ICAHN ENTERPRISES L.P. - Quarter Report: 2007 March (Form 10-Q)

 

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(Mark One)
ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period ended March 31, 2007
OR
¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                to
Commission file number 1-9516

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	Delaware		13-3398766
	(State or Other Jurisdiction of Incorporation or Organization)		(IRS Employer Identification No.)

767 Fifth Avenue, Suite 4700
New York, NY 10153
(Address of Principal Executive Offices) (Zip Code)

(212) 702-4300
(Registrant’s Telephone Number, Including Area Code)

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check One).

Large Accelerated Filer  ¨	Accelerated Filer  ý	Non-accelerated Filer  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý

As of May 7, 2007, there were 61,856,830 depositary units and 11,907,073 preferred units outstanding.

 

				Page No.
Part I.	FINANCIAL INFORMATION			1
Item 1.	Financial Statements			1
	Consolidated Balance Sheets — March 31, 2007 and December 31, 2006			1
	Consolidated Statements of Operations — Three Months Ended March 31, 2007 and 2006			2
	Consolidated Statement of Changes in Partners’ Equity and Comprehensive Income — Three Months Ended March 31, 2007			3
	Consolidated Statements of Cash Flows — Three Months Ended March 31, 2007 and 2006			4
	Notes to Consolidated Financial Statements
	1.	General		6
	2.	Operating Units		9
	3.	Discontinued Operations and Assets Held for Sale		14
	4.	Related Party Transactions		15
	5.	Investments and Related Matters		16
	6.	Inventories, Net		17
	7.	Trade, Notes and Other Receivables, Net		17
	8.	Other Current Assets		18
	9.	Property, Plant and Equipment		18
	10.	Other Non Current Assets		18
	11.	Minority Interests		19
	12.	Long Term Debt		19
	13.	Other Income (Expense)		22
	14.	Unit Options		22
	15.	Preferred Units		22
	16.	Earnings Per Limited Partnership Unit		22
	17.	Segment Reporting		23
	18.	Income Taxes		25
	19.	Commitments and Contingencies		26
	20.	Fair Value of Financial Instruments		27
	21.	Subsequent Events		27
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations			29
	1.	Overview		29
	2.	Discontinued Operations		30
	3.	Results of Operations		31
	4.	Liquidity and Capital Resources		38
	5.	Certain Trends and Uncertainties		45
Item 3.	Quantitative and Qualitative Disclosures About Market Risk			45
Item 4.	Controls and Procedures			45
Part II.	OTHER INFORMATION			46
Item 1.	Legal Proceedings			46
Item 1A.	Risk Factors			47
Item 6.	Exhibits			47
	Signatures			48
	Certifications

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PART I. FINANCIAL INFORMATION

		March 31, 2007			December 31, 2006
			(unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	2,331,521		$	1,912,235
Investments			563,552			539,115
Inventories, net			235,358			245,502
Trade, notes and other receivables, net			169,841			176,496
Other current assets			76,389			134,987
Assets of discontinued operations held for sale			48,205			47,503
Total current assets			3,424,866			3,055,838
Property, plant and equipment, net:
Gaming			417,978			422,715
Real Estate			273,852			283,974
Home Fashion			206,764			200,382
Total property, plant and equipment, net			898,594			907,071
Investments			201,943			179,932
Intangible assets			25,772			25,916
Other assets			71,492			75,990
Total assets		$	4,622,667		$	4,244,747
LIABILITIES AND PARTNERS’ EQUITY
Current liabilities:
Accounts payable		$	66,497		$	69,853
Accrued expenses and other current liabilities			160,062			197,792
Current portion of long-term debt			23,620			23,970
Securities sold not yet purchased			8,682			25,398
Total current liabilities			258,861			317,013
Long-term debt			1,675,498			1,184,990
Other non current liabilities			23,738			22,212
Preferred limited partnership units:
$10 liquidation preference, 5% cumulative pay-in-kind; 12,100,000 authorized; 11,907,073 and 11,340,243 issued and outstanding as of March 31, 2007 and December 31, 2006, respectively			119,073			117,656
Total long-term liabilities			1,818,309			1,324,858
Total liabilities			2,077,170			1,641,871
Minority interests			198,019			292,221
Commitments and contingencies (Note 19)
Partners’ equity:
Limited partners:
Depositary units: 67,850,000 authorized; 62,994,030 issued and 61,856,830 outstanding as of March 31, 2007 and December 31, 2006			2,560,705			2,524,615
General partner			(201,306)			(202,039)
Treasury units at cost: 1,137,200 depositary units			(11,921)			(11,921)
Partners’ equity			2,347,478			2,310,655
Total liabilities and partners’ equity		$	4,622,667		$	4,244,747

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AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES

		Three Months Ended March 31,
		2007			2006
		(unaudited) (in 000s, except per unit amounts)
Revenues:
Gaming		$	112,888		$	85,945
Real Estate			27,887			20,712
Home Fashion			210,604			243,490
			351,379			350,147
Expenses:
Gaming			89,661			67,322
Real Estate			23,606			17,238
Home Fashion			249,619			281,448
General and administrative expenses			7,679			11,145
			370,565			377,153
Operating loss			(19,186	)		(27,006	)
Other income (expense), net:
Interest expense			(32,977	)		(25,155	)
Interest income			31,458			11,554
Other income (expense), net			84,781			21,309
Equity in earnings of affiliate			—			24
Income (loss) from continuing operations before income taxes and minority interests			64,076			(19,274	)
Income tax expense			(6,949	)		(5,211	)
Minority interests			11,590			15,069
Income (loss) from continuing operations			68,717			(9,416	)
Discontinued operations:
Income from discontinued operations, net of income taxes			16,470			58,841
Minority interest			(1,794	)		54
Gain on sales of assets, net of income taxes			13,185			251
Income from discontinued operations, net of income taxes			27,861			59,146
Net earnings		$	96,578		$	49,730
Net earnings attributable to:
Limited partners		$	94,656		$	48,741
General partner			1,922			989
		$	96,578		$	49,730
Net earnings per LP unit:
Basic earnings:
Income (loss) from continuing operations		$	1.09		$	(0.15	)
Income from discontinued operations			0.44			0.94
Basic earnings per LP unit		$	1.53		$	0.79
Weighted average LP units outstanding:			61,857			61,857
Diluted earnings:
Income (loss) from continuing operations		$	1.09		$	(0.15	)
Income from discontinued operations			0.44			0.94
Diluted earnings per LP unit		$	1.53		$	0.79
Weighted average LP units and equivalent partnership units outstanding			61,857			61,857

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AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES

		General Partner’s Equity (Deficit)			Limited Partners’ Equity Depositary Units			Held in Treasury					Total Partners’ Equity
								Amounts			Units
Balance, December 31, 2006		$	(202,039	)	$	2,524,615		$	(11,921	)	1,137		$	2,310,655
Cumulative effect of adjustment from adoption of SFAS No. 159			(840	)		(41,344	)		—		—			(42,184	)
Comprehensive income:
Net earnings			1,922			94,656			—		—			96,578
Net unrealized losses on securities available for sale			(227	)		(11,202	)		—		—			(11,429	)
Comprehensive income			1,695			83,454			—		—			85,149
Partnership distribution			(125	)		(6,186	)		—		—			(6,311	)
Other			3			166			—		—			169
Balance, March 31, 2007		$	(201,306	)	$	2,560,705		$	(11,921	)	1,137		$	2,347,478

Accumulated other comprehensive income at March 31, 2007 was $13.9 million.

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AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES

		2007			2006
		(unaudited)
Cash Flows from Operating Activities:
Cash Flows from Continuing Operations:
Income (loss) from continuing operations		$	68,717		$	(9,416	)
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization			16,294			18,483
Investment gains			(79,410	)		(13,750	)
Preferred LP unit interest expense			1,417			1,335
Minority interests			(11,590	)		(15,069	)
Equity in earnings of affiliate			—			(24	)
Stock-based compensation expense			—			6,248
Deferred income tax expense (benefit)			362			(384	)
Impairment loss on fixed assets			313			7,828
Net cash used in activities on trading securities			(14,866	)		(40,671	)
Other, net			4,785			2,802
Changes in operating assets and liabilities:
(Increase) decrease in trade notes and other receivables			(6,602	)		20,107
Increase in other assets			(1,164	)		(32,228	)
Decrease (increase) in inventory			10,144			(31,246	)
Increase (decrease) in accounts payable, accrued expenses and other liabilities			63			(2,743	)
Net cash used in continuing operations			(11,537	)		(88,728	)
Cash Flows from Discontinued Operations:
Income from discontinued operations			27,861			59,146
Depreciation, depletion and amortization			194			28,124
Change in fair market value of Oil and Gas derivative contracts			—			(37,252	)
Changes in operating assets and liabilities			—			5,240
Gains on sales of assets			(13,185	)		—
Other, net			(15,471	)		3,708
Net cash (used in) provided by discontinued operations			(601	)		58,966
Net cash used in operating activities			(12,138	)		(29,762	)
Cash Flows from Investing Activities:
Cash Flows from Continuing Operations:
Capital expenditures			(16,898	)		(5,221	)
Purchases of marketable equity and debt securities			(75,671	)		(72,378	)
Proceeds from sales of marketable equity and debt securities			51,471			44,056
Net proceeds from sales and disposition of fixed assets			6,786			7,094
Other			—			(18	)
Net cash used in investing activities – continuing operations			(34,312	)		(26,467	)
Cash Flows from Discontinued Operations:
Capital expenditures			—			(51,476	)
Net proceeds from the sales of real estate			4,359			991
Purchase of minority interest of investment in subsidiary			(47,283	)		—
Release of escrow funds relating to asset sales			50,000			—
Other			(7,319	)		(387	)
Net cash used in investing activities – discontinued operations			(243	)		(50,872	)
Net cash used in investing activities			(34,555	)		(77,339	)

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AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES

		2007			2006
		(unaudited) (in $000s)
Cash Flows from Financing Activities:
Cash Flows Continuing Operations:
Partners’ equity:
Partnership distributions		$	(6,311	)	$	—
Dividend paid to minority holders of subsidiary			(18,451	)		—
Debt:
Proceeds from senior notes payable			492,130			—
Repayment of credit facilities			(127	)		—
Periodic principal payments			(1,262	)		(1,098	)
Net cash provided by (used in) financing activities – continuing operations			465,979			(1,098	)
Net cash used in financing activities – discontinued operations			—			(3,075	)
Net Cash Provided by (used in) Financing Activities			465,979			(4,173	)
Net increase (decrease) in cash and cash equivalents			419,286			(111,274	)
Net change in cash of assets held for sale			—			37,112
Cash and cash equivalents, beginning of period			1,912,235			460,091
Cash and cash equivalents, end of period		$	2,331,521		$	385,929
Supplemental information
Cash payments for interest		$	45,982		$	26,950
Cash payments for income taxes, net of refunds		$	3,429		$	798
Net unrealized losses on securities available for sale		$	(11,429	)	$	(10,751	)

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AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES

American Real Estate Partners, L.P., or the Company or AREP, is a master limited partnership formed in Delaware on February 17, 1987. We are a diversified holding company owning subsidiaries engaged in the following continuing operating businesses: Gaming, Real Estate and Home Fashion. In November 2006, we divested our Oil and Gas operating business and our Atlantic City gaming properties. Further information regarding our reportable segments is contained in Note 17. As described in Note 21, on April 22, 2007 we entered into an agreement to sell our remaining gaming operations.

We own a 99% limited partnership interest in American Real Estate Holdings Limited Partnership, or AREH. AREH, the operating partnership, holds our investments and conducts our business operations. Substantially all of our assets and liabilities are owned by AREH and substantially all of our operations are conducted through AREH and its subsidiaries. American Property Investors, Inc., or API, owns a 1% general partnership interest in both us and AREH, representing an aggregate 1.99% general partnership interest in us and AREH. API is owned and controlled by Mr. Carl C. Icahn.

The accompanying consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements and related notes contained in our Annual Report on Form 10-K, for the year ended December 31, 2006. The financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission related to interim financial statements. The financial information contained herein is unaudited; however, management believes all adjustments have been made that are necessary to present fairly the results for the interim periods. All such adjustments are of a normal and recurring nature, except for the adoption of SFAS No. 159, as described below. 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 wholly and 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.

Because of the diversified nature of our business, the results of operations for quarterly and other interim periods are not indicative of the results to be expected for the full year. Variations in the amount and timing of gains and losses on our investments can be significant. The results of our Real Estate and Home Fashion segments are seasonal.

On November 28, 2005, AREP Laughlin Corporation entered into an agreement to purchase the Flamingo Laughlin Hotel and Casino, now known as the Aquarius Casino Resort, or the Aquarius, in Laughlin, Nevada from Harrah’s Operating Company, Inc. AREP Laughlin Corporation was formed by AREH to acquire, own and operate the Aquarius, and AREH contributed 100% of the stock of AREP Laughlin to American Casino and Entertainment Properties LLC, or ACEP, our indirect wholly owned subsidiary, on April 4, 2006. The transaction was approved by the Nevada Gaming Commission upon recommendation of the Nevada Gaming Control Board and closed on May 19, 2006. Accordingly, our financial statements include the financial position and results of operations of the Aquarius from May 19, 2006 forward.

As discussed in Note 21, on April 22, 2007, we entered into an agreement to sell all of the issued and outstanding membership interests of ACEP, which comprise all of our current gaming properties. Accordingly, in the second quarter of fiscal 2007 the financial position and the results of ACEP’s operations will be presented as assets and liabilities of discontinued operations held for sale in the consolidated balance sheets and discontinued operations in the consolidated statements of operations for all periods in accordance with SFAS No. 144.

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AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES

On November 17, 2006, our indirect majority owned subsidiary, Atlantic Coast Entertainment Holdings, Inc., or Atlantic Coast, completed the sale to Pinnacle Entertainment, Inc., or Pinnacle, of the outstanding membership interests in ACE Gaming LLC or ACE, the owner of The Sands Hotel and Casino, or The Sands, in Atlantic City, New Jersey, and 100% of the equity interests in certain subsidiaries of AREH that owned parcels of real estate adjacent to The Sands, including the Traymore site, to Pinnacle.

On November 21, 2006, our indirect wholly owned subsidiary, AREP O & G Holdings LLC, consummated the sale of all of the issued and outstanding membership interests of NEG Oil & Gas LLC, or NEG Oil & Gas, to SandRidge Energy, Inc. or SandRidge, formerly Riata Energy, Inc.

Operating properties of our real estate segment are reclassified to held for sale when subject to a contract or letter of intent. The operations of such properties are classified as discontinued operations. The properties classified as discontinued operations have changed during fiscal 2007 and, accordingly, certain amounts in the statement of operations and cash flows for the three months ended March 31, 2007 and 2006 have been reclassified to conform to the current classification of properties. During the first quarter of 2007 two properties were reclassified to held for sale.

The financial position and results of these operations are presented as assets and liabilities of discontinued operations held for sale in the consolidated balance sheets and discontinued operations in the consolidated statements of operations.

National Energy Group, Inc., or NEGI, and Atlantic Coast are reporting companies under the Securities Exchange Act of 1934, as amended, or the, ‘34 Act. In addition, ACEP voluntarily files annual, quarterly and current reports under the, ‘34 Act.

SFAS No. 155. On February 16, 2006, the FASB issued Statement No. 155, Accounting for Certain Hybrid Instruments – an Amendment of FASB Statements No. 133 and 140 (“SFAS 155”). The statement amends Statement 133 to permit fair value measurement for certain hybrid financial instruments that contain an embedded derivative, provides additional guidance on the applicability of SFAS 133 and 140 to certain financial instruments and subordinated concentrations of credit risk. The new standard is effective for the first fiscal year beginning after September 15, 2006. The adoption of SFAS 155 as of January 1, 2007 did not have any impact on our consolidated financial statements.

EITF 06-3. In June 2006, the Emerging Issues Task Force (“EITF”) issued EITF 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That is, Gross versus Net Presentation)” to clarify diversity in practice on the presentation of different types of taxes in the financial statements. The EITF concluded that, for taxes within the scope of the issue, a company may adopt a policy of presenting taxes either gross within revenue or net. That is, it may include charges to customers for taxes within revenues and the charge for the taxes from the taxing authority within cost of sales, or, alternatively, it may net the charge to the customer and the charge from the taxing authority. If taxes are reported on a gross basis, and are significant, an entity should disclose the amounts of those taxes subject to EITF 06-3. The guidance is effective for periods beginning after December 15, 2006. We present sales tax on a net basis in our consolidated financial statements, and the adoption of EITF 06-3 did not have any impact on our financial position, results of operations, or cash flows.

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AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES

FIN No. 48. In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement 109 (“FIN 48”), which clarifies the accounting for uncertainty in tax positions taken or expected to be taken in a tax return, including issues relating to financial statement recognition and measurement. FIN 48 provides that the tax effects from an uncertain tax position can be recognized in the financial statements only if the position is “more-likely-than-not” to be sustained if the position were to be challenged by a taxing authority. The assessment of the tax position is based solely on the technical merits of the position, without regard to the likelihood that the tax position may be challenged. If an uncertain tax position meets the “more-likely-than-not” threshold, the largest amount of tax benefit that is greater than 50 percent likely to be recognized upon ultimate settlement with the taxing authority is recorded. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. We adopted FIN 48 as of January 1, 2007. The adoption of FIN 48 did not have a material impact on our consolidated financial statements. See note 18 for additional information.

SFAS No. 157. In September 2006, the FASB issued FASB Statement No. 157, Fair Value Measurements (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This statement applies under other accounting pronouncements that require or permit fair value measurements and, accordingly, SFAS 157 does not require any new fair value measurements. We adopted SFAS 157 as of January 1, 2007, in conjunction with the adoption of SFAS No. 159, as required. The adoption of SFAS 157 did not have any impact on our consolidated financial statements.

SFAS No. 159. In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115 (“SFAS 159”), which gives entities the option to measure eligible financial assets, financial liabilities and firm commitments at fair value (i.e., the fair value option), on an instrument-by-instrument basis, that are otherwise not permitted to be accounted for at fair value under other accounting standards. The election to use the fair value option is available when an entity first recognizes a financial asset or financial liability or upon entering into a firm commitment. Subsequent changes in fair value must be recorded in earnings. Additionally, SFAS 159 allows for a one-time election for existing positions upon adoption, with the transition adjustment recorded to beginning partners’ equity.

We adopted SFAS 159 as of January 1, 2007 and elected to apply the fair value option to our investment in ImClone Systems Incorporated, or ImClone. In the fourth quarter of the fiscal year ended December 31, 2006, we first applied the equity method of accounting to our investment in ImClone due to changes in ImClone’s board resulting in our having the ability to exercise significant influence over ImClone. We believe that the quality of the earnings and the value of the investment that we report over time relating to our investment in ImClone is more accurately reflected by the market value methodology of SFAS 159 rather than the equity method of accounting. The equity method of accounting would require an appraisal of the fair values of ImClone’s assets and liabilities at the dates that we acquired shares of common stock of ImClone as well as future appraisals should there be any material indications of impairment. We believe that such an appraisal would be subjective given the nature of ImClone’s pharmaceutical operations.

As of the date of adoption, the carrying value of our investment in ImClone was approximately $164.3 million and the fair value of our investment was approximately $122.2 million. In accordance with the transition requirements of SFAS 159, we recorded a cumulative effect adjustment to beginning partners’ equity for the difference between the fair value and carrying value on the date of adoption, which reduced partners’ equity by approximately $42.2 million.

As a result of the adoption of SFAS 159, we are required to record unrealized gains or losses for the change in fair value of our investment in ImClone. During the three-month period ended March 31, 2007, we recorded approximately $63.9 million of unrealized gains resulting from the change in the market value of ImClone’s stock which is recorded as a component of other income (expense), net in the consolidated statement of operations.

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AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES

Through the second quarter of the fiscal year ended December 31, 2006, or fiscal 2006, we had four principal operating businesses: Oil and Gas, Gaming, Real Estate and Home Fashion. As described in Note 3, in November 2006 we divested our Oil and Gas operating businesses and our Atlantic City Gaming properties. As a result, our Oil and Gas operations and our Atlantic City Gaming properties are now classified as discontinued operations and thus are not considered a reportable segment of our continuing operations. We now have three principal operating businesses: Gaming, Real Estate and Home Fashion.

We own and operate gaming properties in Nevada. Our properties include the Stratosphere Casino Hotel and Tower, Arizona Charlie’s Decatur, and Arizona Charlie’s Boulder in Las Vegas and the Aquarius Casino Resort in Laughlin. Results for the Aquarius are included from the date of acquisition, May 19, 2006. As described above, in November 2006, we sold our Atlantic City Gaming properties. As a result, such operations are now classified as discontinued operations.

Summary balance sheets for the continuing operations of our Gaming segment as of March 31, 2007 and December 31, 2006 as included in the consolidated balance sheets are as follows (in $000s):

		March 31,    2007			December 31, 2006
		(unaudited)
Current assets		$	98,667		$	85,583
Property, plant and equipment, net			417,978			422,715
Other non-current assets			44,001			44,455
Total assets		$	560,646		$	552,753
Current liabilities		$	50,614		$	54,763
Long-term debt			257,202			257,329
Other non-current liabilities			6,144			5,993
Total liabilities		$	313,960		$	318,085

As discussed in Note 21, on April 22, 2007, we entered into an agreement to sell all of the issued and outstanding membership interests of ACEP for $1.3 billion, plus or minus certain adjustments such as working capital. Accordingly, in the second quarter of fiscal 2007 the financial position and the results of ACEP’s operations will be presented as assets and liabilities of discontinued operations held for sale in the consolidated balance sheets and discontinued operations in the consolidated statements of operations for all periods in accordance with SFAS No. 144.

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AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES

Summarized unaudited statements of operations for the continuing operations of our Gaming segment for the three months ended March 31, 2007 and 2006 are as follows (in $000s):

		Three Months Ended March 31,
		2007			2006
Revenues:
Casino		$	67,370		$	48,022
Hotel			22,616			17,433
Food and beverage			23,109			18,070
Tower, retail and other income			9,311			8,219
Gross revenues			122,406			91,744
Less promotional allowances			9,518			5,799
Net revenues			112,888			85,945
Expenses:
Casino			22,566			16,488
Hotel			9,063			6,843
Food and beverage			15,975			13,201
Tower, retail and other income			4,244			4,248
Selling, general and administrative			29,472			20,782
Depreciation and amortization			8,341			5,760
Total costs and expenses			89,661			67,322
Operating income from continuing operations		$	23,227		$	18,623

Our real estate operations consist of three segments: rental real estate, property development and associated resort activities.

A summary of real estate property and equipment as of March 31, 2007 and December 31, 2006 as included in the consolidated balance sheets is as follows (in $000s):

		March 31,     2007			December 31, 2006
		(unaudited)
Rental properties:
Finance leases, net		$	65,302		$	66,335
Operating leases			41,653			46,170
Property development			122,306			126,537
Resort properties			44,591			44,932
Total real estate		$	273,852		$	283,974

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AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES

Summarized unaudited statements of operations attributable to our continuing real estate operations are as follows (in $000s):

	Three Months Ended March 31,
	2007			2006
Revenues:
Rental real estate:
Interest income on financing leases	$	1,578		$	1,735
Rental income		1,939			1,511
Property development		18,145			11,384
Resort activities		6,225			6,082
Total revenues		27,887			20,712
Operating expenses:
Rental real estate		1,493			998
Property development		15,612			9,976
Resort activities		6,501			6,264
Total expenses		23,606			17,238
Operating income	$	4,281		$	3,474

As of March 31, 2007, we owned 36 rental real estate properties. These primarily consist of fee and leasehold interests in real estate in 18 states. Most of these properties are net-leased to single corporate tenants. Approximately 89% of these properties are currently net-leased, 3% are operating properties and 8% are vacant.

The following is a summary of property held for sale (in $000s):

	March 31, 2007			December 31, 2006
	(unaudited)
Leased to others	$	34,653		$	28,015
Vacant		703			703
		35,356			28,718
Less: accumulated depreciation		(8,097	)		(5,053	)
Total	$	27,259		$	23,665

At March 31, 2007 and December 31, 2006, $19.8 million of real estate held for sale was pledged to collateralize the payment of non-recourse mortgages payable.

We market portions of our commercial real estate portfolio for sale. Unaudited sales activity was as follows (in $000s, except unit data):

		Three Months Ended March 31,
		2007			2006
Properties sold			1			4
Proceeds received		$	4,359		$	973
Total gain recorded		$	3,862		$	251
Gain recorded in discontinued operations		$	3,862		$	251

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AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES

We own, primarily through our Bayswater subsidiary, residential development properties. Bayswater, a real estate investment, management and development company, focuses primarily on the construction and sale of single-family houses, multi-family homes and lots in subdivisions and planned communities and raw land for residential development. Our New Seabury development property in Cape Cod, Massachusetts and our Grand Harbor and Oak Harbor development property in Vero Beach, Florida each include land for future residential development of more than 400 and 1,000 units of residential housing, respectively. Both developments operate golf and resort activities. We are also developing residential communities in Naples, Florida and Westchester County, New York.

Unaudited property development sales activity was as follows (in 000s except unit data):

		Three Months Ended March 31,
		2007			2006
Units sold:
New Seabury, Massachusetts			6			10
Grand Harbor/Oak Harbor, Florida			5			2
Falling Waters, Florida			23			—
Westchester, New York			2			—
Tampa Bay, Florida			1			—
			37			12
Revenues:
New Seabury, Massachusetts		$	3,583		$	9,033
Grand Harbor/Oak Harbor, Florida			4,349			2,321
Falling Waters, Florida			5,466			—
Westchester, New York			3,243			30
Tampa Bay, Florida			1,504			—
		$	18,145		$	11,384

We conduct our Home Fashion operations through our majority ownership in West Point International Inc., or WPI, a manufacturer and distributor of home fashion consumer products.

Summary balance sheets for Home Fashion as of March 31, 2007 and December 31, 2006 as included in the consolidated balance sheets are as follows (in $000s):

		March 31, 2007			December 31, 2006
		(unaudited)
Current assets		$	533,815		$	567,419
Assets held for sale			20,946			23,838
Property plant and equipment, net			206,764			200,382
Intangible and other assets			38,333			38,199
Total assets		$	799,858		$	829,838
Current liabilities		$	107,447		$	101,609
Other liabilities			6,941			8,980
Total liabilities		$	114,388		$	110,589

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AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES

Unaudited summarized statements of operations for the three months ended March 31, 2007 and 2006 are as follows (in $000s):

		Three Months Ended March 31,
		2007			2006
Net sales		$	210,604		$	243,490
Cost of goods sold			205,910			228,360
Gross earnings			4,694			15,130
Selling, general and administrative expenses			39,398			43,317
Restructuring and impairment charges			4,311			9,771
Operating loss		$	(39,015	)	$	(37,958	)

Total depreciation for the three months ended March 31, 2007 was $4.8 million, of which $3.7 million was included in cost of sales and $1.1 million was included in selling, general and administrative expenses. Total depreciation for the three months ended March 31, 2006 was $10.4 million, of which $8.6 million was included in cost of sales and $1.8 million was included in selling, general and administrative expenses. Total expenses for the three months ended March 31, 2007 include $4.3 million of restructuring charges (of which approximately $1.3 million relates to severance and $3.0 million relates to continuing costs of closed plants). There were no impairment charges recorded in the first quarter of fiscal 2007. Total expenses for the three months ended March 31, 2006 include $9.8 million of restructuring charges (of which approximately $1.2 million related to severance, $0.9 million related to continuing costs of closed plants and $7.7 million related to non-cash charges for impairment of fixed assets).

Impairment and restructuring charges for the three months ended March 31, 2007 and 2006 are included in Home Fashion operating expenses in the accompanying consolidated statements of operations.

To improve WPI’s competitive position, we intend to continue to restructure its operations to significantly reduce its cost of goods sold by closing certain plants located in the United States, sourcing goods from lower cost overseas facilities and, potentially, acquiring manufacturing facilities outside of the United States. WPI has incurred impairment charges to write-down the value of WPI plants taken out of service to its estimated liquidation value.

Included in restructuring expenses are cash charges associated with the ongoing costs of closed plants, employee severance, benefits and related costs. The amount of the accrued liability balance was $1.2 million as of December 31, 2006. During the three months ended March 31, 2007, we incurred additional restructuring costs of $4.3 million, and $4.5 million was paid during the period. As of March 31, 2007, the accrued liability balance was $1.0 million, which is included in accounts payable and accrued expenses in our consolidated balance sheet.

Total cumulative impairment and restructuring charges for the period from our acquisition of WPI on August 8, 2005, through March 31, 2007, were $51.6 million.

We expect that restructuring charges will continue to be incurred throughout fiscal 2007. As of March 31, 2007, WPI expects to incur additional restructuring costs over the next year relating to the current restructuring plan of between $25 million and $30 million.

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AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES

On November 17, 2006, Atlantic Coast, ACE, AREH, and certain other entities owned by or affiliated with AREH completed the sale to Pinnacle of the outstanding membership interests in ACE and 100% of the equity interests in certain subsidiaries of AREH that own parcels of real estate adjacent to The Sands, including 7.7 acres of land adjacent to The Sands known as the Traymore site. We owned, through subsidiaries, approximately 67.6% of Atlantic Coast, which owned 100% of ACE. The aggregate price was approximately $274.8 million, of which approximately $200.6 million was paid to Atlantic Coast and approximately $74.2 million was paid to affiliates of AREH for subsidiaries that owned the Traymore site and the adjacent properties. Under the terms of the agreement, $51.8 million of the purchase price paid to Atlantic Coast was deposited into escrow to fund indemnification obligations with regard to the claims of creditors and stockholders of GB Holdings, Inc., or GB Holdings. On February 22, 2007 we resolved all outstanding litigation involving our interest in our Atlantic City gaming operations resulting in a release of all claims against us. As a result of the settlement, our ownership of Atlantic Coast increased from 67.6% to 96.9% and $50.0 million of the amount placed into escrow was released to us.

On November 21, 2006, our indirect wholly owned subsidiary, AREP O & G Holdings, LLC, consummated the sale of all of the issued and outstanding membership interests of NEG Oil & Gas to SandRidge, for consideration consisting of $1.025 billion in cash, 12,842,000 shares of SandRidge’s common stock valued, at the date of closing, at $18 per share, and the repayment by SandRidge of $300.0 million of debt of NEG Oil & Gas. On April 4, 2007, we sold our entire position in SandRidge for cash consideration of approximately $243.2 million.

On November 21, 2006, pursuant to an agreement dated October 25, 2006 among AREH, NEG Oil & Gas and National Energy Group, Inc., or NEGI, NEGI sold its membership interest in NEG Holding LLC to NEG Oil & Gas for consideration of approximately $261.1 million paid in cash. Of that amount, $149.6 million was used to repay the principal of and accrued interest with respect to the NEGI 10.75% senior notes due 2007, all of which were held by us.

Operating properties are reclassified to held for sale when subject to a contract or letter of intent. The operations of such properties are classified as discontinued operations. The properties classified as discontinued operations have changed during fiscal 2007 and, accordingly, certain amounts in the statement of operations and cash flows for the three months ended March 31, 2007 and 2006 have been reclassified to conform to the current classification of properties. During the first quarter of 2007 two properties were reclassified to held for sale.

The financial position and results of our Oil and Gas and Real Estate operations and of our Atlantic City Gaming operations described above are presented as assets and liabilities of discontinued operations held for sale in the consolidated balance sheets and discontinued operations in the consolidated statements of operations, respectively, for all periods presented in accordance with SFAS No. 144.

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AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES

A summary of the results of operations for our discontinued operations for the three months ended March 31, 2007 and 2006 is as follows (in $000s) (unaudited):

		Three Months Ended March 31,
		2007			2006
Revenues
Oil and Gas		$	—		$	108,292
Atlantic City Gaming			—			40,773
Rental Real Estate			1,238			1,718
Total revenues		$	1,238		$	150,783
Operating income from discontinued operations:
Oil and Gas		$	—		$	64,988
Atlantic City Gaming			—			732
Rental Real Estate			1,079			962
Total operating income			1,079			66,682
Interest expense			(270	)		(5,435	)
Interest and other income			18,642			1,040
Income tax expense			(2,981	)		(3,446	)
Income from discontinued operations			16,470			58,841
Minority interest			(1,794	)		54
Gain on sales of discontinued operations, net of income taxes			13,185			251
		$	27,861		$	59,146

Interest and other income for the three months ended March 31, 2007 includes approximately $8.5 million relating to a real estate tax refund received by Atlantic Coast and approximately $10.1 million representing the net gain on the settlement of litigation relating to GB Holdings.

The gain on sales of discontinued operations in the three months ended March 31, 2007 includes approximately $3.9 million of gain on sales of real estate and $9.3 million relating to the working capital adjustment to the gain recorded on the sale of our Oil and Gas operations in November 2006.

Assets held for sale as of March 31, 2007 and December 31, 2006 totaled $48.2 million and $47.5 million, respectively. These relate to assets of WPI and Real Estate that are classified as held for sale in accordance with SFAS 144.

In July 2005, we entered into a license agreement with an affiliate for the non-exclusive use of approximately 1,514 square feet of office space for which we pay monthly base rent of $13,000 plus 16.4% of certain “additional rent.” The license agreement expires in May 2012. Under the agreement, base rent is subject to increases in July 2008 and December 2011. Additionally, we are entitled to certain annual rent credits each December beginning December 2005 and continuing through December 2011. In each of the three months ended March 31, 2007 and 2006, we paid rent of approximately $40,000.

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AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES

An affiliate occupies a portion of certain office space leased by us. Monthly payments from the affiliate for the use of the space began on October 12, 2006. For the three months ended March 31, 2007, we received $19,000 for the use of such space.

In the three months ended March 31, 2007 and 2006, we paid approximately $162,000 and $214,500, respectively, to an affiliate for telecommunication services.

An affiliate provided certain professional services to WPI for which WPI incurred charges of approximately $27,000 and $81,000 for the three months ended March 31, 2007 and 2006, respectively.

We provided certain professional services to affiliates for which we charged $175,000 and $113,000 in the three months ended March 31, 2007 and 2006, respectively. As of March 31, 2007, current liabilities in the consolidated balance sheet included $116,164 to be applied to our charges to the affiliate for services to be provided to it.

As of March 31, 2007, affiliates of Mr. Icahn owned 10,304,013 preferred units and 55,655,382 depositary units, which represented approximately 86.5% and 90.0% of the outstanding preferred units and depositary units, respectively.

Current investments consist of the following (in $000s):

		March 31, 2007						December 31, 2006
		Amortized Cost			Carrying Value			Amortized Cost			Carrying Value
		(unaudited)
Current Investments:
Trading
Other investments		$	—		$	28,727		$	—		$	20,538
Total current trading			—			28,727			—			20,538
Available for Sale
Marketable equity and debt securities			236,354			247,880			242,080			265,411
Other investments			284,535			286,945			251,131			253,166
Total current available for sale			520,889			534,825			493,211			518,577
Total current investments		$	520,889		$	563,552		$	493,211		$	539,115

We use the services of an unaffiliated third-party investment manager to manage certain fixed income investments. As of March 31, 2007 and December 31, 2006, $162.0 million and $163.7 million, respectively, had been invested at the discretion of such manager in a diversified portfolio consisting predominantly of short-term investment grade debt securities. Investments managed by the third-party investment manager are classified as available for sale securities in the above table.

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AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES

As described in Note 1 above, we adopted SFAS 159 as of January 1, 2007 and elected to apply the fair value option to our investment in ImClone at the time of adoption. Previously, we accounted for our investment in ImClone under the equity method in accordance with APB 18, The Equity Method of Accounting for Investments in Common Stock. The transition adjustment to beginning partners’ equity related to the adoption of SFAS 159 was a charge of approximately $42.2 million. We recorded approximately $63.9 million of unrealized gains in the first quarter of fiscal 2007 resulting from the change in the market price of ImClone’s stock.

At March 31, 2007 and December 31, 2006, our carrying value of our equity investment in ImClone was $186.1 million based on the fair value method of accounting and $164.3 million based on the equity method of accounting, respectively. As of March 31, 2007 and December 31, 2006, the market value of our ImClone shares held was $186.1 million and $122.2 million, respectively, which we believe is not material to our total assets. As of March 31, 2007, the total shares of ImClone common stock held by us as a percentage of ImClone’s total outstanding shares was 5.4%. ImClone is a registered SEC filer and its consolidated financial statements are readily available at www.sec.gov.

The carrying value of other noncurrent investments was $15.9 million and $15.6 million as of March 31, 2007 and December 31, 2006, respectively. Included in other securities is an investment of 4.4% of the common stock of Philip Services Corporation, an entity controlled by related parties. The investment has a cost basis of $0.7 million, which is net of significant impairment charges taken in prior years.

Inventories, net, relate solely to our Home Fashion segment and consist of the following (in $000s):

		March 31, 2007			December 31, 2006
		(unaudited)
Raw materials and supplies		$	26,372		$	32,059
Goods in process			77,481			83,592
Finished goods			131,505			129,851
		$	235,358		$	245,502

Trade notes and other receivables, net, consist of the following (in $000s):

		March 31, 2007			December 31, 2006
		(unaudited)
Trade receivables – Home Fashion		$	142,827		$	134,111
Allowance for doubtful accounts – Home Fashion			(8,136	)		(8,303	)
Other			35,150			50,688
		$	169,841		$	176,496

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AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES

Other current assets consist of the following (in $000s):

		March 31, 2007			December 31, 2006
		(unaudited)
Restricted cash		$	33,090		$	87,428
Other			43,299			47,559
		$	76,389		$	134,987

As of December 31, 2006, restricted cash included $50.0 million placed into escrow related to our sale of ACE to Pinnacle, which was released in February 2007 in connection with the settlement of the litigation with GB Holdings. Additionally, restricted cash consists of balances for escrow deposits and funds held to collateralize letters of credit.

Property, plant and equipment consists of the following (in $000s):

		March 31, 2007			December 31, 2006
		(unaudited)
Land		$	115,236		$	129,729
Buildings and improvements			443,402			446,878
Machinery, equipment and furniture			332,614			333,741
Assets leased to others			117,110			123,398
Construction in progress			112,480			90,672
			1,120,842			1,124,418
Less accumulated depreciation and amortization			(222,248	)		(217,347	)
Net property, plant and equipment		$	898,594		$	907,071

Depreciation and amortization expense related to property, plant and equipment for the three months ended March 31, 2007 and 2006 were $14.5 million and $17.4 million, respectively.

Other non current assets consist of the following (in $000s):

		March 31, 2007			December 31, 2006
		(unaudited)
Deferred taxes		$	45,626		$	48,976
Deferred finance costs, net of accumulated amortization of $10,560 and $9,883 as of March 31, 2007 and December 31, 2006, respectively			22,780			24,699
Other			3,086			2,315
		$	71,492		$	75,990

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AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES

Minority interests consist of the following (in $000s):

	March 31, 2007			December 31, 2006
	(unaudited)
WPI	$	166,938		$	178,843
Atlantic Coast		6,969			70,563
NEGI		24,112			42,815
	$	198,019		$	292,221

The minority interest in Atlantic Coast was reduced primarily as a result of the settlement of the litigation relating to GB Holdings. As a result, our ownership in Atlantic Coast increased from 67.6% to 96.9%.

Long-term debt consists of the following (in $000s):

		March 31, 2007			December 31, 2006
		(unaudited)
Senior unsecured 7.125% notes due 2013 – AREP		$	972,294		$	480,000
Senior unsecured 8.125% notes due 2012 – AREP			351,327			351,246
Senior secured 7.85% notes due 2012 – ACEP			215,000			215,000
Borrowings under credit facility – ACEP			40,000			40,000
Mortgages payable			108,027			109,289
Other			12,470			13,425
Total long-term debt			1,699,118			1,208,960
Less current portion			(23,620	)		(23,970	)
		$	1,675,498		$	1,184,990

On February 7, 2005, we issued $480.0 million aggregate principal amount of 7.125% senior unsecured notes due 2013, or the 7.125% notes, priced at 100% of principal amount. The 7.125% notes were issued pursuant to an indenture dated February 7, 2005 between us, as issuer, American Real Estate Finance Corp., or AREF, as co-issuer, AREH, as guarantor, and Wilmington Trust Company, as trustee (referred to herein as the 2005 Indenture). Other than AREH, no other subsidiaries guarantee payment on the notes. AREF, our wholly owned subsidiary, was formed solely for the purpose of serving as a co-issuer of the 7.125% notes.

On January 16, 2007, we issued an additional $500.0 million aggregate principal amount of 7.125% notes, or the additional 7.125% senior notes (the 7.125% notes and the additional 7.125% senior notes being referred to herein as the notes), priced at 98.4% of par, or at a discount of 1.6%, pursuant to the 2005 Indenture. The notes have a fixed annual interest rate of 7.125%, which will be paid every six months on February 15 and August 15 and will mature on February 15, 2013. At the time we issued the additional 7.125% senior notes, we entered into a new registration rights agreement in which we agreed to permit noteholders to exchange the notes for new notes which have been registered under the Securities Act of 1933, as amended, or the Securities Act.

On May 12, 2004, AREP and AREH co-issued senior unsecured 8.125% notes due 2012, or the 8.125% notes, in the aggregate principal amount of $353 million. The 8.125% notes were priced at 99.266% of principal amount and have a fixed annual interest rate of 8.125%, which will be paid every six months on June 1 and December 1, commencing December 1, 2004. The 8.125% notes will mature on June 1, 2012. AREH is a guarantor of the debt. No other subsidiaries guarantee payment on the notes.

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AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES

The indentures governing our senior unsecured notes restrict the payment of cash dividends or distributions, the purchase of equity interests or the purchase, redemption, defeasance or acquisition of debt subordinated to the senior unsecured notes. The indentures also restrict 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 of AREP and its subsidiaries on a consolidated basis to the tangible net worth of AREP and its subsidiaries on a consolidated basis would be less than 1.75 to 1.0. As of March 31, 2007, such ratio was less than 1.75 to 1.0.

The indentures governing our senior unsecured notes require that on each quarterly determination date we and the guarantor maintain a minimum ratio of cash flow to fixed charges, each as defined, of 1.5 to 1.0, for the four consecutive fiscal quarters most recently completed prior to such quarterly determination date. For the first fiscal quarter ended March 31, 2007, the ratio of cash flow to fixed charges was greater than 1.5 to 1.0.

The indentures 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 1.0 as of the last day of the most recently completed fiscal quarter. As of March 31, 2007, such ratio was in excess of 1.5 to 1.0. Based on this ratio, as of March 31, 2007, we and AREH could have incurred up to approximately $1.4 billion of additional indebtedness.

On August 21, 2006, we and AREF, as the borrowers, and certain of our subsidiaries, as guarantors, entered into a credit agreement with Bear Stearns Corporate Lending Inc., as administrative agent, and certain other lender parties. Under the credit agreement, we are permitted to borrow up to $150.0 million, including a $50.0 million sub-limit that may be used for letters of credit. Borrowings under the agreement, which are based on our credit rating, bear interest at LIBOR plus 1.0 % to 2.0 %. We pay an unused line fee of 0.25 % to 0.5 %. As of March 31, 2007, there were no borrowings under the facility.

Obligations under the credit agreement are guaranteed by and secured by liens on substantially all of the assets of certain of our indirect wholly owned holding company subsidiaries. The credit agreement has a term of four years and all amounts are due and payable on August 21, 2010. The credit agreement includes covenants that, among other things, restrict the creation of liens and certain dispositions of property by holding company subsidiaries that are guarantors. Obligations under the credit agreement are immediately due and payable upon the occurrence of certain events of default.

The indenture governing ACEP’s 7.85% senior secured notes due 2012 restrict the payment of cash dividends or distributions by ACEP, the purchase of its equity interests, the purchase, redemption, defeasance or acquisition of debt subordinated to ACEP’s notes and investments as “restricted payments.” The indenture also prohibits the incurrence of debt or the issuance of disqualified or preferred stock, as defined, by ACEP, with certain exceptions, provided that ACEP may incur debt or issue disqualified stock if, immediately after such incurrence or issuance, the ratio of consolidated cash flow to fixed charges (each as defined) for the most recently ended four full fiscal quarters for which internal financial statements are available immediately preceding the date on which such additional indebtedness is incurred or disqualified stock or preferred stock is issued would be at least 2.0 to 1.0, determined on a pro forma basis giving effect to the debt incurrence or issuance. As of March 31, 2007, such ratio was in excess of 2.0 to 1.0. The indenture also restricts the creation of liens, the sale of assets, mergers, consolidations or sales of substantially all of ACEP’s assets, the lease or grant of a license, concession, other agreements to occupy, manage or use ACEP’s assets, the issuance of capital stock of restricted subsidiaries and certain related party transactions. The

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AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES

ACEP notes allow ACEP to incur indebtedness, among other things, of up to $ 50.0 million under credit facilities, non-recourse financing of up to $15.0 million to finance the construction, purchase or lease of personal or real property used in its business, permitted affiliate subordinated indebtedness (as defined), the issuance of additional 7.85% senior secured notes due 2012 in an aggregate principal amount not to exceed 2.0 times net cash proceeds received from equity offerings and permitted affiliate subordinated debt, and additional indebtedness of up to $10.0 million.

Effective May 11, 2006, ACEP, and certain of ACEP’s subsidiaries, as guarantors, entered into an amended and restated credit agreement with Wells Fargo Bank N.A., as syndication agent, Bear Stearns Corporate Lending Inc., as administrative agent, and certain other lender parties. As of March 31, 2007, the interest rate on the outstanding borrowings under the credit facility was 6.82% per annum. The credit agreement amends and restates, and is on substantially the same terms as, a credit agreement entered into as of January 29, 2004. Under the amended and restated credit agreement, ACEP will be permitted to borrow up to $60.0 million. Obligations under the credit agreement are secured by liens on substantially all of the assets of ACEP and its subsidiaries. The credit agreement has a term of four years and all amounts are due and payable on May 10, 2010. As of March 31, 2007, there were $40.0 million of borrowings under the credit agreement. The borrowings were incurred to finance a portion of the purchase price of the Aquarius.

The credit agreement includes covenants that, among other things, restrict the incurrence of additional indebtedness by ACEP and its subsidiaries, the issuance of disqualified or preferred stock, as defined, the creation of liens by ACEP or its subsidiaries, the sale of assets, mergers, consolidations or sales of substantially all of ACEP’s assets, the lease or grant of a license or concession, other agreements to occupy, manage or use ACEP’s assets, the issuance of capital stock of restricted subsidiaries and certain related party transactions. The credit agreement also requires that, as of the last date of each fiscal quarter, ACEP’s ratio of consolidated first lien debt to consolidated cash flow not be more than 1.0 to 1.0. As of March 31, 2007, such ratio was less than 1.0 to 1.0. As of March 31, 2007, ACEP was in compliance with each of the covenants.

The restrictions imposed by ACEP’s senior secured notes and the credit facility likely will limit our receiving payments from the operations of our hotel and gaming properties.

Mortgages payable, all of which are non-recourse to us, bear interest at rates between 4.97% and 7.99% and have maturities between September 1, 2008 and July 1, 2016.

On June 16, 2006, WestPoint Home, Inc., an indirect wholly owned subsidiary of WPI, entered into a $250.0 million loan and security agreement with Bank of America, N.A., as administrative agent and lender. On September 18, 2006, The CIT Group/Commercial Services, Inc., General Electric Capital Corporation and Wells Fargo Foothill, LLC were added as lenders under this credit agreement. Under the five-year agreement, borrowings are subject to a monthly borrowing base calculation and include a $75.0 million sub-limit that may be used for letters of credit. Borrowings under the agreement bear interest, at the election of WestPoint Home, either at the prime rate adjusted by an applicable margin ranging from minus 0.25% to plus 0.50% or LIBOR adjusted by an applicable margin ranging from plus 1.25% to 2.00%. WestPoint Home pays an unused line fee of 0.25% to 0.275%. Obligations under the agreement are secured by WestPoint Home’s receivables, inventory and certain machinery and equipment.

The agreement contains covenants including, among others, restrictions on the incurrence of indebtedness, investments, redemption payments, distributions, acquisition of stock, securities or assets of any other entity and capital expenditures. However, WestPoint Home is not precluded from effecting any of these transactions if excess availability, after giving effect to such transaction, meets a minimum threshold.

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AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES

As of March 31, 2007, there were no borrowings under the agreement, but there were outstanding letters of credit of approximately $26.6 million, the majority of which relate to trade obligations.

Unaudited Other Income (Expense), net, is comprised of the following (in $000s):

		Three Months Ended March 31,
		2007			2006
Net realized gains on sales of marketable securities		$	5,177		$	33,431
Unrealized gains on marketable securities			72,126			15,478
Net realized losses on securities sold short			(1,510	)		(5,131	)
Unrealized gains (losses) on securities sold short			3,617			(25,476	)
Gain on sale of assets			3,612			—
Other			1,759			3,007
		$	84,781		$	21,309

We recorded approximately $63.9 million of unrealized gains in the first quarter of fiscal 2007 resulting from the change in the market price of ImClone’s stock.

On June 29, 2005, we granted 700,000 nonqualified unit options to our then chief executive officer to purchase up to 700,000 of our depositary units at an exercise price of $35 per unit which would vest over a period of eight years. On March 14, 2006, our chief executive officer resigned from that position, became a director and Vice Chairman of the Board of API, and was designated as API’s principal executive officer. These changes in status caused the options to be cancelled in accordance with their terms.

In accordance with SFAS No.123(R), Share Based Payment, the cancellation required that any previously unrecognized compensation cost be recognized at the date of cancellation and accordingly we recorded a compensation charge of $6.2 million in the first quarter of fiscal 2006 related to the previously unrecognized compensation cost.

Pursuant to the terms of the preferred units, on February 27, 2007 we declared our scheduled annual preferred unit distribution payable in additional preferred units at the rate of 5% of the liquidation preference per preferred unit of $10. The distribution was paid on March 31, 2007 to holders of record as of March 15, 2007. A total of 566,830 additional preferred units were issued. As of March 31, 2007, 11,907,073 preferred units were issued and outstanding. As of March 31, 2007, the number of authorized preferred units was 12,100,000.

Basic earnings per LP unit are based on earnings attributable to limited partners. Net earnings available for limited partners are divided by the weighted average number of limited partnership units outstanding. Diluted earnings per LP unit are based on earnings before the preferred unit distribution as the numerator with the denominator based on the weighted average number of limited partnership units and equivalent limited partnership units outstanding assuming conversion. The preferred units are considered to be equivalent units.

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AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES

The following table sets forth the computation of basic and diluted earnings per LP unit (in 000s, except per unit data) (unaudited):

		Three Months Ended March 31,
		2007			2006
Attributable to limited partners:
Basic income (loss) from continuing operations		$	67,350		$	(9,224	)
Add preferred unit distribution(1)			—			—
Income (loss) before discontinued operations			67,350		$	(9,224	)
Income from discontinued operations			27,306			57,970
Diluted earnings		$	94,656		$	48,746
Weighted average LP units outstanding			61,857			61,857
Dilutive effect of redemption of preferred LP units(2)			—			—
Dilutive effect of unit options			—			—
Weighted average LP units and equivalent partnership units outstanding			61,857			61,857
Basic earnings per LP unit:
Income (loss) from continuing operations		$	1.09		$	(0.15	)
Income from discontinued operations			0.44			0.94
Basic earnings:		$	1.53		$	0.79
Diluted earnings per LP unit:
Income (loss) from continuing operations		$	1.09		$	(0.15	)
Income from discontinued operations			0.44			0.94
Diluted earnings:		$	1.53		$	0.79

——————

(1)

As its effect would have been anti-dilutive, the adjustment for interest expense associated with the preferred units’ distribution of $1.4 million and $1.3 million for the three months ended March 31, 2007 and 2006, respectively, has been excluded from the calculation of diluted earnings per LP unit.

(2)

As their effect would have been anti-dilutive, 1,063,226 and 2,902,385 units for the three months ended
March 31, 2007 and 2006, respectively, have been excluded from the weighted average LP units and equivalent partnership units outstanding.

Through the second quarter of fiscal 2006, we maintained the following six reportable segments: (1) Oil and Gas; (2) Gaming; (3) Rental Real Estate; (4) Property Development; (5) Associated Resort Activities; and (6) Home Fashion. Our three real estate related operating and reportable segments are all individually immaterial and have been aggregated for purposes of the accompanying consolidated balance sheets and statements of operations.

In November 2006, we divested our Oil and Gas operating units. As a result, our Oil and Gas operations are now classified as discontinued operations and thus are not considered a reportable segment of our continuing operations. We now maintain the five remaining reportable segments.

We assess and measure 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. As discussed above, the terms of financings for the Gaming, Home Fashion and Associated Resorts Activities segments impose restrictions on their ability to transfer funds to us, including restrictions on dividends, distributions, loans and other transactions.

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AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES

The revenues and net segment operating income for each of the reportable segments of our continuing operations are summarized as follows for the three months ended March 31, 2007 and 2006 (in $000s) (unaudited):

		Three Months Ended March 31,
		2007			2006
Revenues:
Gaming, net		$	112,888		$	85,945
Real Estate:
Rental Real Estate			3,517			3,246
Property development			18,145			11,384
Resort operations			6,225			6,082
Total Real Estate			27,887			20,712
Home Fashion			210,604			243,490
Total revenues		$	351,379		$	350,147
Net segment operating income (loss):
Gaming		$	23,227		$	18,623
Real Estate:
Rental Real Estate			2,024			2,248
Property development			2,533			1,408
Resort operations			(276	)		(182	)
Total Real Estate			4,281			3,474
Home Fashion			(39,015	)		(37,958	)
Total segment operating loss			(11,507	)		(15,861	)
Holding Company costs(i)			(7,679	)		(11,145	)
Total operating loss			(19,186	)		(27,006	)
Interest expense			(32,977	)		(25,155	)
Interest income			31,458			11,554
Other income (expense), net			84,781			21,309
Equity in earnings of affiliate			—			24
Income from continuing operations before income taxes & minority interest			64,076			(19,274	)
Income tax expense			(6,949	)		(5,211	)
Minority interests			11,590			15,069
Income (loss) from continuing operations		$	68,717		$	(9,416	)

——————

(i)

Holding Company costs include AREP’s and AREH’s general and administrative expenses and acquisition (legal and professional) costs at the Holding Company level. Selling, general and administrative expenses of the segments are included in their respective operating expenses in the accompanying statements of operations.

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AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES

		March 31, 2007			December 31, 2006
		(unaudited)			(restated)
Assets (in $000s):
Gaming		$	560,646		$	552,753
Real Estate			386,833			382,220
Home Fashion			778,912			806,000
Subtotal			1,726,391			1,740,973
Assets of discontinued operations held for sale			48,205			47,503
Reconciling items(ii)			2,848,071			2,456,271
Total assets		$	4,622,667		$	4,244,747

——————

(ii)

Reconciling items relate principally to cash and investments of AREP and AREH in the Holding Company.

Our corporate subsidiaries recorded the following income tax expense attributable to continuing operations for our taxable subsidiaries for the three months ended March 31, 2007 and 2006 (in $000s) (unaudited):

		Three Months Ended March 31,
		2007			2006
Current		$	(6,587	)	$	(5,595	)
Deferred		$	(362	)		384
		$	(6,949	)		(5,211	)

We recorded income tax provisions of $6.9 million and $5.2 million on pre-tax income of $64.1 million for the three months ended March 31, 2007 and pre-tax loss of ($19.3) million for the three months ended March 31, 2006. Our effective income tax rate was 10.8% and (27.0)% for the respective periods. The difference between the effective tax rate and the statutory federal rate of 35% is due principally to income or losses from partnership entities in which taxes are the responsibility of the partners, as well as changes in valuation allowances.

We adopted the provisions of Financial Accounting Standards Board (FASB) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48), on January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in accordance with SFAS No. 109 , “Accounting for Income Taxes,” and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The adoption of FIN 48 did not have a material impact on our consolidated financial statements.

As of the date of adoption, our unrecognized tax benefits totaled $5.0 million, all of which, if recognized, would affect the annual effective tax rate. During the three months ended March 31, 2007, there have been no changes to the amount of unrecognized tax benefits. We believe it is reasonably possible that the total amounts of unrecognized tax benefits could materially change as a result of settlements due to audits and the expiration of statutes of limitations prior to March 31, 2008; however, quantification of an estimated amount cannot be made at this time.

We recognize interest accrued related to uncertain tax positions in interest expense. Penalties are recognized as a component of income tax expense. The amount of accrued interest and penalties on uncertain tax positions was $1.2 million and $1.1 million as of March 31, 2007 and January 1, 2007, respectively. The amount of interest and penalties accrued during the three months ended March 31, 2007 was approximately $0.1 million.

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AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES

We or certain of our subsidiaries file income tax returns in the U.S. federal jurisdiction, various state jurisdictions, and various non-U.S. jurisdictions. We are no longer subject to U.S. federal, state, and non-U.S. income tax examinations for years prior to 2002.

We are from time to time parties to various legal proceedings arising out of our businesses. We believe however, that other than the proceedings described in Part I, Item 3 of our Annual Report on Form 10-K for fiscal 2006, filed with the SEC on March 6, 2007, including that relating to WPI discussed below, there are no proceedings pending or threatened against us which, if determined adversely, would have a material adverse effect on our business, financial condition, results of operations or liquidity

In August 2005, WPI acquired substantially all of the assets of WestPoint Stevens, Inc. pursuant to an order of the Bankruptcy Court, or the Sale Order. We were holders of approximately 39.99% of the outstanding first lien debt and approximately 51.21% of the outstanding second lien debt of WestPoint Stevens, Inc. Since 2005, we have been involved in litigation with certain of the first lien holders of WestPoint Stevens, Inc., or the Contrarian Group, in the Bankruptcy Court, the U.S. District Court for the Southern District of New York and, since 2006, in the Delaware Chancery Court, relating to the Sale Order and our ownership of a majority of the common stock of WPI. In late 2005, the District ruled on the Contrarian Group’s appeal of the Sale Order and remanded the matter to the Bankruptcy Court. On April 13, 2006, the Bankruptcy Court entered a remand order, or the Remand Order, which provides, among other things, that all of the shares of common stock and rights to acquire shares of common stock of WPI issued to us and the other first lien lenders or held in escrow pursuant to the Sale Order constituted “replacement collateral”, other than 5,250,000 shares of common stock that we acquired for cash. The Bankruptcy Court also issued a stay of the Remand Order pending the parties’ appeal. Both parties appealed the Bankruptcy Court’s Remand Order to the District Court. In addition, the Contrarian Group requested that the stay be lifted or that we be required to post a bond as a condition to the continuance of the stay. On May 9, 2007, the District Court denied the Contrarian Group’s motion to lift the stay of the Remand Order, but conditioned the continuation of the stay on the posting of a bond of $200 million by May 17, 2007. The order is without prejudice to the right of any party to seek a change in the amount of the bond. We are currently reviewing the order. As of the date hereof, the District Court has not rendered a decision on the cross-appeals.

On January 19, 2007, the trustee for the first lien lenders, Beal Bank, and certain of the first lien lenders filed an Amended Complaint, captioned Beal Bank, S.S.B. et al v. WestPoint International, Inc., et al. Plaintiffs seek, among other relief, an order declaring that WPI is obliged to register the common stock (other than the 5,250,000 shares purchased by us) in Beal Bank’s name, an order declaring certain corporate governance changes implemented in 2005 invalid, an order declaring invalid the actions taken at the December 20, 2006 stockholders’ meeting and an order to “unwind” the issuance to us in December 2006 of the preferred stock of WPI, or, alternatively, directing that such preferred stock be held in trust. We have filed a motion to dismiss the Delaware action to which the Plaintiffs have objected. Oral argument is scheduled for May 23, 2007.

We currently own approximately 67.7% of the outstanding shares of common stock and 100% of the preferred stock of WPI. As a result of the District Court’s order in the Bankruptcy case, the proceedings on remand, and the proceedings in the Delaware action, our percentage of the outstanding shares of common stock of WPI could be reduced to less than 50% and perhaps substantially less and our ownership of the preferred stock of WPI could also be affected. If we were to lose control of WPI, it could adversely affect the business and prospects of WPI and the value of our investment in it. In addition, we consolidated the balance sheet of WPI as of March 31, 2007 and WPI’s results of operations for the period from the date of acquisition through March 31, 2007. If we were to own less than 50% of the outstanding common stock or the challenge to our preferred stock ownership is successful, we would have to evaluate whether we should consolidate WPI and if so our financial statements could be materially different than as presented as of March 31, 2007, December 31, 2006 and December 31, 2005 and for the periods then ended.

We cannot predict the outcome of these proceedings or the ultimate impact on our investment in WPI or the business prospects of WPI.

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AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES

The following table sets forth our financial instruments owned, at fair value, and financial instruments sold, but not yet purchased, at fair value (in $000s):

		March 31, 2007			December 31, 2006
		(unaudited)
Financial Instruments Owned:
Trading investments		$	28,727		$	20,538
Available for sale investments:
Marketable equity and debt securities			247,880			265,411
Other securities			286,945			253,166
Investment in ImClone Systems Incorporated			186,058			122,122
		$	749,610		$	661,237
Securities sold not yet purchased		$	8,682		$	25,398

The following table sets forth our financial assets and liabilities that were accounted for at fair value as of March 31, 2007 by level within the fair value hierarchy. As required by SFAS 157, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

		Assets and Liabilities at Fair Value As of March 31, 2007 ($000)
		Level 1			Level 2			Total
		(unaudited)
Assets
Trading investments(i)		$	28,727		$	—		$	28,727
Available for sale investments:
Marketable equity and debt securities(i)			247,880			—			247,880
Other securities			23,500	(i)		263,445	(ii)		286,945
Investment in ImClone Systems Incorporated(i)			186,058			—			186,058
		$	486,165		$	263,445		$	749,610
Liabilities
Securities sold not yet purchased(i)		$	8,682			—			8,682

——————

(i)

Based on quoted prices in active markets of the securities.

(ii)

Includes $243.2 million representing 13,508,666 shares of SandRidge valued at $18.00 per share based on an appraisal conducted in November 2006. As disclosed in Note 21, on April 4, 2007, we sold all of our shares of SandRidge common stock to a consortium of investors for $18.00 per share.

On April 4, 2007, our subsidiaries signed agreements to sell their entire position in the common stock of SandRidge  to a consortium of investors in a series of private transactions. The per share selling price was $18, and total cash consideration received at closing was approximately $243.2 million.

In April 2007, we sold an aggregate of $600.0 million of Variable Rate Senior Convertible Notes due 2013, or the Notes. The Notes were sold in a private placement pursuant to Section 4(2) of the Securities Act. The Notes bear interest at a rate of three month LIBOR minus 125 basis points, but no less than 4.0% nor higher than 5.5%, and are convertible into depositary units of AREP at a conversion price of $132.595 per share, subject to adjustments in certain circumstances.

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AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES

The Notes have not been and will not be registered under the Securities Act and may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements of the Securities Act. In connection with the sale of the Notes, we and the buyers have entered into a registration rights agreement, pursuant to which we have agreed to file one or more shelf registration statements with respect to resales of depositary units issuable upon conversion of the Notes.

On April 22, 2007, American Entertainment Properties Corp, or AEP, a wholly owned indirect subsidiary of AREP, entered into a Membership Interest Purchase Agreement with W2007/ACEP Holdings, LLC, an affiliate of Whitehall Street Real Estate Funds, a series of real estate investment funds affiliated with Goldman, Sachs & Co., to sell all of the issued and outstanding membership interests of ACEP, which comprises our gaming operations, for $1.3 billion, plus or minus certain adjustments such as working capital, more fully described in the agreement. Pursuant to the terms of the agreement, AEP is required to cause ACEP to repay from funds provided by AEP, the principal, interest, prepayment penalty or premium due on ACEP’s 7.85% senior secured notes due 2012 and ACEP’s senior secured credit facility. With this transaction, we anticipate realizing a gain of approximately $0.8 billion on our investments in ACEP, before income taxes. ACEP’s casino assets are comprised of the Stratosphere Casino Hotel & Tower, the Arizona Charlie’s Decatur, the Arizona Charlie’s Boulder and the Aquarius Casino Resort. The transaction is subject to the approval of the Nevada Gaming Commission and the Nevada State Gaming Control Board, as well as customary conditions. The parties expect to close the transaction in approximately eight months; however, we can not assure you that we will be able to consummate the transaction.

On May 4, 2007, the Board of Directors approved a $0.05 increase in our quarterly distribution policy and payment of a quarterly cash distribution of $0.15 per unit on our depositary units payable in the second quarter of fiscal 2007. The distribution will be paid on June 1, 2007 to depositary unitholders of record at the close of business on May 22, 2007. Under the terms of the indenture dated April 5, 2007 governing our senior convertible notes due 2013, we will also be making a $0.05 distribution to holders of these notes in accordance with the formula set forth in the indenture.

In February 2007, we entered into an agreement and plan of merger pursuant to which we would acquire Lear Corporation, or Lear, for an aggregate purchase price of approximately $5.2 billion. In connection with the planned merger, our subsidiary, AREP Car Holdings Corp., entered into a commitment letter with Bank of America, N.A., and Banc of America Securities LLC on February 8, 2007, pursuant to which Bank of America would act as the initial lender under two senior secured credit facilities in an aggregate principal amount of $3.6 billion, consisting of a $1.0 billion senior secured revolving facility and a $2.6 billion senior secured term loan B facility. The credit facilities, along with cash on hand, are intended to refinance and replace Lear’s existing credit facilities and to fund the transactions contemplated by the merger. We intend to fund approximately $1.4 billion of the purchase price from our cash and cash equivalents and investments.

Mr. Carl C. Icahn has proposed that we acquire his interests in American Railcar, Inc., or ARI, and Philip Services Corporation. A committee of independent directors of the board has been formed to consider the proposals. No agreement has been reached as to price or terms. Any acquisition would be subject to, among other things, the negotiation, execution and closing of a definitive agreement and the receipt of a fairness opinion. We continuously identify, evaluate and engage in discussions concerning potential investments and acquisitions, including potential investments in and acquisitions of affiliates of Mr. Icahn. There cannot be any assurance that the current proposals or any other potential transactions that we consider will be completed. ARI is a publicly traded company that is primarily engaged in the business of manufacturing covered hoppers and tank railcars. Philip is an industrial services company that provides industrial outsourcing, environmental services and metal services to major industry sectors throughout North America.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s discussion and analysis of financial condition and results of operations is comprised of the following sections:

1.

Overview

2.

Discontinued Operations

3.

Results of Operations

4.

Liquidity and Capital Resources

5.

Certain Trends and Uncertainties

American Real Estate Partners, L.P., (referred to herein as the Company or AREP or we) is a master limited partnership formed in Delaware on February 17, 1987. AREP is a diversified holding company owning subsidiaries engaged in the following operating businesses: Gaming, Real Estate, and Home Fashion. In addition, during the fourth quarter of fiscal 2006 we divested our Oil and Gas operating unit and our Atlantic City Gaming properties.

Our business strategy includes the following:

Enhance Value of Existing Businesses. We continually evaluate our operating businesses with a view to maximizing their value to us. In each of our businesses, we place senior management with the expertise to run their businesses and give them operating objectives that they must achieve. We may make additional investments in a business segment to improve the performance of their operations.

Invest Capital to Grow Existing Operations or Add New Operating Platforms. Our management team has extensive experience in identifying, acquiring and developing undervalued businesses or assets. We may look to make acquisitions of assets or operations that complement our existing operations. We also may look to add new operating platforms by acquiring businesses or assets directly or establishing an ownership position through the purchase of debt or equity securities of troubled entities and may then negotiate for the ownership or effective control of their assets.

Enhance Returns on Assets. We continually look for opportunities to enhance returns on both liquid and operating assets. We may seek to unlock value by selling all or a part of a business segment.

We own a 99% limited partnership interest in American Real Estate Holdings Limited Partnership, or AREH. AREH and its subsidiaries hold our investments and substantially all of our operations are conducted through AREH and its subsidiaries. American Property Investors, Inc., or API, owns a 1% general partnership interest in both us and AREH, representing an aggregate 1.99% general partnership interest in us and AREH. API is owned and controlled by Mr. Carl C. Icahn. As of March 31, 2007, affiliates of Mr. Icahn beneficially owned approximately 90% of our outstanding depositary units and approximately 86.5% of our outstanding preferred units.

In addition to our Gaming, Real Estate and Home Fashion operating units, we discuss the Holding Company. The Holding Company includes the unconsolidated results of AREH and AREP, and investment activity and expenses associated with the activities of a holding company.

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Discontinued Operations

On November 17, 2006, our indirect majority-owned subsidiary, ACE, a New Jersey limited liability company and a wholly owned subsidiary of Atlantic Coast, which formerly owned The Sands Hotel and Casino in Atlantic City, AREH, and certain other entities owned by or affiliated with AREH, completed the sale to Pinnacle, of the outstanding membership interests in ACE and 100% of the equity interests in certain subsidiaries of AREH that owned parcels of real estate adjacent to The Sands, including 7.7 acres of land known as the Traymore site. We owned, through subsidiaries, approximately 67.6% of Atlantic Coast, which owns 100% of ACE. The aggregate price was approximately $274.8 million, of which approximately $200.6 million was paid to Atlantic Coast and approximately $74.2 million was paid to affiliates of AREH for subsidiaries that owned the Traymore site and the adjacent properties. Under the terms of the agreement, $51.8 million of the purchase price paid to Atlantic Coast was deposited into escrow to fund indemnification obligations with regard to the claims of creditors and stockholders of GB Holdings. On February 22, 2007, we resolved all outstanding litigation involving our interest in the Atlantic City gaming operations, resulting in a release of all claims against us. As a result of the settlement, our ownership of Atlantic Coast increased from 67.6% to 96.9% and $50.0 million of the amount placed into escrow was released to us.

On November 21, 2006, our indirect wholly owned subsidiary, AREP O & G Holdings LLC, consummated the sale of all of the issued and outstanding membership interests of NEG Oil & Gas LLC to SandRidge for consideration consisting of $1.025 billion in cash, 12,842,000 shares of SandRidge’s common stock, valued at $18 per share on the date of closing, and the repayment by SandRidge of $300.0 million of debt of NEG Oil & Gas. On April 4, 2007, we sold our entire position in SandRidge for cash consideration of approximately $243.2 million.

On November 21, 2006, pursuant to an agreement dated October 25, 2006 among AREH, NEG Oil & Gas and NEGI, NEGI sold its membership interest in NEG Holding LLC to NEG Oil & Gas for consideration of approximately $261.1 million paid in cash. Of that amount, $149.6 million was used to repay the principal and accrued interest with respect to the NEGI 10.75% senior notes due 2007, all of which was held by us.

Operating properties of our real estate segment are reclassified to held for sale when subject to a contract or letter of intent. The operations of such properties are classified as discontinued operations. The properties classified as discontinued operations have changed during fiscal 2007 and, accordingly, certain amounts in the statement of operations and cash flows for the three months ended March 31, 2007 and 2006 have been reclassified to conform to the current classification of properties. During the first quarter of fiscal 2007 two properties were reclassified to held for sale.

The financial position and results of these operations are presented as assets and liabilities of discontinued operations held for sale in the consolidated balance sheets and discontinued operations in the consolidated statements of operations, respectively, for all periods presented in accordance with Statement of Financial Accounting Standards No. 144 (SFAS No. 144), Accounting for the Impairment or Disposal of Long-Lived Assets.

Summarized financial information for discontinued operations is set forth below:

		Three Months Ended March 31,
		2007			2006
Total operating income		$	1,079		$	66,682
Interest expense			(270	)		(5,435	)
Interest and other income			18,642			1,040
Income tax expense			(2,981	)		(3,446	)
Income from discontinued operations			16,470			58,841
Minority interests			(1,794	)		54
Gain on sales of discontinued operations, net of income taxes			13,185			251
Total income from discontinued operations, net of income taxes		$	27,861		$	59,146

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Results of Operations

The key factors affecting our financial results for the three months ended March 31, 2007 compared to the three months ended March 31, 2006 were:

Revenues for the first quarter of 2007 increased by $1.2 million, or 0.4%, as compared to the first quarter of 2006. This increase was principally due to increased gaming revenues of $26.9 million resulting from the inclusion of revenues from the Aquarius Hotel and Casino acquired in May 2006, increased revenues from real estate property development activities, substantially offset by reduced sales from WPI of $32.9 million.

Operating loss for the first quarter of 2007 was $19.2 million, as compared to an operating loss of $27.0 million for the first quarter of 2006. This change resulted primarily from a $4.6 million increase in operating income from gaming and reduced holding company expenses as discussed below.

Interest expense for the first quarter of 2007 increased by $7.8 million, or 31.1%, as compared to the first quarter of 2006. This increase is primarily the result of interest incurred on the $500 million of the additional 7.125% senior notes that were issued in January 2007. Interest income for the first quarter of 2007 increased by $19.9 million, as compared to the first quarter of 2006, primarily due to the increase in the Holding Company’s cash position resulting from the sales of our Oil and Gas and Atlantic City gaming operations in November, 2006. Other income (expense), net increased by $63.5 million for the first quarter of 2007 as compared to the first quarter of 2006, resulting primarily from unrealized gains on our investment in ImClone systems Incorporated.

Our Gaming segment consists of our four gaming properties in Nevada: the Stratosphere Casino Hotel and Tower, Arizona Charlie’s Boulder and Arizona Charlie’s Decatur in Las Vegas and the Aquarius Casino Resort, in Laughlin. As described above, operating results for The Sands are classified as discontinued operations and thus are excluded from the results of our continuing Gaming operations. As disclosed in Note 1 to our consolidated financial statements, we acquired the Aquarius on May 19, 2006. Net revenues and operating income for the Aquarius for the three months ended March 31, 2007 were $28.8 million and $5.4 million, respectively. These amounts are included in the table below with the heading “Including Aquarius.” The results of operations discussed below refer to our gaming properties excluding the results of the Aquarius.

As discussed in Note 21 to the financial statements, on April 22, 2007, we entered into an agreement to sell all of the issued and outstanding membership interests of ACEP. Accordingly, in the second quarter of 2007 the financial position and the results of ACEP’s operations will be presented as assets and liabilities of discontinued operations held for sale in the consolidated balance sheets and discontinued operations in the consolidated statements of operations for all periods in accordance with SFAS No. 144.

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The following table summarizes the key operating data for the continuing operations of our gaming segment for the periods indicated (in $000s) (unaudited):

		Three Months Ended March 31,
		Including Aquarius			Excluding Aquarius
		2007			2007			2006
Revenues:
Casino		$	67,370		$	46,132		$	48,022
Hotel			22,616			18,076			17,433
Food and beverage			23,109			18,271			18,070
Tower, retail and other income			9,311			7,992			8,219
Gross revenues			122,406			90,471			91,744
Less promotional allowances			9,518			6,401			5,799
Net revenues			112,888			84,070			85,945
Expenses:
Casino			22,566			16,203			16,488
Hotel			9,063			6,690			6,843
Food and beverage			15,975			13,331			13,201
Tower, retail and other income			4,244			3,561			4,248
Selling, general and administrative			29,472			19,998			20,782
Depreciation and amortization			8,341			6,492			5,760
Total costs and expenses			89,661			66,275			67,322
Operating income		$	23,227		$	17,795		$	18,623