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 FISCAL PERIOD ENDED         September 30, 1998
                                -----------------------------------

[ ] 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: 33-44980

         THE CHESTNUT REAL ESTATE PARTNERSHIP  THE CHESTNUT PARTNERSHIP
--------------------------------------------------------------------------------
           (Exact names of registrants as specified in their charters)

                                    MARYLAND
--------------------------------------------------------------------------------
         (State or other jurisdiction of incorporation or organization)

                    52-1640655                         42-1352739
--------------------------------------------------------------------------------
        (IRS Employer Identification No.)  (IRS Employer Identification No.)

        2330 West Joppa Road  Lutherville, Maryland       21093
--------------------------------------------------------------------------------
    (Address of principal executive offices)            (Zip Code)

Registrant's telephone number, including area code     (515) 245-7616
                                                   -----------------------------

--------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report

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_  No ___

                APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
                   PROCEEDINGS DURING THE PRECEDING FIVE YEARS

Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes ___ No ___

APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding
of each of the issuer's classes of common stock, as of the latest practicable
date
 N/A
-------
Page 1 of 18

<PAGE>


                            THE CHESTNUT PARTNERSHIP
                                       AND
                      THE CHESTNUT REAL ESTATE PARTNERSHIP

                                      INDEX


                                                                            Page
                                                                            ----
Part I   FINANCIAL INFORMATION
------   ---------------------

Item 1   Financial Statements

         The Chestnut Real Estate Partnership
         and The Chestnut Partnership

         *    Separate and Combined Balance Sheets,
              September 30, 1998 and December 31, 1997                        3

         *    Separate and Combined Statement of
              Operations, for the nine months ended
              September 30, 1998 and September 30, 1997                       5

         *    Separate and Combined Statements of Partner's
              Equity (Deficit) for the nine months ended
              September 30, 1998 and for December 31, 1997                    7

         *    Separate and Combined Statement of Cash Flow,
              for the nine months ended September 30, 1998
              and September 30, 1997                                          8

         *    Notes to Financial Statements                                   10

Item 2   Management's Discussion and Analysis of Financial
         Condition and Results of Operations                                  14


PART II  OTHER INFORMATION
-------  -----------------

Item 1   Legal Proceedings                                                    16
Item 6   Exhibits and Reports on Form 8-K                                     16


SIGNATURES                                                                    17
----------


                                      - 2 -

<PAGE>


                      THE CHESTNUT REAL ESTATE PARTNERSHIP
                          AND THE CHESTNUT PARTNERSHIP
                      SEPARATE AND COMBINED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                SEPTEMBER 30, 1998
                                                                  -----------------------------------------------
                                                                                        The
                                                                      The            Chestnut
                                                                   Chestnut         Real Estate        Combined
                                   (UNAUDITED)                    Partnership       Partnership      Partnerships
                                                                 ------------      ------------      ------------
<S>                                                              <C>               <C>               <C>         
                                     ASSETS
Current assets:
      Cash and cash equivalents                                  $  1,920,901      $         --      $  1,920,901
      Accounts receivable                                             259,043                --           259,043
      Prepaid expenses and other                                      444,480                --           444,480
      Assets whose use is limited or restricted:
         Under bond indenture agreements, held in escrow
           by trustee                                                 592,062                --           592,062
         Under letter of credit agreement, held in escrow                   0                --                 0
                                                                 ------------      ------------      ------------
            Total current assets                                    3,216,485                --         3,216,485

Assets whose use is limited or restricted:
   Under bond indenture agreements, held in escrow
     by trustee                                                     1,739,299                --         1,739,299
   Under residency agreements, held in escrow                       1,118,209                --         1,118,209
   Health Center reserves                                           2,930,066                --         2,930,066
   Phase III and IV construction funds                                849,895                --           849,895

Operating property, at cost, net of depreciation                    1,033,022        52,672,755        53,705,777
Costs of acquiring intitial contracts, net of amortization          1,787,668                --         1,787,668
Deferred bond financing costs, net of amortization                  1,055,174                --         1,055,174
                                                                 ------------      ------------      ------------
            Total assets                                         $ 13,729,818      $ 52,672,755      $ 66,402,573
                                                                 ============      ============      ============

                   LIABILITIES AND PARTNERS' EQUITY (DEFICIT)
Current liabilities:
      Bonds payable, current portion                             $    165,000      $         --      $    165,000
      Notes payable, current portion                                   37,524                --            37,524
      Accounts payable                                                305,879                --           305,879
      Accrued expenses                                                224,025                --           224,025
      Accrued property taxes                                           19,325                --            19,325
      Accrued interest payable                                        548,731                --           548,731
      Advances payable                                                204,837                --           204,837
      Refundable deposits, residency agreements                     1,375,825                --         1,375,825
                                                                 ------------      ------------      ------------
            Total current liabilities                               2,881,147                --         2,881,147

Construction costs payable                                                  0                --                 0
Bonds payable, less current portion                                13,415,000                --        13,415,000
Loan Payable                                                        1,844,653                --         1,844,653
Loans from residents                                               52,576,950                --        52,576,950
Advances payable to partners                                          400,000                --           400,000
Refundable deposits, escrowed                                               0                --                 0
Deferred revenues from admission fees                               2,515,584                --         2,515,584
Equity in deficit of the Chestnut Partnership                              --        59,903,516                --

Commitments and Contingencies
                                                                 ------------      ------------      ------------
            Total liabilities                                      73,633,334        59,903,516        73,633,334
Partners' equity (deficit)                                        (59,903,516)       (7,230,761)       (7,230,761)
                                                                 ------------      ------------      ------------
            Total liabilities and partners' equity (deficit)     $ 13,729,818      $ 52,672,755      $ 66,402,573
                                                                 ============      ============      ============
</TABLE>


                                      -3-

<PAGE>


                      THE CHESTNUT REAL ESTATE PARTNERSHIP
                          AND THE CHESTNUT PARTNERSHIP
                      SEPARATE AND COMBINED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                  DECEMBER 31, 1998
                                                                 -----------------------------------------------
                                                                                      The
                                                                      The           Chestnut
                                                                   Chestnut        Real Estate         Combined
                                                                  Partnership      Partnership       Partnerships
                                                                 ------------      ------------      ------------
<S>                                                              <C>               <C>               <C>         
                                   ASSETS
Current assets:
      Cash and cash equivalents                                  $  1,242,588      $         --      $  1,242,588
      Accounts receivable                                             258,317                --           258,317
      Prepaid expenses and other                                      307,057                --           307,057
      Assets whose use is limited or restricted:
         Under bond indenture agreements, held in escrow
           by trustee                                                 398,426                --           398,426
         Under letter of credit agreement, held in escrow                   0                --                 0
                                                                 ------------      ------------      ------------
            Total current assets                                    2,206,388                --         2,206,388

Assets whose use is limited or restricted:
   Under bond indenture agreements, held in escrow
     by trustee                                                     1,888,017                --         1,888,017
   Under residency agreements, held in escrow                         698,721                --           698,721
   Health Center reserves                                           2,149,560                --         2,149,560
   Phase III and IV constuction funds                                 888,670                --           888,670

Operating property, at cost, net of depreciation                      672,690        54,193,360        54,866,050
Costs of acquiring intitial contracts, net of amortization          1,541,209                --         1,541,209
Deferred bond financing costs, net of amortization                    864,575                --           864,575
                                                                 ------------      ------------      ------------
            Total assets                                         $ 10,909,830      $ 54,193,360      $ 65,103,190
                                                                 ============      ============      ============

                LIABILITIES AND PARTNERS' EQUITY (DEFICIT)
Current liabilities:
      Bonds payable, current portion                             $    155,000      $         --      $    155,000
      Notes payable, current portion                                   37,524                --            37,524
      Accounts payable                                                270,639                --           270,639
      Accrued expenses                                                274,590                --           274,590
      Accrued property taxes                                          144,013                --           144,013
      Accrued interest payable                                        233,538                --           233,538
      Advances payable                                                282,257                --           282,257
      Refundable deposits, residency agreements                       823,628                --           823,628
                                                                 ------------      ------------      ------------
            Total current liabilities                               2,221,189         2,221,189

Construction costs payable                                            194,578                --           194,578
Bonds payable, less current portion                                13,500,000                --        13,500,000
Loan Payable                                                        1,862,476                --         1,862,476
Loans from residents                                               48,264,400                --        48,264,400
Advances payable to partners                                        2,012,258                --         2,012,258
Refundable deposits, escrowed                                         247,340                --           247,340
Deferred revenues from admission fees                               2,683,146                --         2,683,146
Equity in deficit of the Chestnut Partnership                              --        60,075,557                --

Commitments and Contingencies
                                                                 ------------      ------------      ------------
            Total liabilities                                      70,985,387        60,075,557        70,985,387

Partners' equity (deficit)                                        (60,075,557)       (5,882,197)       (5,882,197)
                                                                 ------------      ------------      ------------
            Total liabilities and partners' equity (deficit)     $ 10,909,830      $ 54,193,360      $ 65,103,190
                                                                 ============      ============      ============
</TABLE>


                                      -4-

<PAGE>


                      THE CHESTNUT REAL ESTATE PARTNERSHIP
                          AND THE CHESTNUT PARTNERSHIP
                  SEPARATE AND COMBINED STATEMENT OF OPERATIONS
               For the nine month period ended September 30, 1998
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                                            The
                                                           The           Chestnut
                                                         Chestnut       Real Estate        Combined
                                                       Partnership      Partnership      Partnerships
                                                       -----------      -----------      ------------
<S>                                                    <C>              <C>              <C>  
Revenues:
      Amortization of nonrefundable admission fees     $   931,632      $        --      $   931,632
      Apartment service fees                             4,760,661               --        4,760,661
      Health Center revenues                             1,600,160               --        1,600,160
      Capital reserve fees                                  86,519               --           86,519
      Other revenue                                         10,838               --           10,838
      Income from The Chestnut Partnership                      --          947,844               --
                                                       -----------      -----------      -----------
         Total revenues                                  7,389,810          947,844        7,389,810
                                                       -----------      -----------      -----------

Operating expenses:
      Development fee amortization                         230,266               --          230,266
      General and administrative                         1,837,071               --        1,837,071
      Resident care                                      1,259,158               --        1,259,158
      Dietary                                            1,075,340               --        1,075,340
      Plant                                                726,232               --          726,232
      Housekeeping                                         336,106               --          336,106
      Depreciation and amortization                        181,024        1,106,408        1,287,432
                                                       -----------      -----------      -----------
                                                         5,645,196        1,106,408        6,751,604
                                                       -----------      -----------      -----------

         Income (loss) from operations                   1,744,614         (158,564)         638,206
                                                       -----------      -----------      -----------

Other income (expense)
      Interest income                                      224,776               --          224,776
      Interest expense                                  (1,021,545)              --       (1,021,545)
                                                       -----------      -----------      -----------
                                                          (796,770)              --         (796,770)
                                                       -----------      -----------      -----------
         Net income (loss)                             $   947,844      $  (158,564)     $  (158,564)
                                                       ===========      ===========      ===========
</TABLE>


                                     - 5 -

<PAGE>


                      THE CHESTNUT REAL ESTATE PARTNERSHIP
                          AND THE CHESTNUT PARTNERSHIP
                  SEPARATE AND COMBINED STATEMENT OF OPERATIONS
               For the nine month period ended September 30, 1997
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                             The
                                                            The            Chestnut
                                                         Chestnut         Real Estate        Combined
                                                        Partnership       Partnership      Partnerships
                                                       ------------      ------------      ------------
 <S>                                                   <C>               <C>               <C>
Revenues:
      Amortization of nonrefundable admission fees     $    622,340      $         --      $    622,340
      Apartment service fees                              3,761,916                --         3,761,916
      Health Center revenues                              1,376,724                --         1,376,724
      Capital reserve fees                                  100,036                --           100,036
      Other revenue                                          12,542                --            12,542
      Income from The Chestnut Partnership                       --           693,163                --
                                                       ------------      ------------      ------------
         Total revenues                                   5,873,558           693,163         5,873,558
                                                       ------------      ------------      ------------

Expenses:
      Development fee amortization                          146,918                --           146,918
      General and administrative                          1,241,803                --         1,241,803
      Resident care                                       1,171,666                --         1,171,666
      Dietary                                               974,566                --           974,566
      Plant                                                 650,918                --           650,918
      Housekeeping                                          263,084                --           263,084
      Depreciation and amortization                         159,156           922,509         1,081,665
                                                       ------------      ------------      ------------
                                                       $  4,608,111           922,509         5,530,620
                                                       ------------      ------------      ------------

         Income (loss) from operations                    1,265,447          (229,346)          342,938
                                                       ------------      ------------      ------------

Other income (expense)
      Interest income                                       327,016                --           327,016
      Interest expense                                     (899,300)               --          (899,300)
                                                       ------------      ------------      ------------
                                                           (572,284)               --          (572,284)
                                                       ------------      ------------      ------------
         Net income (loss)                                  693,163      $   (229,346)     $   (229,346)
                                                       ============      ============      ============
</TABLE>

                                     - 6 -


<PAGE>


                      THE CHESTNUT REAL ESTATE PARTNERSHIP
                          AND THE CHESTNUT PARTNERSHIP
         SEPARATE AND COMBINED STATEMENTS OF PARTNERS' EQUITY (DEFICIT)
      For the nine month period ended September 30, 1998 and the year ended
                                December 31, 1997
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                       The
                                                       The           Chestnut
                                                     Chestnut       Real Estate        Combined
                                                   Partnership      Partnership      Partnerships
                                                  ------------      -----------      ------------
<S>                                               <C>               <C>              <C>         
Balance, December 31, 1996                        $(51,182,222)     $(2,567,017)     $(2,567,017)

Net income (loss)                                      839,566         (395,180)        (395,180)

Transfer ownership of land preacquisition and
  project development assets to The Chestnut
  Real Estate Partnership                           (6,812,901)              --               --

Distribution to partners                            (2,920,000)      (2,920,000)      (2,920,000)
                                                  ------------      -----------      -----------

Balance, December 31, 1997                        $(60,075,557)     $(5,882,197)     $(5,882,197)
                                                  ============      ===========      ===========




Balance, December 31, 1997                        $(60,075,557)     $(5,882,197)     $(5,882,197)

Net income (loss)                                      947,844         (158,564)        (158,564)

Transfer ownership of land preacquisition and
  project development assets to The Chestnut
  Real Estate Partnership                              414,197                                --

Contributions from partners                                 --               --               --

Distributions to partners                           (1,190,000)      (1,190,000)      (1,190,000)

                                                  ------------      -----------      -----------
Balance, September 30, 1998                       $(59,903,516)     $(7,230,761)     $(7,230,761)
                                                  ============      ===========      ===========
</TABLE>


                                     - 7 -

<PAGE>


                      THE CHESTNUT REAL ESTATE PARTNERSHIP
                          AND THE CHESTNUT PARTNERSHIP
                  SEPARATE AND COMBINED STATEMENT OF CASH FLOWS
               For the nine month period ended September 30, 1998
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                                      The
                                                                                    The             Chestnut
                                                                                  Chestnut         Real Estate        Combined
                                                                                 Partnership       Partnership      Partnerships
                                                                                ------------      ------------      ------------
<S>                                                                             <C>               <C>               <C>
Cash flows from operating activities:
      Net income (loss)                                                         $    947,844      $   (158,564)     $   (158,564)
      Adjustments to reconcile net income to net
        cash provided by operating activities:
           Depreciation                                                                   --         1,106,408         1,106,408
           Other amortization                                                        181,024                --           181,024
           Amortization of nonrefundable admission fees                             (931,632)               --          (931,632)
           Amortization of development fees                                          230,266                --           230,266
           Admission fees received                                                   671,396                --           671,396
           Partnership income                                                             --          (947,844)               --
           Change in operating assets and liabilities:
             Accounts receivable                                                        (726)               --              (726)
             Prepaid expenses and other                                             (137,423)               --          (137,423)
             Accounts payable                                                         35,240                --            35,240
             Accrued expenses                                                        139,941                --           139,941
                                                                                ------------      ------------      ------------
           Net cash provided by operating activities                               1,135,930                --         1,135,930
                                                                                ------------      ------------      ------------

Cash flows from investing activities:
      Increase in funds escrowed under residency agreements                         (419,488)               --          (419,488)
      Additions to operating property                                               (176,401)               --          (176,401)
      Decrease in construction payable                                              (194,578)               --          (194,578)
      Decrease in Phase III and IV construction funds from partner advances           38,775                --            38,775
      Increase in cost of acquiring intitial contracts and bond financing
        costs - Phase III                                                           (618,082)         (618,082)
      Increase in assets held by trustee                                             (44,918)               --           (44,918)
      Decrease in funds escrowed under letter of credit agreement                          0                --                 0
      Increase in Health Center reserves                                            (780,506)               --          (780,506)

                                                                                ------------      ------------      ------------
           Net cash used in investing activities                                  (2,195,197)               --        (2,195,197)
                                                                                ------------      ------------      ------------

Cash flows from financing activities:
      Repayment of partner advances                                                       --                --                --
      Contributions from partners                                                         --                --                --
      Distributions to partners                                                   (1,190,000)               --        (1,190,000)
      Repayments of partner advances                                              (1,612,258)               --        (1,612,258)
      Decrease in advances payable                                                   (77,420)               --           (77,420)
      Principal payments on notes payable                                            (17,823)               --           (17,823)
      Principal payments on bonds                                                    (75,000)               --           (75,000)
      Proceeds from loans from residents, deferred revenues
         and refundable deposits, net                                              4,710,081                --         4,710,081
                                                                                ------------      ------------      ------------
           Net cash provided by financing activities                               1,737,580                --         1,737,580
                                                                                ------------      ------------      ------------

Net increase in cash                                                                 678,313                --           678,313

Cash, beginning of period                                                          1,242,588                --         1,242,588
                                                                                ------------      ------------      ------------

Cash, end of period                                                             $  1,920,901      $         --      $  1,920,901
                                                                                ============      ============      ============
</TABLE>


                                     - 8 -

<PAGE>


                      THE CHESTNUT REAL ESTATE PARTNERSHIP
                          AND THE CHESTNUT PARTNERSHIP
                  SEPARATE AND COMBINED STATEMENT OF CASH FLOWS
               For the nine month period ended September 30, 1997
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                                      The
                                                                                     The            Chestnut
                                                                                  Chestnut         Real Estate        Combined
                                                                                 Partnership       Partnership      Partnerships
                                                                                ------------      ------------      ------------
<S>                                                                             <C>               <C>               <C>         
Cash flows from operating activities:
      Net income (loss)                                                         $    693,163      $   (229,346)     $   (229,346)
      Adjustments to reconcile net income to net
        cash provided by operating activities:
           Depreciation                                                                   --           922,509           922,509
           Other amortization                                                        159,156                --           159,156
           Amortization of nonrefundable admission fees                             (622,340)               --          (622,340)
           Amortization of development fees                                          146,918                --           146,918
           Admission fees received                                                   866,570                --           866,570
           Partnership income                                                             --          (693,163)               --
           Change in operating assets and liabilities:
             Accounts receivable                                                      (9,722)               --            (9,722)
             Prepaid expenses and other                                              (75,919)          (75,919)
             Accounts payable                                                         31,480                --            31,480
             Accrued expenses                                                        299,815                --           299,815
                                                                                ------------      ------------      ------------
           Net cash provided by operating activities                               1,489,121                --         1,489,121
                                                                                ------------      ------------      ------------

Cash flows from investing activities:
      Increase in funds escrowed under residency agreements                         (360,873)               --          (360,873)
      Additions to project operating property                                     (7,003,847)               --        (7,003,847)
      Decrease in construction payable                                            (1,394,580)               --        (1,394,580)
      Increase in loans payable                                                    1,900,000                --         1,900,000
      Increase in Phase III and IV construction funds from partner advances       (1,347,732)               --        (1,347,732)
      Increase in assets held by trustee                                            (273,351)               --          (273,351)
      Decrease in funds escrowed under letter of credit agreement                          0                --                 0
      Increase in Health Center reserves                                          (1,343,663)               --        (1,343,663)

                                                                                ------------      ------------      ------------
           Net cash used in investing activities                                  (9,824,045)               --        (9,824,045)
                                                                                ------------      ------------      ------------

Cash flows from financing activities:
      Proceeds from partner advances                                                      --                --                --
      Distribution to partners                                                    (2,020,000)               --        (2,020,000)
      Proceeds from partner advances                                               2,863,318                --         2,863,318
      Increase in advances payable                                                   263,522                --           263,522
      Principal payments on bonds                                                   (150,000)               --          (150,000)
      Proceeds from loans from residents, deferred revenues
         and refundable deposits                                                   7,427,354                --         7,427,354
                                                                                ------------      ------------      ------------
           Net cash provided by financing activities                               8,384,194                --         8,384,194
                                                                                ------------      ------------      ------------

Net increase in cash                                                                  49,270                --            49,270

Cash, beginning of period                                                          1,394,227                --         1,394,227
                                                                                ------------      ------------      ------------

Cash, end of period                                                             $  1,443,497      $         --      $  1,443,497
                                                                                ============      ============      ============
</TABLE>


                                      - 9 -

<PAGE>


                      THE CHESTNUT REAL ESTATE PARTNERSHIP
                          AND THE CHESTNUT PARTNERSHIP

                          NOTES TO FINANCIAL STATEMENTS


A.       Basis for Presentation

         The accompanying unaudited financial statements of The Chestnut Real
         Estate Partnership (the Real Estate Partnership) and its subsidiary The
         Chestnut Partnership (the Partnership), in the opinion of management,
         reflect all adjustments (none of which were other than normal recurring
         items), eliminations, and reclassification considered necessary for a
         fair statement of the results of the interim periods presented. For
         purposes of preparing the combined financial statements, all material
         transactions between the Partnerships have been eliminated but not
         displayed, including the elimination of the Real Estate partnership's
         obligation to the Partnership.

         Both the Real Estate Partnership and the Partnership are general
         partnerships, and are sometimes referred to as "the Partnerships."

         The Real Estate Partnership is owned 50% by Blakehurst Joint Venture
         (Venture) and 50% by West Joppa Road Limited Partnership (West Joppa)
         (collectively the "Partners").

         The Partnership is owned 1% by Venture, 1% by West Joppa, and 98% by
         the Real Estate Partnership.

         The Real Estate Partnership and the Partnership were formed to develop,
         own, and operate a life care retirement community called Blakehurst
         (Project) in the Towson area of Baltimore County, Maryland.

         The Real Estate Partnership was organized by the Partnership solely for
         the purpose of owning the property and buildings and other improvements
         thereon that constitute the Project in order to minimize certain
         mortgage recordation taxes, and to act as a general partner of the
         Partnership. The publicly-held debt (both Series I and II) is a direct
         obligation of the Partnership, and is guaranteed by the Real Estate
         Partnership. The guaranty, however, is not intended to provide any
         additional security for payment of the principal and interest on the
         bonds than if the Partnership directly held the property and related
         improvements itself. The partners of the Real Estate Partnership own no
         other assets other than their interests in the Partnership. Therefore,
         management believes the combining financial statements of the
         Partnership and the Real Estate Partnership are the most informative,
         because of the guaranty and because of the Operating and Use Agreement,
         which obligates the Partnership to develop, operate and manage the
         Project at its expense and which grants the Partnership use of the
         property until dissolution, liquidation or other termination by mutual
         agreement. The Partnerships have common, ultimate ownership and do not
         have independent operating activities. Management believes this
         presentation best portrays the relationship between the two entities.

B.       Certain Accounting Policies

         Cash

         The Partnerships consider investments with maturities of three months
         or less when purchased, to be cash equivalents.

         Assets Where Use is Limited

         All assets whose use is limited or restricted are cash equivalents as
         of September 30, 1998, and December 31, 1997.


                                     - 10 -

<PAGE>


         Deferred Revenues from Admission Fees

         Admission fees are not advance fees in payment for future services of
         for use of facility, because of the manner in which all operating
         expenditures are allocated to the current residents. The non-refundable
         admission fee is a payment in compensation to the Partnership for the
         development risk and is non-refundable except in isolated cases where
         the Partnership would cancel the Residency Agreement. In such cases,
         the resident could be due a portion of the Administration Fee if
         cancellation occurred within the first two years of the contract. The
         refund is based on the remaining life of the resident, actuarially
         determined. Accordingly, the Admission Fee and Resident Loan (together
         the Entrance Payment) is amortized using the Life Table of the U.S.
         Department of Health and Human Services, which in practice results in
         amortization of the Admission Fee portion of the Entrance Payment on a
         straight line over approximately two years. To date, the Partnership
         has never canceled a Residency Agreement and accordingly has never had
         to refund any portion of the non-refundable admission fee after
         occupancy. Nonetheless, the unamortized admission fees are reported as
         deferred revenue.

         Capitalization of Operating Expenses and Certain Revenues

         Initial occupancy of the Project occurred in August of 1993, with
         cessation of major construction of Phase I occurring in December 1993,
         at which time occupancy was 60%. Construction continued for tenant
         requested improvements and an auditorium addition.

         The Partnership ceased capitalization of operating expenses and certain
         revenues of Phase I in August 1994, because of the extended time frame
         between initial occupancy, completion of major construction, and
         achievement of substantial occupancy.

         The Partnership has also capitalized operating revenues, net of costs
         (except for admission fees and capital reserve fees) for Phase III from
         July 1997 (when initial Phase III-related resident occupancy commenced)
         through March 31, 1998, (when substantial occupancy was achieved) in
         the amount of $77,858. The Phase III portion of the Community had
         reached substantial occupancy at March 31, 1998, with 32 of the 35
         units occupied. As of September 30, 1998, only one of the 35 units of
         Phase III was sold, but not closed.

         Costs of Acquiring Initial Contracts

         Costs of acquiring initial contracts are expected to be recovered from
         the future contract revenues and are therefore capitalized. These costs
         capitalized are amortized over the life expectancy of the initial
         residents, which based on actuarial data, is estimated to be
         approximately 13 years.

         Development Fee

         The development fee incurred in connection with the development of the
         Project, both Phase I and III, is amortized on a pro rata basis as
         admission fee revenue is recognized. Admission fees are being
         recognized over a 24 month period from the date of move-in for those
         being received from Return of Capital Contracts. Admission Fees from
         Traditional contracts are amortized over the expected life of the
         resident.

C.       Results of Operations

         Admission fees are amortized over a twenty-four month period.

         At the time of initial occupancy, residents are required to make a
         non-refundable payment to a capital replacement reserve. This payment
         is reported as income when received by the Partnerships.

         The development fee incurred in connection with the development of the
         Project (Phase I and Phase III) is amortized on a pro-rata basis and
         admission fee revenue is recognized.


                                     - 11 -

<PAGE>


D.       Financing

         In May, 1992, the Partnership completed the issuance of $14,000,000 of
         Ten Year - Put Option Mortgage Bonds, 1992 Series I. The bonds carry an
         initial rate of 9.5%.

         In August, 1992, the Venture and West Joppa, each of which had
         purchased $3,000,000 of Series I Bonds, sold their bonds back to the
         Partnership in conjunction with the Partnership sales of $6,000,000 of
         Ten Year - Put Option Mortgage Bonds, 1992 Series II. These bonds carry
         an initial rate of 8.75%.

         In addition, $20,000,000 has been provided by Venture and West Joppa.
         As of December 31, 1995, all such advances from Partners had been
         repaid, together with interest thereon.

         For the construction of Phase II, an auditorium and miscellaneous
         additional improvements, the Partners funded the cost of approximately
         $800,000.

         For construction of Phase III, a 35-unit addition, West Joppa and Life
         Care Services Corporation (LCS) advanced $7,600,000 and the
         Partnerships arranged to borrow an additional $1,900,000 of long-term
         financing, for a total of $9,500,000. As of September 30, 1998,
         $7,600,000 plus interest thereon had been repaid to West Joppa and LCS,
         and development fees of $654,449 paid to West Joppa and LCS.

         West Joppa and LCS have advanced $400,000 for initial design of Phase
         IV.

E.       Operating Property

         As of September 30, 1998, $9,275,631 of costs had been incurred and
         capitalized for Phase III. As of September 30, 1998, $290,033 of costs
         had been incurred for Phase IV design and initial development efforts.
         Both of these amounts are included in operating property. As of
         December 31, 1997, $9,441,517 had been incurred for construction of
         Phase III and IV.

F.       Transactions with partners

         The Partnerships have agreements with Life Care Services Development
         Corporation (LCSD) and Life Care Services Corporation (LCS), affiliates
         through common ownership of Chestnut Village, Inc., a general partner
         of Venture for development and for management of the community
         respectively. LCSD administers planning, development, financing, and
         marketing functions for the partnerships. LCS has been retained to
         supervise the day-to-day operations of the community.

         The Partnerships entered into a construction management agreement with
         Mullan Contracting Company (Mullan), an affiliate through common
         ownership of one partner of West Joppa for Phase III.

         During the nine months ended September 30, 1998, LCS was reimbursed
         $315,189 for its services and $260,452 for the nine months ended
         September 30, 1997. In addition, LCS was reimbursed in the nine months
         ended September 30, 1998, $711,297 for reimbursement of salaries and
         marketing costs, and $682,840 for the nine months ended September 30,
         1997.

         In the nine months ended September 30, 1998, LCSD was reimbursed
         $249,573 for development fees and was reimbursed $445,443 in the nine
         months ended September 30, 1997.

         In the nine months ended September 30, 1997, Mullan was paid $55,520 of
         construction management fees, and reimbursed $5,793,349 for
         construction costs; in the nine months ended September 30, 1998, no
         payments were made to Mullan.


                                     - 12 -

<PAGE>


G.       Income Taxes

         Income and losses of the Partnerships are included in the income tax
         returns of the partners. Accordingly, the financial statements make no
         provision for income taxes.

H.       Contingencies

         The realization of the costs and long-term success of the Project is
         contingent upon the resale of units vacated due to death or transfer to
         the health center, and maintenance and efficient operation.


                                     - 13 -

<PAGE>


                            THE CHESTNUT PARTNERSHIP
                                       AND
                      THE CHESTNUT REAL ESTATE PARTNERSHIP


Item 2.  Management's Discussion and Analysis of Financial Condition and Results
         of Operation.

Overall Financial Condition

The Project contains a total of 212 (177 in Phase I and 35 in Phase III)
residential units, and a 50-bed health center. As of September 30, 1998, ten
residential units were vacant, of which only one was not sold, a decrease of
three. Subsequently, in October, 5 of the sales were closed, and the vacant
units occupied.

As of September 30, 1998, the project had 98 full-time employees, and 110
part-time employees, none of whom were members of a collective bargaining
agreement.

Results of Operations

As of September 30, 1998, 201 units (95%) were occupied and/or paying monthly
service fees. This occupancy compares to 190 (90%) of the units at September 30,
1997 (assuming Phase III had been available), and 192 units (91%) at December
31, 1997.

Amortization of non-refundable admission fees increased because more residents
moved in during the nine months ended September 30, 1998, than moved in during
the nine months ended September 30, 1997. The two-year amortization period
causes the decline to not be apparent for one year.

On January 1, 1998, a 4.0% increase in the monthly service fees became
effective. That increase, together with an increase in occupancy from September
30, 1997, to September 30, 1998, and an increase in double occupancy accounted
for the increase in revenue from apartment service fees.

Health center revenues increased even though patient days declined in the nine
months ended September 30, 1998, compared to the nine months ended September 30,
1997. Reimbursable rates from Medicare and semi-private rates increased 20% and
10% respectively in the nine months ended September 30, 1998, compared to the
nine months ended September 30, 1997.

Capital reserve fees, which are a one-time payment from new residents, decreased
because fewer new residents moved in during the nine months ended September 30,
1998, than moved in during the nine months ended September 30, 1997.

Operating expenses, excluding depreciation and amortization, increased from
$2,796,477 during the first half of 1997 to $3,485,276 during the first half of
1998. This was due primarily to the 22% increase in number of residents.

Depreciation and amortization increased because of the increase in operating
property since September 30, 1997.

Liquidity and Capital Resources

During 1997, the partners received $2,920,000 in distributions from Phase I; in
the first three quarters of 1998, they received $1,190,000.

Phase III expansion, described under Item 1, was estimated to cost approximately
$10,600,000, which includes the construction management fee to Mullan and
development fee to LCSD. To fund the expansion, the Partners obtained permanent
parity debt financing of $1,900,000 and resident loans and fees of $8,700,000.
Construction period financing was provided by the West Joppa Road Limited
Partnership (WJR) and Life Care Services Corporation (LCS) in the total amount
of $7,600,000.


                                     - 14 -

<PAGE>


The Partners advanced $1,600,000 to the Partnerships in 1996 in connection with
Phase III. During the first quarter of 1997, the Partners advanced $6,000,000
for the construction of Phase III. At December 31, 1997, $2,012,258 of such
advances were still owed to the Partners, of which $2,012,258 was repaid in the
first quarter of 1998.

During 1997, the Partners also funded $400,000 towards the beginning design work
for Phase IV, of which $200,000 was advanced during the first quarter of 1997.

Net cash provided by operating activities in 1998 declined approximately
$353,000. Major contributing factors to this were:

         *    Decrease in net operating loss                           $ 70,800

         *    Increase in depreciation and amortization due to
              completion of Phase III                                   205,800

         *    Increase in amortization of non-refundable admission
              fees revenue due to more move-ins                        (309,300)

         *    Increase in amortization of development fees
              operating expense due to more move-ins                     83,300

         *    Change in operating assets and liabilities               (208,400)

         *    Decrease in Admission fees received due to fewer 
              move-ins                                                 (195,200)

Net cash used by investing activities in 1998 declined significantly,
essentially because major construction activity had been concluded by 1998.

Cash provided by financing activities declined in 1998 compared to 1997 because
of construction period funding not being required.

Because of the level of occupancy, the resident financing, and the long-term
financing described above, the Partnership believes adequate capital resources
are available to the Partnerships.

The long-term success of the Project is ultimately dependent upon maintaining
adequate levels of occupancy and operating of the Project efficiently.

The year 2000 issue is the result of computer programs being written using two
digits rather than four digits to define the applicable year. Computer programs
that have date-sensitive software must recognize the date using "00" as the year
2000, rather than the year 1900. Among other things, this problem could lead to
a temporary inability to process transactions, send invoices, or engage in
normal business transactions.

The management firm retained by the Partners, LCS, has assured the Partners and
provided evidence that it has a substantial Y2K program underway. With regard to
MIS applications which LCS has subcontracted, their vendor continues to provide
status reports indicating that the Y2K compliance efforts are on schedule, and
that recent tests of portions of the system were successful. The MIS work has
been underway beginning in early 1997.

In addition, LCS has been addressing the issue with certain third-party
providers of communications, administrative services, as well as its significant
suppliers of services and products, in an effort to determine whether the
partnership is vulnerable to these parties' failures to remediate their
own year 2000 issues. Generally this phase of the work was completed during the
second quarter of 1998. It has not been possible to make detailed evaluations of
the most critical third-party initiatives, and LCS has relied upon
representations that their progress is appropriate.

There can be no guarantee that the systems of other companies on which the
partnership's operations or systems rely will be timely remediated, or
that a failure by another company to remediate its systems in a timely way would
not have a material adverse effect on the partnership. Due to the general
uncertainty inherent in the year 2000 problem, resulting in part from the
uncertainty of the year 2000 readiness of third-party suppliers and customers,
the partnership is unable to determine at this time whether the consequences of
a year 2000 failure will have a material impact on the company's results
of operations, liquidity, or financial condition. The year 2000 project efforts
by LCS, the partnership believes, will reduce the partnership's level of
uncertainty about the year 2000 problems, but there can be no guarantees as to
the ability to avoid such problems.

                                     - 15 -

<PAGE>


Part II - OTHER INFORMATION


Item 1.  Legal Proceedings

         None

Item 6.  Exhibits and Reports on Form 8-K

         A.   Exhibits

              None

         B.   Reports on Form 8-K

              None


                                     - 16 -

<PAGE>


                                   SIGNATURES

                      THE CHESTNUT REAL ESTATE PARTNERSHIP


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


                              THE CHESTNUT REAL ESTATE PARTNERSHIP

                              By:      BLAKEHURST JOINT VENTURE, a
                                       General Partner

                                       By: CHESTNUT VILLAGE, INC.,
                                           General Partner


Date: November 13, 1998                by:  /s/ Stan G. Thurston
                                           -------------------------------------
                                           Stan G. Thurston, President and Chief
                                           Executive Officer
                                           (Principal Executive Officer)


Date: November 13, 1998                by:  /s/ Arthur V. Neis
                                           -------------------------------------
                                           Arthur V. Neis, Treasurer
                                           (Principal Financial and Accounting
                                           Officer)


                              And By:      THE WEST JOPPA ROAD LIMITED
                                           PARTNERSHIP, General Partner

                                       By: ROSEDALE CARE, INC.,
                                           General Partner


Date: November 13, 1998                by:  /s/ T. F. Mullan
                                           -------------------------------------
                                           Thomas F. Mullan III, President


Date: November 13, 1998                by:  /s/ J. A. Luetkemeyer, Jr.
                                           -------------------------------------
                                           John A. Luetkemeyer, Jr., President


                                     - 17 -

<PAGE>


                                   SIGNATURES

                            THE CHESTNUT PARTNERSHIP


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


                              THE CHESTNUT PARTNERSHIP

                              By:      BLAKEHURST JOINT VENTURE, a
                                       General Partner

                                       By: CHESTNUT VILLAGE, INC.,
                                           General Partner

Date: November 13, 1998                by: /s/ Stan G. Thurston
                                           -------------------------------------
                                           Stan G. Thurston, President and Chief
                                           Executive Officer
                                           (Principal Executive Officer)


Date: November 13, 1998                by: /s/ Arthur V. Neis
                                           -------------------------------------
                                           Arthur V. Neis, Treasurer
                                           (Principal Financial and Accounting
                                           Officer)


                              And By:  THE WEST JOPPA ROAD LIMITED PARTNERSHIP, 
                                       General Partner

                                       By: ROSEDALE CARE, INC.,
                                           General Partner

Date: November 13, 1998                by: /s/ T. F. Mullan
                                           -------------------------------------
                                           Thomas F. Mullan III, President


Date: November 13, 1998                by: /s/ J. A. Luetkemeyer, Jr.
                                           -------------------------------------
                                           John A. Luetkemeyer, Jr., President


                              And By:  THE CHESTNUT REAL ESTATE
                                       PARTNERSHIP, General Partner

                                       By: BLAKEHURST JOINT VENTURE, a
                                               General Partner

                                       By: CHESTNUT VILLAGE, INC.,
                                           General Partner

Date: November 13, 1998                by: /s/ Stan G. Thurston
                                           -------------------------------------
                                           Stan G. Thurston, President


Date: November 13, 1998                by: /s/ Arthur V. Neis
                                           -------------------------------------
                                           Arthur V. Neis, Treasurer


                                     - 18 -