unenforceable or invalid or ceases for any
reason to be in full force and effect, or AREH or any other Guarantor, or
any Person acting on behalf of any Guarantor, denies or disaffirms its
obligations under its Note Guarantee; and

(10) certain events of bankruptcy or insolvency with respect to AREP or
any Guarantor that is a Significant Subsidiary.

If any Event of Default (other than by reason of bankruptcy or insolvency)
occurs and is continuing, the holders of more than 25% in principal amount of
the then outstanding notes may declare the principal, premium, if any, interest,
Liquidated Damages, if any, and any other monetary obligations on all the notes
to be due and payable immediately. Notwithstanding the foregoing, in the case of
an Event of Default arising from certain events of bankruptcy or insolvency,
with respect to the issuers or any Guarantor that is a Significant Subsidiary
all outstanding notes will become due and payable without further action or
notice. Holders of the notes may not enforce the indenture or the notes except
as provided in the indenture. Subject to certain limitations, holders of a
majority in principal amount of the then outstanding notes may direct the
trustee in its exercise of any trust or power. The trustee may withhold from
holders of notes notice of any continuing Default or Event of Default (except a
Default or Event of Default relating to the payment of principal or interest) if
it determines that withholding notice is in its

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interest. In addition, the trustee shall have no obligation to accelerate the
notes if in the best judgment of the trustee acceleration is not in the best
interest of the holders of the notes.

At any time after a declaration of acceleration with respect to the notes
and subject to certain conditions, the holders of a majority in aggregate
principal amount of notes outstanding may rescind and cancel such acceleration
and its consequences.

The holders of a majority in aggregate principal amount of the notes then
outstanding by notice to the trustee may on behalf of the holders of all of the
notes waive any existing Default or Event of Default and its consequences under
the indenture except a continuing Default or Event of Default in the payment of
interest on, premium, if any, or the principal of, any note held by a
non-consenting holder.

The issuers will be required to deliver to the trustee annually a statement
regarding compliance with the indenture, and the issuers will be required,
within ten Business Days, upon becoming aware of any Default or Event of Default
to deliver to the trustee a statement specifying such Default or Event of
Default.

NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES, INCORPORATORS AND
STOCKHOLDERS

No director, officer, employee, incorporator, manager (or managing member)
direct or indirect member, partner or stockholder of the issuers, AREH, API or
any additional Guarantor shall have any liability for any obligations of the
issuers, AREH, API or any additional Guarantor under the notes, the indenture,
any Note Guarantee or for any claim based on, in respect of, or by reason of
such obligations or its creation. Each holder of the notes by accepting a note
waives and releases all such liability. The waiver and release are part of the
consideration for issuance of the notes.

COVENANT DEFEASANCE

The issuers may, at their option and at any time, elect to have their
obligations and the obligations of any of their Subsidiaries or AREH released
with respect to certain covenants that are described in the indenture ("Covenant
Defeasance") and, thereafter, any omission to comply with such obligations shall
not constitute a Default or Event of Default with respect to the notes or any
Note Guarantee. In the event Covenant Defeasance occurs, certain events (not
including non-payment, bankruptcy, receivership, rehabilitation and insolvency
events) described under "Events of Default" will no longer constitute an Event
of Default with respect to the notes.

In order to exercise Covenant Defeasance:

(1) the issuers must irrevocably deposit, or cause to be deposited, with
the trustee, in trust, for the benefit of the holders of the notes, cash in
U.S. dollars, non-callable Government Securities, or a combination thereof,
in such amounts as will be sufficient to pay the principal of, premium, if
any, interest and Liquidated Damages, if any, due on the outstanding notes
on the stated maturity date or on the applicable redemption date, as the
case may be, in accordance with the terms of the indenture;

(2) no Default or Event of Default shall have occurred and be continuing
with respect to certain Events of Default on the date of such deposit;

(3) such Covenant Defeasance shall not result in a breach or violation
of, or constitute a default under any material agreement or instrument
(other than the indenture) to which the issuers or any of their Subsidiaries
is a party or by which the issuers or any of their Subsidiaries is bound;

(4) the issuers shall have delivered to the trustee an opinion of
counsel, which may be an opinion of in-house counsel to AREP or an
Affiliate, containing customary assumptions and exceptions, to the effect
that upon and immediately following the deposit, the trust funds will not be
subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally under
any applicable law;

(5) the issuers shall have delivered to the trustee an Officers'
Certificate stating that the deposit was not made by AREP with the intent of
defeating, hindering, delaying or defrauding any creditors of AREP or
others; and

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(6) the issuers shall have delivered to the trustee an Officers'
Certificate and an opinion of counsel in the United States, which may be an
opinion of in-house counsel to AREP or an Affiliate (which opinion of
counsel may be subject to customary assumptions and exclusions) each stating
that all conditions precedent provided for or relating to the Covenant
Defeasance have been complied with.

SATISFACTION AND DISCHARGE

The indenture will be discharged and will cease to be of further effect as
to all notes issued thereunder, when:

(1)either:

(a) all notes that have been authenticated, except lost, stolen or
destroyed notes that have been replaced or paid and notes for whose
payment money has been deposited in trust and thereafter repaid to AREP,
have been delivered to the trustee for cancellation; or

(b) all notes that have not been delivered to the trustee for
cancellation (1) have become due and payable by reason of the mailing of
a notice of redemption or otherwise, (2) will become due and payable
within one year or (3) are to be called for redemption within 12 months
under arrangements reasonably satisfactory to the trustee for the giving
of notice of redemption by the trustee in the name, and at the
reasonable expense of the issuers, and the issuers or any Guarantor have
irrevocably deposited or caused to be deposited with the trustee as
trust funds in trust solely for the benefit of the holders, cash in U.S.
dollars, non-callable Government Securities, or a combination of cash in
U.S. dollars and non-callable Government Securities, in amounts as will
be sufficient without consideration of any reinvestment of interest, to
pay and discharge the entire Indebtedness on the notes not delivered to
the trustee for cancellation for principal and premium, if any, and
accrued but unpaid interest to the date of maturity or redemption;

(2) no Default of Event of Default has occurred and is continuing on the
date of the deposit or will occur as a result of the deposit and the deposit
will not result in a breach or violation of, or constitute a default under,
any other material instrument to which the issuers are a party or by which
the issuers are bound;

(3) the issuers have paid or caused to be paid all sums payable by it
under the indenture; and

(4) the issuers or any Guarantor have delivered irrevocable instructions
to the trustee under the indenture to apply the deposited money toward the
payment of the notes at maturity or the redemption date, as the case may be.

In addition, the issuers must deliver an Officers' Certificate and an
opinion of counsel to the trustee stating that all conditions precedent to
satisfaction and discharge have been satisfied.

AMENDMENT, SUPPLEMENT AND WAIVER

Except as provided in the next two succeeding paragraphs, the indenture, the
notes or the Note Guarantee may be amended or supplemented with the consent of
the holders of at least a majority in principal amount of the notes then
outstanding (including consents obtained in connection with a tender offer or
exchange offer for notes), and any existing default or compliance with any
provision of the indenture, the notes or the Note Guarantee may be waived with
the consent of the holders of a majority in principal amount of the then
outstanding notes (including consents obtained in connection with a tender offer
or exchange offer for notes).

Without the consent of each holder affected, an amendment or waiver may not
(with respect to any notes held by a nonconsenting holder of notes):

(1) reduce the principal amount of notes whose holders must consent to
an amendment, supplement or waiver;

(2) reduce the principal of or change the fixed maturity of any note or
alter or waive the provisions with

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respect to the redemption of the notes;

(3) reduce the rate of or change the time for payment of interest on any
note;

(4) waive a Default or Event of Default in the payment of principal of,
premium or interest on the notes (except a rescission of acceleration of the
notes by the holders of at least a majority in aggregate principal amount of
the notes and a waiver of the payment default that resulted from such
acceleration);

(5) make any note payable in money other than that stated in the notes;

(6) make any change in the provisions of the indenture relating to
waivers of past Defaults or the rights of holders of notes to receive
payments of principal of or premium, if any, or interest on the notes;

(7) release AREH or any other Guarantor from any of its obligations
under its Note Guarantee or the indenture, except in accordance with the
terms of the indenture; or

(8) make any change in the foregoing amendment and waiver provisions.

Notwithstanding the foregoing, without the consent of any holder of notes,
the issuers, the Guarantors and the trustee together may amend or supplement the
indenture, any Note Guarantee or the notes to cure any ambiguity, defect or
inconsistency, to comply with the covenant relating to mergers, consolidations
and sales of assets, to provide for uncertificated notes in addition to or in
place of certificated notes, to provide for the assumption of the issuers' or
any Guarantor's obligations to holders of the notes and any Note Guarantee in
the case of a merger, consolidation or asset sale, to make any change that would
provide any additional rights or benefits to the holders of the notes, or that
does not adversely affect the legal rights under the indenture of any such
holder.

CONCERNING THE TRUSTEE

The indenture contains certain limitations on the rights of the trustee,
should it become a creditor of the issuers or AREH, to obtain payment of claims
in certain cases, or to realize on certain property received in respect of any
such claim as security or otherwise. The trustee will be permitted to engage in
other transactions; however, if it acquires any conflicting interest it must
eliminate such conflict within 90 days or resign.

The holders of a majority in principal amount of the then outstanding notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy, available to the trustee, subject to
certain exceptions. The indenture will provide that in case an Event of Default
shall occur (which shall not be cured), the trustee will be required, in the
exercise of its power, to use the degree of care of a prudent person in the
conduct of his own affairs. Subject to such provisions, the trustee will be
under no obligation to exercise any of its rights or powers under the indenture
at the request of any holder of notes, unless such holder shall have offered to
the trustee security and indemnity satisfactory to it against any loss,
liability or expense.

GOVERNING LAW

The indenture and the notes are, subject to certain exceptions, governed by
and construed in accordance with the internal laws of the State of New York,
without regard to the choice of law rules thereof. The issuance of the notes and
the Note Guarantee are also subject to a certain extent to the laws of the
jurisdiction of formation of AREP.

ADDITIONAL INFORMATION

Any holder of the notes may obtain a copy of the indenture without charge by
writing to American Real Estate Partners, L.P. at 100 South Bedford Road, Mt.
Kisco, New York 10549, Attention: Chief Financial Officer.

BOOK-ENTRY, DELIVERY AND FORM

The new notes will be issued in one or more notes in global form (the
"Global Notes"). Except as set forth below, the notes will be issued in
registered, global form in minimum denominations of $1,000 and integral

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multiples of $1,000 in excess of $1,000. The Global Notes will be deposited upon
issuance with the trustee as custodian for DTC or its nominee, in each case for
credit to an account of a direct or indirect participant in DTC, as described
below.

Except as set forth below, the Global Notes may be transferred, in whole and
not in part, only to another nominee of DTC or to a successor of DTC or its
nominee. Beneficial interests in the Global Notes may not be exchanged for
definitive notes in registered certificated form ("Certificated Notes") except
in the limited circumstances described below. See " -- Exchange of Global Notes
for Certificated Notes." Except in the limited circumstances described below,
owners of beneficial interests in the Global Notes will not be entitled to
receive physical delivery of notes in certificated form.

In addition, transfers of beneficial interests in the Global Notes will be
subject to the applicable rules and procedures of DTC and its direct and
indirect participants (including, if applicable, those of Euroclear and
Clearstream), which may change from time to time.

Prospective purchasers are advised that the laws of some states require that
certain Persons take physical delivery in definitive form of securities that
they own. Consequently, the ability to transfer beneficial interests in a Global
Note to such Persons will be limited to such extent.

So long as the Global Note Holders is the registered owner of any notes, the
Global Note Holder will be considered the sole holder under the indenture of any
notes evidenced by the Global Notes. Beneficial owners of notes evidenced by the
Global Notes will not be considered the owners or holders of the notes under the
indenture for any purpose, including with respect to the giving of any
directions, instructions or approvals to the trustee thereunder. Neither the
issuers nor the trustee will have any responsibility or liability for any aspect
of the records of DTC or for maintaining, supervising or reviewing any records
of DTC relating to the notes.

DEPOSITORY PROCEDURES

The following description of the operations and procedures of DTC, Euroclear
and Clearstream are provided solely as a matter of convenience. These operations
and procedures are solely within the control of the respective settlement
systems and are subject to changes by them. The issuers take no responsibility
for these operations and procedures and urge investors to contact the system or
their participants directly to discuss these matters.

DTC has advised the issuers that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "Participants") and to facilitate the clearance and settlement of
transactions in those securities between the Participants through electronic
book-entry changes in accounts of its Participants. The Participants include
securities brokers and dealers (including the initial purchaser), banks, trust
companies, clearing corporations and certain other organizations. Access to
DTC's system is also available to other entities such as banks, brokers, dealers
and trust companies that clear through or maintain a custodial relationship with
a Participant, either directly or indirectly (collectively, the "Indirect
Participants"). Persons who are not Participants may beneficially own securities
held by or on behalf of DTC only through the Participants or the Indirect
Participants. The ownership interests in, and transfers of ownership interests
in, each security held by or on behalf of DTC are recorded on the records of the
Participants and Indirect Participants.

Investors in the Global Notes who are Participants may hold their interests
therein directly through DTC. Investors in the Global Notes who are not
Participants may hold their interests therein indirectly through organizations
(including Euroclear and Clearstream) which are Participants. All interests in a
Global Note, including those held through Euroclear or Clearstream, may be
subject to the procedures and requirements of DTC. Those interests held through
Euroclear or Clearstream may also be subject to the procedures and requirements
of such systems. The laws of some states require that certain Persons take
physical delivery in definitive form of securities that they own. Consequently,
the ability to transfer beneficial interests in a Global Note to such Persons
will be limited to that extent. Because DTC can act only on behalf of the
Participants, which in turn act on behalf of the Indirect Participants, the
ability of a Person having beneficial interests in a Global Note to pledge such
interests to Persons that do not participate in the DTC system, or otherwise
take actions in respect of such interests, may be affected by the lack of a
physical certificate evidencing such interests.

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EXCEPT AS DESCRIBED BELOW, OWNERS OF INTERESTS IN THE GLOBAL NOTES WILL NOT
HAVE NOTES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL DELIVERY OF
NOTES IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE REGISTERED OWNERS OR
"HOLDERS" THEREOF UNDER THE INDENTURE FOR ANY PURPOSE.

Payments in respect of the principal of, and interest and premium, if any,
and Liquidated Damages, if any, on, a Global Note registered in the name of DTC
or its nominee will be payable to DTC in its capacity as the registered holder
under the indenture. Under the terms of the indenture, the issuers and the
trustee will treat the Persons in whose names the notes, including the Global
Notes, are registered as the owners of the notes for the purpose of receiving
payments and for all other purposes. Consequently, neither the issuers, the
trustee nor any agent of the issuers or the trustee has or will have any
responsibility or liability for:

(1) any aspect of DTC's records or any Participant's or Indirect
Participant's records relating to or payments made on account of beneficial
ownership interest in the Global Notes or for maintaining, supervising or
reviewing any of DTC's records or any Participant's or Indirect
Participant's records relating to the beneficial ownership interests in the
Global Notes; or

(2) any other matter relating to the actions and practices of DTC or any
of its Participants or Indirect Participants.

DTC has advised the issuers that its current practice, upon receipt of any
payment in respect of securities such as the notes (including principal and
interest), is to credit the accounts of the relevant Participants with the
payment on the payment date unless DTC has reason to believe that it will not
receive payment on such payment date. Each relevant Participant is credited with
an amount proportionate to its beneficial ownership of an interest in the
principal amount of the relevant security as shown on the records of DTC.
Payments by the Participants and the Indirect Participants to the beneficial
owners of notes will be governed by standing instructions and customary
practices and will be the responsibility of the Participants or the Indirect
Participants and will not be the responsibility of DTC, the trustee or the
issuers. Neither the issuers nor the trustee will be liable for any delay by DTC
or any of the Participants or the Indirect Participants in identifying the
beneficial owners of the notes, and the issuers and the trustee may conclusively
rely on and will be protected in relying on instructions from DTC or its nominee
for all purposes.

Transfers between the Participants will be effected in accordance with DTC's
procedures, and will be settled in same-day funds, and transfers between
participants in Euroclear and Clearstream will be effected in accordance with
their respective rules and operating procedures.

Cross-market transfers between the Participants, on the one hand, and
Euroclear or Clearstream participants, on the other hand, will be effected
through DTC in accordance with DTC's rules on behalf of Euroclear or
Clearstream, as the case may be, by their respective depositaries; however, such
cross-market transactions will require delivery of instructions to Euroclear or
Clearstream, as the case may be, by the counterparty in such system in
accordance with the rules and procedures and within the established deadlines
(Brussels time) of such system. Euroclear or Clearstream, as the case may be,
will, if the transaction meets its settlement requirements, deliver instructions
to its respective depositary to take action to effect final settlement on its
behalf by delivering or receiving interests in the relevant Global Note in DTC,
and making or receiving payment in accordance with normal procedures for
same-day funds settlement applicable to DTC. Euroclear participants and
Clearstream participants may not deliver instructions directly to the
depositories for Euroclear or Clearstream.

DTC has advised the issuers that it will take any action permitted to be
taken by a holder of notes only at the direction of one or more Participants to
whose account DTC has credited the interests in the Global Notes and only in
respect of such portion of the aggregate principal amount of the notes as to
which such Participant or Participants has or have given such direction.
However, if there is an Event of Default under the notes, DTC reserves the right
to exchange the Global Notes for notes in certificated form, and to distribute
such notes to its Participants.

Although DTC, Euroclear and Clearstream have agreed to the foregoing
procedures to facilitate transfers of interests in the Global Notes among
participants in DTC, Euroclear and Clearstream, they are under no obligation to
perform or to continue to perform such procedures, and may discontinue such
procedures at any time. None of the issuers, the trustee and any of their
respective agents will have any responsibility for the performance by DTC,

105

Euroclear or Clearstream or their respective participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations.

EXCHANGE OF GLOBAL NOTES FOR CERTIFICATED NOTES

A Global Note is exchangeable for Certificated Notes if:

(1) DTC (a) notifies the issuers that it is unwilling or unable to
continue as depositary for the Global Notes or (b) has ceased to be a
clearing agency registered under the Exchange Act and, in either case, the
issuers fail to appoint a successor depositary;

(2) the issuers, at their option, notify the trustee in writing that it
elects to cause the issuance of the Certificated Notes; or

(3) there has occurred and is continuing a Default or Event of Default
with respect to the notes.

In addition, beneficial interests in a Global Note may be exchanged for
Certificated Notes upon prior written notice given to the trustee by or on
behalf of DTC in accordance with the indenture. In all cases, Certificated Notes
delivered in exchange for any Global Note or beneficial interests in Global
Notes will be registered in the names, and issued in any approved denominations,
requested by or on behalf of the depositary (in accordance with its customary
procedures).

EXCHANGE OF CERTIFICATED NOTES FOR GLOBAL NOTES

Certificated Notes may not be exchanged for beneficial interests in any
Global Note unless the transferor first delivers to the trustee a written
certificate (in the form provided in the indenture) to the effect that such
transfer will comply with the appropriate transfer restrictions applicable to
such notes. See "Notice to Investors."

SAME DAY SETTLEMENT AND PAYMENT

The issuers will make payments in respect of the notes represented by the
Global Notes (including principal, premium, if any, interest and Liquidated
Damages, if any) by wire transfer of immediately available funds to the accounts
specified by DTC or its nominee. The issuers will make all payments of
principal, interest and premium, if any, and Liquidated Damages, if any, with
respect to Certificated Notes by wire transfer of immediately available funds to
the accounts specified by the holders of the Certificated Notes or, if no such
account is specified, by mailing a check to each such holder's registered
address. The notes represented by the Global Notes are expected to be eligible
to trade in DTC's Same-Day Funds Settlement System, and any permitted secondary
market trading activity in such notes will, therefore, be required by DTC to be
settled in immediately available funds. The issuers expect that secondary
trading in any Certificated Notes will also be settled in immediately available
funds.

Because of time zone differences, the securities account of a Euroclear or
Clearstream participant purchasing an interest in a Global Note from a
Participant will be credited, and any such crediting will be reported to the
relevant Euroclear or Clearstream participant, during the securities settlement
processing day (which must be a business day for Euroclear and Clearstream)
immediately following the settlement date of DTC. DTC has advised the issuers
that cash received in Euroclear or Clearstream as a result of sales of interests
in a Global Note by or through a Euroclear or Clearstream participant to a
Participant will be received with value on the settlement date of DTC but will
be available in the relevant Euroclear or Clearstream cash account only as of
the business day for Euroclear or Clearstream following DTC's settlement date.

CERTAIN DEFINITIONS

Set forth below are certain defined terms used in the indenture. Reference
is made to the indenture for full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.

"Acquired Debt" means, with respect to any specified Person:

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(1) Indebtedness of any other Person existing at the time such other
Person is merged with or into or became a Subsidiary of such specified
Person, whether or not such Indebtedness is incurred in connection with, or
in contemplation of, such other Person merging with or into, or becoming a
Subsidiary of, such specified Person; and

(2) Indebtedness secured by a Lien encumbering any asset acquired by
such specified Person.

"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control,"
as used with respect to any Person, means the possession, directly or
indirectly, of the power to direct or cause the direction of the management or
policies of such Person, whether through the ownership of voting securities, by
agreement or otherwise; provided that beneficial ownership of 10% or more of the
Voting Stock of a Person will be deemed to be control. For purposes of this
definition, the terms "controlling," "controlled by" and "under common control
with" have correlative meanings.

"API" means American Property Investors, Inc.

"AREH" means American Real Estate Holdings Limited Partnership.

"AREP" means American Real Estate Partners, L.P.

"AREP Finance" means American Real Estate Finance Corp.

"AREP Partnership Agreement" means AREP's Amended and Restated Agreement of
Limited Partnership, dated May 12, 1987 as amended February 22, 1995 and August
16, 1996.

"Bad Boy Guarantees" means the Indebtedness of any specified Person
attributable to "bad boy" indemnification or Guarantees, which Indebtedness
would be non-recourse to AREP and AREH other than recourse relating to the
specific events specified therein, which such events shall be usual and
customary exceptions typically found in non-recourse financings at such time as
determined by management in its reasonable judgment.

"Beneficial Owner" has the meaning assigned to such term in Rule 13d-3 and
Rule 13d-5 under the Exchange Act, except that in calculating the beneficial
ownership of any particular "person" (as that term is used in Section 13(d)(3)
of the Exchange Act), such "person" will be deemed to have beneficial ownership
of all securities that such "person" has the right to acquire by conversion or
exercise of other securities, whether such right is currently exercisable or is
exercisable only after the passage of time. The terms "Beneficially Owns" and
"Beneficially Owned" have a corresponding meaning.

"Board of Directors" means:

(1) with respect to a corporation, the board of directors of the
corporation or any committee thereof duly authorized to act on behalf of
such board;

(2) with respect to a partnership, the Board of Directors of the general
partner of the partnership;

(3) with respect to a limited liability company, the managing member or
members or any controlling committee of managing members thereof or the
Board of Directors of the managing member; and

(4) with respect to any other Person, the board or committee of such
Person serving a similar function.

"Business Day" means any day excluding Saturday, Sunday and any day which is
a legal holiday under the laws of the State of New York or is a day on which
banking institutions located in such jurisdictions are authorized or required by
law or other governmental action to close.

"Capital Lease Obligation" means, at the time any determination is to be
made, the amount of the liability in respect of a capital lease that would at
that time be required to be capitalized on a balance sheet prepared in

107

accordance with GAAP, and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be prepaid by the lessee without payment of a
penalty.

"Capital Stock" means:

(1)in the case of a corporation, corporate stock;

(2) in the case of an association or business entity, any and all
shares, interests, participations, rights or other equivalents (however
designated) of corporate stock;

(3) in the case of a partnership or limited liability company,
partnership interests (whether general or limited) or membership interests;
and

(4) any other interest or participation that confers on a Person the
right to receive a share of the profits and losses of, or distributions of
assets of, the issuing Person but excluding from all of the foregoing any
debt securities convertible into Capital Stock, whether or not such debt
securities include any right of participation with Capital Stock.

"Cash Equivalents" means:

(1)United States dollars;

(2) securities issued or directly and fully guaranteed or insured by the
United States government or any agency or instrumentality of the United
States government (provided that the full faith and credit of the United
States is pledged in support of those securities) having maturities of not
more than one year from the date of acquisition;

(3) certificates of deposit and eurodollar time deposits with maturities
of one year or less from the date of acquisition, bankers' acceptances with
maturities not exceeding one year and overnight bank deposits, in each case,
with any domestic commercial bank having capital and surplus in excess of
$500.0 million and a Thomson Bank Watch Rating of "B" or better;

(4) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clauses (2) and (3) above
entered into with any financial institution meeting the qualifications
specified in clause (3) above;

(5) commercial paper having one of the two highest ratings obtainable
from Moody's Investors Service, Inc. or Standard & Poor's Rating Services
and, in each case, maturing within one year after the date of acquisition;
and

(6) money market funds at least 95% of the assets of which constitute
Cash Equivalents of the kinds described in clauses (1) through (5) of this
definition.

"Cash Flow of AREP and the Guarantors" means, with respect to any period,
the Net Income of AREP and the Guarantors for such period plus, without
duplication:

(1) provision for taxes based on income or profits of AREP and the
Guarantors or any payments of Tax Amounts by AREP for such period, to the
extent that such provision for taxes or such payments of Tax Amounts were
deducted in computing such Net Income of AREP or any Guarantor; plus

(2) the Fixed Charges of AREP or any Guarantor for such period, to the
extent that such Fixed Charges of AREP and such Guarantor were deducted in
computing such Net Income of AREP and such Guarantor; plus

(3) depreciation, amortization (including amortization of intangibles
but excluding amortization of prepaid cash expenses that were paid in a
prior period) and other non-cash expenses (excluding any such non-cash

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expense to the extent that it represents an accrual of or reserve for cash
expenses in any future period or amortization of a prepaid cash expense that
was paid in a prior period) of AREP and any Guarantor for such period to the
extent that such depreciation, amortization and other non-cash expenses were
deducted in computing such Net Income of AREP and any Guarantor; minus

(4) non-cash items increasing such Net Income of AREP and any Guarantor
for such period, other than the accrual of revenue in the ordinary course of
business,

in each case, consolidating such amounts for AREP and any Guarantor but
excluding any net income, provision for taxes, fixed charges, depreciation,
amortization or other amounts of any of the Subsidiaries of AREP (other than any
Guarantor) and otherwise determined in accordance with GAAP; provided, further,
that the Net Income of AREP and any Guarantor shall include income from
investments or Subsidiaries of AREP (other than any Guarantor) but only to the
extent such income is realized in Cash Equivalents by AREP or any Guarantor.

"Change of Control" means the occurrence of any of the following:

(1) the sale, lease, transfer, conveyance or other disposition by AREP
or AREH (other than by way of merger or consolidation), in one or a series
of related transactions, of all or substantially all of the properties or
assets of AREP or AREH to any "person" (as that term is used in Section
13(d) of the Exchange Act) other than the Principal or a Related Party;
provided, however, that (x) if AREP or AREH receives consideration in Cash
Equivalents and marketable securities with an aggregate Fair Market Value
determined at the time of the execution of each relevant agreement of at
least $1.0 billion for such sale, lease, transfer, conveyance or other
disposition of properties or assets, then such transaction shall not be
deemed a Change of Control and (y) any sale, assignment, transfer or other
disposition of Cash Equivalents, including, without limitation, any
investment or capital contribution of Cash Equivalents or purchase of
property, assets or Capital Stock with Cash Equivalents, will not constitute
a sale, assignment, transfer, conveyance or other disposition of all or
substantially all of the properties or assets for purposes of this clause
(1);

(2) the adoption of a plan relating to the liquidation or dissolution of
AREP;

(3) the consummation of any transaction (including, without limitation,
any merger or consolidation), the result of which is that any "person" (as
defined above), other than the Principal or the Related Parties, becomes the
Beneficial Owner, directly or indirectly, of more than 50% of the Voting
Stock of a Controlling Entity of AREP, measured by voting power rather than
number of shares;

(4) the first day on which a majority of the members of the Board of
Directors of the Controlling Entity are not Continuing Directors; or

(5) for so long as AREP is a partnership, upon any general partner of
AREP ceasing to be an Affiliate of the Principal or a Related Party.

"Change of Control Offer" has the meaning assigned to that term in the
indenture governing the notes.

"Consolidated Net Income" means, with respect to any specified Person for
any period, the aggregate of net income (loss) of such Person, on a consolidated
basis with its Subsidiaries, determined in accordance with GAAP and before any
reduction in respect of preferred stock dividends; provided that:

(1) the Net Income of any Person that is accounted for by the equity
method of accounting or that is a Subsidiary will be included only to the
extent of the amount of dividends or similar distributions paid in cash to
the specified Person or a Subsidiary of the Person;

(2) the Net Income of any of its Subsidiaries will be excluded to the
extent that the declaration or payment of dividends or similar distributions
by that Subsidiary of that Net Income is not at the date of determination
permitted without any prior governmental approval (that has not been
obtained) or, directly or indirectly, by operation of the terms of its
charter or any agreement, instrument, judgment, decree, order, statute, rule
or governmental regulation applicable to that Subsidiary or its
stockholders; and

109

(3) the cumulative effect of a change in accounting principles will be
excluded.

"Continuing Directors" means, as of any date of determination, any member of
the Board of Directors of AREP who:

(1) was a member of such Board of Directors on the date of the
indenture; or

(2) was nominated for election or elected to such Board of Directors
with the approval of the Principal or any of the Related Parties or with the
approval of a majority of the Continuing Directors who were members of such
Board of Directors at the time of such nomination or election.

"Control" means the possession, directly or indirectly, of the power to
direct or cause the direction of management and policies of a Person, whether
through the ownership of Voting Stock, by agreement or otherwise.

"Controlling Entity" means (1) for so long as AREP is a partnership, any
general partner of AREP, (2) if AREP is a limited liability company, any
managing member of AREP or (3) if AREP is a corporation, AREP.

"Default" means any event that is, or with the passage of time or the giving
of notice or both would be, an Event of Default.

"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible, or for which it is
exchangeable, in each case, at the option of the holder of the Capital Stock),
or upon the happening of any event, matures or is mandatorily redeemable,
pursuant to a sinking fund obligation or otherwise, or redeemable at the option
of the holder of the Capital Stock, in whole or in part, on or prior to the date
that is 91 days after the date on which the notes mature. Notwithstanding the
preceding sentence, any Capital Stock that would constitute Disqualified Stock
solely because the holders of the Capital Stock have the right to require AREP
or any Guarantor to repurchase such Capital Stock upon the occurrence of a
change of control, event of loss, an asset sale or other special redemption
event will not constitute Disqualified Stock if the terms of such Capital Stock
provide that AREP or any Guarantor may not repurchase or redeem any such Capital
Stock pursuant to such provisions unless such repurchase or redemption complies
with the covenant described above under the caption " -- Certain Covenants --
Restricted Payments" or where the funds to pay for such repurchase was from the
net cash proceeds of such Capital Stock and such net cash proceeds was set aside
in a separate account to fund such repurchase. Furthermore, any Capital Stock
that would constitute Disqualified Stock solely because the holders of the
Capital Stock have the right to require AREP or any Guarantor to redeem such
Capital Stock, including, without limitation, upon maturity will not constitute
Disqualified Stock if the terms of such Capital Stock provide that AREP or any
Guarantor may redeem such Capital Stock for other Capital Stock that is not
Disqualified Stock. The amount of Disqualified Stock deemed to be outstanding at
any time for purposes of the indenture will be the maximum amount that AREP and
its Subsidiaries (including any Guarantor) may become obligated to pay upon the
maturity of, or pursuant to any mandatory redemption provisions of, such
Disqualified Stock, exclusive of accrued dividends. For the avoidance of doubt,
and by way of example, the Preferred Units, as in effect on the date of the
indenture, do not constitute Disqualified Stock.

"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).

"Equity Offering" means an offer and sale of Capital Stock (other than
Disqualified Stock) of AREP (other than an offer and sale relating to equity
securities issuable under any employee benefit plan of AREP) or a capital
contribution in respect of Capital Stock (other than Disqualified Stock) of
AREP.

"Existing Indebtedness" means up to $43.8 million in aggregate principal
amount of Indebtedness of AREP and any Guarantor, in existence on the Issuance
Date, until such amounts are repaid.

"Fair Market Value" means the value that would be paid by a willing buyer to
an unaffiliated willing seller in a transaction not involving distress or
necessity of either party, determined in good faith by the Board of Directors of
AREP (unless otherwise provided in the indenture).

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"Fixed Charge Coverage Ratio of AREP and the Guarantors" means the ratio of
the Cash Flow of AREP and the Guarantors for such period to the Fixed Charges of
AREP and the Guarantors for such period. In the event that AREP, the Guarantors
or any Guarantor incurs, assumes, guarantees, repays, repurchases, redeems,
defeases or otherwise discharges any Indebtedness (other than ordinary working
capital borrowings) or issues, repurchases or redeems preferred stock subsequent
to the commencement of the period for which the Fixed Charge Coverage Ratio of
AREP and the Guarantors is being calculated and on or prior to the Quarterly
Determination Date for which the calculation of the Fixed Charge Coverage Ratio
of AREP and the Guarantors is being made (the "Calculation Date"), then the
Fixed Charge Coverage Ratio of AREP and the Guarantors will be calculated giving
pro forma effect to such incurrence, assumption, Guarantee, repayment,
repurchase, redemption, defeasance or other discharge of Indebtedness, or such
issuance, repurchase or redemption of preferred stock, and the use of the
proceeds therefrom, as if the same had occurred at the beginning of the
applicable four-quarter reference period.

In addition, for purposes of calculating the Fixed Charge Coverage Ratio:

(1) acquisitions that have been made by the specified Person, including
through mergers or consolidations, or any Person acquired by the specified
Person, and including any related financing transactions, during the
four-quarter reference period or subsequent to such reference period and on
or prior to the Calculation Date will be given pro forma effect (in
accordance with Regulation S-X under the Securities Act) as if they had
occurred on the first day of the four-quarter reference period;

(2) the Cash Flow of AREP and the Guarantors attributable to
discontinued operations, as determined in accordance with GAAP, and
operations or businesses (and ownership interests therein) disposed of prior
to the Calculation Date, will be excluded;

(3) the Fixed Charges of AREP and the Guarantors attributable to
discontinued operations, as determined in accordance with GAAP, and
operations or businesses (and ownership interests therein) disposed of prior
to the Calculation Date, will be excluded, but only to the extent that such
Fixed Charges of AREP and the Guarantors are equal to or less than the Cash
Flow of AREP and the Guarantors from the related discontinued operation
excluded under clause (3) for such period; and

(4) if any Indebtedness bears a floating rate of interest, the interest
expense on such Indebtedness will be calculated as if the rate in effect on
the Calculation Date had been the applicable rate for the entire period
(taking into account any Hedging Obligation applicable to such Indebtedness
if such Hedging Obligation has a remaining term as at the Calculation Date
in excess of 12 months).

"Fixed Charges of AREP and the Guarantors" means, with respect to any
period, the sum, without duplication, of:

(1) the interest expense of AREP, and any Guarantor for such period,
whether paid or accrued, including, without limitation, amortization of debt
issuance costs and original issue discount, non-cash interest payments, the
interest component of any deferred payment obligations, the interest
component of all payments associated with Capital Lease Obligations,
commissions, discounts and other fees and charges incurred in respect of
letter of credit or bankers' acceptance financings, and net of the effect of
all payments made or received pursuant to Hedging Obligations in respect of
interest rates; plus

(2) the interest expense of AREP and any Guarantor that was capitalized
during such period; plus

(3) any interest on Indebtedness of another Person that is guaranteed by
AREP or any Guarantor (other than Bad Boy Guarantees unless such Bad Boy
Guarantee is called upon) or secured by a Lien on assets of AREP or any
additional Guarantor, whether or not such Guarantee or Lien is called upon;
provided that for purposes of calculating interest with respect to
Indebtedness that is Guaranteed or secured by a Lien, the principal amount
of Indebtedness will be calculated in accordance with the last two
paragraphs of the definition of Indebtedness; plus

(4) the product of (a) all dividends, whether paid or accrued and
whether or not in cash, on any series of preferred equity of AREP, other
than dividends on preferred stock to the extent payable in Equity Interests
of

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AREP (other than Disqualified Stock) or dividends on preferred equity
payable to AREP, times (b) a fraction, the numerator of which is one and the
denominator of which is one minus the then current combined federal, state
and local statutory income tax rate of AREP (however, for so long as AREP is
a partnership or otherwise a pass-through entity for federal income tax
purposes, the combined federal, state and local income tax rate shall be the
rate that was utilized to calculate the Tax Amount of AREP to the extent
that the Tax Amount was actually distributed with respect to such period
(and if less than the Tax Amount is distributed, such rate shall be
proportionately reduced) and if no Tax Amount was actually distributed with
respect to such period, such combined federal, state and local income tax
rate shall be zero), expressed as a decimal; provided that this clause (4)
will not include any Preferred Unit Distribution paid in additional
Preferred Units,

in each case, determined on a consolidated basis between AREP and any Guarantor
but on a non-consolidated basis with the Subsidiaries of AREP (other than any
Guarantor) and otherwise in accordance with GAAP.

"GAAP" means generally accepted accounting principles in the United States
set forth in the statements and pronouncements of the Financial Accounting
Standards Board or in such other statements by such other entity as have been
approved by a significant segment of the accounting profession, which are in
effect on the Issuance Date. For the purposes of the indenture, the term
"consolidated" with respect to any Person shall mean such Person consolidated
with its Subsidiaries.

"Gaming Authority" means any agency, authority, board, bureau, commission,
department, office or instrumentality of any nature whatsoever of the United
States or other national government, any state, province or any city or other
political subdivision, including, without limitation, the State of Nevada or the
State of New Jersey, whether now or hereafter existing, or any officer or
official thereof and any other agency with authority thereof to regulate any
gaming operation (or proposed gaming operation) owned, managed or operated by
the Principal, its Related Parties, the issuers or any of their respective
Subsidiaries or Affiliates.

"Gaming Law" means any gaming law or regulation of any jurisdiction or
jurisdictions to which the issuers or any of their Subsidiaries (including AREH)
is, or may at any time after the issue date be, subject.

"GB Securities" means the 11% notes due 2005 issued by GB Property Funding
Corp.

"Government Instrumentality" means any national, state or local government
(whether domestic or foreign), any political subdivision thereof or any other
governmental, quasi-governmental, judicial, public or statutory instrumentality,
authority, body, agency, court, tribunal, commission, bureau or entity or any
arbitrator with authority to bind a party at law.

"Government Securities" means securities that are (1) direct obligations of
the United States of America for the timely payment of which its full faith and
credit is pledged or (2) obligations of a Person controlled or supervised by and
acting as an agency or instrumentality of the United States of America the
timely payment of which is unconditionally guaranteed as a full faith and credit
obligation by the United States of America, which, in either case, are not
callable or redeemable at the option of the issuer thereof, and shall also
include a depository receipt issued by a bank (as defined in Section 3(a)(2) of
the Securities Act), as custodian with respect to any such Government Security
or a specific payment of principal of or interest on any such Government
Security held by such custodian for the account of the holder of such depository
receipt; provided, that (except as required by law) such custodian is not
authorized to make any deduction from the amount payable to the holder of such
depository receipt from any amount received by the custodian in respect of the
Government Security or the specific payment of principal of or interest on the
Government Security evidenced by such depository receipt.

"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, by way of a pledge of
assets or through letters of credit or reimbursement agreements in respect
thereof), of all or any part of any Indebtedness (whether arising by virtue of
partnership arrangements, or by agreements to keep-well, to purchase assets,
goods, securities or services, to take or pay or to maintain financial statement
conditions or otherwise).

"Guarantor" means any Subsidiary of AREP (initially only AREH) that executes
a Note Guarantee in accordance with the provisions of the indenture, and their
respective successors and assigns, in each case, until the

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Note Guarantee of such Person has been released in accordance with the
provisions of the indenture.

"Hedging Obligations" means, with respect to any specified Person, the
obligations of such Person under:

(1) interest rate swap agreements (whether from fixed to floating or
from floating to fixed), interest rate cap agreements and interest rate
collar agreements;

(2) other agreements or arrangements designed to manage interest rates
or interest rate risk; and

(3) other agreements or arrangements designed to protect such Person
against fluctuations in currency exchange rates or commodity prices.

"Indebtedness" means, with respect to any specified Person, any indebtedness
of such Person (excluding accrued expenses and trade payables), whether or not
contingent:

(1)in respect of borrowed money;

(2) evidenced by bonds, notes, debentures or similar instruments or
letters of credit (or reimbursement agreements in respect thereof);

(3)in respect of banker's acceptances;

(4)representing Capital Lease Obligations;

(5) representing the balance deferred and unpaid of the purchase price
of any property or services due more than six months after such property is
acquired or such services are completed; or

(6)representing any Hedging Obligations,

if and to the extent any of the preceding items (other than letters of credit
and Hedging Obligations) would appear as a liability upon a balance sheet of the
specified Person prepared in accordance with GAAP. In addition, the term
"Indebtedness" includes all Indebtedness of others secured by a Lien on any
asset of the specified Person (whether or not such Indebtedness is assumed by
the specified Person) and, to the extent not otherwise included, the Guarantee
by the specified Person of any Indebtedness of any other Person.

The amount of any Indebtedness outstanding as of any date attributable to a
Guarantee shall be the maximum principal amount guaranteed by such specified
Person as of such date.

The amount of any Indebtedness outstanding as of any date shall be (a) the
accreted value thereof, in the case of any Indebtedness with original issue
discount, (b) the principal amount thereof, together with any interest thereon
that is more than 30 days past due, in the case of any other Indebtedness and
(c) in respect of Indebtedness of another Person secured by a Lien on the assets
of the specified Person, the lesser of (x) the Fair Market Value of such assets
at the date of determination and (y) the amount of the Indebtedness of the other
Person to the extent so secured. Notwithstanding anything in the indenture to
the contrary, Indebtedness of AREP, AREH or any Note Guarantor shall not include
any Indebtedness that has been either satisfied and discharged or defeased
through covenant defeasance or legal defeasance.

"Issuance Date" means the closing date for the sale and original issuance of
the notes.

"Issuers" means AREP and AREP Finance, collectively.

"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law, including
any conditional sale or other title retention agreement, any lease in the nature
thereof, any option or other agreement to sell or give a security interest in
and any filing of or agreement to give any financing statement under the Uniform
Commercial Code (or equivalent statutes) of any jurisdiction.

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"Liquidated Damages" means all liquidated damages then owing pursuant to the
registration rights agreement.

"NEG" means National Energy Group, Inc.

"NEG Credit Agreement" means the credit agreement, dated as of December 29,
2003, among NEG Operating LLC, certain commercial lending institutions party
thereto, including Mizuho Corporate Bank, Ltd. as the administrative agent, Bank
of Texas N.A. and Bank of Nova Scotia as co-agents.

"NEG Management Agreements" means the management agreement dated September
12, 2001, between NEG and NEG Operating LLC and the management agreement dated
August 28, 2003, between NEG and TransTexas Gas Corporation, each as in effect
on the date hereof.

"Net Income" means, with respect to any specified Person for any four
consecutive fiscal quarter period, the net income (loss) of such Person
determined in accordance with GAAP and before any reduction in respect of
preferred stock dividends.

"Note Guarantee" means the Guarantee by any Subsidiary of AREP of the
issuers' obligations under the indenture and the notes, executed pursuant to the
provisions of the indenture which initially will only be by AREH.

"Notes" means AREP's 8 1/8% senior notes issued under the indenture,
including any Additional Notes issued.

"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.

"Offering Memorandum" means the offering memorandum with respect to the
private notes dated May 6, 2004.

"Officer" means with respect to any Person, the Chairman of the Board, the
Chief Executive Officer, the President, the Chief Operating Officer, the Chief
Financial Officer, the Treasurer, an Assistant Treasurer, the Controller, the
Secretary or any Vice President of such Person.

"Officers' Certificate" means a certificate signed on behalf of API or AREP
Finance by two Officers (or if a limited liability company, two Officers of the
managing member of such limited liability company) of API or AREP Finance, one
of whom must be the principal executive officer, the principal financial
officer, the treasurer or the principal accounting officer of API or AREP
Finance that meets the requirements set forth in the indenture.

"Other Liquidated Damages" means liquidated damages arising from a
registration default under a registration rights agreement with respect to the
registration of subordinated Indebtedness permitted to be incurred under the
indenture.

"Partners' Equity" with respect to any Person means as of any date, the
partners' equity as of such date shown on the consolidated balance sheet of such
Person and its Subsidiaries or if such Person is not a partnership, the
comparable line-item on a balance sheet, each prepared in accordance with GAAP.

"Permitted Refinancing Indebtedness" means any Indebtedness of AREP or any
Guarantor issued in exchange for, or the net proceeds of which are used to
renew, refund, refinance, replace, defease or discharge other Indebtedness of
AREP or any Guarantor (other than intercompany Indebtedness); provided that:

(1) the principal amount (or accreted value, if applicable) of such
Permitted Refinancing Indebtedness does not exceed the principal amount (or
accreted value, if applicable) of the Indebtedness renewed, refunded,
refinanced, replaced, defeased or discharged (plus all accrued interest on
the Indebtedness and the amount of all fees and expenses, including
premiums, and Other Liquidated Damages, incurred in connection therewith);

(2) in the case of any Indebtedness other than notes redeemed in
accordance with " -- Mandatory Disposition Pursuant to Gaming Laws," such
Permitted Refinancing Indebtedness has a final maturity date later than the
final maturity date of, and has a Weighted Average Life to Maturity equal to
or greater than the Weighted 

114

Average Life to Maturity of, the Indebtedness being renewed, refunded,
refinanced, replaced, defeased or discharged; and

(3) if the Indebtedness being renewed, refunded, refinanced, replaced,
defeased or discharged is subordinated in right of payment to the notes,
such Permitted Refinancing Indebtedness has a final maturity date later than
the final maturity date of, and is subordinated in right of payment to, the
notes on terms at least as favorable to the holders of notes as those
contained in the documentation governing the Indebtedness being renewed,
refunded, refinanced, replaced, defeased or discharged.

"Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization, government or any agency or political subdivision thereof or any
other entity.

"Preferred Stock" means any Equity Interest with preferential right of
payment of dividends or upon liquidation, dissolution, or winding up.

"Preferred Units" means AREP's 5% Cumulative Pay-in-Kind Redeemable
Preferred Units payable on or before March 31, 2010.

"Preferred Unit Distribution" means the scheduled annual Preferred Unit
distribution, payable on March 31 of each year in additional Preferred Units at
the rate of 5% of the liquidation preference of $10.00 per Preferred Unit.

"Principal" means Carl Icahn.

"Principal Property" of a specified Person means any property, assets or
revenue of such Person now owned or hereafter acquired.

"Quarterly Determination Date" means, in connection with AREP's first,
second and third fiscal quarters (commencing with the second fiscal quarter of
2004), the earlier of (i) the date AREP would have been required to file a
quarterly report with the SEC on Form 10-Q if AREP were required to file such
reports and (ii) the date AREP files its quarterly report with the SEC on Form
10-Q. In connection with AREP's fourth fiscal quarter, the earlier of (i) the
date AREP would have been required to file an annual report with the SEC on Form
10-K if AREP were required to file such a report and (ii) the date AREP files
its annual report with the SEC on Form 10-K.

"Related Parties" means (1) Carl Icahn, any spouse and any child, stepchild,
sibling or descendant of Carl Icahn, (2) any estate of Carl Icahn or any person
under clause (1), (3) any person who receives a beneficial interest in any
estate under clause (2) to the extent of such interest, (4) any executor,
personal administrator or trustee who holds such beneficial interest in AREP for
the benefit of, or as fiduciary for, any person under clauses (1), (2) or (3) to
the extent of such interest and (5) any corporation, partnership, limited
liability company, trust, or similar entity, directly or indirectly owned or
Controlled by Carl Icahn or any other person or persons identified in clauses
(1), (2) or (3).

"SEC" means the United States Securities and Exchange Commission.

"Secured Indebtedness" of any specified Person means any Indebtedness
secured by a Lien upon the property of such Person.

"Securities Act" means the Securities Act of 1933, as amended.

"Significant Subsidiary" means any Subsidiary which would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Securities Act, as such regulation is in effect on the Issuance
Date.

"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations to
repay, redeem or repurchase any such interest, accreted value, or principal
prior to the date originally scheduled for the payment or accretion thereof.

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"Subordinated Indebtedness" means any Indebtedness that by its terms is
expressly subordinated in right of payment in any respect (either in the payment
of principal or interest) to the payment of principal, Liquidated Damages or
interest on the notes.

"Subsidiary" means, with respect to any specified Person:

(1) any corporation, association or other business entity of which more
than 50% of the total Voting Stock is at the time owned or Controlled,
directly or indirectly, by that Person or one or more of the other
Subsidiaries of that Person (or a combination thereof); and

(2) any partnership (a) the sole general partner or the managing general
partner of which is such Person or a Subsidiary of such Person or (b) the
only general partners of which are that Person or one or more Subsidiaries
of that Person (or any combination thereof).

For the avoidance of doubt, AREH will be deemed to be a Subsidiary of AREP
so long as AREH remains a Guarantor.

"Tangible Net Worth" of any specified Person as of any date means, the total
shareholders' equity (or if such Person were not a corporation, the equivalent
account) of such Person and its Subsidiaries on a consolidated basis determined
in conformity with GAAP less any and all goodwill and other intangible assets
reflected on the consolidated balance sheet of such Person as of the last day of
the fiscal quarter most recently completed before the date of determination for
which financial statements are then available, but taking into account any
change in total shareholders' equity (or the equivalent account) as a result of
any (x) Restricted Payments made, (y) asset sales or (z) contributions to equity
or from the issuance or sale of Equity Interests (excluding Disqualified Stock)
or from the exchange or conversion (other than to Disqualified Stock) of
Disqualified Stock or debt securities, completed since such fiscal quarter end.

"Tax Amount" means, for any period, the combined federal, state and local
income taxes, including estimated taxes, that would be payable by AREP if it
were a Delaware corporation filing separate tax returns with respect to its
Taxable Income for such period and owned 100% of AREH; provided, that in
determining the Tax Amount, the effect thereon of any net operating loss
carryforwards or other carryforwards or tax attributes, such as alternative
minimum tax carryforwards, that would have arisen if AREP were a Delaware
corporation shall be taken into account; provided, further that (1) if there is
an adjustment in the amount of the Taxable Income for any period, an appropriate
positive or negative adjustment shall be made in the Tax Amount, and if the Tax
Amount is negative, then the Tax Amount for succeeding periods shall be reduced
to take into account such negative amount until such negative amount is reduced
to zero and (2) any Tax Amount other than amounts relating to estimated taxes
shall be computed by a nationally recognized accounting firm (but, including in
any event, AREP's auditors). Notwithstanding anything to the contrary, the Tax
Amount shall not include taxes resulting from AREP's change in the status to a
corporation for tax purposes.

"Taxable Income" means, for any period, the taxable income or loss of AREP
for such period for federal income tax purposes.

"Total Unencumbered Assets" means, as of any Quarterly Determination Date,
the book value of all of the assets of AREP and any Guarantor (including,
without limitation, the Capital Stock of their Subsidiaries, but excluding
goodwill and intangibles) that do not secure, by a Lien, any portion of any
Indebtedness (other than assets secured by a Lien in favor of the notes and such
assets are not secured by a Lien in favor of any other Indebtedness) as of such
date (determined on a consolidated basis between AREP and any Guarantor but not
on a consolidated basis with their Subsidiaries and otherwise in accordance with
GAAP).

"Unsecured Indebtedness" of AREP, AREH and any additional Guarantor means
any Indebtedness of such Person that is not Secured Indebtedness.

"Voting Stock" means, with respect to any Person that is (a) a corporation,
any class or series of capital stock of such Person that is ordinarily entitled
to vote in the election of directors thereof at a meeting of stockholders called

116

for such purpose, without the occurrence of any additional event or contingency,
(b) a limited liability company, membership interests entitled to manage, or to
elect or appoint the Persons that will manage the operations or business of the
limited liability company, or (c) a partnership, partnership interests entitled
to elect or replace the general partner thereof.

"Weighted Average Life to Maturity" means, when applied to any Indebtedness
or Disqualified Stock, as the case may be, at any date, the number of years
(calculated to the nearest one-twelfth) obtained by dividing (1) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal or liquidation preference, including payment at final maturity, in
respect thereof, by (b) the number of years (calculated to the nearest
one-twelfth) that will elapse between such date and the making of such payment,
by (2) the then outstanding principal amount or liquidation preference, as
applicable, of such Indebtedness or Disqualified Stock, as the case may be.

117

CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES

The following general discussion summarizes certain material United States
federal income tax consequences that apply to beneficial owners of the private
notes who:

(1) acquired the private notes at their original issue price for cash,

(2) exchange the private notes for new notes in this exchange offer, and

(3) held the private notes and hold the new notes as "capital assets"
(generally, for investment) as defined in the Internal Revenue Code of 1986, as
amended, the Code.

This summary, however, does not consider state, local or foreign tax laws.
In addition, it does not include all of the rules which may affect the United
States tax treatment of your investment in the notes. For example, special rules
not discussed here may apply to you if you are:

-   A broker-dealer, a dealer in securities or a financial institution;

-   An S corporation;

-   A bank;

-   A thrift;

-   An insurance company;

-   A tax-exempt organization;

-   A partnership or other pass-through entity;

-   Subject to the alternative minimum tax provisions of the Code;

-   Holding the private notes or the new notes as part of a hedge, straddle
or other risk reduction or constructive sale transaction;

-   A person with a "functional currency" other than the U.S. dollar; or

-   A United States expatriate.

If you are a partner in a partnership which holds the new notes, you should
consult your own tax advisor regarding special rules that may apply.

This summary is based on the Code and applicable Treasury Regulations,
rulings, administrative pronouncements and decisions as of the date hereof, all
of which are subject to change or differing interpretations at any time with
possible retroactive effect. We have not sought and will not seek any rulings
from the Internal Revenue Service with respect to the statements made and the
conclusions reached in this summary, and there can be no assurance that the
Internal Revenue Service will agree with such statements and conclusions.

EACH HOLDER IS URGED TO CONSULT HIS TAX ADVISOR REGARDING THE SPECIFIC
FEDERAL, STATE, LOCAL, AND FOREIGN INCOME AND OTHER TAX CONSIDERATIONS OF
PARTICIPATING IN THIS EXCHANGE OFFER AND HOLDING THE NEW NOTES.

EXCHANGE OF PRIVATE NOTES FOR NEW NOTES

The exchange of the private notes for the new notes pursuant to this
exchange offer should not be a taxable event for U.S. federal income tax
purposes. Accordingly, holders participating in this exchange offer should not
recognize 

118

any income, gain or loss in connection with the exchange. In addition,
immediately after the exchange, any such holder should have the same adjusted
tax basis and holding period in the new notes as it had in the private notes,
immediately before the exchange.

CONSEQUENCES OF HOLDING THE NEW NOTES

UNITED STATES HOLDERS

If you are a "United States Holder," as defined below, this section applies
to you. Otherwise, the section "Non-United States Holders," applies to you.

DEFINITION OF UNITED STATES HOLDER

You are a "United States Holder" if you are the beneficial owner of a new
note and you are, for United States federal income tax purposes:

-   a citizen or resident of the United States;

-   a corporation organized under the laws of the United States or any
political subdivision thereof;

-   an estate the income of which is subject to U.S. federal income tax
regardless of its sources; or

-   a trust if a court within the United States can exercise primary
supervision over the administration of the trust and one or more U.S.
persons has authority to control all substantial decisions of the trust,
or if the trust was in existence on August 20, 1996, and treated as a
domestic trust on August 19, 1996, and it has elected to continue to be
treated as a U.S. person.

TAXATION OF STATED INTEREST

Generally, you must include the interest on the new notes in your gross
income as ordinary income:

-   when it accrues, if you use the accrual method of accounting for United
States federal income tax purposes; or

-   when you receive it, if you use the cash method of accounting for United
States federal income tax purposes.

SALE OR OTHER TAXABLE DISPOSITION OF THE NEW NOTES

You will generally recognize taxable gain or loss on the sale, exchange,
redemption, retirement or other taxable disposition of a new note. The amount of
your gain or loss will equal the difference between the amount you receive for
the new note (in cash or other property, valued at fair market value), except to
the extent amounts received are attributable to accrued interest on the note,
and your adjusted tax basis in the new note. Your tax basis in the new note
generally will equal the price you paid for the private note that was exchanged
for the new note.

Your gain or loss will generally be long-term capital gain or loss if your
holding period for the new note is more than one year at the time of the sale,
exchange, redemption, retirement or other taxable disposition. Otherwise, it
will be short-term capital gain or loss. For this purpose, your holding period
for the new note should include your holding period for the private note that
was exchanged for the new note. Long-term capital gains recognized in years
beginning before December 31, 2008 by certain non-corporate holders are
generally taxed at a maximum rate of 15%. The ability to deduct capital losses
is subject to limitations. Payments attributable to accrued interest which you
have not yet included in income will be taxed as ordinary interest income.

119

INFORMATION REPORTING AND BACKUP WITHHOLDING

We will report to certain holders of the new notes and to the IRS the amount
of any interest paid on the new notes in each calendar year and the amounts of
tax withheld, if any, with respect to such payments. You may be subject to a
backup withholding tax when you receive interest payments on a new note or
proceeds upon the sale or other disposition of the new note. Certain holders
(including, among others, corporations, financial institutions and certain
tax-exempt organizations) are generally not subject to information reporting or
backup withholding. In addition, the backup withholding tax will not apply to
you if you provide to us or our paying agent your correct social security or
other taxpayer identification number, or TIN, in the prescribed manner unless:

-   the IRS notifies us or our paying agent that the TIN you provided is
incorrect;

-   you underreport interest and dividend payments that you receive on your
tax return and the IRS notifies us or our paying agent that withholding
is required; or

-   you fail to certify under penalties of perjury that you are not subject
to backup withholding.

The backup withholding tax rate is currently 28%.

Any amounts withheld from a payment to you under the backup withholding
rules may be credited against your United States federal income tax liability,
and may entitle you to a refund, provided the required information is properly
furnished to the Internal Revenue Service on a timely basis.

You should consult your tax advisor as to your qualification for exemption
from backup withholding and the procedures for obtaining such exemption.

NON-UNITED STATES HOLDERS

The following general discussion is limited to the United States federal
income tax consequences relevant to a "Non-United States Holder." A "Non-United
States Holder" is any beneficial owner of a new note if such owner is, for
United States federal income tax purposes, a nonresident alien, or a
corporation, estate, or trust that is not a United States Holder.

INTEREST

Portfolio Interest Exemption. You will generally not be subject to United
States federal income tax or withholding tax on interest paid or accrued on the
new notes if:

-   you do not own, actually or constructively, 10% or more of our capital
or profits interests;

-   you are not a controlled foreign corporation with respect to which we
are a "related person" within the meaning of Section 864(d)(4) of the
Code;

-   you are not a bank receiving interest described in Section 881(c)(3)(A)
of the Code;

-   such interest is not effectively connected with the conduct by you of a
trade or business in the United States; and

-   either (i) you represent that you are not a United States person for
United States federal income tax purposes and you provide your name and
address to us or our paying agent on a properly executed IRS Form W-8BEN
(or a suitable substitute form) signed under penalties of perjury, or
(ii) a securities clearing organization, bank, or other financial
institution that holds customers' securities in the ordinary course of
its business holds the new note on your behalf, certifies to us or our
paying agent under penalties of perjury that it has received IRS Form
W-8BEN (or a suitable substitute form) from you or from another
qualifying financial institution intermediary, and provides a copy of
the Form W-8BEN (or a suitable substitute form)

120

to us or our paying agent.

United States Federal Income or Withholding Tax If Interest Is Not Portfolio
Interest. If you do not claim, or do not qualify for, the benefit of the
portfolio interest exemption described above, you may be subject to a 30%
withholding tax on the gross amount of interest payments, unless reduced or
eliminated by an applicable income tax treaty.

However, income from payments or accruals of interest that is effectively
connected with the conduct by you of a trade or business in the United States
will be subject to United States federal income tax on a net basis at a rate
applicable to United States persons generally (and, if paid to corporate
holders, may also be subject to a branch profits tax at a rate of 30% or lower
applicable treaty rate). If payments are subject to United States federal income
tax on a net basis in accordance with the rules described in the preceding
sentence, such payments will not be subject to United States withholding tax so
long as you provide us or our paying agent with a properly executed IRS Form
W-8ECI.

Non-United States Holders should consult any applicable income tax treaties,
which may provide for a lower rate of withholding tax, exemption from or
reduction of the branch profits tax, or other rules different from those
described above. Generally, in order to claim any treaty benefits you must
submit a properly executed IRS Form W-8BEN.

Reporting. We may report annually to the IRS and to you the amount of
interest paid to you, and the tax withheld, if any, with respect to you.

SALE OR OTHER DISPOSITION OF NEW NOTES

You will generally not be subject to United States federal income tax or
withholding tax on gain recognized on a sale, exchange, redemption, retirement,
or other disposition of a new note unless such gain is effectively connected
with the conduct by you of a trade or business within the United States. Any
gain that is effectively connected with the conduct by you of a trade or
business within the United States will be subject to United States federal
income tax on a net basis at the rates generally applicable to United States
persons as described above.

BACKUP WITHHOLDING AND INFORMATION REPORTING

Payments From United States Office. If you receive payment of interest or
principal directly from us or through the United States office of a custodian,
nominee, agent or broker, you may be subject to both backup withholding and
information reporting.

With respect to interest payments made on the new notes, however, backup
withholding and information reporting will not apply if you certify, generally
on a Form W-8BEN (or Form W-8ECI) or suitable substitute form, that you are not
a United States person in the manner described above under the heading
"Non-United States Holders -- Interest," or you otherwise establish an
exemption.

Moreover, with respect to proceeds received on the sale, exchange,
redemption, or other disposition of a new note, backup withholding or
information reporting generally will not apply if you properly provide,
generally on Form W-8BEN (or Form W-8ECI) or a suitable substitute form, a
statement that you are an "exempt foreign person" for purposes of the broker
reporting rules, and other required information. If you are not subject to
United States federal income or withholding tax on the sale or other disposition
of a new note, as described above under the heading "Non-United States
Holders-Interest -- Sale or Other Disposition of New Notes," you will generally
qualify as an "exempt foreign person" for purposes of the broker reporting
rules.

Payments From Foreign Office. If payments of principal and interest are made
to you outside the United States by or through the foreign office of your
foreign custodian, nominee or other agent, or if you receive the proceeds of the
sale of a new note through a foreign office of a "broker," as defined in the
pertinent United States Treasury Regulations, you will generally not be subject
to backup withholding or information reporting. You will however, be subject to
backup withholding and information reporting if the foreign custodian, nominee,
agent or broker has actual knowledge or reason to know that you are a United
States person. You will also be subject to information

121

reporting, but not backup withholding, if the payment is made by a foreign
office of a custodian, nominee, agent or broker that has certain relationships
to the United States unless the broker has in its records documentary evidence
that you are a Non-United States Holder and certain other conditions are met.

Refunds. Any amounts withheld from a payment to you under the backup
withholding rules may be credited against your United States federal income tax
liability, and may entitle you to a refund, provided the required information is
properly furnished to the Internal Revenue Service on a timely basis.

The information reporting requirements may apply regardless of whether
withholding is required. Copies of the information returns reporting interest
and withholding also may be made available to the tax authorities in the country
in which a Non-United States Holder is a resident under the provisions of an
applicable income tax treaty or other agreement.

THE PRECEDING SUMMARY IS FOR GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE.
PLEASE CONSULT YOUR OWN TAX ADVISOR TO DETERMINE THE TAX CONSEQUENCES OF
PURCHASING, HOLDING AND DISPOSING OF THE NOTES UNDER YOUR PARTICULAR
CIRCUMSTANCES.

122

PLAN OF DISTRIBUTION

Each broker-dealer that receives new notes for its own account pursuant to
the exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of such new notes. This prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of new notes received in exchange for old notes where
such old notes were acquired as a result of market-making activities or other
trading activities. We have agreed that, starting on the expiration date and
ending on the close of business 270 days after the expiration date (or such
shorter period during which participating broker-dealers are required by law to
deliver such prospectus), we will make this prospectus, as amended or
supplemented, available to any broker-dealer for use in connection with any such
resale. In addition, until ?, all dealers effecting transactions in the new
notes may be required to deliver a prospectus.

We will not receive any proceeds from any sale of new notes by
broker-dealers. New notes received by broker-dealers for their own account
pursuant to the exchange offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the new notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such new notes. Any broker-dealer
that resells new notes that were received by it for its own account pursuant to
the exchange offer and any broker or dealer that participates in a distribution
of such new notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit of any such resale of new notes and any
commissions or concessions received any such persons may be deemed to be
underwriting compensation under the Securities Act. The letter of transmittal
states that by acknowledging that it will deliver, and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.

Furthermore, any broker-dealer that acquired any of its old notes directly
from us:

-   may not rely on the applicable interpretation of the staff of the
Commission's position contained in Exxon Capital Holdings Corp., SEC
no-action letter (May 13, 1988), Morgan, Stanley & Co. Inc., SEC
no-action letter (June 5, 1991) and Shearman & Sterling, SEC
no-action letter (July 2, 1983); and

-   must also be named as a selling noteholder in connection with the
registration and prospectus delivery requirements of the Securities
Act relating to any resale transaction.

For a period of 270 days after the expiration date, we will promptly send
additional copies of this prospectus and any amendment or supplement to this
prospectus to any broker-dealer that requests such documents in the letter of
transmittal. We have agreed to pay all expenses incident to the exchange offer
(including the expenses of one counsel for the holder of the old notes) other
than commissions or concessions of any brokers or dealers and will indemnify the
holders of the old notes (including any broker-dealers) against certain
liabilities, including liabilities under the Securities Act.

123

LEGAL MATTERS

The validity of the notes offered by this prospectus and certain legal
matters in connection with the exchange offer will be passed upon for us by
Piper Rudnick LLP, New York, New York.

EXPERTS

The consolidated financial statements of American Real Estate Partners, L.P.
as of December 31, 2003 and 2002 and for each of the three years in the period
ended December 31, 2003; and the consolidated financial statements of American
Real Estate Holdings Limited Partnership as of December 31, 2003 and 2002 and
for each of the three years in the period ended December 31, 2003, 2002 and
2001; included in this prospectus, have been so included in reliance on the
reports of KPMG LLP, independent registered public accounting firm, given on the
authority of said firm as experts in accounting and auditing.

The balance sheet of American Property Investors, Inc. as of December 31, 
2003 included in this prospectus has been included in reliance on the report of 
KPMG LLP, independent accountants, given on the authority of said firm as 
experts in accounting and auditing.

On April 1, 2004, KPMG LLP advised us that it would not seek re-election as
our independent auditor for 2004, and that the client-auditor relationship
between us and KPMG has ceased. None of KPMG's reports on our consolidated
financial statements for the years ended December 31, 2003 or 2002 contained an
adverse opinion or a disclaimer of opinion, nor was any such report qualified or
modified as to uncertainty, audit scope, or accounting principles. During the
two most recent fiscal years and the interim period preceding receipt of KPMG's
letter, there were no (1) disagreements with KMPG on any matters of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreements, if not resolved to the satisfaction of KPMG,
would have caused it to make reference to the subject matter of the
disagreements in connection with its report or (2) "reportable events" as such
term is defined in Item 304(a)(1)(v) of Regulation S-K under the Securities
Exchange Act of 1934.

Effective as of April 26, 2004, our audit committee engaged Grant Thornton
LLP as our independent public accountant. During the years ended December 31,
2002 and 2003, and from January 1, 2004 through April 26, 2004 (the date Grant
Thornton LLP was appointed), neither us nor our audit committee consulted Grant
Thornton LLP with respect to the application of accounting principles to a
specified transaction, either completed or proposed; or any matter that was
either the subject of a disagreement (as defined in Item 304(a)(1)(iv) of
Regulation S-K) or a reportable event (as described in Item 304(a)(1)(v) of
Regulation S-K).

WHERE YOU CAN FIND MORE INFORMATION

We file annual, quarterly and current reports, proxy statements and other
information with the SEC under the Securities Exchange Act of 1934. The Exchange
Act file number for our SEC filings is 1-9516. You may read any document we file
at the SEC's public reference rooms at 450 Fifth Street, N.W., Washington, D.C.
20549. You may also inspect our filings at a regional public reference facility
maintained by the SEC located at Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661 or at 233 Broadway, New York, New York 10279.
Please call the SEC toll free at 1-800-SEC-0330 for information about its public
reference rooms. We file information electronically with the SEC. Our SEC
filings are available from the SEC's Internet site at http: //www.sec.gov.

THIS PROSPECTUS IS PART OF A REGISTRATION STATEMENT THAT WE FILED WITH THE SEC.
THE REGISTRATION STATEMENT, INCLUDING THE ATTACHED EXHIBITS AND SCHEDULES,
CONTAINS ADDITIONAL RELEVANT INFORMATION ABOUT US AND OUR COMMON STOCK. THE
RULES AND REGULATIONS OF THE SEC ALLOW US TO OMIT SOME OF THE INFORMATION
INCLUDED IN THE REGISTRATION STATEMENT FROM THIS PROSPECTUS. YOU MAY INSPECT THE
REGISTRATION STATEMENT, INCLUDING EXHIBITS, AT THE SEC'S PUBLIC REFERENCE
FACILITIES OR INTERNET SITE. OUR STATEMENTS IN THIS PROSPECTUS ABOUT THE
CONTENTS OF ANY CONTRACT OR OTHER DOCUMENT ARE NOT NECESSARILY COMPLETE. YOU
SHOULD REFER TO THE COPY OF EACH CONTRACT OR OTHER DOCUMENT WE HAVE FILED AS AN
EXHIBIT TO THE REGISTRATION STATEMENT FOR COMPLETE INFORMATION.

124

INCORPORATION OF DOCUMENTS BY REFERENCE

The SEC allows us to "incorporate by reference" into this prospectus the
information we file with it, which means that we can disclose important
information to you by referring you to those documents. The information
incorporated by reference is considered to be part of this prospectus, and
information in documents that we file later with the SEC will automatically
update and supersede information in this prospectus. We incorporate by reference
the documents listed below, and they shall be deemed to be a part hereof:

-   Annual Report on Form 10-K for the year ended December 31, 2003,
filed March 15, 2004.

-   Quarterly Report on Form 10-Q for the quarter ended March 31, 2004,
filed May 10, 2004.
-   Quarterly Report on Form 10-Q for the quarter ended June 30, 2004,
filed August 9, 2004.
-   Current Report on Form 8-K filed March 16, 2004.

-   Current Report on Form 8-K filed April 6, 2004.

-   Current Report on Form 8-K filed April 27, 2004.

-   Current Report on Form 8-K filed April 28, 2004.

-   Current Report on Form 8-K filed May 7, 2004.

-   Current Report on Form 8-K filed May 11, 2004.

-   Current Report on Form 8-K filed May 27, 2004.

-   Current Report on Form 8-K filed July 22, 2004.

All documents and reports filed by us with the SEC (other than Current
Reports on Form 8-K containing only Regulation FD disclosure furnished under
Item 7.01 of Form 8-K or containing other disclosure furnished under Item 8.01
of Form 8-K, unless otherwise indicated therein) under Section 13(a), 13(c), 14
or 15(d) of the Exchange Act after the date of this prospectus and prior to the
termination of this offering shall be deemed incorporated herein by reference
and shall be deemed to be part hereof from the date of filing of such documents
and reports. Any statement contained in a document incorporated or deemed to be
incorporated by reference in this prospectus shall be deemed to be modified or
superseded for purposes of this document to the extent that a statement
contained herein or in any subsequently filed document or report that also is or
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this document.

We will provide copies of these documents, other than exhibits, free of
charge, to any person, including any beneficial owner, who receives this
prospectus upon written or oral request of such person. To request a copy, you
should contact us at our headquarters which are located at 100 South Bedford
Road, Mt. Kisco, New York 10549, Attention: Chief Financial Officer.

125

INDEX TO FINANCIAL STATEMENTS

American Real Estate Partners, L.P.
Report of Independent Registered Public Accounting Firm................................................................      F-2
Consolidated Balance Sheets as of June 30, 2004 (unaudited) and as of December 31, 2003 and 2002.......................      F-3
Consolidated Statements of Earnings for the six months ended June 30, 2004 and 2003 (unaudited) and for the years
ended December 31, 2003, 2002 and 2001...............................................................................      F-4
Consolidated Statements of Changes in Partners' Equity and Comprehensive Income for the six months ended June 30,
2004 and 2003 (unaudited) and for the years ended December 31, 2003, 2002 and 2001...................................      F-5
Consolidated Statements of Cash Flows for the six months ended June 30, 2004 and 2003 (unaudited) and for the years
ended December 31, 2003, 2002 and 2001...............................................................................      F-6
Notes to Consolidated Financial Statements.............................................................................      F-8

American Real Estate Holdings Limited Partnership
Report of Independent Registered Public Accounting Firm................................................................      F-38
Consolidated Balance Sheets as of June 30, 2004 (unaudited) and as of December 31, 2003 and 2002.......................      F-39
Consolidated Statements of Earnings for the six months ended June 30, 2004 and 2003 (unaudited) and for the years
ended December 31, 2003, 2002 and 2001...............................................................................      F-40
Consolidated Statements of Changes in Partners' Equity and Comprehensive Income for the six months ended June 30,
2004 and 2003 (unaudited) and for the years ended December 31, 2003, 2002 and 2001...................................      F-41
Consolidated Statements of Cash Flows for the six months ended June 30, 2004 and 2003 (unaudited) and for the years
ended December 31, 2003, 2002 and 2001...............................................................................      F-42
Notes to Consolidated Financial Statements.............................................................................      F-44

American Property Investors, Inc.
Independent Auditors' Report...........................................................................................      F-69
Balance Sheet as of December 31, 2003..................................................................................      F-70
Notes to Balance Sheet.................................................................................................      F-71

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Partners
American Real Estate Partners, L.P.:

We have audited the accompanying consolidated balance sheets of American
Real Estate Partners, L.P. and subsidiaries as of December 31, 2003 and 2002,
and the related consolidated statements of earnings, changes in partners' equity
and comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 2003. These consolidated financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of American
Real Estate Partners, L.P. and subsidiaries as of December 31, 2003 and 2002 and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 2003 in conformity with U.S. generally
accepted accounting principles.

/s/ KPMG LLP

New York, New York

September 5, 2004

F-2

AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
JUNE 30, 2004 (UNAUDITED) AND DECEMBER 31, 2003 AND 2002
(IN $000'S EXCEPT UNIT AND PER UNIT AMOUNTS)

DECEMBER 31,
JUNE 30,    -------------------------
2004           2003          2002
-----------   -----------   -----------
(UNAUDITED)                  (RESTATED)

ASSETS
Real estate leased to others:
Accounted for under the financing method (Notes 4, 14 and 15)......................   $    98,372   $   137,356   $   155,458
Accounted for under the operating method, net of accumulated depreciation
(Notes 5, 14 and 15).............................................................        65,253        76,443       204,242
Properties held for sale (Notes 5 and 14)...........................................        49,193       128,813         4,300
Investment in U.S. Government and Agency obligations (Note 6).......................       113,141        61,573       336,051
Note receivable due from affiliate (Note 12)........................................             -             -       250,000
Cash and cash equivalents (Note 2)..................................................     1,080,261       500,593        79,540
Marketable equity and debt securities (Note 7)......................................        29,975        80,522        26,728
Mortgages and notes receivable (Note 11)............................................       138,739        50,328        56,216
Investment in NEG Holding LLC (Note 10).............................................        77,481        69,346       108,880
Equity interest in GB Holdings, Inc. (Note 8).......................................        28,811        30,854        37,280
Hotel, casino and resort operating properties, net of accumulated depreciation:
American Casino and Entertainment Properties LLC (Note 9).........................       295,080       298,703       290,775
Hotel and resort (Notes 5 and 13).................................................        34,689        41,526        44,346
Land and construction-in-progress...................................................        40,797        43,459        40,415
Deferred tax asset (Note 21)........................................................        86,436        77,874        22,290
Receivables and other assets........................................................        62,516        49,216        49,510
-----------   -----------   -----------
Total.............................................................................   $ 2,200,744   $ 1,646,606   $ 1,706,031
===========   ===========   ===========
LIABILITIES AND PARTNERS' EQUITY
Mortgages payable (Notes 4, 5 and 15):
Real estate leased to others......................................................   $    79,023   $    98,128   $   171,848
Properties held for sale..........................................................        15,142        82,861             -
-----------   -----------   -----------
94,165       180,989       171,848
Senior secured notes payable (Note 17)..............................................       215,000             -             -
Senior unsecured notes payable - net of unamortized discount of $2,569
(Note 18).........................................................................       350,431             -             -
Liability for purchase of debt securities...........................................        59,853             -             -
Credit facilities due affiliates (Notes 10 and 16)..................................             -        25,000        31,064
Senior notes due affiliates (Notes 10 and 16).......................................             -             -       148,637
Interest payable-senior notes (Note 16).............................................             -             -        44,360
Accounts payable, accrued expenses and other liabilities............................        77,760        68,754        64,685
Preferred limited partnership 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, respectively (Notes 19 and 20)................................       104,099       101,649             -
-----------   -----------   -----------
901,308       376,392       460,594
-----------   -----------   -----------
Commitments and contingencies (Notes 3 and 24)
Limited partners:
Preferred units, $10 liquidation preference, 5% cumulative pay-in-kind
redeemable; 9,400,000 authorized; 9,330,963 issued and outstanding as of
December 31, 2002 (Notes 19 and 20)................................................             -             -        96,808
Depositary units; 47,850,000 authorized; 47,235,484 outstanding.....................     1,315,577     1,184,870     1,071,857
General partner.....................................................................        (4,220)       97,265        88,693
Treasury units at cost:
1,137,200 depositary units (Note 27)..............................................       (11,921)      (11,921)      (11,921)
-----------   -----------   -----------
Partners' equity (Notes 2 and 3)....................................................     1,299,436     1,270,214     1,245,437
-----------   -----------   -----------
Total.............................................................................   $ 2,200,744   $ 1,646,606   $ 1,706,031
===========   ===========   ===========

See notes to consolidated financial statements.

F-3

AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS
SIX MONTHS ENDED JUNE 30, 2004 AND 2003 (UNAUDITED) AND YEARS ENDED
DECEMBER 31, 2003, 2002 AND 2001
(IN $000'S EXCEPT UNIT AND PER UNIT AMOUNTS)

SIX MONTHS ENDED
JUNE 30,                  YEARS ENDED DECEMBER 31,
------------------------  --------------------------------------
2004         2003        2003          2002          2001
-----------  -----------  -----------   -----------  -----------
(UNAUDITED)        (RESTATED)    (RESTATED)   (RESTATED)

Revenues:
Hotel and casino operating income (Note 9) ...................  $   148,369  $   130,553  $   262,811   $   250,023  $   242,473
Land, house and condominium sales ............................       17,457        6,411       13,265        76,024       55,566
Interest income on financing leases ..........................        5,426        6,759       13,115        14,722       16,935
Interest income on U.S. Government and Agency obligations
and other investments (Notes 11 and 12) .....................       15,981        8,395       22,583        30,569       31,064
Rental income ................................................        5,123        4,703        9,389         8,703        8,618
Hotel and resort operating income (Note 13) ..................        5,543        6,597       14,592        14,918       12,276
Accretion of investment in NEG Holding LLC (Note 10) .........       16,124       15,451       30,142        32,879        9,834
Oil and gas operating income .................................            -            -            -             -       33,176
NEG management fee ...........................................        5,479        3,879        7,967         7,637        2,699
Dividend and other income (Notes 7 and 11) ...................        3,084        1,710        3,061         2,720        4,877
Equity in earnings (loss) of GB Holdings, Inc. (Note 8) ......         (563)        (213)      (3,466)          305        1,807
-----------  -----------  -----------   -----------  -----------
222,023      184,245      373,459       438,500      419,325
-----------  -----------  -----------   -----------  -----------
Expenses:
Hotel and casino operating expenses (Note 9) .................      110,131      108,051      216,857       217,938      213,847
Cost of land, house and condominium sales ....................       11,063        5,001        9,129        54,640       42,599
Hotel and resort operating expenses (Note 13) ................        4,969        5,342       11,138        12,553       10,792
Interest expense (Notes 7, 14, 15, 16, 17 and 18) ............       17,971       12,330       22,064        28,343       36,577
Oil and gas operating expenses ...............................            -            -            -             -        5,569
Depreciation and amortization ................................       15,592       12,688       25,424        24,255       26,515
General and administrative expenses (Note 3) .................        9,030        6,825       14,081        14,134       13,011
Property expenses ............................................        2,535        2,136        5,375         4,372        2,779
Provision for loss on real estate ............................            -          200          750         3,212        3,184
-----------  -----------  -----------   -----------  -----------
171,291      152,573      304,818       359,447      354,873
-----------  -----------  -----------   -----------  -----------
Operating income ...............................................       50,732       31,672       68,641        79,053       64,452
Other gains and (losses):
Gain on sale of marketable equity and debt securities ........       37,167            -        2,607             -        6,749
(Loss) gain on sale of other assets ..........................            -            -       (1,503)         (353)          27
Write-down of equity securities available for sale (Note 7) ..            -         (961)        (961)       (8,476)           -
Write-down of mortgages and notes receivable (Note 7) ........            -      (18,798)     (18,798)            -            -
Gain on sales and disposition of real estate (Note 14) .......        5,821          866        7,121         8,990        1,737
Loss on limited partnership interests ........................            -            -            -        (3,750)           -
Minority interest in net earnings of Stratosphere Corporation
(Note 9) ....................................................            -            -            -        (1,943)        (450)
-----------  -----------  -----------   -----------  -----------
Income from continuing operations before income taxes ..........       93,720       12,779       57,107        73,521       72,515
Income tax (expense) benefit (Note 21) .......................       (9,257)      (7,059)       1,573       (10,096)      25,664
-----------  -----------  -----------   -----------  -----------
Income from continuing operations ............................       84,463        5,720       58,680        63,425       98,179
-----------  -----------  -----------   -----------  -----------
Discontinued operations:
Income from discontinued operations (Note 5) .................        5,157        3,961        7,991         7,271        7,430
Gain on sales and disposition of real estate (Note 14) .......       55,186        1,924        3,353             -            -
-----------  -----------  -----------   -----------  -----------
Income from discontinued operations ............................       60,343        5,885       11,344         7,271        7,430
-----------  -----------  -----------   -----------  -----------
Net earnings ...................................................  $   144,806  $    11,605  $    70,024   $    70,696  $   105,609
===========  ===========  ===========   ===========  ===========
Net earnings attributable to (Note 3):
Limited partners .............................................  $   136,662  $     5,424  $    59,360   $    63,168  $    66,190
General partner ..............................................        8,144        6,181       10,664         7,528       39,419
-----------  -----------  -----------   -----------  -----------
$   144,806  $    11,605  $    70,024   $    70,696  $   105,609
===========  ===========  ===========   ===========  ===========
Net earnings (loss) per limited partnership unit (Note 2):
Basic earnings (loss):
Income (loss) from continuing operations ....................  $      1.68  $     (0.06) $      0.99   $      1.12  $      1.18
Income from discontinued operations .........................         1.28         0.13         0.24          0.15         0.16
-----------  -----------  -----------   -----------  -----------
Basic earnings per LP unit ...................................  $      2.96  $      0.07  $      1.23   $      1.27  $      1.34
===========  ===========  ===========   ===========  ===========
Weighted average limited partnership units outstanding..........   46,098,284   46,098,284   46,098,284    46,098,284   46,098,284
===========  ===========  ===========   ===========  ===========
Diluted earnings (loss):
Income (loss) from continuing operations ....................  $      1.53  $     (0.06) $      0.93   $      0.99  $      1.06
Income from discontinued operations .........................         1.13         0.13         0.20          0.13         0.13
-----------  -----------  -----------   -----------  -----------
Diluted earnings per LP unit .................................  $      2.66  $      0.07  $      1.13   $      1.12  $      1.19
===========  ===========  ===========   ===========  ===========
Weighted average limited partnership units and equivalent
partnership units outstanding ...............................    52,218,668   46,098,284   54,489,943    56,466,698   55,599,112
===========  ===========  ===========   ===========  ===========

See notes to consolidated financial statements.

F-4

AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS'
EQUITY AND COMPREHENSIVE INCOME
SIX MONTHS ENDED JUNE 30, 2004 (UNAUDITED) AND YEARS ENDED
DECEMBER 31, 2003, 2002 AND 2001
(IN $000'S)

Limited Partner's Equity
General    ----------------------------  Held in Treasury    Total
Partner's   Depositary                    ----------------  Partner's
Equity        Units     Preferred Units   Amounts   Units    Equity
----------  -----------  ---------------  ---------  -----  -----------

Balance, December 31, 2000 (as previously reported) ........ $ (97,207)  $  944,340     $ 87,808       $(11,921)  1,137  $  923,020
Arizona Charlies acquisition (Note 1) ......................   111,675            -            -              -       -     111,675
---------   ----------     --------       --------   -----  ----------
Balance, December 31, 2000 (Restated) ......................    14,468      944,340       87,808        (11,921)  1,137   1,034,695
Comprehensive income:
Net earnings ............................................    39,419       66,190            -              -       -     105,609
Reclassification of unrealized loss
on sale of debt securities ............................        78        3,818            -              -       -       3,896
Net unrealized losses on securities available for sale ..      (269)     (13,257)           -              -       -     (13,526)
---------   ----------     --------       --------   -----  ----------
Comprehensive income .......................................    39,228       56,751            -              -       -      95,979
Pay-in-kind distribution (Note 19) .........................         -       (4,390)       4,390              -       -           -
Capital contribution to American Casino (Note 1) ...........     5,150            -            -              -       -       5,150
---------   ----------     --------       --------   -----  ----------
Balance, December 31, 2001 (Restated) ......................    58,846      996,701       92,198        (11,921)  1,137   1,135,824
Comprehensive income:
Net earnings ............................................     7,528       63,168            -              -       -      70,696
Reclassification of unrealized loss
on sale of debt securities ............................       211       10,384            -              -       -      10,595
Adjustment to reverse unrealized loss on investment
securities reclassified to notes receivable ............       131        6,451            -              -       -       6,582
Net unrealized losses on securities available for sale ..        (5)        (237)           -              -       -        (242)
---------   ----------     --------       --------   -----  ----------
Comprehensive income .......................................     7,865       79,766            -              -       -      87,631
Net adjustment for acquisition of minority interest
(Note 9) ..................................................    21,151            -            -              -       -      21,151
Pay-in-kind distribution (Note 19) .........................         -       (4,610)       4,610              -       -           -
Capital contribution to American Casino (Note 1) ...........       831            -            -              -       -         831
---------   ----------     --------       --------   -----  ----------
Balance, December 31, 2002 (Restated) ......................    88,693    1,071,857       96,808        (11,921)  1,137   1,245,437
Comprehensive income:
Net earnings ............................................    10,664       59,360            -              -       -      70,024
Reclassification of unrealized loss
on sale of debt securities ............................        15          746            -              -       -         761
Net unrealized gains on securities available for sale ...       183        8,991            -              -       -       9,174
Sale of marketable equity securities available for sale .        (6)        (274)           -              -       -        (280)
---------   ----------     --------       --------   -----  ----------
Comprehensive income .......................................    10,856       68,823            -              -       -      79,679
Pay-in-kind distribution (Note 20) .........................         -       (2,391)       2,391              -       -           -
Change in deferred tax asset valuation allowance related
to book-tax differences existing at time of
bankruptcy (Note 21) ....................................       524       46,581            -              -       -      47,105
Capital distribution (Note 1) ..............................    (2,808)           -            -              -       -      (2,808)
Reclassification of Preferred LP units to liabilities
(Note 20) .................................................         -            -      (99,199)             -       -     (99,199)
---------   ----------     --------       --------   -----  ----------
Balance, December 31, 2003 .................................    97,265    1,184,870            -        (11,921)  1,137   1,270,214
Comprehensive income:
Net earnings .............................................     8,144      136,662            -              -       -     144,806
Unrealized losses on securities available for sale .......        (1)         (69)           -              -       -         (70)
Reclassification of unrealized gains
on marketable 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 from American Casino ..................   (17,916)           -            -              -       -     (17,916)
Capital contribution to American Casino ....................    22,800            -            -              -       -      22,800
Arizona Charlie's acquisition (Note 1) .....................  (125,900)           -            -              -       -    (125,900)
Arizona Charlie's acquisition adjustment (Note 9) ..........    (1,213)           -            -              -       -      (1,213)
Change in deferred tax asset related to acquisition ........    12,721            -            -              -       -      12,721
---------   ----------     --------       --------   -----  ----------
Balance, June 30, 2004 (unaudited) ......................... $  (4,220)  $1,315,577     $      -       $(11,921)  1,137  $1,299,436
=========   ==========     ========       ========   =====  ==========

Accumulated other comprehensive gain (loss) at June 30, 2004 (unaudited),
December 31, 2003, 2002 and 2001 was $349, $9,174, ($242) and ($17,178),
respectively.

See notes to consolidated financial statements.

F-5

AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2004 AND 2003 (UNAUDITED) AND YEARS
ENDED DECEMBER 31, 2003, 2002 AND 2001
(IN $000'S)

SIX MONTHS ENDED
JUNE 30,             YEARS ENDED DECEMBER 31,
-------------------    --------------------------------
2004        2003       2003        2002        2001
--------    -------    --------    --------    --------
(UNAUDITED)       (RESTATED)  (RESTATED)  (RESTATED)

Cash flows from operating activities:
Income from continuing operations .............................   $ 84,463    $ 5,720    $ 58,680    $ 63,425    $ 98,179
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization ................................     15,592     12,688      25,424      24,255      26,515
Preferred LP interest expense ................................      2,450          -       2,450           -           -
Gain on sale of marketable equity securities .................    (37,167)         -      (2,607)          -      (6,749)
Gain on sales and disposition of real estate .................     (5,821)      (866)     (7,121)     (8,990)     (1,737)
Loss on limited partnership interests ........................          -          -           -       3,750           -
Loss on sale of assets .......................................          -          -       1,503         353         (27)
Provision for loss on real estate ............................          -        200         750       3,212       3,184
Write-down of equity securities available for sale ...........          -        961         961       8,476           -
Write-down of mortgages and notes receivable .................          -     18,798      18,798           -           -
Minority interest in net earnings of Stratosphere
Corporation .................................................          -          -           -       1,943         450
Equity in losses (earnings) of GB Holdings, Inc. .............        563        213       3,466        (305)     (1,807)
Deferred gain amortization ...................................     (1,019)    (1,019)     (2,038)     (2,038)       (849)
Accretion of investment in NEG Holding LLC ...................    (16,124)   (15,451)    (30,142)    (32,879)     (9,834)
Deferred income tax (benefit) expense ........................      5,995      2,665      (5,875)      9,785     (28,840)
Change in fair market value of derivative contracts ..........          -          -           -           -         716
Changes in operating assets and liabilities:
Decrease (increase) in land and construction-in-progress ...      2,181        146      (4,106)     24,215       7,753
(Decrease) increase in accounts payable, accrued expenses
and other liabilities .....................................       (852)   (35,227)    (37,328)        271      (1,915)
(Increase) decrease in receivables and other assets .........     (3,612)        19        (299)      2,944       4,711
--------    -------    --------    --------    --------
Net cash provided by (used in) continuing operations ........     46,649    (11,153)     22,516      98,417      89,750
--------    -------    --------    --------    --------
Income from discontinued operations ...........................     60,343      5,885      11,344       7,271       7,430
Depreciation and amortization ................................        414      2,231       4,507       3,855       3,634
Net gain from property transactions ..........................    (55,186)    (1,924)     (3,353)          -           -
--------    -------    --------    --------    --------
Net cash provided by discontinued operations .................      5,571      6,192      12,498      11,126      11,064
--------    -------    --------    --------    --------
Net cash provided by (used in) operating activities ..........     52,220     (4,961)     35,014     109,543     100,814
Cash flows from investing activities:
Decrease (increase) in mortgages and notes receivable .........        351    (30,909)    (31,112)    (23,200)    (15,583)
Repayments of mortgages, mezzanine loans and notes receivable..     25,861          -      12,200      23,000           -
Purchase of debt securities ...................................    (54,775)         -           -           -           -
Net proceeds from the sales and disposition of real estate ....     16,635      3,259      15,290      20,513       3,656
Principal payments received on leases accounted for under the
financing method .............................................      2,168      2,737       5,310       5,941       6,858
Additions to hotel, casino and resort operating properties ....    (11,264)    (4,483)    (32,911)    (21,715)    (67,135)
Acquisitions of rental real estate ............................    (14,583)         -           -     (18,226)          -
Acquisition of Arizona Charlie's ..............................   (125,900)         -           -           -           -
Additions to rental real estate ...............................       (299)      (281)       (413)       (181)     (1,064)
(Increase) decrease in investment in U.S. Government and Agency
Obligations (Note 2) .........................................    (51,568)   (16,717)    274,478     (22,410)    162,046
Proceeds from sale of marketable equity & debt securities .....     86,507          -       3,843           -      17,929
Disposition proceeds on sale mortgages and notes receivable ...          -          -       2,621           -           -
Increase in marketable equity & debt securities ...............          -          -     (45,140)     (4,415)          -
Decrease (increase) in note receivable from affiliate .........          -          -     250,000           -    (250,000)
Decrease in minority interest in Stratosphere Corp ............          -          -           -     (44,744)          -
Decrease in investment in Stratosphere Corp. ..................          -          -         788           -           -
Investment in NEG, Inc. .......................................          -          -    (148,101)          -           -
Investment in NEG Holding LLC .................................          -          -           -           -      (4,379)
Guaranteed payment from NEG Holding LLC .......................      7,989     10,239      18,229      21,653       3,625
Priority distribution from NEG Holding LLC ....................          -     40,506      40,506           -           -
Oil and natural gas acquisition, exploration and development
expenditures .................................................          -          -           -           -     (26,432)
Increase (decrease) in due to affiliate .......................          -          -           -     (68,491)     (8,592)
Increase in investment in joint ventures ......................          -          -           -           -      (5,856)
(Decrease) increase in restricted cash ........................       (447)       173           -           -           -
Other .........................................................        (98)       (53)        560         197         (29)
--------    -------    --------    --------    --------
Net cash (used in) provided by continuing operations .........   (119,423)     4,471     366,148    (132,078)   (184,956)

F-6

AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)

SIX MONTHS ENDED
JUNE 30,               YEARS ENDED DECEMBER 31,
---------------------    -----------------------------------
2004         2003        2003         2002         2001
---------    ---------   ----------   ----------   ----------
(UNAUDITED)         (RESTATED)   (RESTATED)   (RESTATED)

Cash flows from discontinued operations:
Net proceeds from the sales and disposition of real estate .......     101,452       3,518        5,336            -            -
----------    --------    ---------    ---------    ---------
Net cash (used in) provided by investing activities ..............     (17,971)      7,989      371,484     (132,078)    (184,956)
----------    --------    ---------    ---------    ---------
Cash flows from financing activities:
Partners' Equity:
Distribution from American Casino ................................     (17,916)          -            -            -            -
Contributions to American Casino .................................      15,894           -            -          598        5,150
Debt: .............................................................           -
Proceeds from Senior Secured and Unsecured Notes Payable .........     565,409           -            -            -            -
Repayment of credit facilities ...................................     (25,000)          -       (2,904)      (5,000)     (35,000)
Proceeds from credit facility ....................................           -           -        7,780       17,220       10,940
Repayment of senior notes ........................................           -           -            -            -      (10,500)
Proceeds from mortgages payable ..................................      10,000      20,000       20,000       12,700            -
Payments on mortgages payable ....................................           -      (3,837)      (3,837)        (462)      (6,457)
Periodic principal payments ......................................      (2,968)     (3,468)      (6,484)      (7,198)      (6,840)
Payment of long-term debt ........................................           -           -            -          (38)      (3,369)
Cash acquired from subsidiary contributed by parent ..............           -           -            -          280            -
Balloon payments .................................................           -           -            -            -       (1,756)
----------    --------    ---------    ---------    ---------
Net cash provided by (used in) financing activities ..............     545,419      12,695      (14,555)     (18,100)     (47,832)
----------    --------    ---------    ---------    ---------
Net increase (decrease) in cash and cash equivalents ...............     579,668      15,723      421,053       (4,435)    (131,974)
Cash and cash equivalents, beginning of period .....................     500,593      79,540       79,540       83,975      215,949
----------    --------    ---------    ---------    ---------
Cash and cash equivalents at end of period .........................  $1,080,261    $ 95,263    $ 500,593    $  79,540    $  83,975
==========    ========    =========    =========    =========
Supplemental information:
Cash payments for interest, net of amounts capitalized ...........  $    8,748    $ 58,598    $  65,110    $  37,176    $  53,723
==========    ========    =========    =========    =========
Cash payments for income taxes ...................................  $        -    $      -    $       -    $       -    $   1,200
==========    ========    =========    =========    =========
Supplemental schedule of noncash investing and financing activities:
Reclassification of real estate to operating lease .................  $        -    $  2,158    $   5,065    $  13,403    $   3,082
Reclassification from hotel and resort operating properties ........      (6,428)          -            -            -       (1,167)
Reclassification of real estate from financing lease ...............           -      (2,158)      (5,065)     (13,503)      (9,754)
Reclassification of real estate from operating lease ...............     (24,849)          -     (126,263)           -            -
Reclassification of real estate to property held for sale ..........      31,277           -      126,263          100        6,672
Decrease in mortgages and notes receivable .........................           -      (3,453)      (3,453)           -            -
Decrease in deferred income ........................................           -       2,565        2,565            -            -
Increase in real estate accounted for under the operating method ...           -         888          888            -            -
Reclassification of real estate to construction-in-progress ........           -           -            -            -        1,167
Reclassification from marketable equity and debt securities ........           -           -            -      (20,494)           -
Reclassification from receivable and other assets ..................           -      (1,631)      (1,631)           -            -
Reclassification to mortgages and notes receivable .................           -       1,631        1,631       20,494            -
----------    --------    ---------    ---------    ---------
$        -    $      -    $       -    $       -    $       -
==========    ========    =========    =========    =========
Net unrealized gains (losses) on securities available for sale .....  $      349    $  2,342    $   9,174    $    (242)   $ (13,526)
==========    ========    =========    =========    =========
Increase in equity and debt securities .............................  $      600    $    600    $   1,200    $   2,890    $   2,500
==========    ========    =========    =========    =========
Purchase of debt securities ........................................  $   59,853    $      -    $       -    $       -    $       -
==========    ========    =========    =========    =========
Contribution of note from NEG Holding LLC ..........................  $        -    $ 10,940    $  10,940    $       -    $       -
==========    ========    =========    =========    =========
Transfer of assets and liabilities to NEG Holding LLC ..............  $        -    $      -    $       -    $       -    $  87,066
==========    ========    =========    =========    =========
Change in deferred tax asset valuation allowance related to book-tax
differences existing at time of bankruptcy .......................  $        -    $      -    $  47,105    $       -    $       -
==========    ========    =========    =========    =========
Member's capital contribution ......................................  $    6,906    $      -    $       -    $       -    $       -
==========    ========    =========    =========    =========
Change in tax asset related to acquisition .........................  $   12,721    $      -    $       -    $       -    $       -
==========    ========    =========    =========    =========
Net asset contributed by parent ....................................  $        -    $      -    $       -    $     233    $       -
==========    ========    =========    =========    =========

See notes to consolidated financial statements

F-7

AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004 (UNAUDITED) AND DECEMBER 31, 2003, 2002 AND 2001

1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

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

By virtue of the Exchange, the Subsidiary owns the assets, subject to the
liabilities, of the Predecessor Partnerships. The Company owns a 99% limited
partner interest in the Subsidiary. American Property Investors, Inc. (the
"General Partner") owns a 1% general partner interest in both the Subsidiary and
the Company representing an aggregate 1.99% general partner interest in the
Company and the Subsidiary. The General Partner is owned and controlled by Mr.
Carl C. Icahn ("Icahn" or "Mr. Icahn").

On August 16, 1996 the Company amended its Partnership Agreement to permit
non-real estate related acquisitions and investments, which has allowed and
continues to permit the Company to take advantage of investment opportunities it
believes exist outside of the real estate market in order to seek to enhance
unitholder value and further diversify its assets. The Amendment permits the
Company to invest in securities issued by companies that are not necessarily
engaged as one of their primary activities in the ownership, development or
management of real estate to further diversify its investments while remaining
in the real estate business and continuing to pursue suitable investments in the
real estate markets. Under the Amendment, investments may include equity and
debt securities of domestic and foreign issuers. The portion of the Company's
assets invested in any one type of security or any single issuer will not be
limited.

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

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

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

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

In May 2004, American Casino & Entertainment Properties LLC ("American
Casino"), an indirect wholly-owned subsidiary of the Company, acquired two Las
Vegas casino/hotels, Arizona Charlie's Decatur and Arizona

F-8

AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Charlie's Boulder, from Mr. Icahn and an entity affiliated with Mr. Icahn for an
aggregate consideration of $125.9 million. The assets acquired and liabilities
assumed in this acquisition have been accounted for at historical cost. The
excess of the purchase price over historical cost of the net assets, which
amounted to $1.213 million, has been accounted for as a capital distribution to
the General Partner. An increase of $111.7 million has been made to the General
Partner's equity at December 31, 2000 as a result of the acquisition. A
reduction of $125.9 million reflecting the purchase price has been made to the
General Partner's equity in May 2004.

In accordance with generally accepted accounting principles, assets
transferred between entities under common control are accounted for at
historical costs similar to a pooling of interests, and the financial statements
of previously separate companies for periods prior to the acquisition are
restated on a combined basis. There is no minority interest allocated to the
other NEG stockholders because of NEG's negative equity. See Note 10.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Financial Statements and Principles of Consolidation -- The consolidated
financial statements include the accounts of AREP and its majority- owned
subsidiaries in which control can be exercised. The Company is considered to
have control if it has a direct or indirect ability to make decisions about an
entity's activities through voting or similar rights. The Company uses the
guidance set forth in AICPA Statement of Position No. 78-9-Accounting for
Investments in Real Estate Ventures, with respect to its investments in
partnerships. In addition, the Company uses the guidance of FASB Interpretation
No. 46 (revised December 2003), Consolidation of Variable Interest Entities, or
FIN 46R, whereby an interest in an entity where the Company is deemed to be the
primary beneficiary would be consolidated. The Company is not deemed to be the 
primary beneficiary, as defined, with respect to National Energy Group, Inc.'s
investment in NEG Holding, LLC. All material intercompany balances and
transactions are eliminated.

Investments in affiliated companies in which AREP owns between 20% and 
50%, and therefore, exercises significant influence, but which it does not
control, are accounted for using the equity method. The Company accounts for
its 36% interest in GB Holdings, Inc. on the equity basis.

The Company has owned, since inception on July 1, 1987, a 99% limited
partnership interest in AREH which is consolidated. AREH, the operating
partnership, was formed to hold the investments of and conduct the business
operations of the Company. Substantially all of the assets and liabilities of
the Company are owned by AREH and substantially all operations are conducted
through AREH.

All adjustments which, in the opinion of management, are necessary to
fairly present the result for the interim periods have been made.

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

Diluted earnings per share uses net earnings attributable to limited
partner interests as the numerator with the denominator based on the weighted
average number of units and equivalent units outstanding. The Preferred units
are considered to be unit equivalents. The number of limited partnership units
used in the calculation of diluted income per limited partnership unit increased
as follows: 6,120,384 limited partnership units for the six months ended June
30, 2004 (unaudited), and 8,391,659, 10,368,414 and 9,500,828 limited
partnership units for the years ended December 31, 2003, 2002 and 2001,
respectively, to reflect the effects of the conversion of preferred units. There
was no increase in the limited partnership units used in the calculation of
diluted income for the six months ended June 30, 2003 as such increase was
anti-dilutive.

For accounting purposes, NEG's earnings prior to the NEG acquisition in
October 2003 and Arizona Charlie's earnings prior to the acquisition in May 2004
have been allocated to the General Partner and therefore excluded from the
computation of basic and diluted earnings per limited partnership unit.

Cash and Cash Equivalents - The Company considers short-term investments,
which are highly liquid with original maturities of three months or less at date
of purchase, to be cash equivalents. Included in cash and cash equivalents at
June 30, 2004 (unaudited), December 31, 2003 and 2002 are investments in
government backed securities of approximately $879,000,000, $378,000,000 and
$5,467,000, respectively.

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

A decline in the market value of any held-to-maturity or available for
sale security below cost that is deemed to be other than temporary results in a
reduction in carrying amount to fair value. The impairment is charged

F-9

AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

to earnings and a new cost basis for the security is established. Dividend
income is recorded when declared and interest income is recognized when earned.

MORTGAGES AND NOTES RECEIVABLE

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

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

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

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

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

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

Properties - Properties held for investment, other than those accounted
for under the financing method, are carried at cost less accumulated
depreciation unless declines in the values of the properties are considered
other than temporary at which time the property is written down to net
realizable value. A property is classified as held for sale at the time
management determines that the criteria in SFAS 144 have been met. Properties
held for sale are carried at the lower of cost or net realizable value. Such
properties are no longer depreciated and their operations are included in
discontinued operations. As a result of the reclassification of certain real
estate to properties held for sale during the six months ended June 30, 2004,
income and expenses of such properties are reclassified to discontinued
operations for all prior periods.

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

Use of Estimates - Management has made a number of estimates and
assumptions relating to the reporting of assets and liabilities, revenues and
expenses and the disclosure of contingent assets and liabilities to prepare
these financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates. The more
significant estimates include the valuation of (i) long-lived assets, (ii)
mortgages and

F-10

AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

notes receivable, (iii) marketable equity and debt securities, (iv) costs to
complete for land, house and condominium developments, (v) gaming-related
liability and loyalty programs and (vi) deferred tax assets.

REVENUE RECOGNITION

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

2. Casino revenues and promotional allowances - The Company recognizes
revenues in accordance with industry practice. Casino revenue is the net win
from gaming activities (the difference between gaming wins and losses). Casino
revenues are net of accruals for anticipated payouts of progressive and certain
other slot machine jackpots. Revenues include the retail value of rooms, food
and beverage and other items that are provided to customers on a complimentary
basis. A corresponding amount is deducted as promotional allowances. Hotel and
restaurant revenue is recognized when services are performed. The cost of such
complimentaries is included in "Hotel and casino operating expenses."
During the first quarter, 2001, the Emerging Issues Task Force reached a 
consensus on the portion of Issue 00-22, "Accounting for 'Points' and Certain 
Other Time-Based or Volume Based Sales Incentive Offers, and Offers for Free 
Products or Services to be Delivered in the Future," which addressed the 
income statement classification of the value of the points redeemable for cash 
awarded under point programs. The consensus states the cost of these programs 
should be reported as a contra-revenue, rather than an expense and is 
retroactive to January 1, 2001, with prior year restatement required. The 
Company applies the current consensus recommendation on Issue 00-22.

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

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

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

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

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

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

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

F-11

AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

RECENT ACCOUNTING STANDARDS:

1. In May 2003, the FASB issued SFAS 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS 150 is
effective at the beginning of the first interim period beginning after June 15,
2003. The Company adopted SFAS 150 on July 1, 2003 and has reclassified its
preferred units to a liability account. See Note 18.

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

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

The Company has an investment in a variable interest entity, which owns
oil and natural gas operating properties. At June 30, 2004 (unaudited) and
December 31, 2003, the variable interest entity had net assets of $162 million
and $161 million, respectively. The Company has determined that it is not the
primary beneficiary of the variable interest entity. The maximum exposure to
losses as a result of its involvement with the variable interest entity is $77
million and $69 million, respectively.

3. RELATED PARTY TRANSACTIONS

a. On May 26, 2004, American Casino acquired two Las Vegas casino/hotels,
Arizona Charlie's Decatur and Arizona Charlie's Boulder from 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 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 9.)

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

c. In addition, in 1997 the Company entered into a license agreement for a
portion of office space from an affiliate. The license agreement dated as of
February 1, 1997 expires May 22, 2004 unless sooner terminated in accordance
with the agreement. Pursuant to the license agreement, the Company has the non-
exclusive use of 3,547 square feet of office space and common areas (of an
aggregate 21,123 rentable square feet sublet by such affiliate) for which it
paid $17,068 per month, together with 16.79% of certain "additional rent". In
November 2000, the Company reduced its office size to approximately 2,275 square
feet, which decreased its monthly rental to $11,185 plus 10.77% of certain
additional rent. For the six months ended June 30, 2004 and 2003 (unaudited),
the Company paid rent of approximately $65,000 and $77,000, respectively. In the
years ended December 31, 2003, 2002 and 2001, the Company paid such affiliate
approximately $159,000, $153,000 and $147,000 of rent, respectively, in
connection with this licensing agreement. The terms of such sublease were
reviewed and approved by the Audit Committee. The agreement, which expired in
May 2004, has been extended on a month-to-month basis. If the Company must
vacate the space, it believes there will be adequate alternative space
available.

d. American Casino billed the Sands Hotel and Casino (the "Sands")
approximately $116,000 and $97,000 for administrative services performed by
Stratosphere personnel during the six months ended June 30, 2004 and 2003
(unaudited), respectively, and $191,000 in the year ended December 31, 2003.

e. The General Partner and its affiliates may realize substantial fees,
commissions and other income from transactions involving the purchase,
operation, management, financing and sale of the Company's properties, subject

F-12

AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

to certain limitations relating to properties acquired from the Predecessor
Partnerships in the Exchange. Some of such amounts may be paid regardless of the
overall profitability of the Company and whether any distributions have been
made to Unitholders. As new properties are acquired, developed, constructed,
operated, leased, financed and sold, the General Partner or its affiliates may
perform acquisition functions, development and construction oversight and other
land development services, property management and leasing services, either on a
day-to-day basis or on an asset management basis, and other services and be
entitled to fees and reimbursement of expenses relating thereto, including
property management fees, real estate brokerage and leasing commissions, fees
for financing either provided or arranged by the General Partner and its
affiliates, development fees, general contracting fees and construction
management fees. The terms of any transactions between the Company and the
General Partner or its affiliates must be fair and reasonable to the Company and
customary to the industry. There were no significant fees paid in the six months
ended June 30, 2004 and 2003 (unaudited) and the years ended December 31, 2003,
2002, and 2001.

f. NEG received management fees from an affiliate of approximately $5.5
million and $3.9 million in the six months ended June 30, 2004 and 2003
(unaudited), respectively, and $8.0 million, $7.6 million and $2.7 million in
the years ended December 31, 2003, 2002 and 2001, respectively.

g. For the six months ended June 30, 2004 and 2003 (unaudited) and for the
year ended December 31, 2003, the Company paid approximately $120,000, $84,000
and $84,000, respectively, to an affiliate of the General Partner for
telecommunication services.

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

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

DECEMBER 31,
JUNE 30,       ----------------------
2004            2003         2002
---------       ---------    ---------
(UNAUDITED)

Minimum lease payments receivable.............................      $ 108,057       $ 161,785    $ 180,943
Unguaranteed residual value...................................         54,362          74,651       87,160
---------       ---------    ---------
162,419         236,436      268,103
Less unearned income..........................................         64,047          99,080      112,645
---------       ---------    ---------
$  98,372       $ 137,356    $ 155,458
=========       =========    =========

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

YEAR ENDING
DECEMBER 31,                                AMOUNT
------------                               --------

2004..............................         $ 17,797
2005..............................           15,686
2006..............................           15,491
2007..............................           14,577
2008..............................           13,221
Thereafter........................           85,013
--------
$161,785
========

At December 31, 2003, approximately $107,543,000 of the net investment in
financing leases was pledged to collateralize the payment of nonrecourse
mortgages payable.

F-13

AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

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

DECEMBER 31,
JUNE 30,     ----------------------
2004           2003        2002
-----------    ---------    ---------
(UNAUDITED)

Land..............................        $    15,782    $  24,040    $  55,034
Commercial Buildings..............             64,552       83,252      194,521
-----------    ---------    ---------
80,334      107,292      249,555
Less accumulated depreciation.....             15,081       30,849       45,313
-----------    ---------    ---------
$    65,253    $  76,443    $ 204,242
===========    =========    =========

As of June 30, 2004 (unaudited), December 31, 2003 and 2002, accumulated
depreciation on the hotel and resort operating properties (not included above)
amounted to approximately $8,573,000, $12,341,000 and $9,665,000, respectively
(See Note 13).

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

YEAR ENDING
DECEMBER 31,                         AMOUNT
------------                        --------

2004...........................     $  9,967
2005...........................        8,802
2006...........................        5,443
2007...........................        3,874
2008...........................        2,810
Thereafter.....................        5,799
--------
$ 36,695
========

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

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

DECEMBER 31,
JUNE 30,       ------------------------
2004            2003          2002
-------------     -----------    ---------
(UNAUDITED)

Leased to others..........................................              $      67,437     $   146,416    $       -
Vacant....................................................                      1,350           2,550        4,300
-------------     -----------    ---------
68,787         148,966        4,300
Less accumulated depreciation.............................                     19,594          20,153            -
-------------     -----------    ---------
$      49,193     $   128,813    $   4,300
=============     ===========    =========

The following is a summary of income from discontinued operations (in
$000's):

JUNE 30,               DECEMBER 31,
------------------  --------------------------------
2004      2003      2003        2002       2001
--------  --------  ---------   --------   ---------
(UNAUDITED)

Rental income..........................................       $ 10,001  $ 10,441  $  20,795   $ 19,222   $  18,269
Hotel and resort operating income......................          1,913     2,073      3,912      3,679       4,142
--------  --------  ---------   --------   ---------
11,914    12,514     24,707     22,901      22,411
--------  --------  ---------   --------   ---------
Mortgage interest expense..............................          2,457     3,124      6,247      5,691       5,599
Depreciation and amortization..........................            414     2,126      4,507      3,855       3,634

F-14

AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

JUNE 30,               DECEMBER 31,
------------------  --------------------------------
2004      2003      2003        2002       2001
--------  --------  ---------   --------   ---------
(UNAUDITED)

Property expenses......................................          2,318     1,542      2,646      2,899       2,376
Hotel and resort operating expenses....................          1,568     1,761      3,316      3,185       3,372
--------  --------  ---------   --------   ---------
6,757     8,553     16,716     15,630      14,981
--------  --------  ---------   --------   ---------
Income from discontinued operations....................       $  5,157  $  3,961  $   7,991   $  7,271   $   7,430
========  ========  =========   ========   =========

At June 30, 2004 (unaudited) and December 31, 2003, approximately
$19,823,000 and $105,984,000, respectively, of real estate held for sale was
pledged to collateralize the payment of non-recourse mortgages payable.

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

The Company has investments in U.S. Government and Agency Obligations
whose maturities range from 2004 to December 2008 as follows (in $millions):

DECEMBER 31,
JUNE 30,        --------------------------------------------
2004                  2003                  2002
--------------------  --------------------  ----------------------
COST      CARRYING     COST     CARRYING     COST       CARRYING
BASIS       VALUE      BASIS      VALUE      BASIS        VALUE
---------  ----------  --------  ----------  ---------   ----------
(UNAUDITED)

Available for Sale:
Matures in:
less than 1 year ....................          $    98.5  $     98.6  $   52.8  $     52.8  $   292.9   $    292.9
2-5 years............................               14.5        14.5       9.0         8.8       39.7         39.7
Thereafter...........................                  -           -         -           -        3.4          3.4
---------  ----------  --------  ----------  ---------   ----------
$   113.0  $    113.1  $   61.8  $     61.6  $   336.0   $    336.0
=========  ==========  ========  ==========  =========   ==========

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

DECEMBER 31,
JUNE 30,        ------------------------------------------
2004                  2003                  2002
--------------------  --------------------  --------------------
COST     CARRYING     COST     CARRYING     COST     CARRYING
BASIS      VALUE      BASIS      VALUE      BASIS      VALUE
--------  ----------  --------  ----------  --------  ----------
(UNAUDITED)

Available for Sale:
Philip Service Corporation (b):
Equity...............................        $      -  $        -  $      -  $        -  $    9.4  $      0.2
Corporate bonds (c)....................               -           -      45.1        51.6         -           -
Other..................................             1.1         4.7       1.3         4.2       2.5         3.0
--------  ----------  --------  ----------  --------  ----------
1.1         4.7      46.4        55.8      11.9         3.2
Held-to-maturity:
GB Notes (a)...........................            21.3        25.3      21.3        24.7      21.3        23.5
--------  ----------  --------  ----------  --------  ----------
Total................................        $   22.4  $     30.0  $   67.7  $     80.5  $   33.2  $     26.7
========  ==========  ========  ==========  ========  ==========

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

F-15

AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

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

The Company, the General Partner, and the directors and officers of the
General Partner were in the process of pursuing gaming applications to obtain
licenses from the New Jersey Casino Control Commission. In March 2000, in an
effort to facilitate the consummation of the reorganization process of Greate
Bay and Claridge Hotel, the Company entered into separate agreements to transfer
its interests in such entities to an affiliate of the General Partner for $40.5
million, which was equal to the Company's cost for such Notes. The affiliate of
the General Partner was obligated to sell back to the Company, and the Company
was obligated to repurchase such interests at the same price (together with a
commercially reasonable interest factor), when the appropriate licenses were
obtained by the Company. The Company would also acquire its proportionate share
of all sale proceeds, stock rights, acquired shares and other benefits, if any,
that may have accreted to or obtained in connection with such interests while
held by the affiliate of the General Partner. Subsequent to the transfer, the
affiliate of the General Partner purchased $1.7 million of the Claridge Notes
for approximately $0.9 million on the Company's behalf.

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

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

In May 2002, the Company was qualified as a holding company by the New
Jersey Casino Control Commission (the "Casino Control Commission") and in
accordance with the prior agreement repurchased its interest in the Sands,
located in Atlantic City, New Jersey, from affiliates of the General Partner. As
a result, the Company acquired approximately 3.6 million common shares (36%) of
GBH and $26.9 million face amount of GB Notes. The Company paid approximately
$68.8 million to reacquire its interests representing the affiliates' advances
plus accrued interest of approximately $11 million. In accordance with the
agreement, interest was accrued from March 2000 to May 2002 at an annual rate of
1 1/2% over the prime rate. Interest expense of approximately $919,000, and
$5,306,000 for the years ended December 31, 2002 and 2001, respectively, has
been included in "Interest expense" in the Consolidated Statements of Earnings.
As required by the New Jersey Casino Control Act (the "Casino Control Act"), the
Partnership Agreement was amended to provide that securities of the Company are
held subject to the condition that if a holder thereof is found to be
disqualified by the Casino Control Commission, pursuant to the provisions of the
Casino Control Act, such holder shall dispose of his interest in the Company in
accordance with the Casino Control Act.

F-16

AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

On June 30, 2004, GBH announced that its stockholders approved the
transfer of the Sands to its wholly-owned 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 hold approximately 77.5% of the
GBH stock and held approximately 58.2% of the original debt, of which the
Company owns approximately 36.3% of the common stock and held approximately
24.5% of the debt. This debt is included in "Marketable Equity and Debt
Securities" in the consolidated balance sheets. The Company and Mr. Icahn
tendered all of their debt in the exchange. 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;

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

-     3,627,711 warrants, which under certain conditions will allow the
Company to purchase approximately 998,000 shares of common stock at
$.01 per share of Atlantic Holdings representing approximately 10%
of the outstanding common stock of Atlantic Holdings, on a fully
diluted basis.

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

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

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

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

The secured term debt matures March 31, 2005 and bears interest at 9% per
annum. Interest was payable quarterly, in arrears, beginning July 1, 2000. The
secured convertible payment-in-kind debt matures March 31, 2005 and bears
interest at 10% per annum. Interest was accreted quarterly with interest on the
accreted interest also calculated at the rate of 10% per annum.

The market value of Philip's common stock declined steadily since it was
acquired by the Company. In 2002, based on a review of Philip's financial
statements, management of the Company deemed the decrease in value to be other
than temporary. As a result, the Company wrote down its investment in Philip's
common stock by charges to earnings of $8,476,000 and charges to other
comprehensive income ("OCI") of $761,000 in the year ended December 31, 2002.
This investment had been previously written down by approximately $6.8 million
in charges to earnings. The Company's adjusted carrying value of Philip's common
stock was approximately $200,000 at December 31, 2002.

F-17

AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In June 2003, Philip announced that it and most of its wholly owned U.S.
subsidiaries filed voluntary petitions under Chapter 11 of the Federal
Bankruptcy Code.

In the year ended December 31, 2003, management of the Company determined
that it was appropriate to write-off the balance of its investment in the
Philip's common stock by a charge to earnings of approximately $961,000; of this
amount $761,000 was previously charged to other comprehensive income in 2002,
which was reversed in 2003, and included in the $961,000 charge to earnings.

The Company also has a participation in Philip's debt with an original
cost at the date of their acquisition of approximately $19.7 million. At
December 31, 2001, such notes were classified as available-for-sale securities
and were written down through charges to OCI, to an estimated fair market value
of approximately $13.2 million. In 2002, upon concluding its review of these
investments, management determined that such investments were more properly
classified as notes receivable.

Approximately $6.6 million of charges to OCI were reversed and the
investments were reclassified at their original cost to "Mortgages and notes
receivable" at December 31, 2002. These adjustments had no effect on the
Company's reported earnings for the year ended December 31, 2002.

In 2003, the cost basis of the debt was approximately $22.1 million. As
previously mentioned, Philip filed for bankruptcy protection in June 2003.
Management of the Company reviewed Philip's financial statements, bankruptcy
documents and the prices of recent purchases and sales of the debt and
determined this investment to be impaired. Based upon this review, management
concluded the fair value of the debt to be approximately $3.3 million;
therefore, the Company recorded a write-down of approximately $18.8 million by a
charge to earnings which was included in "Write-down of mortgages and notes
receivable" in the Consolidated Statements of Earnings in the year ended
December 31, 2003. In December 2003, the Company sold two-thirds of its term and
PIK debt with a basis of $2.2 million for $2.6 million generating a gain of $0.4
million.

Philip emerged from bankruptcy on December 31, 2003 as a private company
controlled by an Icahn affiliate. The Company's remaining interest in the notes
will be delivered and exchanged for approximately 443,000 common shares
representing a 4.4% equity interest in the new Philip valued at the carrying
value of the debt at December 31, 2003 of $1.1 million. Subsequent to December
31, 2003, the Company received a bankruptcy distribution of approximately
$350,000.

c. In December 2003, the Company acquired approximately $86.9 million
principal amount of corporate bonds for approximately $45.1 million. Such bonds
were classified as available for sale securities. Available for sale securities
are carried at fair value on the balance sheet. Unrealized holding gains and
losses are excluded from earnings and reported as a separate component of
Partners' Equity. At December 31, 2003, the carrying value of the bonds was
approximately $51.6 million and accumulated other comprehensive gain was
approximately $6.5 million. 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.

8. EQUITY INTEREST IN GB HOLDINGS, INC.

The Company reflects its pro rata equity interest in GB Holdings, Inc.,
which is approximately 36%, under this caption in the Consolidated Balance
Sheets. "Equity in the earnings (losses) of GB Holdings, Inc." of approximately
($0.6 million) and ($0.2 million) for the six months ended June 30, 2004 and
2003 (unaudited), respectively, and ($3.5 million), $0.3 million and $1.8
million have been recorded in the Consolidated Statements of Earnings in the
years ended December 31, 2003, 2002 and 2001, respectively (See Note 7).

F-18

AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

9. HOTEL AND CASINO OPERATING PROPERTIES

In September 2000, Stratosphere's Board of Directors approved a going
private transaction proposed by the Company and an affiliate of Icahn. On
February 1, 2001 the Company entered into a merger agreement with Stratosphere
under which the Company would acquire the remaining shares of Stratosphere that
it did not currently own. The Company owned approximately 51% of Stratosphere
and Mr. Icahn owned approximately 38.6%. The Company, subject to certain
conditions, agreed to pay approximately $44.3 million for the outstanding shares
of Stratosphere not currently owned by it. Stratosphere stockholders not
affiliated with Icahn would receive a cash price of $45.32 per share and Icahn
related stockholders would receive a cash price of $44.33 per share. This
transaction was completed in December 2002 after shareholders' approval.
The acquisition by the Company of the minority shares not owned by an
Icahn affiliate has been accounted for as a purchase in accordance with
Financial Accounting Standards Board ("FASB") Statement No. 141, "Business
Combinations." The acquisition by the Company of the common stock held by an
Icahn affiliate has been recorded at historical cost. The excess of the
affiliate's historical cost over the amount of the cash disbursed, which
amounted to $21,151,000, has been accounted for as an addition to the General
Partner's equity.
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, AREH, transferred 100% of the common stock of Stratosphere to American
Casino. As a result, following the acquisition and contributions, 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, 2004
and 2003 and December 31, 2003, 2002 and 2001 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 of the two Arizona
Charlie's entities 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 assets
acquired and liabilities assumed in this acquisition have been accounted for at
historical cost. The excess of the purchase price over historical cost of the
net assets, which amounted to $1.213 million, has been accounted for as a
capital distribution to the General Partner. An increase of $111.7 million has
been made to the General Partner's equity at December 31, 2000 as a result of
the acquisition. A reduction of $125.9 million reflecting the purchase price has
been made to the General Partner's equity in May 2004.

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 six months ended June 30, 2004 and
2003 (unaudited) and for the years ended December 31, 2003, 2002 and 2001 have
been included in "Hotel and casino operating income and expenses" in the
Consolidated Statements of Earnings. Hotel and casino operating expenses include
all expenses except for 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.

F-19

AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

American Casino's depreciation and amortization expense was $12.3 million and
$10.3 million for the six months ended June 30, 2004 and 2003, respectively, and
$20.2 million, $20.2 million and $17.2 million for the years ended December 31,
2003, 2002 and 2001, respectively. American Casino's income tax provision was
$5.9 million and $4.4 million for the six months ended June 30, 2004 and 2003
(unaudited), respectively, and $4.9 million for each of the years ended December
31, 2002 and 2001. American Casino recorded an income tax benefit of $1.8
million for the year ended December 31, 2003. American Casino accounted for
approximately 67% and 71% of the Company's revenues in the six months ended June
30, 2004 and 2003 (unaudited), respectively and approximately 70%, 57% and 58%
for the years ended December 31, 2003, 2002 and 2001, respectively, and
approximately 75% and 71% of the Company's operating income in the six months
ended June 30, 2004 and 2003 (unaudited), respectively, and 66%, 39% and 42% for
the years ended December 31, 2003, 2002 and 2001, respectively.

The amount of revenues and expenses attributable to casino, hotel and
restaurants, respectively, is summarized as follows: 

Six Months         Six Months      Year Ended       Year Ended        Year Ended
Ended              Ended        December 31,    December 31,      December 31,
June 30, 2004     June 30, 2003        2003             2002              2001
-------------     -------------     ------------    ------------      ------------

Hotel and casino operating income:
Casino ...........................     $   82,391         $  73,998        $ 147,888       $ 143,057        $ 142,919  
Hotel ............................         27,723            23,572           47,259          44,263           38,326
Food and beverage ................         33,420            29,847           59,583          56,349           55,453
Tower, retail and other income ...         16,580            14,540           30,336          28,247           29,512
----------         ---------        ---------       ---------        ----------
Gross revenues ...........        160,114           141,957          285,066         271,916          266,210
Less promotional allowances ......        (11,745)          (11,404)         (22,255)        (21,893)         (23,737)
----------         ---------        ---------       ---------        ----------
Net revenues .....................     $  148,369         $ 130,553        $ 262,811       $ 250,023        $ 242,473
==========         =========        =========       =========        ==========

Hotel and casino operating expenses:
Casino ...........................     $  31,182          $  30,620        $  61,284       $  59,879        $  60,026
Hotel ............................        11,536             10,565           22,074          20,142           17,190
Food and beverage ................        23,664             22,133           44,990          43,393           42,806
Other operating expenses .........         6,422              6,946           13,524          14,505           15,133
Selling, general and
administrative ..................        37,327             37,787           74,985          80,019           78,692
----------          ---------       ----------       ---------        ---------
Total expenses ...................     $ 110,131          $ 108,051        $ 216,857       $ 217,938         $213,847
==========         ==========       ==========      ==========        =========

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.

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

ARIZONA CHARLIE'S DECATUR

Arizona Charlie's Decatur is located on approximately 17 acres of land,
four miles west of the Las Vegas strip. Arizona Charlie's Decatur contains
approximately 52,000 square feet of gaming space, 258 hotel rooms, four
restaurants and three bars.

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. 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.

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.

American Casino's property and equipment consist of the following as of
June 30, 2004 and December 31, 2003 and 2002 (in $000's):

DECEMBER 31,
JUNE 30,        -----------------------
2004              2003         2002
-----------       ----------    ---------
(UNAUDITED)

Land and improvements, including land held for development........         $  46,976        $   47,041    $  47,233
Building and improvements.........................................           221,430           220,280      216,668
Furniture, fixtures and equipment.................................           105,236            98,586       88,230
Construction in progress..........................................             6,770             7,224          339
---------        ----------    ---------
380,412           373,131      352,470
Less accumulated depreciation and amortization....................            85,332            74,428       61,695
---------        ----------    ---------
$ 295,080        $  298,703    $ 290,775
=========        ==========    =========

F-20

AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Included in property and equipment at June 30, 2004 (unaudited) and
December 31, 2003 and 2002 are assets recorded under capital leases of $4.0
million, $4.0 million and $1.0 million, respectively.

10. NATIONAL ENERGY GROUP

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 NEG from
entities affiliated with Mr. Icahn for an aggregate cash consideration of
approximately $148.1 million plus approximately $6.7 million in cash of accrued
interest on the debt securities. The agreement was reviewed and approved by the
Audit Committee who were advised by its independent financial advisor and legal
counsel. The securities acquired were $148,637,000 in principal amount of
outstanding 10 3/4% Senior Notes due 2006 of NEG and 5,584,044 shares of common
stock of NEG. As a result of the foregoing transaction and the acquisition by
the Company of additional securities of NEG prior to the closing, the Company
beneficially owns in excess of 50% of the outstanding common stock of NEG.

NEG owns a 50% interest in Holding LLC, the other 50% interest in Holding
LLC is held by Gascon Partners ("Gascon") an Icahn affiliate and managing
member. Holding LLC owns NEG Operating LLC ("Operating LLC") which owns
operating oil and gas properties managed by NEG. Under the Holding LLC operating
agreement, as of June 30, 2004, NEG is to receive guaranteed payments of
approximately $39.9 million in addition to a priority distribution of
approximately $148.6 million before the Icahn affiliate receives any monies. Due
to the substantial uncertainty that NEG will receive any distribution above the
priority and guaranteed payments amounts, NEG accounts for its investment in
Holding LLC as a preferred investment.

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

b. Investment in NEG Holding LLC
As explained below, NEG's investment in Holding LLC is recorded as a
preferred investment. The initial investment was recorded at historical carrying
value of the net assets contributed with no gain or loss recognized on the
transfer. The Company currently assesses its investment in Holding LLC though a
cash flow analysis to determine if Holding LLC will have sufficient cash flows
to fund the guaranteed payments and priority distribution. This analysis is done
on a quarterly basis. Holding LLC is required to make SFAS 69 disclosures on an
annual basis, which include preparation of reserve reports by independent
engineers and cash flow projections. These cash flow projections are the basis
for the cash flow analysis. The Company follows the conceptual guidance of SFAS
144 "Accounting for the Impairment of Long-Lived Assets" in assessing any
potential impairments in the investment in Holding LLC. 
Summarized financial information for Holding LLC is as follows (in
$000's):

DECEMBER 31,
JUNE 30,    ---------------------
2004        2003        2002
-----------   --------    --------
(UNAUDITED)

Current assets .............................    $ 26,249    $ 33,415    $ 42,126
Noncurrent assets(1) .......................     212,365     189,988     180,611
--------    --------    --------
Total assets ...............................    $238,614    $223,403    $222,737
========    ========    ========
Current liabilities ........................    $ 20,412    $ 14,253    $ 20,927
Noncurrent liabilities .....................      56,129      48,640       1,968
--------    --------    --------
Total liabilities ..........................      76,541      62,893      22,895
Members' equity ............................     162,073     160,510     199,842
--------    --------    --------
Total liabilities and members' equity ......    $238,614    $223,403    $222,737
========    ========    ========

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

F-21

AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

JUNE 30,                     DECEMBER 31,
----------------------  -----------------------------------
2004       2003        2003         2002         2001
---------   ----------  ---------    ---------    ---------
(UNAUDITED)
(IN $000'S)

Total revenues.........................................          $  32,366   $  33,135   $  80,475    $  39,509    $ 12,637
Costs and expenses.....................................            (22,393)    (23,624)    (47,277)     (32,064)     (9,988)
---------   ---------   ---------    ---------    --------
Operating income.......................................              9,973       9,511      33,198        7,445       2,649
Other income (expense).................................               (948)        872      (2,855)       6,481      (3,940)
---------   ---------   ---------    ---------    --------
Net income (loss)......................................          $   9,025   $  10,383   $  30,343    $  13,926    $ (1,291)
=========   =========   =========    =========    ========

In August 2000, pursuant to a plan of reorganization Holding LLC was
formed. Prior to September 2001, NEG owned and operated certain oil and gas
properties. In September 2001, NEG contributed oil and natural gas properties in
exchange for Holding LLC's obligation to pay NEG the guaranteed payments and
priority distributions. NEG also received a 50% membership interest in Holding
LLC. Gascon also contributed oil and natural gas assets and cash in exchange for
future payments and a 50% membership interest. The Holding LLC operating
agreement requires the payment of guaranteed payments and priority distributions
to NEG in order to pay interest on senior debt and the principal amount of the
debt of $148.6 million in 2006. After the receipt by NEG of the guaranteed
payments and priority distributions that total approximately $300 million, the
agreement requires the distribution of an equal amount to Gascon. Holding LLC is
contractually obligated to make the guaranteed payments and priority
distributions to NEG and Gascon before any distributions can be made to the LLC
interest.

NEG originally recorded its investment in Holding LLC at the historical
cost of the oil and gas properties contributed into the LLC. In evaluating the
appropriate accounting to be applied to this investment, NEG anticipated it will
collect the guaranteed payments and priority distributions through 2006.
However, based on cash flow projections prepared by the management of Holding
LLC and its reserve engineers, there is substantial uncertainty that there will
be any residual value in Holding LLC subsequent to the payment of the amounts
required to be paid to Gascon. Due to this uncertainty, NEG has been accreting
its investment in Holding LLC at the implicit rate of interest up to the
guaranteed payments and priority distributions collected through 2006,
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 investment in Holding LLC. The
investment in Holding LLC is evaluated quarterly for other than temporary
impairment. The rights of NEG upon liquidation of Holding LLC are identical to
those described above and NEG considered those rights in determining the
appropriate presentation.

Because of the continuing substantial uncertainty that there would be any
residual value in Holding LLC after the guaranteed payments and priority
distributions, no income other than the accretion is currently being given
accounting recognition. NEG's investment in Holding LLC will be reduced to zero
upon collection of the priority distributions in 2006. After that date, NEG will
continue to monitor payments made to Gascon and, at such time as it would appear
that there is any residual value to NEG's 50% interest in Holding LLC, it would
receive accounting recognition.  Throughout, and up to this point, NEG believes
that the 50% interest in Holding LLC represents a residual interest that is
currently valued at zero. The Company accounts for its residual equity
investment in Holding LLC in accordance with APB 18.

The following is a roll forward of the Investment in Holding LLC as of
June 30, 2004 (unaudited) and December 31, 2003 (in $000s):

JUNE 30,       DECEMBER 31,
2004             2003
----------      ------------
(UNAUDITED)

Investment in Holding LLC at beginning of period..........................     $ 69,346          $108,880
Priority distribution from Holding LLC....................................            -           (51,446)
Guaranteed payment from Holding LLC.......................................       (7,989)          (18,230)
Accretion of investment in Holding LLC....................................       16,124            30,142
--------          --------
Investment in Holding LLC at end of period................................     $ 77,481          $ 69,346
========          ========

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

1. Guaranteed payments are to be paid to NEG, calculated on an annual
interest rate of 10.75% on the outstanding priority distribution amount. The
priority distribution amount includes all outstanding debt owed to entities
owned or controlled by Carl C. Icahn, including the amount of NEG's 10.75%
Senior Notes. As of June 30, 2004 (unaudited) and December 31, 2003, the
priority distribution amount was $148.6 million which equals the amount of NEG's
10.75% Senior Notes due the Company. The guaranteed payments will be made on a
semi-annual basis.

F-22

AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

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

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

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

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

11. MORTGAGES AND NOTES RECEIVABLE (IN $000's)

BALANCE AT
DECEMBER 31,
COLLATERALIZED BY PROPERTY                        JUNE 30,  -------------------
TENANTED BY OR DEBTOR                              2004       2003       2002
-------------------------------------------      ---------  --------   --------
(UNAUDITED)

Peninsula/Hampton & Alex Hotel (b).........     $  16,269   $ 42,030   $ 23,200
Philip debt (c)                                       741      1,091     20,494
Westpoint Stevens (d)......................        69,475          -          -
Union Power Partners L.P. and Panda Gila     
River L.P. (d)..........................        45,153          -          -
Other......................................         7,101      7,207     12,522
---------   --------   --------
$ 138,739   $ 50,328   $ 56,216
=========   ========   ========

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

a. On November 30, 2000, the Company entered into a mezzanine loan
agreement to fund $23 million in two tranches to an unaffiliated borrower. The
funds were to be used for certain initial development costs associated with a 65
unit condominium property located at 931 1st Avenue in New York City. The first
tranche of $10 million was funded on November 30, 2000 and provided for interest
accruing at a rate of 25% per annum, with principal and interest due at
maturity, May 29, 2003. Also, in November 2000, approximately $3.7 million of
the second tranche of the loan was funded. The balance of approximately $9.3
million was funded in installments during 2001. The second tranche provided for
interest accruing at a rate of 21.5% per annum with principal and interest due
at maturity, November 29, 2002. The loans were payable at any time from the
proceeds of unit sales after satisfaction of senior debt of approximately $45
million. The loans were secured by the pledge of membership interests in the
entity that owns the real estate. In May 2002, the Company received
approximately $31.3 million for prepayment of the mezzanine loans. The balance
of the prepayment of $8.3 million represented accrued interest ($7.9 million)
and exit fees ($0.4 million) which amounts were recognized as "Interest income
on U.S. Government and Agency obligations and other investments" and "Other
income" respectively, in the Consolidated Statements of Earnings for the year
ended December 31, 2002.

F-23

AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

b. At December 31, 2002, the Company had funded two mezzanine loans for
approximately $23.2 million and had commitments to fund, under certain
conditions, additional advances of approximately $5 million. Both loans have an
interest rate of 22% per annum compounded monthly. The Peninsula loan, for a
Florida condominium development, which had a term of 24 months from the date of
funding, February 2002, was repaid in full in 2003. Approximately $6.8 million
of interest income was recorded and is included in "Interest income on U.S.
Government and Agency obligations and other investments" in the Consolidated
Statements of Earnings. The Alex Hotel loan, for a New York City hotel with
approximately 200 rooms, has a term of 36 months from the closing date, April
2002. At December 31, 2003, accrued interest of approximately $4.4 million has
been deferred for financial statement purposes pending receipt of principal and
interest payments in connection with this loan. Origination fees of $3.0 million
have been received in connection with one of the mezzanine loans and
approximately $1.5 million and $1.1 million has been recognized as "Other
income" in the Consolidated Statements of Earnings in the years ended December
31, 2003 and 2002 respectively. In February 2003, the Company funded the Hampton
mezzanine loan for approximately $30 million on a Florida condominium
development. The loan is due in 18 months with one six month extension and has
an interest rate of 22% per annum compounded monthly. The Company has committed
to fund an additional $15 million if required by the borrower to complete the
project. At December 31, 2003 accrued interest of approximately $6.7 million has
been deferred for financial statement purposes pending receipt of principal and
interest payments in connection with this loan. On April 30, 2004, the Company
received approximately $16.2 million for the prepayment of the Alex Hotel 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 six months ended June 30, 2004 (unaudited).

c. See Note 7 with respect to Philip debt.

d. 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
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 purchase of debt securities" on the Consolidated
Balance Sheets.

12. NOTE RECEIVABLE DUE FROM AFFILIATE

On October 17, 2003 Mr. Icahn, Chairman of the Board of the General
Partner, repaid the $250 million loan which had been made to him by the Company
on December 27, 2001. The Company made the two-year $250 million loan to Mr.
Icahn, secured by securities consisting of (i) 21,136,044 and 8,073,466 of the
Company's depositary units and preferred units, respectively, owned by Mr.
Icahn, such units having an aggregate market value on that date of $250 million
and (ii) shares of a private company owned by Mr. Icahn, which shares were
represented to have an aggregate book value of at least $250 million, together
with an irrevocable proxy on sufficient additional shares of the private company
so that the pledged shares and the shares covered by the proxy equal in excess
of 50% of the private company's shares. The interest on the loan was payable
semi-annually, at a per annum rate equal to the greater of (i) 3.9% and (ii) 200
basis points over 90 day LIBOR to be reset each calendar quarter. The applicable
rate in 2003 was 3.9% and in 2002 ranged from 3.9% to 4.03%. Interest income of
approximately $7.9 million, $9.9 million and $0.1 million was earned on this
loan in the years ended December 31, 2003, 2002 and 2001, respectively, and is
included in "Interest income on U.S. Government and Agency obligations and other
investments" in the Consolidated Statements of Earnings.

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

13. HOTEL AND RESORT OPERATING PROPERTIES

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

F-24

AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

Resort operations have been included in the "Hotel and resort operating
income and expenses" in the Consolidated Statements of Earnings. Net hotel and
resort operations for this property ("hotel and resort operating income" less
"hotel and resort operating expenses") resulted in income of approximately
$308,000 and $1,005,000 for the six months ended June 30, 2004 and 2003
(unaudited), respectively, and income of approximately $3,033,000, $1,909,000
and $712,000 for the years ended December 31, 2003, 2002, and 2001,
respectively. Hotel and resort operating expenses include all expenses except
for approximately $1,277,000 and $1,227,000 for the six months ended June 30,
2004 and 2003 (unaudited), respectively, and $2,451,000, $1,833,000 and $970,000
for the years ended December 31, 2003, 2002 and 2001 of depreciation and
amortization, respectively, which is included in such caption in the
Consolidated Statements of Earnings.

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

b. The Company owned a hotel located in Miami, Florida which had a
carrying value of approximately $6.4 million and $6.3 million at December 31,
2003 and 2002, respectively, and is unencumbered by any mortgages. Approximately
$1.3 million of capital improvements were completed in the year ended 
December 31, 2002.

The Company has a management agreement for the operation of the hotel with
a national management organization. As a result of the decision to sell the
property in 2004, the operating results for the hotel have been reclassified to
discontinued operations for all periods. In the six months ended June 30, 2004
and 2003 (unaudited), net hotel operations which totaled $345,000 and $417,000,
respectively, has been included in discontinued operations. Depreciation expense
of $105,000 in the six months ended June 30, 2003 (unaudited) has been included
in discontinued operations. Net hotel and resort operations ("hotel and resort
operating revenues" less "hotel and resort operating expenses") totaled
approximately $596,000, $494,000 and $770,000 for the years ended December 31,
2003, 2002 and 2001, respectively and have been included in discontinued
operations. Depreciation expense of $210,000, $374,000 and $342,000 for the
years ended December 31, 2003, 2002 and 2001, respectively, have been included
in discontinued operations.

14. SIGNIFICANT PROPERTY TRANSACTIONS

Information on significant property transactions during the six-month
period ended June 30, 2004 and the three-year period ended December 31, 2003 is
as follows:

a. In September 2002, the Company purchased an industrial building located
in Nashville, Tennessee for approximately $18.2 million. The building was
constructed in 2001 and is fully leased to two tenants, Alliance Healthcare and
Jet Equipment & Tools Inc., with leases expiring in 2011. The annual net
operating income is anticipated to be approximately $1.6 million increasing to
approximately $1.9 million by 2011. In October 2002, the Company closed a $12.7
million non-recourse mortgage loan on the Nashville, Tennessee property. The
loan bears interest at 6.4% per annum and matures in ten years. Required
payments are interest only for the first three years and then principal
amortization will commence based on a thirty-year amortization schedule. In June
2004, the Company sold the property for a selling price of $19.2 million. A gain
of approximately $2.4 million was recognized.

At December 31, 2003 and 2002, the property had a carrying value of
approximately $18,066,000 and $17,584,000 respectively, and was encumbered by a
non-recourse mortgage in the amount of $12,700,000.

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

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

F-25

AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

d. Due to favorable real estate market conditions and the mature nature of
the Company's real portfolio, the Company is marketing for sale its rental real
estate portfolio. The Company intends to utilize proceeds from any asset sales
to continue to invest in the Company's core businesses, including real estate,
gaming and entertainment and oil and gas. The Company 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 individually encumbered by
mortgage debt which in the aggregate is approximately $84 million at June 30,
2004 (unaudited). There can be no assurance that offers satisfactory to the
Company will be received.

At June 30, 2004 (unaudited), 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 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 (unaudited), 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.l 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 January 2004, the Company sold five properties to Alabama Power, its
tenant, for approximately $10.9 million, recognizing a gain of approximately
$6.0 million. Also in January 2004, the Company sold a grocery-anchored shopping
center located in Audubon, New Jersey for approximately $7.3 million,
recognizing a gain of approximately $6.8 million, which is included in
discontinued operations.

In January 2004, the Company purchased a 34,422 square foot commercial
condominium unit located in New York City for approximately $14.5 million. The
unit contains a Citibank branch, a furniture store and a restaurant. The Company
obtained mortgage financing of $10 million for this property in April 2004.

15. MORTGAGES PAYABLE

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

BALANCE AT DECEMBER 31,
ANNUAL PRINCIPAL      JUNE 30,     ----------------------------
RANGE OF INTEREST RATES      RANGE OF MATURITIES     AND INTEREST PAYMENT     2004           2003            2002
-----------------------      -------------------     --------------------  ------------   ------------    -------------
(UNAUDITED)

5.630% - 8.430%........      10/15/07 - 12/31/18        $       19,328     $     94,165   $    180,989    $    166,287
9.000 - 9.500..........      11/30/03 - 11/30/09                     -                -              -           5,561
--------------     ------------   ------------    ------------
$       19,328     $     94,165   $    180,989    $    171,848
==============     ============   ============    ============

The following is a summary of the anticipated future principal payments of
the mortgages (in 000's):

YEAR ENDING
DECEMBER 31,                                    AMOUNT
------------------------------------          ---------

2004................................          $   6,489
2005................................              6,702
2006................................              7,360
2007................................             14,176
2008................................             58,817
2009 - 2013.........................             66,905
2014 - 2018.........................             20,540
---------
$ 180,989
=========

F-26

AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

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

16. SENIOR NOTES AND CREDIT FACILITIES DUE AFFILIATES

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

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

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

In August 2001, NEG redeemed both $16.4 million of principal outstanding
under the notes and $4.8 million of Reinstated Interest for a cash consideration
of $10.5 million. NEG paid two Icahn affiliates approximately $0.4 million in
current interest on the redeemed senior note obligations at the date of
redemption related to interest owed from the last semi-annual interest payment
date of May 1, 2001, to the date of redemption. As this was a partial redemption
of the Notes, it has been accounted for as a modification of terms that changes
the amounts of future cash payments. Accordingly, the excess of redeemed
principal and interest over the redemption payment of $10.5 million is being
amortized as a reduction to interest expense over the remaining life of the
bonds. In connection with this transaction, NEG borrowed $10.9 million under its
existing credit facility with an Icahn affiliate.

In October 2003, the Company acquired these Notes. These Notes are
eliminated in consolidation (See Note 10).

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

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

F-27

AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

and interest accrued thereon outstanding on March 27, 2003. The Arnos facility
was canceled on December 29, 2003 in conjunction with a third party bank
financing.

c. On September 24, 2001, Arizona Charlie's, Inc. the predecessor entity
to Arizona Charlie's, LLC, which was acquired by American Casino in May 2004,
refinanced the remaining principal balance of $7.9 million on a prior note
payable to Arnos Corp., a company related through common ownership. The note
bears interest at the prime rate plus 1.50% (5.75% per annum at December 31,
2002), with a maturity of June 2004, and was collateralized by all the assets of
Arizona Charlie's, Inc. The note was repaid during November 2003. During the
years ended December 31, 2003, 2002 and 2001, Arizona Charlie's Inc. paid
interest expense of $0.1 million, $0.4 million and $1.3 million, respectively.

d. During fiscal year 2002, Fresca, LLC, which was acquired by American
Casino in May 2004, entered into an unsecured line of credit in the amount of
$25.0 million with Starfire Holding Corporation ("Starfire"), a common-
ownership related party. The outstanding balance, including accrued interest,
was due and payable on January 2, 2007. As of December 31, 2003, Fresca, LLC had
$25.0 million outstanding. The note bears interest on the unpaid principal
balance from January 2, 2002 until maturity at the rate per annum equal to the
prime rate, as established by Fleet Bank, from time to time, plus 2.75%.
Interest is payable semi-annually in arrears on the first day of January and
July, and at maturity. The note is guaranteed by Mr. Icahn. The note was repaid
during May 2004 (unaudited). During the years ended December 31, 2003 and 2002,
Fresca, LLC paid $1.2 million and $0.4 million, respectively. 

17. SENIOR SECURED NOTES PAYABLE AND CREDIT FACILITY

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 notes have a fixed annual
interest rate of 7.85%, which will be paid every six months on February 1 and
August 1, commencing August 1, 2004. The notes will mature on February 1, 2012.
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 of Arizona Charlie's Decatur and Boulder, to repay
intercompany indebtedness and for distributions to AREH. The notes are recourse
only to, and are 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
November 22, 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 November 22, 2004, then
American Casino 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.

A syndicate of lenders has provided a non-amortizing $20.0 million
revolving credit facility. The commitments are available to the Company in the
form of revolving loans, and include a letter of credit facility (subject to
$10.0 million sublimit). The proceeds of loans under the senior secured
revolving credit facility will be available to provide working capital and other
general corporate purposes. Loans made under the senior secured revolving
facility will mature and the commitments under them will terminate on January
29, 2008.

18. SENIOR UNSECURED NOTES PAYABLE

On May 12, 2004, the Company 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. American Real
Estate Finance Corp. ("AREF"), a wholly-owned subsidiary of the Company, was
formed solely for the purpose of serving as a co-issuer of the debt securities.
AREF will not have any operations or assets and will not have any revenues. The
Company intends to use the proceeds of this offering for general business
purposes, including its primary business strategy of acquiring undervalued
assets in its existing lines of business or other businesses and to provide
additional capital to grow its existing businesses. The notes restrict the
ability of the Company 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 the Company issued the notes, the Company entered into a registration
rights agreement in which the Company 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 8, 2004
or if the Company fails to consummate an exchange offer in which the Company
issues notes registered under the Securities Act of 1933 for the privately
issued notes within 30 business days after November 8, 2004 then the Company
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.

F-28

AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

19. RIGHTS OFFERINGS

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

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

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

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

b. In September 1997, the Company completed its 1997 Rights Offering (the
"1997 Offering") to holders of its Depositary Units. The aggregate amount raised
in the 1997 Rights Offering was approximately $267 million. The Preferred and
Depositary Units issued under the 1997 Rights Offering carry the same rights and
designations as those issued in 1995.

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

As of June 30, 2004 and at December 31, 2003, affiliates of the General
Partner owned 8,960,995 and 8,477,139 Preferred Units, respectively, and
39,896,836 Depositary Units.

20. PREFERRED UNITS

Pursuant to the terms of the Preferred Units, on February 21, 2003, the
Company declared its scheduled annual preferred unit distribution payable in
additional Preferred Units at the rate of 5% of the liquidation preference of
$10. The distribution was payable March 31, 2003 to holders of record as of
March 14, 2003. A total of 466,548 additional Preferred Units were issued. At
December 31, 2003 and 2002, 9,796,607 and 9,330,963 Preferred Units are issued
and outstanding, respectively.

Pursuant to the terms of the Preferred Units, on February 25, 2004, the
Company declared its scheduled annual preferred unit distribution payable in
additional Preferred Units at the rate of 5% of the liquidation preference of
$10. The distribution was paid on March 31, 2004 to holders of record as of
March 12, 2004. In addition, the Company increased the number of authorized
Preferred Units to 10,400,000.

F-29

AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

On July 1, 2003, the Company adopted Statement of Financial Accounting
Standards No. 150 (SFAS 150) "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity." SFAS 150 requires that a
financial instrument, which is an unconditional obligation, be classified as a
liability. Previous guidance required an entity to include in equity financial
instruments that the entity could redeem in either cash or stock. Pursuant to
SFAS 150 the Company's Preferred Units, which are an unconditional obligation,
have been reclassified from "Partners' equity" to a liability account in the
consolidated Balance Sheets and the preferred pay-in-kind distribution for the
period from July 1, 2003 to December 31, 2003 of $2,449,000 and all future
distributions have been and will be recorded as "Interest expense" in the
Consolidated Statements of Operations.

21. INCOME TAXES (IN $000's)

DECEMBER 31,
------------------------
2003          2002
----------    ----------

The difference between the book basis and the tax basis of the net
assets of the Company, not directly subject to income taxes, is as
follows:
Book basis of American Real Estate Holdings net assets excluding
Stratosphere Corp. and NEG, Inc. ..................................           $1,149,418   $1,177,329
Excess of tax over book (Excess of book over tax basis) ............               79,238       (1,778)
----------   ----------
Tax basis of net assets ............................................           $1,228,656   $1,175,551
==========   ==========

a.    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 six months ended June 30, 2004
and 2003 and the years ended December 31, 2003, 2002 and 2001
(in $000's):

JUNE 30,                    DECEMBER 31,
--------------------   ----------------------------------
2004       2003        2003        2002         2001
--------   ---------   ---------   ---------    ---------
(UNAUDITED)

Current..............   $ (3,225)  $ (2,318)   $ (4,302)   $   (311)     $ (3,176)
Deferred.............     (6,032)    (4,741)      5,875      (9,785)       28,840
--------   --------    --------    --------      --------
$ (9,257)  $ (7,059)   $  1,573    $(10,096)     $ 25,664
========   ========    ========    ========      ========

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

DECEMBER 31,
JUNE 30,      ----------------------
2004           2003         2002
-----------     ---------   ----------
(UNAUDITED)

Deferred tax assets:
Property, plant and equipment......     $ 50,897      $ 39,858    $  63,756
Net operating loss carryforwards...       26,824        30,942       48,477
Investment in NEG Holding LLC......       17,792        18,845        8,440
Other..............................        6,798         5,962        6,589
--------      --------    ---------
102,311        95,607      127,262
Valuation allowance................      (15,875)      (17,733)    (104,972)
--------      --------    ---------
Net deferred tax assets............     $ 86,436      $ 77,874    $  22,290
========      ========    =========

At June 30, 2004 and December 31, 2003, American Casino had net operating
loss carryforwards available for federal income tax purposes of approximately
$24.1 million (unaudited) and $28.5 million, respectively, which begin expiring
in 2019.

(iii) The provision (benefit) for income taxes differs from the
amount computed at the federal statutory rate as a result of
the following:

Year Ended      Year Ended     Year Ended
December 31,    December 31,   December 31,
2003           2002           2001
--------        --------       ---------

Federal statutory rate                         35.0%           35.0%           35.0%
Federal income tax credits                     (0.4)%          (0.3)%          (0.3)%
Permanent differences                           0.2%            0.1%            0.9%
Tax deduction not given book benefit            5.0%            0.0%            0.0%
Income not subject to taxation                (14.3)%         (22.3)%         (25.9)%
Valuation allowance                           (28.3)%          (0.5)%         (41.8)%
Other                                           0.5%            0.5%            0.0%
--------        --------       ---------
2.3%           12.5%          (32.1)%
========        ========       =========

F-30

AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

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

Additionally, American Casino's acquisition of Arizona Charlie's, LLC and
Fresca, LLC in May 2004 resulted in a net increase in the tax basis of assets in
excess of book basis. As a result, the Company recognized an additional deferred
tax asset of approximately $12.7 million from the transaction. Pursuant to SFAS
109, the benefit of the deferred tax asset from this transaction is credited
directly to equity.

At June 30, 2004 and December 31, 2003, NEG had net operating loss
carryforwards available for federal income tax purposes of approximately $52.5
million (unaudited) and $58 million, respectively, which begin expiring in 2018
and 2009, respectively. Net operating loss limitations may be imposed as a
result of subsequent changes in stock ownership of NEG. Prior to the formation
of Holding LLC, the income tax benefit associated with the loss carryforwards
had not been recognized since, in the opinion of management, there was not
sufficient positive evidence of future taxable income to justify recognition of
a benefit. Upon the formation of Holding LLC, management again evaluated all
evidence, both positive and negative, in determining whether a valuation
allowance to reduce the carrying value of deferred tax assets was still needed
and concluded, based on the projected allocations of taxable income by Holding
LLC, NEG more likely than not will realize a partial benefit from the loss
carryforwards. In accordance with SFAS 109, NEG recorded a deferred tax asset of
$31.9 million in September 2001, $25.5 million as of December 31, 2002, $25.9
million as of December 31, 2003, and $22.7 million as of June 30, 2004
(unaudited). Ultimate realization of the deferred tax asset is dependent upon,
among other factors, NEG's ability to generate sufficient taxable income within
the carryforward periods and is subject to change depending on the tax laws in
effect in the years in which the carryforwards are used. As a result of the
recognition of expected future income tax benefits, subsequent periods will
reflect a full effective tax rate provision.

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

THREE MONTHS ENDED(1)
----------------------------------------------------------------------------------------
MARCH 31,              JUNE 30,             SEPTEMBER 30,          DECEMBER 31,
--------------------   --------------------   -------------------   -------------------
2003       2002        2003       2002        2003       2002      2003        2002
--------   ---------   --------   ---------   --------   --------   -------   ----------

Revenues .................................  $ 93,606   $ 106,036   $ 90,572   $ 111,426   $ 95,412   $102,964   $93,869   $ 118,074
========   =========   ========   =========   ========   ========   =======   =========
Operating Income .........................  $ 16,133   $  21,138   $ 15,608   $  25,309   $ 16,773   $ 16,031   $20,127   $  16,125
Gains (losses) on property transactions ..     1,138       1,639       (272)          -        501      2,891     5,754       4,460
Loss on sale of assets ...................         -           -          -           -       (311)         -    (1,192)       (353)
Gain on sale of marketable equity and
debt securities ........................         -           -          -           -      2,168          -       439           -
Write-down of equity securities available
for sale ...............................      (961)          -          -      (8,476)         -          -         -           -
Write-down write-up of mortgages & notes
receivable .............................         -           -    (18,798)          -          -          -         -           -
Loss on limited partnership interest .....         -           -          -           -          -          -         -      (3,750)
Minority interest in net earnings of
Stratosphere Corp. ....................         -        (407)         -        (589)         -       (612)        -        (335)
--------   ---------   --------   ---------   --------   --------   -------   ---------
Income (loss) from continuing operations
before income tax ......................    16,310      22,370     (3,462)     16,244     19,131     18,760    25,128      16,147
Income tax (expense) benefit .............    (3,892)     (2,273)    (3,167)     (3,230)    (3,577)    (2,072)   12,209      (2,521)
--------   ---------   --------   ---------   --------   --------   -------   ---------
Income (loss) from continuing operations .    12,418      20,097     (6,629)     13,014     15,554     16,688    37,337      13,626
Income from discontinued operations ......     1,974       1,818      3,842       1,818      3,399      1,818     2,129       1,817
--------   ---------   --------   ---------   --------   --------   -------   ---------
Net earnings (loss) ......................  $ 14,392   $  21,915   $ (2,787)  $  14,832   $ 18,953   $ 18,506   $39,466   $  15,443
========   =========   ========   =========   ========   ========   =======   =========
Net Earnings (loss) per limited

F-31

AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

THREE MONTHS ENDED(1)
----------------------------------------------------------------------------------------
MARCH 31,              JUNE 30,             SEPTEMBER 30,          DECEMBER 31,
--------------------   --------------------   -------------------   -------------------
2003       2002        2003       2002        2003       2002      2003        2002
--------   ---------   --------   ---------   --------   --------   -------   ----------

Partnership unit(2):
Basic earnings:
Income (loss) from continuing operations.. $    .16   $     .34   $   (.21)  $     .23   $    .25   $    .30   $   .80   $     .25
Income from discontinued operations ......      .04         .04        .08         .04        .07        .04       .05         .04
--------   ---------   --------   ---------   --------   --------   -------   ---------
Basic earnings (loss) per LP unit ........ $    .20   $     .38   $   (.13)  $     .27   $    .32   $    .34   $   .85   $     .29
========   =========   =========  =========   ========   ========   =======   =========
Diluted earnings:
Income (loss) from continuing operations. $    .15   $     .30   $   (.21)  $     .21   $    .23   $    .27   $   .70   $     .22
Income from discontinued operations .....      .03         .03        .08         .03        .06        .03       .04         .03
--------   ---------   --------   ---------   --------   --------   -------   ---------
Diluted earnings (loss) per LP unit ...... $    .18   $     .33   $   (.13)  $     .24   $    .29   $    .30   $   .74   $     .25
========   =========   =========  =========   ========   ========   =======   =========

----------
(1)   All quarterly amounts have been restated for the effects of the
acquisition of NEG, Arizona Charlie's Decatur, Arizona Charlie's Boulder
and the reporting of discontinued operations.

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

23. SEGMENT REPORTING

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

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

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

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

The revenues, net earnings, assets and real estate investment capital
expenditures for each of the reportable segments are summarized as follows for
the six months ended and as of June 30, 2004 and 2003 (unaudited) and the years
ended and as of December 31, 2003, 2002, and 2001 (in $000's):

F-32

AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

JUNE 30,                            DECEMBER 31,
------------------------      ---------------------------------------
2004           2003           2003           2002           2001
---------      ---------      ---------      ---------      ---------
(UNAUDITED)

Revenues:
Hotel & casino operating properties ....................  $ 147,806      $ 130,340      $ 259,345      $ 250,328      $ 244,280
Land, house and condominium sales ......................     17,457          6,411         13,265         76,024         55,566
Rental real estate .....................................     10,549         11,462         22,504         23,425         25,553
Hotel & resort operating properties ....................      5,543          6,597         14,592         14,918         12,276
Oil & gas operating properties .........................     21,603         19,330         38,109         40,516         45,709
Other investments ......................................     16,012          3,305         13,914         15,508          7,794
---------      ---------      ---------      ---------      ---------
Subtotal ...............................................    218,970        177,445        361,729        420,719        391,178
Reconciling items .......................................      3,053(1)       6,800(1)      11,730(1)      17,781(1)      28,147(1)
---------      ---------      ---------      ---------      ---------
Total revenues .......................................  $ 222,023      $ 184,245(1)   $ 373,459      $ 438,500      $ 419,325
=========      =========      =========      =========      =========
Net earnings:
Segment earnings:
Hotel & casino operating property ......................  $  37,675      $  22,289      $  42,488      $  32,390      $  30,433
Land, house and condominium sales ......................      6,394          1,410          4,136         21,384         12,967
Oil & gas operating properties .........................      8,014          9,326         38,109         40,516         40,140
Rental real estate .....................................        574          1,055         16,379         15,841         19,590
Hotel and resort operating properties ..................     21,602         19,330          3,454          2,365          1,484
Other investments ......................................     16,013          3,305         13,914         15,508          7,794
---------      ---------      ---------      ---------      ---------
Total segment earnings ................................     90,272         56,715        118,480        128,004        112,408
Interest income .........................................      3,053          6,800         11,730         17,781         28,147
Interest expense ........................................    (17,971)       (12,330)       (22,064)       (28,343)       (36,577)
General and administrative expenses .....................     (9,030)        (6,825)       (14,081)       (14,134)       (13,011)
Depreciation and amortization ...........................    (15,592)       (12,688)       (25,424)       (24,255)       (26,515)
---------      ---------      ---------      ---------      ---------
Operating Income ......................................     50,732         31,672         68,641         79,053         64,452
Gain on sales and disposition of real estate from
continuing operations ..................................      5,821            866          7,121          8,990          1,737
(Loss) gain on sale of assets ...........................          -              -         (1,503)          (353)            27
Loss on sale of limited partnership interests ...........          -              -              -         (3,750)             -
Write-down of mortgages and notes receivable ............          -        (18,798)       (18,798)             -              -
Write-down of equity securities available for sale ......     37,167           (961)          (961)        (8,476)             -
Gain on sale of marketable equity securities ............          -              -          2,607              -          6,749
Minority interest in net earnings of Stratosphere Corp...          -              -              -         (1,943)          (450)
Income tax (expense) benefit ............................     (9,257)        (7,059)         1,573        (10,096)        25,664
Income from discontinued operations .....................     60,343          5,885         11,344          7,271          7,430
General partner's share of net income ...................     (8,144)        (6,181)       (10,664)        (7,528)       (39,419)
---------      ---------      ---------      ---------      ---------
Net earnings-limited partners' unitholders ..............  $ 136,662      $   5,424      $  59,360      $  63,168      $  66,190
=========      =========      =========      =========      =========

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

JUNE 30,                  DECEMBER 31,
----------    --------------------------------------
2004          2003          2002          2001
----------    ----------    ----------    ----------
(UNAUDITED)

Assets:
Rental real estate .......................    $  214,946    $  340,062    $  359,700    $  358,597
Hotel and casino operating properties ....       295,080       298,703       290,775       295,211
Land and construction-in-progress ........        40,797        43,459        40,415        69,429
Hotel and resort operating properties ....        34,689        41,526        44,346        43,990
Other investments ........................       275,006       231,050       479,104       458,372
----------    ----------    ----------    ----------
860,518       954,800     1,214,340     1,225,599
Reconciling items ........................     1,340,226       691,806       491,691       495,501
----------    ----------    ----------    ----------
Total ...................................    $2,200,744    $1,646,606    $1,706,031    $1,721,100
==========    ==========    ==========    ==========
Real estate investment capital expenditures:
Acquisitions:
Rental real estate .......................    $   14,583    $        -    $   18,226    $        -
Land and construction-in-progress ........             -             -             -             -
Hotel and casino operating properties ....             -             -             -             -
Hotel and resort operating properties ....             -             -             -             -
----------    ----------    ----------    ----------
$   14,583    $        -    $   18,226    $        -
==========    ==========    ==========    ==========
Developments:
Rental real estate .......................    $      299    $      413    $      181    $    1,064
Land and construction-in-progress ........             -             -         1,138         3,804

F-33

JUNE 30,             DECEMBER 31,
-------    -----------------------------
2004       2003       2002       2001
-------    -------    -------    -------
(UNAUDITED)

Hotel and casino operating properties..      9,527     31,844     19,133     53,207
Hotel and resort operating properties..      1,737      1,067      2,582     13,928
-------    -------    -------    -------
$11,563    $33,324    $23,034    $72,003
=======    =======    =======    =======

24. COMMITMENTS AND CONTINGENCIES

a. In January 2002, Kmart Corp., a tenant leasing seven properties owned
by the Company which represent approximately $1,374,000 in annual rentals, filed
a voluntary petition for reorganization under Chapter 11 of the Federal
Bankruptcy Code. Pursuant to an order of the Bankruptcy Court, four leases have
been rejected representing approximately $713,000 in annual rents. At June 30,
2004, two of the rejected properties were classified as held for sale and three
properties were sold. The Company recorded a provision for loss of approximately
$1.9 million on the four properties, whose leases were rejected, for the year
ended December 31, 2001. The Company has not been notified regarding the three
remaining leases representing approximately $661,000 in annual rents. At June
30, 2004 (unaudited) and December 31, 2003 and 2002, the carrying value of the
seven properties (four properties at June 30, 2004) was approximately
$3,223,000, $5,482,000 and $6,529,000, respectively, which management believes
is less than the estimate of net realizable value.

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

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

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

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

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

In February 2002, New Seabury Properties LLC ("New Seabury"), an AREP
subsidiary and owner of the property, filed in Barnstable County Massachusetts
Superior Court, a civil complaint appealing the Administrative

F-34

AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Decision by the Commission, and a separate civil complaint to find the
Commission in contempt of the Settlement Agreement. The Court subsequently
consolidated the two complaints into one proceeding. In July 2003, New Seabury
and the Commission filed cross motions for summary judgment.

Also, in July 2003, in accordance with a Court ruling, the Commission
reconsidered the question of its jurisdiction over the initial development
proposal and over a modified development proposal that New Seabury filed in
March 2003. The Commission concluded that both proposals are within its
jurisdiction (the Second Administrative Decision). In August 2003, New Seabury
filed in Barnstable County Massachusetts Superior Court another civil complaint
appealing the Second Administrative Decision to find the Commission in contempt
of the Settlement Agreement.

In November 2003, the Court ruled in New Seabury's favor on its July 2003
motion for partial summary judgment, finding that the special permit remains
valid and that the modified development proposal is in substantial compliance
with the Special Permit and therefore exempt from the Commission's jurisdiction
(the Court did not yet rule on the initial proposal). Under the modified
development proposal New Seabury could potentially develop up to 278 residential
units and 145,000 square feet of commercial space. In 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 matters 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 General Partner monitors all tenant bankruptcies and defaults and may,
when it deems it necessary or appropriate, establish additional reserves for
such contingencies.

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

25. FAIR VALUE OF FINANCIAL INSTRUMENTS

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

MORTGAGES AND NOTES RECEIVABLE

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

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

The approximate estimated fair values of the mortgages and notes
receivable held as of June 30, 2004 (unaudited) and December 31, 2003 and 2002
are summarized as follows (in $000's):

AT JUNE 30, 2004          AT DECEMBER 31, 2003         AT DECEMBER 31, 2002
-------------------------    ------------------------     -------------------------
NET         ESTIMATED        NET        ESTIMATED        NET          ESTIMATED
INVESTMENT    FAIR VALUE    INVESTMENT    FAIR VALUE     INVESTMENT     FAIR VALUE
-----------    ----------    ----------    ----------     ----------     ----------
(UNAUDITED)

Total                $ 138,739     $ 138,739      $ 50,272     $  55,000       $ 51,449       $ 53,973
=========     =========      ========     =========       ========       ========

F-35

AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The net investment at June 30, 2004 and December 31, 2003 and 2002 is
equal to the carrying amount of the mortgage receivable less any deferred income
recorded.

MORTGAGES PAYABLE

The approximate estimated fair values of the mortgages payable as of June
30, 2004 and December 31, 2003 and 2002 are summarized as follows (in $000's):

AT JUNE 30, 2004           AT DECEMBER 31, 2003         AT DECEMBER 31, 2002
-----------------------      ------------------------     ------------------------
CARRYING      ESTIMATED      CARRYING      ESTIMATED      CARRYING      ESTIMATED
VALUE       FAIR VALUE        VALUE       FAIR VALUE       VALUE       FAIR VALUE
--------     ----------      ---------     ----------     ---------     ----------
(UNAUDITED)

Total              $ 94,165      $ 93,348       $ 180,989     $ 185,000      $ 171,848     $ 190,000
========      ========       =========     =========      =========     =========

LIMITATIONS

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

26. EMPLOYEE BENEFIT PLANS

a. Employees of the Company who are members of various unions are covered
by union-sponsored, collectively bargained, multi-employer health and welfare
and defined benefit pension plans. The Company recorded expenses for such plans
of approximately $7,600,000, $6,500,000 and $4,900,000 for the years ended
December 31, 2003, 2002 and 2001, and $4,100,000 (unaudited) and $3,500,000
(unaudited) for the six months ended June 30, 2004 and 2003, respectively.
Sufficient information is not available from the plans' sponsors to permit the
Company to determine the adequacy of the plans' funding status.

b. The Company has retirement savings plans under Section 401(k) of the
Internal Revenue Code covering its non-union employees. The plans allow
employees to defer, within prescribed limits, up to 15% of their income on a
pre-tax basis through contributions to the plans. The Company currently matches,
within prescribed limits, up to 6% of eligible employees' compensation at rates
ranging from 33% to 50%. The Company recorded charges for matching contributions
of approximately $714,000, $981,000 and $1,023,000, for the years ended December
31, 2003, 2002 and 2001, respectively and $305,000 (unaudited) and $418,000
(unaudited) for the six months ended June 30, 2004 and 2003, respectively.

27. REPURCHASE OF DEPOSITARY UNITS

The Company has previously been authorized to repurchase up to 1,250,000
Depositary Units. As of June 30, 2004 and December 31, 2003, the Company has
purchased 1,137,200 Depositary Units at an aggregate cost of approximately
$11,921,000.

28. SUBSEQUENT EVENTS (UNAUDITED)

a. In July 2004, the Company 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. The
Company plans to invest in the further development of these properties and the
enhancement of the existing infrastructure.

F-36

AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

F-37

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Partners
American Real Estate Holdings Limited Partnership:

We have audited the accompanying consolidated balance sheets of American
Real Estate Holdings Limited Partnership and subsidiaries as of December 31,
2003 and 2002, and the related consolidated statements of earnings, changes in
partners' equity and comprehensive income, and cash flows for each of the years
in the three-year period ended December 31, 2003. These consolidated financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of American
Real Estate Holdings Limited Partnership and subsidiaries as of December 31,
2003 and 2002 and the results of their operations and their cash flows for each
of the years in the three-year period ended December 31, 2003 in conformity with
U.S. generally accepted accounting principles.

/s/ KPMG LLP

New York, New York
September 5, 2004

F-38

AMERICAN REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
JUNE 30, 2004 (UNAUDITED) AND DECEMBER 31, 2003 AND 2002
(IN $000'S)

JUNE 30,             DECEMBER 31,
2004            2003          2002
-----------     ----------    ----------
(UNAUDITED)    (RESTATED)    (RESTATED)

ASSETS
Real estate leased to others:
Accounted for under the financing method (Notes 4, 14 and 15) ..............    $    98,372     $  137,356    $  155,458
Accounted for under the operating method, net of accumulated depreciation
(Notes 5, 14 and 15) ......................................................         65,253         76,443       204,242
Properties held for sale (Notes 5 and 14) ....................................         49,193        128,813         4,300
Investment in U.S. Government and Agency obligations (Note 6) ................        113,141         61,573       336,051
Note receivable due from affiliate (Note 12) .................................              -              -       250,000
Cash and cash equivalents (Note 2) ...........................................      1,080,135        500,469        79,416
Marketable equity and debt securities (Note 7) ...............................         29,975         80,522        26,728
Mortgages and notes receivable (Note 11) .....................................        138,739         50,328        56,216
Investment in NEG Holding LLC (Note 10) ......................................         77,481         69,346       108,880
Equity interest in GB Holdings, Inc. (Note 8) ................................         28,811         30,854        37,280
Hotel, casino and resort operating properties, net of accumulated depreciation:
American Casino and Entertainment Properties LLC (Note 9) ..................        295,080        298,703       290,775
Hotel and resort (Notes 5 and 13) ..........................................         34,689         41,526        44,346
Land and construction-in-progress ............................................         40,797         43,459        40,415
Deferred tax asset (Note 19) .................................................         86,436         77,874        22,290
Due from American Real Estate Partners, L.P. .................................         10,297         18,044        18,056
Receivables and other assets .................................................         62,516         49,216        49,510
-----------     ----------    ----------
Total ....................................................................    $ 2,208,665     $1,662,275    $1,721,680
-----------     ----------    ----------
LIABILITIES AND PARTNERS' EQUITY
Mortgages payable (Notes 4, 5 and 15):
Real estate leased to others ...............................................    $    79,023     $   98,128    $  171,848
Properties held for sale ...................................................         15,142         82,861             -
-----------     ----------    ----------
94,165        180,989       171,848
Senior secured notes payable (Note 17) .......................................        215,000              -             -
Senior unsecured notes payable - American Real Estate Partners, L.P. - net of
unamortized discount of $10,406 (Note 18) ....................................        342,594              -             -
Liability for purchase of debt securities ....................................         59,853              -             -
Credit facilities due affiliates (Notes 10 and 16) ...........................              -         25,000        31,064
Senior notes due affiliates (Notes 10 and 16) ................................              -              -       148,637
Interest payable-senior notes (Note 16) ......................................              -              -        44,360
Accounts payable, accrued expenses and other liabilities .....................         77,760         68,753        64,685
-----------     ----------    ----------
789,372        274,742       463,897
-----------     ----------    ----------
Commitments and contingencies (Notes 3 and 20)
Limited partner ..............................................................      1,405,101      1,373,658     1,248,774
General partner ..............................................................         14,192         13,875        12,614
-----------     ----------    ----------
Partners' equity .............................................................      1,419,293      1,387,533     1,261,108
-----------     ----------    ----------
Total ....................................................................    $ 2,208,665     $1,662,275    $1,721,680
===========     ==========    ==========

See notes to consolidated financial statements.

F-39

AMERICAN REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS
SIX MONTHS ENDED JUNE 30, 2004 AND 2003 (UNAUDITED) AND YEARS ENDED
DECEMBER 31, 2003, 2002 AND 2001
(IN $000'S)

SIX MONTHS ENDED
JUNE 30,                YEARS ENDED DECEMBER 31,
----------------------    -----------------------------------
2004         2003         2003         2002         2001
---------    ---------    ---------    ---------    ---------
(UNAUDITED)        (RESTATED)   (RESTATED)   (RESTATED)

Revenues:
Hotel and casino operating income (Note 9) ..................   $ 148,369    $ 130,553    $ 262,811    $ 250,023    $ 242,473
Land, house and condominium sales ...........................      17,457        6,411       13,265       76,024       55,566
Interest income on financing leases .........................       5,426        6,759       13,115       14,722       16,935
Interest income on U.S. Government and Agency obligations and
other investments (Notes 11 and 12) ........................      15,981        8,395       22,583       30,569       31,064
Rental income ...............................................       5,123        4,703        9,389        8,703        8,618
Hotel and resort operating income (Note 13) .................       5,543        6,597       14,592       14,918       12,276
Accretion of investment in NEG Holding LLC (Note 10) ........      16,123       15,451       30,142       32,879        9,834
Oil and gas operating income ................................           -            -            -            -       33,176
NEG management fee ..........................................       5,479        3,879        7,967        7,637        2,699
Dividend and other income (Notes 7 and 11) ..................       3,085        1,710        3,061        2,720        4,877
Equity in (loss) earnings of GB Holdings, Inc. (Note 8) .....        (563)        (213)      (3,466)         305        1,807
---------    ---------    ---------    ---------    ---------
222,023      184,245      373,459      438,500      419,325
---------    ---------    ---------    ---------    ---------
Expenses:
Hotel and casino operating expenses (Note 9) ................     110,131      108,051      216,857      217,938      213,847
Cost of land, house and condominium sales ...................      11,063        5,001        9,129       54,640       42,599
Hotel and resort operating expenses (Note 13) ...............       4,969        5,342       11,138       12,553       10,792
Interest expense (Notes 7, 14, 15, 16, 17 and 18) ...........      15,500       12,330       19,615       28,343       36,577
Oil and gas operating expenses ..............................           -            -            -            -        5,569
Depreciation and amortization ...............................      15,525       12,688       25,424       24,255       26,515
General and administrative expenses (Note 3) ................       9,030        6,825       14,081       14,134       13,011
Property expenses ...........................................       2,535        2,136        5,375        4,372        2,779
Provision for loss on real estate ...........................           -          200          750        3,212        3,184
---------    ---------    ---------    ---------    ---------
168,753      152,573      302,369      359,447      354,873
---------    ---------    ---------    ---------    ---------
Operating income ..............................................      53,270       31,672       71,090       79,053       64,452
Other gains and (losses):
Gain on sale of marketable equity and debt securities .......      37,167            -        2,607            -        6,749
(Loss) Gain on sale of other assets .........................           -            -       (1,503)        (353)          27
Write-down of equity securities available for sale (Note 7) .           -         (961)        (961)      (8,476)           -
Write-down of mortgages and notes receivable (Note 7) .......           -      (18,798)     (18,798)           -            -
Gain on sales and disposition of real estate (Note 14) ......       5,821          866        7,121        8,990        1,737
Minority interest in net earnings of Stratosphere Corporation
(Note 9) ...................................................           -            -            -       (1,943)        (450)
---------    ---------    ---------    ---------    ---------
Income from continuing operations before income taxes .........      96,258       12,779       59,556       77,271       72,515
Income tax (expense) benefit (Note 19) ......................      (9,257)      (7,059)       1,573      (10,096)      25,664
---------    ---------    ---------    ---------    ---------
Income from continuing operations ...........................      87,001        5,720       61,129       67,175       98,179
---------    ---------    ---------    ---------    ---------
Discontinued operations:
Income from discontinued operations (Note 5) ................       5,157        3,961        7,991        7,271        7,430
Gain on sales and disposition of real estate (Note 14) ......      55,186        1,924        3,353            -            -
---------    ---------    ---------    ---------    ---------
Income from discontinued operations ...........................      60,343        5,885       11,344        7,271        7,430
---------    ---------    ---------    ---------    ---------
Net earnings ..................................................   $ 147,344    $  11,605    $  72,473    $  74,446    $ 105,609
=========    =========    =========    =========    =========
Net earnings attributable to (Note 3):
Limited partner .............................................   $ 145,871    $  11,489    $  71,749    $  73,702    $ 104,553
General partner .............................................       1,473          116          724          744        1,056
---------    ---------    ---------    ---------    ---------
$ 147,344    $  11,605    $  72,473    $  74,446    $ 105,609
=========    =========    =========    =========    =========

See notes to consolidated financial statements.

F-40

AMERICAN REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS'
EQUITY AND COMPREHENSIVE INCOME
SIX MONTHS ENDED JUNE 30, 2004 (UNAUDITED) AND YEARS ENDED
DECEMBER 31, 2003, 2002 AND 2001
(IN $000'S)

GENERAL       LIMITED
PARTNER'S     PARTNER'S      PARTNERS'
EQUITY        EQUITY        EQUITY
---------    -----------    -----------

Balance, December 31, 2000 (as previously reported) .....................   $   9,349    $   925,592    $   934,941
Arizona Charlies' Acquisition ...........................................       1,117        110,558        111,675
---------    -----------    -----------
Balance, December 31, 2000 (Restated) ...................................      10,466      1,036,150      1,046,616
Comprehensive income:
Net earnings .........................................................       1,056        104,553        105,609
Reclassification of unrealized loss on sale of debt securities .......          39          3,857          3,896
Net unrealized losses on securities available for sale ...............        (135)       (13,391)       (13,526)
---------    -----------    -----------
Comprehensive income ....................................................         960         95,019         95,979
---------    -----------    -----------
Capital contribution to American Casino (Note 1) ........................          51          5,099          5,150
---------    -----------    -----------
Balance, December 31, 2001 (Restated) ...................................      11,477      1,136,268      1,147,745
Comprehensive income:
Net earnings .........................................................         744         73,702         74,446
Reclassification of unrealized loss on sale of debt securities .......         106         10,489         10,595
Adjustment to reverse unrealized loss on investment securities
reclassified to notes receivable ....................................          66          6,516          6,582
Net unrealized losses on securities available for sale ...............          (2)          (240)          (242)
---------    -----------    -----------
Comprehensive income ....................................................         914         90,467         91,381
---------    -----------    -----------
Net adjustment for acquisition of minority interest (Note 9) ............         212         20,939         21,151
Capital contribution to American Casino (Note 1) ........................           8            823            831
---------    -----------    -----------
Balance, December 31, 2002 (Restated) ...................................      12,611      1,248,497      1,261,108
Comprehensive income:
Net earnings .........................................................         724         71,749         72,473
Reclassification of unrealized loss on sale of debt securities .......           8            753            761
Net unrealized gains on securities available for sale ................          92          9,082          9,174
Sale of marketable equity securities available for sale ..............          (3)          (277)          (280)
---------    -----------    -----------
Comprehensive income ....................................................         821         81,307         82,128
---------    -----------    -----------
Change in deferred tax asset valuation allowance related to book-tax 
differences existing at time of bankruptcy (Note 19)...................         471         46,634         47,105
Capital distribution (Note 1) ...........................................         (28)        (2,780)        (2,808)
---------    -----------    -----------
Balance, December 31, 2003 (Restated) ...................................      13,875      1,373,658      1,387,533
Comprehensive income:
Net earnings ..........................................................       1,473        145,871        147,344
Unrealized losses on securities available for sale ....................          (1)           (69)           (70)
Reclassification of unrealized gains on marketable securities sold ....         (64)        (6,361)        (6,425)
Net unrealized gains on securities available for sale .................           4            415            419
---------    -----------    -----------
Comprehensive income ....................................................       1,412        139,856        141,268
---------    -----------    -----------
Capital distribution from American Casino ...............................        (179)       (17,737)       (17,916)
Capital contribution to American Casino .................................         228         22,572         22,800
Arizona Charlies' acquisition (Note 1) ..................................      (1,259)      (124,641)      (125,900)
Arizona Charlies' acquisition adjustment (Note 9) .......................         (12)        (1,201)        (1,213)
Change in deferred tax asset related to acquisition .....................         127         12,594         12,721
---------    -----------    -----------
Balance, June 30, 2004 (unaudited) ......................................   $  14,193    $ 1,405,100    $ 1,419,293
=========    ===========    ===========

Accumulated other comprehensive gain (loss) at June 30, 2004, December 31,
2003, 2002 and 2001 was $349 (unaudited), $9,174, ($242) and ($17,178),
respectively.

See notes to consolidated financial statements.

F-41

AMERICAN REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2004 AND 2003 (UNAUDITED) AND
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(IN $000'S)

SIX MONTHS ENDED
JUNE 30,                 YEARS ENDED DECEMBER 31,
---------------------     ------------------------------------
2004        2003         2003          2002         2001
---------    --------     ---------    ---------    ---------
(UNAUDITED)         (RESTATED)   (RESTATED)   (RESTATED)

Cash flows from operating activities:
Income from continuing operations...............................   $  87,001    $  5,720     $  61,129    $  67,175    $  98,179
Adjustments to reconcile income from continuing operations to
net cash provided by (used in) operating activities:..........
Depreciation and amortization...................................      15,525      12,688        25,424       24,255       26,515
Gain on sale of marketable equity securities....................     (37,167)       (866)       (2,607)           -       (6,749)
Loss on sale of assets..........................................           -           -         1,503          353          (27)
Gain on sales and disposition of real estate....................      (5,821)          -        (7,121)      (8,990)      (1,737)
Provision for loss on real estate...............................           -         200           750        3,212        3,184
Write-down of equity securities available for sale..............           -         961           961        8,476            -
Write-down of mortgages and notes receivable....................           -      18,798        18,798            -            -
Minority interest in net earnings of Stratosphere Corporation...           -           -             -        1,943          450
Equity in losses (earnings) of GB Holdings, Inc.................         563         213         3,466         (305)      (1,807)
Deferred gain amortization......................................      (1,019)     (1,019)       (2,038)      (2,038)        (849)
Accretion of investment in NEG Holding LLC......................     (16,124)    (15,451)      (30,142)     (32,879)      (9,834)
Deferred income tax (benefit) expense...........................       5,995       2,665        (5,875)       9,785      (28,840)
Change in fair market value of derivative contracts.............           -           -             -            -          716
Changes in operating assets and liabilities:
Increase (decrease) in accounts payable, accrued expenses
and other liabilities.......................................       1,598     (35,227)      (37,328)         270       (1,915)
(Increase) decrease in receivables and other assets............      (1,431)        165        (4,404)      27,159       12,464
---------    --------     ---------    ---------    ---------
Net cash provided by (used in) continuing operations...........      49,120     (11,153)       22,516       98,416       89,750
---------    --------     ---------    ---------    ---------
Income from discontinued operations.............................      60,343       5,885        11,344        7,271        7,430
Depreciation and amortization...................................         414       2,231         4,507        3,855        3,634
Net gain from property transactions.............................     (55,186)     (1,924)       (3,353)           -            -
---------    --------     ---------    ---------    ---------
Net cash provided by discontinued operations....................       5,571       6,192        12,498       11,126       11,064
---------    --------     ---------    ---------    ---------
Net cash provided by (used in) operating activities.............      54,691      (4,961)       35,014      109,542      100,814
---------    --------     ---------    ---------    ---------
Cash flows from investing activities:
Decrease (increase) in mortgages and notes receivable............         351     (30,909)      (31,112)     (23,200)     (15,583)
Repayments of mortgages, mezzanine loans and notes receivable....      25,861           -        12,200       23,000            -
Purchase of debt securities......................................     (54,775)          -             -            -            -
Net proceeds from the sales and disposition of real estate.......      16,635       3,259        15,290       20,513        3,656
Principal payments received on leases accounted for under the
financing method....... .......................................       2,168       2,737         5,310        5,941        6,858
Additions to hotel, casino and resort operating properties.......     (11,264)     (4,483)      (32,911)     (21,715)     (67,135)
Acquisitions of rental real estate...............................     (14,583)          -             -      (18,226)           -
Acquisition of Arizona Charlie's.................................    (125,900)          -             -            -            -
Additions to rental real estate..................................        (299)       (281)         (413)        (181)      (1,064)
(Increase) decrease in investment in U.S. Government and
Agency Obligations (Note 2)....................................     (51,568)    (16,717)      274,478      (22,410)     162,046
Proceeds from sale of marketable equity & debt securities........      86,507           -         3,843            -       17,929
Disposition proceeds on sale mortgages and notes receivable......           -           -         2,621            -            -
Increase in marketable equity & debt securities..................           -           -       (45,140)      (4,415)           -
Decrease (increase) in note receivable from affiliate............           -           -       250,000            -     (250,000)
Decrease in minority interest in Stratosphere Corp...............           -           -             -      (44,744)           -
Decrease in investment in Stratosphere Corp......................           -           -           788            -            -
Investment in NEG, Inc...........................................           -           -      (148,101)           -            -
Investment in NEG Holding LLC....................................           -           -             -            -       (4,379)
Guaranteed payment from NEG Holding LLC..........................       7,989      10,239        18,229       21,653        3,625
Priority distribution from NEG Holding LLC.......................           -      40,506        40,506            -            -
Oil and natural gas acquisition, exploration and development
expenditures...................................................           -           -             -            -      (26,432)
Increase (decrease) in due to affiliate..........................       5,344           -             -      (68,491)      (8,592)
Increase in restricted cash......................................        (447)          -             -            -            -
Increase in due from affiliate...................................           -           -             -            -       (6,000)
Other                                                                    (100)        120           569          197          115
---------    --------     ---------    ---------    ---------
Net cash (used in) provided by continuing operations............    (114,081)      4,471       366,148     (131,878)    (184,956)
Cash flows from discontinued operations:
Net proceeds from the sales and disposition of real estate......     101,452       3,518         5,336            -            -
---------    --------     ---------    ---------    ---------
Net cash (used in) provided by investing activities.............     (12,629)      7,989       371,484     (131,878)    (184,956)
---------    --------     ---------    ---------    ---------

See notes to consolidated financial statements.

F-42

AMERICAN REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
SIX MONTHS ENDED JUNE 30, 2004 AND 2003 (UNAUDITED) AND YEARS ENDED
DECEMBER 31, 2003, 2002 AND 2001
(IN $000'S)

SIX MONTHS ENDED
JUNE 30,             YEARS ENDED DECEMBER 31,
--------------------   -----------------------------------
2004        2003       2003       2002         2001
----------   -------   ----------  ----------   ----------
(UNAUDITED)      (RESTATED)  (RESTATED)   (RESTATED)

Cash Flows From Financing Activities:
Members' Equity:
Contributions to American Casino.................................      15,894         -           -        598          5,150
Distributions from American Casino...............................     (17,916)        -           -          -              -
Debt:
Repayment of credit facilities...................................     (25,000)        -      (2,904)    (5,000)       (35,000)
Proceeds from credit facility....................................           -         -       7,780     17,220         10,940
Repayment of senior notes........................................           -         -           -          -        (10,500)
Proceeds from Senior Notes Payable...............................     557,594         -           -          -              -
Proceeds from mortgages payable..................................      10,000    20,000      20,000     12,700              -
Payments on mortgages payable....................................           -    (3,837)     (3,837)      (462)        (6,457)
Periodic principal payments......................................      (2,968)   (3,468)     (6,484)    (7,198)        (6,840)
Balloon payments.................................................           -         -           -          -         (1,756)
Payment of long term debt........................................           -         -           -        (38)        (3,369)
Cash acquired from subsidiary contributed by parent..............           -         -           -        280              -
----------   -------   ---------   --------      ---------
Net cash provided by (used in) financing activities............     537,604    12,695      14,555     18,100        (47,832)
----------   -------   ---------   --------      ---------
Net increase (decrease) in cash and cash equivalents................     579,666    15,723     421,053     (4,436)      (131,974)
Cash and cash equivalents, beginning of period......................     500,469    79,416      79,416     83,852        215,826
----------   -------   ---------   --------      ---------
Cash and cash equivalents at end of period..........................  $1,080,135   $95,139   $ 500,469   $ 79,416      $  83,852
==========   =======   =========   ========      =========
Supplemental information:
Cash payments for interest, net of amounts capitalized............  $    8,748   $58,598   $  65,110   $ 37,176      $  53,723
==========   =======   =========   ========      =========
Cash payments for income taxes....................................           -   $     -   $       -   $      -      $   1,200
==========   =======   =========   ========      =========
Supplemental schedule of noncash investing and financing
activities:
Reclassification of real estate to operating lease..................  $       -    $ 2,158   $   5,065   $ 13,403      $   3,082
Reclassification from hotel and resort operating properties.........      (6,428)        -           -          -         (1,167)
Reclassification of real estate from financing lease................           -    (2,158)     (5,065)   (13,503)        (9,754)
Reclassification of real estate from operating lease................     (24,849)        -    (126,263)         -              -
Reclassification of real estate to property held for sale...........      31,277         -     126,263        100          6,672
Decrease in mortgages and notes receivable..........................           -    (3,453)     (3,453)         -              -
Decrease in deferred income.........................................           -     2,565       2,565          -              -
Increase in real estate accounted for under the operating method....           -       888         888          -              -
Reclassification of real estate to (from) construction-in-progress..           -         -           -          -          1,167
Reclassification from marketable equity and debt securities.........           -         -           -    (20,494)             -
Reclassification from receivable and other assets...................           -    (1,631)     (1,631)         -              -
Reclassification to mortgages and notes receivable..................           -     1,631       1,631     20,494              -
----------   -------   ---------   --------      ---------
$        -   $     -   $       -   $      -      $       -
==========   =======   =========   ========      =========
Net unrealized gains (losses) on securities available for sale......  $      349   $ 2,342   $   9,174   $   (242)     $ (13,526)
==========   =======   =========   ========      =========
Increase in equity and debt securities..............................  $      600   $   600   $   1,200   $  2,890      $   2,500
==========   =======   =========   ========      =========
Purchase of debt securities.........................................  $   59,853   $     -   $       -   $      -      $       -
==========   =======   =========   ========      =========
Contribution of note from NEG Holding LLC...........................  $        -   $10,940   $  10,940   $      -      $       -
==========   =======   =========   ========      =========
Transfer of assets and liabilities to NEG Holding LLC...............  $        -   $     -   $       -   $      -      $  87,066
==========   =======   =========   ========      =========
Members' capital contribution.......................................  $    6,906   $     -   $       -   $      -      $       -
==========   =======   =========   ========      =========
Change in tax asset related to acquisition..........................  $   12,721   $     -   $       -   $      -      $       -
==========   =======   =========   ========      =========
Change in deferred tax asset valuation allowance related to
book-tax differences existing at time of bankruptcy...............  $        -   $     -   $  47,105   $      -      $       -
==========   =======   =========   ========      =========
Net Assets contributed by parent....................................  $        -   $     -   $       -   $    233       $      -
==========   =======   =========   ========      =========

See notes to consolidated financial statements

F-43

AMERICAN REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004 (UNAUDITED) AND DECEMBER 31, 2003, 2002 AND 2001

1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

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

By virtue of the Exchange, the Company owns the assets, subject to the
liabilities, of the Predecessor Partnerships. The Limited Partner owns a 99%
limited partner interest in the Company. American Property Investors, Inc. (the
"General Partner") owns a 1% general partner interest in both the Limited
Partner and the Company, representing an aggregate 1.99% general partner
interest in the Company and the Limited Partner. The General Partner is owned
and controlled by Mr. Carl C. Icahn ("Mr. Icahn" or "Icahn").

On August 16, 1996, the Company amended its Partnership Agreement to
permit non-real estate related acquisitions and investments which has allowed
and continues to permit the Company to take advantage of investment
opportunities it believes exist outside of the real estate market in order to
seek to enhance unitholder value and further diversify its assets. The Amendment
permits the Company to invest in securities issued by companies that are not
necessarily engaged as one of their primary activities in the ownership,
development or management of real estate to further diversify its investments
while remaining in the real estate business and continuing to pursue suitable
investments in the real estate markets. Under the Amendment, investments may
include equity and debt securities of domestic and foreign issuers. The portion
of the Company's assets invested in any one type of security or any single
issuer will not be limited.

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

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

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

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

In May 2004, American Casino & Entertainment Properties LLC ("American
Casino"), an indirect wholly-owned subsidiary of the Company, acquired two Las
Vegas casino/hotels, Arizona Charlie's Decatur and Arizona

F-44

AMERICAN REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Charlie's Boulder, from Mr. Icahn and an entity affiliated with Mr. Icahn
for an aggregate consideration of $125.9 million. The assets acquired and
liabilities assumed in this acquisition have been accounted for at historical
cost. The excess of the purchase price over historical cost of the net assets,
which amounted to $1.213 million, has been accounted for as a capital
distribution. An increase of $111.7 million has been made to Partner's equity at
December 31, 2000 as a result of the acquisition. A reduction of $125.9 million
reflecting the purchase price has been made to Partner's equity in May 2004.

In accordance with generally accepted accounting principles, assets
transferred between entities under common control are accounted for at
historical costs similar to a pooling of interests, and the financial statements
of previously separate companies for periods prior to the acquisition are
restated on a combined basis. There is no minority interest allocated to the
other NEG stockholders because of NEG's negative equity. See Note 10.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Financial Statements and Principles of Consolidation -- The consolidated
financial statements include the accounts of AREP and its majority- owned
subsidiaries in which control can be exercised. The Company is considered to
have control if it has a direct or indirect ability to make decisions about an
entity's activities through voting ot similar rights. The Company uses the
guidance set forth in AICPA Statement of Position No. 78-9-Accounting for
Investments in Real Estate Ventures, with respect to its investments in
partnerships. In addition, the Company uses the guidance of FASB Interpretation
No. 46 (revised December 2003), Consolidation of Variable Interest Entities, or
FIN 46R, whereby an interest in an entity where the Company is deemed to be the
primary beneficiary would be consolidated. The Company is not deemed to be the 
primary beneficiary, as defined, with respect to National Energy Group, Inc.'s
investment in NEG Holding, LLC. All material intercompany balances and
transactions are eliminated.

Investments in affiliated companies in which AREP owns between 20% and 
50%, and therefore, exercises significant influence, but which it does not
control, are accounted for using the equity method. The Company accounts for
its 36% interest in GB Holdings, Inc. on the equity basis.

All adjustments which, in the opinion of management, are necessary to
fairly present the result for the interim periods have been made.

Cash and Cash Equivalents -- The Company considers short-term investments,
which are highly liquid with original maturities of three months or less at date
of purchase, to be cash equivalents. Included in cash and cash equivalents at
June 30, 2004 (unaudited), December 31, 2003 and 2002 are investments in
government backed securities of approximately $879,000,000, $378,000,000 and
$5,467,000, respectively.

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

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

MORTGAGES AND NOTES RECEIVABLE

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

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

F-45

AMERICAN REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

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

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

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

Properties - Properties held for investment, other than those accounted
for under the financing method, are carried at cost less accumulated
depreciation unless declines in the values of the properties are considered
other than temporary at which time the property is written down to net
realizable value. A property is classified as held for sale at the time
management determines that the criteria in SFAS 144 have been met. Properties
held for sale are carried at the lower of cost or net realizable value. Such
properties are no longer depreciated and their operations are included in
discontinued operations. As a result of reclassification of certain real estate
held for sale during the six months ended June 30, 2004, income and expenses of
such properties are reclassified to discontinued operations for all prior
periods.

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

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

REVENUE RECOGNITION

1. Revenue from real estate sales and related costs are recognized at the
time of closing primarily by specific identification. The Company follows the
guidelines for profit recognition set forth by Financial Accounting Standards
Board (FASB) Statement No. 66, "Accounting for Sales of Real Estate."
2. Casino revenues and promotional allowances -- The Company recognizes
revenues in accordance with industry practice. Casino revenue is the net win
from gaming activities (the difference between gaming wins and losses). Casino
revenues are net of accruals for anticipated payouts of progressive and certain
other slot machine jackpots. Revenues include the retail value of rooms, food
and beverage and other items that are provided to customers on a complimentary
basis. A corresponding amount is deducted as promotional allowances. Hotel and
restaurant revenue is recognized when services are performed. The cost of such
complimentaries is included in "Hotel and casino operating expenses".
During the first quarter, 2001, the Emerging Issues Task Force reached a 
consensus on the portion of Issue 00-22, "Accounting for 'Points' and Certain 
Other Time-Based or Volume Based Sales Incentive Offers, and Offers for Free 
Products or Services to be Delivered in the Future," which addressed the 
income statement classification of the value of the points redeemable for cash 
awarded under point programs. The consensus states the cost of these programs 
should be reported as a contra-revenue, rather than an expense and is 
retroactive to January 1, 2001, with prior year restatement required. The 
Company applies the current consensus recommendation on Issue 00-22.
F-46

AMERICAN REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

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

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

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

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

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

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

RECENT ACCOUNTING STANDARDS:

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

The Company is required to apply FIN 46R to variable interests created
after January 2003. For variable interest entities created prior to January
2003, for which FIN 46 has not been applied prior to December 24, 2003, the
interpretation is required to be applied in reporting periods ending after March
15, 2004. The interpretation had no effect on the Company's financial
statements.

The Company has an investment in a variable interest entity, which owns
oil and natural gas operating properties. At June 30, 2004 (unaudited) and
December 31, 2003, the variable interest entity has net assets of $162 million
and $161 million, respectively. The Company has

F-47

AMERICAN REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

determined that it is not the primary beneficiary of the variable interest
entity. The maximum exposure to losses as a result of its involvement with the
variable interest entity was $77 million (unaudited) and $69 million
respectively.

3. RELATED PARTY TRANSACTIONS

a. On May 26, 2004, American Casino acquired two Las Vegas casino/hotels,
Arizona Charlie's Decatur and Arizona Charlie's Boulder from 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 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 9.)

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

c. In addition, in 1997 the Company entered into a license agreement for a
portion of office space from an affiliate. The license agreement dated as of
February 1, 1997 expires May 22, 2004 unless sooner terminated in accordance
with the agreement. Pursuant to the license agreement, the Company has the non-
exclusive use of 3,547 square feet of office space and common areas (of an
aggregate 21,123 rentable square feet sublet by such affiliate) for which it
paid $17,068 per month, together with 16.79% of certain "additional rent". In
November 2000, the Company reduced its office size to 2,275 square feet, which
decreased its monthly rental to $11,185 plus 10.77% of certain additional rent.
For the six months ended June 30, 2004 and 2003 (unaudited), the Company paid
rent of approximately $65,000 and $77,000, respectively. In the years ended
December 31, 2003, 2002 and 2001, the Company paid such affiliate approximately
$159,000, $153,000 and $147,000 of rent, respectively, in connection with this
licensing agreement. The terms of such sublease were reviewed and approved by
the Audit Committee. The agreement, which expired in May 2004, has been extended
on a month-to-month basis. If the Company must vacate the space, it believes
there will be adequate alternative space available.

d. American Casino billed the Sands Hotel and Casino (the "Sands")
approximately $116,000 and $97,000 for administrative services performed by
Stratosphere personnel during the six months ended June 30, 2004 and 2003
(unaudited), respectively, and $191,000 in the year ended December 31, 2003.

e. The General Partner and its affiliates may realize substantial fees,
commissions and other income from transactions involving the purchase,
operation, management, financing and sale of the Company's properties, subject
to certain limitations relating to properties acquired from the Predecessor
Partnerships in the Exchange. Some of such amounts may be paid regardless of the
overall profitability of the Company and whether any distributions have been
made to Unitholders. As new properties are acquired, developed, constructed,
operated, leased, financed and sold, the General Partner or its affiliates may
perform acquisition functions, development and construction oversight and other
land development services, property management and leasing services, either on a
day-to-day basis or on an asset management basis, and other services and be
entitled to fees and reimbursement of expenses relating thereto, including
property management fees, real estate brokerage and leasing commissions, fees
for financing either provided or arranged by the General Partner and its
affiliates, development fees, general contracting fees and construction
management fees. The terms of any transactions between the Company and the
General Partner or its affiliates must be fair and reasonable to the Company and
customary to the industry. There were no significant fees paid in the years
ended December 31, 2003, 2002, and 2001 and the six months ended June 30, 2004
and 2003 (unaudited).

f. NEG received management fees from an affiliate of approximately $5.5
million and $3.9 million in the six months ended June 30, 2004 and 2003
(unaudited), respectively, and $8.0 million, $7.6 million and $2.7 million in
the years ended December 31, 2003, 2002 and 2001, respectively.

F-48

AMERICAN REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

g. For the six months ended June 30, 2004 and 2003 (unaudited) and for the
year ended December 31, 2003, the Company paid approximately $120,000, $84,000
and $84,000, respectively, to an affiliate of the General Partner for
telecommunication services.

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

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

JUNE 30,           DECEMBER 31,
-----------   -----------------------
2004           2003          2002
-----------   ---------     ---------
(UNAUDITED)

Minimum lease payments receivable..................      $108,057    $ 161,785     $ 180,943
Unguaranteed residual value........................        54,362       74,651        87,160
--------    ---------     ---------
162,419      236,436       268,103
Less unearned income...............................        64,047       99,080       112,645
--------    ---------     ---------
$ 98,372    $ 137,356     $ 155,458
========    =========     =========

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

YEAR ENDING DECEMBER 31,                                 AMOUNT
------------------------                                 ------

2004................................................   $ 17,797
2005................................................     15,686
2006................................................     15,491
2007................................................     14,577
2008................................................     13,221
Thereafter..........................................     85,013
--------
$161,785
========

At December 31, 2003, approximately $107,543,000 of the net investment in
financing leases was pledged to collateralize the payment of nonrecourse
mortgages payable.

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

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

JUNE 30,           DECEMBER 31,
-----------    -----------------------
2004          2003          2002
-----------    ---------     ---------
(UNAUDITED)

Land......................................      $15,782      $  24,040     $  55,034
Commercial Buildings......................       64,552         83,252       194,521
-------      ---------     ---------
80,334        107,292       249,555
Less accumulated depreciation.............       15,081         30,849        45,313
-------      ---------     ---------
$65,253      $  76,443     $ 204,242
=======      =========     =========

As of June 30, 2004 (unaudited), December 31, 2003 and 2002, accumulated
depreciation on the hotel and resort operating properties (not included above)
amounted to approximately $8,573,000, $12,341,000 and $9,665,000, respectively
(See Note 13).

F-49

AMERICAN REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

YEAR ENDING DECEMBER 31,                                 AMOUNT
------------------------                                 ------

2004................................................   $   9,967
2005................................................       8,802
2006................................................       5,443
2007................................................       3,874
2008................................................       2,810
Thereafter..........................................       5,799
---------
$  36,695
=========

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

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

JUNE 30,          DECEMBER 31,
-----------    ---------------------
2004         2003          2002
-----------    --------      -------
(UNAUDITED)

Leased to others..........................      $67,437      $146,416      $     -
Vacant....................................        1,350         2,550        4,300
-------      --------      -------
68,787       148,966        4,300
Less accumulated depreciation.............       19,594        20,153            -
-------      --------      -------
$49,193      $128,813      $ 4,300
=======      ========      =======

The following is a summary of income from discontinued operations
($000's):

JUNE 30,                  DECEMBER 31,
--------------------   -------------------------------
2004         2003      2003       2002        2001
-------      -------   --------   --------    --------
(UNAUDITED)

Rental income...........................      $10,001      $10,441   $ 20,795   $ 19,222    $ 18,269
Hotel and resort operating income.......        1,913        2,073      3,912      3,679       4,142
-------      -------   --------   --------    --------
11,914       12,514     24,707     22,901      22,411
-------      -------   --------   --------    --------
Mortgage interest expense...............        2,457        3,124      6,247      5,691       5,599
Depreciation and amortization...........          414        2,126      4,507      3,855       3,634
Property expenses.......................        2,318        1,542      2,646      2,899       2,376
Hotel and resort operating expenses.....        1,568        1,761      3,316      3,185       3,372
-------      -------   --------   --------    --------
6,757        8,553     16,716     15,630      14,981
-------      -------   --------   --------    --------
Income from discontinued operations.....      $ 5,157      $ 3,961   $  7,991   $  7,271    $  7,430
=======      =======   ========   ========    ========

At December 31, 2003 and June 30, 2004 (unaudited), approximately
$105,984,000 and $19,823,000, respectively, of real estate held for sale was
pledged to collateralize the payment of non-recourse mortgages payable.

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

The Company has investments in U.S. Government and Agency Obligations
whose maturities range from 2004 to December 2008 as follows (in $millions):

F-50

JUNE 30,                             DECEMBER 31,
----------------------     -------------------------------------------------
2004                    2003                         2002
----------------------     ---------------------     -----------------------
COST       CARRYING      COST        CARRYING       COST         CARRYING
BASIS       VALUE        BASIS        VALUE         BASIS          VALUE
-----------   --------     -------      -------      --------      ---------
(UNAUDITED)

Available for Sale:
Matures in:
less than 1 year.............      $.98.5      $ 98.6       $  52.8      $  52.8      $  292.9      $   292.9
2-5 years....................        14.5        14.5           9.0          8.8          39.7           39.7
Thereafter...................           -           -             -            -           3.4            3.4
------      ------       -------      -------      --------      ---------
$113.0      $113.1       $  61.8      $  61.6      $  336.0      $   336.0
======      ======       =======      =======      ========      =========

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

JUNE 30,                             DECEMBER 31,
----------------------     -------------------------------------------------
2004                    2003                         2002
----------------------     ---------------------     -----------------------
COST       CARRYING      COST        CARRYING       COST         CARRYING
BASIS       VALUE        BASIS        VALUE         BASIS          VALUE
-----------   --------     -------      -------      --------      ---------
(UNAUDITED)

Available for Sale:
Philip Service Corporation (b):
Equity...................................     $   -      $      -      $     -      $    -        $  9.4        $  0.2
Corporate bonds (c)........................         -             -         45.1        51.6             -             -
Other......................................       1.1           4.7          1.3         4.2           2.5           3.0
-----      --------      -------      ------        ------        ------
1.1           4.7         46.4        55.8          11.9           3.2
Held-to-maturity:
GB Notes(a)..............................      21.3          25.3         21.3        24.7          21.3          23.5
-----      --------      -------      ------        ------        ------
Total....................................     $22.4      $   30.0      $  67.7      $ 80.5        $ 33.2        $ 26.7
=====      ========      =======      ======        ======        ======

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

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

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

The Company, the General Partner, and the directors and officers of
the General Partner were in the process of pursuing gaming applications to
obtain licenses from the New Jersey Casino Control Commission. In March 2000, in
an effort to facilitate the consummation of the reorganization process of Greate
Bay and Claridge Hotel, the Company entered into separate agreements to transfer
its interests in such entities to an affiliate of the General Partner for $40.5
million, which was equal to the Company's cost for such Notes. The affiliate of
the General Partner was obligated to sell back to the Company, and the Company
was obligated to repurchase such interests at the same price (together with a
commercially reasonable interest factor), when the appropriate licenses were
obtained by the Company. The Company would also acquire its proportionate share
of all sale proceeds, stock rights, acquired shares and other benefits, if any,
that may have accreted to or obtained in connection with such

F-51

AMERICAN REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

interests while held by the affiliate of the General Partner. Subsequent to the
transfer, the affiliate of the General Partner purchased $1.7 million of the
Claridge Notes for approximately $0.9 million on the Company's behalf.

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

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

In May 2002, the Company was qualified as a holding company by the New
Jersey Casino Control Commission (the "Casino Control Commission") and in
accordance with the prior agreement repurchased its interest in the Sands,
located in Atlantic City, New Jersey, from affiliates of the General Partner. As
a result, the Company acquired approximately 3.6 million common shares (36%) of
GBH and $26.9 million face amount of GB Notes. The Company paid approximately
$68.8 million to reacquire its interests representing the affiliates' advances
plus accrued interest of approximately $11 million. In accordance with the
agreement, interest was accrued from March 2000 to May 2002 at an annual rate of
1 1/2% over the prime rate. Interest expense of approximately $919,000, and
$5,306,000 for the years ended December 31, 2002 and 2001, respectively, has
been included in "Interest expense" in the Consolidated Statements of Earnings.
As required by the New Jersey Casino Control Act (the "Casino Control Act"), the
Partnership Agreement was amended to provide that securities of the Company are
held subject to the condition that if a holder thereof is found to be
disqualified by the Casino Control Commission, pursuant to the provisions of the
Casino Control Act, such holder shall dispose of his interest in the Company in
accordance with the Casino Control Act.

On June 30, 2004, GBH announced that its stockholders approved the
transfer of the Sands to its wholly-owned 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 hold approximately 77.5% of the
GBH stock and held approximately 58.2% of the original debt, of which the
Company owns approximately 36.3% of the common stock and held approximately
24.5% of the debt. This debt is included in "Marketable Equity and Debt
Securities" in the consolidated balance sheets. The Company and Mr. Icahn
tendered all of their debt in the exchange. 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;

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

F-52

AMERICAN REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

-     3,627,711 warrants, which under certain conditions will allow the
Company to purchase approximately 998,000 shares of common stock at
$.01 per share of Atlantic Holdings representing approximately 10%
of the outstanding common stock of Atlantic Holdings, on a fully
diluted basis.

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

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

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

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

The secured term debt matures March 31, 2005 and bears interest at 9% per
annum. Interest was payable quarterly, in arrears, beginning July 1, 2000. The
secured convertible payment-in-kind debt matures March 31, 2005 and bears
interest at 10% per annum. Interest was accreted quarterly with interest on the
accreted interest also calculated at the rate of 10% per annum.

The market value of Philip's common stock declined steadily since it was
acquired by the Company. In 2002, based on a review of Philip's financial
statements, management of the Company deemed the decrease in value to be other
than temporary. As a result, the Company wrote down its investment in Philip's
common stock by charges to earnings of $8,476,000 and charges to other
comprehensive income ("OCI") of $761,000 in the year ended December 31, 2002.
This investment had been previously written down by approximately $6.8 million
in charges to earnings. The Company's adjusted carrying value of Philip's common
stock was approximately $200,000 at December 31, 2002.

In June 2003, Philip announced that it and most of its wholly owned U.S.
subsidiaries filed voluntary petitions under Chapter 11 of the Federal
Bankruptcy Code.

In the year ended December 31, 2003, management of the Company determined
that it was appropriate to write-off the balance of its investment in the
Philip's common stock by a charge to earnings of approximately $961,000; of this
amount $761,000 was previously charged to other comprehensive income in 2002,
which was reversed in 2003, and included in the $961,000 charge to earnings.

The Company also has a participation in Philip's debt with an original
cost at the date of their acquisition of approximately $19.7 million. At
December 31, 2001, such notes were classified as available-for-sale securities
and were written down through charges to OCI, to an estimated fair market value
of approximately $13.2 million. In 2002, upon concluding its review of these
investments, management determined that such investments were more properly
classified as notes receivable.

Approximately $6.6 million of charges to OCI were reversed and the
investments were reclassified at their original cost to "Mortgages and notes
receivable" at December 31, 2002. These adjustments had no effect on the
Company's reported earnings for the year ended December 31, 2002.

In 2003, the cost basis of the debt was approximately $22.1 million. As
previously mentioned, Philip filed for bankruptcy protection in June 2003.
Management of the Company reviewed Philip's financial statements, bankruptcy
documents and the prices of recent purchases and sales of the debt and
determined this investment to be impaired. Based upon this review, management
concluded the fair value of the debt to be approximately $3.3 million;
therefore, the Company recorded a write-down of approximately $18.8 million by a
charge to earnings

F-53

AMERICAN REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

which was included in "Write-down of mortgages and notes receivable" in the
Consolidated Statements of Earnings in the year ended December 31, 2003. In
December 2003, the Company sold two-thirds of its term and PIK debt with a basis
of $2.2 million for $2.6 million generating a gain of $0.4 million.

Philip emerged from bankruptcy on December 31, 2003 as a private company
controlled by an Icahn affiliate. The Company's remaining interest in the notes
will be delivered and exchanged for approximately 443,000 common shares
representing a 4.4% equity interest in the new Philip valued at the carrying
value of the debt at December 31, 2003 of $1.1 million. Subsequent to December
31, 2003, the Company received a bankruptcy distribution of approximately
$350,000.

c. In December 2003, the Company acquired approximately $86.9 million
principal amount of corporate bonds for approximately $45.1 million. Such bonds
were classified as available for sale securities. Available for sale securities
are carried at fair value on the balance sheet. Unrealized holding gains and
losses are excluded from earnings and reported as a separate component of
Partners' Equity. At December 31, 2003, the carrying value of the bonds was
approximately $51.6 million and accumulated other comprehensive gain was
approximately $6.5 million. 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.

8. EQUITY INTEREST IN GB HOLDINGS, INC.

The Company reflects its pro rata equity interest in GB Holdings, Inc.,
which is approximately 36%, under this caption in the Consolidated Balance
Sheets. "Equity in the earnings (losses) of GB Holdings, Inc." of approximately
($0.6 million) and ($0.2 million) for the six months ended June 30, 2004 and
2003 (unaudited), respectively, and ($3.5 million), $0.3 million and $1.8
million have been recorded in the Consolidated Statements of Earnings in the
years ended December 31, 2003, 2002 and 2001, respectively (See Note 7).

9. HOTEL AND CASINO OPERATING PROPERTIES

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

The acquisition by the Company of the minority shares not owned by an
Icahn affiliate has been accounted for as a purchase in accordance with
Financial Accounting Standards Board ("FASB") Statement No. 141, "Business
Combinations." The acquisition by the Company of the common stock held by an
Icahn affiliate has been recorded at historical cost. The excess of the
affiliate's historical cost over the amount of the cash disbursed, which
amounted to $21,151,000, has been accounted for as an addition to the partner's
equity in accordance with their partnership interests.

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, the Company 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

F-54

AMERICAN REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

for periods prior to the acquisition are restated on a combined basis. The
Company's June 30, 2004 and 2003 and December 31, 2003, 2002 and 2001
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 of the two Arizona
Charlie's entities 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 assets
acquired and liabilities assumed in this acquisition have been accounted for at
historical cost. The excess of the purchase price over historical cost of the
net assets, which amounted to $1.213 million, has been accounted for as a
capital distribution. An increase of $111.7 million has been made to Partner's
equity at December 31, 2000 as a result of the acquisition. A reduction of
$125.9 million reflecting the purchase price has been made to Partner's equity
in May 2004.

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 released from escrow. American Casino used the
proceeds of the offering for the acquisition and to repay intercompany
indebtedness and for distributions to the Company.

American Casino's operations for the six months ended June 30, 2004 and
2003 (unaudited) and for the years ended December 31, 2003, 2002 and 2001 have
been included in "Hotel and casino operating income and expenses" in the
Consolidated Statements of Earnings. Hotel and casino operating expenses include
all expenses except for 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 $12.3 million and $10.3
million for the six months ended June 30, 2004 and 2003, respectively, and $20.2
million, $20.2 million and $17.2 million for the years ended December 31, 2003,
2002 and 2001, respectively. American Casino's income tax provision was $5.9
million and $4.4 million for the six months ended June 30, 2004 and 2003
(unaudited), respectively, and $4.9 million for each of the years ended December
31, 2002 and 2001. American Casino records an income tax benefit of $1.8 million
for the year ended December 31, 2003. American Casino accounted for
approximately 67% and 71% of the Company's revenues in the six months ended June
30, 2004 and 2003 (unaudited), respectively and approximately 70%, 57% and 58%
for the years ended December 31, 2003, 2002 and 2001, respectively, and
approximately 75% and 71% of the Company's operating income in the six months
ended June 30, 2004 and 2003 (unaudited), respectively, and 66%, 39% and 42% for
the years ended December 31, 2003, 2002 and 2001, respectively.

The amount of revenues and expenses attributable to casino, hotel and restaurants, respectively, is summarized as follows: 

Six Months         Six Months      Year Ended       Year Ended        Year Ended
Ended              Ended        December 31,    December 31,      December 31,
June 30, 2004     June 30, 2003        2003             2002              2001
-------------     -------------     ------------    ------------      ------------

Hotel and casino operating income:
Casino ...........................     $   82,391         $  73,998        $ 147,888       $ 143,057        $ 142,919  
Hotel ............................         27,723            23,572           47,259          44,263           38,326
Food and beverage ................         33,420            29,847           59,583          56,349           55,453
Tower, retail and other income ...         16,580            14,540           30,336          28,247           29,512
----------         ---------        ---------       ---------        ----------
Gross revenues ...........        160,114           141,957          285,066         271,916          266,210
Less promotional allowances ......        (11,745)          (11,404)         (22,255)        (21,893)         (23,737)
----------         ---------        ---------       ---------        ----------
Net revenues .....................     $  148,369         $ 130,553        $ 262,811       $ 250,023        $ 242,473
==========         =========        =========       =========        ==========

Hotel and casino operating expenses:
Casino ...........................     $  31,182          $  30,620        $  61,284       $  59,879        $  60,026
Hotel ............................        11,536             10,565           22,074          20,142           17,190
Food and beverage ................        23,664             22,133           44,990          43,393           42,806
Other operating expenses .........         6,422              6,946           13,524          14,505           15,133
Selling, general and
administrative ..................        37,327             37,787           74,985          80,019           78,692
----------          ---------       ----------       ---------        ---------
Total expenses ...................     $ 110,131          $ 108,051        $ 216,857       $ 217,938         $213,847
==========         ==========       ==========      ==========        =========

STRATOSPHERE TOWER CASINO AND HOTEL

The Stratosphere, which offers the tallest free-standing observation tower
in the United States, is situated on approximately 3 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.

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

ARIZONA CHARLIE'S DECATUR

Arizona Charlie's Decatur is located on approximately 17 acres of land,
four miles west of the Las Vegas strip. Arizona Charlie's Decatur contains
approximately 52,000 square feet of gaming space, 258 hotel rooms, four
restaurants and three bars.

F-55

AMERICAN REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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. Arizona
Charlie's Boulder contains approximately 41,000 square feet of gaming, 303 hotel
rooms, four restaurants and a 202-space recreational vehicle park.

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.

American Casino's property and equipment consist of the following as of
June 30, 2004 and December 31, 2003 and 2002 (in $000's):

JUNE 30,                   DECEMBER 31,
------------      ------------------------------
2004               2003              2002
------------      ------------       -----------
(UNAUDITED)

Land and improvements, including land held for development ........   $    46,976       $    47,041        $   47,233
Building and improvements..........................................       221,430           220,280           216,668
Furniture, fixtures and equipment..................................       105,236            98,586            88,230
Construction in progress...........................................         6,770             7,224               339
-----------       -----------        ----------
380,412           373,131           352,470
Less accumulated depreciation and amortization.....................       (85,332)          (74,428)          (61,695)
-----------       -----------        ----------
$   295,080       $   298,703        $  290,775
===========       ===========        ==========

Included in property and equipment at June 30, 2004 (unaudited) and December 31,
2003 and 2002, are assets recorded under capital leases of $4.0 million, $4.0
million and $1.0 million, respectively.

10. NATIONAL ENERGY GROUP

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 NEG from
entities affiliated with Mr. Icahn for an aggregate cash consideration of
approximately $148.1 million plus approximately $6.7 million in cash of accrued
interest on the debt securities. The agreement was reviewed and approved by the
Audit Committee who were advised by its independent financial advisor and legal
counsel. The securities acquired were $148,637,000 in principal amount of
outstanding 10 3/4% Senior Notes due 2006 of NEG and 5,584,044 shares of common
stock of NEG. As a result of the foregoing transaction and the acquisition by
the Company of additional securities of NEG prior to the closing, the Company
beneficially owns in excess of 50% of the outstanding common stock of NEG.

NEG owns a 50% interest in Holding LLC, the other 50% interest in Holding
LLC is held by Gascon Partners ("Gascon") an Icahn affiliate and managing
member. Holding LLC owns NEG Operating LLC ("Operating LLC") which owns
operating oil and gas properties managed by NEG. Under the Holding LLC operating
agreement, as of June 30, 2004, NEG is to receive guaranteed payments of
approximately $39.9 million in addition to a priority distribution of
approximately $148.6 million before the Icahn affiliate receives any monies. Due
to the substantial uncertainty that NEG will receive any distribution above the
priority and guaranteed payments amounts, NEG accounts for its investment in
Holding LLC as a preferred investment.

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

b. Investment in NEG Holding LLC

F-56

AMERICAN REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

As explained below, NEG's investment in Holding LLC is recorded as a
preferred investment. The initial investment was recorded at historical carrying
value of the net assets contributed with no gain or loss recognized on the
transfer. The Company currently assesses its investment in Holding LLC through a
cash flow analysis to determine if Holding LLC will have sufficient cash flows
to fund the guaranteed payments and priority distribution. This analysis is done
on a quarterly basis. Holding LLC is required to make SFAS 69 disclosures on an
annual basis, which include preparation of reserve reports by independent
engineers and cash flow projections. These cash flow projections are the basis
for the cash flow analysis. The Company follows the conceptual guidance of SFAS
144 "Accounting for the Impairment of Long-Lived Assets" in assessing any
potential impairments in the investment in Holding LLC.

Summarized financial information for Holding LLC is as follows (in
$000's):

JUNE 30,               DECEMBER 31,
-----------     -------------------------
2004            2003            2002
-----------     ---------       ---------
(UNAUDITED)

Current assets................................      $ 26,249      $  33,415       $  42,126
Noncurrent assets(1)..........................       212,365        189,988         180,611
--------      ---------       ---------
Total assets..................................      $238,614      $ 223,403       $ 222,737
========      =========       =========
Current liabilities...........................      $ 20,412      $  14,253       $  20,927
Noncurrent liabilities........................        56,129         48,640           1,968
--------      ---------       ---------
Total liabilities.............................        76,541         62,893          22,895
Members' equity...............................       162,073        160,510         199,842
--------      ---------       ---------
Total liabilities and members' equity.........      $238,614      $ 223,403       $ 222,737
========      =========       =========

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

JUNE 30,                        DECEMBER 31,
----------------------    -------------------------------------
2004         2003          2003          2002        2001
--------     --------     ---------      ---------   ---------

Total revenues................................    $ 32,366     $ 33,135     $  80,475      $  39,509   $  12,637
Costs and expenses............................     (22,393)     (23,624)      (47,277)       (32,064)     (9,988)
--------     --------     ---------      ---------   ---------
Operating income..............................       9,973        9,511        33,198          7,445       2,649
Other income (expense)........................        (948)         872        (2,855)         6,481      (3,940)
--------     --------     ---------      ---------   ---------
Net income (loss).............................    $  9,025     $ 10,383     $  30,343      $  13,926   $  (1,291)
========     ========     =========      =========   =========

In August 2000, pursuant to a plan of reorganization Holding LLC, was
formed. Prior to September 2001, NEG owned and operated certain oil and gas
properties.  In September 2001, NEG contributed oil and natural gas properties
in exchange for Holding LLC's obligation to pay NEG the guaranteed payments and
priority distributions. NEG also received a 50% membership interest in Holding
LLC. Gascon also contributed oil and natural gas assets and cash in exchange for
future payments and a 50% membership interest. The Holding LLC operating
agreement requires the payment of guaranteed payments and priority distributions
to NEG in order to pay interest on senior debt and the principal amount of the
debt of $148.6 million in 2006. After the receipt by NEG of the guaranteed
payments and priority distributions that total approximately $300 million, the
agreement requires the distribution of an equal amount to Gascon. Holding LLC is
contractually obligated to make the guaranteed payments and priority
distributions to NEG and Gascon before any distributions can be made to the LLC
interest.

NEG originally recorded its investment in Holding LLC at the historical
cost of the oil and gas properties contributed into the LLC. In evaluating the
appropriate accounting to be applied to this investment, NEG anticipated it will
collect the guaranteed payments and priority distributions through 2006.
However, based on cash flow projections prepared by the management of Holding
LLC and its reserve engineers, there is substantial uncertainty that there will
be any residual value in Holding LLC subsequent to the payment of the amounts
required to be paid to Gascon. Due to this uncertainty, NEG has been accreting
its investment in Holding LLC at the implicit rate of interest up to the
guaranteed payments and priority distributions collected through 2006,
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 investment in Holding LLC. The
investment in Holding LLC is evaluated quarterly for other than temporary
impairment. The rights of NEG upon liquidation of Holding LLC are identical to
those described above and NEG considered those rights in determining the
appropriate presentation.

Because of the continuing substantial uncertainty that there would be any
residual value in Holding LLC after the guaranteed payments and priority
distributions, no income other than the accretion is currently being given
accounting recognition. NEG's investment in Holding LLC will be reduced to zero
upon collection of the priority distributions in 2006. After that date, NEG will
continue to monitor payments made to Gascon and, at such time as it would appear
that there is any residual value to NEG's 50% interest in Holding LLC, it would
receive accounting recognition.  Throughout, and up to this point, NEG believes
that the 50% interest in Holding LLC represents a residual interest that is
currently valued at zero. The Company accounts for its residual equity
investment in Holding LLC in accordance with APB 18.

F-57

AMERICAN REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following is a roll forward of the Investment in Holding LLC as
of June 30, 2004 (unaudited) and December 31, 2003 (in $000's):

JUNE 30,      DECEMBER 31,
2004             2003
-----------     ------------
(UNAUDITED)

Investment in Holding LLC at beginning of period.................      $69,346       $   108,880
Priority distribution from Holding LLC...........................            -           (51,446)
Guaranteed payment from Holding LLC..............................       (7,989)          (18,230)
Accretion of investment in Holding LLC...........................       16,124            30,142
-------       -----------
Investment in Holding LLC at end of period.......................      $77,481       $    69,346
=======       ===========

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

1. Guaranteed payments are to be paid to NEG, calculated on an annual
interest rate of 10.75% on the outstanding priority distribution amount. The
priority distribution amount includes all outstanding debt owed to entities
owned or controlled by Carl C. Icahn, including the amount of NEG's 10.75%
Senior Notes. As of June 30, 2004 (unaudited) and December 31, 2003, the
priority distribution amount was $148.6 million which equals the amount of NEG's
10.75% Senior Notes due the Company. The guaranteed payments will be made on a
semi-annual basis.

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

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

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

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

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

11. MORTGAGES AND NOTES RECEIVABLE (IN $000'S)

BALANCE AT
DECEMBER 31,
COLLATERALIZED BY PROPERTY            JUNE 30,     ---------------------
TENANTED BY OR DEBTOR               2004          2003          2002
-------------------------------------     -----------    ---------   ---------
(UNAUDITED)

Peninsula/Hampton & Alex Hotel(b)....      $  16,269     $  42,030   $  23,200
Philip debt(c).......................            741         1,091      20,494
Westpoint Stevens(d).................         69,475             -           -
Union Power Partners and Panda                45,153             -           -
Gila River L.P.(d)..................  
Other................................          7,101         7,207      12,522
---------     ---------   ---------
$ 138,739     $  50,328   $  56,216
=========     =========   =========

F-58

AMERICAN REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

a. On November 30, 2000, the Company entered into a mezzanine loan
agreement to fund $23 million in two tranches to an unaffiliated borrower. The
funds were to be used for certain initial development costs associated with a 65
unit condominium property located at 931 1st Avenue in New York City. The first
tranche of $10 million was funded on November 30, 2000 and provided for interest
accruing at a rate of 25% per annum, with principal and interest due at
maturity, May 29, 2003. Also, in November 2000, approximately $3.7 million of
the second tranche of the loan was funded. The balance of approximately $9.3
million was funded in installments during 2001. The second tranche provided for
interest accruing at a rate of 21.5% per annum with principal and interest due
at maturity, November 29, 2002. The loans were payable at any time from the
proceeds of unit sales after satisfaction of senior debt of approximately $45
million. The loans were secured by the pledge of membership interests in the
entity that owns the real estate. In May 2002, the Company received
approximately $31.3 million for prepayment of the mezzanine loans. The balance
of the prepayment of $8.3 million represented accrued interest ($7.9 million)
and exit fees ($0.4 million) which amounts were recognized as "Interest income
on U.S. Government and Agency obligations and other investments" and "Other
income" respectively, in the Consolidated Statements of Earnings for the year
ended December 31, 2002.

b. At December 31, 2002, the Company had funded two mezzanine loans for
approximately $23.2 million and had commitments to fund, under certain
conditions, additional advances of approximately $5 million. Both loans have an
interest rate of 22% per annum compounded monthly. The Peninsula loan, for a
Florida condominium development, which had a term of 24 months from the date of
funding, February 2002, was repaid in full in 2003. Approximately $6.8 million
of interest income was recorded and is included in "Interest income on U.S.
Government and Agency obligations and other investments" in the Consolidated
Statements of Earnings. The Alex Hotel loan, for a New York City hotel with
approximately 200 rooms, has a term of 36 months from the closing date, April
2002. At December 31, 2003, accrued interest of approximately $4.4 million has
been deferred for financial statement purposes pending receipt of principal and
interest payments in connection with this loan. Origination fees of $3.0 million
have been received in connection with one of the mezzanine loans and
approximately $1.5 million and $1.1 million has been recognized as "Other
income" in the Consolidated Statements of Earnings in the years ended December
31, 2003 and 2002 respectively. In February 2003, the Company funded the Hampton
mezzanine loan for approximately $30 million on a Florida condominium
development. The loan is due in 18 months with one six month extension and has
an interest rate of 22% per annum compounded monthly. The Company has committed
to fund an additional $15 million if required by the borrower to complete the
project. At December 31, 2003 accrued interest of approximately $6.7 million has
been deferred for financial statement purposes pending receipt of principal and
interest payments in connection with this loan. On April 30, 2004, the Company
received approximately $16.2 million for the prepayment of the Alex Hotel 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 six months ended June 30, 2004 (unaudited).

c. See Note 7 with respect to Philip debt.

d. 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 purchase of debt securities" on the Consolidated
Balance Sheets.

F-59

AMERICAN REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

12. NOTE RECEIVABLE DUE FROM AFFILIATE

On October 17, 2003 Mr. Icahn, Chairman of the Board of the General
Partner, repaid the $250 million loan which had been made to him by the Company
on December 27, 2001. The Company made the two-year $250 million loan to Mr.
Icahn, secured by securities consisting of (i) 21,136,044 and 8,073,466 of the
Company's depositary units and preferred units, respectively, owned by Mr.
Icahn, such units having an aggregate market value on that date of $250 million
and (ii) shares of a private company owned by Mr. Icahn, which shares were
represented to have an aggregate book value of at least $250 million, together
with an irrevocable proxy on sufficient additional shares of the private company
so that the pledged shares and the shares covered by the proxy equal in excess
of 50% of the private company's shares. The interest on the loan was payable
semi-annually, at a per annum rate equal to the greater of (i) 3.9% and (ii) 200
basis points over 90 day LIBOR to be reset each calendar quarter. The applicable
rate in 2003 was 3.9% and in 2002 ranged from 3.9% to 4.03%. Interest income of
approximately $7.9 million, $9.9 million and $.1 million was earned on this loan
in the years ended December 31, 2003, 2002 and 2001, respectively, and is
included in "Interest income on U.S. Government and Agency obligations and other
investments" in the Consolidated Statements of Earnings.

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

13. HOTEL AND RESORT OPERATING PROPERTIES

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

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

Resort operations have been included in the "Hotel and resort operating
income and expenses" in the Consolidated Statements of Earnings. Net hotel and
resort operations for this property ("hotel and resort operating income" less
"hotel and resort operating expenses") resulted in income of approximately
$308,000 and $1,005,000 for the six months ended June 30, 2004 and 2003
(unaudited), respectively, and income of approximately $3,033,000, $1,909,000
and $712,000 for the years ended December 31, 2003, 2002, and 2001,
respectively. Hotel and resort operating expenses include all expenses except
for approximately $1,277,000 and $1,227,000 for the six months ended June 30,
2004 and 2003 (unaudited), respectively, and $2,451,000, $1,833,000 and $970,000
for the years ended December 31, 2003, 2002 and 2001, respectively, of
depreciation and amortization, which is included in such caption in the
Consolidated Statements of Earnings.

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

b. The Company owned a hotel located in Miami, Florida which had a
carrying value of approximately $6.4 million and $6.3 million at December 31,
2003 and 2002, respectively, and is unencumbered by any mortgages. Approximately
$1.3 million of capital improvements were completed in the year ended December
31, 2002.

The Company has a management agreement for the operation of the hotel with
a national management organization. As a result of the decision to sell the
property in 2004, the operating results for the hotel have been reclassified to
discontinued operations for all periods. In the six months ended June 30, 2004
and 2003, net hotel operations which totaled $345,000 and $417,000,
respectively, have been included in discontinued operations. Depreciation
expense of $105,000 for each of the six months ended June 30, 2003 (unaudited)
has been included in discontinued operations. Net hotel and resort operations
("hotel and resort operating revenues" less "hotel and resort operating
expenses") totaled approximately $596,000, $494,000 and $770,000 for the years
ended December 31, 2003, 2002 and 2001, respectively, and have been included in
discontinued operations. Depreciation expense of

F-60

AMERICAN REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

$210,000, $374,000 and $342,000 for the years ended December 31, 2003, 2002 and
2001, respectively, have been included in discontinued operations.

14. SIGNIFICANT PROPERTY TRANSACTIONS

Information on significant property transactions during the six-months
ended June 30, 2004 and the three-year period ended December 31, 2003 is as
follows:

a. In September 2002, the Company purchased an industrial building located
in Nashville, Tennessee for approximately $18.2 million. The building was
constructed in 2001 and is fully leased to two tenants, Alliance Healthcare and
Jet Equipment & Tools Inc., with leases expiring in 2011. The annual net
operating income is anticipated to be approximately $1.6 million increasing to
approximately $1.9 million by 2011. In October 2002, the Company closed a $12.7
million non-recourse mortgage loan on the Nashville, Tennessee property. The
loan bears interest at 6.4% per annum and matures in ten years. Required
payments are interest only for the first three years and then principal
amortization will commence based on a thirty-year amortization schedule. In June
2004, the Company sold the property for a selling price of $19.2 million. A gain
of approximately $2.4 million was recognized.

At December 31, 2003 and 2002, the property had a carrying value of
approximately $17,584,000 and $18,066,000, respectively, and was encumbered by a
non-recourse mortgage in the amount of $12,700,000.

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

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

d. Due to favorable real estate market conditions and the mature nature of
the Company's real portfolio, the Company is marketing for sale its rental real
estate portfolio. The Company intends to utilize proceeds from any asset sales
to continue to invest in its core businesses, including real estate, gaming and
entertainment and oil and gas. The Company 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 individually encumbered by mortgage debt which in the
aggregate is approximately $84 million at June 30, 2004 (unaudited). There can
be no assurance that offers satisfactory to the Company will be received.

At June 30, 2004 (unaudited), 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 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 (unaudited), 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 January 2004, the Company sold five properties to Alabama Power, its
tenant, for approximately $10.9 million, recognizing a gain of approximately
$6.0 million. Also in January 2004, AREP sold a grocery-anchored shopping center
located in Audubon, New Jersey for approximately $7.3 million, recognizing a
gain of approximately $6.8 million, which is included in discontinued
operations.

F-61

AMERICAN REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In January 2004, the Company purchased a 34,422 square foot commercial
condominium unit located in New York City for approximately $14.5 million. The
unit contains a Citibank branch, a furniture store and a restaurant. The Company
obtained mortgage financing of $10 million for this property in April 2004.

15. MORTGAGES PAYABLE

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

BALANCE AT DECEMBER 31,
ANNUAL PRINCIPAL        JUNE 30,      ---------------------------
RANGE OF INTEREST RATES      RANGE OF MATURITIES   AND INTEREST PAYMENT         2004            2003          2002
----------------------------   -------------------   --------------------    --------------   ------------   ------------

5.630% -- 8.430%............   10/15/07 - 12/31/18     $      19,328         $       94,165   $    180,989   $    166,287
9.000 -- 9.500..............   11/30/03 - 11/30/09                 -                      -              -          5,561
-------------         --------------   ------------   ------------
$      19,328         $       94,165   $    180,989   $    171,848
=============         ==============   ============   ============

The following is a summary of the anticipated future principal payments of
the mortgages (in 000's):

YEAR ENDING
DECEMBER 31,                                 AMOUNT
---------------------------------------   -----------

2004...................................   $     6,489
2005...................................         6,702
2006...................................         7,360
2007...................................        14,176
2008...................................        58,817
2009 - 2013............................        66,905
2014 - 2018............................        20,540
-----------
$   180,989
===========

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

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

16. SENIOR NOTES AND CREDIT FACILITIES DUE AFFILIATES

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

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

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

In August 2001, NEG redeemed both $16.4 million of principal outstanding
under the notes and $4.8 million of Reinstated Interest for a cash consideration
of $10.5 million. NEG paid two Icahn affiliates approximately $.4 million in
current interest on the redeemed senior note obligations at the date of
redemption related to interest owed from the last semi-annual interest payment
date of May 1, 2001, to the date of redemption. As this was a

F-62

AMERICAN REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

partial redemption of the Notes, it has been accounted for as a modification of
terms that changes the amounts of future cash payments. Accordingly, the excess
of redeemed principal and interest over the redemption payment of $10.5 million
is being amortized as a reduction to interest expense over the remaining life of
the bonds. In connection with this transaction, NEG borrowed $10.9 million under
its existing credit facility with an Icahn affiliate.

In October 2003, the Company acquired these Notes. These Notes are
eliminated in consolidation (See Note 10).

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

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

c. On September 24, 2001, Arizona Charlie's, Inc., the predecessor entity
to Arizona Charlie's, LLC, which was acquired by American Casino in May 2004,
refinanced the remaining principal balance of $7.9 million on a prior note
payable to Arnos Corp., a company related through common ownership. The note
bears interest at the prime rate plus 1.50% (5.75% per annum at December 31,
2002), with a maturity of June 2004, and was collateralized by all the assets of
Arizona Charlie's, Inc. The note was repaid during November 2003. During the
years ended December 31, 2003, 2002 and 2001, Arizona Charlie's, Inc. paid
interest expense of $0.1 million, $0.4 million and $1.3 million, respectively.

d. During fiscal year 2002, Fresca, LLC, which was acquired by American
Casino in May 2004, entered into an unsecured line of credit in the amount of
$25.0 million with Starfire Holding Corporation ("Starfire"), a common-ownership
related party. The outstanding balance, including accrued interest, was due and
payable on January 2, 2007. As of December 31, 2003, Fresca, LLC had $25.0
million outstanding. The note bears interest on the unpaid principal balance
from January 2, 2002 until maturity at the rate per annum equal to the prime
rate, as established by Fleet Bank, from time to time, plus 2.75%. Interest is
payable semi-annually in arrears on the first day of January and July, and at
maturity. The note is guaranteed by Mr. Icahn. The note was repaid during May
2004 (unaudited). During the years ended December 31, 2003 and 2002, Fresca, LLC
paid $1.2 million and $0.4 million, respectively.

17. SENIOR SECURED NOTES PAYABLE AND CREDIT FACILITY

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 notes have a fixed annual
interest rate of 7.85%, which will be paid every six months on February 1 and
August 1, commencing August 1, 2004. 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 the
Company. The notes are recourse only to, and are 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 November 22, 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 November 22, 2004, then American Casino 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.

A syndicate of lenders has provided a non-amortizing $20.0 million
revolving credit facility. The commitments are available to the Company in the
form of revolving loans, and include a letter of credit facility (subject to a
$10.0 million sublimit). The proceeds of loans under the senior secured
revolving credit facility will be

F-63

AMERICAN REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

available to provide working capital and other general corporate purposes. Loans
made under the senior secured revolving facility will mature and the commitments
under them will terminate on January 29, 2008.

18. SENIOR UNSECURED NOTES PAYABLE - AMERICAN REAL ESTATE PARTNERS, L.P.

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 have a fixed annual interest rate 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. The Company is a guarantor of the debt;
however, no other subsidiaries guarantee payment on the notes. American Real
Estate Finance Corp. ("AREF"), a wholly-owned subsidiary of AREP, was formed
solely for the purpose of serving as a co-issuer of the debt securities. AREF
will not have any operations or assets and will not have any revenues. AREP
loaned the Company $342.6 million, net of discount. Since the Company is the
operating subsidiary the interest rate, dates of payment and maturity date are
on the same terms as the AREP Senior Notes. The Company intends to use the
proceeds of this offering for a general business purposes, including its primary
business strategy of acquiring undervalued assets in its existing lines of
business or other businesses and to provide additional capital to grow its
existing businesses. The notes restrict the ability of AREP and the Company,
subject to certain exceptions, to, among other things; incur additional debt;
pay dividends or make distributions; repurchase stock; create liens; and enter
in to transactions with affiliates. The notes were issued in an offering not
registered under the Securities Act of 1933. At the time AREP issued the notes,
AREP entered into a registration rights agreement in which AREP agreed to
exchange the notes for new notes which have been registered under the Securities
Act of 1993. If the registration statement is not declared effective by the SEC
on or prior to November 8, 2004 or if AREP fails to consummate an exchange offer
in which AREP issues notes registered under the Securities Act of 1933 for the
privately issued notes within 30 business days after November 8, 2004, then AREP
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.

19. INCOME TAXES (IN $000'S)

DECEMBER 31,
-----------------------------
2003            2002
-------------   -------------

a.    The difference between the book basis and the tax basis of the net assets
of the Company, not directly subject to income taxes, is as follows:
Book basis of American Real Estate Holding's net assets excluding Stratosphere
Corp. and NEG, Inc.............................................................   $   1,149,418   $   1,177,329

Excess of tax over book (Excess of book over tax basis)..........................          79,238          (1,778)
-------------   -------------
Tax basis of net assets..........................................................   $   1,228,656   $   1,175,551
-------------   -------------

b.    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 six months ended June 30, 2004
and 2003 and the years ended December 31, 2003, 2002 and 2001
(in $000's):

F-64

AMERICAN REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

JUNE 30,                       DECEMBER 31,
------------------------    -----------------------------------
2004          2003         2003          2002        2001
-----------    ---------    ---------    ---------    ---------
(UNAUDITED)

Current........................   $    (3,225)   $  (2,318)   $  (4,302)   $    (311)   $  (3,176)
Deferred.......................        (6,032)      (4,741)       5,875       (9,785)      28,840
-----------    ---------    ---------    ---------    ---------
$    (9,257)   $  (7,059)   $   1,573    $ (10,096)   $  25,664
===========    =========    =========    =========    =========

(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 and 2002 (in $000's):

DECEMBER 31,
JUNE 30,         -------------------
2004           2003           2002
------------    -----------    ------------
(UNAUDITED)

Deferred tax assets:
Property, plant and equipment......    $     50,897    $    39,858    $     63,756
Net operating loss carryforwards...          26,824         30,942          48,477
Investment in NEG Holding LLC......          17,792         18,845           8,440
Other..............................           6,798          5,962           6,589
------------    -----------    ------------
102,311         95,607         127,262
Valuation allowance................         (15,875)        17,773        (104,972)
------------    -----------    ------------
Net deferred tax assets............    $     86,436    $    77,874    $     22,290
============    ===========    ============

At June 30, 2004 and December 31, 2003, American Casino had net operating
loss carryforwards available for federal income tax purposes of approximately
$24.1 million (unaudited) and $28.5 million, respectively, which begin expiring
in 2019.
(iii) The provision (benefit) for income taxes differs from the 
amount computed at the federal statutory rate as a result of the following:

YEAR ENDED     YEAR ENDED     YEAR ENDED
DECEMBER 31,    DECEMBER 31,   DECEMBER 31,
2003           2002           2001
------------    ------------   ------------
Federal statutory rate .................        35.0%           35.0%          35.0%
Federal income tax credits .............        (0.3)%          (0.2)%         (0.3)%
Permanent differences ..................         0.1%            0.0%           0.9%
Tax deduction not given book benefit ...         4.8%            0.0%           0.0%
Income not subject to taxation .........       (15.0)%         (22.9)%        (25.9)%
Valuation allowance ....................       (27.3)%          (0.5)%        (41.8)%
Other ..................................         0.5%            0.5%           0.0%
-------         -------        -------
(2.2)%          11.9%         (32.1)%
=======         =======        =======

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

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

Additionally, American Casino's acquisition of Arizona Charlie's, LLC and
Fresca, LLC in May 2004 resulted in a net increase in the tax basis of assets in
excess of book basis. As a result, the Company recognized an additional deferred
tax asset of approximately $12.7 million from the transaction. Pursuant to SFAS
109, the benefit of the deferred tax asset from this transaction is credited
directly to equity.

At June 30, 2004 and December 31, 2003, NEG had net operating loss
carryforwards available for federal income tax purposes of approximately $52.5
million (unaudited) and $58 million, respectively, which begin expiring in 2018
and 2009, respectively. Net operating loss limitations may be imposed as a
result of subsequent changes in stock ownership of NEG. Prior to the formation
of Holding LLC, the income tax benefit associated with the loss carryforwards
had not been recognized since, in the opinion of management, there was not
sufficient positive evidence of future taxable income to justify recognition of
a benefit. Upon the formation of Holding LLC, management again evaluated all
evidence, both positive and negative, in determining whether a valuation
allowance to reduce the carrying value of deferred tax assets was still needed
and concluded, based on the projected allocations of taxable income by Holding
LLC, NEG more likely than not will realize a partial benefit from the loss
carryforwards. In accordance with SFAS 109, NEG recorded a deferred tax asset of
$31.9 million in September 2001, $25.5 million as of December 31, 2002, $25.9
million as of December 31, 2003, and $22.7 million as of June 30, 2004
(unaudited). Ultimate realization of the deferred tax asset is dependent upon,
among other factors, NEG's ability to generate sufficient taxable income within
the carryforward periods and is subject to change depending on

F-65

AMERICAN REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the tax laws in effect in the years in which the carryforwards are used. As a
result of the recognition of expected future income tax benefits, subsequent
periods will reflect a full effective tax rate provision.

20. COMMITMENTS AND CONTINGENCIES

a. In January 2002, Kmart Corp., a tenant leasing seven properties owned
by the Company which represent approximately $1,374,000 in annual rentals, filed
a voluntary petition for reorganization under Chapter 11 of the Federal
Bankruptcy Code. Pursuant to an order of the Bankruptcy Court, four leases have
been rejected representing approximately $713,000 in annual rents. At June 30,
2004, two of the rejected properties have been classified as held for sale and
three properties were sold. The Company recorded a provision for loss of
approximately $1.9 million on the four properties, whose leases were rejected,
for the year ended December 31, 2001. The Company has not been notified
regarding the three remaining leases representing approximately $661,000 in
annual rents. At June 30, 2004 and December 31, 2003 and 2002, the carrying
value of the seven properties (four properties at June 30, 2004)was
approximately $3,223,000, $5,482,000 and $6,529,000, respectively, which
management believes is less than the estimate of net realizable value.

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

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

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

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

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

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

F-66

AMERICAN REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Also, in July 2003, in accordance with a Court ruling, the Commission
reconsidered the question of its jurisdiction over the initial development
proposal and over a modified development proposal that New Seabury filed in
March 2003. The Commission concluded that both proposals are within its
jurisdiction (the Second Administrative Decision). In August 2003, New Seabury
filed in Barnstable County Massachusetts Superior Court another civil complaint
appealing the Second Administrative Decision to find the Commission in contempt
of the Settlement Agreement.

In November 2003, the Court ruled in New Seabury's favor on its July 2003
motion for partial summary judgment, finding that the special permit remains
valid and that the modified development proposal is in substantial compliance
with the Special Permit and therefore exempt from the Commission's jurisdiction
(the Court did not yet rule on the initial proposal). Under the modified
development proposal New Seabury could potentially develop up to 278 residential
units and 145,000 square feet of commercial space. In 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 matters 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 General Partner monitors all tenant bankruptcies and defaults and may,
when it deems it necessary or appropriate, establish additional reserves for
such contingencies.

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

21. FAIR VALUE OF FINANCIAL INSTRUMENTS

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

MORTGAGES AND NOTES RECEIVABLE

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

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

The approximate estimated fair values of the mortgages and notes
receivable held as of June 30, 2004 (unaudited) and December 31, 2003 and 2002
are summarized as follows (in $000's):

AT JUNE 30, 2004          AT DECEMBER 31, 2003        AT DECEMBER 31, 2002
------------------------    ------------------------    ------------------------
NET        ESTIMATED        NET        ESTIMATED        NET        ESTIMATED
INVESTMENT    FAIR VALUE    INVESTMENT    FAIR VALUE    INVESTMENT    FAIR VALUE
-----------   ----------    ----------    ----------    ----------    ----------
(UNAUDITED)

Total................ $   138,739   $  138,739    $   50,272    $   55,000    $   51,449    $   53,973
===========   ==========    ==========    ==========    ==========    ==========

The net investment at June 30, 2004 and December 31, 2003 and 2002 is
equal to the carrying amount of the mortgage receivable less any deferred income
recorded.

MORTGAGES PAYABLE

F-67

AMERICAN REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The approximate estimated fair values of the mortgages payable as of June
30, 2004 and December 31, 2003 and 2002 are summarized as follows (in $000's):

AT JUNE 30, 2004           AT DECEMBER 31, 2003        AT DECEMBER 31, 2002
------------------------    ------------------------    ------------------------
CARRYING     ESTIMATED      CARRYING     ESTIMATED      CARRYING     ESTIMATED
VALUE      FAIR VALUE      VALUE       FAIR VALUE      VALUE       FAIR VALUE
-----------   ----------    ----------    ----------    ----------    ----------
(UNAUDITED)

Total...............  $    94,165   $   93,348    $  180,989    $  185,000    $  171,848    $  190,000
===========   ==========    ==========    ==========    ==========    ==========

LIMITATIONS

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

22. EMPLOYEE BENEFIT PLANS

a. Employees of the Company who are members of various unions are covered
by union-sponsored, collectively bargained, multi-employer health and welfare
and defined benefit pension plans. The Company recorded expenses for such plans
of approximately $7,600,000, $6,500,000 and $4,900,000 for the years ended
December 31, 2003, 2002 and 2001, and $4,100,000 (unaudited) and $3,500,000
(unaudited) for the six months ended June 30, 2004 and 2003, respectively.
Sufficient information is not available from the plans' sponsors to permit the
Company to determine the adequacy of the plans' funding status.

b. The Company has retirement savings plans under Section 401(k) of the
Internal Revenue Code covering its non-union employees. The plans allow
employees to defer, within prescribed limits, up to 15% of their income on a
pre-tax basis through contributions to the plans. The Company currently matches,
within prescribed limits, up to 6% of eligible employees' compensation at rates
ranging from 33% to 50%. The Company recorded charges for matching contributions
of approximately $714,000, $981,000 and $1,023,000, for the years ended December
31, 2003, 2002 and 2001, respectively and $305,000 (unaudited) and $418,000
(unaudited) for the six months ended June 30, 2004 and 2003, respectively.

23. SUBSEQUENT EVENTS (UNAUDITED)

a. In July 2004, the Company 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. The
Company 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.

F-68

INDEPENDENT AUDITORS' REPORT

The Board of Directors
American Property Investors, Inc.

We have audited the accompanying balance sheet of American Property
Investors, Inc. as of December 31, 2003. This financial statement is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement based on our audit.

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

In our opinion, the balance sheet referred to above presents fairly, in
all material respects, the financial position of American Property Investors,
Inc. as of December 31, 2003, in conformity with accounting principles generally
accepted in the United States of America.

/s/ KPMG LLP

New York, New York
July 29, 2004

F-69

AMERICAN PROPERTY INVESTORS, INC.

BALANCE SHEET
DECEMBER 31, 2003

DECEMBER 31,
2003
------------

ASSETS
Cash and cash equivalents ....................................................     $     96,493
Investment in partnerships (Note 2) ..........................................       24,743,688
Accrued interest receivable (Note 3) .........................................           59,538
------------
$ 24,899,719
============
LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts payable and accrued expenses ........................................     $    229,929
Stockholder's equity:
Common stock - $1 par value, 1,216 shares authorized, 216 shares
outstanding ..............................................................              216
Additional paid-in capital .................................................       26,084,497
Note receivable from affiliate (Note 3) ....................................       (9,500,000)
Retained earnings ..........................................................        8,085,077
------------
Total stockholder's equity .................................................       24,669,790
------------
Total liabilities and stockholder's equity ................................     $ 24,899,719
============

See accompanying notes to consolidated financial statements.

F-70

AMERICAN PROPERTY INVESTORS, INC.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2003

1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

a. Organization

American Property Investors, Inc. ("API" or "the Company") is the general
partner of both American Real Estate Partners, L.P. ("AREP") and American Real
Estate Holdings Limited Partnership ("AREH"). API has a 1% general partnership
interest in both AREP and AREH. API is a wholly-owned subsidiary of Becton
Corporation ("Becton") which in turn is owned by Carl C. Icahn. Mr. Icahn also
owns, indirectly, approximately 86.5 % of the limited partnership interests of
AREP, a New York Stock Exchange master limited partnership.

b. Cash and Cash Equivalents

The Company considers all temporary cash investments with maturity at the
date of purchase of three months or less to be cash equivalents.

c. Use of Estimates

Management of the Company has made certain estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statement to
prepare this balance sheet in conformity with accounting principles generally
accepted in the United States of America. Actual results could differ from those
estimates.

d. Income Taxes

The Company and its parent have elected and the stockholders have
consented, under the applicable provisions of the Internal Revenue Code, to
report their income for Federal income tax purposes as a Subchapter S
Corporation. The stockholders report their respective shares of the net taxable
income or loss on their personal tax returns. Accordingly, no liability has been
accrued for current or deferred Federal income taxes related to the operations
of the Company in the accompanying balance sheet. State and local taxes are
deminimus

e. Investments in Partnerships

The Company evaluates its investments in partially-owned entities in
accordance with FASB Interpretation No. 46 (revised December 2003),
Consolidation of Variable Interest Entities, or FIN 46R. If the partially-owned
entity is a "variable interest entity," or a "VIE," and the Company is the
"primary beneficiary" as defined in FIN 46R, the Company would account for such
investment as if it were a consolidated subsidiary.

For a partnership investment which is not a VIE or in which the Company is
not the primary beneficiary, the Company follows the accounting set forth in
AICPA Statement of Position No. 78-9 - Accounting for Investments in Real Estate
Ventures (SOP 78-9). In accordance with this pronouncement, investments in joint
ventures are accounted for under the equity method when its ownership interest
is less than 50% and it does not exercise direct or indirect control. Factors
that are considered in determining whether or not the Company exercises control
include important rights of partners in significant business decisions,
including dispositions and acquisitions of assets, financing and operating and
capital budgets, board and management representation and authority and other
contractual rights of the partners. To the extent that the Company is deemed to
control these entities, these entities would be consolidated.

The Company has determined that the AREP and AREH partnerships are not
VIEs and therefore it accounts for these investments under the equity method of
accounting as the limited partners have important rights as defined in SOP 78-9.
This investment was recorded initially at cost and was subsequently adjusted for
equity in earnings or losses and cash contributions and distributions.

F-71

AMERICAN PROPERTY INVESTORS, INC.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2003

On a periodic basis the Company evaluates whether there are any indicators
that the value of its investments in partnerships are impaired. An investment is
considered to be impaired if the Company's estimate of the value of the
investment is less than the carrying amount. The ultimate realization of the
Company's investments in partnerships is dependent on a number of factors
including the performance of that entity and market conditions. If the Company
determines that a decline in the value of a partnership is other than temporary,
then the Company would record an impairment charge.

2. INVESTMENT IN PARTNERSHIPS

The Company has a 1% general partnership interest in both AREP and AREH.
AREP is the 99% limited partner and holding company of AREH which is involved in
the following operating businesses: (i) rental real estate, (ii) hotel, casino
and resort operations, (iii) land, house and condominium development, (iv)
investment in oil and gas operating properties and (v) investments in
securities, including investments in other entities and marketable and debt
securities.

Summarized financial information for American Real Estate Partners, L.P.
and subsidiaries as of December 31, 2003 is as follows (in thousands of
dollars):

Real estate leased to others and held for sale     $  342,612
Hotel, casino and resort properties                   340,229
Land and construction in progress                      43,459
Investment in oil and gas businesses                   69,346
Investments in securities                             111,376
Cash and cash equivalents                             500,593
Other assets                                          238,991
----------
Total assets                                $1,646,606
==========
Mortgages payable                                     180,989
Accounts payable and accrued expenses                  68,754
Credit facility due to affiliate                       25,000
Preferred limited partnership units                   101,649
----------
Total liabilities                              376,392
Partners' equity                                    1,270,214
----------
Total liabilities and partners' equity      $1,646,606
==========

The carrying amount of the investment in partnerships on the Company's
balance sheet is less than the underlying equity in the net assets of the
partnerships by $72,801,000. This difference is as a result of adjustments
reflected in AREP's equity to account for certain acquisitions from affiliates
of the general partner. The differences between the historical cost of companies
acquired and the purchase price paid to the affiliates of the general partner
were accounted for by AREP as contributions from or distributions to the general
partner.

3. NOTE RECEIVABLE

The Company has an unsecured demand note receivable due from Carl C.
Icahn, in the amount of $9,500,000. Interest on the note accrues at the rate of
3.75% per annum and is payable on the last day of April and October. Interest
has been paid through October 31, 2003.

F-72

Until February 6, 2005, all dealers that effect transactions in these
securities, whether or not participating in this exchange offer, may be required
to deliver a prospectus. Each broker-dealer that receives new notes for its own
account pursuant to the exchange offer must acknowledge that it will deliver a
prospectus in connection with any resale of such new notes. America Real Estate
Partners, L.P., American Real Estate Finance Corp. and the guarantor have
agreed that, starting on the expiration date and ending on the close of
business 270 days after the expiration date (or such shorter period during
which participating broker-dealers are required by law to deliver such
prospectus), they will make this prospectus available to any broker-dealer for
use in connection with any such resale.

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PROSPECTUS

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AMERICAN REAL ESTATE PARTNERS, L.P.
AND
AMERICAN REAL ESTATE FINANCE CORP.

OFFER TO EXCHANGE OUR 8-1/8% SENIOR NOTES DUE 2012, WHICH HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, FOR ANY AND ALL OF OUR OUTSTANDING 8-1/8%
SENIOR NOTES DUE 2012.