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, 1996
                                   ---------------------------------------------

( ) 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


                            THE CHESTNUT PARTNERSHIP
                                       AND
                      THE CHESTNUT REAL ESTATE PARTNERSHIP

                                      INDEX


PART I         FINANCIAL INFORMATION                                       Page
------         ---------------------                                       ----

Item 1         Financial Statements

               The Chestnut Real Estate Partnership
               and The Chestnut Partnership

               *    Separate and Combined Balance Sheets,
                    September 30, 1996 and December 31, 1995                 3

               *    Separate and Combined Statement of
                    Operations,  for the nine months ended
                    September 30, 1996 and September 30, 1995                5

               *    Separate and Combined Statements of Partner's
                    Equity (Deficit) for the nine months ended
                    September 30, 1996 and September 30, 1995                7

               *    Separate and Combined Statement of Cash Flow,
                    for the nine months ended September 30, 1996
                    and September 30, 1995                                   8

               *    Notes to Financial Statements                           10

Item 2         Management's Discussion and Analysis of Financial
               Condition and Results of Operations                          13


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

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


SIGNATURES                                                                  17



<TABLE>
<CAPTION>

                                                                 --------------- September 30, 1996 ---------------
                    THE CHESTNUT REAL ESTATE PARTNERSHIP 
                        AND THE CHESTNUT PARTNERSHIP                                    The
                    SEPARATE AND COMBINED BALANCE SHEETS              The             Chestnut
                                                                    Chestnut         Real Estate         Combined
                                (UNAUDITED)                       Partnership        Partnership       Partnerships
                                  ASSETS                         ------------       ------------       ------------
                                                       
Current assets:
<S>                                                              <C>                 <C>                  <C>      
     Cash                                                        $  1,107,217       $     --           $  1,107,217
     Accounts receivable                                              147,841             --                147,841
     Prepaid expenses and other                                       300,272             --                300,272
     Assets whose use is limited or restricted:
        Under bond indenture agreements, held in escrow
          by trustee                                                  623,370             --                623,370
        Capital reserve fee                                           533,114             --                533,114
        Under letter of credit agreement, held in escrow               57,873             --                 57,873
                                                                 ------------       ------------       ------------

           Total current assets                                     2,769,687             --              2,769,687

Assets whose use is limited or restricted:
   Under bond indenture agreements, held in escrow
     by trustee                                                     1,570,320             --              1,570,320
   Under residency agreements, held in escrow                       1,344,019             --              1,344,019
   Health Center reserves                                             936,370             --                936,370

Operating property, at cost, net of depreciation                      350,541         46,735,545         47,086,086
Costs of acquiring intitial contracts, net of amortization          1,741,366             --              1,741,366
Deferred bond financing costs, net of amortization                    920,375             --                920,375
                                                                 ------------       ------------       ------------
           Total assets                                          $  9,632,678       $ 46,735,545       $ 56,368,223
                                                                 ============       ============       ============

               LIABILITIES AND PARTNERS' EQUITY (DEFICIT)
Current liabilities:
     Bonds payable, current portion                              $    130,000       $     --           $    130,000
     Accounts payable                                                 138,545             --                138,545
     Accrued expenses                                                 141,365             --                141,365
     Accrued property taxes                                            55,679             --                 55,679
     Accrued interest payable                                         509,748             --                509,748
     Advances payable                                                  75,092             --                 75,092
                                                                 ------------       ------------       ------------
           Total current liabilities                                1,050,429             --              1,050,429

Construction costs payable                                            501,389             --                501,389
Bonds payable, less current portion                                13,740,000             --             13,740,000
Loans from residents                                               39,122,100             --             39,122,100
Refundable deposits                                                 1,617,983             --                 --
Deferred revenues from admission fees                               2,108,508             --              2,108,508
Equity in deficit of the Chestnut Partnership                          --             48,507,731             --

Commitments and Contingencies
                                                                 ------------       ------------       ------------
           Total liabilities                                       58,140,409         48,507,731         56,522,426
Partners' equity (deficit)                                        (48,507,731)        (1,772,186)        (1,772,186)
                                                                 ------------       ------------       ------------
           Total liabilities and partners' equity (deficit)      $  9,632,678       $ 46,735,545       $ 54,750,240
                                                                 ============       ============       ============
</TABLE>


<TABLE>
<CAPTION>
                                                                 ---------------- December 31, 1995 ---------------
                    THE CHESTNUT REAL ESTATE PARTNERSHIP
                        AND THE CHESTNUT PARTNERSHIP                                    The
                    SEPARATE AND COMBINED BALANCE SHEETS              The             Chestnut
                                                                    Chestnut         Real Estate         Combined
                                                                  Partnership        Partnership       Partnerships
                                                                 ------------       ------------       ------------
                                  ASSETS
Current assets:
<S>                                                              <C>                <C>                     <C>    
     Cash                                                        $    116,939       $     --           $    116,939
     Accounts receivable                                              270,498             --                270,498
     Prepaid expenses and other                                       297,110             --                297,110
     Assets whose use is limited or restricted:
        Under bond indenture agreements, held in escrow
          by trustee                                                  455,790             --                455,790
        Capital reserve fee                                           484,828             --                484,828
        Under letter of credit agreement, held in escrow              109,697             --                109,697
                                                                 ------------       ------------       ------------
           Total current assets                                     1,734,862             --              1,734,862

Assets whose use is limited or restricted:
   Under bond indenture agreements, held in escrow
     by trustee                                                     1,502,481             --              1,502,481
   Under residency agreements, held in escrow                         137,290             --                137,290
   Health Center reserves                                             806,490             --                806,490

Operating property, at cost, net of depreciation                      531,145         47,176,639         47,707,784
Costs of acquiring intitial contracts, net of amortization          1,861,460             --              1,861,460
Deferred bond financing costs, net of amortization                    960,143             --                960,143
                                                                 ------------       ------------       ------------
           Total assets                                          $  7,533,871       $ 47,176,639       $ 54,710,510
                                                                 ============       ============       ============

               LIABILITIES AND PARTNERS' EQUITY (DEFICIT)
Current liabilities:
     Bonds payable, current portion                              $    130,000       $     --           $    130,000
     Accounts payable                                                 107,384             --                107,384
     Accrued expenses                                                 159,891             --                159,891
     Accrued property taxes                                           163,641             --                163,641
     Accrued interest payable                                         217,216             --                217,216
     Advances payable                                                 190,153             --                190,153
                                                                 ------------       ------------       ------------
           Total current liabilities                                  968,285             --                968,285

Construction costs payable                                             55,719             --                 55,719
Bonds payable, less current portion                                13,805,000             --             13,805,000
Loans from residents                                               37,572,750             --             37,572,750
Refundable deposits                                                   744,151             --                744,151
Deferred revenues from admission fees                               1,795,592             --              1,795,592
Equity in deficit of the Chestnut Partnership                          --             47,407,626              --

Commitments and Contingencies
                                                                 ------------       ------------       ------------
           Total liabilities                                       54,941,497         47,407,626         54,941,497

Partners' equity (deficit)                                        (47,407,626)          (230,987)          (230,987)
                                                                 ------------       ------------       ------------
           Total liabilities and partners' equity (deficit)      $  7,533,871       $ 47,176,639       $ 54,710,510
                                                                 ============       ============       ============
</TABLE>


<TABLE>
<CAPTION>
                           THE CHESTNUT REAL ESTATE PARTNERSHIP
                               AND THE CHESTNUT PARTNERSHIP
                      SEPARATE AND COMBINED STATEMENT OF OPERATIONS

                    For the nine month period ended September 30, 1996
                                       (UNAUDITED)                                                          
                                                                                        The                        
                                                                      The             Chestnut                     
                                                                    Chestnut         Real Estate         Combined  
                                                                  Partnership        Partnership       Partnerships
Revenues:                                                        ------------       ------------       ------------
<S>                                                              <C>                <C>                     <C>     
     Amortization of nonrefundable admission fees                $   712,664        $     --           $    712,664 
     Apartment service fees                                        3,469,623              --              3,469,623
     Health Center revenues                                        1,450,722              --              1,450,722
     Capital reserve fees                                             48,286              --                 48,286
     Other revenue                                                    12,547              --                 12,547
     Income in Partnership                                              --               249,793              --
                                                                 -----------        ------------       ------------
        Total revenues                                             5,693,841             249,793          5,693,841
                                                                 -----------        ------------       ------------

Operating expenses:
     Development fee amortization                                    180,604              --                180,604
     General and administrative                                    1,411,174              --              1,411,174
     Resident care                                                 1,069,014              --              1,069,014
     Dietary                                                         953,784              --                953,784
     Plant                                                           632,948              --                632,948
     Housekeeping                                                    251,329              --                251,329
     Depreciation and amortization                                   159,864             890,992          1,050,856
                                                                 -----------        ------------       ------------
                                                                   4,658,716             890,992          5,549,709
                                                                 -----------        ------------       ------------

        Income (loss) from operations                              1,035,125            (641,199)           144,133
                                                                 -----------        ------------        -----------

Other income (expense)                                                                    
     Interest income                                                 168,288              --                168,288
     Interest expense                                               (953,620)             --               (953,620)
                                                                 -----------        ------------       ------------
                                                                    (785,332)             --               (785,332)
                                                                 -----------        ------------       ------------
        Net income (loss)                                        $   249,793        $  (641,199)       $   (641,199)
                                                                 ===========        ============       ============
</TABLE>


<TABLE>
<CAPTION>
                           THE CHESTNUT REAL ESTATE PARTNERSHIP
                               AND THE CHESTNUT PARTNERSHIP
                      SEPARATE AND COMBINED STATEMENT OF OPERATIONS

                    For the nine month period ended September 30, 1995
                                       (UNAUDITED)                                          
                                                                                        The
                                                                      The             Chestnut 
                                                                    Chestnut         Real Estate         Combined 
                                                                  Partnership        Partnership       Partnerships  
Revenues:                                                        -----------        ------------       ------------
<S>                                                              <C>                <C>                   <C>      
     Amortization of nonrefundable admission                     $ 1,601,604        $    --            $  1,601,604
     Apartment service fees                                        2,881,721             --               2,881,721
     Health Center revenues                                        1,285,115             --               1,285,115
     Capital reserve fees                                             67,431             --                  67,431
     Other revenue                                                    14,248             --                  14,248
     Income in Partnership                                              --              35,475                --
                                                                 -----------        ------------       ------------
        Total revenues                                             5,850,119            35,475            5,850,119
                                                                 -----------        ------------       ------------

Expenses:
     Development fee amortization                                  614,526               --                 614,526
     General and administrative                                  1,345,945               --               1,345,945
     Resident care                                                 945,211               --                 945,211
     Dietary                                                       863,950               --                 863,950
     Plant                                                         555,626               --                 555,626
     Housekeeping                                                  212,311               --                 212,311
     Depreciation and amortization                                 159,864             907,427            1,067,291
                                                               -----------          ------------       ------------
                                                               $ 4,697,433          $  907,427         $  5,604,860
                                                               -----------          ------------       ------------

        Income (loss) from operations                            1,152,686            (871,952)             245,259
                                                               -----------          ------------       ------------

Other income (expense)
     Interest income                                               160,568               --                  160,568
     Interest expense                                           (1,277,779)              --               (1,277,779)
                                                               -----------          ------------        ------------
                                                                (1,117,211)               0               (1,117,211)
                                                               -----------          ------------        ------------
        Net income (loss)                                           35,475            (871,952)             (871,952)
                                                               ===========          ============        ============
</TABLE>


<TABLE>
<CAPTION>
               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, 1996 and the twelve
month period ended December 31, 1995
                           (UNAUDITED)                                                  The
                                                                     The              Chestnut
                                                                  Chestnut           Real Estate          Combined 
                                                                Partnership          Partnership        Partnerships
                                                               ------------         ------------        ------------
<S>                                                            <C>                     <C>                   <C>    
Balance, December 31, 1994                                     $(47,092,819)        $  700,424          $    700,424

Net income (loss)                                                   (70,280)        (1,281,390)           (1,281,390)
 
Transfer ownership of land preacquisition and
  project development assets to The Chestnut
  Real Estate Partnership                                          (594,505)              --                   --

Contributions from Partners                                         349,978            349,978              349,978
                                                               ------------         ------------        ------------

Balance, December 31, 1995                                     $(47,407,626)        $ (230,987)         $   (230,987)
                                                               ============         ============        ============




Balance, December 31, 1995                                     $(47,407,626)        $ (230,987)         $   (230,987)
  
Net income (loss)                                                   249,793           (641,199)             (641,199)

Transfer ownership of land preacquisition andhfghfdgh)
  project development assets to The Chestnut
  Real Estate Partnership                                          (449,898)              --                   --

Contributions from partners                                         600,000            600,000               600,000

Distributions to partners                                        (1,500,000)        (1,500,000)           (1,500,000)

                                                               ------------         ------------        ------------
Balance, June 30, 1996                                         $(48,507,731)       $(1,772,186)         $ (1,772,186)
                                                               ============        =============        ============
</TABLE>


<TABLE>
<CAPTION>
                           THE CHESTNUT REAL ESTATE PARTNERSHIP
                               AND THE CHESTNUT PARTNERSHIP
                      SEPARATE AND COMBINED STATEMENT OF CASH FLOWS

                    For the nine month period ended September 30, 1996
                                       (UNAUDITED)                                          The
                                                                           The           Chestnut
                                                                        Chestnut        Real Estate         Combined
                                                                      Partnership       Partnership       Partnerships
                                                                      -----------       -----------       -----------
Cash flows from operating activities:
<S>                                                                   <C>                  <C>               <C>      
     Net income (loss)                                                $   249,793       $  (641,199)      $  (641,199)
     Adjustments to reconcile net income to net
       cash provided by operating activities:
          Depreciation                                                       --             890,992           890,992
          Other amortization                                              159,864            --               159,864
          Amortization of nonrefundable admission fees                   (712,664)           --              (712,664)
          Amortization of development fees                                180,604            --               180,604
          Income in Partnership                                              --            (249,793)             --
          Change in operating assets and liabilities:
            Accounts receivable                                           122,657            --               122,657
            Prepaid expenses and other                                     (3,163)           --                (3,163)
            Accounts payable                                              476,830            --               476,830
            Accrued expenses                                              166,045            --               166,045
                                                                      -----------       -----------       -----------
          Net cash provided by operating activities                       639,966            --               639,966
                                                                      -----------       -----------       -----------

Cash flows from investing activities:
     Increase in funds escrowed under residency agreements             (1,206,729)           --            (1,206,729)
     Additions to operating property                                     (449,898)           --              (449,898)
     Increase in assets held by trustee                                  (235,418)           --              (235,418)
     Increase in assets payable to trustee                                (48,286)           --               (48,286)
     Decrease in funds escrowed under letter of credit agreement           51,824            --                51,824
                                                                      -----------       -----------       -----------

          Net cash used in investing activities                        (1,888,508)           --            (1,888,508)
                                                                      -----------       -----------       -----------

Cash flows from financing activities:
     Repayment of partner advances                                           --              --                 --
     Contributions from partners                                          600,000            --               600,000
     Distributions to partners                                         (1,500,000)           --            (1,500,000)
     Decrease in advances payable                                        (115,061)           --              (115,061)
     Decrease in bonds payable                                            (65,000)           --               (65,000)
     Decrease in Health Center reserves                                  (129,880)           --              (129,880)
     Proceeds from loans from residents, deferred revenues 
        and refundable deposits, net                                    3,448,762            --             3,448,762
                                                                      -----------       -----------       -----------
          Net cash provided by financing activities                     2,238,820            --             2,238,820
                                                                      -----------       ----------        -----------

Net increase in cash                                                      990,278            --               990,278

Cash, beginning of period                                                 116,939            --               116,939
                                                                      -----------       -----------       -----------

Cash, end of period                                                   $ 1,107,217       $    --           $ 1,107,217
                                                                      ===========       ===========       ===========
</TABLE>


<TABLE>
<CAPTION>
                                                                                           
                           THE CHESTNUT REAL ESTATE PARTNERSHIP
                               AND THE CHESTNUT PARTNERSHIP
                      SEPARATE AND COMBINED STATEMENT OF CASH FLOWS

                    For the nine month period ended September 30, 1995    
                                                                                            The
                                       (UNAUDITED)                         The           Chestnut
                                                                        Chestnut        Real Estate          Combined
                                                                      Partnership       Partnership        Partnership
                                                                      -----------       -----------        -----------
Cash flows from operating activities:
<S>                                                                   <C>              <C>                <C>      
     Net income (loss)                                                $    35,475       $  (871,952)       $  (871,952)
     Adjustments to reconcile net income to net
       cash provided by operating activities:
          Depreciation                                                       --             907,427            907,427
          Other amortization                                              159,864            --                159,864
          Amortization of nonrefundable admission fees                 (1,601,604)           --             (1,601,604)
          Amortization of development fees                                614,526            --                614,526
          Income in Partnership                                              --             (35,475)             --
          Change in operating assets and liabilities:
            Accounts receivable                                            49,447            --                 49,447
            Prepaid expenses and other                                   (284,871)           --               (284,871)
            Accounts payable                                               23,656            --                 23,656
            Accrued expenses                                              297,712            --                297,712
                                                                      -----------       -----------        -----------
          Net cash used in operating activities                          (705,795)           --               (705,795)
                                                                      -----------       -----------        -----------

Cash flows from investing activities:
     Decrease in funds escrowed under residency agreements                193,422            --                193,422
     Additions to project operating property                             (396,474)           --               (396,474)
     Increase in assets held by trustee                                  (247,563)           --               (247,563)
     Increase in assets payable to trustee                                   --              --                --
     Increase in short-term investments                                  (417,535)           --               (417,535)
     Increase in funds escrowed under letter of credit agreement             --              --                --
                                                                      -----------       -----------        -----------

          Net cash used in investing activities                          (868,150)           --               (868,150)
                                                                      -----------       -----------        -----------

Cash flows from financing activities:
     Repayment of partner advances                                     (3,717,337)           --             (3,717,337)
     Contributions from Partners                                             --              --                --
     Distribution to partners                                                   0
     Decrease in advances payable                                        (128,331)           --               (128,331)
     Decrease in Bonds Payable                                               --              --                --
     Increase in Health Center reserves                                  (178,470)           --               (178,470)
     Proceeds from loans from residents, deferred revenues
        and refundable deposits                                         4,765,815            --              4,765,815
                                                                      -----------       -----------        -----------
          Net cash provided by financing activities                       741,677            --                741,677
                                                                      -----------       -----------        -----------

Net decrease in cash                                                     (832,268)           --               (832,268)

Cash, beginning of period                                               1,035,260            --              1,035,260
                                                                      -----------       -----------        -----------

Cash, end of period                                                   $   202,992       $    --            $   202,992
                                                                      ===========       ===========        ===========
</TABLE>


                      THE CHESTNUT REAL ESTATE PARTNERSHIP
                          AND THE CHESTNUT PARTNERSHIP

                          NOTES TO FINANCIAL STATEMENTS


A.       Basis for Presentation

         The accompanying unaudited financial statements, 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.

         The separate and combined financial statements include The Chestnut
         Real Estate Partnership (the Real Estate Partnership) and its
         subsidiary The Chestnut Partnership (the Partnership). Both the Real
         Estate Partnership and the Partnership are general partnerships.

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

         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 and the Partnership are sometimes
         hereinafter referred to as the "Partnerships".

         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

         Assets held by the Trustee under the escrow agreement are cash
         equivalents as of September 30, 1996.

         Deferred Revenues from Admission Fees

         Admission fees are not advance fees in payment for future services or
         for use of facility, because of the Fair Share Allocation Formula which
         allocates all operating expenditures 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 cancelled 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 occurring in December 1993, at which
         time occupancy was 60%. Construction has continued for tenant requested
         improvements and an auditorium addition.

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

         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 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 is amortized on a pro-rata basis and admission fee revenue is
         recognized.

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 was provided by Venture and West Joppa. As of
         December 31, 1995, all such advances from Partners had been repaid,
         together with interest thereon.

         An auditorium and miscellaneous additional improvements (Phase III)
         totalling approximately $800,000, was financed by the Partners from
         non-refundable entrance fees. This concluded Phase I financing
         activities.

         During the quarter ended September 30, 1996, the partners contributed
         $600,000 in anticipation of Phase III. See "Overall Financial
         Condition" discussion below.

E.       Transactions with partners

         Life Care Services Corporation (LCS), an affiliate of Chestnut Village,
         Inc. (CVI), has entered into an agreement with the Partnership to
         administer planning, development, financing, marketing, and accounting
         functions for the Partnership during Phase I and II development
         (development agreement). In anticipation of subsequent phases of
         development activity, an amendment has been made where in Partners of
         West Joppa and LCS are both responsible for marketing and other tasks.
         This agreement was entered into in December 1994. During the nine
         months ended September 30, 1996 and September 30, 1995, no fees were
         paid to LCS, to Rosedale Care, Inc. or to Continental Care, Inc. Those
         Agreements are now concluded.

         The Partnership has entered into a development agreement with LCS for
         Phase III. No fees were paid under the terms of this agreement during
         the quarter ended September 30, 1996.

         The Partnership also has a management agreement with LCS. During the
         nine months ended September 30, 1996, LCS received $244,527 for its
         services and $229,590 for the nine months ended September 30, 1995.

         To reimburse it for advances made on behalf of the Partnerships, LCS
         was reimbursed $1,188,641 during the nine months ended September 30,
         1996 and $1,045,772 for the nine months ended September 30, 1995.
         Certain costs continue to be advanced by LCS, and will be reimbursed by
         the Partnership from available funds, including $446,592 which LCS has
         advanced for Phase III construction expenditures.

         The Partnership had a service agreement with West Joppa for West Joppa
         to assist LCS in development and marketing of the Project. During the
         nine month periods ended September 30, 1996 and September 30, 1995, it
         did not receive a fee under this agreement, as it has expired.

         The Partnership has entered into a construction agreement with Mullan
         Contracting Co. (Mullan), an affiliate of one of the partners of West
         Joppa. During the quarter ended September 30, 1996, Mullan received
         $50,732 in conjunction with construction of Phase III.

F.       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.

G.       Contingencies

         The realization of the costs of the Project in initially contingent
         upon the sale of the remaining Phase I units, and resale of units
         vacated due to death or transfer to the health center.

         Subsequent to initial occupancy of Phase I, maintenance of and
         efficient operation of the Project are also critical to the long term
         success of the Project.


                            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 177 residential units, and a 50-bed health
center. As of September 30, 1996, 167 (94%) of the residential units have been
reserved or occupied. The apartment occupancy decreased two units in the
quarter, during which there were five apartment units sold and no sales were
cancelled. As of September 30, 1995, 92% of the residential units were sold or
occupied, an increase of 3% in the quarter.

As of September 30, 1996, the project had 109 full-time equivalent employees,
none of whom were members of a collective bargaining agreement.

The Partnership has received regulatory approval for the development and sale of
Phase III. The Phase III addition will include 35 residential units, a swimming
pool with whirlpool, men's and women's locker rooms, an exercise room,
additional surface parking near the health center, carriage house, 12 surface
garages and 19 under building garages. The pool and core tower will be an
integral part of the building's infrastructure, benefiting residents in future
phases. The core tower will include an elevator that will serve as the link to
the Phase IV residential building, trash chutes, resident storage and resident
laundry rooms.

The estimated construction cost for Phase III is approximately $11.7 million
including appropriate statutory reserves. Of this amount, it is anticipated that
approximately $2 million would be funded through long term financing.
Approximately $9.7 million would be borrowed through a construction loan which
would be repaid through entrance fees and partner capital contributions.

The partners are now completing various agreements and other matters related to
financing. Construction has begun on Phase III.

As a result of Phase I being essentially sold out (Phase II had no residential
units) and the receipt of regulatory approval for Phase III, the Partnership
began accepting deposits for the Phase III units in the second quarter of 1996.
As of September 30, 1996 a total of 29 units (of the total 35 units) in Phase
III were reserved through the receipt by the Partnership of deposits equal to
10% of the entrance fees.


Results of Operations

As of September 30, 1996, 164 units (93%) were occupied and/or paying monthly
service fees. This occupancy compares to 142 (80%) of the units at September 30,
1995, and 156 units (88%) at December 31, 1995.

Amortization of non-refundable admission fees decreased because fewer residents
moved in during the nine months ended September 30, 1996 than moved in during
the nine months ended September 30, 1995. This decline more than offset
improvements from other sources of revenue.

On January 1, 1996, a 5% increase in the monthly service fees became effective.
That increase together with an increase in occupancy from September 30, 1995 to
the nine months ended September 30, 1996, accounted for the increase in
apartment service fees.

Health center revenues increased primarily because the average occupancy in the
first nine months of 1995 was 86% compared to an average occupancy of 94% in
1996, and increased billing rates.

Capital reserve fees, which are a one-time payment from new residents declined
because fewer new residents moved-in during the nine months ended September 30,
1996, than moved-in during the nine months ended September 30, 1995.

Total operating expenditures declined approximately $54,000. Operating
departmental expenses increased approximately $400,000 offsetting the decline in
depreciation and amortization charges of approximately $450,000. The average
number of full time equivalent employees was 109 in the nine months ended
September 30, 1996 compared to 100 average full time equivalent employees in
1995. This increase was consistent with the average occupancy increase year over
year from 77% to 88%. The decline in amortization in development fee occurred
because it is related to the number of apartments being occupied for the first
time.

Interest expense declined because the advances from partners was paid off at
December 31, 1995, but was outstanding during the nine months ended September
30, 1995.

The net loss for the nine months ended September 30, 1996, was approximately 25%
less than for the same period in 1995. The net loss in being funded by the
Partners from admission fees.


Liquidity and Capital Resources

As of May 28, 1992, significant Phase I financing activities were concluded.
Construction financing and long-term financing both were achieved on that date.
Construction financing in the amount of $20,000,000 from a group of lenders was
achieved and the Partnership raised $14,000,000 (before deduction of costs of
underwriting) through long-term financing.

The Partnerships issued two types of taxable bonds in May, 1992. One type was
issued in underwritten public offering of $8,000,000 principal amount of
Blakehurst 10 Year Put Option Mortgage Bond 1992, Series I. Also in May the
Partnership issued a private transaction to affiliates of the partnership, a
total of $6,000,000 principal amount of Blakehurst Retirement Community Put
Option Bonds, Private Placement Series on terms substantially identical to the
public offering except that the Private Placement Bonds provided for redemption
of such bonds from the proceeds of the sale of 1992 Series II Bonds. The
Partnership sold the 1992 Series II Bonds in the amount of $6,000,000 in August,
1992.

In 1993, the construction financing loan of $20,000,000 was repaid, and in 1995
all of the Partners' advances (which initially totaled $20,000,000) were repaid.

An auditorium and miscellaneous additional improvements (Phase II), totaling
approximately $800,000, which were funded by the Partners, were completed in
early 1996.

The Partners have funded, as of September 30, 1996, $600,000 for Phase III
owners' capital contribution.

Document preparation is in its final stages for the financing of Phase III as
described above.

The Partners authorized a distribution $1,500,000 in the quarter, following
funding of Phase II and funding all reserves and distribution funds as required
by the financing institutions for Phase I.

Net cash provided by operating activities increased by approximately $1,346,000
in the nine months ended September 30, 1996, compared to the nine months ended
September 30, 1995. Increased occupancy improved net income by $231,000; lower
amortization of non-refundable fees by approximately $890,000 because of few
move-ins was the other major contribution to the improvement.

Net cash used by investing activities was approximately $1,000,000 more in the
nine months ended September 30, 1996, compared to the nine months ended
September 30, 1995. Phase III deposits by prospective residents increased funds
escrowed by $679,000; and at September 30, 1996, there were more apartment units
sold, but not occupied, than at September 30, 1995, resulting in an increase in
funds escrowed under residency agreements. And finally, funds of approximately
$52,000 were released when a letter of credit provided for assurance of
completion of site work, was cancelled.

Net cash provided by financing activities was approximately $1,500,000 better in
the nine months ended September 30, 1996 compared to the nine months ended
September 30, 1995. Repayment of partner advances used approximately $3,700,000
of cash in 1995, and none in 1996 because the advances were totally paid by
December 31, 1995. Distributions to partners, net of contributions, used
$900,000 of cash in 1996. Cash from Resident loans was approximately $1,317,000
less in 1996 than in 1995 because of more new residents moving into the
community.

Because of the level of sales, the various residency agreement alternatives
available to prospective residents, the resident financing, and the long-term
financing described above, the Partnership believes adequate capital resources
are available to successfully complete final occupancy of Phase I, sell out
Phase II units and construct Phase III.

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



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


                                   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: October 31, 1996          by: /s/ Stan G. Thurston
                                    -------------------------------------
                                    Stan G. Thurston, President and Chief 
                                    Executive Officer
                                   (Principal Executive Officer)


Date: October 31, 1996          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: October 31, 1996          by: /s/ Thomas F. Mullan
                                    ------------------------------------
                                    Thomas F. Mullan III, President


Date: October 31, 1996          by: /s/ J. A. Luetkemeyer, Jr.
                                    ------------------------------------
                                    John A. Luetkemeyer, Jr., President



                                   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: October 31, 1996          by: /s/ Stan G. Thurston
                                    -------------------------------------
                                    Stan G. Thurston, President and Chief 
                                    Executive Officer
                                    (Principal Executive Officer)


Date: October 31, 1996          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: October 31, 1996          by: /s/ Thomas F. Mullan
                                    ------------------------------------
                                    Thomas F. Mullan III, President


Date: October 31, 1996          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: October 31, 1996          by: /s/ Stan G. Thurston
                                    ------------------------------------
                                    Stan G. Thurston, President


Date: October 31, 1996          by: /s/ Arthur V. Neis
                                    ------------------------------------
                                    Arthur V. Neis, Treasurer