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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

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

For the Fiscal Year Ended December 31, 1997
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

AMERICAN REAL ESTATE PARTNERS, L.P.
(Exact name of registrant as specified in its charter)

DELAWARE                                               13-3398766
(State or other jurisdiction of                              (IRS Employer
incorporation or organization)                               Identification No.)

100 South Bedford Road, Mt. Kisco, New York                       10549
(Address of principal executive offices)                        (Zip Code)

(914) 242-7700
(AREP's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Name of each exchange
Title of each class                           on which registered
-------------------                          ---------------------
Depositary Units Representing                         New York Stock Exchange
Limited Partner Interests

5% Cumulative Pay-in-Kind Redeemable Preferred        New York Stock Exchange
Units Representing Limited Partner Interests

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark whether AREP (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 and (2) has been subject to such filing requirements for
the past 90 days.
YES  X       NO

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]

Based upon the closing price of Depositary Units on March 2, 1998, as reported
on the New York Stock Exchange Composite Tape (as reported by The Wall Street
Journal), the aggregate market value of AREP's Depositary Units held by
nonaffiliates of AREP as of such date was $162,433,343.

Based upon the closing price of Preferred Units on February 27, 1998, as
reported on the New York Stock Exchange Composite Tape (as reported by The Wall
Street Journal), the aggregate market value of AREP's Preferred Units held by
nonaffiliates of AREP as of such date was $7,635,889.

Number of Depositary Units outstanding as of March 2, 1998:  46,198,284.
Number of Preferred Units outstanding as of March 2, 1998:  7,311,054.

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PART I

Item 1.  Business.

Introduction

American Real Estate Partners, L.P. ("AREP") was formed in Delaware on
February 17, 1987. Pursuant to an exchange offer (the "Exchange Offer") which
was consummated on July 1, 1987, AREP acquired the real estate and other assets,
subject to the liabilities, of thirteen limited partnerships (the "Predecessor
Partnerships"). The Predecessor Partnerships acquired such assets between 1972
and 1985. A registration statement on Form S-4 relating to the Exchange Offer
(Registration No. 33-13943) was filed with the Securities and Exchange
Commission (the "SEC") and declared effective May 18, 1987.

AREP's general partner is American Property Investors, Inc. (the
"General Partner"), a Delaware corporation which is wholly owned by Carl C.
Icahn ("Icahn"). The General Partner's principal business address is 100 South
Bedford Road, Mt. Kisco, New York 10549, and its telephone number is (914)
242-7700. AREP's business is conducted through a subsidiary limited partnership,
American Real Estate Holdings Limited Partnership (the "Subsidiary" or "AREH"),
in which AREP owns a 99% limited partnership interest. The General Partner also
acts as the general partner for the Subsidiary. The General Partner has a 1%
general partnership interest in each of AREP and the Subsidiary. References to
AREP herein include the Subsidiary, unless the context otherwise requires.

As described below, AREP is primarily engaged in the business of
acquiring and managing real estate and activities related thereto. On August 16,
1996, an amendment (the "Amendment") to the Partnership's Amended and Restated
Agreement of Limited Partnership (the "Partnership Agreement") became effective
which permits AREP to make non-real estate related investments. As described
below, the Amendment permits AREP to invest in securities issued by companies
that are not necessarily engaged as one of their primary activities in the
ownership, development or management of real estate to further diversify its
investments while remaining in the real estate business and continuing to pursue
suitable investments in the real estate markets.

General Description of Business

AREP is primarily engaged in the business of acquiring and managing
real estate and activities related thereto. Such acquisitions may be
accomplished by purchasing assets outright or by acquiring securities of
entities which hold significant real estate related assets. Historically, the
properties owned by AREP have been primarily office, retail, industrial,
residential and hotel properties. Most of the real estate assets currently owned
by AREP were acquired from the Predecessor Partnerships and such assets
generally are net-leased to single, corporate tenants. As of March 2, 1998, AREP
owned 205 separate real estate assets primarily consisting of fee and leasehold
interests in 35 states.

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For each of the years ended December 31, 1997, 1996 and 1995, no single
real estate asset or series of assets leased to the same lessee accounted for
more than 10% of the gross revenues of AREP. However, at December 31, 1997, 1996
and 1995, Portland General Electric Company ("PGEC") occupied a property (the
"PGEC Property") which represented more than 10% of AREP's total real estate
assets. See Item 2 - "Properties."

AREP's primary investment strategy in recent periods has been to seek
to acquire undervalued assets including residential development projects, land
parcels for future residential and commercial development, commercial
properties, non-performing loans and securities of entities which own, manage or
develop significant real estate assets, including limited partnership units and
securities issued by real estate investment trusts, debt or equity securities of
companies which may be undergoing restructuring and sub-performing properties
that may require active asset management and significant capital improvements.

In addition to holding real property, AREP may consider the acquisition
or seek effective control of land development companies and other real estate
operating companies which may have a significant inventory of assets under
development, as well as experienced personnel. AREP may originate or purchase
mortgage loans including non-performing mortgage loans. AREP will normally
acquire non-performing mortgage loans with a view to acquiring title to or
control over the underlying properties. AREP also may retain purchase money
mortgages in connection with its sale of portfolio properties, with such terms
as the General Partner deems appropriate at the time of sale. Certain of AREP's
investments may be owned by special purpose subsidiaries formed by AREP or by
joint ventures (including joint ventures with affiliates of the General
Partner).

In August 1996, AREP amended the Partnership Agreement to permit
non-real estate investments which, while AREP continues to seek undervalued
investment opportunities in the real estate market, will permit it to take
advantage of investment opportunities it believes exist outside of the real
estate market in order to seek to maximize Unitholder value and further
diversify its assets. Investments in non-real estate assets will consist of
equity and debt securities of domestic and foreign issuers that are not
necessarily engaged as one of their primary activities in the ownership,
development or management of real estate, and may include, for example, lower
rated securities which may provide the potential for higher yields and therefore
may entail higher risk. AREP will conduct these activities in such a manner so
as not to be deemed an investment company under the Investment Company Act of
1940 (the "1940 Act"). Generally, this means that no more than 40% of AREP's
total assets will be invested in securities. In addition, AREP will structure
its investments so as to continue to be taxed as a partnership rather than as a
corporation under the applicable publicly-traded partnership rules of the
Internal Revenue Code.

All decisions with respect to the improvement, expansion, acquisition,
disposition, development, management, financing or refinancing of properties or
other investments are at the sole discretion of the General Partner.

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1997 Rights Offering

On September 25, 1997, AREP completed a rights offering (the "1997
Offering"), pursuant to which it raised approximately $267 million, net of
related expenses. In addition, in connection therewith the General Partner
contributed $5,419,382 in accordance with the terms of the Partnership
Agreement. Pursuant to the terms of the 1997 Offering, holders of depositary
units representing limited partner interests (the "Depositary Units") on the
record date received one transferable subscription right (each a "Right") for
each five Depositary Units held. Each Right was exercisable at a subscription
price of $52 for a combination of securities consisting of four Depositary Units
and one 5% cumulative pay-in-kind redeemable preferred unit representing a
limited partner interest (the "Preferred Units"). High Coast Limited
Partnership, a Delaware limited partnership which is controlled by Icahn, acted
as guarantor of the offering ("High Coast"). Initially, High Coast acquired
11,116,568 Depositary Units and 2,779,142 Preferred Units as a result of
exercising Rights received based upon its ownership of Depositary Units. In
addition, High Coast exercised an over-subscription privilege and pursuant to
the foregoing and its subscription guaranty it acquired a total of 6,502,764
additional Depositary Units and 1,625,691 additional Preferred Units; as a
result, the 1997 Offering was fully subscribed.

The 1997 Offering enabled AREP to increase its available liquidity so
that it will be in a better position to take advantage of investment
opportunities and to further diversify its portfolio of assets. Additionally,
AREP may determine to reduce the debt of certain properties where the interest
rate is considered to be in excess of current market rates.

As described below, the types of investments AREP will pursue include
residential/commercial development, debt or equity securities of companies which
may be undergoing restructuring and subperforming assets that may require active
asset management and significant capital expenditures. These investments may not
be readily financeable and may not generate immediate positive cash flow for
AREP. As such, they require AREP to maintain a strong capital base in order to
react quickly to these market opportunities as well as to allow AREP the
financial strength to develop or reposition these assets.

The Amendment

On August 16, 1996, the Amendment became effective which permits AREP
to make non-real estate related investments. Pursuant to the Amendment, AREP,
while continuing to pursue suitable investments in the real estate markets as
described, may invest a portion of its funds in securities of issuers that are
not necessarily engaged as one of their primary activities in the ownership,
development or management of real estate. Such investments may include equity
and debt securities of domestic and foreign issuers. The investment objective of
AREP with respect to such investments will be to purchase undervalued
securities, so as to maximize total return consisting of current income and/or
capital appreciation. Undervalued securities are those which AREP believes may
have greater inherent value than indicated by their then current trading price
and/or may lend themselves to "activist" shareholder involvement. The equity
securities in which AREP may invest may include common stocks, preferred stocks

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and securities convertible into common stocks, as well as warrants to purchase
such securities. The debt securities in which AREP may invest may include bonds,
debentures, notes, mortgage-related securities and municipal obligations.
Certain of such securities may include lower rated securities which may provide
the potential for higher yields and therefore may entail higher risk. AREP will
conduct its investment activities in such a manner so as not to be deemed an
investment company under the 1940 Act. While the General Partner believes that
investments pursuant to the Amendment may result in increased Unitholder value
and further diversification of the Partnership's assets, there can be no
assurances thereof and there are significant risks which may also attend the
Amendment. See Item 1 - "Investment Opportunities and Strategies - Non-Real
Estate Related Investments" below and Note 1 to the Financial Statements
contained herein for more information relating to the Amendment.        

Investment Opportunities and Strategies

AREP believes that it will benefit from diversification of its
portfolio of assets. By the end of the year 2000, net leases representing
approximately 18% of AREP's net annual rentals from its real estate portfolio
will be due for renewal, and by the end of the year 2002, net leases
representing approximately 32% of AREP's net annual rentals will be due for
renewal. Since most of AREP's properties are net-leased to single corporate
tenants, it may be difficult and time consuming to re-lease or sell those
properties that existing tenants decline to re-let or purchase and that AREP may
be required to incur expenditures to renovate such properties for new tenants.
In addition, AREP may become responsible for the payment of certain operating
expenses, including maintenance, utilities, taxes, insurance and environmental
compliance costs associated with such properties which are presently the
responsibility of the tenant. As a result, AREP could experience an adverse
impact on net cash flow from such properties in the future.

Real Estate Investments

As mentioned above, in selecting future real estate investments, AREP
intends to focus on assets that it believes are undervalued in the real estate
market, which investments may require substantial liquidity to maintain a
competitive advantage. Despite the substantial capital pursuing real estate
opportunities, management believes that there are still opportunities available
to acquire investments that are undervalued. This may include commercial
properties, residential and commercial development projects, land parcels for
future residential and commercial development, non-performing loans and the
securities of entities which own, manage or develop significant real estate
assets, including limited partnership units and securities issued by REITS, and
debt or equity securities of companies which may be undergoing restructuring and
subperforming properties that may require active asset management and
significant capital improvements. Management believes that, in the current
market, investments requiring some degree of active management or development
activity have the greatest potential for growth, both in terms of capital
appreciation and the generation of cash flow. In order to further these
investment objectives, AREP may consider the acquisition or seek effective
control of land development companies and other real estate operating companies
which may have a significant

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inventory of assets under development, as well as experienced personnel. This
may enhance AREP's ability to further diversify its portfolio of properties and
gain access to additional operating and development capabilities. Such
acquisitions may include those from affiliates of the General Partner, provided
the terms thereof are fair and reasonable and are approved by the Audit
Committee of the Board of Directors of the General Partner (the "Audit
Committee"). In this regard, in 1997, an offer was made by AREP acting through
its Audit Committee to purchase a land development company owned by Icahn for
approximately $48.5 million, which offer was not accepted. While the Audit
Committee may consider having AREP make a higher offer for the land development
company and may consider making such offer in Units of AREP (the number of Units
could be conditioned upon the Audit Committee's obtaining a fairness opinion),
there can be no assurances thereof or whether the transaction will be pursued.

Other real estate investment opportunities AREP may pursue include
entering into joint venture arrangements or providing financing to developers
for the purpose of developing single-family homes, luxury garden apartments or
commercial properties. The loans may provide for a contractual rate of interest
to be paid as well as providing for a participation in the profits of the
development and/or an equity participation. Additionally, AREP will seek to
acquire underperforming properties through outright purchase or the purchase of
the debt or securities of such entities. For example, AREP may elect to
establish an ownership position by first acquiring debt secured by targeted
assets and then negotiate for the ownership or effective control of some or all
of the underlying equity in such assets. AREP may also seek to establish a
favorable economic and negotiating position through the acquisition of other
rights or interests that provide it with leverage in negotiating the acquisition
of targeted assets. AREP will also seek to acquire assets that are not in
financial distress but due to the particular circumstances of their ownership,
use or location, present substantial opportunities for development or long-term
growth. AREP may also consider acquiring additional net-leased properties at
appropriate yields or to effectuate tax-free exchanges.

As mentioned, AREP has invested and expects to invest in undeveloped
land and development properties. In particular, AREP expects to continue to
pursue this year the development of two residential sites it owns in Armonk, New
York and East Hampton, New York. The Armonk site is comprised of approximately
43 residential building lots, and the East Hampton site is comprised of
approximately 16 residential building lots. Undeveloped land and development
properties involve more risk than properties on which development has been
completed. Undeveloped land and development properties do not generate any
operating revenue, while costs are incurred to develop the properties. In
addition, undeveloped land and development properties incur expenditures prior
to completion, including property taxes and development costs. Also,
construction may not be completed within budget or as scheduled and projected
rental levels or sales prices may not be achieved and other unpredictable
contingencies beyond the control of AREP could occur. AREP will not be able to
recoup any of such costs until such time as these properties, or parcels
thereof, are either disposed of or developed into income-producing assets.
Accordingly, the greater the length of time it takes to develop or dispose of
these properties, or such parcels, the greater will be the costs incurred by
AREP without the benefit of income from these properties, which may adversely
affect the ability of AREP to successfully develop such properties. Furthermore,
the ultimate disposition price of these properties may be less than the costs
incurred by AREP with respect thereto.

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AREP may continue to purchase real estate limited partnership interests
by pursuing negotiated agreements or commencing tender offers. The illiquidity
of many of these securities and their "informal" trading market enable entities
such as AREP to purchase these interests at what may be significant discounts to
the value of their underlying real estate in many instances. It should also be
noted, however, that such illiquidity may adversely affect AREP's ability to
profit from these investments in the near term, although AREP believes that such
investments provide opportunities for long term appreciation.

Further, as reported generally, recent global economic and monetary
conditions, especially in Asia, may create opportunities for value-added
investors in those markets. AREP has begun to consider additional opportunities
in foreign markets, but there can be no assurance that any such transactions
will be pursued or consummated. It should be noted that such investments may be
subject to additional considerations relating to foreign political and
regulatory risks, as well as currency and exchange risks, which may affect the
liquidity and value of any such investments in the near term, although AREP
believes that such investments provide opportunities for long term appreciation.

As discussed below, AREP recently made a $42.8 million investment in
First Mortgage Notes issued by Stratosphere Corporation ("Stratosphere"), which
owns the Stratosphere Tower, Casino & Hotel. In addition to the Stratosphere
transaction, AREP may consider additional investment opportunities in the gaming
industry. See Item 1 - Recent Acquisitions - Investment in Mortgages and Notes
Receivable for a further discussion on Stratosphere, as well as a discussion on
AREP's recent investments in the Sands Hotel and Casino and the Claridge Hotel
and Casino. It should be noted that investments in the gaming industry involve
significant risks, including those relating to competitive pressures and
political and regulatory considerations. In recent years, there have been
several new gaming establishments opened as well as facility expansions,
providing increased supply of competitive products and properties in the
industry, which may adversely affect the operating margins and investment
returns. As new openings and expansion projects have been completed, supply has
grown more quickly than demand in some areas, and competition has increased.
Likewise, an increase in supply often leads to increases in complimentary and
promotional expenses in the industry. While the increase in supply and
competition may provide additional investment opportunities for investors such
as AREP, such investments may require additional capital expenditures and
restructurings (such as in the case of Stratosphere) and there can be no
assurance that such investments will not be adversely affected by such pressures
or prove to be successful. Furthermore, federal, state and local jurisdictions
from time to time consider legislation regarding the gaming industry which could
adversely impact gaming operations. AREP believes, however, that investments in
the gaming industry provide AREP with opportunities for long term appreciation.

While AREP believes opportunities in real estate acquisitions continue
to remain available, such acquisition opportunities for value-added investors
are becoming more competitive to source and the increased competition may have
some impact on the spreads and the ability to find quality assets that provide
returns that are sought. These investments may not be readily financeable and
may not generate immediate positive cash flow for AREP. As such, they require
AREP to maintain a strong capital base in order to react quickly to these market
opportunities as well as to allow AREP the financial strength to develop or
reposition these assets. While this may impact cash flow in the near term and
there can be no assurance that any asset acquired by AREP will increase in value
or generate positive cash flow, AREP intends to focus on assets that it believes
may provide opportunities for long-term growth and further its objective to
diversify its portfolio.

Non-Real Estate Related Investments

In selecting future investments, AREP may, while remaining in the real
estate business and continuing to pursue suitable investments for AREP in the
real estate markets, invest a portion of its funds available for investment in
securities of issuers that are not necessarily engaged as one of their primary
activities in the ownership, development or management of real estate. Such
investments may include equity and debt securities of domestic and foreign
issuers. The investment objective of AREP with respect to such investments will
be to purchase undervalued securities, so as to maximize total returns
consisting of current income and/or capital appreciation. Undervalued securities
are those which AREP believes may have greater inherent value than indicated by
their then current trading price and/or may lend themselves to "activist"
shareholder involvement. These securities may be undervalued due to market
inefficiencies, may relate to opportunities wherein economic or market trends
have not been identified and reflected in market value, or may include those in
complex or not readily followed securities. Less favorable financial reports,
lowered credit ratings, revised industry forecasts

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or sudden legal complications may result in market inefficiencies and
undervalued situations. As is the case with real estate related investments,
with regard to non-real estate related investments, AREP may determine to
establish an ownership position through the purchase of debt or equity
securities of such entities and then negotiate for the ownership or effective
control of some or all of the underlying equity in such assets.

The equity securities in which AREP may invest may include common
stocks, preferred stocks and securities convertible into common stocks, as well
as warrants to purchase such securities. The debt securities in which AREP may
invest may include bonds, debentures, notes, mortgage-related securities and
municipal obligations. Certain of such securities may include lower rated
securities which may provide the potential for higher yields and therefore may
entail higher risk. In addition, AREP may engage in various investment
techniques, such as options and futures transactions, foreign currency
transactions and leveraging for either hedging or other purposes.

AREP will conduct its investment activities in such a manner so as not
to be deemed an investment company under the 1940 Act. Generally, this means
that AREP does not intend to enter the business of investing in securities and
that no more than 40% of AREP's total assets will be invested in securities. The
portion of AREP's assets invested in each type of security or any single issuer
or industry will not be limited. Investments may be made directly by AREP or
indirectly through entities in which it has an interest.

AREP will concentrate on undervalued securities, which may include, for
example, high yield securities and neglected securities, and AREP's investments
may be subject to significant amounts of business, financial, market and other
risks. There can be no assurance that AREP will correctly evaluate such
investments and their attendant risks or that such investments will be
profitable to AREP. In addition, the securities in which AREP may invest are
subject to the following inherent risks:

Equity Securities. Equity securities fluctuate in value, often based on
factors unrelated to the issuer of the securities, and such fluctuations can be
pronounced.

Fixed-Income Securities. Even though interest-bearing securities are
investments which may promise a stable stream of income, the prices of such
securities generally are inversely affected by changes in interest rates and,
therefore, are subject to the risk of market price fluctuations. The value of
fixed-income securities also may be affected by changes in the credit rating or
financial condition of the issuer.

Lower Rated Securities. AREP may invest a portion of its funds in
higher yielding (and, therefore, higher risk) securities (commonly known as junk
bonds). Such investments generally may be subject to certain risks with respect
to the issuing entity and to greater market fluctuations than certain lower
yielding, higher rated convertible debt securities. The secondary market for
these securities may be less liquid than that of higher rated securities;
adverse conditions could make it difficult at times for AREP to sell certain
securities or could result in lower prices.

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Foreign Markets. Foreign securities and other markets generally are not
as developed or efficient as those in the United States. Securities of some
foreign issuers are less liquid and more volatile than securities of comparable
U.S. issuers. Similarly, volume and liquidity in most foreign securities markets
are less than in the United States and, at times, volatility of price can be
greater than in the United States. Since foreign securities often are purchased
with and payable in currencies of foreign countries, the value of these assets
measured in U.S. dollars may be affected favorably or unfavorably by changes in
currency rates and exchange control regulations.

Use of Leverage. Use of borrowed funds to leverage acquisitions can
exaggerate the effect of any increase or decrease in market value. Such
borrowings would be subject to interest costs which may not be recovered by
appreciation in value of the securities purchased.

Use of Derivatives. AREP may use derivatives ("Derivatives"), which are
financial instruments which derive their performance, at least in part, from the
performance of an underlying asset, index or interest rate, such as options and
mortgage-related securities. While Derivatives can be used effectively in
furtherance of AREP's investment objectives such as by providing a hedging
technique, under certain market conditions they can increase the volatility or
decrease the liquidity of AREP's assets.

Natural Resources Investments. AREP may consider investments in oil
and gas and other mineral or natural resource businesses. Income and gains
derived from the exploration, development, mining, production, processing,
refining, transportation or marketing of oil, gas, minerals or other natural
resources is qualifying income for purposes of maintaining AREP's tax
classification as a partnership. Accordingly, investments in these lines of
business may be done by AREP on a tax efficient basis. Management notes that an
investment in any of these lines of businesses will be subject to the inherent
investment risks of that business. AREP may determine to conduct any such
business through a subsidiary limited liability company or limited partnership
to limit the exposure of its other investments. At present, there can be no
assurance that any such transactions will be pursued or consummated, or the type
of such transaction.

Partnership Distributions

On March 26, 1998, AREP announced that no distributions on its
Depositary Units are expected to be made in 1998. No distributions were made in
1997, 1996 or 1995. In making its announcement, AREP noted that it intends to
continue to apply available cash flow toward its operations, repayment of
maturing indebtedness, tenant requirements and other capital expenditures and
creation of cash reserves for contingencies facing AREP, including environmental
matters and scheduled lease expirations. As previously reported, by the end of
the year 2000, net leases representing approximately 18% of AREP's net annual
rentals from its portfolio will be due for renewal, and by the end of the year
2002, 32% of such rentals will be due for renewal. In making its decision, AREP
also considered the number of properties that are leased to retail tenants
(approximately 29% of AREP's net annual rentals from its portfolio) some of
which are experiencing cash flow difficulties and restructurings. Further, AREP
noted that the types of investments AREP is pursuing, including assets that may
not be readily financeable or generating positive cash flow, such as development
properties, non-performing mortgage loans or securities of companies which may
be undergoing restructuring or require significant capital investments, require
AREP to maintain a strong capital base in order to own, develop and reposition
those assets. See Item 5 - "Market for AREP's Common Equity and Related Security
Holder Matters - Distributions" and Item 7

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- - "Management's Discussion and Analysis of the Financial Condition and Results
of Operations - Capital Resources and Liquidity."

On March 31, 1997, AREP distributed to holders of record of its
Preferred Units as of March 14, 1997 approximately 103,721 additional Preferred
Units. Pursuant to the terms of the Preferred Units, on February 27, 1998, AREP
declared its scheduled annual preferred unit distribution payable in additional
Preferred Units at the rate of 5% of the liquidation preference of $10.00. The
distribution is payable March 31, 1998 to holders of record as of March 13,
1998.

Recent Acquisitions

Investment in Mortgages and Notes Receivable

In June, 1997 AREP invested approximately $42.8 million to purchase
approximately $55 million face value of 14 1/4% First Mortgage Notes, due May
15, 2002, issued by the Stratosphere, which has approximately $203 million of
such notes outstanding. An affiliate of the General Partner owns approximately
$46.6 million face value of the Stratosphere First Mortgage Notes.

Stratosphere owns and operates the Stratosphere Tower, Casino & Hotel,
a destination resort complex located in Las Vegas, Nevada, containing a 97,000
square foot casino and 1,444 hotel rooms and suites and other attractions.

Stratosphere and its wholly owned subsidiary Stratosphere Gaming Corp.
filed voluntary petitions on January 27, 1997, for Chapter 11 reorganization
pursuant to the United States Bankruptcy Code (the "Bankruptcy Code").  
Stratosphere and its subsidiary are acting as debtors in possession on behalf  
of their respective bankrupt estates and are authorized as such to operate     
their business subject to bankruptcy court supervision.

Stratosphere recently filed a Second Amended Plan of Reorganization
which, as proposed, would provide holders of the First Mortgage Notes with 100%
of the equity in the reorganized entity. If such plan is approved by the
Bankruptcy Court, it would provide AREP and an affiliate of the General Partner
with a controlling interest in such reorganized entity.

If such transaction were consummated AREP and the affiliate of the
General Partner would enter into a joint venture regarding such Stratosphere
investment, with such venture to be managed by such affiliate of the General
Partner on terms fair and reasonable to AREP; AREP's investment will be
structured to comply with applicable regulatory requirements. Furthermore, AREP
understands that Stratosphere may seek approximately $100 million for expansion
of its hotel facility, a portion of which may be provided by AREP and the
affiliate of the General Partner.

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AREP, the General Partner and the directors and officers of the
General Partner are currently in the process of pursuing gaming applications to
obtain licenses from the Nevada Gaming Authority. AREP understands that the
application process may take a number of months. AREP has no reason to believe
it will not obtain its necessary license; however, AREP understands that the
licensing applications of the affiliate of the General Partner may be reviewed
by the authorities earlier than its application. In an effort to facilitate the
consummation of the Stratosphere reorganization process if approved by the
court in advance of the obtaining of such license by AREP, AREP may transfer
its interests in Stratosphere to an affiliate of the General Partner at a price
equal to AREP's cost for such Stratosphere First Mortgage Notes. Such transfer
will be made to accommodate such reorganization process only if the affiliate
of the General Partner receives its license but AREP does not receive its
license, by the time of Stratosphere's reorganization as described. However, in
such event, the affiliate of the General Partner would be obligated to sell
back to AREP, and AREP would be obligated to repurchase, such interests (or
their equivalent) in Stratosphere at the same price (together with a
commercially reasonable interest factor) when the appropriate licenses are
obtained for AREP. AREP believes that there should be no problem for AREP to
obtain its license, and thereupon such Stratosphere interests (if so
transferred to the affiliate of the General Partner) would be transferred back
to AREP; however, in order to secure AREP, if such Stratosphere interests are
not so transferred back to AREP then any net gains (less such interest) from
the subsequent sale by the affiliate of the General Partner of such
Stratosphere interests previously held by AREP will be paid to AREP. Presently,
AREP understands that the Stratosphere First Mortgage Notes are trading at less
than AREP's cost for such notes, and at December 31, 1997, AREP recorded a
$9,790,000 provision for loss on its investment in Stratosphere (See Note 8).

Furthermore, in January, 1998, AREP acquired an interest in the Sands
Hotel and Casino (the "Sands") located in Atlantic City, New Jersey by
purchasing the principal amount of $17.5 million of First Mortgage Notes issued
by GB Property Funding Corp. ("GB Property"). GB Property was organized as a
special purpose entity for the borrowing of funds by Greate Bay Hotel and
Casino, Inc. ("Greate Bay"). The purchase price for such notes was approximately
$14.3 million. Notes in the amount of $185 million were issued, which bear
interest at 10.875% per annum and are due on January 15, 2004.

Greate Bay owns and operates the Sands, a destination resort complex,
containing a 76,000 foot casino and 532 hotel rooms and other amenities. On
January 5, 1998, GB Property and Greate Bay filed for bankruptcy protection
under Chapter 11 of the Bankruptcy Code to restructure its long term debt.

In January, 1998, AREP also acquired an interest in the Claridge Hotel
and Casino (the "Claridge Hotel") located in Atlantic City, New Jersey by
purchasing the principal amount of $15 million of First Mortgage Notes of the
Claridge Hotel and Casino Corporation (the "Claridge Corporation"). The purchase
price of such notes was approximately $14.1 million. Notes in the amount of $85
million were issued, which bear interest at 11.75% payable annually and are due
February 1, 2002.

The Claridge Corporation through its wholly-owned subsidiary, the
Claridge at Park Place, Incorporated, operates the Claridge Hotel, a destination
resort complex, containing a 59,000 foot casino on three levels and 502 hotel
rooms and other attractions.

See Item 1 - "Investment Opportunities and Strategies - Real Estate
Investments", above, for a discussion of certain considerations relating to the
gaming industry. 

Investment in Real Estate Assets

On August 18, 1997, a wholly-owned subsidiary of AREP acquired five
notes and mortgages for approximately $10,745,000 with an aggregate face amount
of approximately $14,340,000, excluding accrued and unpaid interest and
penalties owed by the borrower that are estimated to total approximately an
additional $8,200,000. The notes are secured by certain real property belonging
to the borrower, New Seabury Company Limited Partnership ("New Seabury"). The
loans are currently non-performing and the debtor has filed a Chapter 11
petition for relief in the United States Bankruptcy Court, District of
Massachusetts. The properties are part of a master planned community situated in
the town of Mashpee located on Cape Cod in Massachusetts. AREP is attempting to
foreclose on the underlying collateral pertaining to all of the above mentioned
notes.

On September 26, 1997, a wholly-owned subsidiary of AREP acquired four
additional notes and mortgages for a purchase price of approximately $5,000,000
with an outstanding principal balance of approximately $8,320,000, excluding
accrued and unpaid interest and penalties owed by the borrower that are
estimated to total approximately an additional $3,000,000 to $4,000,000. The
notes are secured by certain real property belonging to the

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12
borrower, New Seabury. The loans also are currently non-performing and subject
to the debtor's Chapter 11 proceeding. The properties are part of a master
planned community situated in the Town of Mashpee located in Cape Cod in
Massachusetts.

On June 30, 1997, AREP acquired two adjacent medical office buildings
located in Nashville, Tennessee, both of which are net leased to Baptist
Hospitals, Inc. ("Baptist"). The total purchase price was approximately
$34,616,000 which included the assumption of existing mortgages on each building
totalling approximately $31,666,000. The lease term, which commenced June 28,
1996, is for 22.5 years with seven 10-year renewal periods at approximately
$3,032,000 per annum paid semi-annually. The mortgages bear interest at the rate
of 7.84% per annum, self-liquidate on December 31, 2018, and have total debt
service of approximately $3,070,000 payable semi-annually.

On September 26, 1997 AREP purchased a retail property located in
Schaumburg, Illinois. The purchase price was approximately $9,138,000 which was
paid all in cash. The completed building, which is approximately 100,000 square
feet, is to be tenanted by Bed Bath & Beyond, Inc., and Golfsmith International,
Inc. Bed Bath & Beyond's lease is for an initial term of fifteen years starting
at $565,896 per year for their approximately 71,000 square foot store with four
five-year renewal options at increased rentals. Golfsmith International's lease
is for an initial term of fifteen years starting at $375,450 per year with three
five-year renewal options at increased rentals. The rent commencement date for
both tenants occurred in the fourth quarter of 1997. A mortgage loan commitment
has been entered into to provide funding of approximately $7,150,000 for this
property.

In December, 1997, AREP purchased two multi-tenant industrial buildings
located in Hebron, Kentucky for approximately $19 million. Net rental income for
such properties is estimated to be approximately $1.75 million per annum. AREP
has entered into a commitment to obtain a mortgage of approximately $12.6
million with interest at 7.21% per annum payable on a 30 year basis due in 124
months.

AREP also entered into a contract to purchase for approximately $21
million a third single tenant building in the Hebron complex subject to certain
contingencies including substantial completion by October, 1998. A mortgage loan
commitment has been executed to provide funding of $19.4 million in connection
with this acquisition.

Investment in Real Estate Limited Partnership Units

In June 1996, AREP entered into an agreement with non-affiliated third
parties and became a member of a limited liability company, Beattie Place LLC
("Beattie"). The purpose of Beattie is to acquire, hold, and ultimately dispose
of limited partnership units in ten Balcor Limited Partnerships (the "Balcor
Units") in connection with previously commenced tender offers. These Balcor
limited partnerships own and operate commercial and multi-family real estate
properties nationwide. AREP agreed to purchase a non-voting membership interest
in Beattie of approximately 71.5%. As of December 31, 1997, Beattie purchased
approximately 119,000 Balcor Units of which approximately 85,000 Balcor Units
represent AREP's pro rata

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13
share. A total of approximately $9,834,000 was invested by AREP in this venture.
AREP received return of capital distributions of approximately $2,476,000 in
excess of its original investment.

On July 17, 1996, AREP and Bayswater Realty and Capital Corp.
("Bayswater"), an affiliate of Icahn, became partners of Boreas Partners, L.P.
("Boreas"), a Delaware limited partnership. AREP's total partnership interests
in Boreas is 70%. Boreas together with unaffiliated third parties entered into
an agreement and became limited partners of Raleigh Capital Associates, L.P.
("Raleigh") for the purpose of making a tender offer for outstanding limited
partnership and assignee interests of Arvida/JMB Partners, L.P. ("Arvida") a
real estate partnership. Boreas and an affiliated general partner have a total
interest in Raleigh of 33 1/3%. A total of approximately $13,729,000
invested by AREP in these ventures representing approximately 35,000 Arvida
units, net of a return of capital distribution of approximately $4,629,000. See
Note 7 to the Financial Statements contained herein.

As of December 31, 1997, AREP had participated in four other tender
offers for limited partnership units. AREP has invested approximately $9,192,000
in these partnerships.

In February 1998, AREH formed Olympia Investors, L.P. ("Olympia"), a
Delaware limited partnership, the general partner of which is Olympia-GP, Inc.,
a Delaware corporation also formed in February 1998 and wholly-owned by AREH,
and the sole limited partner of which is AREH. On March 12, 1998, Olympia
commenced tender offers for units of limited partnership interest ("IR Units")
of the following limited partnerships (the "IR Partnerships"), representing
approximately 40% of each of the IR Partnerships: (i) Integrated Resources High
Equity Partners - Series 85; (ii) High Equity Partners L.P. - Series 86; and
(iii) High Equity Partners L.P. - Series 88. The offers aggregate approximately
$52.6 million. The offers are scheduled to expire at 12:00 midnight, New
York City time, on April 8, 1998, unless extended. There can be no assurance
that such offers for the IR Units will be successful.

In connection with the making of the Offers, AREH and Olympia entered
into an agreement dated March 6, 1998 (the "Agreement") with Presidio Capital
Corp. ("Presidio"), a corporation organized in the British Virgin Islands which
directly or indirectly controls the general partners of each of the IR
Partnerships. Under the Agreement, among other things, Presidio has a call
option to purchase 50% of the IR Units acquired by Olympia pursuant to the
offers at a price per IR Unit equal to the lesser of the price paid by Olympia
or 85% of net asset value (except the limitation of the call price to 85% of net
asset value will not apply if Olympia raises its price above that amount in to
meet or top competing third party bids), plus 50% of Olympia's costs associated
with the offers. In addition, the Agreement contains buy/sell provisions
pursuant to which either party can initiate buy/sell procedures by notifying the
other of a specified price per IR Unit (not to exceed then current net asset
value) and the other terms and conditions on which the non-initiating party
would then be required to elect either to buy certain IR Units from the
initiating party or to sell certain IR Units to the initiating party.

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14
Investment in RJR

In 1996, AREP purchased 3,121,700 shares of RJR Nabisco Holdings Corp.
("RJR"), representing approximately 1.1% of the total outstanding RJR common
shares, at a total cost of approximately $83,000,000, and at an average cost per
share of $26.46 per share. Icahn owned (through affiliates) an additional
16,808,100 shares of RJR. In February 1997, AREP sold its entire interest in RJR
for net proceeds of approximately $112,000,000 realizing a gain of approximately
$29,000,000. See Note 6 to the Financial Statements contained herein. AREP's
pro rata share of third party expenses relating to such RJR investment was
approximately $2,154,000 which was approved by the Audit Committee and paid in
1997.

Financing Activities

During 1997, AREP had approximately $6,854,000 in maturing balloon
mortgages due, all of which was repaid. Approximately $3,500,000 of additional
balloon payments are due during 1998. During the period 1998 through 1999
approximately $9,000,000 in balloon mortgages will come due. AREP will seek to
refinance a portion of these maturing mortgages, although it does not expect to
refinance all of them and may repay them from cash flow and reserves created
from time to time, thereby reducing cash flow otherwise available for other
uses.

AREP also has maturing debt requirements under its two unsecured note
agreements (the "Note Agreements") that it entered into in May 1988. Under the
Note Agreements, AREP is required to make semi-annual interest payments and
annual principal payments. In May 1994, AREP repaid $10,000,000, and in 1995
through 1997, repaid $11,308,000 each year in respect of the outstanding
principal balance under the Note Agreements. A final principal payment of
approximately $11,308,000 is due under such agreements in May, 1998. See Note 11
to the Financial Statements contained herein. See Item 2 - "Properties."

AREP is continuing to seek opportunities to refinance upon favorable
terms and sell certain of its properties to generate proceeds for future
investments. Management continues to seek to improve the long-term value of
AREP's portfolio by, among other means, using its available cash and reinvesting
capital transaction proceeds to maximize capital appreciation and
diversification of the portfolio.

Leasing Activities

In 1997, seven leases covering seven properties and representing
approximately $812,000 in annual rentals expired. Six of these leases,
originally representing approximately $661,000 in annual rental income, were
re-let or renewed for approximately $676,000 in annual rentals. Such renewals
are generally for a term of five years. One property, with an approximate annual
rental income of $151,000 is currently being marketed for sale or lease.

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15
In 1998, 25 leases covering 25 properties and representing
approximately $2,123,000 in annual rentals are scheduled to expire. Eleven of
these leases, originally representing approximately $403,000 in annual rental
income have been or will be re-let or renewed for approximately $414,000 in
annual rentals. Such renewals are generally for a term of five years. Six
properties with an approximate annual rental income of $947,000 will be marketed
for sale or lease when the current lease term expires. Four properties with
annual rental income of $210,000 will be purchased by their tenants pursuant to
the exercise of purchase options. The status of four leases, with approximate
annual rental income of $563,000 is uncertain at this time.

By the end of the year 2000, net leases representing approximately 18%
of AREP's net annual rentals from its portfolio will be due for renewal, and by
the end of the year 2002, net leases representing approximately 32% of AREP's
net annual rentals will be due for renewal. In many of these leases, the tenant
has an option to renew at the same rents they are currently paying and in many
of the leases the tenant also has an option to purchase the property. AREP
believes that tenants acting in their best interests will renew those leases
which are at below market rents, and permit leases for properties that are less
marketable (either as a result of the condition of the property or its location)
or are at above-market rents to expire. AREP expects that it may be difficult
and time consuming to re-lease or sell those properties that existing tenants
decline to re-let or purchase and that AREP may be required to incur
expenditures to renovate such properties for new tenants. AREP also may become
responsible for the payment of certain operating expenses, including
maintenance, utilities, taxes, insurance and environmental compliance costs
associated with such properties which are presently the responsibility of the
tenant. In addition, net leases representing approximately 29% of AREP's net
annual rentals from its portfolio are with tenants in the retail sector, many of
which are currently experiencing cash flow difficulties and a number of which
are in bankruptcy. As a result, operating expenses may be incurred with respect
to the properties underlying any such leases rejected in bankruptcy and those
expenses, coupled with the effects of the downturn in the retail markets, could
have an adverse impact on AREP's net cash flow.

Bankruptcies and Defaults

AREP is aware that 14 of its present and former tenants have been or
are currently involved in some type of bankruptcy or reorganization. Under the
Bankruptcy Code, a tenant may assume or reject its unexpired lease. In the      
event a tenant rejects its lease, the Bankruptcy Code limits the amount of
damages a landlord, such as AREP, is permitted to to claim in the bankruptcy   
proceeding as a result of the lease termination. Generally, a claim resulting  
from a rejection of an unexpired lease is a general unsecured claim. When a    
tenant rejects a lease, there can be no assurance that AREP will be able to    
re-let the property at an equivalent rental. As a result of tenant              
bankruptcies, AREP has incurred and expects - at least in the near term -
to continue to incur certain property expenses and other related costs. Thus
far, these costs have consisted largely of legal fees, real estate taxes and
property operating expenses. Of AREP's 14 present and former tenants involved in
bankruptcy proceedings or reorganization, ten have rejected their leases,
affecting 29 properties, all of which have been vacated. These rejections have
had an adverse impact on annual net cash flow

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16
(including both the decrease in revenues from lost rents, as well as increased
operating expenses).

On June 23, 1995, Bradlees, a tenant leasing four properties owned by
AREP, filed a voluntary petition for reorganization pursuant to the provisions
of Chapter 11 of the Bankruptcy Code. The annual rentals for these four
properties is approximately $1,320,000. The tenant is current in its obligations
under the leases. The tenant has not yet determined whether it will exercise its
right to reject or affirm the leases, which will require an order of the
Bankruptcy Court. There are existing assignors who are still obligated to
fulfill all of the terms and conditions of the leases. At December 31, 1997, the
carrying value of these four properties was approximately $6,978,000. One of the
properties is encumbered by a nonrecourse mortgage payable of approximately
$870,000.

On September 18, 1995, Caldor Corp., a tenant leasing a property owned
by AREP, filed a voluntary petition for reorganization pursuant to the
provisions of Chapter 11 of the Federal Bankruptcy Code. The annual rental for
this property is approximately $248,000. The tenant is current in its
obligations under the lease with the exception of approximately $12,000 of pre-
petition rent. The tenant has not yet determined whether it will exercise its
right to reject or affirm the lease which will require an order of the
Bankruptcy Court. At December 31, 1997, the property was vacant and had a
carrying value of approximately $1,874,000 and is unencumbered by any mortgage.

On September 24, 1996 Best Products, a tenant leasing a property owned
by AREP, filed a voluntary petition for reorganization pursuant to the
provisions of Chapter 11 of the Bankruptcy Code. The annual rental for this
property was approximately $508,000. The tenant has exercised its right to
reject the lease, effective April 30, 1997, which has been approved by the
Bankruptcy Court. At December 31, 1997, the property was vacant and had a
carrying value of approximately $3,300,000 and is unencumbered by any mortgage.

For a description of certain other tenant and mortgagor bankruptcies
affecting AREP, please refer to Notes 9 and 15 to the Financial Statements
contained herein. The General Partner monitors all tenant bankruptcies and
defaults and may, when it deems it necessary or appropriate, establish
additional reserves for such contingencies.

Environmental Matters

Under various federal, state and local laws, ordinances and
regulations, an owner or operator of real property may become liable for the
costs of removal or remediation of certain hazardous substances released on or
in its property. Such laws often impose such liability without regard to whether
the owner or operator knew of, or was responsible for, the release of such
hazardous substances. If any such substances were found in or on any property
invested in by AREP, AREP could be exposed to liability and be required to incur
substantial remediation costs. The presence of such substances or the failure to
undertake proper remediation may adversely affect the ability to finance,
refinance or dispose of such property. AREP will generally require that
properties in which AREP invests have been subject to a Phase I

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17
environmental site assessment, which involves record review, visual site
assessment and personnel interviews, but does not involve invasive procedures
such as air and soil sampling or groundwater analysis. There can be no
assurance, however, that these evaluations will reveal all potential liabilities
or that future property uses or conditions or changes in applicable
environmental laws and regulations or activities at nearby properties will not
result in the creation of environmental liabilities with respect to a property.

Additionally, pursuant to the Resource Conservation and Recovery Act 42
U.S.C. section 9601, et seq. and the regulations promulgated thereunder ("RCRA")
certain owners, operators and other parties in control of a property that has a
non-exempt underground storage tank ("UST") are required to remove, replace,
retrofit or take such tanks out of service by December 22, 1998. Many of AREP's
tenants have UST's that may be covered by this requirement. AREP is in the
process of finalizing a notification protocol to address this situation. AREP
believes that under the terms of its net leases with its tenants, the cost of,
and obligation to comply with, this RCRA requirement generally would be the
responsibility of its tenant. At this time, AREP cannot ascertain whether or not
any of its tenants will refuse to assume and implement this obligation.
Furthermore, with respect to vacated properties and prior lease terminations,
there cannot be any assurance that AREP would not be deemed responsible for this
RCRA requirement. There also can be no assurance that a tenant will bear the
costs of, or undertake compliance with, this RCRA requirement.

Most of AREP's properties continue to be net-leased to single corporate
tenants, and AREP believes these tenants would be responsible for any
environmental conditions existing on the properties they lease. Normally,
therefore, such conditions should not have a material adverse effect on the
financial statements or competitive position of AREP. Many of the properties
acquired by AREP in connection with the Exchange Offer were not subjected to any
type of environmental site assessment at the time of the acquisition.
Consequently, AREP undertook to have Phase I Environmental Site Assessments
initiated at certain properties (approximately 160) in its portfolio. In
addition, AREP conducted approximately 50 more Phase I Environmental Site
Assessments during 1997 on some of the properties in its portfolio which had not
yet been assessed. AREP believes that under the terms of its net leases with its
tenants, the costs of any environmental problems that may be discovered on these
properties generally would be the responsibility of such tenants. However, while
most tenants have assumed responsibility for the environmental conditions
existing on their leased property, there can be no assurance that AREP would not
be deemed to be a responsible party or that the tenant could bear the costs of
remediation.

The Phase I Environmental Assessments received on these properties
inconclusively indicate that certain sites may have environmental conditions
that should be further reviewed. AREP has notified the responsible tenants to
attempt to ensure that they cause any required investigation and/or remediation
to be performed. It is possible that, in some instances, the tenant will either
refuse to take appropriate action, or fail to respond at all, in which case AREP
may be required to act. Therefore, if the tenants fail to perform
responsibilities under their leases in respect of such sites, based solely upon
the consultant's preliminary estimates resulting from its Phase I Environmental
Site Assessments referred to above, it is presently estimated that AREP's
exposure could amount to $2-3 million. However, as no Phase II Environmental
Site

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Investigations have been conducted by the consultant, there can be no accurate
estimation of the need for or extent of any required remediation. Phase I
Environmental Assessments will also be performed in connection with new
acquisitions and with such property refinancings as AREP may deem necessary and
appropriate.

In addition to conducting such Phase I Environmental Site Assessments,
AREP has developed a site inspection program. This program is being conducted by
two in-house employees (both of which are experienced construction managers and
registered architects) who visit AREP's properties and visually inspect the
premises to assess the physical condition of the properties in an effort to
determine whether there are any obvious indications of environmental conditions
which would potentially expose AREP to liability and to ensure that the physical
condition of the property is being maintained properly. There is no assurance,
however, that this program will in fact minimize any potential environmental or
other cost exposure to AREP.

AREP could also become liable for environmental clean-up costs if a
bankrupt or insolvent tenant were unable to pay such costs. Environmental
problems may also delay or impair AREP's ability to sell, refinance or re-lease
particular properties, resulting in decreased income and increased cost to AREP.

Other Property Matters

Under Title III of the Americans with Disabilities Act of 1990 and the
rules promulgated thereunder (collectively, the "ADA"), in order to protect
individuals with disabilities, owners and certain tenants of public
accommodations (such as hotels, restaurants, offices and shopping centers) must
remove architectural and communication barriers which are structural in nature
from existing places of public accommodation to the extent "readily achievable"
(as defined in the ADA). In addition, under the ADA, alterations to a place of
public accommodation or a commercial facility are to be made so that, to the
maximum extent feasible, such altered portions are readily accessible to and
usable by disabled individuals.

Except for certain properties operated by AREP, the General Partner
believes that the existing net leases require the tenants of many of AREP's
properties to comply with the ADA. If a tenant does not comply with the ADA or
rejects its lease in bankruptcy without complying with the ADA, AREP may
ultimately have to bear the expense of complying with the ADA.

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

Employees

Eighteen people, including three who are officers of the General
Partner, presently perform services for AREP on a full-time basis. These people
perform administrative services for AREP, including accounting, legal,
financial, investor services, secretarial, real estate

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management and other services. Management believes it currently has sufficient
staffing to operate effectively the day-to-day business of AREP.

Competition

Competition in leasing and selling remains strong. As previously
discussed, many of AREP's tenants have rights to renew at prior rental rates.
AREP's experience is that tenants will renew below market leases and permit
leases that are less marketable or at above market rents to expire, making it
difficult for AREP to re-let or sell on favorable terms properties vacated by
tenants. The real estate market continues to be weak in certain areas of the
country, particularly in the retail category. The downturn in the retail markets
and ongoing corporate consolidations have contributed to increasing vacancy
rates and oversupply for retail tenants. AREP believes it is one of the largest
real estate entities of its kind and that it will continue to compete
effectively with other similar real estate companies, although there are real
estate entities with greater financial resources than AREP.

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

Item 2.  Properties.

As of March 2, 1998, AREP owned 205 separate real estate assets
(primarily consisting of fee and leasehold interests and, to a limited extent,
interests in real estate mortgages) in 35 states. These properties are generally
net-leased to single corporate tenants. Approximately 90% of AREP's properties
are currently net-leased, 3% are operating properties, 2% are in the process of
being developed and 5% are vacant and being marketed for sale. See Note 10 to
the Financial Statements contained herein for information on mortgages payable.

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

Number                   Average Net Effective
Type of Property        of Properties                Rent Per Square Foot
- ---------------         -------------               ---------------------

Retail                       95                             $4.46(1)
Industrial                   21                             $2.25(1)

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Number                   Average Net Effective
Type of Property           of Properties                Rent Per Square Foot
- ---------------            -------------               ---------------------

Office                             30                             $7.55(1)
Supermarkets                       20                             $3.36(1)
Banks                               8                             $5.20(1)
Other:
Properties That
Collateralize Purchase
Money Mortgages                 9                             N/A
Land                             15                             N/A
Truck Terminals                   4                             $3.72(1)
Hotels                            2                             N/A
Apartment Complexes               1                             N/A

- -----------------

(1)  Based on net-lease rentals.

The following table summarizes the number of AREP's properties in each
region specified below:

Location                          Number
of Property                     of Properties
-----------                     -------------

United States:
Southeast                                92
Northeast                                42
South Central                             9
Southwest                                15
North Central                            41
Northwest                                 6

From January 1, 1997 through March 2, 1998, AREP sold or otherwise
disposed of 25 properties. In connection with such sales and dispositions, AREP
received an aggregate of approximately $47,000,000 in cash, net of closing costs
and amounts utilized to satisfy mortgage indebtedness which encumbered such
properties. As of December 31, 1997, AREP owned seven properties that were being
actively marketed for sale. The aggregate net realizable value of such
properties is estimated to be approximately $4,164,000.

On January 7, 1997 AREP sold three properties tenanted by Federal
Realty Investment Trust ("FRIT") for a total selling price of approximately
$9,363,000. Two first mortgages with principal balances outstanding of
approximately $878,000 were repaid at closing. In addition, closing costs of
approximately $40,000 were incurred. As a result, AREP recognized a gain of
approximately $1,778,000 in 1997. In addition, on January 7, 1997, FRIT made a
loan to AREP in the approximate amount of $8,759,000 secured by a fourth
property tenanted by FRIT located in Broomal, Pennsylvania. Concurrently with
this loan, AREP granted and FRIT exercised an option to purchase the Broomal
property with a closing

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to occur on or about June 30, 1998. The purchase price is the unpaid balance of
the mortgage loan of approximately $8,500,000 at the closing date. The
nonrecourse mortgage loan bears interest at the rate of 8% per annum and
requires monthly debt service payments of approximately $72,000.

On January 16, 1997, AREP sold the Travelodge Hotel it had been
operating since January 18, 1996 when the former tenant, Forte Hotels, Inc.
entered into a Lease Termination and Mutual Release Agreement. The selling price
was approximately $2,165,000 net of closing costs. A gain of $1,403,000 was
recorded in 1997.

In April 1997, AREP sold the hotel property located in Phoenix,
Arizona. The selling price was approximately $15,525,000 net of approximately
$250,000 of closing costs. A gain of approximately $7,863,000 was recognized in
1997. See Item 1 -- "Investment in Real Estate Assets."

On December 12, 1997, AREP sold the property tenanted by Hancock Bank
located in Baton Rouge, Louisiana. The selling price was $5,075,000 and closing
costs of approximately $84,000 were incurred. As a result, AREP recognized a
gain of approximately $1,345,000.

For each of the years ended December 31, 1997, 1996 and 1995, no single
real estate asset or series of assets leased to the same lessee accounted for
more than 10% of the gross revenues of AREP. However, at December 31, 1997, 1996
and 1995, PGEC occupied a property, which represented more than 10% of AREP's
total real estate assets. PGEC is an electric utility engaged in the generation,
purchase, transmission, distribution and sale of electricity, whose shares are
traded on the NYSE.

The PGEC Property is an office complex consisting of three buildings
containing an aggregate of approximately 803,000 square feet on an approximate
2.7 acre parcel of land located in Portland, Oregon. A Predecessor Partnership
originally purchased the PGEC Property on September 11, 1978 for a price of
approximately $57,143,000.

The PGEC Property is net-leased to a wholly owned subsidiary of PGEC
for forty years, with two ten-year and one five-year renewal options. The annual
rental is $5,137,309 until 2003, $4,973,098 until 2018 and $2,486,549 during
each renewal option. PGEC has guaranteed the performance of its subsidiary's
obligations under the lease. The lessee has an option to purchase the PGEC
Property in September of 2003, 2008, 2013 and 2018 at a price equal to the fair
market value of the PGEC Property determined in accordance with the lease and is
required to make a rejectable offer to purchase the PGEC Property in September
2018 for a price of $15,000,000. A rejection of such offer will have no effect
on the lease obligations or the renewal and purchase options.

On December 5, 1997 AREP executed a mortgage loan with Principal Mutual
Life Insurance Company in the original principal amount of approximately $46.3
million, secured by, among other things, a first deed of trust, security
agreement and assignment of rents on the PGEC Property. The loan replaced the
existing mortgage loan on the complex with an

I-20

22
outstanding principal balance of approximately $24.2 million, bearing interest
at 8.5% and maturing in 2002.

The interest rate is fixed at 7.51%. The entire net annual rent payable
by PGEC of approximately $5,137,000 is required to be applied toward the debt
service on the loan. The refinancing has a maturity date of September 10, 2008,
at which time a remaining principal payment of approximately $20 million will be
due from AREP.

Item 3.  Legal Proceedings.

Unitholder Litigation

Two limited partners in AREP brought a derivative action against AREP,
the General Partner, its directors and one of its officers, alleging breach of
fiduciary duties by the defendants in connection with, inter alia, AREP's
investments in Arvida and Stratosphere, Amanda & Kimberly Kahn v. Carl C. Icahn,
et al., C.A. No. 15916 (Del. Ch.). Plaintiffs claim that defendant Icahn
improperly diverted opportunities to participate in these investments from AREP
to himself. Plaintiffs seek damages arising from these alleged breaches of
fiduciary duty, attorneys fees and other relief. Management believes plaintiffs
claims are without merit and are vigorously defending against them.

In August 1994, three class action complaints against AREP were filed
with the Delaware Court of Chancery, New Castle County, in connection with the
1995 Offering, Allan Haymes, I.R.A. v. American Real Estate Partners, L.P.,
American Property Investors, Inc. and Carl C. Icahn and Steven Yavers v.
American Real Estate Partners, L.P., American Property Investors, Inc. and Carl
C. Icahn and Wilbert Schoomer v. American Real Estate Partners, L.P., American
Property Investors, Inc. and Carl C. Icahn (the "Complaints"). The Complaints
were consolidated. The Complaints claimed defendants breached fiduciary and
common law duties owed to plaintiffs and plaintiffs' class by self dealing and
failing to disclose all relevant facts regarding the 1995 Offering, and sought
declaratory and injunctive relief declaring the action was properly maintainable
as a class action, declaring the defendants breached their fiduciary and other
duties, enjoining the 1995 Offering, ordering defendants to account for all
damages suffered by the class for alleged acts and transactions and awarding
further relief as the court deemed appropriate. On April 7, 1995, defendants
moved to dismiss the consolidated complaint as moot. On July 28, 1995, the
parties submitted a stipulation of dismissal agreeing to dismiss the action as
moot. The plaintiffs reserved their right to make application to the Court for
fees and expenses. On August 3, 1995, the Court signed an order dismissing the
plaintiffs' claims with prejudice as moot. The Court retained jurisdiction with
respect to any application filed by the plaintiffs for fees and expenses.

In January 1997, the plaintiffs by their attorneys submitted an
application for an award of attorneys' fees and reimbursement of expenses in the
aggregate of $500,000. AREP opposed this application and on December 3, 1997,
the Court awarded plaintiffs an award of attorneys fees and expenses in the
amount of $158,566. AREP paid the award in January, 1998.

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23
Environmental Litigation

Lockheed, a tenant of a formerly-held leasehold property in Palo Alto,
California, has entered into a consent decree with the California Department of
Toxic Substances ("CDTS") to undertake certain environmental remediation at this
property. Lockheed has estimated that the environmental remediation costs may be
up to approximately $14,000,000. In a non-binding determination by CDTS,
Lockheed was found responsible for approximately 75% of such costs and the
balance was allocated to other parties. AREP was allocated no responsibility for
any such costs.

Lockheed previously served a notice that it may exercise its statutory
right to have its liability reassessed in a binding arbitration proceeding. In
this notice of arbitration, Lockheed stated that it would attempt to have
allocated to AREP and to AREP's ground-lessor (which may have sought to claim a
right of indemnity against AREP) approximately 9% and 17%, respectively, of the
total remediation costs. In April 1995 Lockheed began ground water remediation
at the leasehold property.

On February 19, 1998, the property was conveyed by AREP to Lockheed for
a purchase price of $9,400,000. In connection with the sale, Lockheed executed a
release and indemnity in favor of AREP and a stipulation dismissing the
environmental arbitration, as against AREP. Leland Stanford Junior University
(the fee owner/ground lessor) also executed a release in favor of AREP.

On December 11, 1995, Panos Sklavenitis commenced an action against the
Subsidiary and others related to a shopping center that he purchased from a
successor-in-interest to AREP. The action was brought in the United States
District Court for the Central District of California, for reimbursement of the
cost of remediating certain environmental contamination that appears to have
been caused by a dry cleaner that was a tenant at the property; the amount of
damages sought have not yet been quantified. Mr. Sklavenitis is suing the
parties who are in the chain of ownership, as well as the dry cleaner and its
predecessor. AREP is presently engaged in discussions to settle this matter and
has made an offer of $10,000 toward an aggregate settlement, although there can
be no assurances that such offer will be accepted.

Bankruptcies

AREP is aware that 14 of its present and former tenants have been or
are currently involved in some type of bankruptcy or reorganization. Of AREP's
14 present and former tenants involved in bankruptcy proceedings or
reorganization, nine have rejected their leases, affecting 29 properties, all of
which have been vacated by such tenants. See also Notes 9 and 15 to the
Financial Statements contained herein and "Business - Bankruptcies and Defaults"
which describe various tenant and mortgagor bankruptcies for which AREP has
filed claims.

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24
Item 4.  Submission of Matters to a Vote of Security Holders.

No matters were submitted to a vote of Unitholders during 1997.

I-23

25
PART II

Item 5.  Market for AREP's Common Equity and Related Security Holder Matters.

Market Information

AREP's Depositary Units are traded on the NYSE under the symbol "ACP."
Trading on the NYSE commenced July 23, 1987, and the range of high and low
market prices for the Depositary Units on the New York Stock Exchange Composite
Tape (as reported by The Wall Street Journal) from January 1, 1996 through
December 31, 1997 is as follows:

Quarter Ended:            High           Low
- -------------             ----           ---

March 31, 1996          $ 9.375       $ 8.625
June 30, 1996             9.125         8.875
September 30, 1996        9.125         8.625
December 31, 1996         9.25          8.875

March 31, 1997           11.75          9.125
June 30, 1997            14.25          9.875
September 30, 1997       13.625        10.625
December 31, 1997        11.375         9.4375

On March 2, 1998, the last sales price of the Depositary Units, as
reported by the New York Stock Exchange Composite Tape (as reported by The Wall
Street Journal) was $11.0625.

As of March 2, 1998, there were approximately 15,000 record holders of
the Depositary Units.

Since January 1, 1994, AREP has made no cash distributions with respect
to the Depositary Units.

Distributions

On March 26, 1998, the Board of Directors of the General Partner
announced that no distributions are expected to be made in 1998. In making its
announcement, AREP noted it plans to continue to apply available Partnership
operating cash flow toward its operations, repayment of maturing indebtedness,
tenant requirements and other capital expenditures and creation of cash reserves
for Partnership contingencies, including environmental matters and scheduled
lease expirations. As previously reported, by the end of the year 2000, net
leases representing approximately 18% of AREP's net annual rentals from its
portfolio will be due for renewal, and by the end of the year 2002, 32% of such
rentals will be due for renewal. Another factor that AREP took into
consideration was that net leases representing approximately 29% of AREP's net
annual rentals from its portfolio are with tenants in the retail sector, some of
which are currently experiencing cash flow difficulties and restructurings.

II-1

26
AREP further stated that it continues to believe that excess cash should be used
to enhance long-term Unitholder value through investment in assets and companies
with assets undervalued by the market. AREP believes that, in addition to
acquiring development properties, non-performing mortgage obligations and
securities of companies which may be undergoing restructuring or with real
estate assets requiring significant capital investments, it should diversify its
portfolio and seek to make acquisitions of land development companies and other
real estate operating companies which may have significant assets under
development and may enhance its ability to develop and manage these properties.
These types of investments may involve debt restructuring, capital improvements
and active asset management, and by their nature may not be readily financeable
and may not generate immediate positive cash flow. As such, they require AREP to
maintain a strong capital base both to react quickly to these market
opportunities as well as to allow AREP to rework the assets to enhance their
turnaround performance. See Item 7 - "Management's Discussion and Analysis of
the Financial Condition and Results of Operations - Capital Resources and
Liquidity."

As of March 2, 1998, there were 46,198,284 Depositary Units and
7,311,054 Preferred Units outstanding. Trading in the Preferred Units commenced
March 31, 1995 on the NYSE under the symbol "ACP PR." The Preferred Units
represent limited partner interests in AREP and have certain rights and
designations, generally as follows. Each Preferred Unit has a liquidation
preference of $10.00 and entitles the holder thereof to receive distributions
thereon, payable solely in additional Preferred Units, at a rate of 5% of the
liquidation preference thereof, payable annually on March 31 of each year (each,
a "Payment Date"), commencing March 31, 1996. On any Payment Date commencing
with the Payment Date on March 31, 2000, AREP, with the approval of the Audit
Committee, may opt to redeem all, but not less than all, of the Preferred Units
for a price, payable either in all cash or by issuance of additional Depositary
Units, equal to the liquidation preference of the Preferred Units, plus any
accrued but unpaid distributions thereon. On March 31, 2010, AREP must redeem
all, but not less than all, of the Preferred Units on the same terms as any
optional redemption. Holders of Preferred Units will have no voting rights
except as mentioned in Item 10 - "Directors and Executive Officers of AREP,"
below.

On March 31, 1997, AREP distributed to holders of record of its
Preferred Units as of March 14, 1997, approximately 103,721 additional Preferred
Units. Pursuant to the terms of the Preferred Units, on February 27, 1998, AREP
declared its scheduled annual preferred unit distribution payable in additional
Preferred Units at the rate of 5% of the liquidation preference of $10.00. The
distribution is payable March 31, 1998 to holders of record as of March 13,
1998.

Each Depositary Unitholder will be taxed on the Unitholder's allocable
share of AREP's taxable income and gains and, with respect to Preferred
Unitholders, accrued guaranteed payments, whether or not any cash is distributed
to the Unitholder.

II-2

27
Repurchase of Depositary Units

AREP announced in 1987 its intention to purchase up to 1,000,000
Depositary Units. On June 16, 1993, AREP increased the amount of shares
authorized to be repurchased to 1,250,000 Depositary Units. As of March 2, 1998,
AREP had purchased 1,037,200 Depositary Units at an aggregate cost of
approximately $11,184,000. Management has not been acquiring Depositary Units
for AREP, although AREP may from time to time acquire additional Depositary
Units.

Item 6.  Selected Financial Data.

(Dollars in Thousands Except Per Unit Amounts)
Year Ended December 31,
-------------------------------------------------------
1997*         1996*         1995*          1994*          1993*
-----------   ----------    -----------    -----------    ----------- 

Total revenues                               $    70,918   $   71,774    $    69,920    $    61,551    $    60,157
===========   ==========    ===========    ===========    ===========
Earnings before property
and securities transactions                $    41,020   $   34,240    $    30,833    $    19,577    $    18,379

Gain on sales and 
disposition of real estate                      16,051       24,517          5,091          4,174          4,760

Gain on sales of marketable
equity securities                               29,188           --             --             --             --

Provision for loss on mortgages             
receivable                                      (9,790)          --             --             --             --

Provision for loss on real          
estate                                          (1,085)        (935)          (768)          (582)          (462)
-----------   ----------    -----------    -----------    -----------

Net earnings                                 $    75,384   $   57,822    $    35,156    $    23,169    $    22,677
===========   ==========    ===========    ===========    ===========
Net earnings per limited
partnership unit:

Basic:                                       

Earnings before property and 
Securities transactions                $      1.19   $     1.27    $      1.30    $      1.39    $      1.30

Net gain from property and
Securities transactions                       1.08          .90            .19            .25            .30
-----------   ----------    -----------    -----------    -----------

Net earnings                               $      2.27   $     2.17    $      1.49    $      1.64    $      1.60
===========   ==========    ===========    ===========    ===========

Weighted average limited
partnership units outstanding               31,179,246   25,666,640     22,703,180     13,812,800     13,812,800
===========   ==========    ===========    ===========    ===========

Diluted:                                    

Earnings before property and 
securities transactions                $      1.16   $     1.20    $      1.17    $      1.39    $      1.30

Net gain from property and 
securities transactions                        .97          .82            .16            .25            .30
-----------   ----------    -----------    -----------    -----------
Net earnings                               $      2.13   $     2.02    $      1.33    $      1.64    $      1.60
===========   ==========    ===========    ===========    ===========

Weighted average limited partnership
units and equivalent partnership
units outstanding                           34,655,395   28,020,392     27,538,840     13,812,800     13,812,800
===========   ==========    ===========    ===========    ===========
Distributions to partners                    $        --  $        --    $        --    $        --    $     7,078

At year end:

Real estate leased to others                 $   387,252  $   357,184    $   412,075    $   437,699    $   444,409

Hotel operating properties                   $     5,002  $    12,955    $    13,362    $    13,654    $    14,070

Investment in treasury bills                 $   372,165  $        --    $        --    $        --    $        --

Mortgages and note receivable                $    59,970  $    15,226    $    15,056    $     8,301    $    20,065

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Total assets                           $991,230     $641,310     $620,880    $492,868      $502,981

Senior indebtedness                    $ 11,308     $ 22,616     $ 33,923    $ 45,231      $ 55,231

Mortgages payable                      $156,433     $115,911     $163,968    $174,096      $195,274

Partners' equity                       $809,325     $485,559     $404,189    $259,237      $236,068

*    To the extent financial information pertaining to AREP is reflected, such
information is consolidated for AREP and its Subsidiary.

Item 7.  Management's Discussion and Analysis of the
Financial Condition and Results of Operations.

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

General

AREP believes that it will benefit from diversification of its
portfolio of assets. To further its investment objectives, AREP may consider the
acquisition or seek effective control of land development companies and other
real estate operating companies which may have a significant inventory of
quality assets under development, as well as experienced personnel. From time to
time AREP has discussed and in the future may discuss and may make such
acquisitions from Icahn, the General Partner or their affiliates, provided the
terms thereof are fair and reasonable to AREP. In this regard, in 1997 an offer
was made by AREP acting through its Audit Committee to purchase a land
development company owned by Icahn for approximately $48.5 million, which offer
was not accepted. While the Audit Committee may consider having AREP make a
higher offer for the land development company and may consider making such offer
in Units of AREP (the number of Units would be conditioned upon the Audit
Committee's obtaining a fairness opinion), there can be no assurances thereof or
whether the transaction will be pursued. Additionally, in selecting future real
estate investments, AREP intends to focus on assets that it believes are
undervalued in the real estate market, which investments may require substantial
liquidity to maintain a competitive advantage. Despite the substantial capital
pursuing real estate opportunities, AREP believes that there are still
opportunities available to acquire investments that are undervalued. These may
include commercial properties, residential and commercial development projects,
land, non-performing loans, the securities of entities which own, manage or
develop significant real estate assets, including limited partnership units and
securities issued by real estate investment trusts and debt or equity securities
of companies which may be undergoing restructuring, and sub-performing
properties that may require active asset management and significant capital
improvements. AREP notes that while there are still opportunities available to
acquire investments that are undervalued, acquisition opportunities in

II-4

29
the real estate market for value-added investors have become more competitive to
source and the increased competition may have some impact on the spreads and the
ability to find quality assets that provide returns that are sought. These
investments may not be readily financeable and may not generate immediate
positive cash flow for AREP. As such, they require AREP to maintain a strong
capital base in order to react quickly to these market opportunities as well as
to allow AREP the financial strength to develop or reposition these assets.
While this may impact cash flow in the near term and there can be no assurance
that any asset acquired by AREP will increase in value or generate positive cash
flow, AREP intends to focus on assets that it believes may provide opportunities
for long-term growth and further its objective to diversify its portfolio.

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

By the end of the year 2000, net leases representing approximately 18%
of AREP's net annual rentals from its portfolio will be due for renewal, and by
the end of the year 2002, net leases representing approximately 32% of AREP's
net annual rentals will be due for renewal. Since most of AREP's properties are
net-leased to single, corporate tenants, it is expected that it may be difficult
and time-consuming to re-lease or sell those properties that existing tenants
decline to re-let or purchase and AREP may be required to incur expenditures to
renovate such properties for new tenants. In addition, AREP may become
responsible for the payment of certain operating expenses, including
maintenance, utilities, taxes, insurance and environmental compliance costs
associated with such properties, which are presently the responsibility of the
tenant. As a result, AREP could experience an adverse impact on net cash flow in
the future from such properties.

The Amendment became effective in August, 1996 and permits AREP to
invest in securities issued by companies that are not necessarily engaged as one
of their primary activities in the ownership, development or management of real
estate while remaining in the real estate business and continuing to pursue
suitable investments for AREP in the real estate market. AREP made an investment
in accordance with the Amendment in the common stock of RJR and recognized a
gain of approximately $29 million on the sale of this investment. In addition,
AREP has invested approximately $42.8 million in Stratosphere. (See Note and
see Item 1 -  "Investment Opportunities and Strategies - Non-Real Estate
Related Investments").                  

AREP raised funds through the 1997 Offering to increase its assets
available for investment, take advantage of assets investment opportunities,
further diversify its portfolio of assets and mitigate against the impact of
potential lease expirations. The 1997 Offering was successfully completed in
September 1997 and net proceeds of approximately $267 million were raised for
investment purposes.

Expenses relating to environmental clean-up have not had a material
effect on the earnings, capital expenditures, or competitive position of AREP.
Management believes that substantially all such costs would be the
responsibility of the tenants pursuant to lease terms.

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30
While most tenants have assumed responsibility for the environmental conditions
existing on their leased property, there can be no assurance that AREP will not
be deemed to be a responsible party or that the tenant will bear the costs of
remediation. Also, as AREP acquires more operating properties, its exposure to
environmental clean-up costs may increase. AREP completed Phase I Environmental
Site Assessments of certain of its properties by third-party consultants. Based
on the results of these Phase I Environmental Site Assessments, the
environmental consultant has recommended that certain sites may have
environmental conditions that should be further reviewed. AREP has notified each
of the responsible tenants to attempt to ensure that they cause any required
investigation and/or remediation to be performed. If such tenants do not arrange
for further investigations, or remediations, if required, AREP may determine to
undertake the same at its own cost. If the tenants fail to perform
responsibilities under their leases referred to above, based solely upon the
consultant's estimates resulting from its Phase I Environmental Site Assessments
referred to above, it is presently estimated that AREP's exposure could amount
to $2-3 million, however, as no Phase II Environmental Site Assessments have
been conducted by the consultants, there can be no accurate estimation of the
need for or extent of any required remediation, or the costs thereof. In
addition, AREP has conducted Phase I Environmental Site Assessments for
approximately 50 more net leased properties during 1997. None of these studies
has indicated any significant likelihood of environmental contamination from
tenant operation although there can be no assurances thereof. Phase I
Environmental Site Assessments will also be performed in connection with new
acquisitions and with such property refinancings as AREP may deem necessary and
appropriate. AREP is in the process of finalizing a protocol for notifying
tenants of RCRA's December 22, 1998 requirements for UST's. If any tenants
required to comply with RCRA fail to do so, AREP may determine to undertake same
at its own cost. AREP may also, at its own cost, have to cause compliance with
this RCRA requirement in connection with vacated properties, bankrupt tenants,
as well as non-net leased properties and new acquisitions.

AREP is considering the potential impact of the year 2000 in the
processing of date- sensitive information by AREP's computerized information
systems. The year 2000 problem is the result of computer programs being written
using two digits (rather than four) to define the applicable year. Any of AREP's
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000, which could result in miscalculations
or system failures. Based on preliminary information, costs of addressing
potential problems are not currently expected to have a material adverse impact
on AREP's financial position, results of operations or cash flows in future
periods. However, if AREP, its tenants or vendors are unable to resolve such
processing issues in a timely manner, it could result in a material financial
risk. Accordingly, AREP anticipates devoting the necessary resources to resolve
all significant year 2000 issues in a timely manner.

II-6

31
Results of Operations

Calendar Year 1997 Compared to Calendar Year 1996

Gross revenues decreased by approximately $856,000, or 1.2%, during
the calendar year 1997 as compared to the same period in 1996. This decrease
reflects approximate decreases of $3,945,000, or 39.3%, in hotel operating
income, $3,382,000, or 16.9%, in rental income, $2,698,000 in other income and
$927,000, or 3.6%, in interest income on financing leases partially offset by
approximate increases of $6,860,000, or 69.5%, in interest income on treasury
bills and other investments and $3,236,000 in dividend income. The decrease in
hotel operating income is primarily attributable to the sale of the Phoenix
Holiday Inn in April 1997. The decrease in rental income is primarily due to
property sales. The decrease in other income is primarily due to the Travelodge
lease termination in 1996. The decrease in interest income on financing leases
is primarily attributable to normal lease amortization and property sales. The
increase in interest income on treasury bills and other investments is
primarily due to an increase in short-term investments as a result of the 1997
Offering. The increase in dividend income is due to AREP's investment in
limited partnership units.

Expenses decreased by approximately $7,636,000, or 20.3%, during the
calendar year 1997 compared to the same period in 1996. This decrease reflects
decreases of approximately $3,654,000, or 21.7%, in interest expense,
$2,709,000, or 35.4%, in hotel operating expenses, $954,000, or 21.6%, in
property expenses and $568,000, or 10.0%, in depreciation and amortization
partially offset by an increase of approximately $249,000, or 8.5%, in general
and administrative expenses. The decrease in interest expense is primarily
attributable to normal loan amortization and reductions due to repayments of
maturing balloon debt obligations, including the Senior Unsecured Debt, as well
as the sale of encumbered properties. The decrease in hotel operating expenses
is primarily attributable to the sale of the Phoenix Holiday Inn in April 1997.

Earnings before property and securities transactions increased during
the calendar year 1997 by approximately $6,780,000 compared to the same period
in 1996, primarily due to increased interest income on treasury bills and other
investments and dividend income and decreased property expenses and interest
expense due to repayments of maturing debt obligations partially offset by
decreased rental income, other income, net hotel operating income and interest
income on financing leases.

Gain on property transactions decreased by approximately $8,466,000
during the calendar year 1997 as compared to the same period in 1996, due to
differences in the size and number of transactions.

During the calendar year 1997, AREP recorded a provision for loss on
real estate of approximately $1,085,000 as compared to $935,000 in the
comparable period of 1996.

During the calendar year 1997, AREP recorded a provision for loss on
mortgages receivable of $9,790,000 in connection with its investment in
Stratosphere. There was no such provision in 1996.

During the calendar year 1997, AREP recorded a non-recurring gain on
the sale of marketable securities of approximately $29,188,000 relating to its
RJR stock. There was no such transaction in 1996.

Net earnings for the calendar year 1997 increased by approximately
$17,562,000 as compared to net earnings for calendar year 1996 primarily due to
the non-recurring gain on the sale of the RJR stock and increased earnings
before property and securities transactions, partially offset by the provision
for loss on mortgages receivable and decreased gain on sales of real estate. 

Diluted earnings before property and securities transactions per
weighted average limited partnership unit outstanding were $1.16 in 1997
compared to $1.20 in 1996, and diluted net gain from property and securities
transactions was $.97 in 1997 compared to $.82 in 1996. Diluted net earnings
per weighted average limited partnership unit outstanding totaled $2.13 in 1997
compared to $2.02 in 1996.  

Calendar Year 1996 Compared to Calendar Year 1995

Gross revenues increased by approximately $1,853,000, or 2.7%, during
the calendar year 1996 as compared to the same period in 1995. This increase
reflects approximate increases of $2,641,000 in dividend income, $1,713,000, or
21.0%, in interest income on treasury bills and other investments, $357,000, or
1.8%, in rental income, $312,000 in other income, and $209,000, or 2.1%, in
hotel operating income partially offset by a decrease of approximately
$3,379,000, or 11.5%, in interest income on financing leases. The increase in
dividend income is primarily due to AREP's investment in RJR common stock. The
increase in interest income on treasury bills and other investments is primarily
due to increased interest income earned on the 1995 Offering and sales proceeds
and the investment in the Facility Agreement. The increase in rental income is
primarily due to the joint ventures' properties which are now operating. The
hotel operating revenues were generated by two hotels operated by AREP through a
third party management company since August 7, 1992. The decrease in interest
income on financing leases is primarily attributable to normal lease
amortization and property sales.

Expenses decreased by approximately $1,554,000, or 4.0%, during the
calendar year 1996 compared to the same period in 1995. This decrease reflects
decreases of approximately $2,771,000, or 14.1%, in interest expense and
$42,000, or .5%, in hotel operating expenses, partially offset by increases of
approximately $584,000, or 15.2%, in property expenses, $342,000, or 6.4%, in
depreciation and amortization, and $333,000, or 12.8%, in general and
administrative expenses. The decrease in interest expense is primarily
attributable to normal loan amortization and reductions due to repayments of
maturing balloon debt obligations, including the Senior Unsecured Debt, as well
as the sale of encumbered properties. The hotel expenses were generated from the
hotels mentioned previously.

Earnings before property transactions increased during the calendar
year 1996 by approximately $3,407,000 as compared to the same period in 1995,
primarily due to increased dividend and interest income, decreased interest
expense, partially offset by a decrease in financing lease income.

Gain on property transactions increased by approximately $19,425,000
during the calendar year 1996 as compared to the same period in 1995, due to
differences in the size and number of transactions.

During the calendar year 1996, AREP recorded a provision for loss on
real estate of $935,000 as compared to approximately $769,000 in the comparable
period of 1995.

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32
Net earnings for the calendar year 1996 increased by approximately
$22,666,000 as compared to net earnings for the calendar year 1995. This
increase is primarily attributable to the increase gain on property transactions
due to differences in the size and number of transactions.

Diluted earnings before property and securities transactions per
weighted average limited partnership unit outstanding were $1.20 in 1996
compared to $1.17 in 1995, and diluted net gain from property and securities
transactions was $.82 in 1996 compared to $.16 in 1995. Diluted net earnings
per weighted average limited partnership unit outstanding totalled $2.02 in
1996 compared to $1.33 in 1995.   

Capital Resources and Liquidity

Generally, the cash needs of AREP for day-to-day operations have been
satisfied from cash flow generated from current operations. In recent years,
AREP has applied a significant portion of its cash flow to the repayment of
maturing debt obligations. Cash flow from day-to-day operations represents net
cash provided by operating activities (excluding working capital changes and
non-recurring other income) plus principal payments received on financing leases
as well as principal receipts on certain mortgages receivable reduced by
periodic principal payments on mortgage debt.

AREP may not be able to re-let certain of its properties at current
rentals. As previously discussed, net leases representing approximately 32% of
AREP's net annual rentals will be due for renewal by the end of the year 2002.
In 1997, seven leases covering seven properties and representing approximately
$812,000 in annual rentals expired. Six of these leases originally representing
approximately $661,000 in annual rental income have been or will be re-let or
renewed for approximately $676,000 in annual rentals. Such renewals are
generally for a term of five years. One property, with an approximate annual
rental income of $151,000, is currently being marketed for sale or lease.

In 1998, 25 leases covering 25 properties and representing
approximately $2,123,000 in annual rentals are scheduled to expire. Eleven of
these leases originally representing approximately $403,000 in annual rental
income have been or will be re-let or renewed for approximately $414,000 in
annual rentals. Such renewals are generally for a term of five years. Six
properties, with an approximate annual rental income of $947,000, will be
marketed for sale or lease when the current lease term expires. Four properties
with annual rental income of $210,000 will be purchased by their tenants
pursuant to the exercise of purchase options. The status of four leases, with
approximate annual rental income of $563,000, is uncertain at this time.

In 1997 AREP sold 22 properties representing approximately $2,596,000
of net operating cash flow for net proceeds of approximately $37.6 million which
are being retained for reinvestment.

On March 26, 1998, the Board of Directors of the General Partner
announced that no distributions on its Depositary Units are expected to be made
in 1998. In making its announcement, AREP noted it plans to continue to apply
available operating cash flow toward its operations, repayment of maturing
indebtedness, tenant requirements and other capital expenditures and creation of
cash reserves for contingencies including environmental matters and scheduled
lease expirations. As previously reported, by the end of the year 2000, net
leases representing approximately 18% of AREP's net annual rentals will be due
for renewal, and by

II-8

33
the end of the year 2002, 32% of such rentals will be due for renewal. Another
factor that AREP took into consideration was that net leases representing
approximately 29% of AREP's annual rentals from its portfolio are with tenants
in the retail sector, some of which are currently experiencing cash flow
difficulties and restructurings. Further, AREP noted that the types of
investments AREP is pursuing, including assets that may not be readily
financeable or generating positive cash flow, such as development properties,
non-performing mortgage loans or securities of companies which may be undergoing
restructuring or require significant capital investments, require AREP to
maintain a strong capital base in order to own, develop and reposition those
assets.

During the year ended December 31, 1997, AREP generated approximately
$38.7 million in cash flow from day-to-day operations which excludes
approximately $3.9 million in interest earned on the 1997 Offering proceeds
which will be retained for future acquisitions. During 1996, AREP generated
approximately $31.9 million in such cash flow from day-to-day operations which
excluded approximately $4 million in interest earned on the proceeds from 1995
Rights Offering.

Capital expenditures for real estate, excluding new acquisitions, were
approximately $1,836,000 during 1997. During 1996, such expenditures totalled
approximately $3,900,000.

Pursuant to the Note Agreements, AREP is required to make semi-annual 
interest payments and annual principal payments. The interest rate charged on  
the Senior Unsecured Debt is 9.6% per annum. As of December 31, 1997, AREP
was in compliance with the terms of the Note Agreements. AREP has the
final $11.3 million principal payment due on its Senior Unsecured Debt in
May 1998 and approximately $3.5 million and $5.4 million of maturing balloon
mortgages due in 1998 and 1999, respectively. During the year ended December 31,
1997, approximately $18.2 million of maturing debt obligations, including
an $11.3 million payment on the Senior Unsecured Debt were repaid out of AREP's
cash flow. During the year ended December 31, 1996, $26.5 million of maturing
debt obligations were repaid out of AREP's cash flow which included a $11.3
million payment on the Senior Unsecured Debt. AREP may seek to refinance a
portion of these maturing mortgages, although it does not expect to refinance
all of them, and may repay them from cash flow and increase reserves from time
to time, thereby reducing cash flow otherwise available for other uses.

During 1997, net cash flow after payment of maturing debt obligations
and capital expenditures was approximately $18.7 million which was added to
AREP's operating cash reserves. During 1996, net cash flow after payment of
maturing debt obligation and capital expenditures was approximately $1.5 million
which was added to AREP's operating cash reserves. AREP's operating cash
reserves are approximately $43.2 million at December 31, 1997 (which does not
include the cash from capital transactions that has increased primarily due to
the sale of the RJR common stock which is being retained for investment or the
cash from the 1997 Offering which was recently completed), which are being
retained to meet maturing debt obligations, capitalized expenditures for real
estate and certain contingencies facing AREP. AREP from time to time may
increase its cash reserves to meet its maturing debt obligations, tenant
requirements and other capital expenditures and to guard against scheduled lease
expirations and other contingencies including environmental matters.

Sales proceeds from the sale or disposal of portfolio properties
totalled approximately $37.6 million in 1997. During 1996, sales proceeds
totalled approximately $40.7 million. During 1997, AREP received approximately
$21 million of net proceeds from the refinancing

II-9

34

of the PGEC facility in Portland, Oregon. AREP intends to use asset sales,
financing and refinancing proceeds for new investments.

In 1996 AREP invested approximately $83 million in the common stock of
RJR. In February 1997, AREP sold its entire interest in RJR for net proceeds of
approximately $112 million and realized a non-recurring gain of approximately
$29 million. In addition to the non-recurring RJR gain, AREP has realized
substantial gains on sales of real estate which may be non-recurring. There can
be no assurance that AREP will be able to realize gains such as those from any
of its investment activities. Recently, AREP invested approximately $42.8
million to purchase certain mortgage notes issued by Stratosphere having a face
value of $55 million. In addition, an affiliate of the General Partner
currently owns approximately $46.6 million face value of such Stratosphere
mortgage notes. Stratosphere owns and operates the Stratosphere Tower, Casino &
Hotel in Las Vegas, Nevada and has filed a voluntary proceeding for
reorganization pursuant to Chapter 11 of the Bankruptcy Code. Stratosphere
filed a Second Amended Plan of Reorganization which, as proposed, would provide
holders of the First Mortgage Notes with 100% of the equity in the reorganized
entity. It is presently anticipated that if such transaction is consummated
that AREP and the affiliate of the General Partner would enter into a joint
venture regarding such Stratosphere investment, with such venture to be managed
by such affiliate of the General Partner on terms fair and reasonable to AREP
and AREP's investment to be structured under applicable regulatory
requirements. Furthermore, AREP understands that Stratosphere may seek
approximately $100 million for expansion of its hotel facility, a portion of
which may be provided by AREP and the affiliate of the General Partner. See
Item 1 - "Recent Acquisitions - Investment in Mortgages and Notes Receivable."
Furthermore, AREP recently invested approximately $14.3 million for interests
in the Sands and approximately $14.1 million for interests in the Claridge
Hotel. In addition, AREP invested approximately $15 million to purchase
defaulted mortgage notes secured by real estate in Cape Cod, Massachusetts and
is investigating possible tender offers for real estate operating companies and
real estate limited partnership units However, no assurances can be made that
such transactions will be pursued or that such investments will be made or
prove to be profitable. Also, AREP understands that Stratosphere has been
experiencing negative cash flow, and there can be no assurance that any plan of
reorganization of Stratosphere out of bankruptcy will prove to be successful.
Furthermore, at December 31, 1997, AREP recorded a $9,790,000 provision for
loss in its Stratosphere investment. See Note 8. Also, see Item 1 - "Investment
Opportunities and Strategies - Real Estate Investments," for a discussion of
certain considerations relating to the gaming industry.

To further its investment objectives, AREP may consider the acquisition
or seek effective control of land development companies and other real estate
operating companies which may have a significant inventory of quality assets
under development as well as experienced personnel. This may enhance its ability
to further diversify its portfolio of properties and gain access to additional
operating and development capabilities.

Pursuant to the 1997 Offering, which closed in September 1997, AREP
raised approximately $267 million (in addition to approximately $5.4 million
received from the General Partner) to increase its available liquidity so that
it will be in a better position to take advantage of investment opportunities
and to further diversity its portfolio. Additionally, AREP may determine to
reduce debt of certain properties where the interest rate is considered to be in
excess of current market rates. See Note .

AREP's cash and cash equivalents and investment in treasury bills
increased by approximately $396 million during 1997, primarily due to $267
million (in addition to approximately $5.4 million received from the General
Partner) from the 1997 Offering, approximately $112 million from the sale
of RJR stock, approximately $60 million from sales and refinancings and
approximately $18.7 million of net cash flow from

II-10

35
operations, partially offset by $70 million in acquisitions. The funds on hand
reserves, are being retained for investment and AREP's operating cash reserves.

II-11

36

Item 8. Financial Statements

INDEPENDENT AUDITORS' REPORT

The Partners
American Real Estate Partners, L.P:

We have audited the accompanying consolidated balance sheets of American Real
Estate Partners, L.P. and subsidiary as of December 31, 1997 and 1996, and the
related consolidated statements of earnings, changes in partners' equity, and
cash flows for each of the years in the three-year period ended December 31,
1997. In connection with our audits of the consolidated financial statements, we
also have audited the 1997 financial statement schedule as listed in the Index
at Item 14 (a) 2. These consolidated financial statements and the financial
statement schedule are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these consolidated financial
statements and the financial statement schedule based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of American Real Estate
Partners, L.P. and subsidiary as of December 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.

KPMG Peat Marwick LLP

New York, New York
March 20, 1998

II-12

37
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 and 1996 (in $000's)

ASSETS                                             1997        1996
- --------                                        --------    --------

REAL ESTATE LEASED TO OTHERS:
Accounted for under the financing
method (Notes 2, 4 and 9)                $265,657    $253,782
Accounted for under the operating
method, net of accumulated
depreciation (Notes 2, 5 and 9)           121,595     103,402

INVESTMENT IN TREASURY BILLS                     372,165        --

CASH AND CASH EQUIVALENTS (Note 2)               129,147     105,543

MORTGAGES AND NOTE
RECEIVABLE (Notes 8 and 17)                   59,970      15,226

INVESTMENT IN LIMITED PARTNERSHIPS (Note 7)       22,970      29,948

HOTEL OPERATING PROPERTIES, net of
accumulated depreciation (Notes 5 and 9)       5,002      12,955

RECEIVABLES AND OTHER ASSETS (Note 17)             7,838       8,605

PROPERTY HELD FOR SALE (Notes 2, 9 and 16)         4,164       3,698

DEBT PLACEMENT COSTS - Net of
accumulated amortization (Note 2)              1,473       1,299

CONSTRUCTION-IN-PROGRESS (Note 9)                  1,249         680

MARKETABLE EQUITY SECURITIES (Note 6)               --       106,172
--------    --------

TOTAL                           $991,230    $641,310
========    ========

(Continued)

II-13

38
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 and 1996 (in $000's) (Continued)

1997          1996
---------     ---------

LIABILITIES AND PARTNERS' EQUITY

MORTGAGES PAYABLE (Notes 4, 5, 10 and 17)                                      $ 156,433     $ 115,911

SENIOR INDEBTEDNESS (Notes 11 and 17)                                             11,308        22,616

ACCOUNTS PAYABLE, ACCRUED EXPENSES
AND OTHER LIABILITIES (Notes 7, 9 and 17)                                     10,929        12,249

DEFERRED INCOME (Note 8)                                                           2,792         3,460

DISTRIBUTIONS PAYABLE (Notes 3 and 18)                                               443         1,515
---------     ---------

181,905       155,751
---------     ---------
COMMITMENTS AND CONTINGENCIES
(Notes 3 and 15)

LIMITED PARTNERS:
Preferred units, $10 liquidation preference, 5% cumulative pay-in-kind
redeemable; 9,400,000 authorized; 7,311,054 and 2,074,422 issued and
outstanding as of December 31, 1997 and 1996                               75,852        21,522

Depositary units; 47,850,000 authorized; 47,235,484
and 26,703,840 outstanding as of
December 31, 1997 and 1996                                                728,329       465,336

GENERAL PARTNER                                                                   16,328         9,885

TREASURY UNITS AT COST:
1,037,200 depositary units                                                   (11,184)      (11,184)
---------     ---------

PARTNERS' EQUITY (Notes 2, 3 and 12)                                             809,325       485,559
---------     ---------

TOTAL                                                          $ 991,230     $ 641,310
=========     =========

See notes to consolidated financial statements.

II-14

39
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (in $000's, except per unit
amounts)

REVENUES:                                             1997         1996        1995
--------     --------     -------

Interest income on financing
leases                                       $ 25,146     $ 26,073     $ 29,452
Interest income on treasury bills
and other investments                          16,726        9,866        8,153
Rental income                                     16,617       19,999       19,642
Hotel operating income (Note 9)                    6,098       10,043        9,834
Dividend income (Notes 6 and 7)                    5,877        2,641         --
Other income (Notes 8 and 9)                         454        3,152       2,839
--------     --------     -------

70,918       71,774      69,920
--------     --------     -------

EXPENSES:
Interest expense                                  13,189       16,843       19,614
Depreciation and amortization                      5,112        5,680        5,338
General and administrative expenses (Note 3)       3,188        2,939        2,605
Property expenses                                  3,457        4,411        3,827
Hotel operating expenses (Note 9)                  4,952        7,661        7,703
--------     --------     --------

29,898       37,534      39,087
--------     --------     -------

EARNINGS BEFORE PROPERTY AND
SECURITIES TRANSACTIONS                           41,020       34,240       30,833

PROVISION FOR LOSS ON MORTGAGES
RECEIVABLE (Note 8)                               (9,790)        --           --

PROVISION FOR LOSS ON
REAL ESTATE (Notes 9 and 16)                      (1,085)        (935)        (768)

GAIN ON SALE OF MARKETABLE EQUITY
SECURITIES (Note 6)                               29,188         --           --

GAIN ON SALES AND
DISPOSITION OF REAL ESTATE (Note 9)               16,051       24,517        5,091
--------     --------     --------

NET EARNINGS                                        $ 75,384     $ 57,822     $ 35,156
========     ========     ========

NET EARNINGS ATTRIBUTABLE TO
(Note 3):
Limited partners                                $ 73,884     $ 56,671     $ 34,456

General partner                                    1,500        1,151          700
--------     --------     --------

$ 75,384     $ 57,822     $ 35,156
========     ========     ========

II-15

40
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

1997                 1996                 1995
----                 ----                 ----

NET EARNINGS PER LIMITED
PARTNERSHIP UNIT (Note 2):
Basic earnings                            $   2.27                $  2.17              $ 1.49
=====                  =====                ====

WEIGHTED AVERAGE LIMITED
PARTNERSHIP UNITS OUTSTANDING               31,179,246        25,666,640             22,703,180
==========        ==========             ==========

Diluted earnings                          $   2.13                $  2.02              $ 1.33
=====                  =====                ====

WEIGHTED AVERAGE LIMITED
PARTNERSHIP UNITS AND EQUIVALENT
PARTNERSHIP UNITS OUTSTANDING               34,655,395        28,020,392             27,538,840
==========        ==========             ==========

See notes to consolidated financial statements.

II-16

41
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (in $000's)

Limited Partners' Equity                        
General     -----------------------     Held in Treasury       Total  
Partner's    Depository    Preferred    ------------------    Partners'
Equity        Units         Units      Amount       Units     Equity
------        -----         -----      ------       -----     ------

BALANCE, DECEMBER 31, 1994                  $  5,381     $ 265,040     $  --        $(11,184)    1,037    $ 259,237

Net earnings                                 700        34,456        --            --        --         35,156

Rights offering (Note 12)                   --          88,904      19,756          --        --        108,660

Expenses of Rights offering                                                     
(Note 12)                                 (21)       (1,049)       --            --        --         (1,070)

Capital contribution (Note 12)             2,206          --          --            --        --          2,206

Pay-in-kind distribution (Note 12)          --            (741)        741          --        --           --
--------     ---------     -------      --------     -----    ---------

BALANCE, DECEMBER 31, 1995                     8,266       386,610      20,497       (11,184)    1,037      404,189

Net earnings                                   1,151        56,671        --            --        --         57,822

Unrealized gains on securities                                                      
available for sale (Note 6)                  468        23,080        --            --        --         23,548

Pay-in-kind distribution (Note 12)              --          (1,025)      1,025          --        --           --
--------     ---------     -------      --------     -----    ---------

BALANCE, DECEMBER 31, 1996                     9,885       465,336      21,522       (11,184)    1,037      485,559

Net earnings                               1,500        73,884        --            --        --         75,384

Rights offering (Note 12)                   --         215,582      51,329          --        --        266,911

Expenses of Rights offering                                                     
(Note 12)                                  (8)         (392)       --            --        --           (400)

Capital contribution (Note 12)             5,419          --          --            --        --          5,419

Sale of marketable equity securities                                            
available for sale (Note 6)              (468)      (23,080)       --            --        --        (23,548)

Pay-in-kind distribution (Note 12)          --          (3,001)      3,001          --        --           --
--------     ---------     -------      --------     -----    ---------

BALANCE, DECEMBER 31, 1997                  $ 16,328     $ 728,329     $75,852      $(11,184)    1,037    $ 809,325
========     =========     =======      ========     =====    =========

See notes to consolidated financial statements.

II-17

42
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (in 000's)

1997          1996        1995
---------     ---------     ---------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings                                                           $ 75,384      $ 57,822     $  35,156
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization                                       5,112         5,680         5,338
Amortization of deferred income                                       (26)          (26)          (26)
Gain on sale of marketable equity securities                      (29,188)         --            --
Gain on sales and disposition of real estate                      (16,051)      (24,517)       (5,091)
Provision for loss on mortgages receivable                          9,790          --            --
Provision for loss on real estate                                   1,085           935           768
Changes in:
(Decrease) increase in accounts payable and
accrued expenses                                           (1,277)        6,449          (783)
Decrease in deferred income                                        (4)           (4)           (4)
Decrease (increase) in receivables and other assets             1,188        (2,357)           72
---------     ---------     ---------
Net cash provided by operating activities                  46,013        43,982        35,430
---------     ---------     ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in mortgages and note receivable                               (56,345)         (570)       (7,396)
Net proceeds from the sales and disposition of real estate               37,643        40,673        21,304
Principal payments received on leases
accounted for under the financing method                               7,683         7,314         7,205
Construction in progress                                                   (570)       (5,264)      (14,081)
Principal receipts on mortgages receivable                                  332           330           301
Property acquisitions                                                   (63,064)         (103)       (3,280)
Capitalized expenditures for real estate                                 (1,836)       (3,855)       (2,068)
Investment in treasury bills                                           (372,165)         --            --
Disposition (acquisition) of marketable securities                      111,784       (82,596)         --
Decrease (increase) in investment in limited partnership interests        6,977       (29,948)         --
---------     ---------     ---------
Net cash (used in) provided by investing activities      (329,561)      (74,019)        1,985
---------     ---------     ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
Partners' equity:
Proceeds from rights offering                                        272,331          --         110,866
Expenses of the rights offering                                         (267)          (21)         (468)
Distribution to partners                                              (1,071)         (156)         (105)
Debt:
Increase (decrease) in mortgages payable                              62,623          (593)       18,631
Periodic principal payments                                           (7,578)       (8,091)       (8,959)
Balloon payments                                                      (6,854)      (14,598)       (3,632)
Senior debt principal payment                                        (11,308)      (11,308)      (11,308)
Increase in construction loan payable                                   --           4,033         5,440
Debt placement costs                                                    (724)           52          (234)
---------     ---------     ---------
Net cash provided by (used in) financing activities       307,152       (30,682)      110,231
---------     ---------     ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS                                                              23,604       (60,719)      147,646
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                105,543       166,262        18,616
---------     ---------     ---------

CASH AND CASH EQUIVALENTS, END OF YEAR                                    $ 129,147     $ 105,543     $ 166,262
=========     =========     =========

(Continued)

II-18

43
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (in 000's)

1997         1996         1995
--------     --------     --------

SUPPLEMENTAL INFORMATION:
Cash payments for interest                                       $ 12,377     $ 16,510     $ 19,904
========     ========     ========

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Property acquired in satisfaction of mortgages:
Additions to property accounted for under the
operating method                                           $  6,646     $     36     $    256
Decrease in mortgages receivable                                (9,109)         (97)        (365)
Increase to property held for sale                                 300         --           --
Decrease in deferred income                                      2,163           61          109
--------     --------     --------

$    --      $   --       $   -- 
========     ========     ========

Reclassification of real estate to operating lease               $  4,001     $ 10,207     $ 15,140

Reclassification of real estate from operating lease               (2,497)      (2,437)      (1,105)

Reclassification of real estate from financing lease               (4,001)        (235)        (669)

Reclassification of real estate from construction in progress        --        (10,207)     (15,140)

Reclassification of real estate to property held for sale           2,497        2,672        1,774
--------     --------     --------

$    --      $   --       $   -- 
========     ========     ========

See notes to consolidated financial statements.

II-19

44
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 and
1995

1.     ORGANIZATION AND BASIS OF PRESENTATION

On July 1, 1987, American Real Estate Holdings Limited Partnership (the
"Subsidiary"), in connection with an exchange offer (the "Exchange"),
entered into merger agreements with American Real Estate Partners, L.P.
(the "Company") and each of American Property Investors, L.P., American
Property Investors II, L.P., American Property Investors III, L.P.,
American Property Investors IV, L.P., American Property Investors V,
L.P., American Property Investors VI, L.P., American Property Investors
VII, L.P., American Property Investors VIII, L.P., American Property
Investors IX, L.P., American Property Investors X, L.P., American
Property Investors XI, L.P., American Property Investors 82, L.P. and
American Property Investors 83, L.P. (collectively, the "Predecessor
Partnerships"), pursuant to which the Subsidiary acquired all the assets,
subject to the liabilities (known and unknown) of the Predecessor
Partnerships.

The limited partners of the Predecessor Partnerships received limited
partner interests in the Subsidiary. The number of such limited partner
interests received by a limited partner was determined based upon his
percentage ownership interest in the Predecessor Partnerships, the value
of the Predecessor Partnerships' net assets and the number of limited
partner interests allocable to the Predecessor Partnerships' general
partners and their affiliates. The limited partner interests in the
Subsidiary were contributed to the Company in exchange for limited
partner interests therein. Limited partnership interests were allocable
to the Predecessor Partnerships' general partners and their affiliates as
a result of their rights: (i) to receive a portion of the cash flow of
the Predecessor Partnerships by virtue of their ownership of interests in
such partnerships and their entitlement to receive management fees and
nonaccountable expense reimbursements and (ii) to share in the proceeds
from the sale or liquidation of the assets of the Predecessor
Partnerships and to receive real estate commissions with respect to the
sale of properties by the Predecessor Partnerships. These rights of the
Predecessor Partnerships' general partners and their affiliates were
valued in connection with the Exchange. As a result of such valuation,
and the assignment of the interests receivable by the corporate
affiliates to American Property Investors, Inc. (the "General Partner"),
an aggregate of 1,254,280 units and a 1% general partner interest in the
Company were issued to the General Partner and 5,679 units were issued to
noncorporate affiliates of the Predecessor Partnerships' general
partners. In addition, the General Partner also received a 1% general
partner interest in the Subsidiary.

By virtue of the Exchange, the Subsidiary owns the assets, subject to the
liabilities, of the Predecessor Partnerships. The Company owns a 99%
limited partner interest in the Subsidiary. The General Partner owns a 1%
general partner interest in both the Subsidiary and the Company
representing an aggregate 1.99% general partner interest in the Company
and the Subsidiary.

The participation in the transaction by a Predecessor Partnership was
conditioned upon obtaining the approval of a majority-in-interest of the
limited partners in such Predecessor Partnership. Such approvals were
obtained with respect to each of the Predecessor Partnerships prior to
July 1, 1987.

II-20

45
During 1989, Integrated Resources, Inc. ("Integrated"), the former parent
of the General Partner, experienced serious financial difficulties and,
on February 13, 1990, it filed in the Bankruptcy Court for the Southern
District of New York a voluntary petition for reorganization pursuant to
the provisions of Chapter 11 of the Federal Bankruptcy Code (the
"Filing"). The General Partner was a separate entity and neither the
General Partner nor any other subsidiary of Integrated was included in
the Filing.

On September 13, 1990, in connection with its voluntary petition for
reorganization pursuant to Chapter 11 of the Bankruptcy Code, Integrated
entered into an agreement whereby it agreed to sell all of its stock in
the General Partner to Meadowstar Holding Company, Inc. ("Meadowstar").
Neither the Company nor the General Partner was a party to such
agreement. The sale of the stock of the General Partner to Meadowstar was
approved by the Bankruptcy Court on October 22, 1990. On November 15,
1990, pursuant to the terms of the Acquisition Agreement, Meadowstar
purchased all of the outstanding shares of Common Stock of the General
Partner. In May 1993, Carl C. Icahn acquired all of Meadowstar's interest
in the General Partner.

An amendment (the "Amendment") to the Company's Partnership Agreement
became effective on August 16, 1996 which permits the Company to make
non-real estate investments. The Amendment permits the Company to invest
in securities issued by companies that are not necessarily engaged as one
of their primary activities in the ownership, development or management
of real estate to further diversify its investments while remaining in
the real estate business and continuing to pursue suitable investments in
the real estate markets. Under the Amendment, investments may include
equity and debt securities of domestic and foreign issuers. The
proportion of the Company's assets invested in any one type of security
or any single issuer will not be limited. The investment objective of the
Company with respect to such investments will be to purchase undervalued
securities so as to maximize total returns consisting of current income
and/or capital appreciation.

The Company will conduct its activities in such a manner so as not to be
deemed an investment company under the Investment Company Act of 1940.
Generally, this means that no more than 40% of the Company's total assets
will be invested in securities. In addition, the Company will structure
its investments so as to continue to be taxed as a partnership rather
than as a corporation under the applicable publicly-traded partnership
rules of the Internal Revenue Code.

As the Company will concentrate under the Amendment on undervalued
securities, which may include, for example, high-yield securities and
neglected securities, its investments may be subject to significant
amounts of business, financial, market and other risks. Investments in
securities issued by companies that are not engaged as one of their
primary activities in the ownership, development or management of real
estate will entail somewhat different risks from those associated with
investments in real estate assets. The equity securities in which the
Company may invest pursuant to the Amendment may include common stocks,
preferred stocks and securities convertible into common stocks, as well
as warrants to purchase those securities. The debt securities in which
the Company may invest may include bonds, debentures, notes,
mortgage-related securities and municipal obligations. Certain of such
securities may include lower-rated securities which may provide the
potential for higher yields and therefore may entail higher risk. In
addition, the Company may engage in various investment techniques, such
as options and futures transactions, foreign currency transactions and
leveraging for either hedging or other purposes. Use of borrowed funds to
leverage acquisitions can exaggerate the effect of any increase or
decrease in market value. There can be no assurance that the Company will
correctly evaluate such investments and their attendant risks or that
such investments will be profitable to the Company.

Transactions under the Amendment may include transactions with affiliates
of Carl Icahn 

II-21

46
("Icahn"), the Chairman of the Board of its General Partner and, through
High Coast, its principal unitholder, provided the terms thereof are fair
and reasonable to the Company. Mr. Icahn has confirmed that neither he
nor his affiliates would receive any fees from the Company for services
rendered in connection with non-real estate related investments by the
Company.

2.     SIGNIFICANT ACCOUNTING POLICIES

Financial Statements and Principles of Consolidation - The consolidated
financial statements are prepared on the accrual basis of accounting and
include only those assets, liabilities and results of operations which
relate to the Company and the Subsidiary. All material intercompany
accounts and transactions have been eliminated in consolidation.

Registration Costs, Expenses of the Exchange and Rights Offering Expenses
- Registration costs of the Predecessor Partnerships were charged against
partners' equity upon the closing of the public offerings in accordance
with prevalent industry practice. Expenses of the Exchange were charged
against partners' equity upon consummation of the Exchange. Rights
Offering Expenses were charged against partners' equity upon consummation
of the Right's Offerings.

Net Earnings Per Limited Partnership Unit - In February 1997 the
Financial Accounting Standards Board (the "FASB") issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share ("SFAS
128")". SFAS 128 became effective for financial statements for both
interim and annual periods ending after December 15, 1997. It also
required all prior period earnings per share data presented to be
restated. Under SFAS 128, basic earnings per share are based on earnings
after the preferred pay-in-kind distribution to Preferred Unitholders.

The resulting net earnings available for limited partners is divided by
the weighted average number of shares of limited partnership units
outstanding. Diluted earnings per share uses net earnings attributable to
limited partner interests as the numerator with the denominator based on
the weighted average number of units and equivalent units outstanding.
The Preferred units are considered to be unit equivalents. The weighted
average number of depositary units outstanding for basic earnings per
share purposes for years ended December 31, 1997, 1996 and 1995 were
31,179,246, 25,666,640, and 22,703,180, respectively. The weighted
average number of depositary units and equivalent units assumed
outstanding for diluted earnings per share purposes for the years ended
December 31, 1997 and 1996 were 34,655,395 and 28,020,392, respectively.
The weighted average number of depositary units and equivalent units
outstanding and subscribed for assumed outstanding for the year ended
December 31, 1995 was 27,538,840. The number of limited partner units
used in the calculation of diluted income per limited partner unit
increased by 3,476,149, 2,353,752, and 4,835,660 limited partner units
for the years ended December 31, 1997, 1996 and 1995, respectively to
reflect the effects of the conversion of preferred units. The diluted
earnings per share calculation for the year ended December 31, 1995
assumes the Depositary and Preferred Units subscribed for in the Rights
Offering were outstanding at the beginning of the year. Also, with
respect to the year ended December 31, 1995 calculation, net income has
been increased by approximately $2,100,000 in accordance with the
modified treasury stock method.

For the years ended December 31, 1997, 1996 and 1995, basic and diluted 
earnings per weighted average limited partnership unit outstanding are detailed
as follows:

1997     1996    1995
----     ----    ----

Basic:
Earnings before property
and securities transactions......     $1.19    $1.27   $1.30
Net gain from property  
and securities transactions......      1.08      .90     .19
-----    -----   -----
Net earnings........................     $2.27    $2.17   $1.49
=====    =====   =====

Diluted:
Earnings before property
and securities transactions......     $1.16    $1.20   $1.17
Net gain from property
and securities transactions......       .97      .82     .16
-----    -----   -----
Net earnings........................     $2.13    $2.02   $1.33
=====    =====   =====

There were no distributions in 1997, 1996 or 1995.

Cash and Cash Equivalents - The Company considers short-term investments,
which are highly liquid with original maturities of three months or less
from date of purchase, to be cash equivalents. 

Included in cash and cash equivalents at December 31, 1997 and 1996 are
investments in government backed securities of approximately $127,805,000
and $102,270,000, respectively.

II-22

47
Marketable Equity Securities - Investments in equity securities
classified as available for sale, for accounting purposes, are required
to be carried at fair value on the Balance Sheet of the Company.
Unrealized holding gains and losses are excluded from earnings and
reported as a separate component of Partners' Equity.

Investment in Limited Partnership Units - Investment in Limited
Partnership Units are accounted for under the cost method with income
distributions reflected in earnings and return of capital distributions
as a reduction of investment.

Income Taxes - No provision has been made for Federal, state or local
income taxes since the Company is a partnership and, accordingly, such
taxes are the responsibility of the partners.

Leases - The Company leases to others substantially all its real property
under long-term net leases and accounts for these leases in accordance
with the provisions of Financial Accounting Standards Board Statement No.
13, "Accounting for Leases," as amended. This Statement sets forth
specific criteria for determining whether a lease is to be accounted for
as a financing lease or operating lease.

a.     Financing Method - Under this method, minimum lease payments to be
received plus the estimated value of the property at the end of
the lease are considered the gross investment in the lease.
Unearned income, representing the difference between gross
investment and actual cost of the leased property, is amortized to
income over the lease term so as to produce a constant periodic
rate of return on the net investment in the lease.

b.     Operating Method - Under this method, revenue is recognized as
rentals become due and expenses (including depreciation) are
charged to operations as incurred.

Properties - Properties, other than those accounted for under the
financing method, are carried at cost less accumulated depreciation
unless declines in the values of the properties are considered other than
temporary.

For each of the years ended December 31, 1997, 1996 and 1995 no
individual or series of real estate assets leased to the same lessee
accounted for more than 10% of the gross revenues of the Company. At
December 31, 1997 and 1996, Portland General Electric Company occupied a
property, consisting of corporate offices, which represented more than
10% of the Company's total real estate assets.

Depreciation - Depreciation on properties accounted for under the
operating method is computed using the straight-line method over the
estimated useful life of the particular property or property components,
which range from 5 to 45 years. When properties are sold or otherwise
disposed of, the cost and accumulated depreciation are removed from the
property account and the accumulated depreciation account, and any gain
or loss on such sale or disposal is generally credited or charged to
income (See Note 9).

Debt Placement Costs - Debt placement costs are amortized over the term
of the respective indebtedness.

Use of Estimates - Management of the Partnership has made a number of
estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities to
prepare these financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those estimates.

Assets Held for Sale - Assets held for sale are carried at the lower of
cost or net realizable value.

II-23

48
Reclassifications - Certain amounts in the 1996 and 1995 financial
statements have been reclassified to conform to the 1997 presentation.

Accounting by Creditors for Impairment of a Loan - On January 1, 1995,
SFAS No. 114, Accounting by Creditors for Impairment of a Loan
("Statement 114"), as amended by SFAS 118. Accounting by Creditors for
Impairment of a Loan - Income Recognition Disclosures, was adopted by the
Company. In accordance with these standards, if it is probable that based
upon current information that a creditor with be unable to collect all
amounts due according to the contractual terms of a loan agreement, the
asset is considered "impaired". Reserves are established against impaired
loans in amounts equal to the difference between the recorded investment
in the asset and either the present value of the cash flows expected to
be received, or the fair value of the underlying collateral if
foreclosure is deemed probable or if the loan is considered collateral
dependent.

Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of - The Company has adopted Statement of Financial
Accounting Standards 121, which was issued in March 1995 , and requires
that long-lived assets and certain identifiable intangibles, and goodwill
related to those assets to be held and used by an entity and long-lived
assets and certain identifiable intangibles to be disposed of, be
reviewed for impairment whenever events changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.

In performing the review for recoverability, the Company estimates the
future cash flows expected to result from the use of the asset and its
eventual disposition. If the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the carrying
amount of the asset an impairment loss is recognized. Otherwise, an
impairment loss is not recognized. Measurement of an impairment loss for
long-lived assets and identifiable intangibles that the Company expects
to hold and use is based on the fair value of the asset. Long-lived
assets and certain identifiable intangibles to be disposed of are
reported at the lower of carrying amount or fair value less cost to sell.

3.     CONFLICTS OF INTEREST AND TRANSACTIONS WITH RELATED PARTIES

a.     The General Partner and its affiliates may realize substantial
fees, commissions and other income from transactions involving the
purchase, operation, management, financing and sale of the
Partnership's properties, subject to certain limitations relating
to properties acquired from the Predecessor Partnerships in the
Exchange. Some of such amounts may be paid regardless of the
overall profitability of the Partnership and whether any
distributions have been made to Unitholders. As new properties are
acquired, developed, constructed, operated, leased, financed and
sold, the General Partner or its affiliates may perform
acquisition functions, development and construction oversight and
other land development services, property management and leasing
services, either on a day-to-day basis or on an asset management
basis, and other services and be entitled to fees and
reimbursement of expenses relating thereto, including the
Reinvestment Incentive Fee, property management fees, real estate
brokerage and leasing commissions, fees for financing either
provided or arranged by the General Partner and its affiliates,
development fees, general contracting fees and construction
management fees. The terms of any transactions between the Company
and the General Partner or its affiliates must be fair and
reasonable to the Company and customary to the industry.

Reinvestment incentive fees as payment for services rendered in
connection with the acquisition of properties from July 1, 1987
through July 1, 1997 were 1% of the purchase price for the first
five years and are 1/2% for the second five years.

II-24

49
Reinvestment incentive fees were only payable on an annual basis
if the sum of (x), the sales price of all Predecessor
Partnerships' properties (net of associated debt which encumbered
such properties at the consummation of the Exchange) sold through
the end of such year, and (y), the appraised value of all
Predecessor Partnerships' properties which have been financed or
refinanced (and not subsequently sold), net of the amount of any
refinanced debt, through the end of such year determined at the
time of such financings or refinancings, exceeded the aggregate
values assigned to such Predecessor Partnerships' properties for
purposes of the Exchange. If the subordination provisions were not
satisfied in any year, payment of reinvestment incentive fees for
such year were deferred. At the end of each year, a new
determination was made with respect to subordination requirements
(reflecting all sales, financings and refinancings from the
consummation of the Exchange through the end of such year) in
order to ascertain whether reinvestment incentive fees for that
year and for any prior year, which had been deferred, may be paid.

From the commencement of the Exchange through June 30, 1997 the
Company (i) sold or disposed of an aggregate of 159 properties of
the Predecessor Partnerships for an aggregate of approximately
$99,268,000, net of associated indebtedness which encumbered such
properties at the consummation of the Exchange and (ii) refinanced
25 Predecessor Partnership properties with an aggregate appraised
value, net of the amount of the refinanced debt, of approximately
$37,672,000 for a sum total of approximately $136,940,000.
Aggregate appraised values attributable to such properties for
purposes of the Exchange were approximately $145,663,000. Eighteen
properties have been acquired since the commencement of the
exchange, including two properties acquired in June 1997 (see Note
9), for aggregate purchase prices of approximately $61,000,000.
Reinvestment incentive fees of approximately $480,000 have
previously been paid to the General Partner. Since the
subordination requirements were not met as of June 30, 1997, the
termination date of the right to receive such fee, no reinvestment
incentive fee was due or payable to the General Partner for the
two properties acquired in 1997.

b. The Company and certain affiliates of its General Partner
entered into an agreement with the third-party landlord of its
leased executive office space. The agreement provided for the
Company and these affiliates to relocate their offices to an
adjacent building also owned by the landlord which relocation
occurred in September 1995. In accordance with the agreement, the
Company entered into a lease, expiring in 2001, for 7,920 square
feet of office space, at an annual rental of approximately
$153,000. The Company has sublet to certain affiliates 3,205
square feet at an annual rental of approximately $62,000,
resulting in a net annual rental of approximately $91,000. The
prior lease, which was terminated, provided for approximately
6,900 square feet at an annual rental of $155,000. During the year
ended December 31, 1996, the affiliates reimbursed the Company
approximately $62,000 for rent in connection with the new lease.

In addition, in 1995, the Company and an affiliate received a
lease termination fee of $350,000 which has been allocated
$175,000 to the Company and $175,000 to the affiliates. Such
allocations and terms of the sublease were approved by the Audit
Committee of the Board of Directors of the General Partner.

II-25

50
c.     The Company was reimbursed by an affiliate of the General Partner
for payroll and certain overhead expenses related to certain
employees of the Company who provided services on a part-time
basis in the amounts of approximately $34,000, $50,000 and $86,000
for the years ended December 31, 1997, 1996 and 1995,
respectively. Such reimbursements were approved by the Audit
Committee of the Board of Directors of the General Partner.

d.    In addition, in 1997 the Company entered into a license
agreement for a portion of office space from an affiliate of the
General Partner. The license agreement dated as of February 1,
1997 expires May 22, 2004 unless sooner terminated in accordance
with the agreement. Pursuant to the license agreement, the Company
has the non-exclusive use of 3,547 square feet of office space and
common areas (of an aggregate 21,123 rentable square feet sublet
by such affiliate) for which it pays $17,068 per month, together
with 16.79% of certain "additional rent". In 1997, the Company
paid an affiliate of the General Partner $68,747 of rent in
connection with this licensing agreement. In connection with the
build-out of the space, the Company reimbursed such affiliate
$486,989, representing the Company's allocable share of such costs
net of a pro rata share of the sub-lessor's allowance for such
build-out. The terms of such sublease were reviewed and approved
by the Audit Committee.

4.     REAL ESTATE LEASED TO OTHERS ACCOUNTED FOR UNDER THE FINANCING METHOD

Real estate leased to others accounted for under the financing method is
summarized as follows (in $000's):

December 31,
--------------------
1997        1996
--------    --------

Minimum lease payments receivable    $342,131    $321,414
Unguaranteed residual value           150,912     143,916
--------    --------
493,043     465,330

Less unearned income                  227,386     211,548
--------    --------

$265,657    $253,782
========    ========

The following is a summary of the anticipated future receipts of the
minimum lease payments receivable at December 31, 1997 in ($000's):

Year ending
December 31,            Amount  
------------            ------  

1998               $ 33,645
1999                 32,814
2000                 31,452
2001                 27,719
2002                 24,329
Thereafter          192,172
--------
$342,131
========

At December 31, 1997, approximately $192,446,000 of the net investment
in financing leases was pledged to collateralize the payment of
nonrecourse mortgages payable.

II-26

51
5.     REAL ESTATE LEASED TO OTHERS ACCOUNTED FOR UNDER THE OPERATING METHOD

Real estate leased to others accounted for under the operating method is
summarized as follows (in $000's):

December 31,
--------------------
1997        1996
--------    --------

Land                             $ 48,293    $ 50,261
Commercial building               113,471      93,642
--------    --------
161,764     143,903
Less accumulated depreciation      40,169      40,501
--------    --------
$121,595    $103,402
========    ========

As of December 31, 1997 and 1996, accumulated depreciation on the hotel
operating properties (not included above) amounted to approximately
$2,200,000 and $3,254,000, respectively (See Note 9).

The following is a summary of the anticipated future receipts of minimum
lease payments under noncancelable leases at December 31, 1997 (in
$000's):

Year ending
December 31,                           Amount
------------                        ------------

1998                             $     10,015
1999                                    8,632
2000                                    7,031
2001                                    5,737
2002                                    4,768
Thereafter                             18,232
--------
$     54,415

At December 31, 1997, approximately $43,873,000 of real estate leased to
others was pledged to collateralize the payment of nonrecourse mortgages
payable.

6.     MARKETABLE EQUITY SECURITIES

In 1996, the Company purchased 3,121,700 shares of RJR Nabisco Holdings
Corp. ("RJR") common stock at a cost of approximately $82,596,000 at an
average cost per share of $26.46. As of December 31, 1996 the Company
owned 3,121,700 shares of RJR, representing approximately 1.1% of the
total outstanding RJR common shares. On December 31, 1996, the closing
price of RJR common shares on the New York Stock Exchange was $34.00
representing a market value of approximately $106,000,000 and
approximately 16.5% of the Company's total assets. Carl C. Icahn, the
Chairman of the Board of the General Partner, owned (through affiliates)
an additional 16,808,100 shares of RJR, as of December 31, 1996,
representing approximately 6.2% of the total outstanding RJR common
shares.

The Company recorded "Dividend income" of $2,281,000 for the year ended
December 31, 1996 on the 3,121,700 shares of RJR purchased in 1996.

Unrealized holding gains of approximately $23,548,000 were recorded as a
separate component of Partners' Equity at December 31, 1996.

In February 1997, the Company sold its entire interest in RJR for net
proceeds of approximately $111,784,000 realizing a gain of approximately
$29,188,000. The Company's 

II-27

52
pro rata share of third party expenses relating to such RJR investment
was approximately $2,154,000 which was paid in the year ended December
31, 1997 and approved by the Audit Committee.

7.     INVESTMENT IN LIMITED PARTNERSHIP UNITS

a. In June 1996, the Company entered into an agreement with
non-affiliated third parties and became a member of a limited liability
company, Beattie Place LLC ("Beattie"). The purpose of Beattie is to
acquire, hold, and ultimately dispose of limited partnership units in ten
Balcor Limited Partnerships (the "Balcor Units") in connection with
previously commenced tender offers. These Balcor limited partnerships own
and operate commercial and multi-family real estate properties
nationwide. The Company agreed to purchase a non-voting membership
interest in Beattie of approximately 71.5%. Beattie purchased
approximately 119,000 Balcor Units of which approximately 85,000 Balcor
Units represent the Company's pro rata share. As of December 31, 1997,
the Company has received return of capital distributions of approximately
$2,476,000 in excess of its original investment of $9,834,000. Such
excess return of capital distributions have been recognized in "Dividend
income" in the year ended December 31, 1997. Approximately $622,000 and
$360,000 of income distributions were received and recorded in "Dividend
income" for the years ended December 31, 1997 and 1996, respectively.

b. In July 1996, the Company's subsidiary, American Real Estate Holdings
Limited Partnership ("AREH") and an affiliate of the General Partner,
Bayswater Realty and Capital Corp. ("Bayswater") became partners of
Boreas Partners, L.P., ("Boreas"), a Delaware limited partnership. AREH
and Bayswater have a 69.999% and 30% limited and general partner
interest, respectively, and a wholly owned subsidiary of AREH has a .001%
interest as a general partner of Boreas. AREH's total interests are 70%.
Boreas together with unaffiliated third parties entered into an agreement
and became limited partners of Raleigh Capital Associates, L.P.
("Raleigh") for the purpose of making a tender offer for up to 46% of the
outstanding limited partnership and assignee interests ("Units") of
Arvida/JMB Partners, L.P. ("Arvida") a real estate partnership. Boreas
and an affiliated general partner have a total interest in Raleigh of 33
1/3%. In 1996, Boreas made capital contributions of approximately
$17,650,000 to Raleigh representing, as of December 31, 1996,
approximately 27,000 of the outstanding Units. In February 1997, Raleigh
returned approximately $3,625,000, together with interest earned thereon
of approximately $29,000, of excess capital contribution. In April 1997,
an additional contribution of approximately $4,333,000 was made
representing 8,000 additional units. As of December 31, 1997, Boreas has
invested approximately $13,729,000 in Raleigh, net of return of capital
distributions of approximately $4,629,000. Boreas received approximately
$1,333,000 of income distribution, representing Arvida's 1996 cash flow
distribution, which was recorded as "Dividend income" in the year ended
December 31, 1997.

The Company has consolidated Boreas in the accompanying financial
statements and $4,149,000 representing Baywater's minority interest has
been included in "Accounts payable, accrued expenses, and other
liabilities."

c. As of December 31, 1997, the Company has participated in four other
tender offers for limited partnership units. The Company has invested
approximately $9,192,000 in these partnerships.

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53
8.     MORTGAGES AND NOTE RECEIVABLE
(in $000's)

Balance at
Balance          Monthly           December 31,
Collateralized by Property           Interest         Maturity        at             Payment       ------------------
Tenanted by or Debtor                  Rate             Date       Maturity          Amount        1997          1996
- ---------------------                  ----             ----       --------          ------        ----          ----

Hardee's Food Systems, Inc.    (i)     9.00% (a)     11/05          $     -             1 (a)      $   117    $    154

Bank of Virginia               (i)     9.00  (b)      1/06               848            1 (b)          359         354

Best Products Co., Inc.        (i)     9.00  (c)      9/01                -             - (c)          173         197

Data 100 Corp.                 (i)     9.00          12/10                -   (d)      10               -          915
11.6087        12/19                -   (d)       -                -         537

Easco Corp.                    (i)     8.875          2/98 (e)         3,587           27 (e)        3,481       3,493

Winchester Partnership         (i)     9.00          11/01                -            34            1,336       1,610

Queens Moat Houses,                                                                       
P.L. C. (Note receivable)   (f)    Variable       12/00             9,839  (f)       - (f)        5,600       7,966

Stratosphere Corp.                    14.25           5/02                -   (g)       - (g)       33,021          -

New Seabury Company, LP                 -              -                  -   (h)       - (h)       15,883          -
-------    --------
$59,970    $ 15,226
=======    ========

(a)    5.75% is paid currently and 3.25% is deferred. The principal and
deferred interest is payable in monthly installments from March
1999 until November 2005.

(b)    4.5% is paid currently and 4.5% is deferred until maturity.

(c)    Payments are $46,931 through November 1, 1996 and $54,276 through
September 1, 2001.

(d)    In August 1997, the outstanding principal balance of the notes was
paid off and a gain of approximately $950,000 was realized in the
year ended December 31, 1997.

(e)    As of January 31, 1997, the purchase money mortgage was amended.
The maturity date was extended to February 1998; however, an
additional extension is in the process of negotiation under
similar terms.

(f)    On August 15, 1995, the Company invested approximately $7.1
million in a note receivable by purchasing a portion
(approximately 1.85%) of an unsecured Senior Term Facility
Agreement ("Facility Agreement"). The borrower is Queens Moat
Houses P.L.C. ("Queens Moat") and certain subsidiaries. Queens
Moat is a United Kingdom based hotel operator with properties in
the U.K., Germany, Netherlands, France and Belgium. The Company
purchased its participation portion from Lazard Freres & Co. LLC
at 71.75% of the face amount of the Company's pro rata portion of
the Facility Agreement's outstanding senior advances on the
acquisition date. The Facility Agreement's advances are
denominated in Pounds Sterling, Deutsche Marks, Dutch Guilders,
Belgian Francs and French Francs. The discount at acquisition
date, based on the then existing spot rate, was approximately $2.8
million. The Facility Agreement matures December 31, 2000 and
bears interest at LIBOR (London Interbank Offered Rate) plus 1.75%
per annum for the relevant currencies. Interest accrued from July
1, 1995 to June 30, 1996, in the approximate amount of $622,000,
has been capitalized into the note receivable in 

II-29

54
accordance with the terms of the Facility Agreement. Subsequent to
June 30, 1996 interest periods and payments can vary from one
month to two, three or six months at the discretion of the
borrower. There are scheduled payments of the advances over the
term of the loan. In addition, repayments are required when
certain underlying assets are sold. During the years ended
December 31, 1997 and 1996, these repayments totalled
approximately $2,165,000 and $419,000, respectively.

The discount at acquisition date is being amortized over the term
of the Facility Agreement. For the years ended December 31, 1997
and 1996, approximately $1,015,000 and $619,000 of discount was
amortized including $626,000 and $122,000 as a result of
repayments, respectively. In accordance with accounting policy,
foreign exchange gains and losses will be recorded each quarter
based on the prevailing exchange rates at each balance sheet date.
Foreign exchange losses of approximately $979,000 and $253,000 and
gains of approximately $158,000 have been recognized and are
included in "Other Income" for the years ended December 31, 1997,
1996 and 1995, respectively.

(g)    In June, 1997 the Company invested approximately $42.8 million to
purchase approximately $55 million face value of 14 1/4% First
Mortgage Notes, due May 15, 2002, issued by the Stratosphere
Corporation ("Stratosphere"), which has approximately $203 million
of such notes outstanding. An affiliate of the General Partner
owns approximately $46.6 million face value of the Stratosphere
First Mortgage Notes.

Stratosphere owns and operates the Stratosphere Tower, Casino &
Hotel, a destination resort complex located in Las Vegas, Nevada,
containing a 97,000 square foot casino and 1,444 hotel rooms and
suites and other attractions.

Stratosphere and its wholly owned subsidiary Stratosphere Gaming
Corp. filed voluntary petitions on January 27, 1997, for Chapter
11 Reorganization pursuant to the United States Bankruptcy Code.
Stratosphere and its subsidiary are acting as debtors in
possession on behalf of their respective bankrupt estates and are
authorized as such to operate their business subject to bankruptcy
court supervision. Stratosphere did not make the required November
15, 1996 interest payment due on the First Mortgage Notes and does
not intend to accrue any interest on this debt subsequent to the
bankruptcy filing until a plan of reorganization is confirmed by
the bankruptcy court.

Stratosphere recently filed a Second Amended Plan of
Reorganization which, as proposed, would provide holders of the
First Mortgage Notes with 100% of the equity in the reorganized
entity. If such plan is approved by the Bankruptcy Court, it would
provide the Company and an affiliate of the General Partner with a
controlling interest in such reorganized entity.

It is presently anticipated that if such transaction is pursued
and consummated that the Company and the affiliate of the General
Partner would enter into a joint venture regarding such
Stratosphere investment, with such venture to be managed by such
affiliate of the General Partner on terms fair and reasonable to
the Company and the Company's investment to be structured under
applicable regulatory requirements. Furthermore, the Company
understands that Stratosphere may seek approximately $100 million
for expansion of its hotel facility, a portion of which may be
provided by the Company and the affiliate of the General Partner.

The Company, the General Partner, and the directors and officers
of the General Partner are currently in the process of pursuing
gaming applications to obtain licenses from the Nevada Gaming
Authority.

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55
The Company understands that the application process may take a
number of months. The Company has no reason to believe it will not
obtain its necessary license; however, the Company understands
that the licensing application of the affiliate of the General
Partner may be reviewed by the authorities earlier than its
application. In an effort to facilitate the consummation of the
Stratosphere reorganization process if approved by the court in
advance of the obtaining of such license by the Company, the
Company may transfer its interests in Stratosphere to an affiliate
of the General Partner at a price equal to the Company's cost for
such Stratosphere First Mortgage Notes. Such transfer will be made
to accommodate such reorganization process only if the affiliate
of the General Partner receives its license but the Company does
not receive its license by the time of Stratosphere's
reorganization as described. However, in such event, the affiliate
of the General Partner would be obligated to sell back to the
Company, and the Company would be obligated to repurchase such
interests (or their equivalent) in Stratosphere at the same price
(together with a commercially reasonable interest factor) when the
appropriate licenses are obtained for the Company. The Company
believes there should be no problem for the Company to obtain its
license, and thereupon such Stratosphere interests would be
transferred back to the Company; however, in order to secure the
Company, if such Stratosphere interests are not transferred back
to the Company then any net gains (less such interest) from the
subsequent sale by the affiliate of the General Partner of such
Stratosphere interests previously held by the Company will be paid
to the Company. Presently, the Company understands that the
Stratosphere First Mortgage Notes are trading at less than the
Company's cost for such notes.

Based on current hotel and casino operations' management believes
the fair value of this investment to be $33,021,000. As a result,
the Company has recorded as provision for loss on mortgages
receivable of $9,790,000 in the year ended December 31, 1997.

(h)    On August 18, 1997, a wholly-owned subsidiary of the Company
acquired five notes and mortgages for approximately $10,745,000
with an aggregate face amount of approximately $14,340,000,
excluding accrued and unpaid interest and penalties owed by the
borrower and estimated to total approximately an additional
$8,200,000. The notes are secured by certain real property
belonging to the borrower, New Seabury Company Limited Partnership
("New Seabury"). The loans are currently non-performing and the
debtor has filed a Chapter 11 petition for relief in the United
States Bankruptcy Court, District of Massachusetts. The properties
are part of a master planned community situated in the town of
Mashpee located on Cape Cod in Massachusetts. Subsequent to the
closing, the Company received approximately $115,000 in cash flow
from property operations from a portion of the underlying
collateral which has been applied to the Company's investment.

On September 26, 1997, a wholly-owned subsidiary of the Company
acquired four additional notes and mortgages for a purchase price
of approximately $5,000,000 with an outstanding principal balance
of approximately $8,320,000, excluding accrued and unpaid interest
and penalties owed by the borrower and estimated to total
approximately an additional $3,000,000 to $4,000,000. The notes
are secured by certain real property belonging to the borrower,
New Seabury. The loans also are currently non-performing and
subject to the debtor's Chapter 11 proceeding. The properties are
part of a master planned community situated in the Town of Mashpee
located in Cape Cod in Massachusetts.

The Company is attempting to foreclose on the underlying
collateral pertaining to all of the above mentioned notes.

(i)    The Company has generally not recognized any profit in connection
with the property sales in which the above purchase money
mortgages receivable were taken back. Such profits are being
deferred and will be recognized when the principal balances on the
purchase money mortgages are received since profit recognition was
not allowed under generally accepted accounting principles at the
time of sale.

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56
9.     SIGNIFICANT PROPERTY TRANSACTIONS

Information on significant property transactions during the three-year
period ended December 31, 1997 is as follows:

a.     On July 14, 1992, Integra, a Hotel and Restaurant Company
("Integra"), which leased two hotel properties located in Miami,
Florida and Phoenix, Arizona filed a voluntary petition for
reorganization pursuant to the provisions of Chapter 11 of the
Bankruptcy Code. The tenant's petition, previously filed with the
Bankruptcy Court, to reject the aforementioned leases, was
approved on August 7, 1992, and the Company assumed operation of
the properties on that date.

At December 31, 1997, the property located in Miami Florida has a
carrying value of approximately $5,004,000 and is unencumbered by
any mortgages. This property is subject to a ground lease. Based
on current conditions, management believes the carrying value of
the Miami property is reasonably stated.

In April 1997, the Company sold the hotel property located in
Phoenix, Arizona. The selling price was $15,750,000 and a gain of
approximately $7,863,000 was recognized in the year ended December
31, 1997. This property was encumbered by a nonrecourse mortgage
with a principal balance outstanding of approximately $3,211,000
which was repaid at closing. A prepayment penalty of approximately
$250,000 was also incurred.

The Company entered into a management agreement for the operation
of the hotels with a national management organization. Since
August 7, 1992, the hotels have been classified as Hotel Operating
Properties and their revenues and expenses separately disclosed in
the Consolidated Statements of Earnings. Net hotel operations
(hotel operating revenues less hotel operating expenses) totalled
approximately $1,110,000, $2,382,000 and $2,131,000 for the years
ended December 31, 1997, 1996 and 1995, respectively. Hotel
operating expenses include all expenses except for approximately
$527,000, $933,000 and $822,000 of depreciation and $83,000,
$335,000 and $339,000 of interest expense for the years ended
December 31, 1997, 1996 and 1995, respectively. These amounts are
included in their respective captions in the Consolidated
Statements of Earnings.

b.     On July 31, 1992, Chipwich, Inc. ("Chipwich"), parent of Peltz
Food Corporation, a tenant in a property owned by the Company
filed a voluntary petition for reorganization pursuant to the
provisions of Chapter 11 of the Federal Bankruptcy Code. Chipwich
then filed a motion for rejection of the lease and, pursuant to an
order of the Bankruptcy Court, the lease was rejected on September
29, 1992. There was a guarantor of the lease and the Company
settled its claim against the guarantor.

In 1995, the guarantor paid the Company $2,200,000 in full
satisfaction of its leasehold obligation which, net of related
costs, resulted in approximately $2,034,000 of "Other income" in
the year ended December 31, 1995. The Company reclassified this
property to "Property held for sale" and reduced its carrying
value to net realizable value by recording a provision for loss on
real estate of $250,000 and $611,552 in the years ended December
31, 1996 and 1995, respectively. In October 1997, the Company sold
this property and recognized a gain of approximately $94,000.

c.     On June 17, 1993, the Company purchased two non-performing
mortgage loans for a combined price of $13,000,000. Each loan was
collateralized by a residential apartment complex located in
Lexington, Kentucky. The face value of the non-performing loans
was approximately $21,188,000.

The first non-performing loan, purchased for $6,990,000, was
collateralized by a 396 unit 

II-32

57
multi-family complex. The Company foreclosed on this property
("Stoney Falls"), and received the deed on October 11, 1993.

The second non-performing loan, purchased for $6,010,000, was
collateralized by a 232 unit apartment complex. The Company
foreclosed on this property ("Stoney Brooke") and received the
deed on February 11, 1994. Subsequent to the acquisition, the
Company received distributions from the seller of the note and
began to receive cash flow from the property pertaining to the
period prior to formal foreclosure, net of expenditures incurred
by the Company, which were applied as a reduction to the initial
cost of the loan. This cash flow, net of expenditures incurred by
the Company, totalled approximately $735,000.

On September 17, 1996, the Company sold the two apartment
complexes for $20,325,000. First mortgages with principal balances
outstanding of approximately $9,800,000 were repaid at closing. As
a result, the Company recognized a gain on the sale of these
properties of approximately $6,723,000 in the year ended December
31, 1996.

d.     The Company entered into two joint ventures in June 1994 with
unaffiliated co-venturers for the purpose of developing luxury
garden apartment complexes. The Alabama joint venture has been
consolidated in the accompanying financial statements. The North
Carolina joint venture sold its property in December 1996.

1. The first joint venture, formed as an Alabama Limited
Liability Company, developed a 240 unit multi-family project
situated on approximately twenty acres, currently owned by the
joint venture, located in Hoover, Alabama, a suburb of Birmingham.
The Company, which owns a 70% majority interest in the joint
venture, contributed $1,750,000 in June 1994 and the co-venturer
contributed $250,000. As of December 31, 1997 and 1996
approximately $81,000 and $135,000, respectively, representing the
minority interest of the co-venturer has been included in
"Accounts payable, accrued expenses, and other liabilities" in the
accompanying financial statements. Distributions, which totaled
$107,000 and $75,000 in 1997 and 1996, respectively, are made in
proportion to ownership interests. The co-venturer was credited
with $500,000 of additional capital in lieu of receiving a general
contractor's fee. Permanent financing was obtained by the joint
venture in the amount of $8,860,000 of which $360,000 is
guaranteed by the co-venturer and personally by its principals.
The complex was completed in September 1995, and all rental units
were available for occupancy. The development totalled
approximately $10,889,000, including the acquisition of land
valued at approximately $1,138,000. An affiliate of the Company's
co-venturer is managing the property.

For the years ended December 31, 1997, 1996 and 1995, net rental
operations resulted in losses of approximately $14,000, $219,000
and $301,000, including approximately $472,000, $502,000 and
$289,000 of depreciation and amortization, before consideration of
the co-venturer's minority interest in such losses of
approximately $4,000, $66,000 and $90,000, respectively. These
amounts are included in their respective captions in the
Consolidated Statements of Earnings.

A reinvestment incentive fee of approximately $38,000 was paid to
the general partner upon completion of the project (See Note 3).

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58
2. The second joint venture, a Delaware limited partnership,
developed a 288 unit multi-family project situated on
approximately thirty-three acres in Cary, North Carolina
(Raleigh-Durham area). The Company, owned a ninety percent (90%)
majority interest in the partnership, contributed approximately
$4,022,000 and was a limited partner. Construction financing was
obtained by the joint venture in the amount of $12,205,000 and was
guaranteed by the joint venture general partner and personally by
its principals. The complex was completed in August 1996 and all
rental units were available for occupancy. The total development
costs including the acquisition of land, were approximately
$16,000,000. In December 1996, the joint venture sold the property
for $21,000,000.

The Company received approximately $8,300,000 of the net proceeds
and recognized a gain of approximately $4,900,000.

A reinvestment incentive fee of approximately $72,000 was paid to
the Company's general partner upon completion of the project (See
Note 3).

e.     On February 1, 1995, the Penske Corp. exercised its purchase
option on three properties leased from the Company (two in New
Jersey and one in New York). The selling price was approximately
$4,535,000 and a gain of approximately $1,003,000 was recognized
in the year ended December 31, 1996. Each property was encumbered
by first and second mortgages which totalled approximately
$1,152,000 and which were paid from the sales proceeds.

f.     On March 24, 1995, the Company sold the property tenanted by Pace
Membership Warehouse, Inc. in Taylor, Michigan. The selling price
was $9,300,000 and a gain of approximately $3,307,000 was
recognized in the year ended December 31, 1995. The property was
encumbered by a nonrecourse mortgage payable of approximately
$4,346,000 which the purchaser assumed.

g.     On May 18, 1995, the Company purchased approximately 248 acres of
partially improved land located in Armonk, New York. The purchase
price was approximately $3,044,000. The Company intends to
construct approximately 45 to 50 single-family detached luxury
homes subject to subdivision and other required approvals. No
material development costs have yet been incurred.

A reinvestment incentive fee of approximately $15,000 was paid to
the Company's general partner in 1996 (See Note 3).

h.     On June 28, 1995, General Signal Technology Corporation, a tenant
of a property located in Andover, Massachusetts exercised its
rights under the lease to purchase the property. The selling price
was approximately $19,808,000 and a loss of approximately $125,000
was recognized in the year ended December 31, 1995. The property
was encumbered by two nonrecourse mortgages payable which totalled
approximately $10,670,000 and were paid from the sales proceeds.

i.     On January 11, 1996, Forte Hotels, Inc. ("Forte") a/k/a
Travelodge, a tenant in a property owned by the Company entered
into a Lease Termination and Mutual Release Agreement
("Agreement") which required Forte to pay the Company $2,800,000.

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59
As a result of the above settlement the Company recognized "Other
income" of approximately $2,700,000, net of related costs, in the
year ended December 31, 1996. In January 1997, the Company sold
this property for approximately $2,165,000, net of closing costs.
A gain of approximately $1,403,000 was recorded in the year ended
December 31, 1997.

j.     On May 10, 1996, the Company sold a property in Miami, Florida
that was tenanted by the Cordis Corporation. The Company permitted
an early exercise by the tenant of its purchase option as the
Company believed the option price to be above the market price.
The selling price for the property was $24,310,000. First and
second mortgages with principal balances outstanding of
approximately $14,416,000 were repaid at closing. In addition,
closing costs of approximately $228,000 were incurred. As a
result, the Company recognized a gain on the sale of this property
of approximately $4,659,000.

In connection with the early extinguishment of the outstanding
mortgage balances, the Company paid approximately $522,000 in
prepayment penalties which were included in interest expense.

k.     On July 24, 1996, the Company entered into a gross lease with AT&T
Corp. for its Atlanta office building formerly leased to Days Inn
of America, Inc. The initial term of the lease is for five years
at $1,478,923 per annum plus operating expense escalations with
two five-year renewal periods. The renewal rent is the initial
term rent plus 50% of the increase in the Consumer Price Index.
Tenant improvements, allowances and commissions incurred in
connection with this lease were approximately $2,500,000. The
lease commenced on November 25, 1996.

l.     On July 29, 1996, the Company sold a property in Woodbury, NY that
was tenanted by Pioneer Standard Electronics, Inc. The selling
price was $2,000,000 and the Company recognized a gain of
approximately $1,040,000 in the year ended December 31, 1996.

m.     On August 15, 1996, the Company sold a property in Philadelphia,
Pennsylvania that was tenanted by A&P and Ginos. The selling price
for the property was $3,500,000. A first mortgage with a principal
balance outstanding of approximately $301,000 was repaid at
closing. In addition, closing costs of approximately $194,000 were
incurred. As a result, the Company recognized a gain on the sale
of this property of approximately $2,198,000.

n.     On September 30, 1996, the Company sold a property in Southfield,
Michigan that was tenanted by the Penske Corporation. The selling
price for the property was $4,700,000 and the Company recognized a
gain on the sale of this property of approximately $3,253,000.

o.     On January 7, 1997, the Company sold three properties tenanted by
Federal Realty Investment Trust ("FRIT") for a total selling price
of approximately $9,363,000. Two first mortgages with principal
balances outstanding of approximately $878,000 were repaid at
closing. In addition, closing costs of approximately $40,000 were
incurred. As a result, the Company recognized a gain of
approximately $1,778,000.

In addition, on January 7, 1997, FRIT made a loan to the Company
in the approximate amount of $8,759,000 secured by a fourth
property tenanted by FRIT located in Broomal, PA. Concurrently
with this loan, the Company granted and FRIT exercised an option
to purchase the Broomal property with a closing to occur on or
about June 30, 1998. The purchase price will be the unpaid balance
of the mortgage loan of approximately $8,500,000 at the closing
date. The nonrecourse mortgage loan bears interest at the rate of
8% per annum and requires monthly debt service payments of
approximately $72,000.

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60
p.     On June 30, 1997, the Company acquired two adjacent medical office
buildings located in Nashville, Tennessee, both of which are net
leased to Baptist Hospitals, Inc. ("Baptist"). The total purchase
price was approximately $34,616,000 which included the assumption
of existing mortgages on each building totaling approximately
$31,666,000.

The lease term, which commenced June 28, 1996, is for 22.5 years
with seven 10-year renewal periods at approximately $3,032,000 per
annum paid semi-annually. The mortgages bear interest at the rate
of 7.84% per annum, self liquidate December 31, 2018, and have
total debt service of approximately $3,070,000 payable
semi-annually. Cash flow from these properties is approximately
break-even.

q.     On September 26, 1997 the Company purchased a retail property
located in Schaumburg, Illinois for approximately $9,138,000 cash.
The completed building, which is approximately 100,000 square
feet, is tenanted by Bed Bath & Beyond, Inc., and Golfsmith
International, Inc.

Bed Bath & Beyond's lease is for an initial term of fifteen years
starting at $565,896 per year for their approximately 71,000
square foot store with four five year renewal options at increased
rentals. Golfsmith International's lease is for an initial term of
fifteen years starting at $375,450 per year with three five year
renewal options at increased rentals. The rent commencement date
for both tenants occurred in November 1997.

A mortgage loan commitment has been entered into to provide
funding of approximately $7,150,000 for this property.

r.     On December 12, 1997, the Company sold the property tenanted by
Hancock Bank located in Baton Rouge, Louisiana. The selling price
was $5,075,000. As a result, the Company recognized a gain of
approximately $1,345,000.

s.     In December 1997, the Company purchased for approximately $19
million, two multi-tenant industrial buildings, located in Hebron,
Kentucky. Net rental income is approximately $1.75 million per
annum. The Company entered into a commitment to obtain a mortgage
of approximately $12.6 million with interest at 7.21% per annum
payable on a 30 year basis due in 124 months.

The Company also entered into a contract to purchase for
approximately $21 million a third single tenant building in the
Hebron complex subject to certain contingencies including
substantial completion by October 1998. A mortgage loan commitment
has been executed to provide funding of approximately $19.4
million in connection with this acquisition.

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10.    MORTGAGES PAYABLE

At December 31, 1997, mortgages payable, all of which are nonrecourse to
the Company, are summarized as follows (in $000's):

Balance at
Annual Principal              December 31,
Number of          Range of            Range of                and            ----------------------------
Mortgages       Interest Rates        Maturities        Interest Payment           1997           1996
---------       --------------        ----------        ----------------           ----           ----

14         7.080%  -  8.790%    6/30/99  - 12/31/18      $   13,064         $   104,737     $    57,952
32         9.000   - 10.750     4/30/98  - 12/13/13           8,547              51,132          55,073
2        11.500   - 12.000    10/31/05  - 12/31/05              84                 564           2,886
-------           ---------       ---------
$   21,695         $   156,433     $   115,911
=======             =======       =========

The following is a summary of the anticipated future principal payments
of the mortgages:

Year ending
December 31,                               Amount      
------------                             ----------      

1998                                  $ 20,233
1999                                    14,102
2000                                    19,907
2001                                     8,314
2002                                     6,664
2003 - 2007                                33,513
2008 - 2012                                37,679
2013 - 2017                                11,753
2018                                        4,268
--------
$156,433
========

In December 1997, the Company executed a new mortgage loan and obtained
funding in the principal amount of $46.3 million, which is secured by a
mortgage on a three building office/retail/conference center complex net
leased by the Company to a subsidiary of Portland General Electric
Corporation ("PGE") in Portland, Oregon, The complex contains
approximately 800,000 square feet on approximately 2.7 acres. The loan
replaces an existing mortgage loan on the complex with an outstanding
principal balance of approximately $24.2 million, bearing interest at
8.5% and maturing in 2002.

The interest rate on the new mortgage loan is 7.51%. The entire net
annual rent payable by PGE of approximately $5,137,000 will be applied by
the Company towards the debt service on the loan. The new loan has a
maturity date of September, 2008, at which time the remaining principal
payment of approximately $20 million will be due from the Company. Debt
placement costs of approximately $574,000 were incurred.

11.    SENIOR INDEBTEDNESS

On May 27, 1988, the Company closed a $50,000,000, 10-year senior
unsecured debt financing. The notes bear interest at 9.6%, payable
semiannually, 2% of which was deferred and added to the principal at the
Company's option during the first five years. In May 1995, 1996 and 1997,
the Company repaid approximately $11,308,000 each year of the outstanding
principal balance of the notes. The Company is required to make its final
principal repayment of approximately $11,308,000 on the final payment
date of May 27, 1998.

The note agreements also place limitations on the Company with respect
to, among other 

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62
things, additional debt and the use of proceeds from property sales. In
addition, distributions and the amounts used to purchase partnership
interests cannot exceed cash flow, as defined in the agreements, plus
$15,000,000. The Company is also required to maintain, among other
things, specified levels of (i) net annual rentals, as defined in the
agreements, on properties unencumbered by mortgage financing and (ii) net
cash flow.

12.    RIGHTS OFFERINGS

a.     A registration statement relating to the 1995 Rights Offering (the
"1995 Offering") was filed with the Securities and Exchange
Commission and declared effective February 23, 1995.

On March 1, 1995, the Company issued to record holders of its
Depositary Units one transferable subscription right (a "Right"),
for each seven Depositary Units of the Company held on February
24, 1995, the record date. The Rights entitled the holders thereof
(the "Rights Holders") to acquire during the subscription period
at a subscription price of $55, six Depositary Units and one 5%
cumulative pay-in-kind redeemable preferred unit representing a
limited partner interest ("Preferred Units"). The subscription
period commenced on March 1, 1995 and expired at the close of
business on March 30, 1995.

The Preferred Units have certain rights and designations,
generally as follows. Each Preferred Unit has a liquidation
preference of $10.00 and entitles the holder thereof to receive
distributions thereon, payable solely in additional Preferred
Units, at the rate of $.50 per Preferred Unit per annum (which is
equal to a rate of 5% of the liquidation preference thereof),
payable annually on March 31 of each year (each, a "Payment
Date"). On any Payment Date commencing with the Payment Date on
March 31, 2000, the Company with the approval of the Audit
Committee of the Board of Directors of the General Partner may opt
to redeem all, but not less than all, of the Preferred Units for a
price, payable either in all cash or by issuance of additional
Depositary Units, equal to the liquidation preference of the
Preferred Units, plus any accrued but unpaid distributions
thereon. On March 31, 2010, the Company must redeem all, but not
less than all, of the Preferred Units on the same terms as any
optional redemption. The first Payment Date was April 1, 1996 on
which 98,782 additional Preferred Units were issued. On March 31,
1997, the distribution of 103,721 additional Preferred Units were
issued to holders of record as of March 14, 1997.

1,975,640 Rights were issued in the 1995 Offering of which 418,307
were exercised. 190,554 Depositary Units and 31,759 Preferred
Units were subscribed for through the exercise of the
Over-Subscription Privilege by Rights Holders other than High
Coast Limited Partnership ("High Coast"), a Delaware limited
partnership.

High Coast acted as guarantor for the 1995 Offering and is an
affiliate of Carl C. Icahn, ("Icahn"), the Chairman of American
Property Investors, Inc., ("API"), the general partner of the
Company. API is also the general partner of the guarantor and the
two limited partners are affiliates of and are controlled by
Icahn. Pursuant to its subscription guaranty, High Coast
oversubscribed for a total of 9,343,998 Depositary Units and
1,557,333 Preferred Units. As a result, the 1995 Offering was
fully subscribed. The proceeds received by the Company, after
deduction of expenses of approximately $1.1 million incurred by
the Company in connection with the 1995 Offering, were
approximately $107.6 million.

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63
In addition, in accordance with the terms of the Company's and its
subsidiary's partnership agreements, API was required to
contribute approximately $2.2 million in order to maintain its
aggregate 1.99% general partnership interest.

On April 12, 1995, the Company received approximately $108.7
million, the gross proceeds of the 1995 Offering, from its
subscription agent and approximately $2.2 million from API. The
Company issued 1,975,640 Preferred Units and an additional
11,853,840 Depositary Units. Trading in the Preferred Units
commenced March 31, 1995 on the New York Stock Exchange ("NYSE")
under the symbol "ACP PR". The Depositary Units trade on the NYSE
under the symbol "ACP".

b.     In September 1997, the Company completed its 1997 Rights Offering
(the "1997 Offering") to holders of its Depositary Units. The
aggregate amount raised in the 1997 Offering was approximately
$267 million, which is expected to be used primarily for
additional investment opportunities.

Record date holders were issued one transferable right for each
five Depositary Units held. Each right (the "Primary Subscription
Right") entitled the holder thereof to acquire during the
subscription period, at a subscription price of $52, four
Depositary Units and one 5% cumulative pay-in-kind redeemable
Preferred Unit representing a limited partner interest. The
subscription period commenced August 13, 1997 and expired at the
close of business on September 11, 1997.

5,132,911 Rights were issued in the 1997 Offering of which
3,307,512 were exercised. 798,832 Depositary Units and 199,708
Preferred Units were subscribed for through the exercise of the
Over-Subscription Privilege by Rights Holders other than High
Coast.

High Coast acted as the guarantor for the offering. Pursuant to
its subscription guaranty, High Coast agreed to subscribe for and
purchase all of the Depositary Units and Preferred Units not
otherwise purchased by Rights Holders. As a result, the offering
was fully subscribed. Pursuant to its subscription guaranty, High
Coast over-subscribed for a total of 6,502,764 Depositary Units
and 1,625,691 Preferred Units.

In addition, in accordance with the terms of the Company's and its
subsidiary's partnership agreements, API was required to
contribute approximately $5.4 million in order to maintain its
aggregate 1.99% general partnership interest.

On September 25, 1997 the Company received approximately $267
million, the gross proceeds of the 1997 Offering, from its
subscription agent and approximately $5.4 million from API.
Expenses incurred in connection with the 1997 Offering were
approximately $400,000. The Company issued an additional 5,132,911
Preferred Units and 20,531,644 Depositary Units. The Preferred and
Depositary Units trade on the New York Stock Exchange under the
symbols "ACP PR" and "ACP", respectively.

As of December 31, 1997, High Coast owns 6,325,778 Preferred Units
and 31,515,044 Depositary Units.

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64
13.    RECONCILIATION OF NET EARNINGS PER FINANCIAL STATEMENTS TO TAX REPORTING
(in $000's)

1997         1996         1995
--------     --------     --------

Net earnings per financial statements        $ 75,384     $ 57,822     $ 35,156

Minimum lease payments received,
net of income earned on leases
accounted for under the financing
method                                      7,683        7,314        7,205

Gain on real estate transactions for tax
purposes (lesser than)/greater than
that for financial statement purposes      (5,594)       8,867        9,739

Provision for loss for financial
statement purposes                         10,875          935          769

Difference attributed to joint
ventures and minority interest                (46)        (143)         (86)

Difference between expense accruals,
net of income accruals, at
beginning of year and end of year          (2,094)         807         (994)

Depreciation and amortization for
tax purposes in excess of that for
financial statement purposes due
to leases accounted for under the
financing method                           (4,464)      (5,215)      (7,071)

Other                                             (26)         (26)         (26)
--------     --------     --------

Taxable income                               $ 81,718     $ 70,361     $ 44,692
========     ========     ========

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65
14.    QUARTERLY FINANCIAL DATA (UNAUDITED)
(IN $ THOUSANDS, EXCEPT PER UNIT DATA)

Three Months Ended
-----------------------------------------------
March 31,                June 30,
----------                --------
1997         1996          1997         1996
-------    -----------    --------     --------

Revenues                                      $17,299    $    20,592    $ 15,523     $ 16,976
=======    ===========    ========     ========

Earnings before property and securities
transactions                               $ 8,605    $    10,949    $  8,369     $  7,126
Gains on property transactions                  2,957             52       7,967        5,454
Gain (loss) on sale of marketable
equity securities                           29,227           --           (39)        --
Provision for loss on real estate                --             --          (362)        (175)
-------    -----------    --------     --------

Net earnings                                  $40,789    $    11,001    $ 15,935     $ 12,405
=======    ===========    ========     ========

Net earnings per limited partnership unit:
Basic earnings                             $  1.55    $       .41    $    .61     $    .46
=======    ===========    ========     ========

Diluted earnings                           $  1.43    $       .39    $    .57     $    .43
=======    ===========    ========     ========

Three Months Ended
--------------------------------------------
September 30,           December 31,
-------------           ------------
1997        1996        1997         1996
----        ----        ----         ----

Revenues                                      $ 16,054     $16,760    $ 22,042     $ 17,446
========     =======    ========     ========

Earnings before property and securities
transactions                               $  8,894     $ 7,841    $ 15,152     $  8,325
Gains on property transactions                   2,364      13,595       2,764        5,415
Gain (loss) on sale of marketable equity
securities                                     --          --          --           --
Provision for loss on mortgages receivable        --          --        (9,790)        --
Provision for loss on real estate                 (343)       --          (380)        (760)
--------     -------    --------     --------

Net earnings                                  $ 10,915     $21,436    $  7,746     $ 12,980
========     =======    ========     ========

Net earnings per limited partnership unit:
Basic earnings                             $    .36     $   .81    $    .14     $    .49
========     =======    ========     ========

Diluted earnings                           $    .36     $   .75    $    .14     $    .45
========     =======    ========     ========

Net earnings per unit is computed separately for each period and,
therefore, the sum of such quarterly per unit amounts may differ from the
total for the year.

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66
15.    COMMITMENTS AND CONTINGENCIES

a.     Lockheed Missile and Space Company, Inc. ("Lockheed"), a tenant of
the Company's leasehold property in Palo Alto, California, has
entered into a consent decree with the California Department of
Toxic Substances Control ("CDTS") to undertake certain
environmental remediation at this property. Lockheed has estimated
that the environmental remediation costs may be up to
approximately $14,000,000. In a non-binding determination by the
CDTS, Lockheed was found responsible for approximately 75% of such
costs and the balance was allocated to other parties. The Company
was allocated no responsibility for any such costs.

Lockheed previously served a notice that it may exercise its
statutory right to have its liability reassessed in a binding
arbitration proceeding. In this notice, Lockheed stated that it
would attempt to have allocated to the Company and to the
Company's ground-lessor (which may have sought to claim a right of
indemnity against the Company) approximately 9% and 17%,
respectively, of the total remediation costs.

On February 19, 1998, the property was conveyed by the Company to
Lockheed for a purchase price of $9,400,000. A gain of
approximately $4 million will be recorded in the first quarter of
1998. In connection with the sale, Lockheed executed a release and
indemnity in favor of the Company and a stipulation dismissing the
environmental arbitration, as against the Company. Leland Stanford
Junior University (the fee owner/ground lessor) also executed a
release in favor of the Company.

b.     On June 23, 1995, Bradlees Stores, Inc., a tenant leasing four
properties owned by the Company, filed a voluntary petition for
reorganization pursuant to the provisions of Chapter 11 of the
Federal Bankruptcy Code. The annual rentals for these four
properties is approximately $1,320,000. The tenant is current in
its obligations under the leases. The tenant has not yet
determined whether it will exercise its right to reject or affirm
the leases which will require an order of the Bankruptcy Court.
There are existing assignors who are still obligated to fulfill
all of the terms and conditions of the leases.

At December 31, 1997, the carrying value of these four properties
is approximately $6,978,000. One of the properties is encumbered
by a nonrecourse mortgage payable of approximately $870,000.

c.     On September 18, 1995, Caldor Corp., a tenant in a property owned
by the Company, filed a voluntary petition for reorganization
pursuant to the provisions of Chapter 11 of the Federal Bankruptcy
Code. The annual rental for this property is approximately
$248,000. The tenant is current in its obligations under the lease
with the exception of approximately $12,000 of prepetition rent.
The tenant has not yet determined whether it will exercise its
right to reject or affirm the leases which will require an order
of the Bankruptcy Court. At December 31, 1997, the property has a
carrying value of approximately $1,874,000 and is unencumbered by
any mortgage.

d.     On September 24, 1996, Best Products, a tenant leasing a property
owned by the Company, filed a voluntary petition for
reorganization pursuant to the provision of Chapter 11 of the
Federal Bankruptcy Code. The annual rental for this property was
approximately $508,000. The tenant has exercised its right to
reject the lease, effective April 30, 1997, which has been
approved by the Bankruptcy Court. At December 31, 1997, the
property was vacant and has a carrying value of approximately
$3,300,000 and is unencumbered by any mortgage.

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67
16.    PROPERTY HELD FOR SALE

At December 31, 1997, the Company owned seven properties that were being
actively marketed for sale. The aggregate value of the properties is
estimated to be approximately $4,164, 000 after incurring a provision for
loss on real estate in the amount of $240,000 in the year ended December
31, 1997. At December 31, 1996, the aggregate value of twelve properties
was estimated to be approximately $3,698,000 after incurring a provision
for loss on real estate in the amount of $275,000 in 1996.

17.    FAIR VALUE OF FINANCIAL INSTRUMENTS

Cash and Cash Equivalents, Investment in Treasury Bills, Accounts
Receivable, Mortgages Payable and Accounts Payable, Accrued Expenses and
Other Liabilities

The carrying amount of cash and cash equivalents, investment in treasury
bills, accounts receivable, mortgages payable and accounts payable,
accrued expenses and other liabilities are carried at cost, which
approximates their fair value.

Mortgages Receivable

The fair values of the mortgages receivable past due, in process of
foreclosure, or for which foreclosure proceedings are pending, are based
on the discounted cash flows of the underlying lease. The fair values of
the mortgages receivable satisfied subsequent to year end are based on
the amount of the net proceeds received.

The fair values of the mortgages receivable which are current are based
on the discounted cash flows of their respective payment streams.

The approximate estimated fair values of the mortgages receivable held as
of December 31, 1997 are summarized as follows (in 000's):

At December 31, 1997
---------------------------------------
Collateralized by                                              Net                 Estimated
Property Tenanted by or debtor                             Investment              Fair Value
------------------------------                             ----------            -------------

Hardee's Food Systems, Inc.                              $        15             $           187
Bank of Virginia                                                 359                         474
Best Products Co., Inc.                                          173                         169
Easco Corp.                                                      916                       3,450
Winchester Partnership                                         1,336                       1,336
Stratosphere Corp.                                            33,021                      33,021
New Seabury Company, L.P.                                     15,883                      17,240

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68

At December 31, 1996
---------------------------------------
Collateralized by                                              Net                    Estimated
Property Tenanted by or debtor                             Investment                Fair Value
------------------------------                          --------------               ----------

Hardee's Food Systems, Inc.                             $         51                 $     177
Bank of Virginia                                                 353                       445
Best Products Co., Inc.                                          197                       198
Data 100 Corp.                                                   788                     1,065
Easco Corp.                                                      928                     3,450
Winchester Partnership                                         1,609                     1,593

The net investment at December 31, 1997 and 1996 is equal to the carrying
amount of the mortgage receivable less any deferred income recorded.

Marketable Equity Securities

Marketable equity securities vailable for sale are carried at fair market
value.

Senior Indebtedness

The approximate fair value and carrying value of the Company's senior
indebtedness at December 31, 1997 and 1996 is $11,756,000 and
$11,308,000, $22,756,000 and $22,616,000, respectively. The estimated
fair value is based on the amount of future cash flows associated with
the instrument discounted using the rate at which the Company believes it
could currently replace the senior indebtedness.

Limitations

Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instrument. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot be
determined with precision. Changes in assumptions could significantly
affect the estimates.

18.    DISTRIBUTIONS PAYABLE

Distributions payable represent amounts accrued and unpaid due to
non-consenting investors ("Non-consents"). Non-consents are those
investors who have not yet exchanged their limited partnership interest
in the various Predecessor Partnerships for limited partnership units of
American Real Estate Partners, L.P. In the year ended December 31, 1997,
approximately $1,020,000 of distributions due to non-consents were paid
to certain states pursuant to local escheatment laws.

19.    SUBSEQUENT EVENTS

a.  Pursuant to the terms of the Preferred Units, on February 27, 1998,
the Company declared its scheduled annual preferred unit distribution
payable in additional Preferred Units at the rate of 5% of the
liquidation preference of $10. The distribution is payable March 31,
1998 to holders of record as of March 13, 1998.

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69
b.  On January 21 and 28, 1998, the Company acquired an interest in the
Sands Hotel and Casino (the "Sands") located in Atlantic City, New
Jersey by purchasing the principal amount of $17.5 million of First
Mortgage Notes issued by GB Property Funding Corp. ("GB Property").
GB Property was organized as a special purpose entity for the
borrowing of funds by Greate Bay Hotel and Casino, Inc. ("Greate
Bay"). The purchase price for such notes was approximately $14.3
million. Notes in the amount of $185 million were issued, which bear
interest at 10.875% per annum and are due on January 15, 2004.

Greate Bay owns and operates the Sands, a destination resort complex,
containing a 76,000 foot casino and 532 hotel rooms and other
amenities. On January 5, 1998, GB Property and Greate Bay filed for
bankruptcy protection under Chapter 11 of the Bankruptcy Code to
restructure its long term debt.

c.  In January, 1998, the Company acquired an interest in the Claridge
Hotel and Casino (the "Claridge Hotel") located in Atlantic City, New
Jersey by purchasing the principal amount of $15 million of First
Mortgage Notes of the Claridge Hotel and Casino Corporation (the
"Claridge Corporation"). The purchase price of such notes was
approximately $14.1 million. Notes in the amount of $85 million were
issued, which bear interest at 11.75% payable annually and are due
February 1, 2002.

The Claridge Corporation through its wholly-owned subsidiary, the
Claridge at Park Place, Incorporated, operates the Claridge Hotel, a
destination resort complex, containing a 59,000 foot casino on three
levels and 502 hotel rooms and other attractions

d.  In March 1998, the Company executed a contract, with contingencies
for the sale of the property tenanted by AT&T Corp. The sales
price is $8,600,000.

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None

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70
PART III

Item 10.          Directors and Executive Officers of AREP.

The names, offices held and the ages of the directors and executive
officers of the General Partner are as follows:

Name               Age                   Office
----               ---                   ------

Carl C. Icahn                62         Chairman of the Board

Alfred D. Kingsley           55          Director

William A. Leidesdorf        52          Director

Jack G. Wasserman            61          Director

John P. Saldarelli           56          Vice President, Secretary and
Treasurer

Carl C. Icahn has been Chairman of the Board of the General Partner
since November 15, 1990. He is also President and a Director of Starfire Holding
Corporation (formerly Icahn Holding Corporation), a Delaware corporation ("SHC")
and Chairman of the Board and a Director of various of SHC's subsidiaries,
including ACF Industries, Inc., a New Jersey corporation ("ACF"). SHC is
primarily engaged in the business of holding, either directly or through
subsidiaries, a majority of the common stock of ACF and its address is 100 South
Bedford Road, Mount Kisco, New York 10549. Mr. Icahn has also been Chairman of
the Board of Directors of ACF since October 29, 1984 and a Director of ACF since
June 29, 1984. ACF is a railroad freight and tank car leasing, sales and
manufacturing company. He has also been Chairman of the Board of Directors and
President of Icahn & Co., Inc. since 1968. Icahn & Co., Inc. is a registered
broker-dealer and a member of the National Association of Securities Dealers. In
1979, Mr. Icahn acquired control and presently serves as Chairman of the Board
of Directors of Bayswater Realty & Capital Corp., which is a real estate
investment and development company. ACF, Icahn & Co., Inc. and Bayswater Realty
& Capital Corp. are deemed to be directly or indirectly owned and controlled by
Carl C. Icahn. Mr. Icahn was Chief Executive Officer and Member of the Office of
the Chairman of Trans World Airlines, Inc. ("TWA") from November 8, 1988 to
January 8, 1993; Chairman of the Board of Directors of TWA from January 3, 1986
to January 8, 1993 and Director of TWA from September 27, 1985 to January 8,
1993. Mr. Icahn also serves as a director of Cadus Pharmaceutical Corporation, a
public biotechnology company. Mr. Icahn also has substantial equity interests in
and controls various partnerships and corporations which invest in publicly
traded securities.

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71
Alfred D. Kingsley has served as Director of the General Partner since
November 15, 1990. He was also Vice Chairman of the Board of Directors of TWA
from February 1, 1989 to January 8, 1993 and a Member of the Office of the
Chairman from November 8, 1988 to January 8, 1993. Mr. Kingsley was a Director
of TWA from September 27, 1985 to January 8, 1993. He also was a Director and
Executive Officer and Director of Research at Icahn & Co., Inc. and related
entities from 1968 until December 1994. He also has been Vice Chairman of the
Board of Directors of ACF since October 29, 1984 and a Director of ACF since
June 29, 1984. Mr. Kingsley has also been a Senior Managing Director of Greenway
Partners, L.P. since May 1993, which invests in publicly traded securities.
Since September 30, 1997, Mr. Kingsley has served as Chairman of the Board of
Outboard Marine Corporation, a privately held company engaging in the
manufacturing of outboard motors and boats.

William A. Leidesdorf has served as Director of the General Partner
since March 26, 1991. Since April 1995, Mr. Leidesdorf has acted as an
independent real estate investment banker. From January 1, 1994 through April
1995, Mr. Leidesdorf was Managing Director of RFG Financial, Inc., a commercial
mortgage company. From September 30, 1991 to December 31, 1993, Mr. Leidesdorf
was Senior Vice President of Palmieri Asset Management Group. From May 1, 1990
to September 30, 1991, Mr. Leidesdorf was Senior Vice President of Lowe
Associates, Inc., a real estate development company, where he was involved in
the acquisition of real estate and the asset management workout and disposition
of business areas. He also acted as the Northeast Regional Director for Lowe
Associates, Inc. From June 1985 to January 30, 1990, Mr. Leidesdorf was Senior
Vice President and stockholder of Eastdil Realty, Inc., a real estate company,
where he was involved in the asset management workout, disposition of business
and financing areas. During the interim period from January 30, 1990 through May
1, 1990, Mr. Leidesdorf was an independent contractor for Eastdil Realty, Inc.
on real estate matters.

Jack G. Wasserman has served as a Director of the General Partner since
December 3, 1993. Mr. Wasserman is an attorney and a member of the New York
State Bar and has been with the New York based law firm of Wasserman, Schneider
& Babb since 1966, where he is currently a senior partner. Mr. Wasserman also
serves as a director of Cadus Pharmaceutical Corporation, a public biotechnology
company.

John P. Saldarelli has served as Vice President, Secretary and
Treasurer of the General Partner since March 18, 1991. Mr. Saldarelli was also
President of Bayswater Realty Brokerage Corp. from June 1987 until November 19,
1993 and Vice President of Bayswater Realty & Capital Corp. from September 1979
until April 15, 1993, both of which are deemed to be directly or indirectly
owned and, controlled by Carl C. Icahn.

William Leidesdorf, Jack G. Wasserman and Alfred D. Kingsley are on the
Audit Committee of the Board of Directors of the General Partner.

Each of Messrs. Icahn and Kingsley served on the Board of Directors of
TWA. On January 31, 1992, TWA filed a petition for bankruptcy in the U.S.
Bankruptcy Court in Delaware, seeking reorganization under Chapter 11 of the
Bankruptcy Code. In connection therewith, the Pension Benefit Guaranty
Corporation asserted that there existed in the TWA defined benefit plans an
underfunding deficiency, and that if the Plans were terminated, TWA and all
members of the controlled group of which TWA was a member, including the General

III-2

72
Partner, would be liable, jointly and severally, for approximately $1.2 billion.
On January 8, 1993, TWA, the Pension Benefit Guaranty Corporation, Mr. Icahn and
the members of the controlled group, among others, settled all claims and
potential claims which they had against each other.

Each executive officer and director will hold office until the next
annual meeting of the General Partner and until his or her successor is elected
and qualified. Directors who are not employed by AREP or certain affiliates,
receive fees of $3,000 for attendance at each quarterly meeting of the Board of
Directors. Mr. Kingsley, Mr. Leidesdorf and Mr. Wasserman each received $9,000
for attendance at such meetings in 1997. In addition, directors who are not
employed by AREP or certain affiliates may receive additional fees for special
meetings of or services rendered on behalf of the Audit Committee. Mr. Kingsley,
Mr. Leidesdorf and Mr. Wasserman each received $35,000 for participation in such
special meetings on behalf of the Audit Committee in 1997.

Each of the executive officers of the General Partner performs services
for other affiliates of the General Partner.

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

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

III-3

73
Filing of Reports

To the best of AREP's knowledge, no director, executive officer or
beneficial owner of more than 10% of AREP's Depositary Units failed to file on a
timely basis reports required by section 16(a) of the Securities Exchange Act of
1934, as amended, during the year ended December 31, 1996.

Item 11.          Executive Compensation.(1)

The following table sets forth information in respect of the
compensation of the Chief Executive Officer and each of the other four most
highly compensated executive officers of AREP for services in all capacities to
AREP for the fiscal years ended December 31, 1997, 1996 and 1995.(2)

SUMMARY COMPENSATION TABLE
Annual Compensation
- -------------------------------------------------------------------
(a)                                    (b)       (c)
Name and Principal Position                    Year     Salary ($)
- ----------------------------                   ----     ----------

John P. Saldarelli(3)                          1997      136,000
Vice President, Secretary and Treasurer        1996      132,300
1995      126,000

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

(2)      Carl C. Icahn, the Chief Executive Officer, received no compensation as
such for the periods indicated. In addition, other than John P.
Saldarelli, no other executive officer received compensation in excess
of $100,000 from AREP for the applicable period.

(3)      On March 18, 1991, Mr. Saldarelli was elected Vice President, Secretary
and Treasurer of the General Partner. Mr. Saldarelli devotes
substantially all of his time to the performance of services for AREP
and the General Partner. The other executive officers and directors of
the General Partner devote only a portion of their time to performance
of services for AREP.

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74
In February 1993, AREP adopted a 401K plan pursuant to which AREP will
make a matching contribution to an employee's individual plan account in the
amount of one-third (1/3) of the first six (6%) percent of gross salary
contributed by the employee.

Item 12.          Security Ownership of Certain
Beneficial Owners and Management.

As of March 2, 1998, High Coast, which is controlled by Icahn, owned
31,515,044 Depositary Units, or approximately 68.2% of the outstanding
Depositary Units and 6,325,778 Preferred Units or approximately 86.5% of the
outstanding Preferred Units.

The affirmative vote of Unitholders holding more than 75% of the total
number of all Units then outstanding, including Depositary Units held by the
General Partner and its affiliates, is required to remove the General Partner.
Thus, since Icahn, through High Coast, holds approximately 68.2% of the
Depositary Units outstanding, the General Partner will not be able to be removed
pursuant to the terms of the Partnership Agreement without Icahn's consent.
Moreover, under the Partnership Agreement, the affirmative vote of the General
Partner and Unitholders owning more than 50% of the total number of all
outstanding Depositary Units then held by Unitholders, including High Coast, is
required to approve, among other things, selling or otherwise disposing of all
or substantially all of AREP's assets in a single sale or in a related series of
multiple sales, dissolving AREP or electing to continue AREP in certain
instances, electing a successor general partner, making certain amendments to
the Partnership Agreement or causing AREP, in its capacity as sole limited
partner of the Subsidiary, to consent to certain proposals submitted for the
approval of the limited partners of the Subsidiary. Accordingly, as High Coast
holds in excess of 50% of the Depositary Units outstanding, Icahn, through High
Coast, will have effective control over such approval rights.

As of February 4, 1998, to the best knowledge of AREP, Schneider
Capital Management Corporation, a Pennsylvania corporation, which filed a
Schedule 13-G on February 4, 1998, owned 3,614,974 Depositary Units, or
approximately 7.825% of the outstanding Depositary Units.

III-5

75
The following table provides information, as of March 2, 1998, as to
the beneficial ownership of the Depositary Units and Preferred Units of AREP for
each director of the General Partner, and all directors and executive officers
of the General Partner as a group.

Beneficial                      Beneficial
Name of                   Ownership of      Percent       Ownership of        Percent
Beneficial Owner        Depositary Units   of Class      Preferred Units     of Class
- ----------------        ----------------   --------      ---------------     --------

Carl C. Icahn(1)           31,515,044         68.2%          6,325,778          86.5%

All directors and
executive officers         31,515,044         68.2%          6,325,778          86.5%
as a group (6 persons)

- ---------------
(1)      Carl C. Icahn, through High Coast, is the beneficial owner of the
31,515,044 Depositary Units set forth above and may also be deemed to
be the beneficial owner of the 39,971 Depositary Units owned of record
by API Nominee Corp., which in accordance with state law are in the
process of being turned over to the relevant state authorities as
unclaimed property; however, Mr. Icahn disclaims such beneficial
ownership. The foregoing is exclusive of a 1.99% ownership interest in
AREP which the General Partner holds by virtue of its 1% General
Partner interest in each of AREP and the Subsidiary, but inclusive of
the Depositary Units High Coast acquired through the 1997 Offering.
Furthermore, pursuant to a registration rights agreement entered into
by High Coast in connection with the 1997 Offering, AREP has agreed to
pay any expenses incurred in connection with two demand and unlimited
piggy-back registrations requested by High Coast.

Item 13.          Certain Relationships and Related Transactions.

Related Transactions with the General Partner and its Affiliates

Icahn, in his capacity as majority Unitholder, will not receive any
additional benefit with respect to distributions and allocations of profits and
losses not shared on a pro rata basis by all other Unitholders. In addition,
Icahn has confirmed to AREP that neither he nor any of his affiliates will
receive any fees from AREP in consideration for services rendered in connection
with non-real estate related investments by AREP such as advice to purchase RJR
shares which generated $29 million of profits for AREP in 1997. AREP may
determine to make investments in which Icahn or his affiliates have independent
investments in such assets; in addition, AREP may enter into other transactions
with the General Partner and its affiliates, including, without limitation,
buying and selling assets from or to the General Partner or its affiliates and
participating in joint venture investments in assets with the General Partner or
its affiliates, whether real estate or non-real estate related, provided the
terms of all such transactions are fair and reasonable to AREP. Furthermore, it
should be noted that the Partnership Agreement provides that the General Partner
and its affiliates are permitted to have other business interests and may engage
in other business ventures of any nature whatsoever, and may compete directly or
indirectly with the business of AREP. Icahn and his affiliates currently invest
in and perform

III-6

76
investment management services with respect to assets that may be similar to
those AREP may invest in and intend to continue to do so; pursuant to the
Partnership Agreement, however, AREP shall not have any right to participate
therein or receive or share in any income or profits derived therefrom. See Item
1. "Business - Investment in RJR" and "Investment in Limited Partnership Units."

For the years ended December 31, 1997 and 1996, AREP made no payments
with respect to the Depositary Units owned by the General Partner. However, in
1997 and 1996 the General Partner was allocated approximately $1,500,000 and
approximately $1,151,000, respectively, of the income of AREP as a result of its
1.99% general partner interest in AREP.

On March 31, 1997, Icahn received 91,473 Preferred Units as part of
AREP's scheduled annual preferred unit distribution and is expected to receive
an additional 316,289 Preferred Units in March 1998 as part of such scheduled
annual preferred unit distribution.

In May 1995, AREP and an affiliate of the General Partner ("Affiliate")
entered into an agreement with the third-party landlord of its leased executive
office space. The agreement provided for AREP and the Affiliate to relocate
their offices to an adjacent building also owned by the landlord which
relocation occurred in September 1995. In accordance with the agreement, AREP
entered into a lease, expiring in 2001, for 7,920 square feet of office space,
at an annual rental of approximately $153,000. AREP has sublet to certain
affiliates of the General Partner 3,205 square feet at an annual rental of
approximately $62,000, resulting in a net annual rental of approximately
$91,000. Affiliates of the General Partner reimbursed AREP for approximately
$62,000 in rent paid by AREP on its behalf during 1997 in connection with the
new lease. The prior lease, which was terminated, provided for approximately
6,900 square feet at an annual rental of $155,000 to AREP. In addition, AREP and
the Affiliate received a lease termination fee of $350,000 allocated $175,000 to
AREP and $175,000 to the Affiliate. Such allocations and the terms of the
sublease were reviewed and approved by the Audit Committee. In addition, in 1997
AREP entered into a license agreement for a portion of office space from an
affiliate of the General Partner. The license agreement dated as of February 1,
1997 expires May 22, 2004 unless sooner terminated in accordance with the
agreement. Pursuant to the license agreement, AREP has the non-exclusive use of
approximately 3,547 square feet of office space and common areas (of an
aggregate 21,123 rentable square feet sublet by such affiliate) for which it
pays $17,067.78 per month, together with 16.79% of certain "additional rent". In
1997, AREP paid an affiliate of the General Partner $68,747 of rent in
connection with this licensing agreement. In connection with the build-out of
the space, AREP reimbursed such affiliate $486,989, representing AREP's
allocable share of such costs net of a pro rata share of the sub-lessor's
allowance for such build-out. The terms of such sublease were reviewed and
approved by the Audit Committee. For a discussion of the offer made by AREP to
an affiliate of the General Partner for the purchase of a land development
company, see Item 7 -"Management's Discussion and Analysis of the Financial
Condition and Results of Operations."

III-7

77
Property Management and Other Related Transactions

The General Partner and its affiliates may receive fees in connection
with the acquisition, sale, financing, development, construction, marketing and
management of new properties acquired by AREP. As development and other new
properties are acquired, developed, constructed, operated, leased and financed,
the General Partner or its affiliates may perform acquisition functions,
including the review, verification and analysis of data and documentation with
respect to potential acquisitions, and perform development and construction
oversight and other land development services, property management and leasing
services, either on a day-to-day basis or on an asset management basis, and may
perform other services and be entitled to fees and reimbursement of expenses
relating thereto, provided the terms of such transactions are fair and
reasonable to AREP in accordance with the Partnership Agreement and customary to
the industry. It is not possible to state precisely what role, if any, the
General Partner or any of its affiliates may have in the acquisition,
development or management of any new investments. Consequently, it is not
possible to state the amount of the income, fees or commissions the General
Partner or its affiliates might be paid in connection with the investment of the
1997 Offering proceeds since the amount thereof is dependent upon the specific
circumstances of each investment, including the nature of the services provided,
the location of the investment and the amount customarily paid in such locality
for such services. However, Unitholders may expect that, subject to the specific
circumstances surrounding each transaction and the overall fairness and
reasonableness thereof to AREP, the fees charged by the General Partner and its
affiliates for the services described below generally will be within the ranges
set forth below:

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

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

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

III-8

78
- Development and Construction Services. The General Partner or its
affiliates may also receive fees for development services, generally 1% to 4% of
development costs, and general contracting services or construction management
services, generally 4% to 6% of construction costs.

AREP has commenced discussions with Bayswater Realty & Capital Corp.,
an affiliate of the General Partner, to perform development, construction
management, marketing and sales services with respect to two residential
development sites located in Armonk, New York and East Hampton, New York
respectively. The Armonk site is comprised of approximately 43 residential
building lots, and the East Hampton site is comprised of 16 residential building
lots. It is presently anticipated that Bayswater would be reimbursed a pro rata
portion of the salaries, benefits and related expenses for the personnel
performing such services, plus all reasonable and customary out of pocket
expenses incurred in connection with performing such services. Such
reimbursements will be subject to review and approval by the Audit Committee.

In addition, through July 1, 1997, subject to the limitations described
below, the General Partner was entitled to receive a specified reinvestment
incentive fee (a "Reinvestment Incentive Fee") for performing acquisition
services equal to a percentage of the purchase price (whether paid in cash,
Depositary Units, other securities and/or with mortgage financing) of properties
(other than Predecessor Properties) acquired from July 1, 1987 through July 1,
1997. This percentage was 1% for the first five years and 1/2% for the second
five years. Although a Reinvestment Incentive Fee accrued each time a property
was acquired, Reinvestment Incentive Fees were only payable on an annual basis,
within 45 days after the end of each calendar year, if the following
subordination provisions were satisfied. Reinvestment Incentive Fees accrued in
any year were only payable if the sum of (x) the sales price of all Predecessor
Properties (net of associated debt which encumbered these Properties at the
consummation of the Exchange) sold through the end of that year and (y) the
appraised value of all Predecessor Properties which have been financed or
refinanced (and not subsequently sold), net of the amount of any refinanced debt
through the end of that year determined at the time of such financings or
refinancings, exceeds the aggregate values assigned to those Predecessor
Properties for purposes of the Exchange. If the subordination provisions were
not satisfied in any year, payment of Reinvestment Incentive Fees for that year
were deferred. Through December 31, 1997, an aggregate of (i) 159 Predecessor
Properties were sold or disposed of for an aggregate amount of approximately
$99,268,000 net of associated indebtedness which encumbered these Properties at
the consummation of the Exchange, and (ii) 25 Predecessor Properties were
refinanced at an aggregate appraised value, net of the amount of the refinanced
debt, of approximately $37,672,000 for a sum total of approximately
$136,940,000. Aggregate appraised values attributable to these Predecessor
Properties for purposes of the Exchange were approximately $145,663,000. Two
properties were acquired in June 1997. Since the subordination requirements were
not met as of June 30, 1997, the termination date of the right to receive such
fee, no reinvestment incentive fee is due or payable to the General Partner for
such properties.

III-9

79
AREP may also enter into other transactions with the General Partner
and its affiliates, including, without limitation, buying and selling properties
and borrowing and lending funds from or to the General Partner or its
affiliates, joint venture developments and issuing securities to the General
Partner or its affiliates in exchange for, among other things, assets that they
now own or may acquire in the future, provided the terms of such transactions
are fair and reasonable to AREP. The General Partner is also entitled to
reimbursement by AREP for all allocable direct and indirect overhead expenses
(including, but not limited to, salaries and rent) incurred in connection with
the conduct of AREP's business.

In addition, employees of AREP may, from time to time, provide services
to affiliates of the General Partner, with AREP being reimbursed therefor.
Reimbursement to AREP by such affiliates in respect of such services is subject
to review and approval by the Audit Committee. In 1997 such amounts were       
approximately $34,000, which reimbursement was approved by the Audit Committee. 
In addition, an affiliate of the General Partner provided certain              
administrative services to AREP in the amount of approximately $3,000 in 1997.

The Audit Committee meets on an annual basis, or more often if
necessary, to review any conflicts of interest which may arise, including the
payment by AREP of any fees to the General Partner or any of its affiliates. The
General Partner and its affiliates may not receive duplicative fees.

III-10

80
Part IV

Item 14.          Exhibits, Financial Statement Schedules
and Reports on Form 8-K.

(a)(1)            Financial Statements:

The following financial statements of American Real Estate Partners,
L.P. are included in Part II, Item 8:

Page
Number
------
Independent Auditors' Report                                       II-12

Consolidated Balance Sheets -                                      II-13-14
December 31, 1997 and 1996

Consolidated Statements of Earnings -                              II-15-16
Years ended December 31, 1997, 1996 and 1995

Consolidated Statements of Changes in Partners' Equity -           II-17
Years ended December 31, 1997, 1996 and 1995

Consolidated Statements of Cash Flows -                            II-18-19
Years ended December 31, 1997, 1996 and 1995

Notes to Consolidated Financial Statements                         II-20-45

(a)(2)            Financial Statement Schedules:

Schedule III -    Real Estate Owned and Revenues                   IV-5-22
Earned (by tenant or guarantor,
as applicable)

All other Financial Statement schedules have been omitted because the required
financial information is not applicable or the information is shown in the
Financial Statements or Notes thereto.

(a)(3)            Exhibits:

3.1           Certificate of Limited Partnership of AREP, dated
February 17, 1987 (filed as Exhibit No. 3.1 to AREP's
Annual Report on Form 10-K for the year ended December
31, 1987 and incorporated herein by reference).

IV-1

81
3.2           Amended and Restated Agreement of Limited Partnership of
AREP, dated as of May 12, 1987 (filed as Exhibit No. 3.2
to AREP's Annual Report on Form 10-K for the year ended
December 31, 1987 and incorporated herein by reference).

3.3           Amendment No. 1 to the Amended and Restated Agreement of
Limited Partnership of AREP (filed as Exhibit 3.3 to
AREP's Annual Report on Form 10-K for the year ended
December 31, 1994 and incorporated herein by reference).

3.4           Certificate of Limited Partnership of American Real
Estate Holdings Limited Partnership (the "Subsidiary"),
dated February 17, 1987, and amendment thereto, dated
March 12, 1987 (filed as Exhibit No. 3.3 to AREP's Annual
Report on Form 10-K for the year ended December 31, 1987
and incorporated herein by reference).

3.5           Amended and Restated Agreement of Limited Partnership of
the Subsidiary, dated as of July 1, 1987 (filed as
Exhibit No. 3.4 to AREP's Annual Report on Form 10-K for
the year ended December 31, 1987 and incorporated herein
by reference).

4.1           Depositary Agreement among AREP, the General Partner and
Registrar and Transfer Company, dated as of July 1, 1987
(filed as Exhibit No. 4.1 to AREP's Annual Report on Form
10-K for the year ended December 31, 1987 and
incorporated herein by reference).

4.2           Amendment No. 1 to the Depositary Agreement (filed as
Exhibit 4.2 to AREP's Annual Report on Form 10-K for the
year ended December 31, 1994 and incorporated herein by
reference).

4.3           Specimen Depositary Receipt (filed as Exhibit No. 4.2 to
AREP's Annual Report on Form 10-K for the year ended
December 31, 1987 and incorporated herein by reference).

4.4           Form of Transfer Application (filed as Exhibit No. 4.3 to
AREP's Annual Report on Form 10-K for the year ended
December 31, 1987 and incorporated herein by reference).

4.5           Specimen Certificate representing Preferred Units (filed
as Exhibit No. 4.9 to AREP's Registration Statement on
Form S-3 (Registration No. 33-54767) and incorporated
herein by reference).

10.1          Nonqualified Unit Option Plan (filed as Exhibit No. 10.1
to AREP's Annual Report on Form 10-K for the year ended
December 31, 1987 and incorporated herein by reference).

IV-2

82
10.2          Distribution Reinvestment Plan (filed as Exhibit No. 10.3
to AREP's Annual Report on Form 10-K for the year ended
December 31, 1987 and incorporated herein by reference).

10.3          Note Purchase Agreements, dated as of May 27, 1988 among
AREP, the Subsidiary and The Prudential Insurance Company
of America (the "Note Agreements") (filed as Exhibit Nos.
2a and 2b to AREP's Current Report on Form 8-K dated May
27, 1988 and incorporated herein by reference).

10.4          Amendment No. 1 to the Note Agreements dated November 17,
1988 (filed as Exhibit No. 10.2 to AREP's Registration
Statement on Form S-3 (Registration No. 33-54767) and
incorporated herein by reference).

10.5          Amendment No. 2 to the Note Agreements dated November 17,
1988 (filed as Exhibit No. 10.3 to AREP's Registration
Statement on Form S-3 (Registration No. 33-54767) and
incorporated herein by reference).

10.6          Amendment No. 3 to the Note Agreements dated as of June
21, 1994 (filed as Exhibit No. 10.4 to AREP's
Registration Statement on Form S-3 (Registration No.
33-54767) and incorporated herein by reference).

10.7          Amendment No. 4 to the Note Agreements dated as of August
12, 1994 (filed as Exhibit No. 10.5 to AREP's
Registration Statement on Form S-3 (Registration No.
33-54767) and incorporated herein by reference).

10.8          9.6% Senior Promissory Note of AREP and the Subsidiary
due May 27, 1998 payable to The Prudential Insurance
Company of America (filed as Exhibit No. 2c to AREP's
Current Report on Form 8-K dated May 27, 1988 and
incorporated herein by reference).

10.9          9.6% Senior Promissory Note of AREP and the Subsidiary
due May 27, 1998 payable to Prudential Property and
Casualty Insurance Company (filed as Exhibit No. 2d to
AREP's Current Report on Form 8-K dated May 27, 1988 and
incorporated herein by reference).

10.10         Subscription Guaranty Agreement between AREP and High
Coast Limited Partnership (the "Guarantor") (filed as
Exhibit 4.10 to AREP's Registration Statement on Form S-3
(Registration No. 33-54767) and incorporated herein by
reference).

10.11         Registration Rights Agreement between AREP and the
Guarantor (filed as Exhibit 4.11 to AREP's Registration
Statement on Form S-3 (Registration No. 33-54767) and
incorporated herein by reference).

IV-3

83
10.12         Amended and Restated Agency Agreement (filed as Exhibit
10.12 to AREP's Annual Report on Form 10-K for the year
ended December 31, 1994 and incorporated herein by
reference).

10.13         Subscription Agent Agreement (filed as Exhibit 10.13 to
AREP's Annual Report on Form 10-K for the year ended
December 31, 1994 and incorporated herein by reference).

10.14         Subscription Guaranty Agreement between AREP and the
Guarantor (filed as Exhibit 4.10 to Amendment No. 1 to
AREP's Registration Statment on Form S-3 (Registration
No. 333-31561) and incorporated herein by reference).

10.15         Registration Rights Agreement between AREP and the
Guarantor (filed as Exhibit 4.11 to Amendment No. 1 to
AREP's Registration Statment on Form S-3 (Registration
No. 333-31561) and incorporated herein by reference).

10.16         Subscription Agent filed as Exhibit 99.1 to AREP's 
Registration Statment on Form S-3 (Registration
No. 333-31561) and incorporated herein by reference.

16            Letter dated September 27, 1991 of Deloitte & Touche
regarding change in accountants (filed as Exhibit No. A
to AREP's Current Report on Form 8-K dated October 3,
1991 and incorporated herein by reference).

22            List of Subsidiaries (filed as Exhibit No. 22 to AREP's
Annual Report on Form 10-K for the year ended December
31, 1987 and incorporated herein by reference).

(b)      Reports on Form 8-K:

(1) A Form 8-K was filed on July 18, 1997 regarding the Company's
filing of a registration statement on Form S-3 ("Registration
Statement") with the Securities and Exchange Commission regarding a
proposed rights offering (the "1997 Offering") by the Registrant to
holders of its depositary units.

(2) A Form 8-K was filed on July 24, 1997 regarding announcing the
record date for the proposed 1997 Offering.

(3) A Form 8-K was filed on August 7, 1997 announcing that the
Securities and Exchange Commission declared effective the Registration
Statement relating to the 1997 Offering.

IV-4

84
AMERICAN REAL ESTATE PARTNERS, LP
a limited partnership

Schedule III
PAGE 1

REAL ESTATE OWNED AND REVENUES EARNED

Part 1 - Real estate owned at December 31, 1997 - Accounted for under the:

Operating Method
----------------------------------------
Amount   
Carried  
No. of       Amount of     Initial Cost      Cost of       at close  
State   Locations   Encumberances    to Company    Improvements     of period  
-----   ---------   -------------    ----------    ------------     ---------  
COMMERCIAL PROPERTY LAND AND BUILDING
- -------------------------------------

Acme Markets, Inc. and FPBT of Penn.           PA        1                        $2,004,393                    $2,004,393  
Alabama Power Company                          AL        5         $4,292,790                                               
Amer Stores and The Fidelity Bank              PA        1                                                                  
Amer Stores, Grace, & Shottenstein Stores      NJ        1                         2,043,567                     2,043,567  
American Recreation Group, Inc.                NC        1                           642,771       (342,771)       300,000  
Amterre Ltd. Partnership                       NJ        1                                                                  
Amterre Ltd. Partnership                       PA        2                                                                  
Amterre Ltd. Partnership                       PA        1          8,581,485                                               
Best Products Co., Inc.                        VA        1                         3,358,053        (54,500)     3,303,553  
Caldor, Inc.                                   MA        1                                                                  
Chesebrough-Pond's Inc.                        CN        1                         1,549,805                     1,549,805  
Chomerics, Inc.                                MA        1                                                                  
Collins Foods International, Inc.              OR        3                           169,048                       169,048  
Collins Foods International, Inc.              CA        1                            87,810                        87,810  
David Miller of California                     CA        1                         1,036,681                     1,036,681  
Dillon Companies, Inc.                         MO        1                           546,681                       546,681  
Dillon Companies, Inc.                         LA        6                         1,555,112                     1,555,112  
Druid Point Bldg.                              GA        1                         6,139,692        114,890      6,254,582  
Duke Power Co.                                 NC        1          2,903,279                                               
European American Bank and Trust Co.           NY        1                         1,355,210                     1,355,210  
Farwell Bldg.                                  MN        1            939,773      5,073,279                     5,073,279  
Federated Department Stores, Inc.              CA        1                           363,342                       363,342  
First National Supermarkets, Inc.              CT        1         13,933,727                                               
First Union National Bank                      NC        1                                                                  
Fisher Scientific Company                      IL        1                           597,806                       597,806  
Foodarama Supermarkets, Inc.                   PA        1                                                                  
Forte Hotels International, Inc.               NJ        1            216,914                                               
Forte Hotels International, Inc.               TX        1                                                                  
Fox Grocery Company                            WV        1          1,193,998                                               
Gino's, Inc.                                   MO        1             13,662        209,213                       209,213  
Gino's, Inc.                                   CA        1             15,711        225,100                       225,100  
Gino's, Inc.                                   OH        1             14,627        201,938                       201,938  
Gino's, Inc.                                   IL        1             16,986        235,972                       235,972  
Gino's, Inc.                                   NJ        1                                                                  
Golf Road                                      IL        1                         9,292,656                     9,292,656   

Part 1 - Real estate owned at December 31, 1997 - Accounted for under the:

Operating Method                  Financing Method
-------------------------------    -----------------------------
Rent due                      Minimum lease  
and accrued                     payments due   
or received                     and accrued    
Reserve for      in advance at        Net            at end      
Depreciation      end of period    Investment       of period     
------------      -------------    ----------       ---------     
COMMERCIAL PROPERTY LAND AND BUILDING
- -------------------------------------

Acme Markets, Inc. and FPBT of Penn.          $1,389,613         ($13,407)                                     
Alabama Power Company                                                           $7,517,553        ($92,771)    
Amer Stores and The Fidelity Bank                                                  633,667         (11,083)    
Amer Stores, Grace, & Shottenstein Stores      1,525,255          (10,228)                                     
American Recreation Group, Inc.                                                                                
Amterre Ltd. Partnership                                                                                       
Amterre Ltd. Partnership                                                                                       
Amterre Ltd. Partnership                                                         5,958,448         (72,990)    
Best Products Co., Inc.                                                                                        
Caldor, Inc.                                                                     1,873,574                     
Chesebrough-Pond's Inc.                        1,110,025          (11,770)                                     
Chomerics, Inc.                                                                  6,202,655                     
Collins Foods International, Inc.                                                   81,764                     
Collins Foods International, Inc.                                                   46,444                     
David Miller of California                       494,648                                                       
Dillon Companies, Inc.                           310,198           (3,272)                                     
Dillon Companies, Inc.                           854,145          (34,946)                                     
Druid Point Bldg.                                883,216                                                       
Duke Power Co.                                                                   4,716,271                     
European American Bank and Trust Co.           1,284,888                                                       
Farwell Bldg.                                  1,088,188                                                       
Federated Department Stores, Inc.                                                  208,036                     
First National Supermarkets, Inc.                                               23,685,974        (221,459)    
First Union National Bank                                                          577,217                     
Fisher Scientific Company                        143,004                                                       
Foodarama Supermarkets, Inc.                                                                                   
Forte Hotels International, Inc.                                                 6,412,979         (59,447)    
Forte Hotels International, Inc.                                                                               
Fox Grocery Company                                                              3,258,447                     
Gino's, Inc.                                                                       165,655                     
Gino's, Inc.                                                                       151,721                     
Gino's, Inc.                                                                       135,210                     
Gino's, Inc.                                                                       137,724                     
Gino's, Inc.                                                                                                   
Golf Road                                         55,756                                                        

Part 2 - Revenues earned for the Year ended December 31, 1997

Expended
Total         for interest,
revenue           taxes,        Net income
applicable       repairs and      applicable
to period         expenses       to period
---------         --------       ---------
COMMERCIAL PROPERTY LAND AND BUILDING
- -------------------------------------

Acme Markets, Inc. and FPBT of Penn.        $245,888          $46,729         $199,159
Alabama Power Company                        797,599          417,135          380,464
Amer Stores and The Fidelity Bank             81,172                0           81,172
Amer Stores, Grace, & Shottenstein Stores    157,735          130,451           27,284
American Recreation Group, Inc.               48,164           10,100           38,064
Amterre Ltd. Partnership                           0              208             (208)
Amterre Ltd. Partnership                           0           11,357          (11,357)
Amterre Ltd. Partnership                     597,424          814,130         (216,706)
Best Products Co., Inc.                      109,134          327,333         (218,199)
Caldor, Inc.                                 167,527            1,612          165,915
Chesebrough-Pond's Inc.                      141,236           19,580          121,656
Chomerics, Inc.                              792,465                0          792,465
Collins Foods International, Inc.             35,411           21,234           14,177
Collins Foods International, Inc.             11,455           31,123          (19,668)
David Miller of California                    63,482           20,750           42,732
Dillon Companies, Inc.                        65,268           13,688           51,580
Dillon Companies, Inc.                       183,340           12,184          171,156
Druid Point Bldg.                          1,351,918        1,242,925          108,993
Duke Power Co.                               482,477          296,475          186,002
European American Bank and Trust Co.         175,000           13,384          161,616
Farwell Bldg.                                957,184          554,753          402,431
Federated Department Stores, Inc.             63,418                0           63,418
First National Supermarkets, Inc.          2,194,767        1,355,148          839,619
First Union National Bank                     53,820                0           53,820
Fisher Scientific Company                    176,583           22,426          154,157
Foodarama Supermarkets, Inc.                  81,014           13,040           67,974
Forte Hotels International, Inc.             585,869           56,984          528,885
Forte Hotels International, Inc.             (11,423)           2,403          (13,826)
Fox Grocery Company                          290,442          114,824          175,618
Gino's, Inc.                                  33,514            3,762           29,752
Gino's, Inc.                                  42,735            8,081           34,654
Gino's, Inc.                                  39,120            3,529           35,591
Gino's, Inc.                                  45,689            4,353           41,336
Gino's, Inc.                                  33,010           (1,081)          34,091
Golf Road                                    108,494          135,636          (27,142)

IV-5

85
AMERICAN REAL ESTATE PARTNERS, LP
a limited partnership

Schedule III
PAGE 2

REAL ESTATE OWNED AND REVENUES EARNED

Part 1 - Real estate owned at December 31, 1997 - Accounted for under the:   

Operating Method      
-----------------------------------------
Amount   
Carried  
No. of       Amount of     Initial Cost      Cost of       at close  
State   Locations   Encumberances    to Company    Improvements     of period  
-----   ---------   -------------    ----------    ------------     ---------  

Grand Union Co.                                NJ        1                             430,664                       430,664 
Grand Union Co.                                MD        1                             372,383                       372,383 
Grand Union Co.                                NY        3                           1,110,120      (19,100)       1,091,020 
Grand Union Co.                                NY        1                                                                   
Grand Union Co.                                VA        1                             266,468                       266,468 
Grand Union Co.                                NY        1            4,473,221                                              
Gunite                                         IN        1              148,230      1,134,565                     1,134,565 
G.D. Searle & Co.                              MD        1                             299,229                       299,229 
G.D. Searle & Co.                              MN        1                             261,918                       261,918 
G.D. Searle & Co.                              AL        1                                   0                             0 
G.D. Searle & Co.                              IL        1                             256,295                       256,295 
G.D. Searle & Co.                              FL        1                                   0                             0 
G.D. Searle & Co.                              MN        1                             339,358                       339,358 
G.D. Searle & Co.                              IL        1                             323,559                       323,559 
G.D. Searle & Co.                              TN        1                             214,421                       214,421 
G.D. Searle & Co.                              TN        1                                   0                             0 
G.D. Searle & Co.                              MD        1                             325,891                       325,891 
Hancock                                        LA        1                                                                   
Haverty Furniture Companies, Inc.              GA        1              245,234                                              
Haverty Furniture Companies, Inc.              FL        1              185,175                                              
Haverty Furniture Companies, Inc.              VA        1              232,724                                              
Holiday Inn                                    AZ        1                                                                   
Integra A Hotel and Restaurant Co.             AL        2                             245,625                       245,625 
Integra A Hotel and Restaurant Co.             IL        1                             198,392                       198,392 
Integra A Hotel and Restaurant Co.             IN        1                             231,513                       231,513 
Integra A Hotel and Restaurant Co.             OH        1                                                                   
Integra A Hotel and Restaurant Co.             MO        1                             224,837                       224,837 
Integra A Hotel and Restaurant Co.             TX        1                             228,793                       228,793 
Integra A Hotel and Restaurant Co.             MI        1                             234,464                       234,464 
Intermountain Color                            KY        1               11,180        559,644                       559,644 
J.C. Penney Company, Inc.                      MA        1                           2,484,262                     2,484,262 
Kelley Springfield Tire Company                TN        1                             120,946                       120,946 
K-Mart Corporation                             LA        1                                                                   
K-Mart Corporation                             WI        1                                                                   
K-Mart Corporation                             FL        1                                                                   
K-Mart Corporation                             MN        1              530,000                                              
K-Mart Corporation                             FL        1                           2,760,118                     2,760,118 

Part 1 - Real estate owned at December 31, 1997 - Accounted for under the: 

Operating Method                   Financing Method
--------------------------------   -----------------------------
Rent due                      Minimum lease                 
and accrued                     payments due        
or received                     and accrued         
Reserve for      in advance at        Net            at end          
Depreciation      end of period    Investment       of period         
------------      -------------    ----------       ---------         

Grand Union Co.                                                                   427,410                         
Grand Union Co.                                 249,742                                                           
Grand Union Co.                                                                 1,101,687                         
Grand Union Co.                                                                                                   
Grand Union Co.                                 178,999                                                           
Grand Union Co.                                                                 7,310,207                         
Gunite                                        1,065,034          (17,340)                                         
G.D. Searle & Co.                               145,833           (2,383)                                         
G.D. Searle & Co.                               174,337           (2,551)                                         
G.D. Searle & Co.                                     0                                                           
G.D. Searle & Co.                               161,229           (3,835)                                         
G.D. Searle & Co.                                     0                                                           
G.D. Searle & Co.                               147,266           (1,847)                                         
G.D. Searle & Co.                               223,483           (2,360)                                         
G.D. Searle & Co.                               145,172            1,562                                          
G.D. Searle & Co.                                     0                                                           
G.D. Searle & Co.                               146,800           (2,250)                                         
Hancock                                                          (28,024)                                         
Haverty Furniture Companies, Inc.                                                 616,002                         
Haverty Furniture Companies, Inc.                                                 466,667         (749)           
Haverty Furniture Companies, Inc.                                                 594,370                         
Holiday Inn                                                                                                       
Integra A Hotel and Restaurant Co.                                              1,397,060                         
Integra A Hotel and Restaurant Co.                                                461,675          859            
Integra A Hotel and Restaurant Co.                                                604,563                         
Integra A Hotel and Restaurant Co.                                                620,765                         
Integra A Hotel and Restaurant Co.                                                469,913                         
Integra A Hotel and Restaurant Co.                                                576,867                         
Integra A Hotel and Restaurant Co.                                                577,240                         
Intermountain Color                             434,676                                                           
J.C. Penney Company, Inc.                     1,588,326          (41,707)                                         
Kelley Springfield Tire Company                  75,200                                                           
K-Mart Corporation                                                              1,684,293                         
K-Mart Corporation                                                              1,919,517                         
K-Mart Corporation                                                              2,224,386                         
K-Mart Corporation                                                              1,780,445                         
K-Mart Corporation                            1,688,401                                                           

Part 2 - Revenues earned for the Year ended December 31, 1997

Expended
Total              for interest,
revenue                 taxes,          Net income
applicable            repairs and         applicable
to period              expenses          to period
------------             --------          ---------

Grand Union Co.                           85,502                 1,900              83,602
Grand Union Co.                           33,750                19,576              14,174
Grand Union Co.                          220,389                 6,234             214,155
Grand Union Co.                            7,083               128,895            (121,812)
Grand Union Co.                           24,150                 3,579              20,571
Grand Union Co.                          676,977               460,329             216,648
Gunite                                   208,080                33,042             175,038
G.D. Searle & Co.                         27,000                 5,372              21,628
G.D. Searle & Co.                         22,162                 3,519              18,643
G.D. Searle & Co.                              0                 1,263              (1,263)
G.D. Searle & Co.                         23,013                 5,990              17,023
G.D. Searle & Co.                              0                  (645)                645
G.D. Searle & Co.                         30,614                 5,551              25,063
G.D. Searle & Co.                         28,319                 4,656              23,663
G.D. Searle & Co.                         18,740                     0              18,740
G.D. Searle & Co.                              0                 5,193              (5,193)
G.D. Searle & Co.                         28,598                 5,365              23,233
Hancock                                  450,785               152,045             298,740
Haverty Furniture Companies, Inc.         55,885                25,361              30,524
Haverty Furniture Companies, Inc.         42,337                19,150              23,187
Haverty Furniture Companies, Inc.         54,193                24,410              29,783
Holiday Inn                            2,138,010             1,699,352             438,658
Integra A Hotel and Restaurant Co.       239,858                 4,600             235,258
Integra A Hotel and Restaurant Co.       103,757                 2,470             101,287
Integra A Hotel and Restaurant Co.       121,983                 2,300             119,683
Integra A Hotel and Restaurant Co.        89,986                 2,330              87,656
Integra A Hotel and Restaurant Co.       108,409                 2,330             106,079
Integra A Hotel and Restaurant Co.       139,420                 2,360             137,060
Integra A Hotel and Restaurant Co.       138,537                 2,300             136,237
Intermountain Color                       81,330                29,063              52,267
J.C. Penney Company, Inc.                250,244                79,496             170,748
Kelley Springfield Tire Company           11,449                 8,155               3,294
K-Mart Corporation                       141,806                   516             141,290
K-Mart Corporation                       173,164                     0             173,164
K-Mart Corporation                       213,781                     0             213,781
K-Mart Corporation                       146,038                46,819              99,219
K-Mart Corporation                       236,480               278,694             (42,214)

IV-6

86
AMERICAN REAL ESTATE PARTNERS, LP
a limited partnership

Schedule III
PAGE 3

REAL ESTATE OWNED AND REVENUES EARNED 

Part 1 - Real estate owned at December 31, 1997 - Accounted for under the:

Operating Method
----------------------------------------
Amount   
Carried  
No. of       Amount of     Initial Cost      Cost of       at close  
State   Locations   Encumberances    to Company    Improvements     of period  
-----   ---------   -------------    ----------    ------------     ---------  

K-Mart Corporation                             IA        1                                                                 
K-Mart Corporation                             FL        2                         2,636,000                     2,636,000  
K-Mart Corporation                             IL        1            263,859                                               
Kobacker Stores, Inc.                          MI        4                           215,148                       215,148  
Kobacker Stores, Inc.                          KY        1             66,777         88,364                        88,364  
Kobacker Stores, Inc.                          OH        5             65,759        354,030                       354,030  
Kraft, Inc.                                    NC        1                                                                  
Landmark Bancshares Corporation                MO        1                                                                  
Levitz Furniture Corporation                   NY        1                           988,463                       988,463  
Lockheed Corporation                           CA        1                         2,449,469                     2,449,469  
Louisiana Power and Light Company              LA        8          3,464,338                                               
Louisiana Power and Light Company              LA        7          2,075,693      3,491,431                     3,491,431  
Macke Co.                                      VA        1                                                                  
Marsh Supermarkets, Inc.                       IN        1                         5,001,933                     5,001,933  
Montgomery Ward, Inc.                          PA        1                         3,289,166                     3,289,166  
Montgomery Ward, Inc.                          NJ        1                                                                  
Morrison, Inc.                                 AL        1                           324,288                       324,288  
Morrison, Inc.                                 GA        1                           347,404                       347,404  
Morrison, Inc.                                 FL        1                           375,392                       375,392  
Morrison, Inc.                                 VA        2                           363,059                       363,059  
M.C.O. Properties                              CO        1                                                                  
North Carolina National Bank                   SC        6                         2,938,008                     2,938,008  
Occidental Petroleum Corp.                     CA        1          1,857,296                                               
Ohio Power Co. Inc.                            OH        1                                                                  
Old National Bank of Washington                WA        1                         4,190,632                     4,190,632  
Park West                                      KY        1                        19,020,000                    19,020,000  
Penske Corp.                                   OH        1            108,036                                               
Pneumo Corp.                                   OH        1            878,314                                               
Portland General Electric Company              OR        1         46,177,752                                               
Rouse Company                                  MD        1          3,320,839                                               
Safeway Stores, Inc.                           LA        1                         1,782,885                     1,782,885  
Sams                                           MI        1          5,543,256      8,844,225                     8,844,225  
Smith's Management Corp.                       NV        1            371,047                                               
Southland Corporation                          FL        5                         1,162,971                     1,162,971  
Staples                                        NY        1                         2,455,975      1,607          2,457,582  
Stop 'N Shop Co., Inc.                         NY        1                         5,013,507                     5,013,507  
Stop 'N Shop Co., Inc.                         VA        1            869,612                                               

Part 1 - Real estate owned at December 31, 1997 - Accounted for under the:

Operating Method                    Financing Method
---------------------------------   --------------------------------
Rent due                      Minimum lease                
and accrued                     payments due                 
or received                     and accrued                  
Reserve for      in advance at        Net            at end                    
Depreciation      end of period    Investment       of period                   
------------      -------------    ----------       ---------                   

K-Mart Corporation                                                               1,367,760                                   
K-Mart Corporation                            1,765,878                          1,831,105                                   
K-Mart Corporation                                                                 977,099                                   
Kobacker Stores, Inc.                                               (416)          423,743          (1,133)                  
Kobacker Stores, Inc.                                                              100,094                                   
Kobacker Stores, Inc.                                                              613,834                                   
Kraft, Inc.                                                                                                                  
Landmark Bancshares Corporation                                                  4,586,844                                   
Levitz Furniture Corporation                                     (13,017)        2,149,353         (27,661)                  
Lockheed Corporation                                             (52,793)        4,143,163        (107,624)                  
Louisiana Power and Light Company                                               12,443,623                                   
Louisiana Power and Light Company                                                4,321,049                                   
Macke Co.                                                         15,484                                                     
Marsh Supermarkets, Inc.                      2,133,683                                                                      
Montgomery Ward, Inc.                         2,120,374                                                                      
Montgomery Ward, Inc.                                                            1,570,578          (4,105)                  
Morrison, Inc.                                                                     720,862                                   
Morrison, Inc.                                                                     690,199                                   
Morrison, Inc.                                                                     728,153                                   
Morrison, Inc.                                                                   1,785,553                                   
M.C.O. Properties                                                                                                            
North Carolina National Bank                  1,008,024           (3,926)                                                    
Occidental Petroleum Corp.                                                                                                   
Ohio Power Co. Inc.                                                              3,962,361         (38,220)                  
Old National Bank of Washington               2,816,843                                                                      
Park West                                                                                                                    
Penske Corp.                                                                       573,940                                   
Pneumo Corp.                                                                     2,272,594                                   
Portland General Electric Company                                               52,081,512                                   
Rouse Company                                                                    6,362,762                                   
Safeway Stores, Inc.                          1,061,233           (7,096)                                                    
Sams                                          1,371,772          (90,412)                                                    
Smith's Management Corp.                                                           838,205                                   
Southland Corporation                           657,550                                                                      
Staples                                          37,661                                                                      
Stop 'N Shop Co., Inc.                        3,589,887                                                                      
Stop 'N Shop Co., Inc.                                                           2,815,364         (30,930)                  

Part 2 - Revenues earned for the Year ended December 31, 1997

Expended
Total          for interest,                
revenue            taxes,        Net income
applicable        repairs and      applicable
to period          expenses       to period
---------          --------       ---------

K-Mart Corporation                              128,806                0           128,806
K-Mart Corporation                              413,734           36,563           377,171
K-Mart Corporation                               78,194           24,912            53,282
Kobacker Stores, Inc.                            62,971            7,805            55,166
Kobacker Stores, Inc.                            19,192           10,975             8,217
Kobacker Stores, Inc.                            92,644           18,822            73,822
Kraft, Inc.                                      50,414          (39,646)           90,060
Landmark Bancshares Corporation                 644,743              466           644,277
Levitz Furniture Corporation                    354,406              563           353,843
Lockheed Corporation                            847,243                0           847,243
Louisiana Power and Light Company             1,567,252          372,734         1,194,518
Louisiana Power and Light Company             1,007,611          225,702           781,909
Macke Co.                                        74,516            6,739            67,777
Marsh Supermarkets, Inc.                        506,300          231,479           274,821
Montgomery Ward, Inc.                           314,280           61,698           252,582
Montgomery Ward, Inc.                           147,710               54           147,656
Morrison, Inc.                                  134,559            2,300           132,259
Morrison, Inc.                                  134,750                0           134,750
Morrison, Inc.                                  142,096            2,300           139,796
Morrison, Inc.                                  276,296            4,943           271,353
M.C.O. Properties                                12,974           33,144           (20,170)
North Carolina National Bank                    224,823           51,285           173,538
Occidental Petroleum Corp.                            0          253,333          (253,333)
Ohio Power Co. Inc.                             370,060                0           370,060
Old National Bank of Washington                 677,222          496,555           180,667
Park West                                             0              187              (187)
Penske Corp.                                     84,821           12,474            72,347
Pneumo Corp.                                    223,429           93,346           130,083
Portland General Electric Company             4,497,800        2,268,352         2,229,448
Rouse Company                                   563,969          347,415           216,554
Safeway Stores, Inc.                             85,150           13,751            71,399
Sams                                          1,127,521          712,492           415,029
Smith's Management Corp.                         75,545           37,115            38,430
Southland Corporation                           127,573           15,424           112,149
Staples                                         277,966           94,494           183,472
Stop 'N Shop Co., Inc.                          454,145           71,754           382,391
Stop 'N Shop Co., Inc.                          254,630           85,787           168,843

IV-7  

87
AMERICAN REAL ESTATE PARTNERS, LP
a limited partnership

Schedule III
PAGE 4

REAL ESTATE OWNED AND REVENUES EARNED

Part 1 - Real estate owned at December 31, 1997 - Accounted for under the:

Operating Method
----------------------------------------
Amount   
Carried  
No. of       Amount of     Initial Cost      Cost of       at close  
State   Locations   Encumberances    to Company    Improvements     of period  
-----   ---------   -------------    ----------    ------------     ---------  

Super Foods Services, Inc.                     MI        1         6,635,566
SuperValu Stores, Inc.                         MN        1                         1,370,965                     1,370,965      
SuperValu Stores, Inc.                         OH        1                         3,000,671                     3,000,671      
SuperValu Stores, Inc.                         GA        1                         2,344,836                     2,344,836      
SuperValu Stores, Inc.                         IN        1                         2,267,573                     2,267,573      
Telecom Properties, Inc.                       OK        1            44,630                                                    
Telecom Properties, Inc.                       KY        1           115,678         281,253                       281,253      
The A&P Company                                MI        1                                                                      
The TJX Companies, Inc.                        IL        1                                                                      
Toys "R" Us, Inc.                              MA        1                                                                      
Toys "R" Us, Inc.                              IL        1                                                                      
Toys "R" Us, Inc.                              NY        1                                                                      
Toys "R" Us, Inc.                              TX        1           856,725         501,836                       501,836      
Toys "R" Us, Inc.                              MI        1                                                                      
Toys "R" Us, Inc.                              TX        1                                                                      
Trafalgar Industries, Inc.                     NY        1                                                                      
USA Petroleum Corporation                      SC        2                           163,161                       163,161      
USA Petroleum Corporation                      OH        1                            78,443                        78,443      
USA Petroleum Corporation                      GA        2                           138,062                       138,062      
Waban                                          NY        1         3,608,807       8,378,095                     8,378,095      
Watkins                                        MO        1                           965,741                       965,741      
Webcraft Technologies                          MD        1           487,877         780,774                       780,774      
Wetterau, Inc.                                 PA        1                                                                      
Wetterau, Inc.                                 NJ        2                                                                      
Wickes Companies, Inc.                         CA        2         1,507,459       2,447,297                     2,447,297      

RESIDENTIAL PROPERTY LAND AND BUILDING                                            
- -------------------------------------                                             
Crown Cliffs                                   AL        1         8,504,936      10,944,883      120,992       11,065,875  (2) 

Part 1 - Real estate owned at December 31, 1997 - Accounted for under the:

Operating Method                Financing Method
-------------------------------   -----------------------------
Rent due                      Minimum lease                 
and accrued                     payments due      
or received                     and accrued       
Reserve for      in advance at        Net            at end         
Depreciation      end of period    Investment       of period        
------------      -------------    ----------       ---------        

Super Foods Services, Inc.                                                       10,213,426                        
SuperValu Stores, Inc.                          211,948                                                           
SuperValu Stores, Inc.                          474,489                                                           
SuperValu Stores, Inc.                          367,453                                                           
SuperValu Stores, Inc.                          354,965                                                           
Telecom Properties, Inc.                                                            115,990                       
Telecom Properties, Inc.                                                            101,212                       
The A&P Company                                                                   1,678,976                       
The TJX Companies, Inc.                                                           2,661,258       (54,094)        
Toys "R" Us, Inc.                                                                                                 
Toys "R" Us, Inc.                                                                                                 
Toys "R" Us, Inc.                                                                                                 
Toys "R" Us, Inc.                                                                 1,107,437                       
Toys "R" Us, Inc.                                                                                                 
Toys "R" Us, Inc.                                                                                                 
Trafalgar Industries, Inc.                                                                                        
USA Petroleum Corporation                                                           167,972                       
USA Petroleum Corporation                                                            88,832                       
USA Petroleum Corporation                                                           146,749                       
Waban                                           500,930                                                           
Watkins                                          81,047           (9,650)                                         
Webcraft Technologies                           117,371                                                           
Wetterau, Inc.                                                                      823,756                       
Wetterau, Inc.                                                                    1,780,342                       
Wickes Companies, Inc.                        1,250,994          (18,970)                                         

RESIDENTIAL PROPERTY LAND AND BUILDING          
- -------------------------------------           
Crown Cliffs                                  1,173,049                                                           

Part 2 - Revenues earned for the Year ended December 31, 1997

Expended
Total           for interest,
revenue              taxes,       Net income
applicable         repairs and      applicable
to period           expenses       to period
---------           --------       ---------

Super Foods Services, Inc.              1,087,412          578,888         508,524
SuperValu Stores, Inc.                    114,885           26,679          88,206
SuperValu Stores, Inc.                    319,834           58,394         261,440
SuperValu Stores, Inc.                    224,215           45,631         178,584
SuperValu Stores, Inc.                    193,024           44,128         148,896
Telecom Properties, Inc.                   10,965            4,663           6,302
Telecom Properties, Inc.                   37,044           12,120          24,924
The A&P Company                           176,747                0         176,747
The TJX Companies, Inc.                   238,968            3,701         235,267
Toys "R" Us, Inc.                          82,445           55,006          27,439
Toys "R" Us, Inc.                         101,865           71,337          30,528
Toys "R" Us, Inc.                         104,136           80,361          23,775
Toys "R" Us, Inc.                         108,188           78,725          29,463
Toys "R" Us, Inc.                          77,087           56,207          20,880
Toys "R" Us, Inc.                         142,913           64,402          78,511
Trafalgar Industries, Inc.                      0           31,226         (31,226)
USA Petroleum Corporation                  39,312            1,035          38,277
USA Petroleum Corporation                  18,900                0          18,900
USA Petroleum Corporation                  33,264                0          33,264
Waban                                     659,262          421,042         238,220
Watkins                                   114,800           26,234          88,566
Webcraft Technologies                     171,353           80,549          90,804
Wetterau, Inc.                             88,039           12,352          75,687
Wetterau, Inc.                            187,312            2,254         185,058
Wickes Companies, Inc.                    588,030          281,054         306,976

RESIDENTIAL PROPERTY LAND AND BUILDING
- -------------------------------------
Crown Cliffs                            1,741,608        1,760,276         (18,668)

IV-8

88
AMERICAN REAL ESTATE PARTNERS, LP
a limited partnership

Schedule III
PAGE 5

REAL ESTATE OWNED AND REVENUES EARNED

PART 1 - REAL ESTATE OWNED AT DECEMBER 31, 1997 - ACCOUNTED FOR UNDER THE:

Operating Method
----------------------------------------
Amount   
Carried  
No. of       Amount of     Initial Cost      Cost of       at close  
State   Locations   Encumberances    to Company    Improvements     of period  
-----   ---------   -------------    ----------    ------------     ---------  

COMMERCIAL PROPERTY - LAND
- --------------------------
Easco Corp.                                    NC        1                          157,560                       157,560   
Foodarama supermarkets, Inc.                   NY        1                          140,619                       140,619   
Foodarama supermarkets, Inc.                   PA        1                          112,554                       112,554   
Gino's, Inc.                                   MD        1                           86,027                        86,027   
Gino's, Inc.                                   PA        1                           36,271                        36,271   
Gino's, Inc.                                   MI        1                           71,160                        71,160   
Gino's, Inc.                                   MA        2                          102,048                       102,048   
Gino's, Inc.                                   NJ        1                           61,050                        61,050   
J.C. Penney Company, Inc.                      NY        1                           51,009                        51,009   
Levitz Furniture Corporation                   CA        2                        1,134,836                     1,134,836   
Levitz Furniture Corporation                   KS        1                          460,490                       460,490   

COMMERCIAL PROPERTY - BUILDING
- ------------------------------
Bank South                                     GA        1                                                                  
Harwood Square                                 IL        1                        6,803,769                     6,803,769   
Holiday Inn                                    FL        1                        6,846,683       357,299       7,203,982   
Lockheed Corporation                           CA        1                                                                  
Safeway Stores, Inc.                           CA        1                          558,652                       558,652   
Toys "R" Us, Inc.                              RI        1                                                                  
United Life & Accident Ins. Co.                NH        1                                                                  
Wickes Companies, Inc.                         PA        1                                                                  
Weigh-Tronix, Inc.                             CA        1                                                                  
Baptist Hospital 1                             TN        1         23,089,860                                               
Baptist Hospital 2                             TN        1          8,569,902                                               

PART 1 - REAL ESTATE OWNED AT DECEMBER 31, 1997 - ACCOUNTED FOR UNDER THE:

Operating Method                Financing Method
-------------------------------   ------------------------------
Rent due                      Minimum lease                 
and accrued                     payments due       
or received                     and accrued        
Reserve for      in advance at        Net            at end          
Depreciation      end of period    Investment       of period         
------------      -------------    ----------      -------------      

COMMERCIAL PROPERTY - LAND
- --------------------------
Easco Corp.                                                      (26,750)                                          
Foodarama supermarkets, Inc.                                                                                       
Foodarama supermarkets, Inc.                                                                                       
Gino's, Inc.                                                                                                       
Gino's, Inc.                                                                                                       
Gino's, Inc.                                                                                                       
Gino's, Inc.                                                                                                       
Gino's, Inc.                                                                                                       
J.C. Penney Company, Inc.                                                                                          
Levitz Furniture Corporation                                     (17,443)                                          
Levitz Furniture Corporation                                                                                       

COMMERCIAL PROPERTY - BUILDING
- ------------------------------
Bank South                                                                       3,755,472                          
Harwood Square                                2,997,054                                                             
Holiday Inn                                   2,200,324                                                             
Lockheed Corporation                                                             5,293,023                          
Safeway Stores, Inc.                            513,925                                                             
Toys "R" Us, Inc.                                                                1,027,896                          
United Life & Accident Ins. Co.                                                  4,396,908          (43,667)        
Wickes Companies, Inc.                                                           3,240,160          (46,366)        
Weigh-Tronix, Inc.                                                               2,501,135                          
Baptist Hospital 1                                                              25,234,428        1,105,517         
Baptist Hospital 2                                                               9,365,708          410,318         

PART 2 - REVENUES EARNED FOR THE YEAR ENDED DECEMBER 31, 1997

Expended
Total       for interest,
revenue         taxes,        Net income
applicable     repairs and      applicable
to period       expenses       to period
---------       --------       ---------

COMMERCIAL PROPERTY - LAND
- --------------------------
Easco Corp.                               12,400           710           11,690
Foodarama supermarkets, Inc.              14,000         1,786           12,214
Foodarama supermarkets, Inc.              12,000             0           12,000
Gino's, Inc.                               7,143             0            7,143
Gino's, Inc.                               7,143             0            7,143
Gino's, Inc.                               7,143           480            6,663
Gino's, Inc.                              14,286             0           14,286
Gino's, Inc.                               7,143             0            7,143
J.C. Penney Company, Inc.                  5,500             0            5,500
Levitz Furniture Corporation              99,302         7,095           92,207
Levitz Furniture Corporation              47,009             0           47,009

COMMERCIAL PROPERTY - BUILDING
- ------------------------------
Bank South                               382,109       220,716          161,393
Harwood Square                           737,149       271,064          466,085
Holiday Inn                            3,959,694     4,145,683         (185,989)
Lockheed Corporation                     676,617         4,653          671,964
Safeway Stores, Inc.                      26,900        20,691            6,209
Toys "R" Us, Inc.                         98,014             0           98,014
United Life & Accident Ins. Co.          372,115             0          372,115
Wickes Companies, Inc.                   457,648             0          457,648
Weigh-Tronix, Inc.                       259,859             0          259,859
Baptist Hospital 1                       994,844       905,141           89,703
Baptist Hospital 2                       369,279       335,940           33,339

IV-9

89
AMERICAN REAL ESTATE PARTNERS, LP
a limited partnership

Schedule III
PAGE 6

REAL ESTATE OWNED AND REVENUES EARNED

Part 1 - Real estate owned at December 31, 1997 - Accounted for under the:

Operating Method
----------------------------------------
Amount   
Carried  
No. of       Amount of     Initial Cost      Cost of       at close  
State   Locations   Encumberances    to Company    Improvements     of period  
-----   ---------   -------------    ----------    ------------     ---------  

DEVELOPMENT PROPERTY
- ------------------------------
Dellwood                                       NY        1                           3,120,317                    3,120,317    
Grassy Hollow                                  NY        1                             601,135                      601,135    
East Syracuse                                  NY        1                             138,108                      138,108    

---------------------------------------------------------
$156,432,734    $168,789,822    $178,417     $168,968,239(1)
=========================================================

Part 1 - Real estate owned at December 31, 1997 - Accounted for under the:

Operating Method                  Financing Method
-------------------------------    -----------------------------
Rent due                      Minimum lease                 
and accrued                     payments due       
or received                     and accrued        
Reserve for      in advance at        Net            at end          
Depreciation      end of period    Investment       of period         
------------      -------------    ----------       ---------         

DEVELOPMENT PROPERTY
- ------------------------------
Dellwood                                                                                                           
Grassy Hollow                                                                                                      
East Syracuse                                                                                                      

--------------------------------------------------------------
$42,369,888(1)     ($399,347)     $265,656,836      $704,395         
==============================================================

Part 2 - Revenues earned for the Year ended December 31, 1997

Expended
Total         for interest,
revenue            taxes,        Net income
applicable       repairs and      applicable
to period         expenses       to period
---------         --------       ---------

DEVELOPMENT PROPERTY
- ------------------------------
Dellwood                                            0               0                 0
Grassy Hollow                                       0               0                 0
East Syracuse                                       0               0                 0

----------------------------------------------
$47,857,010     $24,041,366       $23,815,644
==============================================

(1)Amount shown includes hotel operating properties.

(2)The Company owns a 70% interest in the joint venture which owns this
property.

IV-10

90

Schedule III
Page 7

AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY

REAL ESTATE OWNED AND REVENUES EARNED
YEAR ENDED DECEMBER 31, 1997

1a.    A reconciliation of the total amount at which real estate owned,
accounted for under the operating method and hotel operating properties,
was carried at the beginning of the period, with the total at the close
of the period, is shown below:

Balance - January 1, 1997                                  $ 160,112,640
Additions during period                                       28,946,473
Write downs                                                     (704,782)
Reclassifications during period from financing leases          4,000,824
Reclassifications during period to assets held for sale       (3,763,071)
Disposals during period                                      (19,623,845)
-------------

Balance - December 31, 1997                                $ 168,968,239
=============

b.    A reconciliation of the total amount of accumulated depreciation at the
beginning of the period, with the total at the close of the period, is
shown below:

Balance - January 1, 1997                                  $ 43,754,936
Depreciation during period                                    3,849,795
Disposals during period                                      (3,752,894)
Reclassifications during period to assets held for sale      (1,481,949)
------------

Balance - December 31, 1997                                $ 42,369,888
============

Depreciation on properties accounted for under the operating method is
computed using the straight-line method over the estimated useful life of
the particular property or property components, which range from 5 to 45
years.

2.     A reconciliation of the total amount at which real estate owned,
accounted for under the financing method, was carried at the beginning of
the period, with the total at the close of the period, is shown below:

Balance - January 1, 1997                               $  253,781,903
Additions during period                                     34,750,966
Write downs                                                   (380,000)
Reclassifications during period                             (4,000,824)
Disposals during period                                    (10,812,126)
Amortization of unearned income                             25,146,392
Minimum lease rentals received                             (32,829,475)
--------------

Balance - December 31, 1997                             $  265,656,836
==============

3.     The aggregate cost of real estate owned for Federal income tax purposes
is $361,474,634.

(Continued)

IV-11

91
Schedule III
Page 8

AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY

REAL ESTATE OWNED AND REVENUES EARNED
YEAR ENDED DECEMBER 31, 1997

4.     Net income applicable to the period in Schedule III is reconciled with
net earnings as follows:

Net income applicable to financing and operating leases            $    23,815,644
Add interest income - other and dividend income                         23,060,868
---------------

46,876,512
---------------

Deduct expenses not allocated:

General and administrative expenses                                      3,187,794
Nonmortgage interest expense                                             1,525,796
Other                                                                    1,143,306
---------------

5,856,896
---------------

Earnings before gain on property and securities transactions            41,019,616
Provision for loss on mortgages receivable                              (9,790,000)
Provision for loss on property                                          (1,084,782)
Gain on sales of real estate                                            16,051,491
Gain on sale of marketable equity securities                            29,188,087
---------------
Net earnings                                                       $    75,384,412
===============

(Continued)

IV-12

92
Schedule III
Page 9

AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY

REAL ESTATE OWNED AND REVENUES EARNED
YEAR ENDED DECEMBER 31, 1996

1a.    A reconciliation of the total amount at which real estate owned,
accounted for under the operating method and hotel operating properties,
was carried at the beginning of the period, with the total at the close
of the period, is shown below:

Balance - January 1, 1996                                              $   193,311,259
Additions during period                                                     11,991,211
Write downs                                                                   (660,000)
Reclassifications during period from financing leases                          233,879
Reclassifications during period to assets held for sale                     (6,110,905)
Disposals during period                                                    (38,652,804)
---------------

Balance - December 31, 1996                                            $   160,112,640
===============

b.     A reconciliation of the total amount of accumulated depreciation at the
beginning of the period, with the total at the close of the period, is
shown below:

Balance - January 1, 1996                                               $  49,406,334
Depreciation during period                                                  4,895,252
Disposals during period                                                    (6,530,965)
Reclassifications during period to assets held for sale                    (4,015,685)
-------------

Balance - December 31, 1996                                             $  43,754,936
=============

Depreciation on properties accounted for under the operating method is
computed using the straight-line method over the estimated useful life of
the particular property or property components, which range from 5 to 45
years.

2.     A reconciliation of the total amount at which real estate owned,
accounted for under the financing method, was carried at the beginning of
the period, with the total at the close of the period, is shown below:

Balance - January 1, 1996                     $  281,532,52      
Other                                                  (988)
Reclassifications during period                    (233,879)
Disposals during period                         (20,201,810)
Amortization of unearned income                  26,073,205
Minimum lease rentals received                  (33,387,154)
-------------

Balance - December 31, 1996                   $ 253,781,903
=============

3.     The aggregate cost of real estate owned for Federal income tax purposes
is $340,405,247.

(Continued)

IV-13

93
Schedule III
Page 10

AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY

REAL ESTATE OWNED AND REVENUES EARNED
YEAR ENDED DECEMBER 31, 1996

4.   Net income applicable to the period in Schedule III is reconciled with net
earnings as follows:

Net income applicable to financing and operating leases    $ 27,911,271
Add interest income - other and dividend income              12,949,679
------------

40,860,950
------------

Deduct expenses not allocated:

General and administrative expenses                           2,938,684
Nonmortgage interest expense                                  2,604,345
Other                                                         1,077,736
------------
6,620,765
------------
Earnings before gain on property transactions                34,240,185
Provision for loss on property                                 (935,000)
Gain on sales of real estate                                 24,516,867
----------- 

Net earnings                                               $ 57,822,052
============

(Continued)

IV-14

94
Schedule III
Page 11

AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY

REAL ESTATE OWNED AND REVENUES EARNED
YEAR ENDED DECEMBER 31, 1995

1a.  A reconciliation of the total amount at which real estate owned, accounted
for under the operating method and hotel operating properties, was carried
at the beginning of the period, with the total at the close of the period,
is shown below:

Balance - January 1, 1995                                   $ 185,327,608
Additions during period                                        22,019,288
Write downs                                                      (768,701)
Reclassifications during period to assets held for sale        (3,227,355)
Disposals during period                                       (10,039,581)
-------------

Balance - December 31, 1995                                 $ 193,311,259
=============

b.   A reconciliation of the total amount of accumulated depreciation at the
beginning of the period, with the total at the close of the period, is
shown below:

Balance - January 1, 1995                                    $ 48,234,722
Depreciation during period                                      4,731,153
Disposals during period                                        (2,106,287)
Reclassifications during period to property held for sale      (1,453,254)
------------

Balance - December 31, 1995                                  $ 49,406,334
============

Depreciation on properties accounted for under the operating method is
computed using the straight-line method over the estimated useful life of
the particular property or property components, which range from 5 to 45
years.

2.   A reconciliation of the total amount at which real estate owned, accounted
for under the financing method, was carried at the beginning of the period,
with the total at the close of the period, is shown below:

Balance - January 1, 1995                      $ 314,260,786       
Reclassifications during period                   (1,280,739)
Disposals during period                          (24,242,668)
Amortization of unearned income                   29,452,066
Minimum lease rentals received                   (36,656,916)
-------------

Balance - December 31, 1995                    $ 281,532,529
=============

3.   The aggregate cost of real estate owned for Federal income tax purposes is
$376,471,538.

(Continued)

IV-15

95
Schedule III
Page 12

AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY

REAL ESTATE OWNED AND REVENUES EARNED
YEAR ENDED DECEMBER 31, 1995

4.   Net income applicable to the period in Schedule III is reconciled with net
earnings as follows:

Net income applicable to financing and operating leases    $ 29,312,510
Add interest income - other                                   8,398,380
------------

37,710,890
------------

Deduct expenses not allocated:

General and administrative expenses                           2,605,331
Nonmortgage interest expense                                  3,696,889
Other                                                           575,794
------------

6,878,014
------------

Earnings before gain on property transactions                30,832,876

Provision for loss on property                                 (768,701)

Gain on sales of real estate                                  5,091,445
------------

Net earnings                                               $ 35,155,620
============

(Continued)

IV-16

96
Schedule III
Page 13

AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY

REAL ESTATE OWNED BY STATE (ACCOUNTED FOR UNDER THE
FINANCING METHOD) DECEMBER 31, 1997

Net
State                                             Investment
-----                                           ------------

Alabama                                          $  9,635,475
California                                         12,344,143
Connecticut                                        23,685,974
Florida                                             5,250,311
Georgia                                             5,208,422
Illinois                                            4,241,657
Indiana                                               604,563
Iowa                                                1,367,760
Kentucky                                              201,306
Louisiana                                          18,448,966
Maryland                                            6,362,762
Massachusetts                                       8,076,230
Michigan                                           12,892,840
Minnesota                                           1,780,445
Missouri                                            5,216,755
Nevada                                                838,750
New Hampshire                                       4,396,908
New Jersey                                         10,191,310
New York                                           10,561,246
North Carolina                                      5,293,488
Ohio                                                8,268,594
Oklahoma                                              115,990
Oregon                                             52,163,782
Pennsylvania                                       10,656,031
Rhode Island                                        1,027,896
South Carolina                                        167,972
Tennessee                                          34,599,708
Texas                                               1,684,305
Virginia                                            5,195,283
West Virginia                                       3,258,447
Wisconsin                                           1,919,517
------------

$265,656,836
============

(Continued)

IV-17

97
Schedule III
Page 14

AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY

REAL ESTATE OWNED AND RESERVE FOR DEPRECIATION BY STATE
(ACCOUNTED FOR UNDER THE OPERATING METHOD)
DECEMBER 31, 1997

Amount at which
Carried at          Reserve for
State                                     Close of Year       Depreciation
-----                                     -------------       ------------

Alabama                                 $ 11,635,789          $ 1,173,049
California                                 8,303,187            2,259,567
Connecticut                                1,549,805            1,110,025
Florida                                   14,138,464            6,312,153
Georgia                                    9,084,883            1,250,669
Illinois                                  17,708,445            3,580,526
Indiana                                    8,635,584            3,553,683
Kansas                                       460,490                 --
Kentucky                                  19,949,261              434,676
Louisiana                                  6,829,427            1,915,376
Maryland                                   1,864,304              659,746
Massachusetts                              2,586,310            1,588,326
Michigan                                   9,364,998            1,371,772
Minnesota                                  7,045,520            1,621,739
Missouri                                   1,946,471              391,245
New Jersey                                 2,535,281            1,525,255
New York                                  23,335,066            5,413,367
North Carolina                               457,560                 --
Ohio                                       3,635,082              474,489
Oregon                                       169,048                 --
Pennsylvania                               5,442,384            3,509,988
South Carolina                             3,101,170            1,008,024
Tennessee                                    335,367              220,371
Texas                                        730,630                 --
Virginia                                   3,933,081              178,999
Washington                                 4,190,632            2,816,843
------------          -----------

$168,968,239          $42,369,888
============          ===========

(Continued)

IV-18

98
Schedule III
Page 15

AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY

REAL ESTATE OWNED BY STATE (ACCOUNTED FOR UNDER THE FINANCING METHOD)
DECEMBER 31, 1996

Net
State                                                Investment
-----                                                ----------

Alabama                                             $ 10,064,256   
California                                            13,300,742
Connecticut                                           24,148,717
Florida                                                5,492,092
Georgia                                                5,491,906
Illinois                                               5,391,892
Indiana                                                  641,103
Iowa                                                   1,406,004
Kentucky                                                 210,480
Louisiana                                             19,222,737
Maryland                                               6,546,154
Massachusetts                                          9,089,554
Michigan                                              14,240,540
Minnesota                                              1,826,407
Missouri                                               5,367,699
Nevada                                                   861,937
New Hampshire                                          4,548,793
New Jersey                                            14,030,998
New York                                              12,059,006
North Carolina                                         6,331,611
Ohio                                                   8,635,226
Oklahoma                                                 121,075
Oregon                                                52,830,039
Pennsylvania                                          13,140,285
Rhode Island                                           1,055,043
South Carolina                                           288,980
Texas                                                  3,237,774
Virginia                                               8,835,855
West Virginia                                          3,395,645
Wisconsin                                              1,969,353
------------

$253,781,903
============

(Continued)

IV-19

99
Schedule III
Page 16

AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY

REAL ESTATE OWNED AND RESERVE FOR DEPRECIATION BY STATE
(ACCOUNTED FOR UNDER THE OPERATING METHOD)
DECEMBER 31, 1996

Amount at which
Carried at               Reserve for
State                         Close of Year             Depreciation
-----                         -------------             ------------

Alabama                      $ 11,514,796               $   734,307
Arizona                         9,364,129                 1,582,362
California                     10,867,240                 2,579,786
Connecticut                     1,549,805                 1,090,444
Florida                        13,781,164                 5,698,752
Georgia                         8,969,994                   983,665
Illinois                        8,931,657                 3,295,252
Indiana                         8,635,584                 3,263,763
Kansas                            460,490                      --
Kentucky                          929,261                   413,759
Louisiana                      11,313,683                 2,620,111
Maryland                        1,864,304                   612,717
Massachusetts                   2,916,915                 1,508,830
Michigan                        9,364,998                 1,210,388
Minnesota                       7,045,520                 1,335,146
Missouri                        1,946,471                   357,347
New Jersey                      4,437,341                 1,507,397
New York                       23,833,344                 5,185,550
North Carolina                  1,591,685                 1,072,369
Ohio                            3,635,082                   416,095
Oregon                            218,713                      --
Pennsylvania                    7,400,025                 4,258,004
South Carolina                  3,101,170                   957,698
Tennessee                         335,367                   214,904
Texas                             730,630                      --
Virginia                        1,182,640                   532,630
Washington                      4,190,632                 2,323,660
------------               -----------

$160,112,640               $43,754,936
============               ===========

(Continued)

IV-20

100
Schedule III
Page 17

AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY

REAL ESTATE OWNED BY STATE (ACCOUNTED FOR UNDER THE FINANCING METHOD)
DECEMBER 31, 1995

Net
State                                                 Investment
-----                                                 ----------

Alabama                                              $ 10,442,132        
California                                             14,214,432
Connecticut                                            24,571,019
Florida                                                25,524,549
Georgia                                                 5,659,651
Illinois                                                5,582,313
Indiana                                                   660,868
Iowa                                                    1,440,868
Kentucky                                                  218,831
Louisiana                                              19,908,683
Maryland                                                6,714,267
Massachusetts                                           9,324,902
Michigan                                               14,507,001
Minnesota                                               1,868,777
Missouri                                                5,496,349
Nevada                                                    883,647
New Hampshire                                           4,688,575
New Jersey                                             14,444,858
New York                                               13,044,999
North Carolina                                          6,705,397
Ohio                                                    8,925,929
Oklahoma                                                  125,713
Oregon                                                 53,486,728
Pennsylvania                                           13,639,937
Rhode Island                                            1,079,730
South Carolina                                            308,267
Texas                                                   3,320,904
Virginia                                                9,206,882
West Virginia                                           3,521,376
Wisconsin                                               2,014,945
------------

$281,532,529
============

(Continued)

IV-21

101
Schedule III
Page 18

AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY

REAL ESTATE OWNED AND RESERVE FOR DEPRECIATION BY STATE
(ACCOUNTED FOR UNDER THE OPERATING METHOD)
DECEMBER 31, 1995

Amount at which
Carried at                Reserve for
State                         Close of Year             Depreciation
-----                         -------------             ------------

Alabama                      $ 11,459,096               $   265,568
Arizona                         9,028,875                 1,141,233
California                     13,574,684                 3,861,125
Connecticut                     1,549,805                 1,070,864
Florida                        13,772,389                 5,122,422
Georgia                         7,750,258                   797,977
Illinois                        8,850,494                 3,065,734
Indiana                         8,635,584                 2,954,479
Kansas                            460,490                      --
Kentucky                       14,851,240                 1,052,938
Louisiana                      11,313,683                 2,479,819
Maryland                        1,864,304                   565,688
Massachusetts                   2,916,915                 1,429,333
Michigan                       12,649,448                 2,865,957
Minnesota                       8,023,299                 1,722,126
Missouri                        1,946,471                   323,448
New Jersey                      4,437,341                 1,489,539
New York                       23,410,097                 4,944,535
North Carolina                  8,580,112                 1,120,666
Ohio                            3,635,082                   357,702
Oregon                            298,451                      --
Pennsylvania                   10,386,463                 6,045,388
South Carolina                  3,101,170                   907,373
Tennessee                         335,367                   205,951
Texas                           4,302,872                 2,810,501
Virginia                        1,986,638                   975,491
Washington                      4,190,631                 1,830,477
------------               -----------

$193,311,259               $49,406,334
============               ===========

IV-22

102
SIGNATURES

Pursuant to the requirements of Section 13 or 15(a) of the Securities
Exchange Act of 1934, AREP has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on the 30th day of 
March, 1998.

AMERICAN REAL ESTATE PARTNERS, L.P.

By:   AMERICAN PROPERTY INVESTORS, INC.
General Partner

By:   /s/ Carl C. Icahn
-------------------------
Carl C. Icahn
Chairman of the Board

Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of AREP and
in the capacities and on the dates indicated.

Signature           Title                                Date
---------           -----                                ----
/s/Carl C. Icahn           Chairman of the Board                March 30, 1998
- -----------------------                                               
Carl C. Icahn             (Principal Executive
Officer)

/s/Alfred D. Kingsley      Director                             March 30, 1998
- ------------------------                                              
Alfred D. Kingsley

/s/William A. Leidesdorf   Director                             March 30, 1998
- ------------------------                                              
William A. Leidesdorf

/s/Jack G. Wasserman       Director                             March 30, 1998
- ------------------------                                              
Jack G. Wasserman

/s/John P. Saldarelli      Treasurer                            March 30, 1998
- ------------------------                                              
John P. Saldarelli        (Principal Financial
Officer and Principal
Accounting Officer)

<ARTICLE> 5
<MULTIPLIER> 1,000

<PERIOD-TYPE>                   YEAR
<FISCAL-YEAR-END>                          DEC-31-1997
<PERIOD-END>                               DEC-31-1997
<CASH>                                         129,147
<SECURITIES>                                   372,165
<RECEIVABLES>                                        0
<ALLOWANCES>                                         0
<INVENTORY>                                          0
<CURRENT-ASSETS>                                     0
<PP                                         434,624
<DEPRECIATION>                                  42,370
<TOTAL-ASSETS>                                 991,230
<CURRENT-LIABILITIES>                                0
<BONDS>                                        167,741
<PREFERRED-MANDATORY>                                0
<PREFERRED>                                          0
<COMMON>                                             0
<OTHER-SE>                                     809,325
<TOTAL-LIABILITY-AND-EQUITY>                   991,230
<SALES>                                              0
<TOTAL-REVENUES>                                70,918
<CGS>                                                0
<TOTAL-COSTS>                                   13,521
<OTHER-EXPENSES>                                 3,188
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                              13,189
<INCOME-PRETAX>                                 75,384
<INCOME-TAX>                                         0
<INCOME-CONTINUING>                             75,384
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                    75,384
<EPS-PRIMARY>                                     2.27
<EPS-DILUTED>                                     2.13