##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





Form 10-Q


|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                             
|þ          |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934 
|          
|           |  | FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005                                                
|          
|OR        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934
|          
|           |  | FOR THE TRANSITION PERIOD
    FROM           TO                                             

COMMISSION FILE NUMBER 1-9516





AMERICAN REAL ESTATE PARTNERS, L.P.


(Exact name of registrant as specified in its charter)





|                                                                              |  |                                         
|----------------------------------------------------------------------------- |  | ----------------------------------------
|Delaware                                                                      |  | 13-3398766                              
|(State or other jurisdiction of
    incorporation or organization)            |  | (I.R.S. Employer
    Identification No.)
|                                                                             
|100 South Bedford Road, Mt. Kisco, NY(Address of principal executive offices) |  | 10549(Zip Code)                         

(914) 242-7700


(Registrants telephone number, including area code)





þ o


þ o












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INDEX


|                                                                                     |  |                                                                                                                        |  |          |    | 
|------------------------------------------------------------------------------------ |  | ---------------------------------------------------------------------------------------------------------------------- |  | -------- | -- | 
|                                                                                     |  |                                                                                                                        |  | Page No. |   
|                                                                                     |  |                                                                                                                        |  |          |   
|Part I. FINANCIAL INFORMATION                                                       
|Item 1.                                                                              |  | Financial Statements                                                                                                   |  |          |    | 
|                                                                                     |  | Consolidated Balance Sheets June 30,
    2005 and December 31, 2004                                                    |  |          | 1  | 
|                                                                                     |  | Consolidated Statements of Earnings Three
    Months Ended June 30, 2005 and 2004                                      |  |          | 2  | 
|                                                                                     |  | Consolidated Statements of Earnings Six
    Months Ended June 30, 2005 and 2004                                        |  |          | 3  | 
|                                                                                     |  | Consolidated Statements of Changes In
    Partners Equity and Comprehensive Income Six Months Ended
    June 30, 2005 |  |          | 4  | 
|                                                                                     |  | Consolidated Statements of Cash Flows Six
    Months Ended June 30, 2005 and 2004                                      |  |          | 5  | 
|                                                                                     |  | Notes to Consolidated Financial
    Statements                                                                         |  |          | 7  | 
|Item 2.                                                                              |  | Managements Discussion and
    Analysis of Financial Condition and Results of Operations                              |  |          | 32 | 
|Item 3.                                                                              |  | Quantitative and Qualitative Disclosures
    about Market Risk                                                         |  |          | 48 | 
|Item 4.                                                                              |  | Controls and Procedures                                                                                                |  |          | 49 | 
|                                                                                    
|Part II. OTHER INFORMATION                                                          
|Item 1.                                                                              |  | Legal Proceedings                                                                                                      |  |          | 49 | 
|Item 4.                                                                              |  | Submission of Matters to a Vote of
    Securities Holders                                                              |  |          | 50 | 
|Item 6.                                                                              |  | Exhibits                                                                                                               |  |          | 50 | 
|EX-3.1: AMENDMENT NO. 4 TO THE AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP
|EX-3.2: AMENDMENT NO. 3 TO THE AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP
|EX-10.6: REGISTRATION RIGHTS AGREEMENT                                              
|EX-31.1: CERTIFICATION                                                              
|EX-31.2: CERTIFICATION                                                              
|EX-32.1: CERTIFICATION                                                              
|EX-32.2: CERTIFICATION                                                              





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##### Table of Contents






AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES


FORM 10-Q, JUNE 30, 2005


Part I. Financial Information


Item 1. Financial Statements


CONSOLIDATED BALANCE SHEETS


|                                                    |                                                                                                                                                                                  |             |                                          |            |              |           |           |           |         |           | 
|--------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------- | ---------------------------------------- | ---------- | ------------ | --------- | --------- | --------- | ------- | --------- | 
|                                                    |                                                                                                                                                                                  | June 30,    |                                          |            | December 31, |          
|                                                    |                                                                                                                                                                                  | 2005        |                                          |            | 2004         |          
|                                                    |                                                                                                                                                                                  |             |                                          |            |              |          
|                                                    |                                                                                                                                                                                  | (In $000s)  |                                         
|                                                    |                                                                                                                                                                                  | (Unaudited) |                                         
|                                                    |                                                                                                                                                                                  |             |                                          | (Restated) |             
|ASSETS                                             
|Current assets                                      |                                                                                                                                                                                  |             |                                          |            |              |           |           |          
|                                                    | Cash and cash equivalents                                                                                                                                                        |             | $                                        | 1,129,271  |              |           | $         | 806,309   |        
|                                                    | Investments                                                                                                                                                                      |             |                                          | 151,649    |              |           |           | 99,088    |        
|                                                    | Trade, notes and other receivables                                                                                                                                               |             |                                          | 267,802    |              |           |           | 230,898   |        
|                                                    | Other current assets                                                                                                                                                             |             |                                          | 49,843     |              |           |           | 86,417    |        
|                                                    |                                                                                                                                                                                  |             |                                          |            |              |          
|                                                    |                                                                                                                                                                                  |             | Total current assets                     |            |              | 1,598,565 |           |           |         | 1,222,712 | 
|Property, plant and equipment, net:                 |                                                                                                                                                                                  |             |                                          |            |              |           |           |          
|                                                    |                                                                                                                                                                                  | Gaming      |                                          |            | 455,812      |           |           |           | 461,000 |          
|                                                    |                                                                                                                                                                                  | Oil and gas |                                          |            | 604,685      |           |           |           | 527,384 |          
|                                                    |                                                                                                                                                                                  | Real estate |                                          |            | 267,853      |           |           |           | 291,068 |          
|                                                    |                                                                                                                                                                                  |             |                                          |            |              |          
|                                                    |                                                                                                                                                                                  |             | Total property, plant and equipment, net |            |              | 1,328,350 |           |           |         | 1,279,452 | 
|Investments                                         |                                                                                                                                                                                  |             | 211,602                                  |            |              |           | 251,439   |          
|Other assets                                        |                                                                                                                                                                                  |             | 125,194                                  |            |              |           | 125,561   |          
|                                                    |                                                                                                                                                                                  |             |                                          |            |              |          
|                                                    |                                                                                                                                                                                  |             | Total assets                             |            | $            | 3,263,711 |           |           | $       | 2,879,164 | 
|                                                    |                                                                                                                                                                                  |             |                                          |            |              |          
|                                                   
|LIABILITIES AND PARTNERS EQUITY                   
|Current liabilities                                 |                                                                                                                                                                                  |             |                                          |            |              |           |           |          
|                                                    | Accounts payable and accrued expenses                                                                                                                                            |             | $                                        | 163,498    |              |           | $         | 151,657   |        
|                                                    | Current portion of long-term debt                                                                                                                                                |             |                                          | 70,162     |              |           |           | 76,679    |        
|                                                    | Securities sold not yet purchased                                                                                                                                                |             |                                          | 70,873     |              |           |           | 90,674    |        
|                                                    |                                                                                                                                                                                  |             |                                          |            |              |          
|                                                    |                                                                                                                                                                                  |             | Total current liabilities                |            |              | 304,533   |           |           |         | 319,010   | 
|                                                    |                                                                                                                                                                                  |             |                                          |            |              |          
|Long-term debt                                      |                                                                                                                                                                                  |             | 1,220,876                                |            |              |           | 683,128   |          
|Other non-current liabilities and minority interest |                                                                                                                                                                                  |             | 111,482                                  |            |              |           | 110,529   |          
|Preferred limited partnership units:                |                                                                                                                                                                                  |             |                                          |            |              |           |           |          
|                                                    | $10 liquidation preference, 5% cumulative pay-in-kind;
    10,900,000 authorized; 10,800,577 and 10,286,264 issued and
    outstanding as of June 30, 2005 and December 31, 2004 |             |                                          | 109,367    |              |           |           | 106,731   |        
|                                                    |                                                                                                                                                                                  |             |                                          |            |              |          
|                                                    |                                                                                                                                                                                  |             | Total long-term liabilities              |            |              | 1,441,725 |           |           |         | 900,388   | 
|                                                    |                                                                                                                                                                                  |             |                                          |            |              |          
|Commitments and contingencies (Note 20)             |                                                                                                                                                                                  |             |                                          |            |              |           |           |          
|Limited partners:                                   |                                                                                                                                                                                  |             |                                          |            |              |           |           |          
|                                                    | Depositary units; 67,850,000 authorized; 62,994,030 and
    47,235,484 issued and outstanding as of June 30, 2005 and
    December 31, 2004, respectively                        |             |                                          | 1,851,018  |              |           |           | 1,361,392 |        
|General partner                                     |                                                                                                                                                                                  |             | (321,644                                 | )          |              |           | 310,295   |          
|Treasury units at cost:                             |                                                                                                                                                                                  |             |                                          |            |              |           |           |          
|                                                    | 1,137,200 depositary units                                                                                                                                                       |             |                                          | (11,921    | )            |           |           | (11,921   | )      
|                                                    |                                                                                                                                                                                  |             |                                          |            |              |          
|Partners equity                                    |                                                                                                                                                                                  |             | 1,517,453                                |            |              |           | 1,659,766 |          
|                                                    |                                                                                                                                                                                  |             |                                          |            |              |          
|                                                    |                                                                                                                                                                                  |             | Total liabilities and partners equity   |            | $            | 3,263,711 |           |           | $       | 2,879,164 | 
|                                                    |                                                                                                                                                                                  |             |                                          |            |              |          



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AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF EARNINGS


|                                                                                            |                                              |                                          |            |            |        |   |            |         |        |  
|------------------------------------------------------------------------------------------- | -------------------------------------------- | ---------------------------------------- | ---------- | ---------- | ------ | - | ---------- | ------- | ------ | -
|                                                                                            |                                              | Three Months Ended June 30,              |           
|                                                                                            |                                              |                                          |           
|                                                                                            |                                              | 2005                                     |            |            | 2004   |  
|                                                                                            |                                              |                                          |            |            |        |  
|                                                                                            |                                              | (In $000s, except per unit data)         |           
|                                                                                            |                                              | (Unaudited)                              |           
|                                                                                            |                                              |                                          |            | (Restated) |       
|Revenues:                                                                                   |                                              |                                          |            |            |        |   |            |        
|                                                                                            | Gaming                                       |                                          | $          | 122,432    |        |   | $          | 118,588 |       
|                                                                                            | Oil and gas                                  |                                          |            | 73,378     |        |   |            | 21,911  |       
|                                                                                            | Real estate                                  |                                          |            | 24,845     |        |   |            | 19,772  |       
|                                                                                            |                                              |                                          |            |            |        |  
|                                                                                            |                                              |                                          | 220,655    |            |        |   | 160,271    |        
|                                                                                            |                                              |                                          |            |            |        |  
|Expenses:                                                                                   |                                              |                                          |            |            |        |   |            |        
|                                                                                            | Gaming                                       |                                          |            | 105,507    |        |   |            | 105,801 |       
|                                                                                            | Oil and gas                                  |                                          |            | 41,473     |        |   |            | 25,216  |       
|                                                                                            | Real estate                                  |                                          |            | 20,146     |        |   |            | 11,989  |       
|                                                                                            | General and administrative expenses          |                                          |            | 1,872      |        |   |            | 1,424   |       
|                                                                                            | Acquisition costs                            |                                          |            | 3,362      |        |   |            | 414     |       
|                                                                                            |                                              |                                          |            |            |        |  
|                                                                                            |                                              |                                          | 172,360    |            |        |   | 144,844    |        
|                                                                                            |                                              |                                          |            |            |        |  
|Operating income                                                                            |                                              |                                          | 48,295     |            |        |   | 15,427     |        
|Other income (expense), net:                                                                |                                              |                                          |            |            |        |   |            |        
|                                                                                            | Interest expense                             |                                          |            | (28,330    | )      |   |            | (14,724 | )     
|                                                                                            | Interest and other income                    |                                          |            | 16,115     |        |   |            | 17,447  |       
|                                                                                            | Other income (expense), net                  |                                          |            | (20,880    | )      |   |            | 7,061   |       
|                                                                                            |                                              |                                          |            |            |        |  
|Income from continuing operations                                                           |                                              |                                          |            |            |        |   |            |        
|                                                                                            | before income taxes                          |                                          |            | 15,200     |        |   |            | 25,211  |       
|                                                                                            | Income tax expense                           |                                          |            | (9,029     | )      |   |            | (3,944  | )     
|                                                                                            |                                              |                                          |            |            |        |  
|Income from continuing operations                                                           |                                              |                                          | 6,171      |            |        |   | 21,267     |        
|                                                                                            |                                              |                                          |            |            |        |  
|Discontinued operations:                                                                    |                                              |                                          |            |            |        |   |            |        
|                                                                                            | Income from discontinued operations          |                                          |            | 187        |        |   |            | 1,648   |       
|                                                                                            | Gain on sales and disposition of real estate |                                          |            | 2,644      |        |   |            | 48,257  |       
|                                                                                            |                                              |                                          |            |            |        |  
|Income from discontinued operations                                                         |                                              |                                          | 2,831      |            |        |   | 49,905     |        
|                                                                                            |                                              |                                          |            |            |        |  
|Net earnings                                                                                |                                              | $                                        | 9,002      |            |        | $ | 71,172     |        
|                                                                                            |                                              |                                          |            |            |        |  
|Net earnings (loss) attributable to (note 15)                                               |                                              |                                          |            |            |        |   |            |        
|                                                                                            |                                              | Limited partners                         |            | $          | (9,636 | ) |            | $       | 76,012 |  
|                                                                                            |                                              | General partner                          |            |            | 18,638 |   |            |         | (4,840 | )
|                                                                                            |                                              |                                          |            |            |        |  
|                                                                                            |                                              | $                                        | 9,002      |            |        | $ | 71,172     |        
|                                                                                            |                                              |                                          |            |            |        |  
|Net earnings (loss) per limited partnership unit:                                           |                                              |                                          |            |            |        |   |            |        
|                                                                                            |                                              | Basic earnings (loss):                   |            |            |        |   |            |         |        |  
|                                                                                            |                                              | Income (loss) from continuing operations |            | $          | (0.27  | ) |            | $       | 0.59   |  
|                                                                                            |                                              | Income from discontinued operations      |            |            | 0.06   |   |            |         | 1.06   |  
|                                                                                            |                                              |                                          |            |            |        |  
|                                                                                            |                                              | Basic earnings (loss) per LP unit        |            | $          | (0.21  | ) |            | $       | 1.65   |  
|                                                                                            |                                              |                                          |            |            |        |  
|Weighted average limited partnership units outstanding                                      |                                              |                                          | 46,271,455 |            |        |   | 46,098,284 |        
|                                                                                            |                                              |                                          |            |            |        |  
|                                                                                            |                                              | Diluted earnings (loss):                 |            |            |        |   |            |         |        |  
|                                                                                            |                                              | Income (loss) from continuing operations |            | $          | (0.27  | ) |            | $       | 0.55   |  
|                                                                                            |                                              | Income from discontinued operations      |            |            | 0.06   |   |            |         | 0.94   |  
|                                                                                            |                                              |                                          |            |            |        |  
|                                                                                            |                                              | Diluted earnings (loss) per LP unit      |            | $          | (0.21  | ) |            | $       | 1.49   |  
|                                                                                            |                                              |                                          |            |            |        |  
|Weighted average limited partnership units and equivalent
    partnership units outstanding |                                              |                                          | 50,176,449 |            |        |   | 51,938,033 |        
|                                                                                            |                                              |                                          |            |            |        |  



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AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF EARNINGS


|                                                                                            |                                              |                                     |            |            |        |   |            |         |         | 
|------------------------------------------------------------------------------------------- | -------------------------------------------- | ----------------------------------- | ---------- | ---------- | ------ | - | ---------- | ------- | ------- | 
|                                                                                            |                                              | Six Months Ended June 30,           |           
|                                                                                            |                                              |                                     |           
|                                                                                            |                                              | 2005                                |            |            | 2004   |  
|                                                                                            |                                              |                                     |            |            |        |  
|                                                                                            |                                              | (In $000s, except per unit data)    |           
|                                                                                            |                                              | (Unaudited)                         |           
|                                                                                            |                                              |                                     |            | (Restated) |       
|Revenues:                                                                                   |                                              |                                     |            |            |        |   |            |        
|                                                                                            | Gaming                                       |                                     | $          | 245,235    |        |   | $          | 234,940 |        
|                                                                                            | Oil and gas                                  |                                     |            | 89,071     |        |   |            | 63,032  |        
|                                                                                            | Real estate                                  |                                     |            | 42,688     |        |   |            | 30,948  |        
|                                                                                            |                                              |                                     |            |            |        |  
|                                                                                            |                                              |                                     | 376,994    |            |        |   | 328,920    |        
|                                                                                            |                                              |                                     |            |            |        |  
|Expenses:                                                                                   |                                              |                                     |            |            |        |   |            |        
|                                                                                            | Gaming                                       |                                     |            | 209,579    |        |   |            | 206,497 |        
|                                                                                            | Oil and gas                                  |                                     |            | 78,671     |        |   |            | 52,279  |        
|                                                                                            | Real estate                                  |                                     |            | 35,841     |        |   |            | 19,564  |        
|                                                                                            | General and administrative expenses          |                                     |            | 5,624      |        |   |            | 2,763   |        
|                                                                                            | Acquisition costs                            |                                     |            | 3,362      |        |   |            | 414     |        
|                                                                                            |                                              |                                     |            |            |        |  
|                                                                                            |                                              |                                     | 333,077    |            |        |   | 281,517    |        
|                                                                                            |                                              |                                     |            |            |        |  
|Operating income                                                                            |                                              |                                     | 43,917     |            |        |   | 47,403     |        
|Other income (expense), net:                                                                |                                              |                                     |            |            |        |   |            |        
|                                                                                            | Interest expense                             |                                     |            | (51,453    | )      |   |            | (25,271 | )      
|                                                                                            | Interest and other income                    |                                     |            | 32,873     |        |   |            | 23,967  |        
|                                                                                            | Other income (expense), net                  |                                     |            | 1,504      |        |   |            | 41,924  |        
|                                                                                            |                                              |                                     |            |            |        |  
|Income from continuing operations before income taxes                                       |                                              |                                     | 26,841     |            |        |   | 88,023     |        
|                                                                                            | Income tax expense                           |                                     |            | (12,436    | )      |   |            | (10,176 | )      
|                                                                                            |                                              |                                     |            |            |        |  
|Income from continuing operations                                                           |                                              |                                     | 14,405     |            |        |   | 77,847     |        
|Discontinued operations:                                                                    |                                              |                                     |            |            |        |   |            |        
|                                                                                            | Income from discontinued operations          |                                     |            | 1,144      |        |   |            | 4,633   |        
|                                                                                            | Gain on sales and disposition of real estate |                                     |            | 21,367     |        |   |            | 55,186  |        
|                                                                                            |                                              |                                     |            |            |        |  
|Income from discontinued operations                                                         |                                              |                                     | 22,511     |            |        |   | 59,819     |        
|                                                                                            |                                              |                                     |            |            |        |  
|Net earnings                                                                                |                                              | $                                   | 36,916     |            |        | $ | 137,666    |        
|                                                                                            |                                              |                                     |            |            |        |  
|Net earnings attributable to (note 15):                                                     |                                              |                                     |            |            |        |   |            |        
|                                                                                            |                                              | Limited partners                    |            | $          | 38,173 |   |            | $       | 130,633 | 
|                                                                                            |                                              | General partner                     |            |            | (1,257 | ) |            |         | 7,033   | 
|                                                                                            |                                              |                                     |            |            |        |  
|                                                                                            |                                              | $                                   | 36,916     |            |        | $ | 137,666    |        
|                                                                                            |                                              |                                     |            |            |        |  
|Net earnings per limited partnership unit:                                                  |                                              |                                     |            |            |        |   |            |        
|                                                                                            |                                              | Basic earnings:                     |            |            |        |   |            |         |         | 
|                                                                                            |                                              | Income from continuing operations   |            | $          | 0.35   |   |            | $       | 1.56    | 
|                                                                                            |                                              | Income from discontinued operations |            |            | 0.48   |   |            |         | 1.27    | 
|                                                                                            |                                              |                                     |            |            |        |  
|                                                                                            |                                              | Basic earnings per LP unit          |            | $          | 0.83   |   |            | $       | 2.83    | 
|                                                                                            |                                              |                                     |            |            |        |  
|Weighted average limited partnership units Outstanding                                      |                                              |                                     | 46,185,348 |            |        |   | 46,098,284 |        
|                                                                                            |                                              |                                     |            |            |        |  
|                                                                                            |                                              | Diluted earnings:                   |            |            |        |   |            |         |         | 
|                                                                                            |                                              | Income from continuing operations   |            | $          | 0.35   |   |            | $       | 1.43    | 
|                                                                                            |                                              | Income from discontinued operations |            |            | 0.44   |   |            |         | 1.12    | 
|                                                                                            |                                              |                                     |            |            |        |  
|                                                                                            |                                              | Diluted earnings per LP unit        |            | $          | 0.79   |   |            | $       | 2.55    | 
|                                                                                            |                                              |                                     |            |            |        |  
|Weighted average limited partnership units and equivalent
    partnership units outstanding |                                              |                                     | 49,973,982 |            |        |   | 52,218,668 |        
|                                                                                            |                                              |                                     |            |            |        |  



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AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF CHANGES


IN PARTNERS EQUITY AND COMPREHENSIVE INCOME


SIX MONTHS ENDED JUNE 30, 2005


|                                                        |                                                        |             |          |        |                   |   |           |                  |   |   |           |   |  |        |       |   |  |   |           |        |  
|------------------------------------------------------- | ------------------------------------------------------ | ----------- | -------- | ------ | ----------------- | - | --------- | ---------------- | - | - | --------- | - |  | ------ | ----- | - |  | - | --------- | ------ | -
|                                                        |                                                        | General     |          |        | Limited Partners |   |           |                  |   |  
|                                                        |                                                        | Partners   |          |        | Equity            |   |           | Held in Treasury |   |   | Total     |  
|                                                        |                                                        | Equity      |          |        | Depositary        |   |           |                  |   |   | Partners |  
|                                                        |                                                        | (Deficit)   |          |        | Units(ii)         |   |           | Amounts          |   |   | Units     |   |  | Equity |      
|                                                        |                                                        |             |          |        |                   |   |           |                  |   |   |           |   |  |        |      
|                                                        |                                                        | (In $000s)  |         
|                                                        |                                                        | (Unaudited) |         
|Balance, December 31, 2004 (Restated)                   |                                                        | $           | 310,295  |        |                   | $ | 1,361,392 |                  |   | $ | (11,921   | ) |  |        | 1,137 |   |  | $ | 1,659,766 |       
|Comprehensive income:                                   |                                                        |             |          |        |                   |   |           |                  |   |   |           |   |  |        |       |   |  |   |           |       
|                                                        | Net earnings                                           |             |          | (1,257 | )                 |   |           | 38,173           |   |   |           |  |  |        |       |  |  |   |           | 36,916 |  
|                                                        | Net unrealized losses on securities available for sale |             |          | (113   | )                 |   |           | (5,545           | ) |   |           |  |  |        |       |  |  |   |           | (5,658 | )
|                                                        |                                                        |             |          |        |                   |   |           |                  |   |   |           |   |  |        |      
|Comprehensive income                                    |                                                        |             | (1,370   | )      |                   |   | 32,628    |                  |   |   |          |   |  |        |      |   |  |   | 31,258    |       
|General Partner contribution                            |                                                        |             | 9,279    |        |                   |   |          |                  |   |   |          |   |  |        |      |   |  |   | 9,279     |       
|AREP Oil and Gas acquisitions(i)                        |                                                        |             | (616,553 | )      |                   |   | 444,998   |                  |   |   |          |   |  |        |      |   |  |   | (171,555  | )     
|GBH/ Atlantic Coast Entertainment Holdings acquisitions |                                                        |             | (23,295  | )      |                   |   | 12,000    |                  |   |   |          |   |  |        |      |   |  |   | (11,295   | )     
|                                                        |                                                        |             |          |        |                   |   |           |                  |   |   |           |   |  |        |      
|Balance, June 30, 2005                                  |                                                        | $           | (321,644 | )      |                   | $ | 1,851,018 |                  |   | $ | (11,921   | ) |  |        | 1,137 |   |  | $ | 1,517,453 |       
|                                                        |                                                        |             |          |        |                   |   |           |                  |   |   |           |   |  |        |      






|    |                                                                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
|(i) | Deferred tax assets and liabilities of $2.6 million, and
    $6.7 million respectively, have been eliminated through
    adjustments to general partners equity.



|     |  |                                                                                                               
|---- |  | --------------------------------------------------------------------------------------------------------------
|(ii) |  | Includes $457.0 million of Limited Partner Unit issuance on
    June 30, 2005 in connection with acquisitions.





4



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AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES





CONSOLIDATED STATEMENT OF CASH FLOWS


|                                      |                                                                                         |                                               |                                                                                     |                                              |         |         |          |          |         |         |          |  
|------------------------------------- | --------------------------------------------------------------------------------------- | --------------------------------------------- | ----------------------------------------------------------------------------------- | -------------------------------------------- | ------- | ------- | -------- | -------- | ------- | ------- | -------- | -
|                                      |                                                                                         | Six Months Ended June 30,                     |                                                                                    
|                                      |                                                                                         |                                               |                                                                                    
|                                      |                                                                                         | 2005                                          |                                                                                     |                                              | 2004    |        
|                                      |                                                                                         |                                               |                                                                                     |                                              |         |        
|                                      |                                                                                         | (In $000s)                                    |                                                                                    
|                                      |                                                                                         | (Unaudited)                                   |                                                                                    
|                                      |                                                                                         |                                               |                                                                                     | (Restated)                                   |        
|Cash flows from operating activities: |                                                                                         |                                               |                                                                                     |                                              |         |         |          |         
|                                      | Income from continuing operations                                                       |                                               | $                                                                                   | 14,405                                       |         |         | $        | 77,847   |        
|                                      | Adjustments to reconcile net earnings to net cash provided by
    operating activities: |                                               |                                                                                     |                                              |         |         |          |          |        
|                                      |                                                                                         | Depreciation, depletion and amortization      |                                                                                     |                                              | 69,163  |         |          |          | 54,255  |        
|                                      |                                                                                         | Preferred LP unit interest expense            |                                                                                     |                                              | 2,636   |         |          |          | 2,450   |        
|                                      |                                                                                         | Gain on sales and disposition of real estate  |                                                                                     |                                              | (176    | )       |          |          | (5,821  | )      
|                                      |                                                                                         | Other (gains) losses                          |                                                                                     |                                              | 498     |         |          |          | (31     | )      
|                                      |                                                                                         | Gain on sales of marketable equity securities |                                                                                     |                                              | (7,178  | )       |          |          | (37,167 | )      
|                                      |                                                                                         | Provision for impaired assets                 |                                                                                     |                                              | 175     |         |          |          |        |        
|                                      |                                                                                         | Losses on securities sold short               |                                                                                     |                                              | 6,798   |         |          |          |        |        
|                                      |                                                                                         | Deferred gain amortization                    |                                                                                     |                                              | (1,019  | )       |          |          | (1,019  | )      
|                                      |                                                                                         | Deferred income tax expense                   |                                                                                     |                                              | 8,595   |         |          |          | 6,235   |        
|                                      |                                                                                         | Minority interest                             |                                                                                     |                                              | (1,547  | )       |          |          | (742    | )      
|                                      |                                                                                         | Changes in operating assets and liabilities:  |                                                                                     |                                              |         |         |          |          |         |        
|                                      |                                                                                         |                                               | Decrease in land and construction-in progress                                       |                                              |         | 3,680   |          |          |         | 2,181   |         
|                                      |                                                                                         |                                               | Increase (decrease) in accounts payable, accrued expenses and
    other liabilities |                                              |         | 21,480  |          |          |         | (323    | )       
|                                      |                                                                                         |                                               | Increase in due from brokers                                                        |                                              |         | 15,815  |          |          |         |        |         
|                                      |                                                                                         |                                               | Decrease (increase) in restricted cash                                              |                                              |         | 15,147  |          |          |         | (447    | )       
|                                      |                                                                                         |                                               | (Increase) decrease in receivables and other assets                                 |                                              |         | (19,638 | )        |          |         | 2,809   |         
|                                      |                                                                                         |                                               |                                                                                     |                                              |         |        
|                                      |                                                                                         |                                               |                                                                                     | Net cash provided by continuing operations   |         |         | 128,834  |          |         |         | 100,227  |  
|                                      |                                                                                         |                                               |                                                                                     |                                              |         |        
|                                      | Income from discontinued operations                                                     |                                               |                                                                                     | 22,511                                       |         |         |          | 59,819   |        
|                                      |                                                                                         | Depreciation and amortization                 |                                                                                     |                                              | 176     |         |          |          | 952     |        
|                                      |                                                                                         | Net gain from property transactions           |                                                                                     |                                              | (21,367 | )       |          |          | (55,186 | )      
|                                      |                                                                                         |                                               |                                                                                     |                                              |         |        
|                                      |                                                                                         |                                               |                                                                                     | Net cash provided by discontinued operations |         |         | 1,320    |          |         |         | 5,585    |  
|                                      |                                                                                         |                                               |                                                                                     |                                              |         |        
|                                      |                                                                                         |                                               |                                                                                     | Net cash provided by operating activities    |         |         | 130,154  |          |         |         | 105,812  |  
|                                      |                                                                                         |                                               |                                                                                     |                                              |         |        
|Cash flows from investing activities: |                                                                                         |                                               |                                                                                     |                                              |         |         |          |         
|                                      | Decrease in other investments                                                           |                                               |                                                                                     | 39,347                                       |         |         |          | 26,212   |        
|                                      | Net proceeds from the sales and disposition of real estate                              |                                               |                                                                                     | 4,639                                        |         |         |          | 16,635   |        
|                                      | Principal payments received on leases accounted for under the
    financing method      |                                               |                                                                                     | 1,771                                        |         |         |          | 2,168    |        
|                                      | Increase in marketable securities                                                       |                                               |                                                                                     | (91,803                                      | )       |         |          | (54,775  | )      
|                                      | Increase in receivables for sold securities                                             |                                               |                                                                                     | (45,151                                      | )       |         |          |         |        
|                                      | Acquisition, exploration and development costs                                          |                                               |                                                                                     | (134,014                                     | )       |         |          | (43,990  | )      
|                                      | Acquisitions of Arizona Charlies                                                        |                                               |                                                                                     |                                             |         |         |          | (125,900 | )      
|                                      | Acquisitions of rental real estate                                                      |                                               |                                                                                     |                                             |         |         |          | (14,583  | )      
|                                      | Additions to hotel, casino and resort operating property                                |                                               |                                                                                     | (10,567                                      | )       |         |          | (17,454  | )      
|                                      | Additions to rental real estate                                                         |                                               |                                                                                     | (387                                         | )       |         |          | (299     | )      
|                                      | Decrease (increase) in investment in U.S. Government and
    Agency Obligations         |                                               |                                                                                     | 39,732                                       |         |         |          | (51,568  | )      
|                                      | Proceeds from sale of marketable equity and debt securities                             |                                               |                                                                                     |                                             |         |         |          | 86,507   |        
|                                      | Investment in TransTexas Gas Corporation                                                |                                               |                                                                                     | (180,000                                     | )       |         |          |         |        
|                                      | Other                                                                                   |                                               |                                                                                     | (140                                         | )       |         |          | (2,184   | )      
|                                      |                                                                                         |                                               |                                                                                     |                                              |         |        
|                                      |                                                                                         |                                               |                                                                                     | Net cash used in investing activities        |         |         | (376,573 | )        |         |         | (179,231 | )
|                                      |                                                                                         |                                               |                                                                                     |                                              |         |        
|                                      | Cash flows from discontinued operations:                                                |                                               |                                                                                     |                                              |         |         |          |          |        
|                                      |                                                                                         |                                               | Net proceeds from the sales and disposition of real estate                          |                                              |         | 41,438  |          |          |         | 101,452 |         
|                                      |                                                                                         |                                               |                                                                                     |                                              |         |        
|                                      |                                                                                         |                                               |                                                                                     | Net cash used in investing activities        |         |         | (335,135 | )        |         |         | (77,779  | )
|                                      |                                                                                         |                                               |                                                                                     |                                              |         |        

5



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##### Table of Contents



AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES


CONSOLIDATED STATEMENT OF CASH
FLOWS  (Continued)


|                                                                         |                   |                                                             |                                           |            |         |         |           |   |         |         | 
|------------------------------------------------------------------------ | ----------------- | ----------------------------------------------------------- | ----------------------------------------- | ---------- | ------- | ------- | --------- | - | ------- | ------- | 
|                                                                         |                   | Six Months Ended June 30,                                   |                                          
|                                                                         |                   |                                                             |                                          
|                                                                         |                   | 2005                                                        |                                           |            | 2004    |        
|                                                                         |                   |                                                             |                                           |            |         |        
|                                                                         |                   | (In $000s)                                                  |                                          
|                                                                         |                   | (Unaudited)                                                 |                                          
|                                                                         |                   |                                                             |                                           | (Restated) |        
|CASH FLOWS FROM FINANCING ACTIVITIES:                                    |                   |                                                             |                                           |            |         |         |           |  
|                                                                         | Partners equity: |                                                             |                                           |            |         |         |           |   |        
|                                                                         |                   | Distribution to partners                                    |                                           |            |        |         |           |   | (17,916 | )      
|                                                                         |                   | Members contribution                                        |                                           |            | 9,279   |         |           |   | 15,894  |        
|                                                                         | Debt:             |                                                             |                                           |            |         |         |           |   |        
|                                                                         |                   | Proceeds from credit facilities                             |                                           |            | 62,100  |         |           |   |        |        
|                                                                         |                   | Proceeds from senior notes                                  |                                           |            | 480,000 |         |           |   | 565,409 |        
|                                                                         |                   | Increase in mortgages payable                               |                                           |            | 4,425   |         |           |   | 10,000  |        
|                                                                         |                   | Periodic principal payments                                 |                                           |            | (2,932  | )       |           |   | (5,858  | )      
|                                                                         |                   | Decrease in due to affiliates                               |                                           |            | (16,342 | )       |           |   | (25,000 | )      
|                                                                         |                   | Debt issuance costs                                         |                                           |            | (8,587  | )       |           |   | (397    | )      
|                                                                         |                   |                                                             |                                           |            |         |        
|                                                                         |                   |                                                             | Net cash provided by financing activities |            |         | 527,943 |           |   |         | 542,132 | 
|                                                                         |                   |                                                             |                                           |            |         |        
|Net increase in cash and cash equivalents                                |                   |                                                             | 322,962                                   |            |         |         | 570,165   |  
|Cash and cash equivalents, beginning of period                           |                   |                                                             | 806,309                                   |            |         |         | 564,221   |  
|                                                                         |                   |                                                             |                                           |            |         |        
|Cash and cash equivalents at end of period                               |                   | $                                                           | 1,129,271                                 |            |         | $       | 1,134,386 |  
|                                                                         |                   |                                                             |                                           |            |         |        
|Supplemental information:                                                |                   |                                                             |                                           |            |         |         |           |  
|                                                                         |                   | Cash payments for interest, net of amounts capitalized      |                                           | $          | 24,667  |         |           | $ | 16,973  |        
|                                                                         |                   |                                                             |                                           |            |         |        
|                                                                         |                   | Cash payments for income taxes                              |                                           | $          | 3,017   |         |           | $ |        |        
|                                                                         |                   |                                                             |                                           |            |         |        
|Supplemental schedule of noncash investing and financing
    activities: |                   |                                                             |                                           |            |         |         |           |  
|                                                                         |                   | Reclassification of real estate from operating lease        |                                           | $          | (7,387  | )       |           | $ | (24,849 | )      
|                                                                         |                   | Reclassification from hotel and resort operating properties |                                           |            |        |         |           |   | (6,428  | )      
|                                                                         |                   | Reclassification to properties held for sale                |                                           |            | 4,154   |         |           |   | 31,277  |        
|                                                                         |                   | Reclassification of real estate to operating lease          |                                           |            | 3,591   |         |           |   |        |        
|                                                                         |                   | Reclassification of real estate from financing lease        |                                           |            | (358    | )       |           |   |        |        
|                                                                         |                   |                                                             |                                           |            |         |        
|                                                                         |                   | $                                                           |                                          |            |         | $       |          |  
|                                                                         |                   |                                                             |                                           |            |         |        
|Net unrealized gains (losses) on securities available for sale           |                   | $                                                           | (5,657                                    | )          |         | $       | 349       |  
|                                                                         |                   |                                                             |                                           |            |         |        
|Purchase of debt securities                                              |                   | $                                                           |                                          |            |         | $       | 59,853    |  
|                                                                         |                   |                                                             |                                           |            |         |        
|Debt conversion                                                          |                   | $                                                           | 29,500                                    |            |         | $       |          |  
|                                                                         |                   |                                                             |                                           |            |         |        
|LP unit issuance                                                         |                   | $                                                           | 456,998                                   |            |         | $       |          |  
|                                                                         |                   |                                                             |                                           |            |         |        
|Net change in tax assets and liabilities related to acquisitions         |                   | $                                                           | 4,105                                     |            |         | $       | 12,721    |  
|                                                                         |                   |                                                             |                                           |            |         |        
|Members capital contribution                                            |                   | $                                                           |                                          |            |         | $       | 6,906     |  
|                                                                         |                   |                                                             |                                           |            |         |        



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##### Table of Contents



AMERICAN REAL ESTATE PARTNERS, L.P.


FORM 10-Q JUNE 30, 2005





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)




|   |        
|-- | -------
|1. | General











| |                           
| | --------------------------
| | Change in Reporting Entity









| |              
| | -------------
| | Stock Options



7



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##### Table of Contents



AMERICAN REAL ESTATE PARTNERS, L.P.


FORM 10-Q JUNE 30, 2005


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)  (Continued)






| |            
| | -----------
| | Investments





| |                              
| | -----------------------------
| | Filing Status of Subsidiaries





|   |                           
|-- | --------------------------
|2. | Related Party Transactions



| |                    
| | -------------------
| | a.     Acquisitions





| |   |                                                                       
| | - | ----------------------------------------------------------------------
| |  | TransTexas Gas Corporation (TransTexas),                            
|
| |  | NEG Holding LLC (NEG Holdings),                                     
|
| |  | Panaco, Inc. (Panaco),                                              
|
| |  | GB Holdings, Inc. (GBH), and                                        
|
| |  | Atlantic Coast Entertainment Holdings, Inc. (Atlantic
    Holdings).



TransTexas:


NEG Holdings:


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##### Table of Contents



AMERICAN REAL ESTATE PARTNERS, L.P.


FORM 10-Q JUNE 30, 2005


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)  (Continued)




Panaco:


GBH and Atlantic Holdings:








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##### Table of Contents



AMERICAN REAL ESTATE PARTNERS, L.P.


FORM 10-Q JUNE 30, 2005


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)  (Continued)




| |                                                 
| | ------------------------------------------------
| | Summary Financial Data for the Acquired Entities



|                       |       |                           |        |           |        |   |        |            |  |   |           |     |  |        |        |         |            |   |        |       |  |   |        |       | 
|---------------------- | ----- | ------------------------- | ------ | --------- | ------ | - | ------ | ---------- |  | - | --------- | --- |  | ------ | ------ | ------- | ---------- | - | ------ | ----- |  | - | ------ | ----- | 
|                       |       | Six Months Ended June 30, |       
|                       |       |                           |       
|                       |       | 2005                      |        |           | 2004   |  
|                       |       |                           |        |           |        |  
|                       |       |                           |        | Operating |        |   |        |            |  |   | Operating |     |  |       
|                       |       | Total                     |        |           | Income |   |        | Net Income |  |   | Total     |     |  | Income |        |         | Net Income |  
|                       |       | Revenues                  |        |           | (Loss) |   |        | (Loss)     |  |   | Revenues  |     |  | (Loss) |        |         | (Loss)     |  
|                       |       |                           |        |           |        |   |        |            |  |   |           |     |  |        |        |         |            |  
|                       |       | (In $000s)                |       
|TransTexas             |       | $                         | 26,049 |           |        | $ | (2,440 | )          |  | $ | (1,416    | )   |  | $      | 30,225 |         |            | $ | 481    |       |  | $ | 2,280  |      
|Panaco                 |       |                           | 23,735 |           |        |   | 1,102  |            |  |   | 26        |     |  |        |       |         |            |   |       |       |  |   |       | (1)  
|NEG Holdings           |       |                           | 39,287 |           |        |   | 11,468 |            |  |   | 9,245     |     |  |        | 32,806 |         |            |   | 9,973  |       |  |   | 9,025  | (2)  
|GBH/ Atlantic Holdings |       |                           | 80,888 |           |        |   | (6,202 | )          |  |   | (6,932    | )   |  |        | 86,571 |         |            |   | (1,267 | )     |  |   | (2,322 | )(3) 
|                       |       |                           |        |           |        |   |        |            |  |   |           |     |  |        |        |         |            |  
|                       | Total |                           | $      | 169,959   |        |   | $      | 3,928      |  |   | $         | 923 |  |        | $      | 149,602 |            |   | $      | 9,187 |  |   | $      | 8,983 | 
|                       |       |                           |        |           |        |   |        |            |  |   |           |     |  |        |        |         |            |  






|    |                                                                                                                          
|--- | -------------------------------------------------------------------------------------------------------------------------
|(1) | Panaco is not presented for the six months ended June 30,
    2004 as it was not under common control during that period.





|    |                                                                                                                                                                                            
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | We recorded net income of $9,893,000 and $8,219,000, on the
    accretion method with respect to NEG, in the first three months
    of 2005 and the first six months of 2004, respectively.
|   
|(3) | We recorded net loss of $986,000 and $215,000, on the equity
    method for GBH/ Atlantic Holdings, in the first three months of
    2005 and the first six months of 2004, respectively.  





| |                                   
| | ----------------------------------
| | b.     Administrative
    Services







10



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##### Table of Contents



AMERICAN REAL ESTATE PARTNERS, L.P.


FORM 10-Q JUNE 30, 2005


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)  (Continued)






| |                                
| | -------------------------------
| | c.     Securities
    Ownership





|   |                                                
|-- | -----------------------------------------------
|3. | Oil and Gas Accounting Policies and Disclosures



| |                               
| | ------------------------------
| | Oil and Natural Gas Properties











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AMERICAN REAL ESTATE PARTNERS, L.P.


FORM 10-Q JUNE 30, 2005


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)  (Continued)






| |                                
| | -------------------------------
| | Revenue and Expense Recognition





| |                        
| | -----------------------
| | Oil and Gas Derivatives





| |             
| | ------------
| | Income Taxes







| |                                            
| | -------------------------------------------
| | Accounting for Asset Retirement Obligations



12



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##### Table of Contents



AMERICAN REAL ESTATE PARTNERS, L.P.


FORM 10-Q JUNE 30, 2005


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)  (Continued)




| |                      
| | ---------------------
| | Other Disclosure Data





| |                  
| | -----------------
| | Capitalized Costs



|                                                           |       |   |          |         | 
|---------------------------------------------------------- | ----- | - | -------- | ------- | 
|Proved properties                                          |       | $ | 923,094  |        
|Other property and equipment                               |       |   | 5,595    |        
|                                                           |       |   |         
|                                                           | Total |   |          | 928,689 | 
|Less: Accumulated depreciation, depletion and amortization |       |   | (401,305 | )      
|                                                           |       |   |         
|                                                           |       | $ | 527,384  |        
|                                                           |       |   |         



|                        |       |   |         |         | 
|----------------------- | ----- | - | ------- | ------- | 
|Acquisitions            |       | $ | 128,673 |        
|Exploration costs       |       |   | 52,765  |        
|Development costs       |       |   | 62,209  |        
|                        |       |   |        
|                        | Total |   | $       | 243,647 | 
|                        |       |   |        
|Depletion rate per MCFe |       | $ | 2.28    |        
|                        |       |   |        





| |                                             
| | --------------------------------------------
| | Supplemental Reserve Information (Unaudited)







13



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AMERICAN REAL ESTATE PARTNERS, L.P.


FORM 10-Q JUNE 30, 2005


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)  (Continued)




|                                                       |                                 |            |  |            |           |  |  |             |  
|------------------------------------------------------ | ------------------------------- | ---------- |  | ---------- | --------- |  |  | ----------- | -
|                                                       |                                 | Oil and    |  |            |          
|                                                       |                                 | Condensate |  |            |          
|                                                       |                                 | (Barrels)  |  |            | Gas (mcf) | 
|                                                       |                                 |            |  |            |           | 
|Proved reserve:                                        |                                 |            |  |            |           |  |  |            
|                                                       | January 1, 2004                 |            |  | 8,165,562  |           |  |  | 206,259,821 |  
|Increase (decrease) during the period attributable to: |                                 |            |  |            |           |  |  |            
|                                                       | Revisions of previous estimates |            |  | 204,272    |           |  |  | 9,810,665   |  
|                                                       | Acquisition                     |            |  | 5,203,599  |           |  |  | 25,981,749  |  
|                                                       | Extensions and discoveries      |            |  | 524,089    |           |  |  | 50,226,279  |  
|                                                       | Sales of reserves               |            |  | (15,643    | )         |  |  | (344,271    | )
|                                                       | Production                      |            |  | (1,484,005 | )         |  |  | (18,895,077 | )
|                                                       |                                 |            |  |            |           | 
|                                                       | End of period                   |            |  | 12,597,874 |           |  |  | 273,039,166 |  
|                                                       |                                 |            |  |            |           | 
|Proved developed reserves:                             |                                 |            |  |            |           |  |  |            
|                                                       | Beginning of period             |            |  | 6,852,118  |           |  |  | 125,765,372 |  
|                                                       | End of period(1)                |            |  | 8,955,300  |           |  |  | 151,451,558 |  






|    |                                                                                                                                       
|--- | --------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes proved developed non-producing reserves as of
    December 31, 2004 of 1,880,771 barrels of oil and
    37,206,946 mcf of gas



| |                                 
| | --------------------------------
| | Standardized Measure Information





|                                                          |  |            |           |  
|--------------------------------------------------------- |  | ---------- | --------- | -
|                                                          |  | (In $000s) |          
|                                                          |  |            |          
|Future cash inflows                                       |  | $          | 2,203,900 |  
|Future production and development costs                   |  |            | (836,092  | )
|                                                          |  |            |          
|Future net cash flows                                     |  |            | 1,367,808 |  
|Future income taxes                                       |  |            | (32,979   | )
|Annual discount (10%) for estimating timing of cash flows |  |            | (563,549  | )
|                                                          |  |            |          
|Standardized measure of discounted future net cash flows  |  | $          | 771,280   |  
|                                                          |  |            |          

14



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##### Table of Contents



AMERICAN REAL ESTATE PARTNERS, L.P.


FORM 10-Q JUNE 30, 2005


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)  (Continued)




|                                                                                                   |  |            |          |  
|-------------------------------------------------------------------------------------------------- |  | ---------- | -------- | -
|                                                                                                   |  | (In $000s) |         
|Beginning of period                                                                                |  | $          | 620,497  |  
|Sales of reserves in place                                                                         |  |            | (1,375   | )
|Sales and transfers of crude oil and natural gas produced net of
    production costs              |  |            | (130,640 | )
|Net change in prices and production costs                                                          |  |            | 16,686   |  
|Development costs incurred during the period and changes in
    estimated future development costs |  |            | (96,236  | )
|Acquisition of reserves                                                                            |  |            | 75,239   |  
|Extensions and discoveries                                                                         |  |            | 193,022  |  
|Income taxes                                                                                       |  |            |         |  
|Revisions of previous quantity estimates                                                           |  |            | 31,730   |  
|Accretion of discount                                                                              |  |            | 62,050   |  
|Changes in production rates and other                                                              |  |            | 307      |  
|                                                                                                   |  |            |         
|End of period                                                                                      |  | $          | 771,280  |  
|                                                                                                   |  |            |         





| |            
| | -----------
| | Receivables





| |                               
| | ------------------------------
| | Recently Issued Pronouncements



15



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##### Table of Contents



AMERICAN REAL ESTATE PARTNERS, L.P.


FORM 10-Q JUNE 30, 2005


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)  (Continued)




|   |             
|-- | ------------
|4. | Unit Options





|                        |  |  |           | 
|----------------------- |  |  | --------- | 
|Risk-free interest rate |  |  | 3.5%      | 
|Volatility              |  |  | 30.0%     | 
|Dividend yield          |  |  | 0%        | 
|Expected life           |  |  | 7-8 years | 







|   |                
|-- | ---------------
|5. | Operating Units





| |              
| | -------------
| | a.     Gaming



16



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##### Table of Contents



AMERICAN REAL ESTATE PARTNERS, L.P.


FORM 10-Q JUNE 30, 2005


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)  (Continued)




|                                  |                              |             |         |         |              |   |         |         | 
|--------------------------------- | ---------------------------- | ----------- | ------- | ------- | ------------ | - | ------- | ------- | 
|                                  |                              | June 30,    |         |         | December 31, |  
|                                  |                              | 2005        |         |         | 2004         |  
|                                  |                              |             |         |         |              |  
|                                  |                              | (In $000s)  |        
|                                  |                              | (Unaudited) |        
|Current assets                    |                              | $           | 145,876 |         |              | $ | 120,499 |        
|Property plant and equipment, net |                              |             | 455,812 |         |              |   | 461,000 |        
|Other assets                      |                              |             | 63,915  |         |              |   | 74,011  |        
|                                  |                              |             |         |         |              |  
|                                  | Total assets                 |             | $       | 665,603 |              |   | $       | 655,510 | 
|                                  |                              |             |         |         |              |  
|Current liabilities               |                              | $           | 60,392  |         |              | $ | 60,425  |        
|Long term debt                    |                              |             | 255,935 |         |              |   | 284,989 |        
|Other liabilities                 |                              |             | 10,546  |         |              |   | 10,746  |        
|Equity                            |                              |             | 338,730 |         |              |   | 299,350 |        
|                                  |                              |             |         |         |              |  
|                                  | Total liabilities and equity |             | $       | 665,603 |              |   | $       | 655,510 | 
|                                  |                              |             |         |         |              |  



|         |                                     |                    |         |        |                  |  |         |        |         |  |         |         |         |  |         |         |         | 
|-------- | ----------------------------------- | ------------------ | ------- | ------ | ---------------- |  | ------- | ------ | ------- |  | ------- | ------- | ------- |  | ------- | ------- | ------- | 
|         |                                     | Three Months Ended |         |        | Six Months Ended | 
|         |                                     | June 30,           |         |        | June 30,         | 
|         |                                     |                    |         |        |                  | 
|         |                                     | 2005               |         |        | 2004             |  |         | 2005   |         |  | 2004    |        
|         |                                     |                    |         |        |                  |  |         |        |         |  |         |        
|         |                                     | (In $000s)         |        
|         |                                     | (Unaudited)        |        
|Revenues |                                     |                    |         |        |                  |  |         |        |         |  |         |         |         |  |         |        
|         | Casino                              |                    | $       | 81,168 |                  |  | $       | 80,911 |         |  | $       | 166,238 |         |  | $       | 161,622 |        
|         | Hotel                               |                    |         | 18,602 |                  |  |         | 16,615 |         |  |         | 36,689  |         |  |         | 32,791  |        
|         | Food and beverage                   |                    |         | 23,307 |                  |  |         | 22,519 |         |  |         | 45,249  |         |  |         | 44,210  |        
|         | Tower, retail and other income      |                    |         | 10,105 |                  |  |         | 10,282 |         |  |         | 19,118  |         |  |         | 19,538  |        
|         |                                     |                    |         |        |                  |  |         |        |         |  |         |        
|         |                                     | Gross revenues     |         |        | 133,182          |  |         |        | 130,327 |  |         |         | 267,294 |  |         |         | 258,161 | 
|         | Less promotional allowances         |                    |         | 10,750 |                  |  |         | 11,739 |         |  |         | 22,059  |         |  |         | 23,221  |        
|         |                                     |                    |         |        |                  |  |         |        |         |  |         |        
|         |                                     | Net revenues       |         |        | 122,432          |  |         |        | 118,588 |  |         |         | 245,235 |  |         |         | 234,940 | 
|         |                                     |                    |         |        |                  |  |         |        |         |  |         |        
|Expenses |                                     |                    |         |        |                  |  |         |        |         |  |         |         |         |  |         |        
|         | Casino                              |                    |         | 27,596 |                  |  |         | 28,423 |         |  |         | 55,322  |         |  |         | 56,333  |        
|         | Hotel                               |                    |         | 8,033  |                  |  |         | 6,674  |         |  |         | 14,759  |         |  |         | 12,925  |        
|         | Food and beverage                   |                    |         | 14,842 |                  |  |         | 14,111 |         |  |         | 28,784  |         |  |         | 27,758  |        
|         | Tower, retail and other             |                    |         | 4,324  |                  |  |         | 3,626  |         |  |         | 8,171   |         |  |         | 6,980   |        
|         | Selling, general and administrative |                    |         | 41,352 |                  |  |         | 42,519 |         |  |         | 83,963  |         |  |         | 82,097  |        
|         | Depreciation and amortization       |                    |         | 9,360  |                  |  |         | 10,448 |         |  |         | 18,580  |         |  |         | 20,404  |        
|         |                                     |                    |         |        |                  |  |         |        |         |  |         |        
|         |                                     |                    | 105,507 |        |                  |  | 105,801 |        |         |  | 209,579 |         |         |  | 206,497 |        
|         |                                     |                    |         |        |                  |  |         |        |         |  |         |        
|         | Operating income                    |                    | $       | 16,925 |                  |  | $       | 12,787 |         |  | $       | 35,656  |         |  | $       | 28,443  |        
|         |                                     |                    |         |        |                  |  |         |        |         |  |         |        



| |                   
| | ------------------
| | b.     Oil and Gas



17



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##### Table of Contents



AMERICAN REAL ESTATE PARTNERS, L.P.


FORM 10-Q JUNE 30, 2005


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)  (Continued)






|                                         |  |             |         |  |              |   |         | 
|---------------------------------------- |  | ----------- | ------- |  | ------------ | - | ------- | 
|                                         |  | June 30,    |         |  | December 31, |  
|                                         |  | 2005        |         |  | 2004         |  
|                                         |  |             |         |  |              |  
|                                         |  | (In $000s)  |        
|                                         |  | (Unaudited) |        
|Current assets                           |  | $           | 101,272 |  |              | $ | 81,748  | 
|Oil and gas properties, full cost method |  |             | 604,685 |  |              |   | 527,384 | 
|Other noncurrent assets                  |  |             | 41,690  |  |              |   | 50,067  | 
|                                         |  |             |         |  |              |  
|Total assets                             |  | $           | 747,647 |  |              | $ | 659,199 | 
|                                         |  |             |         |  |              |  
|Current liabilities                      |  | $           | 75,881  |  |              | $ | 63,148  | 
|Noncurrent liabilities                   |  |             | 171,495 |  |              |   | 336,933 | 
|                                         |  |             |         |  |              |  
|Total liabilities                        |  |             | 247,376 |  |              |   | 400,081 | 
|Equity                                   |  |             | 500,271 |  |              |   | 259,118 | 
|                                         |  |             |         |  |              |  
|Total liabilities and equity             |  | $           | 747,647 |  |              | $ | 659,199 | 
|                                         |  |             |         |  |              |  



|                   |                                          |                    |        |        |                  |   |        |        |   |   |        |        |  |   |        |        | 
|------------------ | ---------------------------------------- | ------------------ | ------ | ------ | ---------------- | - | ------ | ------ | - | - | ------ | ------ |  | - | ------ | ------ | 
|                   |                                          | Three Months Ended |        |        | Six Months Ended |  
|                   |                                          | June 30,           |        |        | June 30,         |  
|                   |                                          |                    |        |        |                  |  
|                   |                                          | 2005               |        |        | 2004             |   |        | 2005   |   |   | 2004   |       
|                   |                                          |                    |        |        |                  |   |        |        |   |   |        |       
|                   |                                          | (In $000s)         |       
|                   |                                          | (Unaudited)        |       
|Revenues           |                                          | $                  | 73,378 |        |                  | $ | 21,911 |        |   | $ | 89,071 |        |  | $ | 63,032 |       
|                   |                                          |                    |        |        |                  |   |        |        |   |   |        |       
|Cost and expenses: |                                          |                    |        |        |                  |   |        |        |   |   |        |        |  |   |        |       
|                   | Oil and gas operating expenses           |                    |        | 11,524 |                  |   |        | 7,467  |   |   |        | 23,951 |  |   |        | 15,293 | 
|                   | Depreciation, depletion and amortization |                    |        | 25,348 |                  |   |        | 14,610 |   |   |        | 46,776 |  |   |        | 31,111 | 
|                   | General and administrative expenses      |                    |        | 4,601  |                  |   |        | 3,139  |   |   |        | 7,944  |  |   |        | 5,875  | 
|                   |                                          |                    |        |        |                  |   |        |        |   |   |        |       
|                   | Total expenses                           |                    |        | 41,473 |                  |   |        | 25,216 |   |   |        | 78,671 |  |   |        | 52,279 | 
|                   |                                          |                    |        |        |                  |   |        |        |   |   |        |       
|                   | Operating income (loss)                  |                    | $      | 31,905 |                  |   | $      | (3,305 | ) |   | $      | 10,400 |  |   | $      | 10,753 | 
|                   |                                          |                    |        |        |                  |   |        |        |   |   |        |       







18



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##### Table of Contents



AMERICAN REAL ESTATE PARTNERS, L.P.


FORM 10-Q JUNE 30, 2005


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)  (Continued)




| |                   
| | ------------------
| | c.     Real Estate



Rental Real Estate.


Property Development and Associated Resort Activities.




|                     |                     |             |         |         |              |  |         |         | 
|-------------------- | ------------------- | ----------- | ------- | ------- | ------------ |  | ------- | ------- | 
|                     |                     | June 30,    |         |         | December 31, | 
|                     |                     | 2005        |         |         | 2004         | 
|                     |                     |             |         |         |              | 
|                     |                     | (In $000s)  |        
|                     |                     | (Unaudited) |        
|Rental properties    |                     |             |         |         |              |  |         |        
|                     | Finance leases, net |             | $       | 75,158  |              |  | $       | 85,281  | 
|                     | Operating leases    |             |         | 43,484  |              |  |         | 49,118  | 
|Property development |                     |             | 102,857 |         |              |  | 106,537 |        
|Resort properties    |                     |             | 46,354  |         |              |  | 50,132  |        
|                     |                     |             |         |         |              | 
|                     | Total real estate   |             | $       | 267,853 |              |  | $       | 291,068 | 
|                     |                     |             |         |         |              | 



19



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##### Table of Contents



AMERICAN REAL ESTATE PARTNERS, L.P.


FORM 10-Q JUNE 30, 2005


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)  (Continued)




|                    |                      |                                     |   |             |                  |  |   |        |        |  |      |        |        |  |   |        |        | 
|------------------- | -------------------- | ----------------------------------- | - | ----------- | ---------------- |  | - | ------ | ------ |  | ---- | ------ | ------ |  | - | ------ | ------ | 
|                    |                      | Three Months Ended                  |   |             | Six Months Ended | 
|                    |                      | June 30,                            |   |             | June 30,         | 
|                    |                      |                                     |   |             |                  | 
|                    |                      | 2005                                |   |             | 2004             |  |   | 2005   |        |  | 2004 |       
|                    |                      |                                     |   |             |                  |  |   |        |        |  |      |       
|                    |                      |                                     |   | (In $000s)  |                  |  |  
|                    |                      |                                     |   | (Unaudited) |                  |  |  
|Revenues:           |                      |                                     |   |             |                  |  |   |        |        |  |      |        |        |  |   |       
|                    | Rental real estate:  |                                     |   |             |                  |  |   |        |        |  |      |        |        |  |   |        |       
|                    |                      | Interest income on financing leases |   | $           | 1,801            |  |   | $      | 2,490  |  |      | $      | 3,767  |  |   | $      | 5,426  | 
|                    |                      | Rental income                       |   |             | 1,982            |  |   |        | 1,901  |  |      |        | 4,017  |  |   |        | 3,792  | 
|                    | Property development |                                     |   | 14,459      |                  |  |   | 12,443 |        |  |      | 22,738 |        |  |   | 17,457 |       
|                    | Resort activities    |                                     |   | 6,603       |                  |  |   | 2,938  |        |  |      | 12,166 |        |  |   | 4,273  |       
|                    |                      |                                     |   |             |                  |  |   |        |        |  |      |       
|                    |                      | Total revenues                      |   |             | 24,845           |  |   |        | 19,772 |  |      |        | 42,688 |  |   |        | 30,948 | 
|                    |                      |                                     |   |             |                  |  |   |        |        |  |      |       
|Operating expenses: |                      |                                     |   |             |                  |  |   |        |        |  |      |        |        |  |   |       
|                    | Rental real estate   |                                     | $ | 1,404       |                  |  | $ | 1,417  |        |  | $    | 3,456  |        |  | $ | 3,564  |       
|                    | Property development |                                     |   | 11,310      |                  |  |   | 7,705  |        |  |      | 18,357 |        |  |   | 11,063 |       
|                    | Resort activities    |                                     |   | 7,432       |                  |  |   | 2,867  |        |  |      | 14,028 |        |  |   | 4,937  |       
|                    |                      |                                     |   |             |                  |  |   |        |        |  |      |       
|                    |                      | Total expenses                      |   |             | 20,146           |  |   |        | 11,989 |  |      |        | 35,841 |  |   |        | 19,564 | 
|                    |                      |                                     |   |             |                  |  |   |        |        |  |      |       
|                    |                      | Operating income                    |   | $           | 4,699            |  |   | $      | 7,783  |  |      | $      | 6,847  |  |   | $      | 11,384 | 
|                    |                      |                                     |   |             |                  |  |   |        |        |  |      |       



|                                            |  |                              |       |  |                  |  |        |      |  |   |        |   |  |  |         |  
|------------------------------------------- |  | ---------------------------- | ----- |  | ---------------- |  | ------ | ---- |  | - | ------ | - |  |  | ------- | -
|                                            |  | Three Months Ended           |       |  | Six Months Ended | 
|                                            |  | June 30,                     |       |  | June 30,         | 
|                                            |  |                              |       |  |                  | 
|                                            |  | 2005                         |       |  | 2004             |  |        | 2005 |  |   | 2004   |  
|                                            |  |                              |       |  |                  |  |        |      |  |   |        |  
|                                            |  | (In $000s, except unit data) |      
|                                            |  | (Unaudited)                  |      
|Properties sold                             |  |                              | 7     |  |                  |  | 25     |      |  |   | 11     |   |  |  | 33      |  
|Proceeds received                           |  | $                            | 4,856 |  |                  |  | 99,349 |      |  | $ | 37,608 |   |  |  | 118,087 |  
|Mortgage debt                               |  |                              |      |  |                  |  |       |      |  |   | 10,702 |   |  |  | 93,845  |  
|Total gain recorded                         |  |                              | 2,644 |  |                  |  | 48,032 |      |  |   | 15,834 |   |  |  | 61,007  |  
|Gain (loss) recorded in operations          |  | $                            |      |  |                  |  | 225    |      |  | $ | (176   | ) |  |  | (5,821  | )
|Gain recorded in discontinued operations(i) |  |                              | 2,644 |  |                  |  | 48,257 |      |  |   | 15,658 |   |  |  | 55,186  |  






|    |                                                                                                                                                                      
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(i) | A gain of $5.7 million on the sale of resort properties was
    recognized in the three months ended March 31, 2005 in
    addition to gains on the rental portfolio.



|   |            
|-- | -----------
|6. | Investments



| |                   
| | ------------------
| | Trading Securities



20



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##### Table of Contents



AMERICAN REAL ESTATE PARTNERS, L.P.


FORM 10-Q JUNE 30, 2005


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)  (Continued)








| |                   
| | ------------------
| | Available for sale

|                        |                                        |               |         |         |                   |   |         |           |  |   |          |         |  |   |         |         | 
|----------------------- | -------------------------------------- | ------------- | ------- | ------- | ----------------- | - | ------- | --------- |  | - | -------- | ------- |  | - | ------- | ------- | 
|                        |                                        | June 30, 2005 |         |         | December 31, 2004 |  
|                        |                                        |               |         |         |                   |  
|                        |                                        | Amortized     |         |         | Carrying          |   |         | Amortized |  |   | Carrying |        
|                        |                                        | Cost          |         |         | Value             |   |         | Cost      |  |   | Value    |        
|                        |                                        |               |         |         |                   |   |         |           |  |   |          |        
|                        |                                        | (Unaudited)   |        
|Current Investments:    |                                        |               |         |         |                   |   |         |           |  |   |          |         |  |   |         |        
|                        | U.S. government and agency obligations |               | $       | 57,598  |                   |   | $       | 57,598    |  |   | $        | 96,840  |  |   | $       | 96,840  | 
|                        | Marketable equity and debt securities  |               |         | 51,669  |                   |   |         | 46,031    |  |   |          | 2,248   |  |   |         | 2,248   | 
|                        |                                        |               |         |         |                   |   |         |           |  |   |          |        
|                        |                                        | $             | 109,267 |         |                   | $ | 103,629 |           |  | $ | 99,088   |         |  | $ | 99,088  |        
|                        |                                        |               |         |         |                   |   |         |           |  |   |          |        
|Non-Current Investments |                                        |               |         |         |                   |   |         |           |  |   |          |         |  |   |         |        
|                        | U.S. government and agency obligations |               | $       | 5,000   |                   |   | $       | 5,000     |  |   | $        | 5,491   |  |   | $       | 5,491   | 
|                        | WestPoint Stevens debt (note 21)       |               |         | 205,850 |                   |   |         | 205,850   |  |   |          | 205,850 |  |   |         | 205,850 | 
|                        | Other                                  |               |         | 752     |                   |   |         | 752       |  |   |          | 40,098  |  |   |         | 40,098  | 
|                        |                                        |               |         |         |                   |   |         |           |  |   |          |        
|                        |                                        | $             | 211,602 |         |                   | $ | 211,602 |           |  | $ | 251,439  |         |  | $ | 251,439 |        
|                        |                                        |               |         |         |                   |   |         |           |  |   |          |        



|   |                                   
|-- | ----------------------------------
|7. | Trade, Notes and Other Receivables





|   |                              
|-- | -----------------------------
|8. | Property, Plant and Equipment



|            |  |               |           |             |                   |   |          |     |  |   |             |  |  |              |           |  |     |   |          |   |  |   |           | 
|----------- |  | ------------- | --------- | ----------- | ----------------- | - | -------- | --- |  | - | ----------- |  |  | ------------ | --------- |  | --- | - | -------- | - |  | - | --------- | 
|            |  | June 30, 2005 |           |             | December 31, 2004 |  
|            |  |               |           |             |                   |  
|            |  |               |           | Accumulated |                   |   |          |     |  |   | Accumulated |  |  |             
|            |  |               |           | Depletion/  |                   |   |          |     |  |   | Depletion/  |  |  |             
|            |  | Cost          |           |             | Depreciation      |   |          | Net |  |   | Cost        |  |  | Depreciation |           |  | Net |  
|            |  |               |           |             |                   |   |          |     |  |   |             |  |  |              |           |  |     |  
|            |  | (In $000s)    |          
|Oil and Gas |  | $             | 1,050,799 |             |                   | $ | (446,114 | )   |  | $ | 604,685     |  |  | $            | 928,689   |  |     | $ | (401,305 | ) |  | $ | 527,384   | 
|Gaming      |  |               | 615,019   |             |                   |   | (159,207 | )   |  |   | 455,812     |  |  |              | 602,673   |  |     |   | (141,673 | ) |  |   | 461,000   | 
|Real Estate |  |               | 294,678   |             |                   |   | (26,825  | )   |  |   | 267,853     |  |  |              | 311,230   |  |     |   | (20,162  | ) |  |   | 291,068   | 
|            |  |               |           |             |                   |   |          |     |  |   |             |  |  |              |           |  |     |  
|Total P,P&E |  | $             | 1,960,496 |             |                   | $ | (632,146 | )   |  | $ | 1,328,350   |  |  | $            | 1,842,592 |  |     | $ | (563,140 | ) |  | $ | 1,279,452 | 
|            |  |               |           |             |                   |   |          |     |  |   |             |  |  |              |           |  |     |  





|   |                                     
|-- | ------------------------------------
|9. | Other Current and Non-Current Assets



21



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##### Table of Contents



AMERICAN REAL ESTATE PARTNERS, L.P.


FORM 10-Q JUNE 30, 2005


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)  (Continued)






|                       |  |            |         |  |              |   |         | 
|---------------------- |  | ---------- | ------- |  | ------------ | - | ------- | 
|                       |  | June 30,   |         |  | December 31, |  
|                       |  | 2005       |         |  | 2004         |  
|                       |  |            |         |  |              |  
|                       |  | (In $000s) |        
|Deferred taxes         |  | $          | 54,147  |  |              | $ | 56,416  | 
|Deferred finance costs |  |            | 27,257  |  |              |   | 38,912  | 
|Restricted deposits    |  |            | 21,260  |  |              |   | 23,519  | 
|Other                  |  |            | 22,530  |  |              |   | 6,714   | 
|                       |  |            |         |  |              |  
|                       |  | $          | 125,194 |  |              | $ | 125,561 | 
|                       |  |            |         |  |              |  





|    |                              
|--- | -----------------------------
|10. | Other Non-Current Liabilities



|                      |  |            |         |  |              |   |         | 
|--------------------- |  | ---------- | ------- |  | ------------ | - | ------- | 
|                      |  | June 30,   |         |  | December 31, |  
|                      |  | 2005       |         |  | 2004         |  
|                      |  |            |         |  |              |  
|                      |  | (In $000s) |        
|Long-term liabilities |  | $          | 82,444  |  |              | $ | 92,789  | 
|Minority interest     |  |            | 26,594  |  |              |   | 17,740  | 
|Other                 |  |            | 2,444   |  |              |   |        | 
|                      |  |            |         |  |              |  
|                      |  | $          | 111,482 |  |              | $ | 110,529 | 
|                      |  |            |         |  |              |  



|    |                                  
|--- | ---------------------------------
|11. | Current Portion of Long-Term Debt



|                  |  |            |        |  |              |   |        | 
|----------------- |  | ---------- | ------ |  | ------------ | - | ------ | 
|                  |  | June 30,   |        |  | December 31, |  
|                  |  | 2005       |        |  | 2004         |  
|                  |  |            |        |  |              |  
|                  |  | (In $000s) |       
|GBH 11% Notes     |  | $          | 43,741 |  |              | $ | 43,741 | 
|Mortgages payable |  |            | 23,765 |  |              |   | 31,177 | 
|Other             |  |            | 2,656  |  |              |   | 1,761  | 
|                  |  |            |        |  |              |  
|                  |  | $          | 70,162 |  |              | $ | 76,679 | 
|                  |  |            |        |  |              |  



| |              
| | -------------
| | GBH 11% Notes



22



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##### Table of Contents



AMERICAN REAL ESTATE PARTNERS, L.P.


FORM 10-Q JUNE 30, 2005


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)  (Continued)




|    |               
|--- | --------------
|12. | Long Term Debt



|                                           |  |            |           |  |              |   |         | 
|------------------------------------------ |  | ---------- | --------- |  | ------------ | - | ------- | 
|                                           |  | June 30,   |           |  | December 31, |  
|                                           |  | 2005       |           |  | 2004         |  
|                                           |  |            |           |  |              |  
|                                           |  | (In $000s) |          
|Senior unsecured 7.125% notes due 2013     |  | $          | 480,000   |  |              | $ |        | 
|Senior unsecured 8.125% notes due 2012     |  |            | 350,760   |  |              |   | 350,598 | 
|Senior secured 7.85% notes due 2012        |  |            | 215,000   |  |              |   | 215,000 | 
|Borrowings under credit facilities         |  |            | 110,934   |  |              |   | 51,834  | 
|Mortgages payable                          |  |            | 83,649    |  |              |   | 91,896  | 
|Other                                      |  |            | 4,298     |  |              |   | 4,977   | 
|                                           |  |            |           |  |              |  
|Total long-term debt                       |  |            | 1,244,641 |  |              |   | 714,305 | 
|Less: current portion of mortgages payable |  |            | 23,765    |  |              |   | 31,177  | 
|                                           |  |            |           |  |              |  
|                                           |  | $          | 1,220,876 |  |              | $ | 683,128 | 
|                                           |  |            |           |  |              |  



| |                                       
| | --------------------------------------
| | Senior Unsecured 7.125% Notes Due 2013







| |                                 
| | --------------------------------
| | Borrowings Under Credit Facility



23



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##### Table of Contents



AMERICAN REAL ESTATE PARTNERS, L.P.


FORM 10-Q JUNE 30, 2005


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)  (Continued)












|    |                       
|--- | ----------------------
|13. | Other Income (Expense)



|                                            |  |                    |         |   |                  |   |        |      |  |   |       |   |  |   |        |  
|------------------------------------------- |  | ------------------ | ------- | - | ---------------- | - | ------ | ---- |  | - | ----- | - |  | - | ------ | -
|                                            |  | Three Months Ended |         |   | Six Months Ended |  
|                                            |  | June 30,           |         |   | June 30,         |  
|                                            |  |                    |         |   |                  |  
|                                            |  | 2005               |         |   | 2004             |   |        | 2005 |  |   | 2004  |  
|                                            |  |                    |         |   |                  |   |        |      |  |   |       |  
|                                            |  | (In $000s)         |        
|                                            |  | (Unaudited)        |        
|Net gains (losses) on marketable securities |  | $                  | (21,324 | ) |                  | $ | 8,310  |      |  | $ | 380   |   |  | $ | 37,167 |  
|Minority interest                           |  |                    | 616     |   |                  |   | 75     |      |  |   | 1,547 |   |  |   | 744    |  
|Gain on sale or disposition of real estate  |  |                    | (10     | ) |                  |   | (225   | )    |  |   | 176   |   |  |   | 5,821  |  
|Other                                       |  |                    | (162    | ) |                  |   | (1,099 | )    |  |   | (599  | ) |  |   | (1,808 | )
|                                            |  |                    |         |   |                  |   |        |      |  |   |       |  
|                                            |  | $                  | (20,880 | ) |                  | $ | 7,061  |      |  | $ | 1,504 |   |  | $ | 41,924 |  
|                                            |  |                    |         |   |                  |   |        |      |  |   |       |  





|    |                
|--- | ---------------
|14. | Preferred Units



24



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AMERICAN REAL ESTATE PARTNERS, L.P.


FORM 10-Q JUNE 30, 2005


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)  (Continued)




|    |                                      
|--- | -------------------------------------
|15. | Earnings Per Limited Partnership Unit



|                                                                                            |                                            |                                  |            |       |                  |   |            |      |  |   |            |      |  |   |            |      | 
|------------------------------------------------------------------------------------------- | ------------------------------------------ | -------------------------------- | ---------- | ----- | ---------------- | - | ---------- | ---- |  | - | ---------- | ---- |  | - | ---------- | ---- | 
|                                                                                            |                                            | Three Months Ended               |            |       | Six Months Ended |  
|                                                                                            |                                            | June 30,                         |            |       | June 30,         |  
|                                                                                            |                                            |                                  |            |       |                  |  
|                                                                                            |                                            | 2005                             |            |       | 2004             |   |            | 2005 |  |   | 2004       |     
|                                                                                            |                                            |                                  |            |       |                  |   |            |      |  |   |            |     
|                                                                                            |                                            | (In $000s, except per unit data) |           
|Attributable to Limited Partners:                                                           |                                            |                                  |            |       |                  |   |            |      |  |   |            |      |  |   |            |     
|Basic income (loss) from continuing operations                                              |                                            | $                                | (12,411    | )     |                  | $ | 27,100     |      |  | $ | 16,110     |      |  | $ | 72,004     |     
|Add Preferred LP Unit distribution                                                          |                                            |                                  | 1,323      |       |                  |   | 1,260      |      |  |   | 2,583      |      |  |   | 2,461      |     
|                                                                                            |                                            |                                  |            |       |                  |   |            |      |  |   |            |     
|Income (loss) before discontinued operations                                                |                                            |                                  | (11,088    | )     |                  |   | 28,360     |      |  |   | 18,693     |      |  |   | 74,465     |     
|Income from discontinued operations                                                         |                                            |                                  | 2,775      |       |                  |   | 48,912     |      |  |   | 22,063     |      |  |   | 58,629     |     
|                                                                                            |                                            |                                  |            |       |                  |   |            |      |  |   |            |     
|Diluted earnings (loss)                                                                     |                                            | $                                | (8,313     | )     |                  | $ | 77,272     |      |  | $ | 40,756     |      |  | $ | 133,094    |     
|                                                                                            |                                            |                                  |            |       |                  |   |            |      |  |   |            |     
|Weighted average limited partnership units outstanding                                      |                                            |                                  | 46,271,455 |       |                  |   | 46,098,284 |      |  |   | 46,185,348 |      |  |   | 46,098,284 |     
|Dilutive effect of redemption of Preferred LP Units                                         |                                            |                                  | 3,904,994  |       |                  |   | 5,839,749  |      |  |   | 3,788,634  |      |  |   | 6,120,384  |     
|                                                                                            |                                            |                                  |            |       |                  |   |            |      |  |   |            |     
|Weighted average limited partnership units and equivalent
    partnership units outstanding |                                            |                                  | 50,176,449 |       |                  |   | 51,938,033 |      |  |   | 49,973,982 |      |  |   | 52,218,668 |     
|                                                                                            |                                            |                                  |            |       |                  |   |            |      |  |   |            |     
|Basic earnings:                                                                             |                                            |                                  |            |       |                  |   |            |      |  |   |            |      |  |   |            |     
|                                                                                            | Income (loss) from continuing operations   |                                  | $          | (0.27 | )                |   | $          | 0.59 |  |   | $          | 0.35 |  |   | $          | 1.56 | 
|                                                                                            | Income (loss) from discontinued operations |                                  |            | 0.06  |                  |   |            | 1.06 |  |   |            | 0.48 |  |   |            | 1.27 | 
|                                                                                            |                                            |                                  |            |       |                  |   |            |      |  |   |            |     
|Basic earnings (loss) per LP unit                                                           |                                            | $                                | (0.21      | )     |                  | $ | 1.65       |      |  | $ | 0.83       |      |  | $ | 2.83       |     
|                                                                                            |                                            |                                  |            |       |                  |   |            |      |  |   |            |     
|Diluted earnings:(i)                                                                        |                                            |                                  |            |       |                  |   |            |      |  |   |            |      |  |   |            |     
|                                                                                            | Income (loss) from continuing operations   |                                  | $          | (0.27 | )                |   | $          | 0.55 |  |   | $          | 0.35 |  |   | $          | 1.43 | 
|                                                                                            | Income (loss) from discontinued operations |                                  |            | 0.06  |                  |   |            | 0.94 |  |   |            | 0.44 |  |   |            | 1.12 | 
|                                                                                            |                                            |                                  |            |       |                  |   |            |      |  |   |            |     
|Diluted earnings (loss) per LP unit                                                         |                                            | $                                | (0.21      | )     |                  | $ | 1.49       |      |  | $ | 0.79       |      |  | $ | 2.55       |     
|                                                                                            |                                            |                                  |            |       |                  |   |            |      |  |   |            |     






|    |                                                                                                                                                                                                                                    
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(i) | The computation of diluted earnings per LP unit for the three
    months ended June 30, 2005 excludes the impact of the
    redemption of the Preferred LP units as the impact of the
    redemption would have been anti-dilutive.



|    |                             
|--- | ----------------------------
|16. | Asset Retirement Obligations



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AMERICAN REAL ESTATE PARTNERS, L.P.


FORM 10-Q JUNE 30, 2005


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)  (Continued)




|                                                |  |             |         |   |              |   |        |  
|----------------------------------------------- |  | ----------- | ------- | - | ------------ | - | ------ | -
|                                                |  | June 30,    |         |   | December 31, |  
|                                                |  | 2005        |         |   | 2004         |  
|                                                |  |             |         |   |              |  
|                                                |  | (In $000s): |        
|Asset retirement obligation-beginning of period |  | $           | 56,524  |   |              | $ | 6,746  |  
|Accretion expense                               |  |             | 1,620   |   |              |   | 593    |  
|Acquistions                                     |  |             |        |   |              |   | 49,538 |  
|Liabilities sold                                |  |             | (16,758 | ) |              |   |       |  
|Revisions/settlements                           |  |             |        |   |              |   | (353   | )
|                                                |  |             |         |   |              |  
|Asset retirement obligation-end of period       |  | $           | 41,386  |   |              | $ | 56,524 |  
|                                                |  |             |         |   |              |  



|    |                        
|--- | -----------------------
|17. | Oil and Gas Derivatives



|                 |  |                  |                |  |                  |  |               |       |  |   |         |  |  |   |       | 
|---------------- |  | ---------------- | -------------- |  | ---------------- |  | ------------- | ----- |  | - | ------- |  |  | - | ----- | 
|Type of Contract |  | Production Month |                |  | Volume per Month |  |               | Floor |  |   | Ceiling | 
|                 |  |                  |                |  |                  |  |               |       |  |   |         | 
|No cost collars  |  |                  | Jan-Dec 2005   |  |                  |  | 40,000 Bbls   |       |  | $ | 42.50   |  |  | $ | 46.00 | 
|No cost collars  |  |                  | March-Dec 2005 |  |                  |  | 14,000 Bbls   |       |  |   | 44.50   |  |  |   | 48.00 | 
|No cost collars  |  |                  | Jan-Dec 2005   |  |                  |  | 25,000 Bbls   |       |  |   | 43.60   |  |  |   | 45.80 | 
|No cost collars  |  |                  | March-Dec 2005 |  |                  |  | 250,000 MMBTU |       |  |   | 6.05    |  |  |   | 7.30  | 
|No cost collars  |  |                  | Jan-Dec 2005   |  |                  |  | 550,000 MMBTU |       |  |   | 6.00    |  |  |   | 8.35  | 
|No cost collars  |  |                  | Jan-Dec 2005   |  |                  |  | 300,000 MMBTU |       |  |   | 3.25    |  |  |   | 4.60  | 
|No cost collars  |  |                  | Jan-Dec 2005   |  |                  |  | 300,000 MMBTU |       |  |   | 4.75    |  |  |   | 5.45  | 
|No cost collars  |  |                  | Jan-Dec 2005   |  |                  |  | 250,000 MMBTU |       |  |   | 6.00    |  |  |   | 8.70  | 
|No cost collars  |  |                  | Jan-Dec 2006   |  |                  |  | 31,000 Bbls   |       |  |   | 41.65   |  |  |   | 45.25 | 
|No cost collars  |  |                  | Jan-Dec 2006   |  |                  |  | 16,000 Bbls   |       |  |   | 41.75   |  |  |   | 45.40 | 
|No cost collars  |  |                  | Jan-Dec 2006   |  |                  |  | 570,000 MMBTU |       |  |   | 6.00    |  |  |   | 7.25  | 
|No cost collars  |  |                  | Jan-Dec 2006   |  |                  |  | 120,000 MMBTU |       |  |   | 6.00    |  |  |   | 7.28  | 
|No cost collars  |  |                  | Jan-Dec 2006   |  |                  |  | 500,000 MMBTU |       |  |   | 4.50    |  |  |   | 5.00  | 



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AMERICAN REAL ESTATE PARTNERS, L.P.


FORM 10-Q JUNE 30, 2005


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)  (Continued)




|                              |                        |                    |        |            |                  |   |        |        |  |   |        |        |  |   |        |        | 
|----------------------------- | ---------------------- | ------------------ | ------ | ---------- | ---------------- | - | ------ | ------ |  | - | ------ | ------ |  | - | ------ | ------ | 
|                              |                        | Three Months Ended |        |            | Six Months Ended |  
|                              |                        | June 30,           |        |            | June 30,         |  
|                              |                        |                    |        |            |                  |  
|                              |                        | 2005               |        |            | 2004             |   |        | 2005   |  |   | 2004   |       
|                              |                        |                    |        |            |                  |   |        |        |  |   |        |       
|                              |                        |                    |        | (In $000s) |                  |   |       
|Realized loss (cash payments) |                        | $                  | 4,835  |            |                  | $ | 3,939  |        |  | $ | 7,967  |        |  | $ | 3,866  |       
|                              | Unrealized (gain) loss |                    |        | (6,936     | )                |   |        | 14,456 |  |   |        | 31,833 |  |   |        | 13,817 | 
|                              |                        |                    |        |            |                  |   |        |        |  |   |        |       
|                              |                        | $                  | (2,101 | )          |                  | $ | 18,395 |        |  | $ | 39,800 |        |  | $ | 17,683 |       
|                              |                        |                    |        |            |                  |   |        |        |  |   |        |       





|    |                  
|--- | -----------------
|18. | Segment Reporting









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AMERICAN REAL ESTATE PARTNERS, L.P.


FORM 10-Q JUNE 30, 2005


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)  (Continued)




|                                                              |                                   |                             |         |         |                  |   |         |         |        |   |         |         |        |   |         |         |        |  
|------------------------------------------------------------- | --------------------------------- | --------------------------- | ------- | ------- | ---------------- | - | ------- | ------- | ------ | - | ------- | ------- | ------ | - | ------- | ------- | ------ | -
|                                                              |                                   | Three Months Ended          |         |         | Six Months Ended |  
|                                                              |                                   | June 30,                    |         |         | June 30,         |  
|                                                              |                                   |                             |         |         |                  |  
|                                                              |                                   | 2005                        |         |         | 2004             |   |         | 2005    |        |   | 2004    |        
|                                                              |                                   |                             |         |         |                  |   |         |         |        |   |         |        
|                                                              |                                   | (In $000s)                  |        
|Revenues:                                                     |                                   |                             |         |         |                  |   |         |         |        |   |         |         |        |   |         |        
|                                                              | Oil and gas                       |                             | $       | 73,378  |                  |   | $       | 21,911  |        |   | $       | 89,071  |        |   | $       | 63,032  |       
|                                                              | Gaming                            |                             |         | 122,432 |                  |   |         | 118,588 |        |   |         | 245,235 |        |   |         | 234,940 |       
|                                                              | Real estate                       |                             |         |         |                  |   |         |         |        |   |         |         |        |   |         |         |       
|                                                              |                                   | Property development        |         |         | 14,459           |   |         |         | 12,443 |   |         |         | 22,738 |   |         |         | 17,457 |  
|                                                              |                                   | Rental real estate          |         |         | 3,783            |   |         |         | 4,391  |   |         |         | 7,784  |   |         |         | 9,218  |  
|                                                              |                                   | Resort operating properties |         |         | 6,603            |   |         |         | 2,938  |   |         |         | 12,166 |   |         |         | 4,273  |  
|                                                              |                                   |                             |         |         |                  |   |         |         |        |   |         |        
|                                                              |                                   | Total real estate           |         |         | 24,845           |   |         |         | 19,772 |   |         |         | 42,688 |   |         |         | 30,948 |  
|                                                              |                                   |                             |         |         |                  |   |         |         |        |   |         |        
|                                                              | Total revenues                    |                             | $       | 220,655 |                  |   | $       | 160,271 |        |   | $       | 376,994 |        |   | $       | 328,920 |       
|                                                              |                                   |                             |         |         |                  |   |         |         |        |   |         |        
|Net segment operating income:                                 |                                   |                             |         |         |                  |   |         |         |        |   |         |         |        |   |         |        
|                                                              | Oil and gas                       |                             | $       | 31,905  |                  |   | $       | (3,305  | )      |   | $       | 10,400  |        |   | $       | 10,753  |       
|                                                              | Gaming                            |                             |         | 16,925  |                  |   |         | 12,787  |        |   |         | 35,656  |        |   |         | 28,443  |       
|                                                              | Real estate                       |                             |         |         |                  |   |         |         |        |   |         |         |        |   |         |         |       
|                                                              |                                   | Property development        |         |         | 3,149            |   |         |         | 4,738  |   |         |         | 4,381  |   |         |         | 6,394  |  
|                                                              |                                   | Rental real estate          |         |         | 2,379            |   |         |         | 2,974  |   |         |         | 4,328  |   |         |         | 5,654  |  
|                                                              |                                   | Resort operating properties |         |         | (829             | ) |         |         | 71     |   |         |         | (1,862 | ) |         |         | (664   | )
|                                                              |                                   |                             |         |         |                  |   |         |         |        |   |         |        
|                                                              |                                   | Total real estate earnings  |         |         | 4,699            |   |         |         | 7,783  |   |         |         | 6,847  |   |         |         | 11,384 |  
|                                                              |                                   |                             |         |         |                  |   |         |         |        |   |         |        
|                                                              | Total segment operating income    |                             |         | 53,529  |                  |   |         | 17,265  |        |   |         | 52,903  |        |   |         | 50,580  |       
|                                                              |                                   |                             |         |         |                  |   |         |         |        |   |         |        
|Holding company costs(i)                                      |                                   |                             | (5,234  | )       |                  |   | (1,838  | )       |        |   | (8,986  | )       |        |   | (3,177  | )      
|                                                              |                                   |                             |         |         |                  |   |         |         |        |   |         |        
|Total operating income                                        |                                   |                             | 48,295  |         |                  |   | 15,427  |         |        |   | 43,917  |         |        |   | 47,403  |        
|                                                              |                                   |                             |         |         |                  |   |         |         |        |   |         |        
|Interest expense                                              |                                   |                             | (28,330 | )       |                  |   | (14,724 | )       |        |   | (51,453 | )       |        |   | (25,271 | )      
|Interest and other income                                     |                                   |                             | 16,115  |         |                  |   | 17,447  |         |        |   | 32,873  |         |        |   | 23,967  |        
|Other income (expense)                                        |                                   |                             | (20,880 | )       |                  |   | 7,061   |         |        |   | 1,504   |         |        |   | 41,924  |        
|Income tax expense                                            |                                   |                             | (9,029  | )       |                  |   | (3,944  | )       |        |   | (12,436 | )       |        |   | (10,176 | )      
|                                                              |                                   |                             |         |         |                  |   |         |         |        |   |         |        
|                                                              | Income from continuing operations |                             | $       | 6,171   |                  |   | $       | 21,267  |        |   | $       | 14,405  |        |   | $       | 77,847  |       
|                                                              |                                   |                             |         |         |                  |   |         |         |        |   |         |        
|Depreciation, depletion and amortization (D, D&A) by segment: |                                   |                             |         |         |                  |   |         |         |        |   |         |         |        |   |         |        
|                                                              | Oil and gas                       |                             | $       | 25,348  |                  |   | $       | 14,610  |        |   | $       | 46,776  |        |   | $       | 31,111  |       
|                                                              | Gaming                            |                             |         | 9,360   |                  |   |         | 10,448  |        |   |         | 18,580  |        |   |         | 20,404  |       
|                                                              | Real estate                       |                             |         |         |                  |   |         |         |        |   |         |         |        |   |         |         |       
|                                                              | Rental real estate                |                             |         | 410     |                  |   |         | 521     |        |   |         | 1,030   |        |   |         | 1,280   |       
|                                                              | Resort operating properties       |                             |         | 870     |                  |   |         | 630     |        |   |         | 1,738   |        |   |         | 1,277   |       
|                                                              |                                   |                             |         |         |                  |   |         |         |        |   |         |        
|                                                              | Total real estate                 |                             |         | 1,280   |                  |   |         | 1,151   |        |   |         | 2,768   |        |   |         | 2,557   |       
|                                                              |                                   |                             |         |         |                  |   |         |         |        |   |         |        
|D,D&A in operating expenses                                   |                                   |                             | 35,988  |         |                  |   | 26,209  |         |        |   | 68,124  |         |        |   | 54,072  |        
|                                                              |                                   |                             |         |         |                  |   |         |         |        |   |         |        
|Amortization in interest expense                              |                                   |                             | 566     |         |                  |   | 127     |         |        |   | 1,039   |         |        |   | 183     |        
|                                                              |                                   |                             |         |         |                  |   |         |         |        |   |         |        
|Total D,D&A                                                   |                                   | $                           | 36,554  |         |                  | $ | 26,336  |         |        | $ | 69,163  |         |        | $ | 54,255  |        
|                                                              |                                   |                             |         |         |                  |   |         |         |        |   |         |        



|   |                                                                                                                                                                                                                                                                                    
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|i) | Holding company costs include general and administrative
    expenses and acquisition costs of the holding company. General
    and administrative expenses of the segments are included in
    their respective operating expenses in the accompanying
    statements of earnings.

28



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AMERICAN REAL ESTATE PARTNERS, L.P.


FORM 10-Q JUNE 30, 2005


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)  (Continued)


|                                   |             |            |   |         |              |  |   |         |           | 
|---------------------------------- | ----------- | ---------- | - | ------- | ------------ |  | - | ------- | --------- | 
|                                   |             | June 30,   |   |         | December 31, | 
|                                   |             | 2005       |   |         | 2004         | 
|                                   |             |            |   |         |              | 
|                                   |             | (In $000s) |  
|Property, plant and equipment, net |             |            |   |         |              |  |   |        
|                                   | Oil and gas |            | $ | 604,685 |              |  | $ | 527,384 |          
|                                   | Gaming      |            |   | 455,812 |              |  |   | 461,000 |          
|                                   | Real estate |            |   | 267,853 |              |  |   | 291,068 |          
|                                   |             |            |   |         |              | 
|                                   |             | Total      |   | $       | 1,328,352    |  |   | $       | 1,279,452 | 
|                                   |             |            |   |         |              | 



|    |             
|--- | ------------
|19. | Income Taxes



|         |  |                    |        |            |                  |   |        |      |  |   |         |   |  |   |         |  
|-------- |  | ------------------ | ------ | ---------- | ---------------- | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|         |  | Three Months Ended |        |            | Six Months Ended |  
|         |  | June 30,           |        |            | June 30,         |  
|         |  |                    |        |            |                  |  
|         |  | 2005               |        |            | 2004             |   |        | 2005 |  |   | 2004    |  
|         |  |                    |        |            |                  |   |        |      |  |   |         |  
|         |  |                    |        | (In $000s) |                  |   |       
|Current  |  | $                  | (2,487 | )          |                  | $ | 980    |      |  | $ | (3,841  | ) |  | $ | (3,941  | )
|Deferred |  |                    | (6,542 | )          |                  |   | (4,924 | )    |  |   | (8,595  | ) |  |   | (6,235  | )
|         |  |                    |        |            |                  |   |        |      |  |   |         |  
|         |  | $                  | (9,029 | )          |                  | $ | (3,944 | )    |  | $ | (12,436 | ) |  | $ | (10,176 | )
|         |  |                    |        |            |                  |   |        |      |  |   |         |  



|                     |                                  |                               |        |             |              |  |         |         |        | 
|-------------------- | -------------------------------- | ----------------------------- | ------ | ----------- | ------------ |  | ------- | ------- | ------ | 
|                     |                                  | June 30,                      |        |             | December 31, | 
|                     |                                  | 2005                          |        |             | 2004         | 
|                     |                                  |                               |        |             |              | 
|                     |                                  | (In $000s)                    |       
|                     |                                  |                               |        | (Unaudited) |             
|Deferred tax assets: |                                  |                               |        |             |              |  |         |        
|                     | Depreciation                     |                               | $      | 20,383      |              |  | $       | 16,871  |       
|                     | Net operating loss carryforwards |                               |        | 54,263      |              |  |         | 90,490  |       
|                     | Investment in NEG Holding LLC    |                               |        | (450        | )            |  |         | 5,333   |       
|                     | Other                            |                               |        | 24,631      |              |  |         | 36,940  |       
|                     |                                  |                               |        |             |              | 
|                     |                                  |                               | 98,827 |             |              |  | 149,634 |        
|                     | Valuation allowance              |                               |        | (41,995     | )            |  |         | (88,590 | )     
|                     |                                  |                               |        |             |              | 
|                     |                                  | Sub-total                     |        |             | 56,832       |  |         |         | 61,044 | 
|                     | Less current portion             |                               |        | (2,685      | )            |  |         | (4,628  | )     
|                     |                                  |                               |        |             |              | 
|                     |                                  | Long-term deferred tax assets |        | $           | 54,147       |  |         | $       | 56,416 | 
|                     |                                  |                               |        |             |              | 



29



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AMERICAN REAL ESTATE PARTNERS, L.P.


FORM 10-Q JUNE 30, 2005


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)  (Continued)












|    |                              
|--- | -----------------------------
|20. | Commitments and Contingencies





|    |                  
|--- | -----------------
|21. | Subsequent Events



| |           
| | ----------
| | Securities





| |                              
| | -----------------------------
| | WestPoint Stevens Acquisition





30



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##### Table of Contents



AMERICAN REAL ESTATE PARTNERS, L.P.


FORM 10-Q JUNE 30, 2005


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)  (Continued)








| |                                                                       
| | ----------------------------------------------------------------------
| | Offer to Acquire Remaining Shares in National Energy Group
    (NEG)



31



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##### Table of Contents








|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
    CONDITION AND RESULTS OF OPERATIONS





|   |         
|-- | --------
|1. | Overview



|   |                      
|-- | ---------------------
|2. | Results of Operations



| |   |                               
| | - | ------------------------------
| |  | Consolidated Financial Results
|
| |  | Gaming                        
|
| |  | Oil and Gas                   
|
| |  | Real Estate                   
|
| |  | Corporate and Investments     



|   |                                
|-- | -------------------------------
|3. | Liquidity and Capital Resources



| |   |                               
| | - | ------------------------------
| |  | Consolidated Financial Results
|
| |  | Gaming                        
|
| |  | Oil and Gas                   
|
| |  | Real Estate                   

4.                Certain
Trends and Uncertainties


Overview




Results of Operations




| |                               
| | ------------------------------
| | Consolidated Financial Results







| |                                                                                  
| | ---------------------------------------------------------------------------------
| | Three months ended June 30, 2005 compared to three
    months ended June 30, 2004



| |   |                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Increased operating income from oil and gas activities
    reflecting higher prices for oil and gas, and higher production
    volumes and reduced derivative losses. On a reported basis,
    operating income from oil and gas activities in the second
    quarter of 2005 was $35.2 million higher than operating
    income from oil and gas activities for the same period in the
    prior year.
|
| |  | Higher interest expense in the current year as a result of
    higher debt levels. On a reported basis, interest expense
    increased approximately $13.6 million.                                                                                                                                                                                                                                    

32



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| |   |                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Losses on marketable securities. Net losses on securities were
    $21.3 million in the current year versus net gains of
    $8.3 million in the prior year.
|
| |  | Reduced gains on sales of properties. On a reported basis,
    income from gains on discontinued operations fell
    $47.1 million.                         



| |                                                                              
| | -----------------------------------------------------------------------------
| | Six months ended June 30, 2005 compared to six months
    ended June 30, 2004



| |   |                                                                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Reduction in gains on securities. Net gains on securities were
    $.4 million in the current year versus $37.2 million
    in the prior year.                                                                              
|
| |  | Higher interest expense in the current year as a result of
    higher debt levels. Interest expense increased approximately
    $26.2 million but is offset by an increase in interest and
    other income of $8.9 million.
|
| |  | Increased operating income from gaming. On a reported basis,
    operating income in the six months ended June 30, 2005 was
    $7.2 million higher than the same period in the prior year.                                 



| |                                                                                  
| | ---------------------------------------------------------------------------------
| | Three months ended June 30, 2005 compared to three
    months ended June 30, 2004









| |                                                                              
| | -----------------------------------------------------------------------------
| | Six months ended June 30, 2005 compared to six months
    ended June 30, 2004







33



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##### Table of Contents





| |       
| | ------
| | Gaming



|                                    |  |                                  |         |            |                  |   |         |      |            |   |         |   |  |   |         |  
|----------------------------------- |  | -------------------------------- | ------- | ---------- | ---------------- | - | ------- | ---- | ---------- | - | ------- | - |  | - | ------- | -
|                                    |  | Three Months Ended               |         |            | Six Months Ended |  
|                                    |  | June 30,                         |         |            | June 30,         |  
|                                    |  |                                  |         |            |                  |  
|                                    |  | 2005                             |         |            | 2004             |   |         | 2005 |            |   | 2004    |  
|                                    |  |                                  |         |            |                  |   |         |      |            |   |         |  
|                                    |  | (In $000s, except per unit data) |        
|                                    |  | (Unaudited)                      |        
|                                    |  |                                  |         | (Restated) |                  |   |         |      | (Restated) |  
|Revenues                            |  |                                  |         |            |                  |   |         |      |            |   |         |   |  |   |         |  
|Casino                              |  | $                                | 81,168  |            |                  | $ | 80,911  |      |            | $ | 166,238 |   |  | $ | 161,622 |  
|Hotel                               |  |                                  | 18,602  |            |                  |   | 16,615  |      |            |   | 36,689  |   |  |   | 32,791  |  
|Food and beverage                   |  |                                  | 23,307  |            |                  |   | 22,519  |      |            |   | 45,249  |   |  |   | 44,210  |  
|Tower, retail and other income      |  |                                  | 10,105  |            |                  |   | 10,282  |      |            |   | 19,118  |   |  |   | 19,538  |  
|                                    |  |                                  |         |            |                  |   |         |      |            |   |         |  
|Gross revenues                      |  |                                  | 133,182 |            |                  |   | 130,327 |      |            |   | 267,294 |   |  |   | 258,161 |  
|Less promotional allowances         |  |                                  | 10,750  |            |                  |   | 11,739  |      |            |   | 22,059  |   |  |   | 23,221  |  
|                                    |  |                                  |         |            |                  |   |         |      |            |   |         |  
|Net revenues                        |  |                                  | 122,432 |            |                  |   | 118,588 |      |            |   | 245,235 |   |  |   | 234,940 |  
|                                    |  |                                  |         |            |                  |   |         |      |            |   |         |  
|Expenses                            |  |                                  |         |            |                  |   |         |      |            |   |         |   |  |   |         |  
|Casino                              |  |                                  | 27,596  |            |                  |   | 28,423  |      |            |   | 55,322  |   |  |   | 56,333  |  
|Hotel                               |  |                                  | 8,033   |            |                  |   | 6,674   |      |            |   | 14,759  |   |  |   | 12,925  |  
|Food and beverage                   |  |                                  | 14,842  |            |                  |   | 14,111  |      |            |   | 28,784  |   |  |   | 27,758  |  
|Tower, retail and other             |  |                                  | 4,324   |            |                  |   | 3,626   |      |            |   | 8,171   |   |  |   | 6,980   |  
|Selling, general and administrative |  |                                  | 41,352  |            |                  |   | 42,519  |      |            |   | 83,963  |   |  |   | 82,097  |  
|Depreciation and amortization       |  |                                  | 9,360   |            |                  |   | 10,448  |      |            |   | 18,580  |   |  |   | 20,404  |  
|                                    |  |                                  |         |            |                  |   |         |      |            |   |         |  
|                                    |  |                                  | 105,507 |            |                  |   | 105,801 |      |            |   | 209,579 |   |  |   | 206,497 |  
|                                    |  |                                  |         |            |                  |   |         |      |            |   |         |  
|Operating income                    |  | $                                | 16,925  |            |                  | $ | 12,787  |      |            | $ | 35,656  |   |  | $ | 28,443  |  
|                                    |  |                                  |         |            |                  |   |         |      |            |   |         |  
|Operating income %                  |  |                                  | 13.8    | %          |                  |   | 10.8    | %    |            |   | 14.5    | % |  |   | 12.1    | %



| |                                                                                      
| | -------------------------------------------------------------------------------------
| | Three months ended June 30, 2005 compared to the three
    months ended June 30, 2004







34



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| |                                                                              
| | -----------------------------------------------------------------------------
| | Six months ended June 30, 2005 compared to Six months
    ended June 30, 2004









35



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| |                    
| | -------------------
| | Results by Location



|                 |              |                    |        |         |                  |   |        |         |  |   |         |         |  |   |         |         | 
|---------------- | ------------ | ------------------ | ------ | ------- | ---------------- | - | ------ | ------- |  | - | ------- | ------- |  | - | ------- | ------- | 
|                 |              | Three Months Ended |        |         | Six Months Ended |  
|                 |              | June 30,           |        |         | June 30,         |  
|                 |              |                    |        |         |                  |  
|                 |              | 2005               |        |         | 2004             |   |        | 2005    |  |   | 2004    |        
|                 |              |                    |        |         |                  |   |        |         |  |   |         |        
|Net revenues     |              |                    |        |         |                  |   |        |         |  |   |         |         |  |   |         |        
|Las Vegas        |              | $                  | 81,509 |         |                  | $ | 73,360 |         |  | $ | 164,437 |         |  | $ | 148,369 |        
|Atlantic City    |              |                    | 40,923 |         |                  |   | 45,228 |         |  |   | 80,798  |         |  |   | 86,571  |        
|                 |              |                    |        |         |                  |   |        |         |  |   |         |        
|                 | Total gaming |                    | $      | 122,432 |                  |   | $      | 118,588 |  |   | $       | 245,235 |  |   | $       | 234,940 | 
|                 |              |                    |        |         |                  |   |        |         |  |   |         |        
|Operating income |              |                    |        |         |                  |   |        |         |  |   |         |         |  |   |         |        
|Las Vegas        |              | $                  | 17,507 |         |                  | $ | 11,045 |         |  | $ | 37,297  |         |  | $ | 25,924  |        
|Atlantic City    |              |                    | (674   | )       |                  |   | 1,938  |         |  |   | (2,138  | )       |  |   | 2,878   |        
|Other            |              |                    | 92     |         |                  |   | (196   | )       |  |   | 497     |         |  |   | (359    | )      
|                 |              |                    |        |         |                  |   |        |         |  |   |         |        
|                 | Total gaming |                    | $      | 16,925  |                  |   | $      | 12,787  |  |   | $       | 35,656  |  |   | $       | 28,443  | 
|                 |              |                    |        |         |                  |   |        |         |  |   |         |        

36



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| |            
| | -----------
| | Oil and Gas



|                   |                                          |                    |        |            |                  |   |        |        |            |   |        |        |   |   |        |        |  
|------------------ | ---------------------------------------- | ------------------ | ------ | ---------- | ---------------- | - | ------ | ------ | ---------- | - | ------ | ------ | - | - | ------ | ------ | -
|                   |                                          | Three Months Ended |        |            | Six Months Ended |  
|                   |                                          | June 30,           |        |            | June 30,         |  
|                   |                                          |                    |        |            |                  |  
|                   |                                          | 2005               |        |            | 2004             |   |        | 2005   |            |   | 2004   |       
|                   |                                          |                    |        |            |                  |   |        |        |            |   |        |       
|                   |                                          | (In $000s)         |       
|                   |                                          | (Unaudited)        |       
|                   |                                          |                    |        | (Restated) |                  |   |        |        | (Restated) |  
|Revenues           |                                          | $                  | 73,378 |            |                  | $ | 21,911 |        |            | $ | 89,071 |        |   | $ | 63,032 |       
|Cost and expenses: |                                          |                    |        |            |                  |   |        |        |            |   |        |        |   |   |        |       
|                   | Oil and gas operating expenses           |                    |        | 11,524     |                  |   |        | 7,467  |            |   |        | 23,951 |   |   |        | 15,293 |  
|                   | Depreciation, depletion and amortization |                    |        | 25,348     |                  |   |        | 14,610 |            |   |        | 46,776 |   |   |        | 31,111 |  
|                   | General and administrative expenses      |                    |        | 4,601      |                  |   |        | 3,139  |            |   |        | 7,944  |   |   |        | 5,875  |  
|                   |                                          |                    |        |            |                  |   |        |        |            |   |        |       
|                   |                                          |                    | 41,473 |            |                  |   | 25,216 |        |            |   | 78,671 |        |   |   | 52,279 |       
|                   |                                          |                    |        |            |                  |   |        |        |            |   |        |       
|                   | Operating income                         |                    | $      | 31,905     |                  |   | $      | (3,305 | )          |   | $      | 10,400 |   |   | $      | 10,753 |  
|                   |                                          |                    |        |            |                  |   |        |        |            |   |        |       
|                   | Operating income %                       |                    |        | 43.5       | %                |   |        | (15.1  | )%         |   |        | 11.7   | % |   |        | 17.1   | %







|                                     |          |                    |        |        |                  |   |         |        |  |   |         |        |  |   |         |        | 
|------------------------------------ | -------- | ------------------ | ------ | ------ | ---------------- | - | ------- | ------ |  | - | ------- | ------ |  | - | ------- | ------ | 
|                                     |          | Three Months Ended |        |        | Six Months Ended |  
|                                     |          | June 30,           |        |        | June 30,         |  
|                                     |          |                    |        |        |                  |  
|                                     |          | 2005               |        |        | 2004             |   |         | 2005   |  |   | 2004    |       
|                                     |          |                    |        |        |                  |   |         |        |  |   |         |       
|Gross oil and gas revenue            |          | $                  | 71,277 |        |                  | $ | 40,306  |        |  | $ | 128,871 |        |  | $ | 80,715  |       
|Realized derivative losses           |          |                    | (4,835 | )      |                  |   | (3,939  | )      |  |   | (7,967  | )      |  |   | (3,866  | )     
|Unrealized derivative gains (losses) |          |                    | 6,936  |        |                  |   | (14,456 | )      |  |   | (31,833 | )      |  |   | (13,817 | )     
|                                     |          |                    |        |        |                  |   |         |        |  |   |         |       
|                                     | Revenues |                    | $      | 73,378 |                  |   | $       | 21,911 |  |   | $       | 89,071 |  |   | $       | 63,032 | 
|                                     |          |                    |        |        |                  |   |         |        |  |   |         |       

37



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|                                         |  |                    |       |  |                  |   |       |      |  |   |        |  |  |   |        | 
|---------------------------------------- |  | ------------------ | ----- |  | ---------------- | - | ----- | ---- |  | - | ------ |  |  | - | ------ | 
|                                         |  | Three Months Ended |       |  | Six Months Ended |  
|                                         |  | June 30,           |       |  | June 30,         |  
|                                         |  |                    |       |  |                  |  
|                                         |  | 2005               |       |  | 2004             |   |       | 2005 |  |   | 2004   | 
|                                         |  |                    |       |  |                  |   |       |      |  |   |        | 
|Production data:                         |  |                    |       |  |                  |   |       |      |  |   |        |  |  |   |        | 
|Oil (Mbbls)                              |  |                    | 392   |  |                  |   | 242   |      |  |   | 731    |  |  |   | 511    | 
|Natural gas (MMcf)                       |  |                    | 7,068 |  |                  |   | 4,437 |      |  |   | 12,993 |  |  |   | 9,426  | 
|Natural gas liquids (Mbbls)              |  |                    | 95    |  |                  |   | 185   |      |  |   | 186    |  |  |   | 326    | 
|Natural gas equivalents (Mmcfe)          |  |                    | 9,991 |  |                  |   | 6,999 |      |  |   | 18,492 |  |  |   | 14,446 | 
|Average Sales Price:                     |  |                    |       |  |                  |   |       |      |  |   |        |  |  |   |        | 
|Oil (per Bbl)                            |  | $                  | 47.50 |  |                  | $ | 31.06 |      |  | $ | 47.88  |  |  | $ | 30.93  | 
|Natural gas (per Mcf)                    |  |                    | 6.32  |  |                  |   | 5.41  |      |  |   | 5.95   |  |  |   | 5.51   | 
|Natural gas liquids (per Bbl)            |  |                    | 29.93 |  |                  |   | 22.50 |      |  |   | 30.17  |  |  |   | 23.44  | 
|Natural gas Equivalents (per Mcfe)       |  |                    | 6.62  |  |                  |   | 5.10  |      |  |   | 6.38   |  |  |   | 5.22   | 
|Expense per Mcfe:                        |  |                    |       |  |                  |   |       |      |  |   |        |  |  |   |        | 
|Oil and gas operating expenses           |  | $                  | 1.15  |  |                  | $ | 1.07  |      |  | $ | 1.30   |  |  | $ | 1.06   | 
|Depreciation, depletion and amortization |  |                    | 2.54  |  |                  |   | 2.09  |      |  |   | 2.53   |  |  |   | 2.15   | 
|General and administrative expenses      |  |                    | 0.46  |  |                  |   | 0.45  |      |  |   | 0.43   |  |  |   | 0.41   | 







| |                                                               
| | --------------------------------------------------------------
| | Three months ended June 30, 2005 compared to
    June 30, 2004



38



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##### Table of Contents





|                              |                        |                    |        |        |                  |   |        |        |  |   |        |        |  |   |        |        | 
|----------------------------- | ---------------------- | ------------------ | ------ | ------ | ---------------- | - | ------ | ------ |  | - | ------ | ------ |  | - | ------ | ------ | 
|                              |                        | Three Months Ended |        |        | Six Months Ended |  
|                              |                        | June 30,           |        |        | June 30,         |  
|                              |                        |                    |        |        |                  |  
|                              |                        | 2005               |        |        | 2004             |   |        | 2005   |  |   | 2004   |       
|                              |                        |                    |        |        |                  |   |        |        |  |   |        |       
|                              |                        | (In $000s)         |       
|Realized loss (cash payments) |                        | $                  | 4,835  |        |                  | $ | 3,939  |        |  | $ | 7,967  |        |  | $ | 3,866  |       
|                              | Unrealized (gain) loss |                    |        | (6,936 | )                |   |        | 14,456 |  |   |        | 31,833 |  |   |        | 13,817 | 
|                              |                        |                    |        |        |                  |   |        |        |  |   |        |       
|                              |                        | $                  | (2,101 | )      |                  | $ | 18,395 |        |  | $ | 39,800 |        |  | $ | 17,683 |       
|                              |                        |                    |        |        |                  |   |        |        |  |   |        |       

















| |                                                                              
| | -----------------------------------------------------------------------------
| | Six months ended June 30, 2005 compared to six months
    ended June 30, 2004





39



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##### Table of Contents















| |            
| | -----------
| | Real Estate



|                    |                      |                                     |   |            |                  |  |   |        |            |  |      |        |        |  |   |        |        | 
|------------------- | -------------------- | ----------------------------------- | - | ---------- | ---------------- |  | - | ------ | ---------- |  | ---- | ------ | ------ |  | - | ------ | ------ | 
|                    |                      | Three Months Ended                  |   |            | Six Months Ended | 
|                    |                      | June 30,                            |   |            | June 30,         | 
|                    |                      |                                     |   |            |                  | 
|                    |                      | 2005                                |   |            | 2004             |  |   | 2005   |            |  | 2004 |       
|                    |                      |                                     |   |            |                  |  |   |        |            |  |      |       
|                    |                      | (In $000s, except per unit data)    |  
|                    |                      | (Unaudited)                         |  
|                    |                      |                                     |   | (Restated) |                  |  |   |        | (Restated) | 
|Revenues:           |                      |                                     |   |            |                  |  |   |        |            |  |      |        |        |  |   |       
|                    | Rental real estate:  |                                     |   |            |                  |  |   |        |            |  |      |        |        |  |   |        |       
|                    |                      | Interest income on financing leases |   | $          | 1,801            |  |   | $      | 2,490      |  |      | $      | 3,767  |  |   | $      | 5,426  | 
|                    |                      | Rental income                       |   |            | 1,982            |  |   |        | 1,901      |  |      |        | 4,017  |  |   |        | 3,792  | 
|                    | Property development |                                     |   | 14,459     |                  |  |   | 12,443 |            |  |      | 22,738 |        |  |   | 17,457 |       
|                    | Resort activities    |                                     |   | 6,603      |                  |  |   | 2,938  |            |  |      | 12,166 |        |  |   | 4,273  |       
|                    |                      |                                     |   |            |                  |  |   |        |            |  |      |       
|                    |                      | Total revenues                      |   |            | 24,845           |  |   |        | 19,772     |  |      |        | 42,688 |  |   |        | 30,948 | 
|                    |                      |                                     |   |            |                  |  |   |        |            |  |      |       
|Operating expenses: |                      |                                     |   |            |                  |  |   |        |            |  |      |        |        |  |   |       
|                    | Rental real estate   |                                     |   | 1,404      |                  |  |   | 1,417  |            |  |      | 3,456  |        |  |   | 3,564  |       
|                    | Property development |                                     |   | 11,310     |                  |  |   | 7,705  |            |  |      | 18,357 |        |  |   | 11,063 |       
|                    | Resort activities    |                                     |   | 7,432      |                  |  |   | 2,867  |            |  |      | 14,028 |        |  |   | 4,937  |       
|                    |                      |                                     |   |            |                  |  |   |        |            |  |      |       
|                    |                      | Total expenses                      |   |            | 20,146           |  |   |        | 11,989     |  |      |        | 35,841 |  |   |        | 19,564 | 
|                    |                      |                                     |   |            |                  |  |   |        |            |  |      |       
|                    | Operating income     |                                     | $ | 4,699      |                  |  | $ | 7,783  |            |  | $    | 6,847  |        |  | $ | 11,384 |       
|                    |                      |                                     |   |            |                  |  |   |        |            |  |      |       

40



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##### Table of Contents





| |                   
| | ------------------
| | Rental Real Estate



| |                                                               
| | --------------------------------------------------------------
| | Three months ended June 30, 2005 compared to
    June 30, 2004





| |                                                             
| | ------------------------------------------------------------
| | Six months ended June 30, 2005 compared to June 30,
    2004





|                                            |  |                              |       |  |                  |  |        |      |  |   |        |   |  |  |         |  
|------------------------------------------- |  | ---------------------------- | ----- |  | ---------------- |  | ------ | ---- |  | - | ------ | - |  |  | ------- | -
|                                            |  | Three Months Ended           |       |  | Six Months Ended | 
|                                            |  | June 30,                     |       |  | June 30,         | 
|                                            |  |                              |       |  |                  | 
|                                            |  | 2005                         |       |  | 2004             |  |        | 2005 |  |   | 2004   |  
|                                            |  |                              |       |  |                  |  |        |      |  |   |        |  
|                                            |  | (In $000s, except unit data) |      
|                                            |  | (Unaudited)                  |      
|Properties sold                             |  |                              | 7     |  |                  |  | 25     |      |  |   | 11     |   |  |  | 33      |  
|Proceeds received                           |  | $                            | 4,856 |  |                  |  | 99,349 |      |  | $ | 37,608 |   |  |  | 118,087 |  
|Mortgage debt                               |  |                              |      |  |                  |  |       |      |  |   | 10,702 |   |  |  | 93,845  |  
|Total gain recorded                         |  |                              | 2,644 |  |                  |  | 48,032 |      |  |   | 15,834 |   |  |  | 61,007  |  
|Gain (loss) recorded in operations          |  | $                            |      |  |                  |  | 225    |      |  | $ | (176   | ) |  |  | (5,821  | )
|Gain recorded in discontinued operations(i) |  |                              | 2,644 |  |                  |  | 48,257 |      |  |   | 15,658 |   |  |  | 55,186  |  






|    |                                                                                                                                                                      
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(i) | A gain of $5.7 million on the sale of resort properties was
    recognized in the three months ended March 31, 2005 in
    addition to gains on the rental portfolio.





| |                     
| | --------------------
| | Property Development



| |                                                               
| | --------------------------------------------------------------
| | Three months ended June 30, 2005 compared to
    June 30, 2004





| |                                                             
| | ------------------------------------------------------------
| | Six months ended June 30, 2005 compared to June 30,
    2004



41



---



##### Table of Contents





| |                  
| | -----------------
| | Resort Operations



| |                                                               
| | --------------------------------------------------------------
| | Three months ended June 30, 2005 compared to
    June 30, 2004







| |                                                             
| | ------------------------------------------------------------
| | Six months ended June 30, 2005 compared to June 30,
    2004







| |                          
| | -------------------------
| | Corporate and Investments





| |                                    
| | -----------------------------------
| | General and Administrative Expenses



| |                                                               
| | --------------------------------------------------------------
| | Three Months ended June 30, 2005 compared to
    June 30, 2004





| |                                                             
| | ------------------------------------------------------------
| | Six Months ended June 30, 2005 compared to June 30,
    2004





| |                  
| | -----------------
| | Acquisition Costs





| |                            
| | ---------------------------
| | Interest Income and Expense





42



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##### Table of Contents





| |                       
| | ----------------------
| | Other Income (Expense)



|                                            |  |                    |         |            |                  |   |        |      |            |   |       |   |  |   |        |  
|------------------------------------------- |  | ------------------ | ------- | ---------- | ---------------- | - | ------ | ---- | ---------- | - | ----- | - |  | - | ------ | -
|                                            |  | Three Months Ended |         |            | Six Months Ended |  
|                                            |  | June 30,           |         |            | June 30,         |  
|                                            |  |                    |         |            |                  |  
|                                            |  | 2005               |         |            | 2004             |   |        | 2005 |            |   | 2004  |  
|                                            |  |                    |         |            |                  |   |        |      |            |   |       |  
|                                            |  | (In $000s)         |        
|                                            |  | (Unaudited)        |        
|                                            |  |                    |         | (Restated) |                  |   |        |      | (Restated) |  
|Net gains (losses) on marketable securities |  | $                  | (21,324 | )          |                  | $ | 8,310  |      |            | $ | 380   |   |  | $ | 37,167 |  
|Minority interest                           |  |                    | 616     |            |                  |   | 75     |      |            |   | 1,547 |   |  |   | 744    |  
|Gain on sale or disposition of real estate  |  |                    | (10     | )          |                  |   | (225   | )    |            |   | 176   |   |  |   | 5,821  |  
|Other                                       |  |                    | (162    | )          |                  |   | (1,099 | )    |            |   | (599  | ) |  |   | (1,808 | )
|                                            |  |                    |         |            |                  |   |        |      |            |   |       |  
|                                            |  | $                  | (20,880 | )          |                  | $ | 7,061  |      |            | $ | 1,504 |   |  | $ | 41,924 |  
|                                            |  |                    |         |            |                  |   |        |      |            |   |       |  











| |                          
| | -------------------------
| | Effective Income Tax Rate







Seasonality




Liquidity and Capital Resources


Consolidated Financial
Results




43



---



##### Table of Contents







|                                       |  |               |           | 
|-------------------------------------- |  | ------------- | --------- | 
|                                       |  | June 30, 2005 |          
|                                       |  |               |          
|                                       |  | (In $000s)    |          
|Senior unsecured 7.125% notes due 2013 |  | $             | 480,000   | 
|Senior unsecured 8.125% notes due 2012 |  |               | 350,760   | 
|Senior secured 7.85% notes due 2012    |  |               | 215,000   | 
|Borrowings under credit facilities     |  |               | 110,934   | 
|Mortgages payable                      |  |               | 83,649    | 
|GBH 11% Notes                          |  |               | 44,957    | 
|Other                                  |  |               | 5,738     | 
|                                       |  |               |          
|Total long-term debt                   |  |               | 1,291,038 | 
|Less: current portion                  |  |               | 70,162    | 
|                                       |  |               |          
|                                       |  | $             | 1,220,876 | 
|                                       |  |               |          







Distribution Policy and Quarterly Distribution




44



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##### Table of Contents









| |                           
| | --------------------------
| | American Casino Borrowings





| |                        
| | -----------------------
| | Contractual Commitments



|                                         |       |                 |       |       |       |   |       |       |  |   |         |       |  |          |       |         |  |   |       |         | 
|---------------------------------------- | ----- | --------------- | ----- | ----- | ----- | - | ----- | ----- |  | - | ------- | ----- |  | -------- | ----- | ------- |  | - | ----- | ------- | 
|                                         |       | Less Than       |       |       | 1-3   |   |       | 3-5   |  |   | After   |       |  |         
|                                         |       | 1 Year          |       |       | Years |   |       | Years |  |   | 5 Years |       |  | Total(1) |      
|                                         |       |                 |       |       |       |   |       |       |  |   |         |       |  |          |      
|                                         |       | (In $ millions) |      
|Mortgages payable                        |       | $               | 23.8  |       |       | $ | 9.7   |       |  | $ | 29.2    |       |  | $        | 40.3  |         |  | $ | 103.0 |        
|Acquisition of WestPoint Stevens         |       |                 | 312.0 |       |       |   |      |       |  |   |        |       |  |          |      |         |  |   | 312.0 |        
|Senior secured notes payable             |       |                 |      |       |       |   |      |       |  |   |        |       |  |          | 215.0 |         |  |   | 215.0 |        
|GBH 11% notes payable                    |       |                 | 45.0  |       |       |   |      |       |  |   |        |       |  |          |      |         |  |   | 45.0  |        
|Senior unsecured notes payable           |       |                 |      |       |       |   |      |       |  |   |        |       |  |          | 831.0 |         |  |   | 831.0 |        
|Capital expenditures                     |       |                 | 90.0  |       |       |   |      |       |  |   |        |       |  |          |      |         |  |   | 90.0  |        
|Interest on borrowings                   |       |                 | 85.8  |       |       |   | 159.4 |       |  |   | 159.4   |       |  |          | 173.9 |         |  |   | 578.5 |        
|Construction and development obligations |       |                 | 28.0  |       |       |   | 15.0  |       |  |   |        |       |  |          |      |         |  |   | 43.0  |        
|                                         |       |                 |       |       |       |   |       |       |  |   |         |       |  |          |      
|                                         | Total |                 | $     | 584.6 |       |   | $     | 184.1 |  |   | $       | 188.6 |  |          | $     | 1,260.2 |  |   | $     | 2,217.5 | 
|                                         |       |                 |       |       |       |   |       |       |  |   |         |       |  |          |      



| |                      
| | ---------------------
| | GBH 11% Notes Payable





45



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##### Table of Contents





| |                               
| | ------------------------------
| | Off Balance Sheet Arrangements



Gaming








Oil and Gas










Real Estate




46



---



##### Table of Contents





Forward Looking
Statements






Certain Trends and Uncertainties






| |        
| | -------
| | General



| |   |                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------
| |  | Competition for acquisitions could adversely affect us and new
    acquisitions may fail to perform as expected.                           
|
| |  | We may not be able to identify suitable investments.                                                                                       
|
| |  | Our investments may be subject to significant uncertainties.                                                                               
|
| |  | We and AREH are holding companies and will depend on the
    businesses of our subsidiaries to satisfy our obligations under
    the notes.
|
| |  | Certain of our management are committed to the management of
    other businesses.                                                         
|
| |  | We may be subject to the pension liabilities of our affiliates.                                                                            
|
| |  | We are subject to the risk of possibly becoming an investment
    company.                                                                 
|
| |  | We may become taxable as a corporation.                                                                                                    



| |            
| | -----------
| | Oil and Gas



| |   |                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The oil and gas industry is highly regulated and federal, state
    and municipal licensing authorities have significant control
    over our operations.
|
| |  | We face substantial risks in the oil and gas industry.                                                                                                   
|
| |  | We may be subject to environmental liability.                                                                                                            
|
| |  | We may experience difficulty finding and acquiring additional
    reserves and may be unable to compensate for the depletion of
    proved reserves.     
|
| |  | Difficulties in exploration and development could adversely
    affect our financial condition.                                                          
|
| |  | Oil and gas prices are likely to be volatile.                                                                                                            
|
| |  | Operating hazards and uninsured risks are inherent to the oil
    and gas industry.                                                                      
|
| |  | Our use of hedging arrangements could adversely affect our
    results of operations.                                                                    

47



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##### Table of Contents





| |   |                                                                              
| | - | -----------------------------------------------------------------------------
| |  | Government regulations impose costs on abandoning oil and gas
    facilities.
|
| |  | The oil and gas industry is highly competitive.                              



| |       
| | ------
| | Gaming



| |   |                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Rising operating costs for our gaming and entertainment
    properties could have a negative impact on our profitability.                                                                                                              
|
| |  | We face substantial competition in the hotel and casino industry.                                                                                                                                                                      
|
| |  | 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 gaming industry is highly regulated. The gaming authorities
    and state and municipal licensing authorities have significant
    control over our operations.                                                                    
|
| |  | Our hotels and casinos may need to increase capital expenditures
    to compete effectively.                                                                                                                                           
|
| |  | Increased state taxation of gaming and hospitality revenues
    could adversely affect our gaming results of operations.                                                                                                               



| |            
| | -----------
| | Real Estate



| |   |                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------
| |  | Our investment in property development may be more costly than
    anticipated.                            
|
| |  | We may not be able to sell our rental properties, which would
    reduce cash available for other purposes.
|
| |  | We face potential adverse effects from tenant bankruptcies or
    insolvencies.                            
|
| |  | We may be subject to environmental liability.                                                              






|        |                                                               
|------- | --------------------------------------------------------------
|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
    RISK









48



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##### Table of Contents














|        |                        
|------- | -----------------------
|ITEM 4. | CONTROLS AND PROCEDURES








PART II. OTHER INFORMATION







|        |                  
|------- | -----------------
|Item 1. | Legal Proceedings



49



---



##### Table of Contents








|        |                                                          
|------- | ---------------------------------------------------------
|Item 4. | Submission of Matters to a Vote of Securities
    Holders



|                                    |  |            |            |  |         |  |         |          |  |  |                  |  |  |  |        | 
|----------------------------------- |  | ---------- | ---------- |  | ------- |  | ------- | -------- |  |  | ---------------- |  |  |  | ------ | 
|                                    |  | Votes Cast |            |  |         |  |        
|                                    |  |            |            |  |         |  |        
|Matter                              |  | For        |            |  | Against |  |         | Withheld |  |  | Broker Non-Votes | 
|                                    |  |            |            |  |         |  |         |          |  |  |                  | 
|I. The Acquisitions                 |  |            | 41,455,508 |  |         |  | 595,437 |          |  |  | 63,991           |  |  |  | 380    | 
|II. The LP Amendment                |  |            | 41,756,000 |  |         |  | 289,648 |          |  |  | 67,763           |  |  |  | 1,905  | 
|III. The OLP Amendment              |  |            | 41,742,726 |  |         |  | 290,950 |          |  |  | 68,887           |  |  |  | 12,753 | 
|IV. The Grant of the Meister Option |  |            | 41,655,180 |  |         |  | 371,647 |          |  |  | 73,525           |  |  |  | 14,963 | 






|        |         
|------- | --------
|Item 6. | Exhibits

| |    |    |  |                                                                                                                                                                                                                                                                                                                                                                                                            
| | -- | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 3  | .1 |  | Amendment No. 4 to Amended and Restated Agreement of
    Limited Partnership of American Real Estate Partners, L.P.                                                                                                                                                                                                                                                                                        
|
| | 3  | .2 |  | Amendment No. 3 to Amended and Restated Agreement of
    Limited Partnership of American Real Estate Holdings Limited
    Partnership.                                                                                                                                                                                                                                                                     
|
| | 10 | .1 |  | Amendment No. 1 to Purchase Agreement, dated
    January 21, 2005, by and among American Real Estate
    Partners, L.P., as Purchaser, and Cyprus, LLC as Seller
    (incorporated by reference to Exhibit 99.1 to AREPs
    Form 8-K (SEC File No. 1-9516), filed on May 27,
    2005).                                                                                                                  
|
| | 10 | .2 |  | Asset Purchase Agreement, dated June 23, 2005, by and among
    WS Textile Co., Inc., New Textile One, Inc., New Textile Two,
    Inc., Textile Co., Inc., WestPoint Stevens Inc., WestPoint
    Stevens Inc. I, WestPoint Stevens Stores Inc., and J.P.
    Stevens Enterprises, Inc. (incorporated by reference to
    Exhibit 10.1 to AREPs Form 8-K (SEC File
    No. 1-9516), filed on July 1, 2005).
|
| | 10 | .3 |  | Equity Commitment Agreement, dated June 23, 2005, by and
    among WS Textile Co., Inc., Textile Holding LLC, American Real
    Estate Holdings Limited Partnership and Aretex LLC (incorporated
    by reference to Exhibit 10.2 to AREPs Form 8-K
    (SEC File No. 1-9516), filed on July 1, 2005).                                                                                                    
|
| | 10 | .4 |  | Rights Offering Sponsor Agreement, dated June 23, 2005, by
    and between WS Textile Co., Inc. and American Real Estate
    Holdings Limited Partnership (incorporated by reference to
    Exhibit 10.3 to AREPs Form 8-K (SEC File
    No. 1-9516), filed on July 1, 2005).                                                                                                                             
|
| | 10 | .5 |  | Option Grant Agreement between American Real Estate Partners,
    L.P. and Keith A. Meister (incorporated by reference to
    Exhibit 10.1 to AREPs Form  8-K (SEC File
    No. 1-9516), filed on July 6, 2005).                                                                                                                                                                                          
|
| | 10 | .6 |  | Registration Rights Agreement, dated June 30, 2005 between
    American Real Estate Partners, L.P. and Highcrest Investors
    Corp., Arnos Corp., Cyprus, LLC and Gascon Partners.                                                                                                                                                                                                                        
|
| | 31 | .1 |  | Certification of Chief Executive Officerpursuant to
    Section 302(a) of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                 
|
| | 31 | .2 |  | Certification of Chief Financial Officerpursuant to
    Section 302(a) of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                 
|
| | 32 | .1 |  | Certification of Principal Executive Officerpursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                
|
| | 32 | .2 |  | Certification of Principal Financial Officerpursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                

50



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##### Table of Contents






SIGNATURES






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



| |     |                 
| | --- | ----------------
| | By: | /s/ Jon F. Weber

| |             
| | ------------
| |             
| | Jon F. Weber
| | President   





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



| |     |                       
| | --- | ----------------------
| | By: | /s/ John P. Saldarelli

| |                                   
| | ----------------------------------
| |                                   
| | John P. Saldarelli                
| | Treasurer, Chief Financial Officer
| | and Principal Accounting Officer  



51



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##### Table of Contents






EXHIBIT INDEX


| |    |    |  |                                                                                                                                                                                                                                                                                                                                                                                                            
| | -- | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 3  | .1 |  | Amendment No. 4 to Amended and Restated Agreement of
    Limited Partnership of American Real Estate Partners, L.P.                                                                                                                                                                                                                                                                                        
|
| | 3  | .2 |  | Amendment No. 3 to Amended and Restated Agreement of
    Limited Partnership of American Real Estate Holdings Limited
    Partnership.                                                                                                                                                                                                                                                                     
|
| | 10 | .1 |  | Amendment No. 1 to Purchase Agreement, dated
    January 21, 2005, by and among American Real Estate
    Partners, L.P., as Purchaser, and Cyprus, LLC as Seller
    (incorporated by reference to Exhibit 99.1 to AREPs
    Form 8-K (SEC File No. 1-9516), filed on May 27,
    2005).                                                                                                                  
|
| | 10 | .2 |  | Asset Purchase Agreement, dated June 23, 2005, by and among
    WS Textile Co., Inc., New Textile One, Inc., New Textile Two,
    Inc., Textile Co., Inc., WestPoint Stevens Inc., WestPoint
    Stevens Inc. I, WestPoint Stevens Stores Inc., and J.P.
    Stevens Enterprises, Inc. (incorporated by reference to
    Exhibit 10.1 to AREPs Form 8-K (SEC File
    No. 1-9516), filed on July 1, 2005).
|
| | 10 | .3 |  | Equity Commitment Agreement, dated June 23, 2005, by and
    among WS Textile Co., Inc., Textile Holding LLC, American Real
    Estate Holdings Limited Partnership and Aretex LLC (incorporated
    by reference to Exhibit 10.2 to AREPs Form 8-K
    (SEC File No. 1-9516), filed on July 1, 2005).                                                                                                    
|
| | 10 | .4 |  | Rights Offering Sponsor Agreement, dated June 23, 2005, by
    and between WS Textile Co., Inc. and American Real Estate
    Holdings Limited Partnership (incorporated by reference to
    Exhibit 10.3 to AREPs Form 8-K (SEC File
    No. 1-9516), filed on July 1, 2005).                                                                                                                             
|
| | 10 | .5 |  | Option Grant Agreement between American Real Estate Partners,
    L.P. and Keith A. Meister (incorporated by reference to
    Exhibit 10.1 to AREPs Form  8-K (SEC File
    No. 1-9516), filed on July 6, 2005).                                                                                                                                                                                          
|
| | 10 | .6 |  | Registration Rights Agreement, dated June 30, 2005 between
    American Real Estate Partners, L.P. and Highcrest Investors
    Corp., Arnos Corp., Cyprus, LLC and Gascon Partners.                                                                                                                                                                                                                        
|
| | 31 | .1 |  | Certification of Chief Executive Officerpursuant to
    Section 302(a) of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                 
|
| | 31 | .2 |  | Certification of Chief Financial Officerpursuant to
    Section 302(a) of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                 
|
| | 32 | .1 |  | Certification of Principal Executive Officerpursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                
|
| | 32 | .2 |  | Certification of Principal Financial Officerpursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                

52