##### 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
    September 30, 2004                                       
|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 333-118021



---

American Real Estate Holdings Limited
Partnership

(Exact name of registrant as specified in its
charter)




---

|                                                                    |  |                                         
|------------------------------------------------------------------- |  | ----------------------------------------
|Delaware                                                            |  | 13-3398767                              
|(State or other jurisdiction of
     incorporation or organization) |  | (I.R.S. Employer
    Identification No.)

|                                             |  |           
|-------------------------------------------- |  | ----------
|100 South Bedford Road, Mt. Kisco,
    NY    |  | 10549     
|(Address of principal executive
    offices) |  | (Zip Code)

(914) 242-7700

(Registrants telephone number, including
area code)




---

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

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



---






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INDEX






|                       |  |                           |  |                                                                                                                                      |  |  |    | 
|---------------------- |  | ------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------ |  |  | -- | 
|                       |  |                           |  | Page No.                                                                                                                            
|                       |  |                           |  |                                                                                                                                     
|Part I.                |  | FINANCIAL
    INFORMATION |  |                                                                                                                                      |  | 
|                       |  |                           |  | Item 1.  Financial
    Statements                                                                                                    |  |  | 2  | 
|                       |  |                           |  | Consolidated Balance Sheets
    as of September 30, 2004 and December 31, 2003                                                       |  |  | 2  | 
|                       |  |                           |  | Consolidated Statements of
    Earnings for the three months ended September 30, 2004 and
    2003                                   |  |  | 3  | 
|                       |  |                           |  | Consolidated Statements of
    Earnings for the nine months ended September 30, 2004 and
    2003                                    |  |  | 4  | 
|                       |  |                           |  | Consolidated Statements of
    Changes In Partners Equity and Comprehensive Income for
    the nine months ended September 30, 2004 |  |  | 5  | 
|                       |  |                           |  | Consolidated Statements of
    Cash Flows for the nine months ended September 30, 2004 and
    2003                                  |  |  | 6  | 
|                       |  |                           |  | Notes to Consolidated
    Financial Statements                                                                                       |  |  | 8  | 
|                       |  |                           |  | Item 2.  Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations                               |  |  | 26 | 
|                       |  |                           |  | Item 3.  Quantitative
    and Qualitative Disclosures about Market Risk                                                              |  |  | 38 | 
|                       |  |                           |  | Item 4.  Controls
    and Procedures                                                                                                 |  |  | 38 | 
|Part II.               |  | OTHER INFORMATION         |  |                                                                                                                                      |  | 
|                       |  |                           |  | Item 6.  Exhibits                                                                                                                    |  |  | 39 | 
|EX-31.1: CERTIFICATION
|EX-31.2: CERTIFICATION
|EX-32.1: CERTIFICATION
|EX-32.2: CERTIFICATION



1



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##### Table of Contents



AMERICAN REAL ESTATE HOLDINGS LIMITED
PARTNERSHIP AND SUBSIDIARIES

FORM 10-Q SEPTEMBER 30, 2004




PART I. FINANCIAL INFORMATION





|        |                     
|------- | --------------------
|Item 1. | Financial Statements

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




CONSOLIDATED BALANCE SHEETS

|                                                                                                                     |                                                                               |               |           |              |           |  |           |           |           | 
|-------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------- | ------------- | --------- | ------------ | --------- |  | --------- | --------- | --------- | 
|                                                                                                                     |                                                                               | September 30, |           | December 31,
|                                                                                                                     |                                                                               | 2004          |           | 2003        
|                                                                                                                     |                                                                               |               |           |             
|                                                                                                                     |                                                                               | (Unaudited)   |           |             
|                                                                                                                     |                                                                               |              
|                                                                                                                     |                                                                               | (In $000s)  
|ASSETS                                                                                                              
|Real estate leased to others:                                                                                        |                                                                               |               |           |              |           |  |           |          
|                                                                                                                     | Accounted for under the financing method                                      |               | $         | 97,241       |           |  | $         | 137,356   |          
|                                                                                                                     | Accounted for under the operating method, net of
    accumulated depreciation |               |           | 64,216       |           |  |           | 76,443    |          
|Properties held for sale                                                                                             |                                                                               |               | 44,768    |              |           |  | 128,813   |          
|Investment in U.S. Government and Agency
    obligations                                                             |                                                                               |               | 118,153   |              |           |  | 61,573    |          
|Cash and cash equivalents                                                                                            |                                                                               |               | 1,010,281 |              |           |  | 500,469   |          
|Marketable equity and debt securities                                                                                |                                                                               |               | 26,657    |              |           |  | 80,522    |          
|Other investments                                                                                                    |                                                                               |               | 246,277   |              |           |  | 50,328    |          
|Investment in NEG Holding LLC                                                                                        |                                                                               |               | 86,413    |              |           |  | 69,346    |          
|Equity interest in GB Holdings, Inc. (Sands Hotel
    and Casino)                                                    |                                                                               |               | 27,848    |              |           |  | 30,854    |          
|Hotel, casino and resort operating properties,
    net of accumulated depreciation:                                  |                                                                               |               |           |              |           |  |           |          
|                                                                                                                     | American Casino & Entertainment
    Properties LLC                            |               |           | 293,299      |           |  |           | 298,703   |          
|                                                                                                                     | Hotel and resorts                                                             |               |           | 50,502       |           |  |           | 41,526    |          
|Land and construction-in-progress                                                                                    |                                                                               |               | 105,715   |              |           |  | 43,459    |          
|Deferred tax asset                                                                                                   |                                                                               |               | 82,334    |              |           |  | 77,874    |          
|Due from American Real Estate Partners,
    L.P.                                                                     |                                                                               |               | 10,579    |              |           |  | 18,044    |          
|Receivables and other assets                                                                                         |                                                                               |               | 58,809    |              |           |  | 46,965    |          
|                                                                                                                     |                                                                               |               |           |              |           |  |           |          
|                                                                                                                     | Total                                                                         |               | $         | 2,323,092    |           |  | $         | 1,662,275 |          
|                                                                                                                     |                                                                               |               |           |              |           |  |           |          
|LIABILITIES AND PARTNERS
    EQUITY                                                                                
|Mortgages payable:                                                                                                   |                                                                               |               |           |              |           |  |           |          
|                                                                                                                     | Real estate leased to others                                                  |               | $         | 78,034       |           |  | $         | 98,128    |          
|                                                                                                                     | Properties held for sale                                                      |               |           | 15,001       |           |  |           | 82,861    |          
|                                                                                                                     |                                                                               |               |           |              |           |  |           |          
|                                                                                                                     |                                                                               |               | 93,035    |              |           |  | 180,989   |          
|Senior secured notes payable                                                                                         |                                                                               |               | 215,000   |              |           |  |          |          
|Senior unsecured notes payable 
    American Real Estate Partners, L.P.  net of
    unamortized discount of $9,900 |                                                                               |               | 343,100   |              |           |  |          |          
|Liability for purchased securities                                                                                   |                                                                               |               | 127,091   |              |           |  |          |          
|Credit facilities due affiliates                                                                                     |                                                                               |               |          |              |           |  | 25,000    |          
|Accounts payable, accrued expenses and other
    liabilities                                                         |                                                                               |               | 92,958    |              |           |  | 68,753    |          
|                                                                                                                     |                                                                               |               |           |              |           |  |           |          
|                                                                                                                     |                                                                               |               | 871,184   |              |           |  | 274,742   |          
|                                                                                                                     |                                                                               |               |           |              |           |  |           |          
|Commitments and contingencies (Notes 2 and
    3)                                                                    |                                                                               |               |           |              |           |  |           |          
|Limited partner                                                                                                      |                                                                               |               | 1,437,389 |              |           |  | 1,373,658 |          
|General partner                                                                                                      |                                                                               |               | 14,519    |              |           |  | 13,875    |          
|                                                                                                                     |                                                                               |               |           |              |           |  |           |          
|                                                                                                                     | Partners equity                                                              |               |           | 1,451,908    |           |  |           | 1,387,533 |          
|                                                                                                                     |                                                                               |               |           |              |           |  |           |          
|                                                                                                                     |                                                                               | Total         |           | $            | 2,323,092 |  |           | $         | 1,662,275 | 
|                                                                                                                     |                                                                               |               |           |              |           |  |           |          

See notes to consolidated financial statements.

2



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##### Table of Contents



AMERICAN REAL ESTATE HOLDINGS LIMITED
PARTNERSHIP AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF EARNINGS


|                                                          |                                                                                     |                                              |         |        |       |   |        |        |       | 
|--------------------------------------------------------- | ----------------------------------------------------------------------------------- | -------------------------------------------- | ------- | ------ | ----- | - | ------ | ------ | ----- | 
|                                                          |                                                                                     |                                             
|                                                          |                                                                                     | Three Months Ended                          
|                                                          |                                                                                     | September 30,                               
|                                                          |                                                                                     |                                             
|                                                          |                                                                                     | 2004                                         |         | 2003  
|                                                          |                                                                                     |                                              |         |       
|                                                          |                                                                                     |                                             
|                                                          |                                                                                     | (Unaudited)                                 
|                                                          |                                                                                     |                                             
|                                                          |                                                                                     | (In $000s)                                 
|Revenues:                                                 |                                                                                     |                                              |         |        |       |   |        |       
|                                                          | Hotel and casino operating income                                                   |                                              | $       | 75,139 |       |   | $      | 66,957 |      
|                                                          | Land, house and condominium sales                                                   |                                              |         | 3,046  |       |   |        | 4,346  |      
|                                                          | Interest income on financing leases                                                 |                                              |         | 2,253  |       |   |        | 3,260  |      
|                                                          | Interest income on U.S. Government and
    Agency obligations and other investments |                                              |         | 18,217 |       |   |        | 4,314  |      
|                                                          | Rental income                                                                       |                                              |         | 2,344  |       |   |        | 2,113  |      
|                                                          | Hotel and resort operating income                                                   |                                              |         | 7,211  |       |   |        | 5,331  |      
|                                                          | Accretion of investment in NEG Holding LLC                                          |                                              |         | 8,932  |       |   |        | 7,222  |      
|                                                          | NEG management fee                                                                  |                                              |         | 2,641  |       |   |        | 1,817  |      
|                                                          | Dividend and other income                                                           |                                              |         | 316    |       |   |        | 463    |      
|                                                          | Equity in losses of GB Holdings, Inc.                                               |                                              |         | (614   | )     |   |        | (428   | )    
|                                                          |                                                                                     |                                              |         |        |       |   |        |       
|                                                          |                                                                                     |                                              | 119,485 |        |       |   | 95,395 |       
|                                                          |                                                                                     |                                              |         |        |       |   |        |       
|Expenses:                                                 |                                                                                     |                                              |         |        |       |   |        |       
|                                                          | Hotel and casino operating expenses                                                 |                                              |         | 59,128 |       |   |        | 55,099 |      
|                                                          | Cost of land, house and condominium sales                                           |                                              |         | 2,218  |       |   |        | 2,860  |      
|                                                          | Hotel and resort operating expenses                                                 |                                              |         | 5,135  |       |   |        | 3,456  |      
|                                                          | Interest expense                                                                    |                                              |         | 13,744 |       |   |        | 5,634  |      
|                                                          | Depreciation and amortization                                                       |                                              |         | 7,003  |       |   |        | 6,140  |      
|                                                          | General and administrative expenses                                                 |                                              |         | 5,149  |       |   |        | 3,375  |      
|                                                          | Property expenses                                                                   |                                              |         | 1,905  |       |   |        | 1,215  |      
|                                                          |                                                                                     |                                              |         |        |       |   |        |       
|                                                          |                                                                                     |                                              | 94,282  |        |       |   | 77,779 |       
|                                                          |                                                                                     |                                              |         |        |       |   |        |       
|Operating income                                          |                                                                                     |                                              | 25,203  |        |       |   | 17,616 |       
|                                                          | Other gains and (losses):                                                           |                                              |         |        |       |   |        |        |      
|                                                          | Gain on sales of marketable debt securities                                         |                                              |         |       |       |   |        | 2,168  |      
|                                                          | (Loss) gain on sales and disposition of real
    estate                             |                                              |         | (10    | )     |   |        | 501    |      
|                                                          |                                                                                     |                                              |         |        |       |   |        |       
|Income from continuing operations before income
    taxes |                                                                                     |                                              | 25,193  |        |       |   | 20,285 |       
|                                                          | Income tax expense                                                                  |                                              |         | (3,637 | )     |   |        | (3,577 | )    
|                                                          |                                                                                     |                                              |         |        |       |   |        |       
|Income from continuing operations                         |                                                                                     |                                              | 21,556  |        |       |   | 16,708 |       
|                                                          |                                                                                     |                                              |         |        |       |   |        |       
|Discontinued operations:                                  |                                                                                     |                                              |         |        |       |   |        |       
|                                                          | Income from discontinued operations                                                 |                                              |         | 1,325  |       |   |        | 2,040  |      
|                                                          |                                                                                     | Gain on sales and disposition of real estate |         |        | 9,347 |   |        |        | 1,430 | 
|                                                          |                                                                                     |                                              |         |        |       |   |        |       
|                                                          | Income from discontinued operations                                                 |                                              |         | 10,672 |       |   |        | 3,470  |      
|                                                          |                                                                                     |                                              |         |        |       |   |        |       
|Net earnings                                              |                                                                                     | $                                            | 32,228  |        |       | $ | 20,178 |       
|                                                          |                                                                                     |                                              |         |        |       |   |        |       
|Net earnings attributable to:                             |                                                                                     |                                              |         |        |       |   |        |       
|                                                          | Limited partner                                                                     |                                              | $       | 31,906 |       |   | $      | 19,976 |      
|                                                          | General partner                                                                     |                                              |         | 322    |       |   |        | 202    |      
|                                                          |                                                                                     |                                              |         |        |       |   |        |       
|                                                          |                                                                                     | $                                            | 32,228  |        |       | $ | 20,178 |       
|                                                          |                                                                                     |                                              |         |        |       |   |        |       

See notes to consolidated financial statements.

3



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##### Table of Contents



AMERICAN REAL ESTATE HOLDINGS LIMITED
PARTNERSHIP AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF EARNINGS


|                                                          |                                                                                     |                                              |         |         |        |   |         |         |       | 
|--------------------------------------------------------- | ----------------------------------------------------------------------------------- | -------------------------------------------- | ------- | ------- | ------ | - | ------- | ------- | ----- | 
|                                                          |                                                                                     |                                             
|                                                          |                                                                                     | Nine Months Ended                           
|                                                          |                                                                                     | September 30,                               
|                                                          |                                                                                     |                                             
|                                                          |                                                                                     | 2004                                         |         | 2003   
|                                                          |                                                                                     |                                              |         |        
|                                                          |                                                                                     |                                             
|                                                          |                                                                                     | (Unaudited)                                 
|                                                          |                                                                                     | (In $000s)                                 
|Revenues:                                                 |                                                                                     |                                              |         |         |        |   |         |        
|                                                          | Hotel and casino operating income                                                   |                                              | $       | 223,508 |        |   | $       | 197,510 |      
|                                                          | Land, house and condominium sales                                                   |                                              |         | 20,503  |        |   |         | 10,757  |      
|                                                          | Interest income on financing leases                                                 |                                              |         | 7,679   |        |   |         | 10,019  |      
|                                                          | Interest income on U.S. Government and
    Agency obligations and other investments |                                              |         | 34,198  |        |   |         | 12,709  |      
|                                                          | Rental income                                                                       |                                              |         | 7,467   |        |   |         | 6,743   |      
|                                                          | Hotel and resort operating income                                                   |                                              |         | 12,754  |        |   |         | 11,928  |      
|                                                          | Accretion of investment in NEG Holding LLC                                          |                                              |         | 25,055  |        |   |         | 22,673  |      
|                                                          | NEG management fee                                                                  |                                              |         | 8,120   |        |   |         | 5,697   |      
|                                                          | Dividend and other income                                                           |                                              |         | 3,401   |        |   |         | 2,173   |      
|                                                          | Equity in losses of GB Holdings, Inc.                                               |                                              |         | (1,177  | )      |   |         | (641    | )    
|                                                          |                                                                                     |                                              |         |         |        |   |         |        
|                                                          |                                                                                     |                                              | 341,508 |         |        |   | 279,568 |        
|                                                          |                                                                                     |                                              |         |         |        |   |         |        
|Expenses:                                                 |                                                                                     |                                              |         |         |        |   |         |        
|                                                          | Hotel and casino operating expenses                                                 |                                              |         | 169,259 |        |   |         | 163,150 |      
|                                                          | Cost of land, house and condominium sales                                           |                                              |         | 13,281  |        |   |         | 7,861   |      
|                                                          | Hotel and resort operating expenses                                                 |                                              |         | 10,104  |        |   |         | 8,798   |      
|                                                          | Interest expense                                                                    |                                              |         | 29,244  |        |   |         | 17,966  |      
|                                                          | Depreciation and amortization                                                       |                                              |         | 22,528  |        |   |         | 18,802  |      
|                                                          | General and administrative expenses                                                 |                                              |         | 14,179  |        |   |         | 10,200  |      
|                                                          | Property expenses                                                                   |                                              |         | 4,440   |        |   |         | 3,551   |      
|                                                          |                                                                                     |                                              |         |         |        |   |         |        
|                                                          |                                                                                     |                                              | 263,035 |         |        |   | 230,328 |        
|                                                          |                                                                                     |                                              |         |         |        |   |         |        
|                                                          | Operating income                                                                    |                                              |         | 78,473  |        |   |         | 49,240  |      
|Other gains and (losses):                                 |                                                                                     |                                              |         |         |        |   |         |        
|                                                          | Write-down of equity securities available for sale                                  |                                              |         |        |        |   |         | (961    | )    
|                                                          | Write-down of other investment                                                      |                                              |         |        |        |   |         | (18,798 | )    
|                                                          | Gain on sales of marketable debt securities                                         |                                              |         | 37,167  |        |   |         | 2,168   |      
|                                                          | Gain on sales and disposition of real estate                                        |                                              |         | 5,811   |        |   |         | 1,367   |      
|                                                          |                                                                                     |                                              |         |         |        |   |         |        
|Income from continuing operations before income
    taxes |                                                                                     |                                              | 121,451 |         |        |   | 33,016  |        
|                                                          | Income tax expense                                                                  |                                              |         | (12,894 | )      |   |         | (10,636 | )    
|                                                          |                                                                                     |                                              |         |         |        |   |         |        
|Income from continuing operations                         |                                                                                     |                                              | 108,557 |         |        |   | 22,380  |        
|                                                          |                                                                                     |                                              |         |         |        |   |         |        
|                                                          | Discontinued operations:                                                            |                                              |         |         |        |   |         |         |      
|                                                          |                                                                                     | Income from discontinued operations          |         |         | 6,482  |   |         |         | 6,049 | 
|                                                          |                                                                                     | Gain on sales and disposition of real estate |         |         | 64,533 |   |         |         | 3,354 | 
|                                                          |                                                                                     |                                              |         |         |        |   |         |        
|                                                          | Income from discontinued operations                                                 |                                              |         | 71,015  |        |   |         | 9,403   |      
|                                                          |                                                                                     |                                              |         |         |        |   |         |        
|Net earnings                                              |                                                                                     | $                                            | 179,572 |         |        | $ | 31,783  |        
|                                                          |                                                                                     |                                              |         |         |        |   |         |        
|Net earnings attributable to:                             |                                                                                     |                                              |         |         |        |   |         |        
|                                                          | Limited partner                                                                     |                                              | $       | 177,776 |        |   | $       | 31,465  |      
|                                                          | General partner                                                                     |                                              |         | 1,796   |        |   |         | 318     |      
|                                                          |                                                                                     |                                              |         |         |        |   |         |        
|                                                          |                                                                                     | $                                            | 179,572 |         |        | $ | 31,783  |        
|                                                          |                                                                                     |                                              |         |         |        |   |         |        

See notes to consolidated financial statements.

4



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##### Table of Contents



AMERICAN REAL ESTATE HOLDINGS LIMITED
PARTNERSHIP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN
PARTNERS

EQUITY AND COMPREHENSIVE INCOME


|                                                                             |  |                                      |        |                   |  |           |           |   |  |   |           |  
|---------------------------------------------------------------------------- |  | ------------------------------------ | ------ | ----------------- |  | --------- | --------- | - |  | - | --------- | -
|                                                                             |  |                                     
|                                                                             |  | Nine Months Ended September 30, 2004
|                                                                             |  |                                     
|                                                                             |  | General Partners                    |        | Limited Partners |  | Partners
|                                                                             |  | Equity                               |        | Equity            |  | Equity   
|                                                                             |  |                                      |        |                   |  |          
|                                                                             |  |                                     
|                                                                             |  | (Unaudited) (In $000s)             
|Balance, December 31, 2003                                                   |  | $                                    | 13,875 |                   |  | $         | 1,373,658 |   |  | $ | 1,387,533 |  
|Comprehensive income:                                                        |  |                                      |        |                   |  |           |           |   |  |   |           |  
|Net earnings                                                                 |  |                                      | 1,796  |                   |  |           | 177,776   |   |  |   | 179,572   |  
|Reclassification of unrealized gains on
    marketable debt securities sold  |  |                                      | (64    | )                 |  |           | (6,361    | ) |  |   | (6,425    | )
|Net unrealized losses on securities available for
    Sale                   |  |                                      | (5     | )                 |  |           | (472      | ) |  |   | (477      | )
|                                                                             |  |                                      |        |                   |  |           |           |   |  |   |           |  
|Comprehensive income                                                         |  |                                      | 1,727  |                   |  |           | 170,943   |   |  |   | 172,670   |  
|                                                                             |  |                                      |        |                   |  |           |           |   |  |   |           |  
|Capital distribution from American Casino                                    |  |                                      | (179   | )                 |  |           | (17,737   | ) |  |   | (17,916   | )
|Capital contribution to American Casino                                      |  |                                      | 228    |                   |  |           | 22,572    |   |  |   | 22,800    |  
|Arizona Charlies acquisition                                                |  |                                      | (1,259 | )                 |  |           | (124,641  | ) |  |   | (125,900  | )
|Change in deferred tax asset related to
    acquisition of Arizona Charlies |  |                                      | 127    |                   |  |           | 12,594    |   |  |   | 12,721    |  
|                                                                             |  |                                      |        |                   |  |           |           |   |  |   |           |  
|Balance, September 30, 2004                                                  |  | $                                    | 14,519 |                   |  | $         | 1,437,389 |   |  | $ | 1,451,908 |  
|                                                                             |  |                                      |        |                   |  |           |           |   |  |   |           |  

Accumulated other comprehensive loss at
September 30, 2004 was $477,000.

See notes to consolidated financial statements.

5



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##### Table of Contents



AMERICAN REAL ESTATE HOLDINGS LIMITED
PARTNERSHIP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                         |                                                                                         |                                                    |                                                                                     |                                            |         |          |         |         |         |         |       | 
|---------------------------------------- | --------------------------------------------------------------------------------------- | -------------------------------------------------- | ----------------------------------------------------------------------------------- | ------------------------------------------ | ------- | -------- | ------- | ------- | ------- | ------- | ----- | 
|                                         |                                                                                         |                                                   
|                                         |                                                                                         | Nine Months Ended                                 
|                                         |                                                                                         | September 30,                                     
|                                         |                                                                                         |                                                   
|                                         |                                                                                         | 2004                                               |                                                                                     | 2003                                      
|                                         |                                                                                         |                                                    |                                                                                     |                                           
|                                         |                                                                                         |                                                   
|                                         |                                                                                         | (Unaudited)                                       
|                                         |                                                                                         | (In $000s)                                       
|Cash flows from operating activities:    |                                                                                         |                                                    |                                                                                     |                                            |         |          |         |        
|                                         | Income from continuing operations                                                       |                                                    | $                                                                                   | 108,557                                    |         |          | $       | 22,380  |        
|                                         | Adjustments to reconcile net earnings to net cash
    provided by operating activities: |                                                    |                                                                                     |                                            |         |          |         |         |        
|                                         |                                                                                         | Depreciation and amortization                      |                                                                                     |                                            | 22,528  |          |         |         | 18,802  |        
|                                         |                                                                                         | Amortization of Senior Note discount               |                                                                                     |                                            | 506     |          |         |         |        |        
|                                         |                                                                                         | Gain on sales and disposition of real estate       |                                                                                     |                                            | (5,811  | )        |         |         | (1,367  | )      
|                                         |                                                                                         | Provision for loss on real estate                  |                                                                                     |                                            | 500     |          |         |         | 300     |        
|                                         |                                                                                         | Write-down of equity securities available for sale |                                                                                     |                                            |        |          |         |         | 961     |        
|                                         |                                                                                         | Write-down of other investments                    |                                                                                     |                                            |        |          |         |         | 18,798  |        
|                                         |                                                                                         | Gain on sales of marketable equity securities      |                                                                                     |                                            | (37,167 | )        |         |         | (2,168  | )      
|                                         |                                                                                         | Equity in losses of GB Holdings, Inc.              |                                                                                     |                                            | 1,177   |          |         |         | 641     |        
|                                         |                                                                                         | Deferred gain amortization                         |                                                                                     |                                            | (1,529  | )        |         |         | (1,529  | )      
|                                         |                                                                                         | Accretion of investment in NEG Holding LLC         |                                                                                     |                                            | (25,055 | )        |         |         | (22,673 | )      
|                                         |                                                                                         | Deferred income tax expense                        |                                                                                     |                                            | 7,970   |          |         |         | 10,636  |        
|                                         |                                                                                         | Changes in operating assets and liabilities:       |                                                                                     |                                            |         |          |         |         |         |        
|                                         |                                                                                         |                                                    | Decrease in land and construction-in-progress                                       |                                            |         | (437     | )       |         |         | (1,149  | )    
|                                         |                                                                                         |                                                    | Increase (decrease) in accounts payable, accrued
    expenses and other liabilities |                                            |         | 7,682    |         |         |         | (38,897 | )    
|                                         |                                                                                         |                                                    | Decrease in receivables and other assets                                            |                                            |         | 6,304    |         |         |         | 4,360   |      
|                                         |                                                                                         |                                                    |                                                                                     |                                            |         |          |         |        
|                                         |                                                                                         |                                                    |                                                                                     | Net cash provided by continuing operations |         |          | 85,225  |         |         |         | 9,095 | 
|                                         |                                                                                         |                                                    |                                                                                     |                                            |         |          |         |        
|                                         | Income from discontinued operations                                                     |                                                    |                                                                                     | 71,015                                     |         |          |         | 9,403   |        
|                                         |                                                                                         | Depreciation and amortization                      |                                                                                     |                                            | 417     |          |         |         | 3,375   |        
|                                         |                                                                                         | Net gain from property transactions                |                                                                                     |                                            | (64,533 | )        |         |         | (3,354  | )      
|                                         |                                                                                         |                                                    |                                                                                     |                                            |         |          |         |        
|                                         |                                                                                         |                                                    | Net cash provided by discontinued operations                                        |                                            |         | 6,899    |         |         |         | 9,424   |      
|                                         |                                                                                         |                                                    |                                                                                     |                                            |         |          |         |        
|                                         |                                                                                         |                                                    | Net cash provided by operating activities                                           |                                            |         | 92,124   |         |         |         | 18,519  |      
|                                         |                                                                                         |                                                    |                                                                                     |                                            |         |          |         |        
|Cash flows from investing activities:    |                                                                                         |                                                    |                                                                                     |                                            |         |          |         |        
|                                         | Decrease (increase) in other investments                                                |                                                    |                                                                                     | 3,042                                      |         |          |         | (31,112 | )      
|                                         | Repayments of mezzanine loans included in other
    investments                         |                                                    |                                                                                     | 49,130                                     |         |          |         |        |        
|                                         | Purchase of other investments                                                           |                                                    |                                                                                     | (118,346                                   | )       |          |         |        |        
|                                         | Net proceeds from the sales and disposition of
    real estate                          |                                                    |                                                                                     | 16,802                                     |         |          |         | 4,261   |        
|                                         | Principal payments received on leases accounted
    for under the financing method      |                                                    |                                                                                     | 3,203                                      |         |          |         | 4,078   |        
|                                         | Acquisition of Arizona Charlies                                                        |                                                    |                                                                                     | (125,900                                   | )       |          |         |        |        
|                                         | Acquisitions of rental real estate                                                      |                                                    |                                                                                     | (14,583                                    | )       |          |         |        |        
|                                         | Acquisition of hotel and resort operating property                                      |                                                    |                                                                                     | (16,463                                    | )       |          |         |        |        
|                                         | Acquisition of land and construction in progress                                        |                                                    |                                                                                     | (62,152                                    | )       |          |         |        |        
|                                         | Additions to hotel, casino and resort operating
    properties                          |                                                    |                                                                                     | (13,973                                    | )       |          |         | (17,521 | )      
|                                         | Additions to rental real estate                                                         |                                                    |                                                                                     | (196                                       | )       |          |         | (327    | )      
|                                         | Increase in investment in U.S. Government
    and Agency Obligations                    |                                                    |                                                                                     | (56,580                                    | )       |          |         | (24,248 | )      
|                                         | Proceeds from sale of marketable equity and debt
    securities                         |                                                    |                                                                                     | 86,507                                     |         |          |         | 3,564   |        
|                                         | Guaranteed payment from NEG Holding LLC                                                 |                                                    |                                                                                     | 7,989                                      |         |          |         | 10,240  |        
|                                         | Priority distribution from NEG Holding LLC                                              |                                                    |                                                                                     |                                           |         |          |         | 40,506  |        
|                                         | Increase in restricted cash                                                             |                                                    |                                                                                     | (447                                       | )       |          |         |        |        
|                                         | Other                                                                                   |                                                    |                                                                                     | 307                                        |         |          |         | (143    | )      
|                                         |                                                                                         |                                                    |                                                                                     |                                            |         |          |         |        
|                                         |                                                                                         |                                                    | (241,660                                                                            | )                                          |         |          | (10,702 | )      
|Cash flows from discontinued operations: |                                                                                         |                                                    |                                                                                     |                                            |         |          |         |        
|                                         |                                                                                         |                                                    | Net proceeds from the sales and disposition of
    real estate                      |                                            |         | 115,186  |         |         |         | 5,424   |      
|                                         |                                                                                         |                                                    |                                                                                     |                                            |         |          |         |        
|                                         |                                                                                         |                                                    | Net cash used in investing activities                                               |                                            |         | (126,474 | )       |         |         | (5,278  | )    
|                                         |                                                                                         |                                                    |                                                                                     |                                            |         |          |         |        

6



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##### Table of Contents



AMERICAN REAL ESTATE HOLDINGS LIMITED
PARTNERSHIP AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH
FLOWS  (Continued)

|                                                                         |                                                                                      |                                    |           |         |         |   |         |        |        |  
|------------------------------------------------------------------------ | ------------------------------------------------------------------------------------ | ---------------------------------- | --------- | ------- | ------- | - | ------- | ------ | ------ | -
|                                                                         |                                                                                      |                                   
|                                                                         |                                                                                      | Nine Months Ended                 
|                                                                         |                                                                                      | September 30,                     
|                                                                         |                                                                                      |                                   
|                                                                         |                                                                                      | 2004                               |           | 2003   
|                                                                         |                                                                                      |                                    |           |        
|                                                                         |                                                                                      |                                   
|                                                                         |                                                                                      | (Unaudited)                       
|                                                                         |                                                                                      | (In $000s)                       
|CASH FLOWS FROM FINANCING ACTIVITIES:                                    |                                                                                      |                                    |           |         |         |   |         |       
|                                                                         | Partners equity:                                                                    |                                    |           |         |         |   |         |        |       
|                                                                         |                                                                                      | Distributions to members           |           | $       | (17,916 | ) |         | $      |       |  
|                                                                         |                                                                                      | Members contribution              |           |         | 15,894  |   |         |        |       |  
|                                                                         | Debt:                                                                                |                                    |           |         |         |   |         |        |       
|                                                                         |                                                                                      | Proceeds from Senior Notes Payable |           |         | 557,594 |   |         |        |       |  
|                                                                         |                                                                                      | Decrease in due to affiliates      |           |         | (17,290 | ) |         |        | (150   | )
|                                                                         |                                                                                      | Proceeds from mortgages payable    |           |         | 10,000  |   |         |        | 20,000 |  
|                                                                         |                                                                                      | Payments on mortgages payable      |           |         |        |   |         |        | (3,837 | )
|                                                                         |                                                                                      | Periodic principal payments        |           |         | (4,120  | ) |         |        | (5,264 | )
|                                                                         |                                                                                      |                                    |           |         |         |   |         |       
|Net cash provided by financing activities                                |                                                                                      |                                    | 544,162   |         |         |   | 10,749  |       
|                                                                         |                                                                                      |                                    |           |         |         |   |         |       
|Net increase in cash and cash equivalents                                |                                                                                      |                                    | 509,812   |         |         |   | 23,990  |       
|Cash and cash equivalents, beginning of period                           |                                                                                      |                                    | 500,469   |         |         |   | 79,415  |       
|                                                                         |                                                                                      |                                    |           |         |         |   |         |       
|Cash and cash equivalents at end of period                               |                                                                                      | $                                  | 1,010,281 |         |         | $ | 103,405 |       
|                                                                         |                                                                                      |                                    |           |         |         |   |         |       
|Supplemental information:                                                |                                                                                      |                                    |           |         |         |   |         |       
|                                                                         |                                                                                      | Cash payments for interest         |           | $       | 26,301  |   |         | $      | 62,513 |  
|                                                                         |                                                                                      |                                    |           |         |         |   |         |       
|Supplemental schedule of noncash investing and
    financing activities: |                                                                                      |                                    |           |         |         |   |         |       
|                                                                         | Reclassification of real estate from operating
    lease                             |                                    | $         | (25,273 | )       |   | $       |       |       
|                                                                         | Reclassification from hotel and resort operating
    properties                      |                                    |           | (6,428  | )       |   |         |       |       
|                                                                         | Reclassification to properties held for sale                                         |                                    |           | 31,701  |         |   |         |       |       
|                                                                         | Reclassification of real estate to operating lease                                   |                                    |           |        |         |   |         | 5,065  |       
|                                                                         | Reclassification of real estate from financing
    lease                             |                                    |           |        |         |   |         | (5,065 | )     
|                                                                         | Reclassification from receivables and other assets                                   |                                    |           |        |         |   |         | (1,631 | )     
|                                                                         | Reclassification to mortgages and notes
    receivable included in other investments |                                    |           |        |         |   |         | 1,631  |       
|                                                                         | Decrease in mortgages and notes receivables
    included in other investments        |                                    |           |        |         |   |         | (3,453 | )     
|                                                                         | Decrease in deferred income                                                          |                                    |           |        |         |   |         | 2,565  |       
|                                                                         | Increase in real estate accounted for under the
    operating method                 |                                    |           |        |         |   |         | 888    |       
|                                                                         |                                                                                      |                                    |           |         |         |   |         |       
|                                                                         |                                                                                      | $                                  |          |         |         | $ |        |       
|                                                                         |                                                                                      |                                    |           |         |         |   |         |       
|Net unrealized (losses) gains on securities
    available for sale       |                                                                                      | $                                  | (477      | )       |         | $ | 1,627   |       
|                                                                         |                                                                                      |                                    |           |         |         |   |         |       
|Increase in equity and debt securities                                   |                                                                                      | $                                  | 932       |         |         | $ | 900     |       
|                                                                         |                                                                                      |                                    |           |         |         |   |         |       
|Purchase of other investments                                            |                                                                                      | $                                  | 127,091   |         |         | $ |        |       
|                                                                         |                                                                                      |                                    |           |         |         |   |         |       
|Distribution of note from NEG Holding LLC                                |                                                                                      | $                                  |          |         |         | $ | 10,940  |       
|                                                                         |                                                                                      |                                    |           |         |         |   |         |       
|Members capital contribution                                            |                                                                                      | $                                  | 6,886     |         |         | $ |        |       
|                                                                         |                                                                                      |                                    |           |         |         |   |         |       
|Change in tax asset related to acquisition                               |                                                                                      | $                                  | 12,721    |         |         | $ |        |       
|                                                                         |                                                                                      |                                    |           |         |         |   |         |       

See notes to consolidated financial statements.

7



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##### Table of Contents



AMERICAN REAL ESTATE HOLDINGS LIMITED
PARTNERSHIP AND SUBSIDIARIES

FORM 10-Q SEPTEMBER 30, 2004



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)




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

American Real Estate Holdings Limited Partnership
(AREH or the Company) is a limited
partnership formed in Delaware on February 17, 1987.
American Real Estate Partners, L.P. (AREP or the
Limited Partner) is a master limited partnership
formed in Delaware on February 17, 1987. AREP owns a 99%
limited partner interest in the Company. American Property
Investors, Inc. (the General Partner) owns a 1%
general partner interest in both AREH and AREP representing an
aggregate 1.99% general partner interest in the Company and
AREP. The General Partner is owned and controlled by
Mr. Carl C. Icahn. The accompanying consolidated
financial statements and related footnotes should be read in
conjunction with the Companys consolidated financial
statements and related footnotes contained in the Registration
Statement on Form S-4, filed with the Securities and
Exchange Commission on August 6, 2004, as amended (File
No. 333-118021), with respect to AREPs
8.125% Senior Notes due 2012 guaranteed by AREH.

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

The consolidated financial statements include the
accounts of the Company and its majority owned subsidiaries in
which control can be exercised. The Company is considered to
have control if it has a direct or indirect ability to make
decisions about an entitys activities through voting or
similar rights. All material intercompany accounts and
transactions have been eliminated in consolidation.

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



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

a. On January 5, 2004, American
Casino & Entertainment Properties LLC (American
Casino), an indirect wholly-owned subsidiary of the
Company, entered into an agreement to acquire two Las Vegas
casino/hotels, Arizona Charlies Decatur and Arizona
Charlies Boulder, from Carl C. Icahn (Mr.
Icahn) and an entity affiliated with Mr. Icahn, for
an aggregate consideration of $125.9 million.
Mr. Icahn is Chairman of the Board of American Property
Investors, Inc., AREHs general partner (API or
the General Partner), and the general partner of
AREP. The acquisition was completed on May 26, 2004 upon
obtaining all approvals necessary under the gaming laws. The
terms of the transactions were approved by the Audit Committee
of the Board of Directors of the General Partner (Audit
Committee) which was advised by its independent financial
advisor and by counsel. See Note 4  Notes to
Consolidated Financial Statements.

b. In 1997 the Company entered into a
license agreement with an affiliate of the General Partner for
office space. Pursuant to the license agreement, the Company has
the non-exclusive use of approximately 2,275 square feet
for which it pays monthly rent of $11,185 plus 10.77% of certain
additional rent. The terms of such license agreement
were reviewed and approved by the Audit Committee. The agreement
which expired in May 2004, has been extended on a month-to-month
basis. For the three and nine months ended September 30,
2004, the Company paid rent of approximately $58,000 and
$123,000, respectively. For the three and nine months ended
September 30, 2003, the Company paid rent of $43,000 and
$119,000, respectively.

c. American Casino billed GB Holdings Inc.
(GBH), the holding company for the Sands Hotel and
Casino (the Sands) located in Atlantic City, New
Jersey, approximately $135,000 and $251,000 for

8



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##### Table of Contents



AMERICAN REAL ESTATE HOLDINGS LIMITED
PARTNERSHIP AND SUBSIDIARIES


FORM 10-Q SEPTEMBER 30, 2004

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

administrative services performed by American
Casino personnel during the three and nine months ended
September 30, 2004, respectively. For the three and nine
months ended September 30, 2003, American Casino billed GBH
approximately $47,000 and $144,000, respectively, for
administrative services. See Note 6  Notes to
Consolidated Financial Statements.

d. National Energy Group, Inc.
(NEG) received management fees from affiliates of
the General Partner of approximately $2.6 million and
$8.1 million in the three and nine months ended
September 30, 2004, respectively, and received management
fees from affiliates of the General Partner of approximately
$1.8 million and $5.7 million in the three and nine
months ended September 30, 2003, respectively. See
Note 5  Notes to Consolidated Financial
Statements.

e. AREP is currently in the preliminary
stages of considering an offer received from entities owned by
Mr. Icahn to sell to AREP (1) Mr. Icahns
indirect interest in NEG Holding LLC, including an option to
purchase the interest in NEG Holding LLC owned by National
Energy Group, Inc. and (2) Mr. Icahns indirect
interest in the following securities:
(a) 4,121,033 shares of GB Holdings, Inc. common
stock, par value $.01 per share; (b) warrants
(expiring July 22, 2011) to purchase an aggregate of
1,133,284 shares of Atlantic Coast Entertainment Holdings,
Inc. (Atlantic Holdings) and (c) $37,009,500
face amount of 3% Notes due 2008 of Atlantic Holdings which
are convertible into shares of common stock of Atlantic Holdings
at the rate of 65.9 shares of each $1,000 face amount of
such notes.

The Audit Committee of the Board of Directors of
the General Partner will evaluate the offer with the assistance
of independent financial and legal advisers. It is not possible
to predict when the Committee will complete its evaluation and
there can be no assurance that any transaction will result from
this proposal or, if a transaction does result, what the terms
of that transaction will be.

f. In the three and nine months ended
September 30, 2004, the Company paid approximately $91,000
and $211,000 to an affiliate of the General Partner for
telecommunication services and paid approximately $129,000 and
$213,000 to the affiliate for such services in the three and
nine months ended September 30, 2003, respectively.

g. An affiliate of the General Partner
provided certain administrative services to the Company which
paid to such affiliate approximately $20,000 and $61,000 in both
the three and nine months ended September 30, 2004 and
2003, respectively.

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

i. On October 28, 2004, the United
States Bankruptcy Court for the Southern District of Texas
issued an order confirming a plan of reorganization for Panaco,
Inc. (the Panaco Plan). In connection with the
Panaco Plan, NEG entered into a Management Agreement with Panaco
(the Panaco Management Agreement), which will become
effective on November 10, 2004 pursuant to the Bankruptcy
Courts Order confirming the effective date of the Panaco
Plan. Affiliates of Mr. Icahn own all of the outstanding
stock of the reorganized Panaco, Inc. Mr. Bob G. Alexander,
President and CEO of NEG, has been appointed to the reorganized
Panaco Board of Directors and will act as the reorganized
Panaco, Inc.s President. Mr. Philip D. Devlin, Vice
President, General Counsel and Secretary of NEG, has been
appointed in the same capacities as an officer of Panaco, Inc.
In exchange for NEGs management services, Panaco will pay
NEG a monthly fee equal to 115% of the actual direct and
indirect administrative overhead costs incurred by NEG in
operating and administrating the Panaco properties.

j. On December 6, 2004, AREP Oil &
Gas LLC, a Delaware limited liability company formed on
December 2, 2004 (AREP Oil & Gas), which is
a wholly-owned subsidiary of the Company, pursuant to a

9



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##### Table of Contents



AMERICAN REAL ESTATE HOLDINGS LIMITED
PARTNERSHIP AND SUBSIDIARIES


FORM 10-Q SEPTEMBER 30, 2004

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

purchase agreement and related assignment and
assumption agreement, each dated as of that date, with Thornwood
Associates LP, a Delaware limited partnership
(Thornwood), purchased $27.5 million aggregate
principal amount of term notes issued by TransTexas Gas
Corporation (TransTexas Notes). The purchase price
for the TransTexas Notes was $28,245,890.41. See Note 15.d.

On December 6, 2004, AREP Oil & Gas,
pursuant to a membership interest purchase agreement and related
assignment and assumption agreement, each dated as of that date,
by and among AREP Oil & Gas, as purchaser, and Arnos Corp.
(Arnos), High River Limited Partnership and Hopper
Investments LLC, as sellers, purchased all of the membership
interests of Mid River LLC (Mid River) for an
aggregate purchase price of $38,125,998.63. See Note 15.d.



|   |                              
|-- | -----------------------------
|3. | Commitments and Contingencies

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

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

Also in July 2003, in accordance with a Court
ruling, the Commission reconsidered the question of its
jurisdiction over the initial development proposal and a
modified development proposal that New Seabury filed in March
2003. The Commission concluded that both proposals are within
its jurisdiction (the Second Administrative
Decision). In August 2003, New Seabury filed, in
Barnstable County Massachusetts Superior Court, another civil
complaint appealing the Second Administrative Decision to find
the Commission in contempt of the Settlement Agreement.

In November 2003, the Court ruled in New
Seaburys favor on its July 2003 motion for partial summary
judgment, finding that the special permit remains valid and that
the modified development proposal is in substantial compliance
with the special permit and therefore exempt from the
Commissions jurisdiction. The Court has not yet ruled on
the initial proposal. Under the modified development proposal,
New Seabury could potentially develop up to 278 residential
units and 145,000 square feet of commercial space. In
February 2004, New Seabury and the Commission jointly moved to
consolidate the three complaints into one proceeding. The Court
subsequently consolidated the three complaints into one
proceeding. In March 2004, New Seabury moved for Summary
Judgment to dispose of remaining claims under all three
complaints and to obtain a final judgment from the Court. Also
in March 2004, the Commission cross-moved for Summary Judgment
on certain claims under each complaint. The Court heard
arguments in June 2004 and took the matter under advisement.
Under the initial proposal, New Seabury could potentially build
up to 675 residential/hotel units and 80,000 square feet of
commercial space. The Company cannot predict the effect on the
development process if it loses any appeal or if the Commission
is ultimately successful in asserting jurisdiction over any of
the development proposals.

The carrying value of New Seaburys
development assets at September 30, 2004 is approximately
$10.2 million.

10



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##### Table of Contents



AMERICAN REAL ESTATE HOLDINGS LIMITED
PARTNERSHIP AND SUBSIDIARIES


FORM 10-Q SEPTEMBER 30, 2004

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                                                  
|-- | -------------------------------------------------
|4. | Hotel, Casino and Resort Operating
    Properties



| |                                             
| | --------------------------------------------
| | a. Hotel and Casino Operating
    Properties

On January 5, 2004, American Casino, an
indirect wholly-owned subsidiary of the Company, entered into an
agreement to acquire two Las Vegas casino/hotels, Arizona
Charlies Decatur and Arizona Charlies Boulder, from
Carl C. Icahn and an entity affiliated with Mr. Icahn, for
an aggregate consideration of $125.9 million. Upon
obtaining all approvals necessary under gaming laws, the
acquisition was completed on May 26, 2004. The terms of the
transactions were approved by the Audit Committee which was
advised by its independent financial advisor and by counsel.
Upon closing, the Company transferred 100% of the common stock
of Stratosphere to American Casino. As a result, following the
acquisition and contribution, American Casino owns and operates
three gaming and entertainment properties in the Las Vegas
metropolitan area. The Company consolidates American Casino and
its subsidiaries in the Companys financial statements. In
accordance with generally accepted accounting principles, assets
transferred between entities under common control are accounted
for at historical costs similar to a pooling of interests, and
the financial statements of previously separate companies for
periods prior to the acquisition are presented on a combined
basis.

In accordance with the purchase agreement, prior
to the acquisition, capital contributions of $22.8 million
were received from and capital distributions of
$17.9 million were paid to affiliates of Mr. Icahn.

Also in January 2004, American Casino closed on
its offering of Senior Secured Notes Due 2012. The Notes, in the
aggregate principal amount of $215 million, bear interest
at the rate of 7.85% per annum. The proceeds were held in
escrow pending receipt of all approvals necessary under gaming
laws and the acquisition of Arizona Charlies Decatur and
Arizona Charlies Boulder. On May 26, 2004, the
proceeds of the offering were released from escrow. American
Casino used the proceeds of the offering for the acquisition and
to repay indebtedness to the Company and for distributions to
the Company.

American Casinos operations for the three
and nine months ended September 30, 2004 and 2003 have been
included in Hotel and casino operating income and
expenses in the Consolidated Statements of Earnings. Hotel
and casino operating expenses include all expenses except for
depreciation and amortization and income tax provision. Such
expenses have been included in Depreciation and
amortization expense and Income tax expense in
the Consolidated Statements of Earnings. American Casinos
depreciation and amortization expense was $5.6 million and
$17.9 million in the three and nine months ended
September 30, 2004, respectively, and $4.9 million and
$15.1 million in the three and nine months ended
September 30, 2003, respectively. American Casinos
income tax provision was $1.7 million and $7.6 million
in the three and nine months ended September 30, 2004,
respectively, and $2.2 million and $6.6 million in the
three and nine months ended September 30, 2003,
respectively. American Casino accounted for approximately 65%
and 71% of the Companys revenues in the nine months ended
September 30, 2004 and 2003, respectively, and
approximately 72% and 71% of the Companys operating income
in the nine months ended September 30, 2004 and 2003,
respectively.

11



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##### Table of Contents



AMERICAN REAL ESTATE HOLDINGS LIMITED
PARTNERSHIP AND SUBSIDIARIES


FORM 10-Q SEPTEMBER 30, 2004

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The amount of revenues and expenses attributable
to casino, hotel and restaurants, respectively, is summarized as
follows:

|                         |                                     |                    |        |                   |   |               |        |               |   |   |         |         |   |   |         |         |  
|------------------------ | ----------------------------------- | ------------------ | ------ | ----------------- | - | ------------- | ------ | ------------- | - | - | ------- | ------- | - | - | ------- | ------- | -
|                         |                                     |                    |        |                  
|                         |                                     | Three Months Ended |        | Nine Months Ended
|                         |                                     |                    |        |                  
|                         |                                     | September 30,      |        | September 30,     |   | September 30, |        | September 30,
|                         |                                     | 2004               |        | 2003              |   | 2004          |        | 2003         
|                         |                                     |                    |        |                   |   |               |        |              
|Revenues:                |                                     |                    |        |                   |   |               |        |               |   |   |         |         |   |   |         |        
|                         | Casino                              |                    | $      | 42,188            |   |               | $      | 37,382        |   |   | $       | 124,579 |   |   | $       | 111,380 |  
|                         | Hotel                               |                    |        | 12,893            |   |               |        | 11,910        |   |   |         | 40,616  |   |   |         | 35,482  |  
|                         | Food and beverage                   |                    |        | 16,705            |   |               |        | 14,456        |   |   |         | 50,125  |   |   |         | 44,303  |  
|                         | Tower, retail and other income      |                    |        | 9,169             |   |               |        | 8,362         |   |   |         | 25,749  |   |   |         | 22,902  |  
|                         |                                     |                    |        |                   |   |               |        |               |   |   |         |         |   |   |         |        
|Gross revenues           |                                     |                    | 80,955 |                   |   |               | 72,110 |               |   |   | 241,069 |         |   |   | 214,067 |        
|                         | Less: Promotional allowances        |                    |        | (5,816            | ) |               |        | (5,153        | ) |   |         | (17,561 | ) |   |         | (16,557 | )
|                         |                                     |                    |        |                   |   |               |        |               |   |   |         |         |   |   |         |        
|Net revenues             |                                     | $                  | 75,139 |                   |   | $             | 66,957 |               |   | $ | 223,508 |         |   | $ | 197,510 |        
|                         |                                     |                    |        |                   |   |               |        |               |   |   |         |         |   |   |         |        
|Cost and Expenses:       |                                     |                    |        |                   |   |               |        |               |   |   |         |         |   |   |         |        
|                         | Casino                              |                    | $      | 15,386            |   |               | $      | 15,684        |   |   | $       | 46,568  |   |   | $       | 46,304  |  
|                         | Hotel                               |                    |        | 6,509             |   |               |        | 5,776         |   |   |         | 18,045  |   |   |         | 16,341  |  
|                         | Food and beverage                   |                    |        | 12,292            |   |               |        | 11,016        |   |   |         | 35,956  |   |   |         | 33,149  |  
|                         | Other operating expenses            |                    |        | 4,015             |   |               |        | 3,747         |   |   |         | 10,437  |   |   |         | 10,693  |  
|                         | Selling, general and administrative |                    |        | 20,926            |   |               |        | 18,876        |   |   |         | 58,253  |   |   |         | 56,663  |  
|                         |                                     |                    |        |                   |   |               |        |               |   |   |         |         |   |   |         |        
|Total costs and expenses |                                     | $                  | 59,128 |                   |   | $             | 55,099 |               |   | $ | 169,259 |         |   | $ | 163,150 |        
|                         |                                     |                    |        |                   |   |               |        |               |   |   |         |         |   |   |         |        

Stratosphere Tower Casino and Hotel

The Stratosphere, which offers the tallest
free-standing observation tower in the United States, is
situated on approximately 31 acres of land located at the
northern end of the Las Vegas Strip. The facility is a
tourist-oriented gaming and entertainment destination property,
which, at September 30, 2004, has approximately
80,000 square feet of gaming space, 2,444 hotel rooms,
eight restaurants and approximately 110,000 square feet of
developed retail space. The Stratosphere features three of the
most visible amusement rides in Las Vegas.

Arizona Charlies Decatur

Arizona Charlies Decatur is located on
approximately 17 acres of land, four miles west of the Las
Vegas strip. Arizona Charlies Decatur contains, at
September 30, 2004, approximately 52,000 square feet
of gaming space, 258 hotel rooms, four restaurants and three
bars.

Arizona Charlies Boulder

Arizona Charlies Boulder is located on
approximately 24 acres of land, seven miles east of the Las
Vegas strip, near an I-515 interchange. Arizona Charlies
Boulder contains, at September 30, 2004, approximately
41,000 square feet of gaming space, 303 hotel rooms, four
restaurants and a 202-space recreational vehicle park.

The ownership and operation of the Las Vegas
casinos are subject to the Nevada Gaming Control Act and
regulations promulgated thereunder, various local ordinances and
regulations, and are subject to the licensing and regulatory
control of the Nevada Gaming Commission, the Nevada State Gaming
Control Board, and various other county and city regulatory
agencies, including the City of Las Vegas.

12



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##### Table of Contents



AMERICAN REAL ESTATE HOLDINGS LIMITED
PARTNERSHIP AND SUBSIDIARIES


FORM 10-Q SEPTEMBER 30, 2004

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                             
| | --------------------------------------------
| | b. Hotel and Resort Operating
    Properties

Hotel and resort operations for the three and
nine months ended September 30, 2004 and 2003 have been
included in Hotel and resort operating income and
expenses in the Consolidated Statements of Earnings. Hotel
and resort operating expenses include all expenses except for
approximately $0.7 million and $2.1 million of
depreciation and amortization for the three and nine months
ended September 30, 2004, respectively, and
$0.7 million and $2.0 million in the three and nine
months ended September 30, 2003, respectively. Such amounts
have been included in Depreciation and amortization
expense in the Consolidated Statements of Earnings.



|   |                            
|-- | ---------------------------
|5. | National Energy Group, Inc.



| |                                   
| | ----------------------------------
| | a. National Energy Group,
    Inc.

In October 2003, pursuant to a purchase agreement
dated as of May 16, 2003, the Company acquired certain debt
and equity securities of National Energy Group, Inc.
(NEG) from entities affiliated with Mr. Icahn
for aggregate cash consideration of approximately
$148.1 million plus approximately $6.7 million in cash
for accrued interest on the debt securities. The agreement was
reviewed and approved by the Audit Committee who were advised by
its independent financial advisor and by legal counsel. The
securities acquired were $148.6 million in principal amount
of outstanding 10 3/4% Senior Notes due 2006 of NEG,
representing all of NEGs outstanding debt securities, and
approximately 5.6 million shares of common stock of NEG. As
a result of the foregoing transaction and the acquisition by the
Company of additional NEG common stock in the open market prior
to the closing, the Company beneficially owns in excess of 50%
of the outstanding common stock of NEG. AREH consolidates NEG in
its financial statements. In accordance with generally accepted
accounting principles, assets transferred between entities under
common control are accounted for at historical costs similar to
a pooling of interests, and the financial statements of
previously separate companies for periods prior to the
acquisition are presented on a combined basis. There is no
minority interest allocated to the other NEG stockholders
because of NEGs negative equity based on book value in
accordance with generally accepted accounting principles.

NEG owns a 50% interest in NEG Holding LLC
(NEG Holding); the other 50% interest in NEG Holding
is held by Gascon Partners (Gascon), an affiliate of
Mr. Icahn. Gascon is the managing member of NEG Holding.
NEG Holding owns NEG Operating LLC (NEG Operating),
which is engaged in the business of oil and gas exploration and
production. Under the NEG Holding operating agreement, as of
September 30, 2004, NEG is to receive guaranteed payments
of approximately $39.9 million and a priority distribution
of approximately $148.6 million before Gascon receives any
distributions. Due to the substantial uncertainty that NEG will
receive any distribution above the priority and guaranteed
payments amounts, NEG accounts for its investment in NEG Holding
as a preferred investment.

NEG Holding is a variable interest entity. As of
September 30, 2004, it has net assets of approximately
$161 million. The Company has determined that the Company
is not the primary beneficiary of the variable interest entity.
As of September 30, 2004, the maximum exposure to losses as
a result of the Companys interest in NEG Holding is
$86 million.

In the three and nine months ended
September 30, 2004 and 2003, NEG recorded income tax
provisions of $2.0 million and $5.3 million,
respectively, and for the three and nine months ended
September 30, 2003, $1.4 million and
$4.1 million, respectively, based on taxable income and
applying an effective tax rate of approximately 35%.

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

13



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##### Table of Contents



AMERICAN REAL ESTATE HOLDINGS LIMITED
PARTNERSHIP AND SUBSIDIARIES


FORM 10-Q SEPTEMBER 30, 2004

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                     
| | ------------------------------------
| | b. Investment in NEG Holding
    LLC

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

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

|                       |                                       |               |         |              |  |   |         |         | 
|---------------------- | ------------------------------------- | ------------- | ------- | ------------ |  | - | ------- | ------- | 
|                       |                                       | September 30, |         | December 31,
|                       |                                       | 2004          |         | 2003        
|                       |                                       |               |         |             
|                       |                                       |              
|                       |                                       | (In $000s)  
|Current assets         |                                       | $             | 26,093  |              |  | $ | 33,415  |        
|Noncurrent assets(1)   |                                       |               | 223,090 |              |  |   | 190,389 |        
|                       |                                       |               |         |              |  |   |         |        
|                       | Total assets                          |               | $       | 249,183      |  |   | $       | 223,804 | 
|                       |                                       |               |         |              |  |   |         |        
|Current liabilities    |                                       | $             | 27,817  |              |  | $ | 14,253  |        
|Noncurrent liabilities |                                       |               | 59,963  |              |  |   | 48,514  |        
|                       |                                       |               |         |              |  |   |         |        
|                       | Total liabilities                     |               |         | 87,780       |  |   |         | 62,767  | 
|Members equity        |                                       |               | 161,403 |              |  |   | 161,037 |        
|                       |                                       |               |         |              |  |   |         |        
|                       | Total liabilities and members equity |               | $       | 249,183      |  |   | $       | 223,804 | 
|                       |                                       |               |         |              |  |   |         |        



---



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

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

|                                                                      |                  |               |        |              |  |   |        |        | 
|--------------------------------------------------------------------- | ---------------- | ------------- | ------ | ------------ |  | - | ------ | ------ | 
|                                                                      |                  | September 30, |        | December 31,
|                                                                      |                  | 2004          |        | 2003        
|                                                                      |                  |               |        |             
|                                                                      |                  |              
|                                                                      |                  | (In $000s)  
|Total Revenues                                                        |                  | $             | 43,754 |              |  | $ | 58,986 |       
|Costs and expenses                                                    |                  |               | 33,815 |              |  |   | 35,661 |       
|                                                                      |                  |               |        |              |  |   |        |       
|                                                                      | Operating Income |               |        | 9,939        |  |   |        | 23,325 | 
|Other income (expense)                                                |                  |               | (1,584 | )            |  |   | (1,435 | )     
|                                                                      |                  |               |        |              |  |   |        |       
|Income before cumulative effect of change in
    accounting principle |                  |               | 8,355  |              |  |   | 21,890 |       
|Cumulative effect of change in accounting
    principle               |                  |               |       |              |  |   | 1,912  |       
|                                                                      |                  |               |        |              |  |   |        |       
|Net Income                                                            |                  | $             | 8,355  |              |  | $ | 23,802 |       
|                                                                      |                  |               |        |              |  |   |        |       

In August 2000, pursuant to a plan of
reorganization, Holding LLC, was formed. Prior to September
2001, NEG owned and operated certain oil and gas properties. In
September 2001, NEG contributed oil and natural gas properties
in exchange for Holding LLCs obligation to pay NEG the
guaranteed payments and priority distributions. NEG also
received a 50% membership interest in Holding LLC. Gascon also
contributed oil and natural gas assets and cash in exchange for
future payments and a 50% membership interest. The Holding LLC
operating agreement requires the payment of guaranteed payments
and priority distributions to NEG in order to pay interest on
senior debt and the principal amount of the debt of
$148.6 million in 2006. After the receipt by NEG of the
guaranteed payments and priority distributions that total
approximately $300 million, the agreement requires the
distribution of an equal amount to Gascon. Holding LLC is
contractually obligated to make the guaranteed payments and
priority distributions to NEG and Gascon before any
distributions can be made to the LLC interest.

14



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##### Table of Contents



AMERICAN REAL ESTATE HOLDINGS LIMITED
PARTNERSHIP AND SUBSIDIARIES


FORM 10-Q SEPTEMBER 30, 2004

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

NEG originally recorded its investment in Holding
LLC at the historical cost of the oil and gas properties
contributed into the LLC. In evaluating the appropriate
accounting to be applied to this investment, NEG anticipated it
will collect the guaranteed payments and priority distributions
through 2006. However, based on cash flow projections prepared
by the management of Holding LLC and its reserve engineers,
there is substantial uncertainty that there will be any residual
value in Holding LLC subsequent to the payment of the amounts
required to be paid to Gascon. Due to this uncertainty, NEG has
been accreting its investment in Holding LLC at the implicit
rate of interest up to the guaranteed payments and priority
distributions collected through 2006, recognizing the accretion
income in earnings. Accretion income is periodically adjusted
for changes in the timing of cash flows, if necessary, due to
unscheduled cash distributions. Receipt of guaranteed payments
and the priority distribution are recorded as reductions in the
investment in Holding LLC. The investment in Holding LLC is
evaluated quarterly for other than temporary impairment. The
rights of NEG upon liquidation of Holding LLC are identical to
those described above and NEG considered those rights in
determining the appropriate presentation.

Because of the continuing substantial uncertainty
that there would be any residual value in Holding LLC after the
guaranteed payments and priority distributions, no income other
than the accretion is currently being given accounting
recognition. NEGs investment in Holding LLC will be
reduced to zero upon collection of the priority distributions in
2006. After that date, NEG will continue to monitor payments
made to Gascon and, at such time as it would appear that there
is any residual value to NEGs 50% interest in Holding LLC,
it would receive accounting recognition. Throughout, and up to
this point, NEG believes that the 50% interest in Holding LLC
represents a residual interest that is currently valued at zero.
The Company accounts for its residual equity investment in
Holding LLC in accordance with APB 18.

|                                                    |  |             |        |  
|--------------------------------------------------- |  | ----------- | ------ | -
|                                                    |  | (In $000s)
|Investment in NEG Holding at December 31,
    2003  |  | $           | 69,346 |  
|Accretion of investment in NEG Holding              |  |             | 25,056 |  
|Guaranteed payment from NEG Holding                 |  |             | (7,989 | )
|                                                    |  |             |        |  
|Investment in NEG Holding at September 30,
    2004 |  | $           | 86,413 |  
|                                                    |  |             |        |  

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



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. Guaranteed payments are to be paid to
    NEG, calculated on an annual interest rate of 10.75% on the
    outstanding priority distribution amount. At September 30,
    2004, the priority distribution amount was $148.6 million
    which equals the principal amount of NEGs
    10.75% Senior Notes that the Company owns. The guaranteed
    payments are required to be made on a semi-annual basis. The
    priority distribution amount is to be paid to NEG by
    November 6, 2006.
|
| | 2. An amount equal to the priority
    distribution amount and all guaranteed payments paid to NEG,
    plus any additional capital contributions made by Gascon, less
    any distribution previously made by NEG to Gascon, is to be paid
    to Gascon.                                                                                                                                                                                                                                        
|
| | 3. An amount equal to the aggregate annual
    interest (calculated at the prime rate plus  1/2% on the
    sum of the guaranteed payments), plus any unpaid interest for
    prior years (calculated at the prime rate plus  1/2% on the
    sum of the guaranteed payments), less any distributions
    previously made by NEG to Gascon, is to be paid to Gascon.                                                                                                                              
|
| | 4. After the above distributions have been
    made, any additional distributions will be made in accordance
    with the ratio of NEGs and Gascons respective
    capital accounts.                                                                                                                                                                                                                                                                                                            

15



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##### Table of Contents



AMERICAN REAL ESTATE HOLDINGS LIMITED
PARTNERSHIP AND SUBSIDIARIES


FORM 10-Q SEPTEMBER 30, 2004

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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



|   |                                                                  
|-- | -----------------------------------------------------------------
|6. | Equity Interest in GB Holdings, Inc. (Sands
    Hotel and Casino)

The Company reflects its equity interest in GBH
under this caption in the Consolidated Balance Sheets. The
Company owns approximately 3.6 million shares, or 36.3%, of
GBH. GBH is the holding company for the Sands Hotel and Casino
located in Atlantic City, New Jersey. The Sands currently
consists of a casino and simulcasting facility with
approximately 79,000 square feet of gaming space, a hotel
with 637 rooms and related amenities.

Equity in losses of GB Holdings, Inc.
of $0.6 million and $1.2 million respectively, have
been recorded in the Consolidated Statements of Earnings for the
three and nine months ended September 30, 2004,
respectively. Equity in losses of GB Holdings, Inc. were
$0.4 million and $0.6 million for the three and nine
months ended September 30, 2003, respectively.

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

On July 22, 2004, Atlantic Holdings
announced that its Consent Solicitation and Offer to Exchange,
in which it offered to exchange its 3% Notes due 2008 for
the 11% Notes due 2005 of GBH, expired and approximately
$66 million principal amount of the 11% Notes due 2005
of GBH (approximately 60% of the outstanding principal amount of
such notes) were tendered to Atlantic Holdings for exchange. On
July 23, 2004, GBH distributed 10 million warrants on
a pro rata basis to stockholders of GBH. Each warrant, under
certain conditions, will allow the holder to purchase one share
of common stock of Atlantic Holdings at a purchase price of
$0.01 per share. The warrants represent, in the aggregate,
the right to purchase 27.5% of the outstanding common stock
of Atlantic Holdings, on July 22, 2004, on a fully diluted
basis.

Prior to the exchange, Mr. Icahn and his
affiliated companies, including the Company, held approximately
58.2% of the 11% Notes due 2005; the Company held
approximately 24.5% of the 11% Notes due 2005. The Company
and Mr. Icahn tendered in the exchange all of the
11% notes due 2005 owned by them.

The Company received:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | $26,914,500 principal amount of the 3% Notes
    due September 2008 of Atlantic Holdings. These notes are
    included in Marketable Equity and Debt Securities in
    the Consolidated Balance Sheets. The carrying value of the debt
    at September 30, 2004 is approximately $22.9 million.
    The difference between the principal amount of the debt and the
    carrying amount is being accrued to interest income over the
    remaining term of the notes;
|
| |  | $3,620,753 in cash; representing accrued interest
    on the 11% Notes due 2005 that were tendered for exchange
    through the date of exchange and a consent fee of $100 per
    $1,000 in principal amount of the 11% Notes due 2005
    tendered for exchange;                                                                                                                                                                                                      
|
| |  | Warrants, which, under certain conditions, will
    allow the Company to purchase 997,621 shares of common
    stock of Atlantic Holdings, at $0.01 per share,
    representing approximately 10% of the outstanding common stock
    of Atlantic Holdings, at July 22, 2004, on a fully diluted
    basis.                                                                                                                                                             

16



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##### Table of Contents



AMERICAN REAL ESTATE HOLDINGS LIMITED
PARTNERSHIP AND SUBSIDIARIES


FORM 10-Q SEPTEMBER 30, 2004

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

This transaction did not have a significant
impact on the Companys consolidated financial statements.



|   |                                          
|-- | -----------------------------------------
|7. | Marketable Equity and Debt
    Securities

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

b. In October 2004, the Company sold
marketable equity securities resulting in a gain of
approximately $3.0 million. The Company will recognize this
gain in the fourth quarter of 2004.



|   |                  
|-- | -----------------
|8. | Other Investments

a. In 2004, the Company purchased
approximately $97.5 million principal amount of secured
bank debt of a bankrupt company for a purchase price of
approximately $79 million. At September 30, 2004, the
Company had entered into a trade confirmation to purchase an
additional $181 million principal amount of secured bank
debt of the same company for approximately $127 million. At
September 30, 2004, the Company reflected its purchase
liability of approximately $127 million in Liability
for purchased securities on the Consolidated Balance
Sheets.

b. The Company purchased secured bank debt
of another company in the principal amount of $68.3 million
for approximately $39.3 million.

The Company accounts for secured bank debt
acquired at a discount for which the Company believes it is not
probable that the undiscounted future cash collection will be
sufficient to recover the face amount of the loan and
constructive interest utilizing the cost recovery method in
accordance with Practice Bulletin 6, Amortization of
Discounts on Certain Acquired Loans. For secured bank debt
acquired at a discount where recovery is probable, the Company
amortizes the discount on the loan over the period in which the
payments are probable of collection, only if the amounts are
reasonably estimable and the ultimate collectibility of the
acquisition amount of the loan and the discount is probable. The
Company evaluates collectibility for every loan at each balance
sheet date.

SOP 03-03, Accounting for Certain Loans or
Debt Securities Acquired in a Transfer, which is effective
for fiscal years beginning after December 15, 2004, limits
the yield that may be accreted to the excess of the
Companys estimate of undiscounted cash flows expected to
be collected over the Companys initial investment in the
loan. The Company does not expect that the adoption of this SOP
will have a significant impact on its financial statements.

c. The Company has provided development
financing for certain real estate projects. The security for
these loans is a pledge of the developers ownership
interest in the properties. Such loans are subordinate to
construction financing and are generally referred to as
mezzanine loans. The Companys mezzanine loans accrue
interest at approximately 22% per annum. However, interest
generally is not paid periodically and is due at maturity or
earlier from unit sales or refinancing proceeds. The Company
defers recognition of interest income on mezzanine loans pending
receipt of principal and interest payments.

17



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##### Table of Contents



AMERICAN REAL ESTATE HOLDINGS LIMITED
PARTNERSHIP AND SUBSIDIARIES


FORM 10-Q SEPTEMBER 30, 2004

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

In June and July of 2004, the Company received
approximately $43.3 million in repayment of a mezzanine
loan. The payment included $31 million of principal and
accrued interest of approximately $12.3 million. In
accordance with the Companys accounting policy, interest
income of approximately $12.3 million was recognized in the
three and nine months ended September 30, 2004.

d. The Company held one second mortgage loan
in the principal amount of $7 million which was repaid in
August 2004.



|   |                             
|-- | ----------------------------
|9. | Senior Secured Notes Payable

In January 2004, American Casino and its
subsidiary, American Casino & Entertainment Properties
Finance Corp. (ACEF), closed on their offering of
Senior Secured Notes due 2012. The notes, in the aggregate
principal amount of $215 million, bear interest at the rate
of 7.85% per annum. ACEF was formed solely for the purpose
of serving as co-issuer on the notes. ACEF does not have any
operations or assets and does not have any revenues. The
proceeds were held in escrow pending receipt of all approvals
necessary under gaming laws and certain other conditions in
connection with the acquisition of Arizona Charlies
Decatur and Boulder. Upon satisfaction of all closing conditions
on May 26, 2004, the proceeds of the offering were released
from escrow. American Casino used the proceeds of the offering
for the acquisition of Arizona Charlies Decatur and
Boulder, to repay intercompany indebtedness and for
distributions to AREH. The notes are recourse only to, and will
be secured by, a lien on the assets of American Casino and
certain of its subsidiaries. The notes restrict the ability of
American Casino and its restricted subsidiaries subject to
certain exceptions, to: incur additional debt; pay dividends and
make distributions; make certain investments; repurchase stock;
create liens; enter into transactions with affiliates; enter
into sale and leaseback transactions; merge or consolidate; and
transfer, lease or sell assets. The notes were issued in an
offering not registered under the Securities Act of 1933. At the
time American Casino issued the notes, it entered into a
registration rights agreement in which it agreed to exchange the
notes for new notes which have been registered under the
Securities Act of 1933. If the registration statement is not
declared effective by the SEC on or prior to November 22,
2004 or if American Casino fails to consummate an exchange offer
in which it issues notes registered under the Securities Act of
1933 for the privately issued notes within 30 business days
after November 22, 2004, then American Casino will pay, as
liquidated damages, $0.05 per week per $1,000 principal
amount for the first 90 day period following such failure,
increasing by an additional $0.05 per week of $1,000
principal amount for each subsequent 90 period, until all
failures are cured.

The Company recorded approximately
$5.2 million and $11.3 million of interest expense on
the notes payable in the three and nine months ended
September 30, 2004.



|    |                               
|--- | ------------------------------
|10. | Senior Unsecured Notes Payable

On May 12, 2004, AREP and its subsidiary,
American Real Estate Finance Corp. (AREF), closed on
their offering of senior notes due 2012. The notes, in the
aggregate principal amount of $353 million, were priced at
99.266%. The notes will have a fixed annual interest rate of
8 1/8%, which will be paid every six months on June 1
and December 1, commencing December 1, 2004. The notes
will mature on June 1, 2012. AREF, a wholly-owned
subsidiary of AREP, was formed solely for the purpose of serving
as a co-issuer of the notes. AREF does not have any operations
or assets and does not have any revenues. The Company is a
guarantor of the debt; however, no other subsidiaries guarantee
payment on the notes. Simultaneously, AREP loaned the

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AMERICAN REAL ESTATE HOLDINGS LIMITED
PARTNERSHIP AND SUBSIDIARIES


FORM 10-Q SEPTEMBER 30, 2004

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Company approximately $342.6 million which
was net of a discount of approximately $10.4 million. The
loan is under the same terms and conditions as AREPs
Senior Notes. The Company intends to use the proceeds of the
offering for general business purposes, including to pursue our
primary business strategy of acquiring undervalued assets in its
existing lines of business or other businesses and to provide
additional capital to grow its existing businesses. The notes
restrict the ability of AREH and AREP, subject to certain
exceptions, to, among other things; incur additional debt; pay
dividends or make distributions; repurchase stock; create liens;
and enter into transactions with affiliates. The notes were
issued in an offering not registered under the Securities Act of
1933. At the time AREP issued the notes, AREP entered into a
registration rights agreement in which it agreed to exchange the
notes for new notes which have been registered under the
Securities Act of 1933. If the registration statement is not
declared effective by the SEC on or prior to November 8,
2004 or if AREP fails to consummate an exchange offer in which
AREP issues notes registered under the Securities Act of 1933
for the privately issued notes within 30 business days after
November 8, 2004, then AREP will pay, as liquidated
damages, $.05 per week per $1,000 principal amount for the
first 90 day period following such failure, increasing by
an additional $.05 per week of $1,000 principal amount for
each subsequent 90 period, until all failures are cured.

The Company recorded $7.8 million and
$11.8 million of interest in the three and nine months
ended September 30, 2004, respectively, in connection with
these notes.



|    |                     
|--- | --------------------
|11. | Comprehensive Income

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

Comprehensive income for the three and nine
months ended September 30, 2004 and 2003 is as follows (in
$000s):

|                                                           |  |                    |        |      |  |   |        |  
|---------------------------------------------------------- |  | ------------------ | ------ | ---- |  | - | ------ | -
|                                                           |  |                   
|                                                           |  | Three Months Ended
|                                                           |  | September 30,     
|                                                           |  |                   
|                                                           |  | 2004               |        | 2003
|                                                           |  |                    |        |     
|Net income                                                 |  | $                  | 32,228 |      |  | $ | 20,178 |  
|Net unrealized losses on securities available for
    sale |  |                    | (826   | )    |  |   | (536   | )
|Sale of marketable securities available for sale           |  |                    |       |      |  |   | (280   | )
|                                                           |  |                    |        |      |  |   |        |  
|Comprehensive income                                       |  | $                  | 31,402 |      |  | $ | 19,362 |  
|                                                           |  |                    |        |      |  |   |        |  

|                                                                                |  |                   |         |      |  |   |        |  
|------------------------------------------------------------------------------- |  | ----------------- | ------- | ---- |  | - | ------ | -
|                                                                                |  |                  
|                                                                                |  | Nine Months Ended
|                                                                                |  | September 30,    
|                                                                                |  |                  
|                                                                                |  | 2004              |         | 2003
|                                                                                |  |                   |         |     
|Net income                                                                      |  | $                 | 179,572 |      |  | $ | 31,783 |  
|Net unrealized (losses) gains on securities
    available for sale              |  |                   | (477    | )    |  |   | 1,866  |  
|Sale of marketable equity securities available
    for sale                     |  |                   |        |      |  |   | (280   | )
|Reclassification of unrealized (losses) gains on
    marketable securities sold |  |                   | (6,425  | )    |  |   | 761    |  
|                                                                                |  |                   |         |      |  |   |        |  
|Comprehensive income                                                            |  | $                 | 172,670 |      |  | $ | 34,130 |  
|                                                                                |  |                   |         |      |  |   |        |  



|    |                  
|--- | -----------------
|12. | Segment Reporting

The Company has six operating segments consisting
of: (1) hotel and casino properties, including its equity
interest in GBH, (2) land, house and condominium
development, (3) rental real estate, (4) hotel and

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AMERICAN REAL ESTATE HOLDINGS LIMITED
PARTNERSHIP AND SUBSIDIARIES


FORM 10-Q SEPTEMBER 30, 2004

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

resort operating properties, (5) investment
in oil and gas operating properties and (6) investment in
securities including investment in other limited partnerships
and marketable equity and debt securities. The Companys
reportable segments offer different services and require
different operating strategies and management expertise.

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

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

|                                                                                 |                   |                                         |                                          |      |        |         |         |   |        |        | 
|-------------------------------------------------------------------------------- | ----------------- | --------------------------------------- | ---------------------------------------- | ---- | ------ | ------- | ------- | - | ------ | ------ | 
|                                                                                 |                   |                                        
|                                                                                 |                   | Three Months Ended                     
|                                                                                 |                   | September 30,                          
|                                                                                 |                   |                                        
|                                                                                 |                   | 2004                                    |                                          | 2003
|                                                                                 |                   |                                         |                                          |     
|Revenues:                                                                        |                   |                                         |                                          |      |        |         |         |  
|                                                                                 |                   | Hotel and casino operating income       |                                          | $    | 74,525 |         |         | $ | 66,529 |       
|                                                                                 |                   | Land, house and condominium sales       |                                          |      | 3,046  |         |         |   | 4,346  |       
|                                                                                 |                   | Rental real estate                      |                                          |      | 4,597  |         |         |   | 5,372  |       
|                                                                                 |                   | Hotel and resort operating income       |                                          |      | 7,211  |         |         |   | 5,331  |       
|                                                                                 |                   | Oil and gas operating properties        |                                          |      | 11,573 |         |         |   | 9,040  |       
|                                                                                 |                   | Other investments                       |                                          |      | 12,480 |         |         |   | 1,428  |       
|                                                                                 |                   |                                         |                                          |      |        |         |         |  
|                                                                                 |                   |                                         | Subtotal                                 |      |        | 113,432 |         |   |        | 92,046 | 
|Reconciling items  primarily interest
    income on U.S. Government obligations |                   |                                         | 6,053                                    |      |        |         | 3,349   |  
|                                                                                 |                   |                                         |                                          |      |        |         |         |  
|                                                                                 |                   |                                         | Total revenues                           |      | $      | 119,485 |         |   | $      | 95,395 | 
|                                                                                 |                   |                                         |                                          |      |        |         |         |  
|Net earnings:                                                                    |                   |                                         |                                          |      |        |         |         |  
|                                                                                 | Segment earnings: |                                         |                                          |      |        |         |         |   |       
|                                                                                 |                   | Hotel and casino operating properties   |                                          | $    | 15,397 |         |         | $ | 11,430 |       
|                                                                                 |                   | Land, house and condominium development |                                          |      | 828    |         |         |   | 1,486  |       
|                                                                                 |                   | Rental real estate                      |                                          |      | 2,692  |         |         |   | 4,085  |       
|                                                                                 |                   | Hotel and resort operating properties   |                                          |      | 2,076  |         |         |   | 1,875  |       
|                                                                                 |                   | Oil and gas operating properties        |                                          |      | 11,573 |         |         |   | 9,040  |       
|                                                                                 |                   | Other investments                       |                                          |      | 12,480 |         |         |   | 1,428  |       
|                                                                                 |                   |                                         |                                          |      |        |         |         |  
|                                                                                 |                   |                                         | Total segment earnings                   |      |        | 45,046  |         |   |        | 29,344 | 
|Income from discontinued operations                                              |                   |                                         | 10,672                                   |      |        |         | 3,518   |  
|Other expenses, net                                                              |                   |                                         | (23,489                                  | )    |        |         | (12,684 | )
|General partners share of net income                                            |                   |                                         | (323                                     | )    |        |         | (202    | )
|                                                                                 |                   |                                         |                                          |      |        |         |         |  
|                                                                                 |                   |                                         | Net earnings limited partner unitholders |      | $      | 31,906  |         |   | $      | 19,976 | 
|                                                                                 |                   |                                         |                                          |      |        |         |         |  

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AMERICAN REAL ESTATE HOLDINGS LIMITED
PARTNERSHIP AND SUBSIDIARIES


FORM 10-Q SEPTEMBER 30, 2004

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                                                                 |                   |                                         |                                          |      |         |         |         |   |         |         | 
|-------------------------------------------------------------------------------- | ----------------- | --------------------------------------- | ---------------------------------------- | ---- | ------- | ------- | ------- | - | ------- | ------- | 
|                                                                                 |                   |                                        
|                                                                                 |                   | Nine Months Ended                      
|                                                                                 |                   | September 30,                          
|                                                                                 |                   |                                        
|                                                                                 |                   | 2004                                    |                                          | 2003
|                                                                                 |                   |                                         |                                          |     
|Revenues:                                                                        |                   |                                         |                                          |      |         |         |         |  
|                                                                                 |                   | Hotel and casino operating income       |                                          | $    | 222,331 |         |         | $ | 196,869 |        
|                                                                                 |                   | Land, house and condominium sales       |                                          |      | 20,503  |         |         |   | 10,757  |        
|                                                                                 |                   | Rental real estate                      |                                          |      | 15,146  |         |         |   | 16,762  |        
|                                                                                 |                   | Hotel and resort operating income       |                                          |      | 12,754  |         |         |   | 11,928  |        
|                                                                                 |                   | Oil and gas operating properties        |                                          |      | 33,175  |         |         |   | 28,370  |        
|                                                                                 |                   | Other investments                       |                                          |      | 28,493  |         |         |   | 4,733   |        
|                                                                                 |                   |                                         |                                          |      |         |         |         |  
|                                                                                 |                   |                                         | Subtotal                                 |      |         | 332,402 |         |   |         | 269,419 | 
|Reconciling items  primarily interest
    income on U.S. Government obligations |                   |                                         | 9,106                                    |      |         |         | 10,149  |  
|                                                                                 |                   |                                         |                                          |      |         |         |         |  
|                                                                                 |                   |                                         | Total revenues                           |      | $       | 341,508 |         |   | $       | 279,568 | 
|                                                                                 |                   |                                         |                                          |      |         |         |         |  
|Net earnings (loss):                                                             |                   |                                         |                                          |      |         |         |         |  
|                                                                                 | Segment earnings: |                                         |                                          |      |         |         |         |   |        
|                                                                                 |                   | Hotel and casino operating properties   |                                          | $    | 53,072  |         |         | $ | 33,719  |        
|                                                                                 |                   | Land, house and condominium development |                                          |      | 7,222   |         |         |   | 2,896   |        
|                                                                                 |                   | Rental real estate                      |                                          |      | 10,706  |         |         |   | 13,211  |        
|                                                                                 |                   | Hotel and resort operating properties   |                                          |      | 2,650   |         |         |   | 3,130   |        
|                                                                                 |                   | Oil and gas operating properties        |                                          |      | 33,175  |         |         |   | 28,370  |        
|                                                                                 |                   | Other investments                       |                                          |      | 28,493  |         |         |   | 4,733   |        
|                                                                                 |                   |                                         |                                          |      |         |         |         |  
|                                                                                 |                   |                                         | Total segment earnings                   |      |         | 135,318 |         |   |         | 86,059  | 
|Gain on sale of marketable equity securities                                     |                   |                                         | 37,167                                   |      |         |         | 2,168   |  
|Gains on sales and disposition of real estate                                    |                   |                                         | 5,811                                    |      |         |         | 1,367   |  
|Write-down of other investments                                                  |                   |                                         |                                         |      |         |         | (18,798 | )
|Income from discontinued operations                                              |                   |                                         | 71,015                                   |      |         |         | 9,403   |  
|Other expenses, net                                                              |                   |                                         | (69,739                                  | )    |         |         | (48,416 | )
|General partners share of net income                                            |                   |                                         | (1,796                                   | )    |         |         | (318    | )
|                                                                                 |                   |                                         |                                          |      |         |         |         |  
|                                                                                 |                   |                                         | Net earnings limited partner unitholders |      | $       | 177,776 |         |   | $       | 31,465  | 
|                                                                                 |                   |                                         |                                          |      |         |         |         |  

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AMERICAN REAL ESTATE HOLDINGS LIMITED
PARTNERSHIP AND SUBSIDIARIES


FORM 10-Q SEPTEMBER 30, 2004

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|        |                                     |                                                          |           |               |           |           |         |         |         |           | 
|------- | ----------------------------------- | -------------------------------------------------------- | --------- | ------------- | --------- | --------- | ------- | ------- | ------- | --------- | 
|        |                                     | September 30,                                            |           | September 30,
|        |                                     | 2004                                                     |           | 2003         
|        |                                     |                                                          |           |              
|Assets: |                                     |                                                          |           |               |           |           |         |        
|        | Rental real estate                  |                                                          | $         | 204,875       |           |           | $       | 340,062 |        
|        | Hotel and casino operating property |                                                          |           | 293,299       |           |           |         | 298,703 |        
|        | Land and construction-in-process    |                                                          |           | 105,715       |           |           |         | 43,459  |        
|        | Hotel and resort operating income   |                                                          |           | 50,502        |           |           |         | 41,526  |        
|        | Other investments                   |                                                          |           | 387,195       |           |           |         | 231,050 |        
|        |                                     |                                                          |           |               |           |           |         |        
|        |                                     |                                                          | 1,041,586 |               |           |           | 954,800 |        
|        | Reconciling items:                  |                                                          |           |               |           |           |         |         |        
|        |                                     | Cash and cash equivalents                                |           |               | 1,010,281 |           |         |         | 500,469 |          
|        |                                     | Deferred tax asset                                       |           |               | 82,334    |           |         |         | 77,874  |          
|        |                                     | Investment in U.S. Government and Agency
    Obligations |           |               | 118,153   |           |         |         | 61,573  |          
|        |                                     | Other                                                    |           |               | 70,738    |           |         |         | 67,559  |          
|        |                                     |                                                          |           |               |           |           |         |        
|        |                                     |                                                          | Total     |               | $         | 2,323,092 |         |         | $       | 1,662,275 | 
|        |                                     |                                                          |           |               |           |           |         |        



|    |                         
|--- | ------------------------
|13. | Income Taxes (in $000s)

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

|         |  |                    |        |                   |  |      |        |      |  |   |         |   |  |   |         |  
|-------- |  | ------------------ | ------ | ----------------- |  | ---- | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|         |  |                    |        |                  
|         |  | Three Months Ended |        | Nine Months Ended
|         |  | September 30,      |        | September 30,    
|         |  |                    |        |                  
|         |  | 2004               |        | 2003              |  | 2004 |        | 2003
|         |  |                    |        |                   |  |      |        |     
|Current  |  | $                  | 240    |                   |  | $    | 1,529  |      |  | $ | (2,985  | ) |  | $ | (789    | )
|Deferred |  |                    | (3,877 | )                 |  |      | (5,106 | )    |  |   | (9,909  | ) |  |   | (9,847  | )
|         |  |                    |        |                   |  |      |        |      |  |   |         |   |  |   |         |  
|         |  | $                  | (3,637 | )                 |  | $    | (3,577 | )    |  | $ | (12,894 | ) |  | $ | (10,636 | )
|         |  |                    |        |                   |  |      |        |      |  |   |         |   |  |   |         |  

(ii) The tax effect of significant
differences representing net deferred tax assets (the difference
between financial statement carrying values and the tax basis of
assets and liabilities) for the Company is as follows at
September 30, 2004 and December 31, 2003 (in
$000s):

|                     |                                  |               |         |              |  |  |         |        | 
|-------------------- | -------------------------------- | ------------- | ------- | ------------ |  |  | ------- | ------ | 
|                     |                                  | September 30, |         | December 31,
|                     |                                  | 2004          |         | 2003        
|                     |                                  |               |         |             
|Deferred tax assets: |                                  |               |         |              |  |  |         |       
|                     | Depreciation                     |               | $       | 48,132       |  |  | $       | 39,858 | 
|                     | Net operating loss carryforwards |               |         | 25,108       |  |  |         | 30,942 | 
|                     | Investment in NEG Holding LLC    |               |         | 15,698       |  |  |         | 18,845 | 
|                     | Other                            |               |         | 9,271        |  |  |         | 5,962  | 
|                     |                                  |               |         |              |  |  |         |       
|                     |                                  |               | 98,209  |              |  |  | 95,607  |       
|Valuation allowance  |                                  |               | (15,875 | )            |  |  | (17,733 | )     
|                     |                                  |               |         |              |  |  |         |       
|                     | Net deferred tax assets          |               | $       | 82,334       |  |  | $       | 77,874 | 
|                     |                                  |               |         |              |  |  |         |       

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AMERICAN REAL ESTATE HOLDINGS LIMITED
PARTNERSHIP AND SUBSIDIARIES


FORM 10-Q SEPTEMBER 30, 2004

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                                  
|--- | ---------------------------------
|14. | Significant Property Transactions

Due to favorable real estate market conditions
and the mature nature of the Companys real estate
portfolio, the Company has solicited offers for its rental real
estate portfolio. In the nine months ended September 30,
2004, the Company sold 47 rental real estate properties for
approximately $226 million which were encumbered by
mortgage debt of approximately $94 million which was repaid
from the sale proceeds.

In the nine months ended September 30, 2004,
of the 47 properties, the Company sold nine financing lease
properties for approximately $43.6 million. The properties
were encumbered by mortgage debt of approximately
$26.8 million which was repaid from the sales proceeds. The
carrying value of these properties was approximately
$37.8 million; therefore, the Company recognized a gain on
sale of approximately $5.8 million in the nine months ended
September 30, 2004, which is included in income from
continuing operations.

In the nine months ended September 30, 2004,
of the 47 properties, the Company sold 38 operating properties
for approximately $182.2 million. The properties were
encumbered by mortgage debt of approximately $67 million
which was repaid from the sales proceeds. The carrying value of
these properties was approximately $117.6 million. The
Company recognized a gain on sale of approximately
$64.6 million in the nine months ended September 30,
2004, which is included in income from discontinued operations.

At September 30, 2004, the Company had an
additional 21 properties under contract or as to which letters
of intent had been executed by potential purchasers, all of
which contracts or letters of intent are subject to
purchasers due diligence and other closing conditions.
Selling prices for the properties covered by the contracts or
letters of intent would total approximately $40.4 million.
These properties are unencumbered by mortgage debt. At
September 30, 2004, the carrying value of these properties
is approximately $19.8 million. In 2003, net income from
these properties totaled approximately $2.4 million, and
depreciation and amortization expense was approximately
$0.2 million. In accordance with generally accepted
accounting principles, only the real estate operating properties
under contract or letter of intent, but not the financing lease
properties, were reclassified to Properties Held for
Sale and the related income and expense reclassified to
Income from discontinued operations.

The Company intends to utilize proceeds from any
asset sales to continue to invest in its core businesses,
including real estate, gaming and entertainment and oil and gas.
The Company may also seek opportunities in other sectors
including industrial, manufacturing and insurance and asset
management. The Company continues to market for sale a
substantial portion of its remaining real estate portfolio.
However, there can be no assurance that offers satisfactory to
the Company will be received and, if received, that the
properties will ultimately be sold at prices acceptable to the
Company.

In January 2004, in conjunction with its
reinvestment program, the Company purchased a 34,422 square
foot commercial condominium unit located in New York City for
approximately $14.5 million. The unit contains a Citibank
branch, a furniture store and a restaurant. AREP obtained
mortgage financing of $10 million for this property in
April 2004.

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

23



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##### Table of Contents



AMERICAN REAL ESTATE HOLDINGS LIMITED
PARTNERSHIP AND SUBSIDIARIES


FORM 10-Q SEPTEMBER 30, 2004

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                  
|--- | -----------------
|15. | Subsequent Events

a. In October 2004, the Company sold seven
properties for approximately $5.8 million. The carrying
value of the properties was approximately $0.5 million. The
Company will recognize a gain with respect to these properties
of approximately $5.3 million in the fourth quarter of 2004.

b. On October 26, 2004, the SEC
declared effective American Casinos Registration Statement
related to the exchange offer of its 7.85% Senior Secured
Notes due 2012. The exchange offer was consummated on
December 1, 2004. The entire $215 million aggregate
principal amount of 7.85% Senior Secured Notes due 2012 was
exchanged for registered 7.85% Senior Secured Notes due 2012.

c. On November 8, 2004, the SEC
declared effective AREPs Registration Statement related to
the exchange offer of its 8.125% Senior Notes due 2012. The
exchange offer expires on December 15, 2004, unless
extended by AREP.

d. On December 6, 2004, AREP Oil
& Gas, pursuant to a purchase agreement and related
assignment and assumption agreement, each dated as of that date,
with Thornwood, purchased $27.5 million aggregate principal
amount of TransTexas Notes. The purchase price for the
TransTexas Notes was $28,245,890.41, which equals the principal
amount of the TransTexas Notes plus accrued but unpaid interest.
The notes are payable annually in equal consecutive annual
payments of $5,000,000, with the final installment of the unpaid
principal payable on August 28, 2008. Interest is payable
semi-annually on February 28 and August 28, at the
rate of 12% per annum. The TransTexas Notes are secured by a
first priority lien on all of TransTexas assets. Thornwood
and TransTexas each is indirectly controlled by Mr. Icahn.

On December 6, 2004, AREP Oil & Gas,
pursuant to a membership interest purchase agreement and related
assignment and assumption agreement, each dated as of that date,
by and among AREP Oil & Gas, as purchaser, and Arnos, High
River Limited Partnership and Hopper Investments LLC, as
sellers, purchased all of the membership interests of Mid River
for an aggregate purchase price of $38,125,998.63. The assets of
Mid River consist of $38 million principal amount of term
loans (the Panaco Debt) outstanding under the term
loan and security agreement, dated as of November 16, 2004,
among Panaco, Inc. as borrower, the lenders (as defined therein)
and Mid River, as administrative agent. The purchase price for
the membership interests in Mid River equals the outstanding
amount of the Panaco Debt, plus accrued but unpaid interest. The
principal is payable in 27 equal quarterly installments of
$1,357,142.86 commencing on March 15, 2005, through and
including September 15, 2011. Interest is payable quarterly
at a rate per annum equal to the LIBOR daily floating rate plus
four percent. The term loan is secured by first priority liens
on all of Panacos assets. Each of the sellers and Panaco
is indirectly controlled by Mr. Icahn.

Mr. Icahn indirectly owns approximately
86.5% of AREPs limited partnership depositary and
preferred units and indirectly owns 100% of AREPs and the
Companys general partner, American Property Investors,
Inc. Each of the transactions was separately approved by the
Audit Committee of AREPs general partner. The Audit
Committee was advised as to each transaction by independent
legal counsel and financial advisors. The Audit Committee
obtained fairness opinions which opined that, as of the date of
each transaction, the consideration to be paid by the purchaser
was fair from a financial point of view to AREP.

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|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 2. | Managements Discussion and Analysis
    of Financial Condition and Results of Operation



| |                           
| | --------------------------
| | Forward Looking Statements

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

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



| |             
| | ------------
| | Introduction

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

In accordance with generally accepted accounting
principles, assets transferred between entities under common
control are accounted for at historical costs similar to a
pooling of interests and the financial statements of previously
separate companies for periods prior to the acquisition are
restated on a combined basis.

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

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



| |                    
| | -------------------
| | Recent Developments

AREP is currently in the preliminary stages of
considering an offer received from entities owned by
Mr. Icahn to sell to AREP (1) Mr. Icahns
indirect interest in NEG Holding LLC, including an option to
purchase the interest in NEG Holding LLC owned by National
Energy Group, Inc. and (2) Mr. Icahns indirect
interest in the following securities:
(a) 4,121,033 shares of GB Holdings, Inc. common
stock, par value $0.01 per share; (b) warrants
(expiring July 22, 2011) to purchase an aggregate of
1,133,284 shares of Atlantic Coast Entertainment Holdings,
Inc. (Atlantic Holdings) and (c) $37,009,500
face amount of 3% Notes due 2008 of Atlantic Holdings which
are convertible into shares of common stock of Atlantic Holdings
at the rate of 65.9 shares of each $1,000 face amount of
such notes.

The Audit Committee of the Board of Directors of
the general partner of AREP will evaluate the offer with the
assistance of independent financial and legal advisers. It is
not possible to predict when the

25



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##### Table of Contents



Committee will complete its evaluation and there
can be no assurance that any transaction will result from this
proposal or, if a transaction does result, what the terms of
that transaction will be.


Results of Operations



| |                                                                                                
| | -----------------------------------------------------------------------------------------------
| | Three Months Ended September 30, 2004
    Compared to Three Months Ended September 30,
    2003

Gross revenues increased by $24.1 million,
or 25.3%, during the three months ended September 30, 2004
as compared to the same period in 2003. This increase reflects
increases of $13.9 million in interest income on
U.S. government and agency obligations and other
investments, $8.2 million in hotel and casino operating
income, $1.9 million in hotel and resort operating income,
$1.7 million in accretion of investment in NEG Holding LLC,
$0.8 million in NEG management fees and $0.2 million
in rental income, partially offset by decreases of
$1.3 million in land, house and condominium sales,
$1.0 million in interest income on financing leases,
$0.2 million in equity in earnings of GB Holdings and
$0.1 million in dividend and other income. The increase in
interest income on U.S. government and agency obligations
and other investments is primarily due to the repayment of two
mezzanine loans and increased interest income from other
investments. The increase in hotel and casino operating income
is primarily due to an increase in casino, hotel and food and
beverage revenues. Hotel and resort operating income increased
primarily due to the Grand Harbor acquisition, partially offset
by the deferral of certain membership initiation fees at New
Seabury.

Expenses increased by $16.6 million, or
21.2%, during the three months ended September 30, 2004 as
compared to the same period in 2003. This increase reflects
increases of $8.1 million in interest expense,
$4.0 million in hotel and casino operating expenses,
$1.8 million in general and administrative expenses,
$1.7 million in hotel and resorts operating expenses,
$0.9 million in depreciation and amortization and
$0.7 million in property expenses partially offset by a
decrease of $0.6 million in the cost of land, house and
condominium sales. The increase in interest expense is primarily
attributable to interest on the $215 million principal
amount of 7.85% senior secured notes due 2012 issued by
American Casino in January 2004 and the $353 million
principal amount of 8.125% Senior Notes payable by the
Company to American Real Estate Partners, L.P. in May 2004. The
increase in hotel and casino operating expenses is primarily
attributable to increased costs associated with increased
revenues. The increase in general and administrative expenses is
primarily attributable to expenses incurred in connection with
the increase in NEG management fees and as a result of the Grand
Harbor acquisition. The increase in hotel and resort operating
expenses are primarily due to the Grand Harbor acquisition.

Operating income increased during the three
months ended September 30, 2004 by $7.6 million as
compared to the same period in 2003 as detailed above.

Earnings from land, house and condominium
operations decreased by $0.7 million in the three months
ended September 30, 2004 compared to the same period in
2003 due to a decrease in the number of units sold.

Earnings from hotel and casino operating
properties increased by $4.2 million during the three
months ended September 30, 2004 due to increased revenues
throughout the properties.

A gain on property transactions from continuing
operations of $0.5 million was recorded in the three months
ended September 30, 2003. There were no such gains in the
comparable period of 2004.

A gain on sale of marketable equity securities of
$2.2 million was recorded in the three months ended
September 30, 2003. There were no such gains in the
comparable period of 2004.

Income from continuing operations before income
taxes increased by $4.9 million in the three months ended
September 30, 2004 as compared to the same period in 2003
as detailed above.

Income tax expense of $3.6 million was
recorded in the three months ended September 30, 2004 and
2003. Income tax expense was recorded by our corporate
subsidiaries, NEG and American Casino.

Income from continuing operations increased by
$4.9 million in the three months ended September 30,
2004 as compared to the same period in 2003 as detailed above.

26



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Income from discontinued operations increased by
$7.2 million in the three months ended September 30,
2004, as compared to the same period in 2003 due to gains on
property dispositions.

Net earnings for the three months ended
September 30, 2004 increased by $12.1 million as
compared to the three months ended September 30, 2003,
primarily due to increased interest income ($13.9 million),
increased income from discontinued operations
($7.2 million) and increased net hotel and casino operating
income ($4.2 million) partially offset by increased
interest expense ($8.1 million), decreased gain on sale of
marketable debt securities ($2.2 million) and increased
general and administrative expenses ($1.8 million).



| |                                                                                              
| | ---------------------------------------------------------------------------------------------
| | Nine Months Ended September 30, 2004
    Compared to Nine Months Ended September 30,
    2003

Gross revenues increased by $61.9 million,
or 22.2%, during the nine months ended September 30, 2004
as compared to the same period in 2003. This increase reflects
increases of $26.0 million in hotel and casino operating
revenues, $21.5 million in interest income on
U.S. government and agency obligations, $9.7 million
in land, house and condominium sales, $2.4 million in NEG
management fees, $2.4 million in accretion of investment in
NEG Holding LLC, $1.2 million in dividend and other income,
$0.8 million in hotel and resort operating income and
$0.7 million in rental income, partially offset by
decreases of $2.3 million in interest income on financing
leases and $0.5 million in equity in earnings of GB
Holdings. The increase in hotel and casino operating income is
primarily due to an increase in casino, hotel, and food and
beverage revenues. The increase in interest income on
U.S. government and agency obligations is primarily due to
the repayment of two mezzanine loans and increased interest
income from other investments. The increase in land, house and
condominium sales is primarily due to sales of higher priced
units. The increase in NEG management fees is primarily due to
management fees received from the Trans Texas Gas Corporation.
The decrease in interest income on financing leases is primarily
due to property sales and reclassifications.

Expenses increased by $32.7 million, or
14.2%, during the nine months ended September 30, 2004, as
compared to the same period in 2003. This increase reflects
increases of $11.3 million in interest expense,
$6.1 million in hotel and casino operating expenses,
$5.4 million in land, house and condominium sales,
$4.0 million in general and administrative expenses,
$3.7 million in depreciation and amortization,
$1.3 million in hotel and resort operating expenses and
$0.9 million in property expenses. The increase in interest
expense is primarily attributable to interest on the Senior
Secured Notes issued by American Casino and the
8.125% Senior Notes payable to AREP and preferred limited
partnership units. The increase in hotel and casino operating
expenses is primarily attributable to increased costs associated
with increased revenues. The increase in the land, house and
condominium sales is primarily attributable to increased sales,
as discussed above. The increase in general and administrative
expenses is primarily attributable to expenses incurred in
connection with the increase in NEG management fees and as a
result of the Grand Harbor acquisition. The increase in
depreciation and amortization is primarily due to increased
depreciation and amortization with respect to American Casino.

Operating income increased during the nine months
ended September 30, 2004 by $29.2 million as compared
to the same period in 2003, as detailed above.

Earnings from land, house and condominium
operations increased by $4.3 million in the nine months
ended September 30, 2004 compared to the same period in
2003 due to sales of higher priced units. Based on current
information, sales are expected to decrease moderately during
the remainder of 2004 into early 2005. However, the Company
currently expects that the acquisition of Grand Harbor and the
approval of a 35 unit sub-division in Westchester County,
New York, should provide increased earnings from these
operations in the second half of 2005.

Earnings from hotel and casino operating
properties increased by $19.9 million during the nine
months ended September 30, 2004 due to increased revenues
throughout the property.

Gain on property transactions from continuing
operations increased by $4.5 million during the nine months
ended September 30, 2004, as compared to the same period in
2003.

A gain on sale of marketable debt securities of
$37.2 million was recorded in the nine months ended
September 30, 2004, as compared to $2.2 million in the
same period in 2003.

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

A write-down of equity securities available for
sale of $1.0 million was recorded in the nine months ended
September 30, 2003. There was no such write-down in the
2004 period.

Income from continuing operations before income
taxes increased by $88.5 million in the nine months ended
September 30, 2004 as compared to the same period in 2003,
as detailed above.

Income tax expense of $12.9 million was
recorded in the nine months ended September 30, 2004 as
compared to $10.6 million in 2003. Income tax expense was
recorded by our corporate subsidiaries NEG and American Casino.

Income from continuing operations increased by
$86.2 million in the nine months ended September 30,
2004 as compared to the same period in 2003, as detailed above.

Income from discontinued operations increased by
$61.6 million in the nine months ended September 30,
2004 as compared to the same period in 2003 due to gains on
property dispositions.

Net earnings for the nine months ended
September 30, 2004 increased by $147.8 million as
compared to the nine months ended September 30, 2003
primarily due to increased income from discontinued operations
($61.6 million), increased gain on marketable debt
securities ($35.0 million), increased net hotel and casino
operating income ($19.9 million), a write-down of other
investments in 2003 ($18.8 million), increased gain on
property dispositions from continuing operations
($4.4 million) and increased net land, house and
condominium sales ($4.3 million).

Capital Resources and Liquidity

Net cash provided by operating activities was
$92.1 million for the nine months ended September 30,
2004 as compared to $18.5 million in the comparable period
of 2003. This increase was primarily due to increased interest
income ($21.5 million), an increase in hotel and casino
operations ($19.9 million), an increase in land, house and
condominium operations ($4.3 million), repayment of
accounts payable and accrued expenses in 2003 and increased
accounts payable and accrued expenses in 2004
($46.6 million) and a decrease in receivables and other
assets ($2.0 million) partially offset by an increase in
interest expense ($11.3 million), a decrease in cash flow
from other operations ($5.4 million) and an increase in
general and administrative expenses ($4.0 million).

The following table reflects, at
September 30, 2004, our contractual cash obligations,
subject to certain conditions, due over the indicated periods
and when they come due (in $ millions):

|                                         |       |           |       |       |  |       |      |         |  |       |      |      |  |   |       |       |  |   |       |       | 
|---------------------------------------- | ----- | --------- | ----- | ----- |  | ----- | ---- | ------- |  | ----- | ---- | ---- |  | - | ----- | ----- |  | - | ----- | ----- | 
|                                         |       | Less Than |       | 1-3   |  | 4-5   |      | After   |  |      
|                                         |       | 1 Year    |       | Years |  | Years |      | 5 Years |  | Total
|                                         |       |           |       |       |  |       |      |         |  |      
|Mortgages payable                        |       | $         | 4.7   |       |  | $     | 10.4 |         |  | $     | 38.4 |      |  | $ | 39.5  |       |  | $ | 93.0  |      
|Purchase of debt securities              |       |           | 127.0 |       |  |       |     |         |  |       |     |      |  |   |      |       |  |   | 127.0 |      
|Senior secured notes payable             |       |           |      |       |  |       |     |         |  |       |     |      |  |   | 215.0 |       |  |   | 215.0 |      
|Senior unsecured notes payable           |       |           |      |       |  |       |     |         |  |       |     |      |  |   | 353.0 |       |  |   | 353.0 |      
|Construction and development obligations |       |           | 40.0  |       |  |       |     |         |  |       |     |      |  |   |      |       |  |   | 40.0  |      
|                                         |       |           |       |       |  |       |      |         |  |       |      |      |  |   |       |       |  |   |       |      
|                                         | Total |           | $     | 171.7 |  |       | $    | 10.4    |  |       | $    | 38.4 |  |   | $     | 607.5 |  |   | $     | 828.0 | 
|                                         |       |           |       |       |  |       |      |         |  |       |      |      |  |   |       |       |  |   |       |      

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

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In January 2004, American Casino closed on its
offering of senior secured notes due 2012. The notes, in the
aggregate principal amount of $215 million, bear interest
at the rate of 7.85% per annum. The proceeds were held in
escrow pending receipt of all approvals necessary under gaming
laws and certain other conditions in connection with the
acquisition of Arizona Charlies Decatur and Boulder. Upon
satisfaction of all closing conditions, the proceeds of the
offering were released from escrow. American Casino used the
proceeds for the acquisition and to repay intercompany
indebtedness and for distributions to AREH.

The American Casino 7.85% senior secured
notes due 2012 contain restrictions on American Casinos
ability to pay dividends or make distributions to us, to
purchase our equity interests in American Casino, to make loans
to us, as well as enter into other transactions with us.
American Casino also has a $20 million credit facility
which contains similar restrictions. At September 30, 2004,
there were no borrowings under the credit facility. The
restrictions imposed by American Casinos Senior Secured
Notes and the credit facility likely will preclude our receiving
payments from the operations of our principal hotel and gaming
properties. American Casino accounted for 65% of our revenues in
the nine months ended September 30, 2004 and 72% of our
operating income in that period.

On May 12, 2004, AREP and AREF closed the
offering of 8.125% Senior Notes due 2012. AREH guarantees
payment of the notes and currently is the sole guarantor.
Simultaneously, AREP loaned the Company approximately
$342.6 million, which was the principal amount of the
notes, net of the discount of approximately $10.4 million.
The loan is under the same terms and conditions as AREPs
Senior Notes. The notes, in the aggregate principal amount of
$353 million, bear interest at the rate of 8.125% per
annum. We intend to use the proceeds for general business
purposes, including to pursue our primary business strategy of
acquiring undervalued assets in our existing lines of business
or other businesses and to provide additional capital to grow
our existing businesses.

AREPs 8.125% senior notes due 2012
restrict the payment by AREP and AREH of cash dividends or
distributions on AREP partner interests, the purchase of
AREPs equity interests or the purchase, redemption,
defeasance or acquisition of debt subordinated to the
8.125% Senior Notes due 2012 as restricted
payments. The notes also prohibit the incurrence of debt,
or the issuance of disqualified stock, as defined, with certain
exceptions provided that we may incur debt or issue disqualified
stock if, immediately after such incurrence or issuance, the
ratio of the aggregate principal amount of all outstanding
indebtedness (on a consolidated basis determined in accordance
with generally accepted accounting principles) to tangible net
worth of AREP (on a consolidated basis determined in accordance
with generally accepted accounting principles, and taking into
account any changes as a result of any (x) restricted payments,
(y) assets sales or (z) contributions to equity or
from the issuance or sale of equity interests or from the
exchange or conversion of disqualified stock or debt) would have
been less than 1.75 to 1. As of September 30, 2004, such
ratio was .49 to 1. In addition, the notes require that on each
quarterly determination date (defined for each of AREPs
first, second and third quarter as the earlier of (1) the
date AREP would have been required to file a quarterly report
with the SEC on Form 10-Q and (2) the date AREP files
its quarterly report) that the Fixed Charge Coverage Ratio of
AREP and the Company for the four consecutive fiscal quarters
most recently completed prior to such quarterly determination
date be at least 1.5 to 1. For the four quarters ended
September 30, 2004, such ratio was 10.71 to 1. If the ratio
is less than 1.5 to 1, AREP will be deemed to have
satisfied this test if there is deposited cash, which together
with cash previously deposited for such purpose and not
released, equal to the amount of interest on the notes for one
year. If at any subsequent quarterly determination date, the
ratio is at least 1.5 to 1, the funds will be released to
AREP. The notes also require, on each quarterly determination
date, that the ratio of total unencumbered assets, as defined,
to the principal amount of unsecured indebtedness, as defined,
be greater than 1.5 to 1 as of the last day of the most recently
completed fiscal quarter. As of September 30, 2004, such
ratio was 5.42 to 1. The notes also restrict the creation of
liens, mergers, consolidations and sales of substantially all of
our assets, and transactions with affiliates.

At September 30, 2004, we had 21 properties
under contract or as to which letters of intent had been
executed by the potential purchaser, all of which contracts or
letters of intent are subject to purchasers due diligence
and other closing conditions. Selling prices for the properties
covered by the contracts or letters of intent would total
approximately $40.4 million. These properties are
unencumbered by mortgage debt.

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

Net proceeds from the sale or disposal of
portfolio properties totaled approximately $132.0 million
in the nine months ended September 30, 2004. During the
comparable period of 2003, sales proceeds totaled approximately
$9.7 million. The Company intends to use asset sales,
financing and refinancing proceeds for new investments.

Capital expenditures for real estate, and hotel,
casino and resort operations were approximately
$14.2 million and $17.9 million during the nine months
ended September 30, 2004 and 2003, respectively. In 2004,
capital expenditures are currently expected to be approximately
$20 million. In the nine months ended September 30,
2004, we acquired a rental property for approximately
$14.6 million, a hotel and resort property for
approximately $16.5 million and development property for
approximately $62.2 million, the latter two acquired in the
Grand Harbor acquisition.

During the nine months ended September 30,
2004 and 2003, approximately $4.1 million and
$9.1 million, respectively, of mortgage principal payments
were repaid. These amounts do not include mortgage debt repaid
in connection with sales of real estate.

Our cash and cash equivalents and investment in
U.S. government and agency obligations increased by
$566.4 million during the nine months ended
September 30, 2004 primarily due to proceeds from the loan
from AREP and of American Casinos 7.85% senior
secured notes due 2012 ($557.6 million), property sales
proceeds ($132.0 million), cash provided by operations
($92.1 million), proceeds from the sale of marketable
equity and debt securities ($86.5 million), repayment of
mezzanine loans ($49.1 million), proceeds from mortgages
payable ($10.0 million) and guaranteed payment from NEG
Holdings ($8.0 million) partially offset by the purchase of
the Arizona Charlies ($125.9 million), purchase of
debt securities ($118.3 million), the Grand Harbor
acquisition ($78.6 million), repayment of affiliate debt
($17.3 million), rental real estate acquisitions
($14.6 million) and capital expenditures
($14.2 million).

Off Balance Sheet Arrangements

We do not maintain any off-balance sheet
transactions, arrangements, obligations or other relationships
with unconsolidated entities or others.

Certain Trends and Uncertainties

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

RISKS RELATING TO OUR BUSINESS

Real Estate



| |                                                                                
| | -------------------------------------------------------------------------------
| | Our investment in property development may
    be more costly than anticipated.

We have invested and expect to continue to invest
in unentitled land, undeveloped land and distressed development
properties. These properties involve more risk than properties
on which development has been completed. Unentitled land may not
be approved for development. Undeveloped land and distressed
development properties do not generate any operating revenue,
while costs are incurred to develop the properties. In addition,
undeveloped land and development properties incur expenditures
prior to completion, including property taxes and development
costs. Also, construction may not be completed within budget or
as scheduled and projected rental levels or sales prices may not
be achieved and other unpredictable contingencies beyond our
control could occur. We will not be able to recoup any of such
costs until such time as these properties, or parcels thereof,
are either disposed of or developed into income-producing assets.

30



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##### Table of Contents





| |                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------
| | Competition for acquisitions could
    adversely affect us and new acquisitions may fail to perform as
    expected.

We seek to acquire investments that are
undervalued. Acquisition opportunities in the real estate market
for value-added investors have become competitive to source and
the increased competition may negatively affect the spreads and
the ability to find quality assets that provide returns that we
seek. These investments may not be readily financeable and may
not generate immediate positive cash flow for us. There can be
no assurance that any asset we acquire, whether in the real
estate sector or otherwise, will increase in value or generate
positive cash flow.



| |                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------
| | We may not be able to sell our rental
    properties, which would reduce cash available for other
    purposes.

We are currently marketing for sale properties
with a book value aggregating approximately $192 million at
September 30, 2004, which are encumbered by mortgage debt
which, in the aggregate, totals approximately $83 million.
We may not be successful in obtaining purchase offers for our
remaining properties at acceptable prices and sales may not be
consummated. If we do not sell this real estate, we will not pay
off the mortgages associated with these properties which would
reduce the amount we could borrow for other purposes. Many of
our properties are net-leased to single corporate tenants, it
may be difficult to sell those properties that existing tenants
decline to re-let. Our attempt to market the real estate
portfolio may not be successful. Even if our efforts are
successful, we cannot be certain that the proceeds from the
sales can be used to acquire businesses and investments at
prices or at projected returns which are deemed favorable.



| |                                                                                
| | -------------------------------------------------------------------------------
| | We face potential adverse effects from
    tenant bankruptcies or insolvencies.

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



| |                                                                                          
| | -----------------------------------------------------------------------------------------
| | The development of our New Seabury property
    may be limited by government authorities.

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



| |                                                  
| | -------------------------------------------------
| | We may be subject to environmental
    liability.

Under various federal, state and local laws,
ordinances and regulations, an owner or operator of real
property may become liable for the costs of removal or
remediation of certain hazardous substances, pollutants and
contaminants released on, under or in its property. These laws
often impose liability without regard to whether the owner or
operator knew of, or was responsible for, the release of such
substances. To the extent any such substances are found in or on
any property invested in by us, we could be exposed to liability
and be required to incur substantial remediation costs. The
presence of such substances or the failure to undertake proper
remediation may adversely affect the ability to finance,
refinance or dispose of such property. We generally conduct a
Phase I environmental site assessment on properties in
which we are considering investing. A Phase I environmental
site assessment involves record review, visual site assessment
and personnel interviews, but does not typically include
invasive testing procedures such as air, soil or groundwater
sampling or other tests performed as part of a Phase II
environmental site assessment. Accordingly, there can be no
assurance that these assessments will disclose all potential
liabilities or that future property uses or conditions

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or changes in applicable environmental laws and
regulations or activities at nearby properties will not result
in the creation of environmental liabilities with respect to a
property.


Hotel and Casino Operations



| |                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The gaming industry is highly regulated.
    The gaming authorities and state and municipal licensing
    authorities have significant control over our
    operations.

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

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



| |                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------
| | Rising operating costs for our gaming and
    entertainment properties could have a negative impact on our
    profitability.

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



| |   |                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Potential changes in the tax or regulatory
    environment which impose additional restrictions or increase
    operating costs;                                    
|
| |  | Our properties use significant amounts of
    electricity, natural gas and other forms of energy, and energy
    price increases may reduce our working capital;    
|
| |  | Our Nevada properties use significant amounts of
    water and a water shortage may adversely affect our operations;                                                
|
| |  | An increase in the cost of health care benefits
    for our employees could have a negative impact on our
    profitability;                                        
|
| |  | Some of our employees are covered by collective
    bargaining agreements and we may incur higher costs or work
    slow-downs or stoppages due to union activities;
|
| |  | Our reliance on slot machine revenues and the
    concentration of manufacturing of slot machines in certain
    companies could impose additional costs on us; and 
|
| |  | Our insurance coverage may not be adequate to
    cover all possible losses and our insurance costs may increase.                                                   

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| |                                                                      
| | ---------------------------------------------------------------------
| | We face substantial competition in the
    hotel and casino industry.

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



| |   |                                                                                                                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We compete with many world class destination
    resorts with greater name recognition, different attractions,
    amenities and entertainment options.                                                                                                                                 
|
| |  | We compete with the continued growth of gaming on
    Native American tribal lands, particularly in California.                                                                                                                                                                         
|
| |  | The existence of legalized gambling in other
    jurisdictions may reduce the number of visitors to our
    properties.                                                                                                                                                                 
|
| |  | Certain states have legalized, and others may
    legalize, casino gaming in specific venues, including race
    tracks and/or in specific areas, including metropolitan areas
    from which we traditionally attract customers, including Los
    Angeles, San Francisco and New York.
|
| |  | Our properties also compete and will in the
    future compete with all forms of legalized gambling.                                                                                                                                                                                    

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



| |                                                                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Economic downturns, terrorism and the
    uncertainty of war, as well as other factors affecting
    discretionary consumer spending, could reduce the number of our
    visitors or the amount of money visitors spend at our
    casinos.

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

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

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

Investments



| |                                                         
| | --------------------------------------------------------
| | We may not be able to identify suitable
    investments.

In addition to real estate investments, we
attempt to take advantage of investment opportunities outside of
the real estate market. The equity securities in which we may
invest may include common stocks, preferred stocks and
securities convertible into common stocks, as well as warrants
to purchase these securities. The debt securities in which we
may invest may include bonds, debentures, notes, or non-rated
mortgage-related securities, municipal obligations, bank debt
and mezzanine loans. Certain of these securities may include
lower rated or non-rated securities which may provide the
potential for higher yields and therefore may entail

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higher risk and may include the securities of
bankrupt or distressed companies. In addition, we may engage in
various investment techniques, including derivatives, options
and futures transactions, foreign currency transactions,
short sales and leveraging for either hedging or
other purposes. We may concentrate our activities by owning one
or a few businesses or holdings, which would increase our risk.
We may not be successful in finding suitable opportunities to
invest our cash and our strategy of investing in undervalued
assets may expose us to numerous risks.




| |                                                                 
| | ----------------------------------------------------------------
| | Our investments may be subject to
    significant uncertainties.

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



| |   |                                                                                     
| | - | ------------------------------------------------------------------------------------
| |  | Fluctuation of interest rates;                                                      
|
| |  | Lack of control in minority investments;                                            
|
| |  | Worsening of general economic and market
    conditions;                            
|
| |  | Lack of diversification;                                                            
|
| |  | Inexperience with non-real estate areas;                                            
|
| |  | Fluctuation of U.S. dollar exchange
    rates; and                                  
|
| |  | Adverse legal and regulatory developments that
    may affect particular businesses.

Oil and Gas



| |                                                           
| | ----------------------------------------------------------
| | We face substantial risks in the oil and
    gas industry.

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



| |   |                                                                                                
| | - | -----------------------------------------------------------------------------------------------
| |  | unexpected drilling conditions;                                                                
|
| |  | pressure or irregularities in formation;                                                       
|
| |  | equipment failures or repairs;                                                                 
|
| |  | fires or other accidents;                                                                      
|
| |  | adverse weather conditions;                                                                    
|
| |  | pipeline ruptures or spills;                                                                   
|
| |  | shortages or delays in the availability of
    drilling rigs and the delivery of equipment; and
|
| |  | price volatility.                                                                              



| |                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------
| | The oil and gas industry is highly
    regulated and federal, state and municipal licensing authorities
    have significant control over our operations.

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

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

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Risks Relating to Our Structure



| |                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our general partner and its control person
    could exercise their influence over us to the detriment of the
    holders of AREPs notes that we guarantee.

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

The interests of Mr. Icahn, including his
interests in entities in which he and we have invested or may
invest in the future, may differ from our interests, he may take
actions that may not be in our interest.



| |                                                                                   
| | ----------------------------------------------------------------------------------
| | Certain of our management are committed to
    the management of other businesses.

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



| |                                                                    
| | -------------------------------------------------------------------
| | We may be subject to the pension
    liabilities of our affiliates.

Mr. Icahn, through certain affiliates,
currently owns 100% of API and approximately 86.5% of the
outstanding depositary units and preferred units of AREP which
owns 100% of our limited partnership interests. Applicable
pension and tax laws make each member of a controlled
group of entities, generally defined as entities in which
there is at least an 80% common ownership interest, jointly and
severally liable for certain pension plan obligations of any
member of the controlled group. These pension obligations
include ongoing contributions to fund the plan, as well as
liability for any unfunded liabilities that may exist at the
time the plan is terminated. In addition, the failure to pay
these pension obligations when due may result in the creation of
liens in favor of the pension plan or the Pension Benefit
Guaranty Corporation, or the PBGC, against the assets of each
member of the controlled group.

As a result of the more than 80% ownership
interest in us by Mr. Icahns affiliates, we and our
subsidiaries, are subject to the pension liabilities of all
entities in which Mr. Icahn has a direct or indirect
ownership interest of at least 80%. One such entity, ACF
Industries LLC, or ACF, is the sponsor of several pension plans
which are underfunded by a total of approximately
$28 million on an ongoing actuarial basis and
$131 million if those plans were terminated, as most
recently reported for the 2003 plan year by the plans
actuaries. These liabilities could increase or decrease,
depending on a number of factors, including future changes in
promised benefits, investment returns, and the assumptions used
to calculate the liability. As members of the ACF controlled
group, we would be liable for any failure of ACF to make ongoing
pension contributions or to pay the unfunded liabilities upon a
termination of the ACF pension plans. In addition, other
entities now or in the future within the controlled group that
includes us may have pension plan

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obligations that are, or may become, underfunded
and we would be liable for any failure of such entities to make
ongoing pension contributions or to pay the unfunded liabilities
upon a termination of such plans.


The current underfunded status of the ACF pension
plans requires ACF to notify the PBGC of certain
reportable events, such as if we cease to be a
member of the ACF controlled group, or if we make certain
extraordinary dividends or stock redemptions. The obligation to
report could cause us to seek to delay or reconsider the
occurrence of such reportable events.

Starfire Holding Corporation, which is 100% owned
by Mr. Icahn, has undertaken to indemnify us and our
subsidiaries from losses resulting from any imposition of
pension funding or termination liabilities that may be imposed
on us and our subsidiaries or our assets as a result of being a
member of the Icahn controlled group. The Starfire indemnity
provides, among other things, that so long as such contingent
liabilities exist and could be imposed on us, Starfire will not
make any distributions to its stockholders that would reduce its
net worth to below $250 million. Nonetheless, Starfire may
not be able to fund its indemnification obligations to us.



| |                                                                           
| | --------------------------------------------------------------------------
| | We are subject to the risk of possibly
    becoming an investment company.

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

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

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






|        |                                                               
|------- | --------------------------------------------------------------
|Item 3. | Quantitative and Qualitative Disclosures
    About Market Risk

The United States Securities and Exchange
Commission requires that registrants include information about
primary market risk exposures relating to financial instruments.
Through our operating and investment activities, we are exposed
to market, credit and related risks, including those described
elsewhere herein. As we may invest in debt or equity securities
of companies undergoing restructuring or undervalued by the
market, these securities are subject to inherent risks due to
price fluctuations, and risks relating to the issuer and its
industry, and the market for these securities may be less liquid
and more volatile than that of higher rated or more widely
followed securities.

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

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


We invest in U.S. government and agency
obligations which are subject to interest rate risk. As interest
rates fluctuate, we will experience changes in the fair value of
these investments with maturities greater than one year. If
interest rates increased 100 basis points, the fair value
of these investments at September 30, 2004, would decline
by approximately $200,000.

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






|        |                        
|------- | -----------------------
|Item 4. | Controls and Procedures

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

b. We are continuing our efforts to evaluate
the effectiveness of the design and operation of our disclosure
controls and procedures and our internal controls over financial
reporting. During the three months ended September 30,
2004, our independent consultants and management identified a
significant deficiency in the consolidation process involving
lack of segregation of duties within the accounting department.
This significant deficiency was not believed to be a material
weakness. We retained an assistant controller and we are in the
process of updating our computer system in order to address this
concern and to enhance financial reporting controls. We are also
documenting some of our established internal procedures which
have been followed but not fully documented. During the three
months ended September 30, 2004, otherwise no change in our
internal control over financial reporting occurred that has
materially affected, or is reasonably likely to materially
affect, such internal control over financial reporting.

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PART II. OTHER INFORMATION






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

| |      |  |  |                                                                                                                   
| | ---- |  |  | ------------------------------------------------------------------------------------------------------------------
| | 31.1 |  |  | Certification of Principal Executive
    Officer-pursuant to Section 302(a) of the Sarbanes-Oxley
    Act of 2002.
| | 31.2 |  |  | Certification of Principal Financial
    Officer-pursuant to Section 302(a) of the Sarbanes-Oxley
    Act of 2002.
| | 32.1 |  |  | Certification of Chief Executive Officer-pursuant
    to Section 906 of the Sarbanes-Oxley Act of 2002.           
| | 32.2 |  |  | Certification of Chief Financial Officer-pursuant
    to Section 906 of the Sarbanes-Oxley Act of 2002.           

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SIGNATURES

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



| |                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------
| | AMERICAN REAL ESTATE HOLDINGS LIMITED PARTNERSHIP                                                                       
|
| | By: American Property Investors, Inc., the
    general partner of American Real Estate Holdings Limited
    Partnership.



| |     |                       
| | --- | ----------------------
| | By: | /s/ JOHN P. SALDARELLI

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

Date: December 15, 2004

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EXHIBIT INDEX

|     |  |                                                                                                                    
|---- |  | -------------------------------------------------------------------------------------------------------------------
|31.1 |  | Certification of Principal Executive
    Officer-pursuant to Section 302 (a) of the
    Sarbanes-Oxley Act of 2002.
|31.2 |  | Certification of Principal Financial
    Officer-pursuant to Section 302 (a) of the
    Sarbanes-Oxley Act of 2002.
|32.1 |  | Certification of Chief Executive Officer-pursuant
    to Section 906 of the Sarbanes-Oxley Act of 2002.            
|32.2 |  | Certification of Chief Financial Officer-pursuant
    to Section 906 of the Sarbanes-Oxley Act of 2002.            

40