SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

(Mark One)

(X)      QUARTERLY  REPORT  PURSUANT  TO  SECTION  13 OR  15(d)  OF THE
SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended              September 30, 1998
------------------

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        (I.R.S. Employer Identification
incorporation or organization)          No.)

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

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

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days.                Yes   X    N
-----    -----

1

American Real Estate Partners, L.P.-Form 10-Q-September 30, 1998

INDEX

PART I.  FINANCIAL INFORMATION
Page No.
Consolidated Balance Sheets -
September 30, 1998 and December 31, 1997 ........................1 - 2

Consolidated Statements of Earnings -
Three Months Ended September 30, 1998 and 1997...................3

Consolidated Statements of Earnings
Nine Months Ended September 30, 1998 and 1997....................4

Consolidated Statement of Changes In
Partners' Equity -         Nine Months
Ended September 30, 1998 ........................................5

Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1998 and 1997....................6-7

Notes to Consolidated Financial Statements.......................8

Management's Discussion and Analysis
of Financial Condition and Results of
Operations.......................................................14

PART II.  OTHER INFORMATION...............................................21

2

American Real Estate Partners, L.P.-Form 10-Q - September 30, 1998

PART I. FINANCIAL INFORMATION

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

CONSOLIDATED BALANCE SHEETS
(In $000's)

September 30,                   December 31,
1998                          1997
--------------------             -------------
(unaudited)

ASSETS

Real estate leased to others:
Accounted for under the financing
method                                                $      248,298                  $ 265,657
Accounted for under the operating
method, net of accumulated
depreciation                                                  141,289                    121,595
Investment in treasury bills                                       422,600                    372,165
Mortgages and notes receivable                                      87,444                     59,970
Cash and cash equivalents                                           66,844                    129,147
Investment in limited partnerships                                  51,234                     22,970
Hotel and resort operating properties,
net of accumulated depreciation                                  33,031                      5,002
Receivables and other assets                                        21,182                      7,838
Marketable equity securities                                         8,818                      -
Property held for sale                                               4,049                      4,164
Debt placement costs,
net of accumulated amortization                                   1,634                      1,473
Construction in progress                                             1,700                      1,249
-----------                  ---------

Total                                                       $ 1,088,123                  $ 991,230
=========                    =======

Continued.....

1

American Real Estate Partners, L.P.-Form 10-Q - September 30, 1998

CONSOLIDATED BALANCE SHEETS - Continued
(In $000's)

September 30,                  December 31,
1998                          1997
------------------               -------------
(unaudited)

LIABILITIES

Mortgages payable                                  $       187,514                 $      156,433
Notes payable                                               15,319                           -

Senior indebtedness                                           -                            11,308
Accounts payable, accrued
expenses and other liabilities                           19,968                         10,929
Deferred income                                              2,790                          2,792
Distributions payable                                          349                            443
---------                      ---------

Total liabilities                                       225,940                        181,905
--------                       --------

Commitments and Contingencies
(Notes 2 and 3)

PARTNERS' EQUITY

Limited partners:
Preferred units, $10 liquidation
preference, 5% cumulative pay-
in-kind redeemable; 9,400,000
authorized; 7,676,607 and 7,311,054
issued and outstanding as of
Sept.30, 1998 and Dec. 31, 1997                        78,685                         75,852

Depositary units; 47,850,000
authorized; 47,235,484
outstanding                                           777,302                        728,329

General partner                                             17,380                         16,328

Treasury units at cost:
1,037,200 depositary units                              (11,184)                       (11,184)
----------                       --------

Total partners' equity                                862,183                        809,325
----------                       --------

Total                                       $     1,088,123                $       991,230
=========                       ========

See notes to consolidated financial statements

2

American Real Estate Partners, L.P.-Form 10-Q - September 30, 1998

CONSOLIDATED STATEMENTS OF EARNINGS
(unaudited)
(In $000's except per unit amounts)

Three Months Ended September 30,
------------------------------------
1998                            1997
----                            ----

Revenues:
Interest income on
financing leases                                    $          5,959                  $          6,604
Interest income on treasury bills
and other investments                                          7,580                             2,797
Rental income                                                    4,671                             4,247
Hotel and resort operating income                                3,901                             1,024
Dividend income                                                  4,649                             1,243
Other income                                                       284                               139
------------                      ------------
27,044                            16,054
------------                      ------------
Expenses:
Interest expense                                                 4,040                             3,287
Depreciation and amortization                                    1,042                             1,483
General and administrative
expenses                                                         663                               744
Property expenses                                                  486                               707
Hotel and resort operating expenses                              2.562                               939
--------------                     -------------
8,793                             7,160
--------------                     -------------
Earnings before property and securities
transactions                                                    18,251                             8,894
Provision for loss on real estate                                   -                                  (343)
Gain on sales and disposition
of real estate                                                   2,683                             2,364
--------------                    --------------

NET EARNINGS                                             $         20,934                  $         10,915
==============                    ==============

Net earnings attributable to:
Limited partners                                      $         20,517                  $         10,698
General partner                                                    417                               217
--------------                   ---------------
$         20,934                  $         10,915
===============                     =============
Net earnings per limited
partnership unit (Note 13)

Basic earnings                                        $            .42                  $            .36
===============                   ===============

Weighted average limited partnership
units outstanding                                           46,198,284                        27,005,660
===========                       ===========

Diluted earnings                                      $            .38                  $            .36
===============                   ===============

Weighted average limited partnership
units and equivalent partnership
units outstanding                                           54,472,284                        29,221,336
===========                       ===========

See notes to consolidated financial statements

3

American Real Estate Partners, L.P.-Form 10-Q - September 30, 1998

CONSOLIDATED STATEMENTS OF EARNINGS
(unaudited)
(In $000's except per unit amounts)

Nine Months Ended September 30,
--------------------------------------------
1998                               1997
----                              -----

Revenues:
Interest income on
financing leases                                $         18,370                    $        18,694
Interest income on treasury bills
and other investments                                     21,956                              8,888
Rental income                                               13,685                             12,488
Hotel and resort operating income                            6,071                              5,106
Dividend income                                              8,974                              3,001
Other income                                                   662                                699
-------------                     --------------
69,718                             48,876
-----------                       ------------
Expenses:
Interest expense                                            11,224                              9,792
Depreciation and amortization                                3,449                              4,393
General and administrative
expenses                                                   2,313                              2,216
Property expenses                                            2,051                              2,571
Hotel and resort operating expenses                          4,428                              4,036
-------------                   ---------------
23,465                             23,008
------------                    ---------------
Earnings before property and securities
transactions                                                46,253                             25,868
Provision for loss on real estate                                (602)                              (705)
Gain on sales and disposition
of real estate                                               9,760                             13,287
Gain on sale of marketable securities                           -                                 29,188
-----------------                   ---------------

NET EARNINGS                                         $         55,411                    $        67,638
=============                      =============

Net earnings attributable to:
Limited partners                                  $         54,308                    $        66,293
General partner                                              1,103                              1,346
----------------                       ------------
$         55,411                    $        67,638
=============                       ============
Net earnings per limited partnership unit (Note 13):

Basic earnings                                    $           1.11                    $          2.48
===============                     ==============

Weighted average limited
partnership units outstanding                           46,198,284                         26,117,885
==========                         ==========

Diluted earnings                                  $           1.01                    $          2.35
===============                     ==============

Weighted average limited partnership
units and equivalent partnership
units outstanding                                       53,918,593                         28,230,265
================                    ===============

See notes to consolidated financial statements

4

American Real Estate Partners, L.P.-Form 10-Q - September 30, 1998

CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' EQUITY
Nine Months Ended September 30, 1998
(unaudited)
(In $000's )

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

Balance
Dec. 31, 1997                    $    16,328       $     728,329        $     75,852      $    (11,184)      $  809,325

Net earnings                           1,103              54,308               -                 -               55,411

Unrealized losses on
securities available
for sale                              (51)             (2,502)              -                 -               (2,553)

Pay-in-kind
distribution                           -                  (2,833)              2,833             -                  -
------------        ----------          ----------        ------------        --------

Balance
Sept.30, 1998                    $    17,380       $     777,302        $     78,685      $    (11,184)      $  862,183
======             =======            ========           =========        =======

See notes to consolidated financial statements

5

American Real Estate Partners, L.P.-Form 10-Q - September 30, 1998

CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(In $000's)

Nine Months Ended September 30,
----------------------------------
1998                      1997
----                      ----

CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings                                                   $           55,411             $      67,639
Adjustments to reconcile earnings to net
cash provided by operating activities:
Depreciation and amortization                                           3,449                     4,393
Amortization of deferred income                                            (1)                      (16)
Gain on sales and disposition of real estate                           (9,760)                  (13,288)
Gain on sale of marketable securities                                   -                       (29,188)
Provision for loss on real estate                                         602                       705
Changes in:
Decrease in deferred income                                              (3)                       (3)
(Increase) decrease in receivables
and other assets                                                 (15,461)                    1,431
Increase (decrease) in accounts payable and
accrued expenses                                                   8,941                    (3,649)
---------------            ---------------

Net cash provided by operating activities                         43,178                    28,024
--------------             -------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in mortgages and notes receivable                                (46,290)                  (56,083)
Property acquisitions                                                     (42,289)                  (43,834)
Purchase of marketable equity securities                                   (8,818)                   -
Net proceeds from the sale and disposition
of real estate                                                           22,146                    28,138
Principal payments received on leases
accounted for under the financing method                                  5,884                     5,690
Construction in progress                                                     (451)                     (397)
Principal receipts on mortgages receivable                                    391                       239
Capitalized expenditures for real estate                                     (495)                   (1,378)
Investment in treasury bills                                              (50,435)                   -
Investment in limited partnerships                                        (28,263)                    6,281
Net proceeds from the sale of marketable securities                          -                      111,784
---------------           -------------

Net cash (used in) provided by
investing activities                                          (148,620)                   50,440
-------------            -------------

CASH FLOWS FROM FINANCING ACTIVITIES:
Partners' equity:
Proceeds of the Rights Offering                                          -                        272,331
Expenses of the Rights Offerings                                         -                           (267)
Distributions to partners                                                   (94)                   (1,056)
Debt:
Increase (decrease) in mortgages payable                                 47,682                    40,350
Periodic principal payments                                              (6,731)                   (5,752)
Balloon payments                                                         (1,369)                   (5,025)
Increase in notes payable                                                15,319                      -
Debt placement costs                                                       (360)                      (43)
Senior debt principal payment                                           (11,308)                  (11,308)
-------------            -------------

Net cash provided by financing
activities                                                       43,139                   289,230
------------             -------------

NET (DECREASE) INCREASE
IN CASH AND CASH EQUIVALENTS                                                    (62,303)                  367,694

CASH AND CASH EQUIVALENTS, beginning of period                                  129,147                   105,544
------------              ------------
CASH AND CASH EQUIVALENTS, end of period                             $           66,844          $        473,238
=============              ============

Continued................

6

American Real Estate Partners, L.P.-Form 10-Q - September 30, 1998

CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(In $000's)

Nine Months Ended September 30,
-------------------------------
1998                     1997
----                     ----

SUPPLEMENTAL INFORMATION:
Cash payments for interest                                       $       11,346           $         9,903
=============            ==============

SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING ACTIVITIES:

Reclassification of real estate:
To property held for sale                                     $        1,271           $         2,496
From mortgages and notes receivable                                  (15,872)
To operating lease                                                    15,872                     4,001
From operating lease                                                  (1,271)                   (2,496)
From financing lease                                                    -                       (4,001)
------------             --------------
$        -               $          -
=============             ==============

See notes to consolidated financial statements

7

American Real Estate Partners, L.P.-Form 10-Q - September 30, 1998

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1.    General

The accompanying  consolidated financial statements and related footnotes should
be read in conjunction  with the consolidated  financial  statements and related
footnotes  contained in the  Company's  annual  report on Form 10-K for the year
ended December 31, 1997.

The results of operations for the three and nine months ended September 30, 1998
are not necessarily indicative of the results to be expected for the full year.

2.   Conflicts of Interest and Transactions with Related Parties

a. The Company entered into a license agreement with an affiliate of the general
partner  for a portion  of office  space at an  annual  rental of  approximately
$205,000, plus its share of certain additional rent. Such agreement was approved
by the Audit  Committee of the Board of Directors of the General  Partner  ("The
Audit  Committee").  For the three and nine months ended September 30, 1998, the
Company  paid  rent of  approximately  $59,000  and  $163,000  respectively,  in
accordance with the agreement.

b. 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.  During  the  three and nine  months  ended  September  30,  1998,  the
affiliates paid the Company approximately $15,000 and $45,000,  respectively for
rent of the  sublet  space.  Such  payments  have  been  approved  by the  Audit
Committee.

8

American Real Estate Partners, L.P.-Form 10-Q - September 30, 1998

c. As of November 3, 1998, High Coast Limited Partnership,  an affiliate of Carl
C.  Icahn,  the  Chairman of the Board of the General  Partner,  owns  6,642,065
Preferred Units and 31,515,044 Depositary Units.

3.   Commitments and Contingencies

On June 24, 1998, the Grand Union Company ("Grand Union"), a tenant leasing five
properties  owned by the Company,  filed a  prepackaged  voluntary  petition for
reorganization  pursuant  to  the  provisions  of  Chapter  11  of  the  Federal
Bankruptcy  Code.  The  Company  was  informed  on  August 5, 1998 that the U.S.
Bankruptcy Court approved Grand Union's reorganization plan. Grand Union emerged
from Chapter 11  protection  on or about August 17, 1998 and affirmed all of the
leases.  These five properties' annual rentals total  approximately  $1,294,000.
The tenant is current in its obligations under the leases.

At  September  30,  1998,  the  carrying  value  of  these  five  properties  is
approximately   $10,128,000.   One  of  these  properties  is  encumbered  by  a
nonrecourse mortgage payable of approximately $4,378,000.

4.   Hotel and Resort Properties

9

American Real Estate Partners, L.P.-Form 10-Q - September 30, 1998

In 1997, the Company acquired mortgages for approximately $16 million secured by
certain real property in Cape Cod,  Massachusetts.  The properties are part of a
master planned community and golf resort known as New Seabury.  The debtor filed
a Chapter 11  petition  in the  United  States  Bankruptcy  Court,  District  of
Massachusetts.

In June 1998,  a Chapter 11 plan of  reorganization  proposed by the Company was
approved  by the  Bankruptcy  Court.  In late July 1998,  the  Company  acquired
substantially  all of the debtor's  assets  including  two golf  courses,  other
recreational  facilities,  a villa rental  program,  condominium  and time share
units and land for future  development.  The Company  assumed  mortgage  debt of
approximately  $8.5  million  (subsequently  repaid) and made other  payments to
creditors  of  approximately  $3.5  million.  Total costs of  approximately  $28
million  have  been   classified  as  "Hotel  and  resort   properties"  on  the
Consolidated  Balance  Sheet.  Resort  operations  for the  period  August  1 to
September 30, 1998 have been included in the "Hotel and resort  operating income
and expenses" in the Consolidated Statements of Earnings.  Resort operations are
highly seasonal in nature with peak activity occurring from June to September.

5.   Mortgages and Notes Receivable

a. In June, 1997 the Company  invested  approximately  $42.8 million to purchase
approximately  $55 million face value of 14 1/4% First Mortgage Notes ("Notes"),
due May 15, 2002, issued by the

10

American Real Estate Partners, L.P.-Form 10-Q - September 30, 1998

Stratosphere Corporation ("Stratosphere"),  which had approximately $203 million
of such notes  outstanding.  In July and September  1998,  the Company  invested
approximately  $17.9 million to purchase  approximately $43.5 million face value
of additional  Notes.  An affiliate of the General  Partner owned  approximately
$83.3 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  filed a Second Amended Plan
of Reorganization  which provided for the holders of the First Mortgage Notes to
receive 100% of the equity in the reorganized  entity and therefore provided the
Company and its affiliate with a controlling interest. Such plan was approved by
the  Bankruptcy  Court  on June 6,  1998  but was not  effective  until  certain
governmental  approvals  were obtained  including,  among other  things,  gaming
licenses from the Nevada Gaming Authority.

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.  The Company  understands  that the
application  process  may take a number of months.  The Company has no reason to
believe that it will not obtain its necessary  license;  however,  the licensing
application

11

American Real Estate Partners, L.P.-Form 10-Q - September 30, 1998

of the affiliate of the General Partner was reviewed by the authorities  earlier
than the Company's application.  In an effort to facilitate the consummation of
the Stratosphere reorganization process,  the Company entered into an agreement
to transfer  its  interests (the  "Transfer  Agreement") in Stratosphere  to  an
affiliate of the General Partner at a price equal to the Company's cost for such
Stratosphere First Mortgage Notes. However, the affiliate of the General Partner
would  be  obligated  to sell  back to the  Company  and the  Company  would  be
obligated  to  repurchase  such  interest  in  Stratosphere  at the  same  price
(together with a commercially  reasonable interest factor), when the appropriate
licenses are obtained by the Company.

In October 1998, the affiliate of the General Partner  obtained its licenses and
in accordance  with the Transfer  Agreement the Company  received  approximately
$60.7 million for its Stratosphere interests. Stratosphere's Second Amended Plan
of Reorganization became effective on October 14, 1998.

b. In January  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 ("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. In August 1998, the Company invested $425,000 to purchase $500,000 face
value of additional  Notes.  In October 1998, the Company  invested  $422,500 to
purchase $650,000 face value of additional notes. An

12

American Real Estate Partners, L.P.-Form 10-Q - September 30, 1998

affiliate of the General Partner also has an investment in Notes of GB Property.
$185 million of such Notes 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 square 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.  $85  million of such notes were
issued, which bear interest at 11.75% payable semi-annually and are due February
1, 2002. In August 1998, the Company received the semi-annual  interest payment.
An affiliate of the General  Partner also has an investment in such Notes of the
Claridge Corporation.

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  square foot casino on three levels and 502 hotel
rooms and other attractions.

13

American Real Estate Partners, L.P.-Form 10-Q - September 30, 1998

d. The Company has classified the Claridge  Corporation and GB Property Notes as
available for sale for accounting  purposes.  These  investments  are carried at
fair market value on the Balance Sheet. At September 30, 1998 unrealized holding
losses of $2.5 million are reflected in Partners Equity.

6.   Marketable Equity Securities
In September 1998, the Company  purchased 350,000 shares of RJR Nabisco Holdings
Corp (RJR) for approximately $8,818,000.

In October 1998, the Company  purchased  2,321,700  additional shares of RJR for
approximately  $59.3  million.  An affiliate  of the general  partner also holds
shares of RJR.

7.   Investment in Limited Partnership Units

a. On July 17, 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'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 tender offers for outstanding limited partnership and assignee
interests ("Units") of Arvida/JMB Partners,

14

American Real Estate Partners, L.P.-Form 10-Q - September 30, 1998

L.P. ("Arvida") a  real estate partnership.  Boreas and the affiliated 
general partner had a total interest in Raleigh of 33 1/3%.

On May 15,  1998  Raleigh  redeemed  the 66 2/3%  partnership  interests  of the
unaffiliated  third parties for  approximately  $27,703,000.  The redemption was
funded  by  Raleigh  utilizing  approximately  $253,000  of its cash on hand and
incurring the following debt  obligations:  (i) $10,000,000 loan from Ing (U.S.)
Capital Corp. ("Ing"), bearing interest at prime plus 1 1/2% ("Base Rate"), with
a maturity date of May 14, 1999,  and  collateralized  by the assets of Raleigh;
(ii) $5,235,263  subordinated  loan from Vegas Financial  Corp., an affiliate of
Carl  C.  Icahn,  bearing  interest  at  the  Base  Rate  plus  1%  and  payable
semi-annually,  with a maturity date of November 15, 2000 and (iii)  $12,215,614
subordinated  loan from the Company under the same terms and  conditions as (ii)
above.

As of September  30,  1998,  Boreas and Raleigh  have been  consolidated  in the
company's  financial  statements.  As a  result,  the  Company's  investment  in
approximately  106,000 Arvida units is approximately $41.2 million. In addition,
notes   payable  of   approximately   $15.2   million  have  been  recorded  and
approximately  $4,149,000  representing  Bayswater's  minority interest has been
included  in  "Accounts  payable,  accrued  expenses,  and  other  liabilities."
Included  in the  Consolidated  Statements  of  Earnings  for the three and nine
months  ended  September  30, 1998 is  approximately  $128,000  and  $594,000 of
"Interest expense", respectively.  (See Note 16).

15

American Real Estate Partners, L.P.-Form 10-Q - September 30, 1998

b. On March 12, 1998 the Company, through its affiliate Olympia Investors,  L.P.
("Olympia"),  initiated tender offers to purchase up to 160,000 units of limited
partnership  interest in Integrated  Resources  High Equity  Partners  Series 85
("HEP 85") at a  purchase  price of $95 per unit,  up to  235,000  units of High
Equity  Partners L.P. - Series 86 ("HEP 86") at a purchase price of $85 per unit
and up to 148,000 units of High Equity Partners L.P. - Series 88 ("HEP 88") at a
purchase  price of $117 per unit  (subsequently  increased to $125.50 per unit).
The offers expired on July 24, 1998.

On September 17, 1998, the Company paid approximately $7.5 million to the tender
agent for 30,864  units of HEP 85;  32,160  units of HEP 86; and 14,695 units of
HEP 88.

Concurrently with the tender offer the Company entered into an agreement with an
affiliate of the general  partner of HEP 85, HEP 86 and HEP 88 which gave them a
purchase  option for 50% of the tendered  units at  Olympia's  tender price plus
expenses. On October 20, 1998, the Company received notice from the affiliate of
the general  partner of HEP 85, HEP 86, and HEP 88 that it would  exercise their
50% purchase  option  pertaining  to all of the tendered  units.

8.   Property Held For Sale

16

American Real Estate Partners, L.P.-Form 10-Q - September 30, 1998

At  September  30,  1998,  the Company  owned eight  properties  that were being
actively  marketed for sale. At September 30, 1998,  these  properties have been
stated  at the  lower  of their  carrying  value or net  realizable  value.  The
aggregate  value of these  properties at September 30, 1998,  after  incurring a
provision for loss on real estate in the amount of $602,000,  is estimated to be
approximately $4,049,000.

9.   Significant Property Transactions

a. On  February  19,  1998,  the Company  sold a property  located in Palo Alto,
California to its tenant, Lockheed Missile and Space Company, Inc. for a selling
price of approximately $9,400,000. As a result, the Company recognized a gain of
approximately $4,130,000 in the nine months ended September 30, 1998.

b. On May 21,  1998,  the Company  sold a property  located in Atlanta,  Georgia
tenanted by AT & T Corp.  for a selling price of  $8,600,000.  As a result,  the
Company  recognized a gain of approximately  $1,266,000 in the nine months ended
September 30, 1998.

c. In accordance with a previously executed option agreement, the Company sold a
property  located  in  Broomal,   Pennsylvania  to  its  tenant  Federal  Realty
Investment Trust. The consideration received by the

17

American Real Estate Partners, L.P.-Form 10-Q - September 30, 1998

Company was a satisfaction  of mortgage  payable in the amount of  approximately
$8,500,000.  A gain of approximately  $2.6 million was recorded in the three and
nine months ended September 30, 1998.

d. On August 5, 1998, the Company  purchased an industrial  building  located in
Hebron,  Kentucky.  The property is net leased to United Parcel Service ("UPS").
The purchase price was $21,080,000 which included the simultaneous  funding of a
mortgage in the amount of $19,480,000.

The lease term,  which  commenced on June 1, 1998, is for an initial term of ten
years at $1,861,240 per year for the first five years and $2,138,304 per year in
years six to ten.  There  are  three  five year  renewal  periods  at  increased
rentals. See note 10b for details on the mortgage.

e. In August 1998, the Company  purchased a  manufacturing  facility  located in
Germantown,   Wisconsin.   The  property  is  net  leased  to  Stone   Container
Corporation.  The purchase  price was  $9,025,000  cash.  The lease term,  which
commenced  May 1, 1998, is for eleven years at  approximately  $807,150 per year
increasing 2% annually.  There is one five year renewal period at  approximately
$1,013,429 per year increasing 3% annually.

10.    Mortgages Payable

18

American Real Estate Partners, L.P.-Form 10-Q - September 30, 1998

a. On March 31, 1998, the Company  executed a mortgage loan and obtained funding
in the principal  amount of approximately  $12.4 million,  which is secured by a
mortgage on two multi-tenant  industrial buildings located in Hebron,  Kentucky.
The loan bears  interest at 7.21% per annum and matures July 15, 2008,  at which
time the remaining principal balance of approximately $10.8 million will be due.
Annual debt service is approximately $1,027,000.

b. On August 5, 1998, the Company  executed a mortgage loan and obtained funding
in the principal  amount of approximately  $19.5 million,  which is secured by a
mortgage on one industrial  building tenanted by United Parcel Service,  located
in Hebron, Kentucky. The loan bears interest at 7.08% per annum and matures July
15, 2008, at which time the remaining  principal balance of approximately  $15.4
million will be due. Annual debt service is approximately $1,664,000.

11.    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  interests  in  the  various  Predecessor
Partnerships  for limited  partnership  units of American Real Estate  Partners,
L.P.

12.    Preferred Units

19

American Real Estate Partners, L.P.-Form 10-Q - September 30, 1998

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  was  payable  March 31,  1998 to holders of record as of March 13,
1998. A total of 365,553 additional Preferred Units were issued. As of September
30, 1998, 7,676,607 Preferred Units are issued and outstanding.

13.    Earnings Per Share

For the three and nine  months  ended  September  30,  1998 and 1997,  basic and
diluted earnings per weighted  average limited  partnership unit are detailed as
follows:

Three Months Ended                            Nine Months Ended
9/30/98               9/30/97                  9/30/98           9/30/97

Basic:
Earnings before property
and securities transactions            $   .37              $     .29                $   .92          $    .91
Net gain from property and
securities transactions                    .05                    .07                    .19              1.57
-----                  -----                  -----          --------
Net earnings                           $   .42              $     .36                $  1.11          $   2.48
======                 -----                 ======           -------

20

American Real Estate Partners, L.P.-Form 10-Q - September 30, 1998

Diluted:
Earnings before property and
securities transactions                $   .33  $   .29       $   .84          $    .90

Net gain from property and
securities transactions                    .05      .07           .17              1.45
-----   ------         -----              ----
Net earnings                           $   .38  $   .36       $  1.01          $   2.35
=====   ======         =====           =======

14.  Comprehensive Income

The Company adopted SFAS No. 130 "Reporting Comprehensive Income" effective January 1, 1998.
SFAS No. 130 establishes standards for the reporting and display of comprehensive income and its
components.  The components of comprehensive income include net income and certain amounts
previously reported directly in equity.

Comprehensive  income for the three months ended  September 30, 1998 and 1997 is
as follows (in thousands):

1998                1997
----                ----

Net income                                                  $    20,934       $     10,915
Unrealized losses on securities
available for sale                                            (2,553)              -
---------          --------
Comprehensive income                                        $    18,381       $     10,915
==========        ===========

21

American Real Estate Partners, L.P.-Form 10-Q - September 30, 1998

Comprehensive income for the nine months ended September 30, 1998 and 1997 is 
as follows (in thousands):

1998              1997
----              ----

Net income                                                     $     55,411         $    67,638
Unrealized losses on securities
available for sale                                                (2,553)            -
Realized gains previously reported
in partner's equity                                                -                 (23,548)
--------------       -----------
Comprehensive income                                      $     52,858          $   44,090
===========          ==========

15.    New Accounting Pronouncements

In June 1997,  FASB  issued  SFAS No.  131,  "Disclosures  about  Segments of an
Enterprise  and  Related  Information."  The  requirements  for SFAS No. 131 are
effective for financial  statements  for periods  ending after December 15, 1997
but need not be applied to interim  financial  statements in the initial year of
its  application.  The  Company  is  currently  evaluating  the  new  disclosure
requirement of SFAS No. 131.

16.      Subsequent Event

a. In October 1998 the Company purchased  approximately $25.3 million of Senior 
Debt of Philip Services Corp. for approximately $14.7 million.  Philip Services 
Corp. is a Canadian based company in the waste recovery business and its common 
shares are listed on the New York Stock Exchange.

22

American Real Estate Partners, L.P.-Form 10-Q - September 30, 1998

b. In October 1998, the Company  repurchased  100,000 of  its Depositary  Units
for $737,500. The Company was previously authorized to purchase up to 1,250,000
Depositary  Units.  As of October  1998,  the  Company  has purchased 1,137,200 
Depositary Units at an aggregate cost of approximately $11,921,000.

c. In November, 1998, Raleigh Capital Associates L.P. ("Raleigh"), which is 70%
owned by  the  Company,  entered  into  a  Buy/Sell  Agreement  (the  "Buy/Sell 
Agreement") with St. Joe Company ("St.Joe") and Arvida/JMB Managers, Inc. ("JMB 
Managers") regarding Arvida/JMB Partners L.P. ("Arvida") (See Note 7). The Buy/
Sell  Agreement  is  subject  to the  satisfaction  of certain  conditions.  In
connection with  the Buy/Sell Agreement, St. Joe and  JMB Managers  delivered a
notice  to Raleigh  in  which  St.  Joe  offered  to  acquire  all  the limited 
partnership interests in Arvida owned by Raleigh (approximately 106,000 units). 

Raleigh has twenty business days to determine whether it will sell to St. Joe
or purchase the general partnership interests in Arvida owned  by JMB Managers.
If Raleigh elects to purchase the general partnership  interests, it will also
make a tender offer to acquire all the remaining limited partnership interests
in Arvida (approximately 297,000 units).

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

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

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

General

The Company believes that it will benefit from  diversification of its portfolio
of assets.  To further its investment  objectives,  the Company 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 the Company 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 the Company. Additionally, in selecting
future real estate investments, the Company intends to focus on

23

American Real Estate Partners, L.P.-Form 10-Q - September 30, 1998

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,
the Company  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 the acquisition of 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.  The
Company  notes that while  there are still  opportunities  available  to acquire
investments that are undervalued,  acquisition  opportunities in 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
the Company. As such, they require the Company to maintain a strong capital base
in order to react quickly to these market  opportunities as well as to allow the
Company 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 the Company will increase in value or generate  positive cash
flow,  the  Company  intends to focus on assets  that it  believes  may  provide
opportunities  for  long-term  growth and further its objective to diversify its
portfolio.  Furthermore,  it  should  be  noted  that  recent  financial  market
conditions have resulted in reductions in available credit on satisfactory terms
to finance real estate related investments.

24

American Real Estate Partners, L.P.-Form 10-Q - September 30, 1998

Historically,  substantially  all of the Company'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  the Company 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  15% of the
Company's net annual rentals from its portfolio will be due for renewal,  and by
the end of the year  2002,  net  leases  representing  approximately  28% of the
Company's  net  annual  rentals  will  be due  for  renewal.  Since  most of the
Company'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 the Company may be required to incur
expenditures  to renovate  such  properties  for new tenants.  In addition,  the
Company 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,  the Company could experience an adverse impact on net
cash flow in the future from such properties.

An amendment to the Partnership Agreement (the "Amendment" ) became effective in
August,  1996  which  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 while  remaining in the
real estate  business and  continuing  to pursue  suitable  investments  for the
Company in the real estate market.

25

American Real Estate Partners, L.P.-Form 10-Q - September 30, 1998

In  September  1997,  the  Company  completed  its  Rights  Offering  (the "1997
Offering") to holders of its Depositary  Units to increase its assets  available
for investment,  take advantage of investment  opportunities,  further diversify
its  portfolio  of assets and  mitigate  against the impact of  potential  lease
expirations.  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 the Company.
Management   believes   that   substantially   all  such  costs   would  be  the
responsibility  of the tenants pursuant to lease terms.  While most tenants have
assumed responsibility for the environmental conditions existing on their leased
property,  there can be no assurance that the Company will not be deemed to be a
responsible  party or that the tenant will bear the costs of remediation.  Also,
as the Company acquires more operating properties, its exposure to environmental
clean-up costs may increase.  The Company  completed Phase I Environmental  Site
Assessments on most 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.

The Company 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,  the Company 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
the Company's  exposure  could amount to $2-3 million,  however,  as no Phase II
Environmental Site Assessments have been conducted by the consultants, there

26

American Real Estate Partners, L.P.-Form 10-Q - September 30, 1998

can  be no  accurate  estimation  of the  need  for or  extent  of any  required
remediation,  or the costs  thereof.  In addition,  the Company has notified all
tenants of the Resource  Conservation and  Recovery Act's ("RCRA") December 22,
1998 requirements for regulated Underground  Storage Tanks.  The Company may, at
its own cost, have to cause compliance with this RCRA requirement in connection 
with  vacated  properties,  bankrupt  tenants  and  new  acquisitions.  Phase I 
Environmental Site  Assessments will  also be  performed in connection with new 
acquisitions and  with  such property  refinancings as  the  Company  may  deem 
necessary and appropriate.

The  Company  is  considering  the  potential  impact  of  the year 2000 in the 
processing  of   date-sensitive  information   by  the   Company'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 the Company'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  current
information, costs of addressing potential  problems are  not  expected to
have  a  material  adverse impact  on the  Company's financial  position,
results  of  operations  or  cash flows  in future periods.  However, if  the
Company, its tenants or vendors are unable to resolve such processing issues
in a timely manner, it  could result in a  material   financial  risk.
Accordingly, the  Company   will  devote  the necessary resources to resolve
all significant  year 2000  issues in  a timely manner.

Results of Operations

Three Months Ended  September 30, 1998 Compared to Three Months Ended  September
30, 1997 Gross revenues  increased by  $10,990,000,  or 68.5%,  during the three
months  ended  September  30, 1998 as compared to the same period in 1997.  This
increase  reflects  increases of $4,783,000 in interest income on treasury bills
and other  investments,  $3,406,000 in dividend income,  $2,877,000 in hotel and
resort operating income, $424,000 in rental income and $145,000 in other income,
partially  offset by a decrease of  $645,000  in  financing  lease  income.  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  attributable to the Company's  investment in
limited  partnership units. The increase in hotel and resort operating income is
primarily  attributable to the acquisition of New Seabury which began operations
August 1, 1998.  The  increase  in rental  income is  primarily  due to property
acquisitions.

Expenses  increased  by  $1,633,000,  or 22.8%,  during the three  months  ended
September 30, 1998 compared to the same period in 1997.  This increase  reflects
increases of $1,623,000 in hotel and

27

American Real Estate Partners, L.P.-Form 10-Q - September 30, 1998

resort operating  expenses and $753,000 in interest expense  partially offset by
decreases of $441,000 in  depreciation  and  amortization,  $221,000 in property
expenses  and $81,000 in general and  administrative  expenses.  The increase in
hotel and resort operating expenses is primarily attributable to the acquisition
of New Seabury as mentioned above. The increase in interest expense is primarily
attributable to financings related to recent property acquisitions.

Earnings before property and securities  transactions increased during the three
months ended  September 30, 1998 by $9,357,000 as compared to the same period in
1997,  primarily due to increased  interest  income on treasury  bills and other
investments,  increased  dividend  income  and  increased  net hotel and  resort
operations.

Gain on property  transactions  increased  by $319,000  during the three  months
ended  September  30,  1998 as  compared  to the same  period  in  1997,  due to
differences in the size and number of transactions.

During the three months ended  September 30, 1998,  the Company did not record a
provision  for loss on real estate as compared to $343,000 in the same period in
1997.

Net  earnings  for the three  months  ended  September  30,  1998  increased  by
$10,019,000  as compared to the three months ended  September 30, 1997 primarily
due to  increased  earnings  before  property  and  securities  transactions  as
mentioned above.

Diluted  earnings per weighted  average  limited  partnership  unit  outstanding
before property and securities  transactions were $.33 in the three months ended
September 30, 1998 compared to $.29 in

28

American Real Estate Partners, L.P.-Form 10-Q - September 30, 1998

the  comparable  period  of 1997,  and net gain  from  property  and  securities
transactions  was $.05 in the three months ended  September 30, 1998 compared to
$.07 in the comparable period of 1997. Diluted net earnings per weighted average
limited  partnership  unit  outstanding  totalled $.38 in the three months ended
September 30, 1998 compared to $.36 in the comparable period of 1997.

Nine Months Ended September 30, 1998 Compared to Nine Months Ended September 30,
1997 Gross revenues increased by $20,842,000,  or 42,6%,  during the nine months
ended  September 30, 1998 as compared to the same period in 1997.  This increase
reflects increases of $13,068,000 in interest income on treasury bills and other
investments,  $5,973,000  in dividend  income,  $1,197,000  in rental income and
$965,000 in hotel and resort  operating  income partially offset by decreases of
$324,000 in financing lease income, and $37,000 in other income. 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  attributable  to the  Company's  investment  in
limited  partnership  units.  The increase in rental  income is primarily due to
property  acquisitions.  The  increase in hotel and resort  operating  income is
primarily  attributable to the acquisition of New Seabury which began operations
on August 1, 1998  partially  offset by the decrease in revenues due to the sale
of the Phoenix Holiday Inn in April, 1997.  Expenses  increased by $457,000,  or
2.0%,  during the nine months  ended  September  30,  1998  compared to the same
period in 1997.  This  increase  reflects  increases of  $1,432,000  in interest
expense,  $392,000 in hotel and resort operating expenses and $97,000 in general
and  administrative  expenses  partially  offset by  decreases  of  $944,000  in
depreciation and amortization and $520,000 in property expenses. The increase in
interest  expense is  primarily  attributable  to  financings  related to recent
property  acquisitions.  The increase in hotel  operating  expenses is primarily
attributable to the

29

American Real Estate Partners, L.P.-Form 10-Q - September 30, 1998

acquisition of New Seabury partially offset by a decrease in expenses due to the
sale of the Phoenix Holiday Inn in April 1997.

Earnings before property and securities  transactions  increased during the nine
months ended September 30, 1998 by $20,385,000 as compared to the same period in
1997,  primarily due to increased  interest  income on treasury  bills and other
investments,  increased  dividend  income  and  increased  net hotel and  resort
operations.

Gain on property  transactions  decreased by  $3,527,000  during the nine months
ended  September  30,  1998 as  compared  to the same  period  in  1997,  due to
differences in the size and number of transactions.

During  the nine  months  ended  September  30,  1998,  the  Company  recorded a
provision for loss on real estate of $602,000 as compared to $705,000 during the
same period in 1997.

During the nine months ended September 30, 1997, the Company  recorded a gain on
the sale of  marketable  equity  securities of  $29,188,000  relating to its RJR
stock. There was no such transaction in 1998.

Net  earnings  for the  nine  months  ended  September  30,  1998  decreased  by
$12,227,000  as compared to the nine months ended  September 30, 1997  primarily
due to the non-recurring gain on the sale of the RJR stock in 1997 and decreased
gain on sales of real  estate  partially  offset by  increased  earnings  before
property and securities transactions as mentioned above.

30

American Real Estate Partners, L.P.-Form 10-Q - September 30, 1998

Diluted  earnings per weighted  average  limited  partnership  unit  outstanding
before property and securities  transactions  were $.84 in the nine months ended
September 30, 1998 compared to $.90 in the  comparable  period of 1997,  and net
gain from property and securities transactions was $.17 in the nine months ended
September 30, 1998 compared to $1.45 in the comparable  period of 1997.  Diluted
net earnings per weighted average limited partnership unit outstanding  totalled
$1.01 in the nine  months  ended  September  30,  1998  compared to $2.35 in the
comparable period of 1997.

Capital Resources and Liquidity

Generally,  the cash needs of the Company for  day-to-day  operations  have been
satisfied from cash flow generated from current operations. In recent years, the
Company  has applied a  significant  portion of its  operating  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.

The  Company believes it may not be able  to re-let  certain  of its  properties
at  current  rentals.  As  previously  discussed,   net    leases   representing
approximately 28% of the Company's net annual rentals will be due for renewal by
the  end  of the  year 2002. In 1998,  25  leases  covering  25  properties  and
representing approximately $2,123,000 in annual rentals are scheduled to expire.
Fourteen  of  these  leases  originally  representing  approximately $543,000 in
annual rental income have been  or will be  re-let or  renewed for approximately
$565,000 in  annual  rentals.  Such  renewals  are  generally for a term of five
years.  Seven  properties, with an approximate annual rental income of $765,000,
will be marketed for sale or

31

American Real Estate Partners, L.P.-Form 10-Q - September 30, 1998

lease when the current lease term expires.  Three  properties with annual rental
income of $138,000 were  purchased by their tenants  pursuant to the exercise of
purchase  options.  One property  with an annual  rental  income of $677,000 was
sold.

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,  the  Company  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.

During  the  nine  months  ended  September  30,  1998,  the  Company  generated
approximately  $35.9  million  in cash flow  from  day-to-day  operations  which
excludes  approximately  $9.1  million in interest  earned on the 1997  Offering
proceeds which is being retained for future acquisitions.

Capital expenditures for real estate were approximately $495,000 during the nine
months ended September 30, 1998.

In 1998,  the Company had the final $11.3 million  principal  payment due on its
Senior  Unsecured  Debt and has  approximately  $4.9 million and $5.4 million of
maturing balloon mortgages due in 1998 and 1999,  respectively.  During the nine
months ended  September 30, 1998,  approximately  $12.7 million of maturing debt
obligations,  including the final $11.3 million payment on the Senior  Unsecured
Debt were  repaid  out of the  Company's  cash  flow.  The  Company  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

32

American Real Estate Partners, L.P.-Form 10-Q - September 30, 1998

cash flow and increase  reserves from time to time,  thereby  reducing cash flow
otherwise available for other uses.

During the nine months ended  September 30, 1998, net cash flow after payment of
maturing debt  obligations  and capital  expenditures  was  approximately  $22.7
million which was added to the Company's operating cash reserves.  The Company's
operating  cash reserves are  approximately  $65.7 million at September 30, 1998
(not  including  the cash from capital  transactions  or from the 1997  Offering
which is being  retained  for  investment),  which  are being  retained  to meet
maturing debt obligations,  capitalized expenditures for real estate and certain
contingencies facing the Company. The Company from time to time may increase its
cash reserves to meet its maturing debt  obligations,  tenant  requirements  and
other capital  expenditures  and to provide for scheduled lease  expirations and
other contingencies including environmental matters.

Sales  proceeds  from the  sale or  disposal  of  portfolio  properties  totaled
approximately  $22.2 million in the nine months ended  September  30, 1998.  The
Company intends to use asset sales,  financing and refinancing  proceeds for new
investments.

The Amendment permits the Company to invest a portion of its funds in securities
of issuers that are not primarily engaged in real estate.  Recently, the Company
obtained an investment in Stratosphere. In addition, an affiliate of the General
Partner  acquired  an  investment  in  Stratosphere  (see Note 5).  The Company

33

American Real Estate Partners, L.P.-Form 10-Q - September 30, 1998

understands   that  Stratosphere   may   seek   approximately   $100  million
for  expansion  of its hotel  facility,  a  substantial  portion of which may be
provided by the Company and the  affiliate of the General  Partner.  In order to
facilitate the Stratosphere  reorganization,  the Company received $60.7 million
for its  interest.  The  Company  expects  that it will  obtain the  appropriate
licenses and repurchase such Stratosphere interest upon such approval.

The Company also  recently  invested  approximately  $68.1 million in the common
stock of RJR Nabisco  Holdings Corp.,  $15.1 million for interests in the Sands,
$14.1 million for interests in the Claridge  Hotel and $14.7 million in the debt
of Philip  Services Corp. and is  investigating  possible tender offers for real
estate operating companies and real estate limited partnership units.

To further its investment  objectives,  the Company 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,  the Company
raised approximately $267 million 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.

34

American Real Estate Partners, L.P.-Form 10-Q - September 30, 1998

Part II.  Other information

Item 6. Exhibits and Reports on Form 8-K

(a)  Financial Data Schedule is attached hereto as Exhibit EX-27

EXHIBIT INDEX

Exhibit               Description
EX-27                 Financial Data Schedule

(b) None

35

American Real Estate Partners, L.P.-Form 10-Q - September 30, 1998

SIGNATURES

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

American Real Estate Partners, L.P.
By: American Property Investors, Inc.
General Partner

/s/ John P. Saldarelli
John P. Saldarelli
Treasurer
(Principal Financial Officer
and Principal Accounting Officer)

36

<ARTICLE> 5
<CIK> 0000813762
<NAME> AMERICAN REAL ESTATE PARTNERS, L.P.
<MULTIPLIER> 1000

<PERIOD-TYPE>                   9-MOS
<FISCAL-YEAR-END>                          DEC-31-1998
<PERIOD-END>                               SEP-30-1998
<CASH>                                          66,844
<SECURITIES>                                   431,418
<RECEIVABLES>                                        0
<ALLOWANCES>                                         0
<INVENTORY>                                          0
<CURRENT-ASSETS>                                     0
<PP                                         463,283
<DEPRECIATION>                                  40,665
<TOTAL-ASSETS>                               1,088,123
<CURRENT-LIABILITIES>                                0
<BONDS>                                        202,833
<PREFERRED-MANDATORY>                                0
<PREFERRED>                                          0
<COMMON>                                             0
<OTHER-SE>                                     862,183
<TOTAL-LIABILITY-AND-EQUITY>                 1,088,123
<SALES>                                              0
<TOTAL-REVENUES>                                69,718
<CGS>                                                0
<TOTAL-COSTS>                                    9,928
<OTHER-EXPENSES>                                 2,313
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                              11,224
<INCOME-PRETAX>                                 55,411
<INCOME-TAX>                                         0
<INCOME-CONTINUING>                             55,411
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                    55,411
<EPS-PRIMARY>                                     1.11
<EPS-DILUTED>                                     1.01