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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 1998

OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________________ TO____________________
COMMISSION FILE NUMBER 1-9381

American Health Properties, Inc.
(Exact name of registrant as specified in its charter)

DELAWARE 95-4084878
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6400 SOUTH FIDDLER'S GREEN CIRCLE 80111
SUITE 1800 (Zip Code)
ENGLEWOOD, CO
(Address of principal executive offices)

(303) 796-9793
(Registrant's telephone number, including area code)

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 ____

SHARES OF REGISTRANT'S COMMON STOCK, $.01 PAR VALUE PER SHARE,
OUTSTANDING AT AUGUST 11, 1998 -- 24,984,422

SHARES OF REGISTRANT'S PSYCHIATRIC GROUP DEPOSITARY SHARES, EACH
REPRESENTING ONE-TENTH OF ONE SHARE OF PSYCHIATRIC GROUP PREFERRED STOCK, $.01
PAR VALUE, OUTSTANDING AT AUGUST 11, 1998 -- 2,083,931.

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2

AMERICAN HEALTH PROPERTIES, INC.

JUNE 30, 1998

TABLE OF CONTENTS

PART I FINANCIAL INFORMATION PAGE

CONSOLIDATED COMPANY

Item 1. Consolidated Condensed Financial Statements:
Balance sheets as of June 30, 1998 and December 31, 1997 . . . . . . . . . . . . . . . . . . . 2
Statements of operations for the three and six months ended June 30, 1998 and 1997 . . . . . . 3
Statements of cash flows for the six months ended June 30, 1998 and 1997 . . . . . . . . . . . 5
Notes to financial statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Item 2. Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . 12

CORE GROUP

Item 1. Core Group Combined Condensed Financial Statements:
Balance sheets as of June 30, 1998 and December 31, 1997 . . . . . . . . . . . . . . . . . . . 22
Statements of operations for the three and six months ended June 30, 1998 and 1997 . . . . . . 23
Statements of cash flows for the six months ended June 30, 1998 and 1997 . . . . . . . . . . . 24
Notes to financial statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

Item 2. Management's Discussion and Analysis of Core Group
Combined Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . 29

PSYCHIATRIC GROUP

Item 1. Psychiatric Group Combined Condensed Financial Statements:
Balance sheets as of June 30, 1998 and December 31, 1997 . . . . . . . . . . . . . . . . . . . 36
Statements of operations for the three and six months ended June 30, 1998 and 1997 . . . . . . 37
Statements of cash flows for the six months ended June 30, 1998 and 1997 . . . . . . . . . . . 38
Notes to financial statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

Item 2. Management's Discussion and Analysis of Psychiatric Group
Combined Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . 45

PART II OTHER INFORMATION

Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . 53

Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

1
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AMERICAN HEALTH PROPERTIES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands except per share amounts)

June 30, December 31,
1998 1997
------------ ------------

ASSETS (Unaudited)
Real estate investments
Real property and mortgage notes, net $ 855,815 $ 745,776
Construction in progress 11,325 4,729
Accumulated depreciation (112,211) (102,235)
------------ ------------
754,929 648,270
Other notes receivable and direct financing leases 6,264 5,553
Other assets 13,678 13,696
Cash and short-term investments 1,854 23,053
------------ ------------

$ 776,725 $ 690,572
============ ============

LIABILITIES AND STOCKHOLDERS' EQUITY
Bank loans payable $ 75,000 $ --
Mortgage notes payable 21,068 17,922
Notes and bonds payable 226,049 225,891
Accounts payable and accrued liabilities 13,781 13,193
Dividends payable 15,186 14,847
Deferred income 4,319 3,758
------------ ------------
355,403 275,611
------------ ------------

Commitments and contingencies

Stockholders' equity
Preferred stock $.01 par value; 1,000 shares authorized;
8-1/2% Cumulative Redeemable Preferred Stock,
Series B; $2,500 liquidation value;
40 shares issued and outstanding 100,000 100,000
Psychiatric Group Preferred Stock;
208 shares issued and outstanding 2 2
Common stock $.01 par value; 100,000 shares authorized;
24,103 and 23,557 shares issued and outstanding 241 236
Additional paid-in capital 496,557 482,030
Cumulative net income 308,501 283,453
Cumulative dividends (483,979) (450,760)
------------ ------------
421,322 414,961
------------ ------------

$ 776,725 $ 690,572
============ ============

The accompanying notes are an integral part of these financial statements.

2
4

AMERICAN HEALTH PROPERTIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands)

Three Months Ended June 30, Six Months Ended June 30,
--------------------------- --------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------

REVENUES
Rental income $ 22,484 $ 17,817 $ 43,842 $ 35,627
Mortgage interest income 1,655 1,531 3,308 3,048
Additional rental and interest income 3,400 3,147 6,820 6,123
Other property income 384 34 719 34
Other interest income 220 242 461 1,272
---------- ---------- ---------- ----------
28,143 22,771 55,150 46,104
---------- ---------- ---------- ----------
EXPENSES
Depreciation and amortization 5,159 3,889 10,033 7,717
Property operating 1,352 77 2,567 88
Interest expense 5,308 4,478 10,250 10,585
General and administrative 2,322 1,948 4,428 3,828
Impairment loss on psychiatric real estate
and notes receivable 2,730 -- 2,730 11,000
---------- ---------- ---------- ----------
16,871 10,392 30,008 33,218
---------- ---------- ---------- ----------

Minority interest 47 47 94 94
---------- ---------- ---------- ----------
INCOME BEFORE EXTRAORDINARY ITEM 11,225 12,332 25,048 12,792
EXTRAORDINARY LOSS ON DEBT PREPAYMENT -- -- -- (11,427)
---------- ---------- ---------- ----------

NET INCOME $ 11,225 $ 12,332 $ 25,048 $ 1,365
========== ========== ========== ==========

SERIES B PREFERRED DIVIDEND REQUIREMENT $ (2,150) $ -- $ (4,300) $ --
========== ========== ========== ==========

ATTRIBUTABLE TO CORE GROUP COMMON STOCK
AND PSYCHIATRIC GROUP DEPOSITARY SHARES -
INCOME BEFORE EXTRAORDINARY ITEM $ 9,075 $ 12,332 $ 20,748 $ 12,792
========== ========== ========== ==========
NET INCOME $ 9,075 $ 12,332 $ 20,748 $ 1,365
========== ========== ========== ==========

The accompanying notes are an integral part of these financial statements.

3
5

AMERICAN HEALTH PROPERTIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (continued)
(Unaudited)
(In thousands except per share amounts)

Three Months Ended June 30, Six Months Ended June 30,
--------------------------- ---------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------

ATTRIBUTABLE TO -
CORE GROUP COMMON STOCK
Income before extraordinary item $ 10,559 $ 11,129 $ 20,993 $ 21,059
Extraordinary loss on debt prepayment $ -- $ -- $ -- $ (11,427)
Net income $ 10,559 $ 11,129 $ 20,993 $ 9,632

Basic per share amounts -
Income before extraordinary item $ 0.44 $ 0.47 $ 0.88 $ 0.90
Extraordinary loss on debt prepayment $ -- $ -- $ -- $ (0.49)
Net income $ 0.44 $ 0.47 $ 0.88 $ 0.41

Weighted average common shares 24,055 23,459 23,887 23,459

Diluted per share amounts -
Income before extraordinary item $ 0.43 $ 0.47 $ 0.87 $ 0.89
Extraordinary loss on debt prepayment $ -- $ -- $ -- $ (0.48)
Net income $ 0.43 $ 0.47 $ 0.87 $ 0.41

Weighted average common shares and
dilutive potential common shares 24,314 23,643 24,154 23,646

Dividends declared per common share $ 0.5450 $ 0.5250 $ 1.0900 $ 1.0500

PSYCHIATRIC GROUP DEPOSITARY SHARES
Net income (loss) $ (1,484) $ 1,203 $ (245) $ (8,267)

Basic per share amounts -
Net income (loss) $ (0.71) $ 0.58 $ (0.12) $ (3.97)

Weighted average depositary shares 2,084 2,084 2,084 2,084

Diluted per share amounts -
Net income (loss) $ (0.71) $ 0.57 $ (0.12) $ (3.97)

Weighted average depositary shares and
dilutive potential depositary shares 2,084 2,098 2,084 2,084

Dividends declared per depositary share $ 0.6400 $ 0.6300 $ 1.2800 $ 1.3800

The accompanying notes are an integral part of these financial statements.

4
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AMERICAN HEALTH PROPERTIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)

Six Months Ended June 30,
------------------------------
1998 1997
------------ ------------

CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 25,048 $ 1,365
Extraordinary loss on debt prepayment -- 11,427
Depreciation, amortization and other non-cash items 11,319 9,033
Deferred income 481 (249)
Impairment loss on psychiatric real estate and notes receivable 2,730 11,000
Change in other assets (388) (1,415)
Change in accounts payable and accrued liabilities 616 3,244
------------ ------------
39,806 34,405
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition and construction of real estate properties (114,105) (15,923)
Mortgage note receivable fundings (179) (3,684)
Principal payments on mortgage notes receivable 39 35
Other notes receivable (1,236) 114
Direct financing leases 525 158
Administrative capital expenditures (61) (11)
------------ ------------
(115,017) (19,311)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings (payments) on bank loans payable 75,000 (39,500)
Proceeds from notes payable issuance -- 218,965
Prepayment of notes payable -- (163,176)
Principal payments on mortgage notes payable (229) --
Financing costs paid (7) (2,152)
Proceeds from sale of common stock 9,475 --
Proceeds from exercise of stock options 2,653 100
Dividends paid (32,880) (27,856)
------------ ------------
54,012 (13,619)
------------ ------------
INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS (21,199) 1,475
CASH AND SHORT-TERM INVESTMENTS, BEGINNING OF PERIOD 23,053 1,480
------------ ------------
CASH AND SHORT-TERM INVESTMENTS, END OF PERIOD $ 1,854 $ 2,955
============ ============

The accompanying notes are an integral part of these financial statements.

5
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AMERICAN HEALTH PROPERTIES, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

1. GENERAL

American Health Properties, Inc., a Delaware corporation (the Company,
which term refers to the Company and its subsidiaries unless the context
otherwise requires), is a self-administered real estate investment trust (REIT)
that commenced operations in 1987. The Company has investments in health care
properties, including acute care, rehabilitation, long-term acute care and
psychiatric hospitals, skilled nursing, assisted living, Alzheimer's care and
medical office/clinic facilities.

The Company's common stock (the Core Group Common Stock) is intended
to reflect the separate financial performance of the Company's investments in
acute care, rehabilitation and long-term acute care hospitals, skilled nursing,
assisted living, Alzheimer's care and medical office/clinic facilities (the
Core Group). The Psychiatric Group Depositary Shares are intended to reflect
the separate financial performance of the Company's investments in psychiatric
hospitals (the Psychiatric Group). The Company's Series B Depositary Shares,
and the Series B Preferred Stock represented thereby, are attributed to the
Company's Core Group for financial accounting and reporting purposes. The
Series B Depositary Shares, and the Series B Preferred Stock represented
thereby, rank senior to the Company's Core Group Common Stock and its
Psychiatric Group Depositary Shares with respect to dividend payments and
liquidation rights. Attribution of the components of the Company's capital
structure to its Core Group and Psychiatric Group for financial accounting and
reporting purposes does not affect the legal title to assets or responsibility
for liabilities of the Company, and each holder of Core Group Common Stock,
Series B Depositary Shares or Psychiatric Group Depositary Shares is a holder
of an issue of capital stock of the entire Company and is subject to the risks
associated with an investment in the Company and all of its businesses, assets
and liabilities.

Basis of Presentation The consolidated condensed financial statements
of the Company included herein have been prepared by the Company without audit
and include all normal, recurring adjustments which are, in the opinion of
management, necessary for a fair presentation of the results of operations
pursuant to the rules and regulations of the Securities and Exchange
Commission. These financial statements should be read in conjunction with
those included in the Company's annual report on Form 10-K for the year ended
December 31, 1997. The financial statements of the Core Group and the
Psychiatric Group, which are included elsewhere herein, should also be read in
conjunction with these financial statements.

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

New Accounting Standards In the first quarter of 1998, the Company
adopted Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income". SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. The adoption of this statement had no impact on
the Company's financial statements.

SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information", establishes standards for reporting financial and descriptive
information about reportable operating segments. In general, reportable
operating segments are components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance. The required adoption in 1998 of SFAS No. 131 is not expected to
have a material impact on the Company's financial statements.

6
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AMERICAN HEALTH PROPERTIES, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

In February 1998, the Financial Accounting Standards Board issued SFAS
No. 132, "Employer's Disclosures about Pensions and Other Post Retirement
Benefits". SFAS No. 132 revises employer's disclosures about pension and other
post retirement benefits to the extent practicable, requires additional
information on changes in the benefit obligations and fair values of plan
assets that will facilitate financial analysis, and eliminates certain
disclosures that are no longer useful. The required adoption in 1998 of SFAS
No. 132 is not expected to have a material impact on the Company's financial
statements.

SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", establishes accounting and reporting standards requiring that
every derivative instrument (including certain derivative instruments embedded
in other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. It also requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. The required adoption in 1999 of SFAS No.
133 is not expected to have a material impact on the Company's financial
statements.

In April 1998, the AICPA issued Statement of Position ("SOP") 98-5,
"Reporting on the Costs of Start-Up Activities". In general, SOP 98-5 requires
costs of start-up activities and organization costs to be expensed as incurred.
Initial application of SOP 98-5 should be reported as the cumulative effect of
a change in accounting principle. The required adoption in 1998 of SOP 98-5 is
not expected to have a material impact on the Company's financial statements.

Interest Paid Interest paid by the Company, net of interest
capitalized, was $9,311,000 and $5,691,000 for the six months ended June 30,
1998 and 1997, respectively. The Company had $294,000 and $201,000 of
capitalized interest for the six months ended June 30, 1998 and 1997,
respectively.

2. STOCKHOLDERS' EQUITY

Equity Offering In February 1998, the Company completed an offering
of 353,201 additional shares of Core Group Common Stock resulting in net
proceeds of approximately $9.5 million.

Equity Issuance In May 1998, the Company issued 62,160 additional
shares of Core Group Common Stock in connection with the acquisition of a
medical office/clinic facility, representing additional equity of approximately
$1.7 million.

Special Stock Dividend Subsequent to the end of the second quarter,
on July 24, 1998, the Company distributed 833,067 new shares of Core Group
Common Stock at a price of $25.9407 per share to holders of Psychiatric Group
Depositary Shares as a special stock dividend. Holders of Psychiatric Group
Depositary Shares received 0.4 shares of Core Group Common Stock for each
Psychiatric Group Depositary Share held and were paid cash-in-lieu of
fractional shares of Core Group Common Stock based on the price of $25.9407.

Stock Incentive Plans During the six months ended June 30, 1998,
options to purchase 160,424 shares of Core Group Common Stock at a weighted
average exercise price of $28.00 per share were issued pursuant to the
Company's stock incentive plans. During the six months ended June 30, 1998,
options to purchase 130,000 shares of Core Group Common Stock were exercised at
a weighted average exercise price of $20.41 per share resulting in additional
equity of $2,653,000. Options to purchase 10,000 shares of Core Group Common
Stock at a weighted average exercise price of $32.06 and options to purchase
10,000 shares of Psychiatric Group Depositary Shares at a weighted average
exercise price of $20.96 per share expired during the six months ended June 30,
1998.

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AMERICAN HEALTH PROPERTIES, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

3. EARNINGS PER SHARE

The following is a reconciliation of the income or (loss) and share
amounts used in the basic and diluted per share computations of income before
extraordinary item attributable to Core Group Common Stock and Psychiatric
Group Depositary Shares:

Three Months Ended June 30, Six Months Ended June 30,
----------------------------------------------- ------------------------------------------------
1998 1997 1998 1997
----------------------- ---------------------- ----------------------- -----------------------
Income Income Income Income
(In thousands) (Loss) Shares (Loss) Shares (Loss) Shares (Loss) Shares
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------

Attributable to Core Group
Income before extraordinary item $ 12,709 -- $ 11,129 -- $ 25,293 -- $ 21,059 --
Less Series B preferred
dividend requirement (2,150) -- -- -- (4,300) -- -- --
Outstanding common shares -- 24,054 -- 23,457 -- 23,886 -- 23,456
Deferred common shares -- 1 -- 2 -- 1 -- 3
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Basic EPS components 10,559 24,055 11,129 23,459 20,993 23,887 21,059 23,459

Effect of dilutive potential
common shares -
Stock options -- 116 -- 85 -- 130 -- 93
DER's -- 143 -- 99 -- 137 -- 94
Subordinated convertible
bonds payable -- -- -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Diluted EPS components $ 10,559 24,314 $ 11,129 23,643 $ 20,993 24,154 $ 21,059 23,646
========== ========== ========== ========== ========== ========== ========== ==========

Attributable to Psychiatric Group
Basic EPS components $ (1,484) 2,084 $ 1,203 2,084 $ (245) 2,084 $ (8,267) 2,084

Effect of dilutive potential
common shares -
Stock options -- -- -- -- -- -- -- --
DER's -- -- -- 14 -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Diluted EPS components $ (1,484) 2,084 $ 1,203 2,098 $ (245) 2,084 $ (8,267) 2,084
========== ========== ========== ========== ========== ========== ========== ==========

4. COMMITMENTS

As of June 30, 1998, the Company had funded $7.5 million of a $17
million commitment to develop two skilled nursing properties in Las Vegas,
Nevada to be operated by an experienced operator of skilled nursing facilities.
The Company has a $35 million forward funding commitment to develop up to five
assisted living facilities to be managed by an experienced operator of assisted
living facilities. As of June 30, 1998, the Company had funded $3.8 million
under this commitment for the development of three facilities having total
development costs of approximately $18.6 million. The Company has a similar
commitment of $22.5 million to develop up to 11 Alzheimer's care facilities to
be managed by an experienced operator of Alzheimer's care facilities. The
Company also has agreed to provide an additional $9.4 million of real estate
financing to an experienced operator of long-term acute care facilities for
which there are currently no identified projects.

5. STATUS OF PSYCHIATRIC GROUP INVESTMENTS

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AMERICAN HEALTH PROPERTIES, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

$2.73 million impairment loss in the second quarter of 1998. On a consolidated
basis, the Company used the proceeds from the mortgage loans payoff to pay down
outstanding borrowings under its bank credit facility. On a Group basis, the
proceeds from the payment of the Four Winds mortgage loans were first used by
the Psychiatric Group to repay the entire $11.2 million outstanding balance of
fixed and revolving inter-Group loans owed to the Company's Core Group by the
Psychiatric Group and to maintain a cash reserve of approximately $2.3 million
for the net current liabilities of the Psychiatric Group. Substantially all of
the remaining proceeds were distributed to holders of Psychiatric Group
Depositary Shares on July 24, 1998 as a special dividend paid in the form of
0.4 shares of Core Group Common Stock per Psychiatric Group Depositary Share.
In order to effectuate the stock dividend, the Psychiatric Group purchased
833,067 shares of Core Group Common Stock from the Core Group at a price of
$25.9407 per share, which represented the average trading price of the Core
Group Common Stock for the last ten trading days prior to the July 17, 1998
record date for the special dividend, as provided in the certificate of
designation for the Psychiatric Group Stock.

The Four Winds loans represented the largest income-producing portion
of the Psychiatric Group's portfolio. In the second quarter of 1998, the Four
Winds loans contributed revenue of $1,776,000 to the Psychiatric Group. As a
result of the payoff of these loans, second quarter 1998 results will be the
last quarter to include results from the Four Winds loans and future quarters'
results will be solely dependent on the remaining three assets in the
portfolio. Furthermore, since the Psychiatric Group does not maintain a
separate management structure, it has an ongoing obligation to pay for an
allocated portion of the Company's general and administrative expenses, subject
to a minimum of $250,000 annually, as well as for specific expenses directly
related to the operations of the Psychiatric Group. Offsetting these expenses
in future quarters will be a reduction of interest expense as a result of the
repayment of the inter- Group loans to the Core Group. Interest expense on
inter-Group loans to the Core Group was $347,000 for the second quarter of
1998. Due to these various factors, future quarterly cash flows and dividends
will decrease very substantially.

The fundamental ongoing changes in the psychiatric industry and the
resulting negative impact on operator financial performance have resulted in
significant impairment losses on psychiatric investments and the periodic
restructuring of psychiatric operator payment obligations in previous years.
The Company recorded an $11 million charge in the first quarter of 1997 for
impairment of the carrying value of its two psychiatric investments in Florida.
The Northpointe property, at which the operator ceased paying its obligations
to the Company in February 1997 and ceased hospital operations in the second
quarter of 1997, continues to remain idle. The Company incurred costs of
approximately $75,000 during the second quarter of 1998 ($.04 per Psychiatric
Group Depositary Share) and $225,000 for the first quarter of 1998 ($.11 per
Psychiatric Group Depositary Share) to protect and maintain this property,
including approximately $150,000 for unexpected expenditures. Although on an
ongoing basis, the Company expects to incur costs of approximately $75,000 per
quarter ($.04 per Psychiatric Group Depositary Share) to protect and maintain
this property while various alternatives for the property are evaluated and
pursued, the Company cannot be assured that other unexpected costs will not be
incurred. Numerous discussions with health care operators and others regarding
a potential sale or lease of the property continue. However, no agreement for
sale or lease has been reached. If efforts to identify a health care operator
for the property prove unsuccessful, the property will most likely have to be
sold for its real estate value, however, the Company cannot be assured that the
current carrying value of the property would be realized through a sale. Early
in the fourth quarter of 1997, a restructuring of The Retreat's obligations to
the Company was completed. The Retreat's restructured base rent is $35,000 per
month ($105,000 per quarter or $.05 per Psychiatric Group Depositary Share) and
additional rent will not accrue or be payable until August 1, 2000. The
Company has received the base rent payments under the restructured terms
through August 1998 but The Retreat is currently in default on other
obligations owed to the Company. Although the restructured agreement with The
Retreat was a positive step in stabilizing the cash flow and operations of this
facility, as evidenced by the current default, the Company cannot be assured
that The Retreat will be able to continue to meet its restructured obligations
or continue operations. While

9
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AMERICAN HEALTH PROPERTIES, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

the Company has now reached an agreement in principle regarding the assumption
of operations at The Retreat by a new operator, certain of the required key
agreements remain under negotiation. The transfer of operations to the new
operator will not occur unless those terms are satisfactorily resolved. If not
resolved, the Company may decide to exercise any or all of its remedies. Even
if there is a change in the operator of The Retreat, continued operations at
The Retreat will remain uncertain until the new operator has demonstrated its
ability to operate the facility successfully. In light of the volatile
circumstances of the two Florida psychiatric properties, the Company cannot be
assured that further impairment losses on these investments will not be
required.

Although the $2,500,000 balance outstanding under Rock Creek Center's
(RCC) revolving credit agreement matured in June 1997 and the initial term of
the RCC lease expired in December 1997, RCC has continued to make interest
payments on the revolving credit agreement and the initial lease term has been
extended to September 30, 1998, with a further extension pending as described
below. RCC has met its rent and interest obligations to the Company through
August 1998, however, the Company cannot be assured that RCC will not
experience future operational and cash flow difficulties as it has in the past.
At the end of June 1998, the operator of the Rock Creek Center (RCC) facility
informed the Company that it had incurred a material, unanticipated liability
to Medicare, which imperils the continuing operation of the facility. In
response, the operator has commenced a significant revision and downsizing of
its operations to focus on geriatric psychiatric care. In order to implement
that change, the operator has given a WARN Act notice to its employees
notifying them that the operations of the facility in its current mode will
cease within 60 days of such notice and inviting them to reapply for positions
in the proposed downsized operation. Under the currently applicable lease
extension, the Company has the right, effective July 1, 1998, to negotiate with
other potential health care operators regarding operating the facility and the
Company has commenced marketing the property to potential new operators. An
agreement in principle has been reached with the existing operator extending
the current lease to March 31, 1999, and extending the maturity of the
revolving credit agreement to March 31, 1999. Under the proposed arrangement,
the operator will continue to pay interest on all outstanding obligations and
will pay $5,000 per month against the principal balance of the revolving credit
agreement. Although discussions with the current operator have not yet been
successful in reaching a mutually acceptable long-term lease, purchase and sale
agreement, and/or payment schedule for the payment of the balance of the
revolving credit agreement, the operator of the facility has approached the
Psychiatric Group with a proposal that may be practicable depending, in part,
on the operator's ability to negotiate an acceptable compromise with Medicare
regarding the unanticipated Medicare liability. Local and national operators
have expressed interest in the facility; however, the Psychiatric Group cannot
be assured that either a long-term lease extension or a new lease will be
accomplished. If the current operator is unsuccessful in formulating a program
which permits it to pay the newly-determined Medicare liability and to make
suitable payments to the Psychiatric Group, and a facility lease with a new
operator is not accomplished, a significant negative impact to the Psychiatric
Group likely will result. Furthermore, if a new operator assumes operation of
the RCC facility, the Company cannot be assured that the current operator will
be able to pay the balance owed under the revolving credit agreement or that a
new operator will be able to operate the facility successfully. The total
revenue contribution to the Psychiatric Group from the RCC investment for the
second quarter was $.17 per Psychiatric Group Depositary Share.

10
12
AMERICAN HEALTH PROPERTIES, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

sell, restructure or seek other means to reduce its investments in the
psychiatric sector. In addition, the Company continues to encourage each of the
psychiatric operators to pursue financing alternatives which might enable them
to acquire the properties and/or repay their borrowings from the Company, as
the case may be. Subject to the rights of the holders of the Company's Series B
Depositary Shares, and the Series B Preferred Stock represented thereby, and
any other preferred stock of the Company then outstanding, the Company expects
to use the net proceeds of any future psychiatric property sales and/or
psychiatric operator borrowing repayments to first repay then outstanding
inter-Group loans and/or other liabilities owed by the Psychiatric Group and to
distribute all remaining net proceeds, if any, in cash or Core Group Common
Stock to holders of Psychiatric Group Depositary Shares. The Company cannot be
assured that the efforts of psychiatric operators to obtain alternative
financing will be successful or, if successful, that the amounts of such
financing would be sufficient to enable the Company to realize the carrying
amounts of its psychiatric investments.

The dividend on the Company's Psychiatric Group Depositary Shares is
determined each quarter based upon the operating results of the Company's
Psychiatric Group. Historically, the level of dividends of the Psychiatric
Group have varied quarter-to-quarter. Any significant advance of additional
funds to psychiatric hospital operators, modification of terms covering the
rental or interest obligations of its psychiatric properties or nonpayment or
deferral of such obligations as they become due likely will have an adverse
impact on the Company's Psychiatric Group results of operations and cash flows,
as well as on the quarterly dividend payment on Psychiatric Group Depositary
Shares. In addition to the foregoing, future operating results, cash flows and
dividends of the Company's Psychiatric Group will be affected by changes in the
level of additional rent, the amount of additional financial advisory fees and,
to the extent necessary, various costs which might be incurred in an effort to
protect, maintain and pursue alternatives for its psychiatric investments.
With the repayment of the Four Winds loans, future quarterly cash flows and
dividends will decrease very substantially from previous quarters. Also, small
events with respect to the Psychiatric Group's three remaining facilities will
likely have a more significant effect on the Psychiatric Group's cash flows and
dividends, and therefore the price of the Psychiatric Group Depositary Shares.
The liquidity of the Psychiatric Group Depositary Shares will also likely be
adversely affected.

The Company will continue to review quarterly the performance of each
of the remaining assets of the Psychiatric Group. Should the Board of
Directors of the Company decide that the remaining Psychiatric Group portfolio
and operations are not consistent with a separate public security, the Board
may then elect to redeem the outstanding Psychiatric Group Depositary Shares.

11
13
AMERICAN HEALTH PROPERTIES, INC.

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

Following is a discussion of the consolidated financial condition and
results of operations of the Company, which should be read in conjunction with
the consolidated financial statements and accompanying notes. For discussions
of the financial condition and results of operations of the Core Group and the
Psychiatric Group, see the management's discussion and analysis of financial
condition and results of operations of the Core Group and the Psychiatric Group
included elsewhere herein.

Factors Regarding Future Results and Forward-Looking Statements This
report includes and incorporates by reference statements that are not purely
historical and are "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, including statements regarding the
Company's expectations, beliefs, intentions or strategies regarding the future.
All statements other than historical fact contained in this report, including
without limitation statements regarding rent or interest to be received from
the Company's operators and tenants, plans with respect to individual
facilities, expectations with respect to the specific terms and renewals of
leases of the Company's facilities, the Company's anticipated dividends and
dividend payout ratios, the potential redemption of the Company's shares, the
Company's liquidity position, projected expenses associated with operating or
maintaining individual properties, the Company's ability to realize the
recorded amounts of its investments and the potential effect of new or existing
regulations on the operations conducted at the Company's facilities, are
forward-looking statements. All forward-looking statements included or
incorporated by reference in this report are based on information available to
the Company on the date hereof, and the Company assumes no obligation to update
such forward-looking statements. Although the Company believes that the
assumptions and expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that such expectations will prove to have
been correct or that the Company will take any actions that may presently be
planned.

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14
AMERICAN HEALTH PROPERTIES, INC.

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

associated with the maintenance and operation of the Company's medical
office/clinic facilities, higher than expected turnover at the Company's
medical office/clinic facilities, a reduction in demand for the services
provided at the Company's facilities, the strength and financial resources of
the Company's competitors, the availability and cost of capital, the Company's
ability to make additional real estate investments at attractive yields and
changes in tax laws and regulations affecting real estate investment trusts.
For a further discussion of certain of these factors, see "- Future Operating
Results" herein.

OPERATING RESULTS

Second Quarter and Year to Date 1998 Compared With 1997

For the second quarter of 1998, the Company reported net income
attributable to Core Group Common Stock and Psychiatric Group Depositary Shares
of $9,075,000 compared with $12,332,000 for the second quarter of 1997. An
impairment loss on psychiatric notes receivable of ($2,730,000) was recorded in
the second quarter of 1998. For the six months ended June 30, 1998, the
Company reported income before extraordinary item attributable to Core Group
Common Stock and Psychiatric Group Depository Shares of $20,748,000 compared
with $12,792,000 for the six months ended June 30, 1997, which included an
impairment loss on psychiatric real estate and notes receivable of
($11,000,000). For the six months ended June 30, 1998, the Company reported
net income attributable to Core Group Common Stock and Psychiatric Group
Depositary Shares of $20,748,000 compared with $1,365,000 for the six months
ended June 30, 1997. An extraordinary loss on debt prepayment of ($11,427,000)
was reported during the six months ended June 30, 1998. See the Consolidated
Condensed Statements of Operations for the comparative gross and per share
amounts attributable to the Core Group Common Stock and the Psychiatric Group
Depositary Shares.

Rental income was $22,484,000 for the second quarter of 1998, an
increase of $4,667,000 or 26% from $17,817,000 for the second quarter of 1997.
Rental income was $43,842,000 for the six months ended June 30, 1998 an
increase of $8,215,000 or 23% from $35,627,000 for the six months ended June
30, 1997. This increase was primarily attributable to rental income from new
Core Group properties acquired subsequent to the first quarter of 1997. These
property additions also resulted in an increase in depreciation and
amortization of $1,270,000 or 33% to $5,159,000 for the second quarter of 1998
compared with $3,889,000 for the second quarter of 1997 and an increase in
depreciation and amortization of $2,316,000 or 30% to $10,033,000 for the six
months ended June 30, 1998 compared with $7,717,000 for the six months ended
June 30, 1997.

Mortgage interest income was $1,655,000 for the second quarter of
1998, an increase of $124,000 or 8% from $1,531,000 in 1997. Mortgage interest
income was $3,308,000 for the six months ended June 30, 1998, an increase of
$260,000 or 9% from $3,048,000 for the six months ended June 30, 1997. This
increase was primarily attributable to the funding of a mortgage note
receivable in the second quarter of 1997.

Additional rental and interest income was $3,400,000 for the second
quarter of 1998, an increase of $253,000 or 8% from $3,147,000 for the second
quarter of 1997. Additional rental and interest income was $6,820,000 for the
six months ended June 30, 1998, an increase of $697,000 or 11% from $6,123,000
for the six months ended June 30, 1997. The increase in additional rental and
interest income for the second quarter of 1998 was attributable to increases in
additional rent of $133,000 from acute care properties and $27,000 from
long-term care properties and an increase of $103,000 in additional rent and
interest from psychiatric properties, partially offset by a $10,000 decrease in
additional rent from rehabilitation properties. The increase in additional
rental and interest income for the six months ended June 30, 1998 was
attributable to increases in additional rent of $473,000 from acute care
properties and $52,000 from long-term care properties and an increase of
$193,000 in additional rent and interest from psychiatric properties, partially
offset by a $21,000 decrease in additional rent from rehabilitation properties.

13
15
AMERICAN HEALTH PROPERTIES, INC.

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

Other property income of $384,000 for the second quarter of 1998 and
$719,000 for the six months ended June 30, 1998, primarily represents property
operating expense reimbursements and parking revenue from medical office/clinic
facility tenants.

Other interest income decreased $22,000 or 9% to $220,000 for the
second quarter of 1998 from $242,000 for the second quarter of 1997. Other
interest income decreased $811,000 or 64% to $461,000 for the six months ended
June 30, 1998 from $1,272,000 for the six months ended June 30, 1997. This
decrease resulted primarily from lower investable cash balances and a lower
average balance of direct financing leases during the second quarter and first
six months of 1998 compared to the same periods in 1997. The decrease is
partially offset by interest income from a subordinated note receivable due
from the operator of an Alzheimer's care facility, which was funded during the
second quarter of 1998. Investable cash balances were significantly higher
during the first quarter of 1997 due to the temporary investment of a portion
of the proceeds of a public debt offering in late January 1997 until used to
prepay the Company's private placement debt in late February 1997 after the
prepayment notice period had expired.

Property operating expense was $1,352,000 for the second quarter of
1998, an increase of $1,275,000 from $77,000 for the second quarter of 1997.
Property operating expense was $2,567,000 for the six months ended June 30,
1998, an increase of $2,479,000 from $88,000 for the six months ended June 30,
1997. For the second quarter of 1998, approximately $1,225,000 of the increase
was attributable to operating expenses of Core Group medical office/clinic
facilities acquired subsequent to the first quarter of 1997 and $50,000 of the
increase was attributable to costs related to the protection and maintenance of
a closed psychiatric property in Florida. Approximately $2,204,000 of the
increase during the first six months of 1998 was attributable to operating
expenses of Core Group medical office/clinic facilities acquired subsequent to
the first quarter of 1997 and $275,000 of the increase was attributable to
costs related to the protection and maintenance of a closed psychiatric
property in Florida, including approximately $150,000 for unexpected
expenditures.

Interest expense was $5,308,000 for the second quarter of 1998, an
increase of $830,000 or 19% from $4,478,000 for the second quarter of 1997.
Interest expense was $10,250,000 for the six months ended June 30, 1998, a
decrease of $335,000 or 3% from $10,585,000 for the six months ended June 30,
1997. The increase in interest expense for the second quarter of 1998 was
primarily attributable to a higher average balance of bank credit facility
borrowings and the assumption of two mortgage loans in connection with the
acquisition of medical office/clinic facilities. This increase is partially
offset by a higher level of capitalized interest in 1998 compared to 1997. The
decrease in interest expense during the first six months of 1998 was primarily
attributable to a lower weighted average effective interest rate on long-term
debt during 1998, partially offset by a higher amount of long-term debt during
1998. In late January 1997, the Company sold $220 million of publicly-traded
unsecured senior notes with a weighted average effective interest rate of
approximately 7.56%. The Company used the proceeds of this offering to pay off
the borrowings under its bank credit facility outstanding at the time and to
prepay $152 million of 11.03% private placement debt in late February 1997
prior to its scheduled maturity, incurring an extraordinary charge in the first
quarter of 1997 of $11,427,000.

General and administrative expenses were $2,322,000 for the second
quarter of 1998, an increase of $374,000 or 19% from $1,948,000 for the second
quarter of 1997. General and administrative expenses were $4,428,000 for the
six months ended June 30, 1998, an increase of $600,000 or 16% from $3,828,000
for the six months ended June 30, 1997. This variation was primarily
attributable to hiring of additional personnel, higher compensation and
benefits expense, an increase in travel expense and an increase in financial
advisory services provided to the Psychiatric Group.

14
16
AMERICAN HEALTH PROPERTIES, INC.

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

Future Operating Results

The operators and tenants of most of the Company's facilities derive a
substantial percentage of their total revenues from federal and state health
care programs such as Medicare and Medicaid and from other third-party payors
such as private insurance companies, self-insured employers and health
maintenance organizations. Such operators and tenants also are subject to
extensive federal, state and local government regulation relating to their
operations, and most of the Company's facilities are subject to periodic
inspection by governmental and other authorities to assure continued compliance
with mandated procedures, licensure requirements under state law and
certification standards under the Medicare and Medicaid programs. A reduction
in reimbursement levels under the Medicare or Medicaid programs, a reduction in
reimbursement by other third-party payors or an operator's or tenant's failure
to maintain its certification under Medicare or Medicaid programs could
adversely affect revenues to the Company's facilities.

The nature of health care delivery in the United States continues to
undergo change and further review at both the national and state levels.
Generally accepted goals of reform continue to include controlling costs and
improving access to medical care. Various plans to decrease the growth in
Medicare spending have been proposed and passed by both Houses of Congress.
These plans generally include revisions to and limits on Medicare and federal
programs providing Medicaid reimbursement to state health care programs and
have had and potentially would have an adverse impact on the level of funds
available in the future to health care facilities. The Balanced Budget Act of
1997 contains extensive changes to the Medicare and Medicaid programs intended
to reduce the projected amount of increase in Medicare spending by an estimated
$115 billion and Medicaid spending by an estimated $13 billion over five years.
In addition, the Budget Act repealed certain limits on states' ability to
reduce their Medicaid reimbursement levels. The Budget Act has the potential to
reduce significantly federal spending on health care services provided at each
of the Company's facilities and provided by the physician tenants of the
Company's medical office/clinic facilities, and to affect revenues of the
Company's operators and tenants adversely. In particular, the Budget Act's
limitations on reimbursable costs and reductions in payment incentives and
capital related payments, as well as the change toward a prospective payment
system, may have a material adverse effect on operator revenues at the
Company's rehabilitation, long-term acute care, and psychiatric hospitals. The
Budget Act's freeze on acute care hospital reimbursement rates may also have an
adverse effect on the operator revenues at the Company's acute care hospitals.
In addition, the prospective payment system imposed by the Budget Act on the
operators of the Company's skilled nursing facilities may have a material
adverse effect on the operator revenues at such facilities if the operators are
unable to effectively respond to the financial incentives provided by the
prospective payment system. The Company cannot be assured that the changes
effected by the Budget Act will not have a material adverse effect on the
Company's financial condition or results of operation.

The Company's Board and management are monitoring the effect of the
Budget Act on the Company's facilities and potential changes to reimbursement
programs closely. The Company believes that the changes effected by the Budget
Act and changes proposed at the federal and state level may pose risks for
certain institutions that are unwilling or unable to respond. At the same time,
the Company believes that this changing health care environment will provide
the Core Group with new opportunities for investment.

15
17
AMERICAN HEALTH PROPERTIES, INC.

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

believe have not complied with such requirements. Outpatient business is
expected to increase as advances in medical technologies allow more procedures
to be performed on an outpatient basis and as payors continue to direct more
patients from inpatient care to outpatient care. In addition, the entrance of
insurance companies into managed care programs is accelerating the introduction
of managed care in new localities, and states and insurance companies continue
to negotiate actively the amounts they will pay for services. Moreover, the
percentage of health care services that are reimbursed under the Medicare and
Medicaid programs continues to increase as the population ages. States are
also expanding their Medicaid programs. Continued eligibility to participate in
these programs is crucial to a provider's financial strength. As a result of
the foregoing, revenues and margins may decrease at the Company's facilities.

Notwithstanding the potential for increasing government regulation,
the Company believes that health care will continue to be delivered on a local
and regional basis and that well-managed, high-quality, cost-controlled
facilities will continue to be an integral part of local and regional health
care delivery systems. The Company also believes that certain acute care
hospitals will need to reconfigure or expand existing facilities or to
affiliate themselves with other providers so as to become part of comprehensive
and cost-effective health care systems. Such systems likely will include lower
cost treatment settings, such as ambulatory care clinics, outpatient surgery
centers, long-term acute care hospitals, skilled nursing facilities, assisted
living and Alzheimer's care facilities and medical office/clinic facilities.
In general, the Core Group facilities are part of local or regional health care
delivery systems or are in the process of becoming integrated into such
systems.

The Company's future operating results could be affected by the
operating performance of the Company's lessees and borrowers. The rental and
interest obligations of its facility operators are primarily supported by the
facility- specific operating cash flow. Real estate investments in the
Company's portfolio are generally further supported by one or more credit
enhancements that take the form of cross-default provisions, letters of credit,
corporate and personal guarantees, security interests in cash reserve funds,
accounts receivable or other personal property and requirements to maintain
specified financial ratios.

During the second quarter of 1998, the Company renewed leases for four
of its acute care hospitals, operated by Tenet Healthcare Corporation, under
the same lease terms and provisions as previously in place. The four leases
accounted for approximately 27% of the Company's total revenues in 1997.

Aggregate revenues from a lease maturing in February 1999 accounted
for 11% of the Company's total revenues in 1997. The property is leased to a
subsidiary of Columbia/HCA Healthcare Corporation (Columbia). The lease grants
the operator options to extend the term of the lease for eight consecutive
five-year renewal terms. Base and additional rent during the first three
extended terms would be on the same terms and conditions as the current initial
term. Minimum rent during the final five extended terms would be fair market
rental but without separate additional rent. The lease also grants the operator
the option to purchase the leased property at fair market value at the
expiration of any term of the lease. If the lease is not renewed and the
current operator does not exercise its option to purchase the property, the
Company will be required to seek a new operator for the property.

The future operating results of the Company will be affected by
additional factors including the amount, timing and yield of additional real
estate investments and the competition for such investments. Operating results
also will be affected by the availability and terms of the Company's future
equity and debt financing. The Company's financing strategy to facilitate
future growth includes objectives to reduce its cost of capital over time and
enhance its liquidity and financial flexibility.

Fundamental changes in the psychiatric industry continue to impact
negatively the facility-specific operating cash flow at the Company's
psychiatric properties. Institutions responsible for the reimbursement of care
provided to patients who use inpatient psychiatric treatment services have
directed efforts toward decreasing

16
18
AMERICAN HEALTH PROPERTIES, INC.

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

their payments for such services, thereby reducing hospital operating revenues.
Some cost-cutting measures used by such institutions include decreasing the
inpatient length of stay, intensively reviewing utilization, directing patients
from inpatient care to outpatient care and negotiating reduced reimbursement
rates for services. The wider use of psychotropic drugs also has resulted in
significant declines in the average length of stay. In addition, aggressive
program compliance enforcement and increased scrutiny of past and current
billing practices has resulted in the filing of lawsuits against some providers
and significant negative publicity which has further exacerbated the financial
and operational difficulties of providers. Although the operators of the
psychiatric hospitals are responding by increasing case management, developing
lower cost outpatient and daypatient programs and reducing operating costs,
their efforts are generally not consistently mitigating the negative impact of
these fundamental psychiatric industry changes. As a result, certain of the
psychiatric hospital operators have not consistently met their contractual
payment obligations to the Company as scheduled and the Company cannot be
assured that psychiatric hospital operators will be able to meet such payment
obligations in the future.

In general, the operators of the Psychiatric Group's properties have
very limited access to financing for their operating and capital needs. To the
extent the psychiatric hospitals have increased working capital needs in the
future, the Company may be the only source of such financing.

Subsequent to the end of the second quarter, on July 1, 1998, the
Company received $35 million as payment in full of its Psychiatric Group's two
New York Four Winds mortgage loans resulting in the accrual of a $2.73 million
impairment loss in the second quarter of 1998. On a consolidated basis, the
Company used the proceeds from the mortgage loans payoff to pay down
outstanding borrowings under its bank credit facility. On a Group basis, the
proceeds from the payment of the Four Winds mortgage loans were first used by
the Psychiatric Group to repay the entire $11.2 million outstanding balance of
fixed and revolving inter-Group loans owed to the Company's Core Group by the
Psychiatric Group and to maintain a cash reserve of approximately $2.3 million
for the net current liabilities of the Psychiatric Group. Substantially all of
the remaining proceeds were distributed to holders of Psychiatric Group
Depositary Shares on July 24, 1998 as a special dividend paid in the form of
0.4 shares of Core Group Common Stock per Psychiatric Group Depositary Share.
In order to effectuate the stock dividend, the Psychiatric Group purchased
833,067 shares of Core Group Common Stock from the Core Group at a price of
$25.9407 per share, which represented the average trading price of the Core
Group Common Stock for the last ten trading days prior to the July 17, 1998
record date for the special dividend, as provided in the certificate of
designation for the Psychiatric Group Stock.

17
19
AMERICAN HEALTH PROPERTIES, INC.

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

1997 and ceased hospital operations in the second quarter of 1997, continues to
remain idle. The Company incurred costs of approximately $75,000 during the
second quarter of 1998 ($.04 per Psychiatric Group Depositary Share) and
$225,000 for the first quarter of 1998 ($.11 per Psychiatric Group Depositary
Share) to protect and maintain this property, including approximately $150,000
for unexpected expenditures. Although on an ongoing basis, the Company expects
to incur costs of approximately $75,000 per quarter ($.04 per Psychiatric Group
Depositary Share) to protect and maintain this property while various
alternatives for the property are evaluated and pursued, the Company cannot be
assured that other unexpected costs will not be incurred. Numerous discussions
with health care operators and others regarding a potential sale or lease of
the property continue. However, no agreement for sale or lease has been
reached. If efforts to identify a health care operator for the property prove
unsuccessful, the property will most likely have to be sold for its real estate
value, however, the Company cannot be assured that the current carrying value
of the property would be realized through a sale. Early in the fourth quarter
of 1997, a restructuring of The Retreat's obligations to the Company was
completed. The Retreat's restructured base rent is $35,000 per month ($105,000
per quarter or $.05 per Psychiatric Group Depositary Share) and additional rent
will not accrue or be payable until August 1, 2000. The Company has received
the base rent payments under the restructured terms through August 1998 but The
Retreat is currently in default on other obligations owed to the Company.
Although the restructured agreement with The Retreat was a positive step in
stabilizing the cash flow and operations of this facility, as evidenced by the
current default, the Company cannot be assured that The Retreat will be able to
continue to meet its restructured obligations or continue operations. While
the Company has now reached an agreement in principle regarding the assumption
of operations at The Retreat by a new operator, certain of the required key
agreements remain under negotiation. The transfer of operations to the new
operator will not occur unless those terms are satisfactorily resolved. If not
resolved, the Company may decide to exercise any or all of its remedies. Even
if there is a change in the operator of The Retreat, continued operations at
The Retreat will remain uncertain until the new operator has demonstrated its
ability to operate the facility successfully. In light of the volatile
circumstances of the two Florida psychiatric properties, the Company cannot be
assured that further impairment losses on these investments will not be
required.

18
20
AMERICAN HEALTH PROPERTIES, INC.

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

either a long-term lease extension or a new lease will be accomplished. If the
current operator is unsuccessful in formulating a program which permits it to
pay the newly-determined Medicare liability and to make suitable payments to
the Psychiatric Group, and a facility lease with a new operator is not
accomplished, a significant negative impact to the Psychiatric Group likely
will result. Furthermore, if a new operator assumes operation of the RCC
facility, the Company cannot be assured that the current operator will be able
to pay the balance owed under the revolving credit agreement or that a new
operator will be able to operate the facility successfully. The total revenue
contribution to the Psychiatric Group from the RCC investment for the second
quarter was $.17 per Psychiatric Group Depositary Share.

Although management currently believes that the recorded amounts of
its psychiatric investments are realizable, if the psychiatric operators are
unable to adapt to the fundamental ongoing changes in the psychiatric industry
successfully and consistently mitigate the negative impact of the ongoing
changes on their financial performance, the Company may be required to
restructure payment obligations further, identify alternative operators, pursue
alternative uses for or dispositions of the properties and/or recognize
additional impairment losses on its psychiatric investments. If the Company is
required to take any of these actions, various costs are likely to be incurred
by the Company in an effort to protect, maintain and pursue alternatives for
its investments. The Company does not currently intend to make new investments
in the psychiatric sector, and over time, may sell, restructure or seek other
means to reduce its investments in the psychiatric sector. In addition, the
Company continues to encourage each of the psychiatric operators to pursue
financing alternatives which might enable them to acquire the properties and/or
repay their borrowings from the Company, as the case may be. Subject to the
rights of the holders of the Company's Series B Depositary Shares, and the
Series B Preferred Stock represented thereby, and any other preferred stock of
the Company then outstanding, the Company expects to use the net proceeds of
any future psychiatric property sales and/or psychiatric operator borrowing
repayments to first repay then outstanding inter-Group loans and/or other
liabilities owed by the Psychiatric Group and to distribute all remaining net
proceeds, if any, in cash or Core Group Common Stock to holders of Psychiatric
Group Depositary Shares. The Company cannot be assured that the efforts of
psychiatric operators to obtain alternative financing will be successful or, if
successful, that the amounts of such financing would be sufficient to enable
the Company to realize the carrying amounts of its psychiatric investments.

19
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AMERICAN HEALTH PROPERTIES, INC.

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

Many existing information systems currently record years in a
two-digit format and will be unable to properly interpret dates beyond the year
1999 which could lead to business disruptions (the Year 2000 Issue). The
Company is currently upgrading its internal information systems in the normal
course of business and does not expect the Year 2000 Issue to have a material
impact on the Company's future operations or financial results. However, the
Company's future operations could be disrupted and/or its financial results
could be negatively impacted by the Year 2000 Issue if the Company's lessees
and borrowers do not adequately address the Year 2000 Issue with respect to
their information systems. As health care providers, the Company's lessees and
borrowers generally rely extensively on information systems, including systems
for capturing patient and cost information and for billing and collecting
reimbursement for health care services provided. Furthermore, the Company's
lessees and borrowers likewise are dependent on a variety of third parties who
must also adequately address the Year 2000 Issue, including private and
government payors. Although, the Company believes that its lessees and
borrowers are generally addressing their Year 2000 Issues, it is not possible
for the Company to determine or be assured that adequate remediation of the
Year 2000 Issue will be accomplished by such lessees and borrowers.
Furthermore, it is not possible for the Company to determine or be assured that
the various payors and other third parties upon which the Company's lessees and
borrowers are dependent for reimbursement and information will accomplish
adequate remediation of their Year 2000 Issues. Accordingly, although the
Company believes that the impact of the Year 2000 Issue, as it relates to its
internal information systems, will not be material, the Company cannot be
assured that the Year 2000 Issues of its lessees and borrowers, and the third
parties upon which they are dependent, will not have a material impact on the
Company's future operations and/or financial results.

LIQUIDITY AND CAPITAL RESOURCES

As of August 11, 1998, the Company had a remaining commitment of
approximately $9.1 million to fund the development of two skilled nursing
facilities. In addition, the Company had a $35 million forward funding
commitment to develop up to five assisted living facilities to be managed by an
experienced operator of assisted living facilities. As of August 11, 1998,
$5.0 million has been funded under this commitment for the development of three
facilities having total development costs of approximately $18.6 million. The
Company has a similar commitment of $22.5 million to develop up to 11
Alzheimer's care facilities to be managed by an experienced operator of
Alzheimer's care facilities. The Company also has agreed to provide an
additional $9.4 million of real estate financing to an experienced operator of
long-term acute care facilities for which there are currently no identified
projects.

The Company has continued to increase its liquidity and enhance its
financial flexibility. In October 1997, the Company completed a $100 million
preferred equity offering and used the net proceeds to pay off all outstanding
borrowings under its bank credit facility at the time and used the remaining
proceeds to fund Core Group investments. In December 1997, the Company closed
on a new $250 million unsecured revolving bank credit facility which matures on
December 31, 2000. In February 1998, the Company completed an offering of
353,201 additional shares of Core Group Common Stock resulting in net proceeds
of approximately $9.5 million. In May 1998, the Company issued 62,160
additional shares of Core Group Common Stock in connection with the acquisition
of a medical office/clinic facility, representing additional equity of
approximately $1.7 million. In addition, options to purchase 130,000 shares of
Core Group Common Stock were exercised during the first six months of 1998,
resulting in additional equity of $2.7 million. In July 1998, the Company
received $35 million as payment in full of its Psychiatric Group's two New York
Four Winds mortgage loans and used the proceeds to pay down outstanding
borrowings under its bank credit facility.

20
22
AMERICAN HEALTH PROPERTIES, INC.

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

existing indebtedness if the Company determines that opportunities to pursue
such transactions would be attractive. The Company currently believes it has
sufficient capital to meet its commitments and that its cash flow and liquidity
will continue to be sufficient to fund current operations and to provide for
the payment of dividends to stockholders in compliance with the applicable
sections of the Internal Revenue Code governing real estate investment trusts.

21
23

AMERICAN HEALTH PROPERTIES, INC.
CORE GROUP COMBINED CONDENSED BALANCE SHEETS
(In thousands)

June 30, December 31,
1998 1997
------------ ------------

ASSETS (Unaudited)
Real estate investments
Real property and mortgage notes, net $ 808,908 $ 696,154
Construction in progress 11,325 4,729
Accumulated depreciation (110,093) (100,493)
------------ ------------
710,140 600,390
Other notes receivable and direct financing leases 3,764 3,053
Revolving loan to Psychiatric Group 2,028 3,379
Fixed rate loan to Psychiatric Group 9,175 9,175
Other assets 13,065 13,082
Cash and short-term investments 1,854 23,053
------------ ------------

$ 740,026 $ 652,132
============ ============

ATTRIBUTED LIABILITIES AND TOTAL ATTRIBUTED EQUITY
Bank loans payable $ 75,000 $ --
Mortgage notes payable 21,068 17,922
Notes and bonds payable 226,049 225,891
Accounts payable and accrued liabilities 12,497 12,760
Dividends payable 13,853 13,555
Deferred income 4,069 3,736
------------ ------------
352,536 273,864
------------ ------------
Commitments and contingencies

Total Attributed Core Group Equity 387,490 378,268
------------ ------------

$ 740,026 $ 652,132
============ ============

The accompanying notes are an integral part of these financial statements.

22
24

AMERICAN HEALTH PROPERTIES, INC.
CORE GROUP COMBINED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except per share amounts)

Three Months Ended June 30, Six Months Ended June 30,
------------------------------ ------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------

REVENUES
Rental income $ 22,129 $ 17,475 $ 43,132 $ 34,704
Mortgage interest income 117 15 230 15
Additional rental income 3,130 2,980 6,256 5,752
Other property income 384 34 719 34
Other interest income 141 157 302 1,088
Interest income on loans to Psychiatric Group 347 394 712 784
------------ ------------ ------------ ------------
26,248 21,055 51,351 42,377
------------ ------------ ------------ ------------
EXPENSES
Depreciation and amortization 4,971 3,701 9,657 7,343
Property operating 1,277 52 2,267 63
Interest expense 5,308 4,478 10,250 10,585
General and administrative 1,936 1,648 3,790 3,233
------------ ------------ ------------ ------------
13,492 9,879 25,964 21,224
------------ ------------ ------------ ------------

Minority interest 47 47 94 94
------------ ------------ ------------ ------------
INCOME BEFORE EXTRAORDINARY ITEM 12,709 11,129 25,293 21,059
EXTRAORDINARY LOSS ON DEBT PREPAYMENT -- -- -- (11,427)
------------ ------------ ------------ ------------

NET INCOME $ 12,709 $ 11,129 $ 25,293 $ 9,632
============ ============ ============ ============
SERIES B PREFERRED DIVIDEND REQUIREMENT $ (2,150) $ -- $ (4,300) $ --
============ ============ ============ ============
ATTRIBUTABLE TO CORE GROUP COMMON STOCK -
INCOME BEFORE EXTRAORDINARY ITEM $ 10,559 $ 11,129 $ 20,993 $ 21,059
============ ============ ============ ============
NET INCOME $ 10,559 $ 11,129 $ 20,993 $ 9,632
============ ============ ============ ============
Basic per share amounts -
Income before extraordinary item $ 0.44 $ 0.47 $ 0.88 $ 0.90
Extraordinary loss on debt prepayment $ -- $ -- $ -- $ (0.49)
Net income $ 0.44 $ 0.47 $ 0.88 $ 0.41

Weighted average common shares 24,055 23,459 23,887 23,459

Diluted per share amounts -
Income before extraordinary item $ 0.43 $ 0.47 $ 0.87 $ 0.89
Extraordinary loss on debt prepayment $ -- $ -- $ -- $ (0.48)
Net income $ 0.43 $ 0.47 $ 0.87 $ 0.41

Weighted average common shares and
dilutive potential common shares 24,314 23,643 24,154 23,646

Dividends declared per common share $ 0.5450 $ 0.5250 $ 1.0900 $ 1.0500

The accompanying notes are an integral part of these financial statements.

23
25

AMERICAN HEALTH PROPERTIES, INC.
CORE GROUP COMBINED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)

Six Months Ended June 30,
------------------------------
1998 1997
------------ ------------

CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 25,293 $ 9,632
Extraordinary loss on debt prepayment -- 11,427
Depreciation, amortization and other non-cash items 10,891 8,591
Deferred income 489 (231)
Change in other assets (389) (1,523)
Change in accounts payable and accrued liabilities (417) 3,385
------------ ------------
35,867 31,281
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition and construction of real estate properties (114,105) (15,923)
Mortgage note receivable fundings (179) (3,684)
Other notes receivable (1,236) --
Direct financing leases 525 158
Paydowns on revolving loan to Psychiatric Group 1,351 43
Administrative capital expenditures (61) (11)
------------ ------------
(113,705) (19,417)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings (payments) on bank loans payable 75,000 (39,500)
Proceeds from notes payable issuance -- 218,965
Prepayment of notes payable -- (163,176)
Principal payments on mortgage notes payable (229) --
Financing costs paid (7) (2,152)
Proceeds from sale of common stock 9,475 --
Proceeds from exercise of stock options 2,653 100
Dividends paid (30,253) (24,626)
------------ ------------
56,639 (10,389)
------------ ------------
INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS (21,199) 1,475
CASH AND SHORT-TERM INVESTMENTS, BEGINNING OF PERIOD 23,053 1,480
------------ ------------
CASH AND SHORT-TERM INVESTMENTS, END OF PERIOD $ 1,854 $ 2,955
============ ============

The accompanying notes are an integral part of these financial statements.

24
26
AMERICAN HEALTH PROPERTIES, INC.

NOTES TO CORE GROUP COMBINED CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

1. GENERAL

Basis of Presentation The combined condensed financial statements of
the Core Group included herein have been prepared by the Company without audit
and include all normal, recurring adjustments which are, in the opinion of
management, necessary for a fair presentation of the results of operations
pursuant to the rules and regulations of the Securities and Exchange
Commission. These financial statements should be read in conjunction with
those included in the Company's annual report on Form 10-K for the year ended
December 31, 1997.

The financial statements of the Core Group include the financial
position, results of operations and cash flows of the Company's core
investments in acute care, rehabilitation and long-term acute care hospitals,
skilled nursing, assisted living, Alzheimer's care and medical office/clinic
facilities, an allocated portion of the Company's general and administrative
expense, all corporate assets and liabilities and related transactions
associated with the ongoing operations of the Company which are not separately
identified with either operating Group, an attributed amount of inter-Group
loans receivable from the Psychiatric Group and an attributed amount of the
Company's stockholders' equity. The Core Group financial statements are
prepared using the amounts included in the Company's consolidated financial
statements.

Although the financial statements of the Core Group and the
Psychiatric Group separately report the assets, liabilities (including
contingent liabilities), stockholders' equity and items of income, expense and
cash flow of the Company attributed to each such Group, such attribution does
not affect the legal title to assets or responsibility for liabilities of the
Company or any of its subsidiaries. Furthermore, such attribution does not
affect the rights of creditors of the Company or any subsidiary, including
rights under financing covenants.

Each holder of Core Group Common Stock, Series B Depositary Shares or
Psychiatric Group Depositary Shares is a holder of an issue of capital stock of
the entire Company and is subject to risks associated with an investment in the
Company and all of its businesses, assets and liabilities. Financial effects
arising from one Group that affect the Company's consolidated results of
operations, financial condition, cash flows or borrowing costs may also affect
the results of operations, financial condition, cash flows or borrowing costs
of the other Group. In addition, net losses of either Group, as well as
dividends and distributions on, and repurchases or redemptions of, Core Group
Common Stock, Series B Depositary Shares or Psychiatric Group Depositary Shares
will reduce the funds of the Company legally available for dividends on Core
Group Common Stock, Series B Depositary Shares and Psychiatric Group Depositary
Shares. Accordingly, the Core

25
27
AMERICAN HEALTH PROPERTIES, INC.

NOTES TO CORE GROUP COMBINED CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

Group's financial statements should be read in conjunction with the Company's
consolidated financial statements and the financial statements of the
Psychiatric Group.

These financial statements include the accounts of the Core Group
business. The Core Group and the Psychiatric Group financial statements, taken
together, comprise all of the accounts included in the Company's consolidated
financial statements.

Interest Paid Interest paid by the Core Group, net of interest
capitalized, was $9,311,000 and $5,691,000 for the six months ended June 30,
1998 and 1997, respectively. The Core Group had $294,000 and $201,000 of
capitalized interest for the six months ended June 30, 1998 and 1997,
respectively.

26
28
AMERICAN HEALTH PROPERTIES, INC.

NOTES TO CORE GROUP COMBINED CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

2. ATTRIBUTED EQUITY

Equity Offering In February 1998, the Company completed an offering
of 353,201 additional shares of Core Group Common Stock resulting in net
proceeds of approximately $9.5 million.

Sale of Stock to Psychiatric Group Subsequent to the end of the
second quarter, on July 24, 1998, the Core Group sold 833,067 new shares of
Core Group Common Stock to the Company's Psychiatric Group at a price of
$25.9407 per share, which the Psychiatric Group concurrently distributed to
holders of Psychiatric Group Depositary Shares as a special stock dividend.
The proceeds of approximately $21.6 million were used by the Core Group to pay
down outstanding borrowings under the Company's bank credit facility.

3. EARNINGS PER SHARE

The following is a reconciliation of the income and share amounts used
in the basic and diluted per share computations of income before extraordinary
item attributable to Core Group Common Stock:

Three Months Ended June 30, Six Months Ended June 30,
----------------------------------------------- -----------------------------------------------
1998 1997 1998 1997
----------------------- ---------------------- ----------------------- ----------------------
(In thousands) Income Shares Income Shares Income Shares Income Shares
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------

Income before extraordinary item $ 12,709 -- $ 11,129 -- $ 25,293 -- $ 21,059 --
Less Series B preferred
dividend requirement (2,150) -- -- -- (4,300) -- -- --
Outstanding common shares -- 24,054 -- 23,457 -- 23,886 -- 23,456
Deferred common shares -- 1 -- 2 -- 1 -- 3
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Basic EPS components 10,559 24,055 11,129 23,459 20,993 23,887 21,059 23,459

4. COMMITMENTS

Inter-Group Loans Subsequent to the end of the second quarter, in
July 1998, the Core Group received $11.2 million from the Psychiatric Group for
the payoff of the entire outstanding balance of fixed and revolving inter-Group
loans owed to the Core Group by the Psychiatric Group. The Core Group used the
proceeds from the

27
29
AMERICAN HEALTH PROPERTIES, INC.

NOTES TO CORE GROUP COMBINED CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

payoff of the inter-Group loans to pay down outstanding borrowings under the
Company's bank credit facility. The Company's Board has established certain
management policies relating to the Core Group's inter-Group loans to the
Psychiatric Group. Under the policies currently in effect, which may be
modified or rescinded at any time in the sole discretion of the Company's
Board, the aggregate revolving inter-Group loans owed by the Psychiatric Group
to the Core Group are limited to a maximum of $7,870,000 at any one time
outstanding, which limit is to be reduced dollar-for-dollar by any permanent
repayment in the future of borrowings under a revolving credit agreement
provided to a Psychiatric Group hospital operator; provided that the limit on
the aggregate revolving inter-Group loans will not be reduced below $5,000,000.
Except for such revolving inter-Group loans, no additional fixed rate or other
inter-Group loans will be advanced by the Core Group to the Psychiatric Group.

Real Estate Properties As of June 30, 1998, the Core Group had funded
$7.5 million of a $17 million commitment to develop two skilled nursing
properties in Las Vegas, Nevada to be operated by an experienced operator of
skilled nursing facilities. The Core Group has a $35 million forward funding
commitment to develop up to five assisted living facilities to be managed by an
experienced operator of assisted living facilities. As of June 30, 1998, the
Core Group had funded $3.8 million under this commitment for the development of
three facilities having total development costs of approximately $18.6 million.
The Core Group has a similar commitment of $22.5 million to develop up to 11
Alzheimer's care facilities to be managed by an experienced operator of
Alzheimer's care facilities. The Core Group also has agreed to provide an
additional $9.4 million of real estate financing to an experienced operator of
long-term acute care facilities for which there are currently no identified
projects.

28
30
AMERICAN HEALTH PROPERTIES, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF CORE GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Following is a discussion of the combined financial condition and
results of operations of the Core Group, which should be read in conjunction
with (a) the combined financial statements and accompanying notes of the Core
Group and (b) management's discussion and analysis of financial condition and
results of operations and the financial statements and accompanying notes of
the Company and the Psychiatric Group included elsewhere herein.

Factors Regarding Future Results and Forward-Looking Statements This
report includes and incorporates by reference statements that are not purely
historical and are "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, including statements regarding the
Company's expectations, beliefs, intentions or strategies regarding the future.
All statements other than historical fact contained in this report, including
without limitation statements regarding rent or interest to be received from
the Company's operators and tenants, plans with respect to individual
facilities, expectations with respect to the specific terms and renewals of
leases of the Company's facilities, the Company's anticipated dividends and
dividend payout ratios, the potential redemption of the Company's shares, the
Company's liquidity position, projected expenses associated with operating
individual properties, the Company's ability to realize the recorded amounts of
its investments and the potential effect of new or existing regulations on the
operations conducted at the Company's facilities, are forward-looking
statements. All forward-looking statements included or incorporated by
reference in this report are based on information available to the Company on
the date hereof, and the Company assumes no obligation to update such
forward-looking statements. Although the Company believes that the assumptions
and expectations reflected in such forward-looking statements are reasonable,
it can give no assurance that such expectations will prove to have been correct
or that the Company will take any actions that may presently be planned.

Certain factors that could cause actual results to differ materially
from those expected include, among others: the financial success of the
operations conducted at the Company's facilities and the financial strength of
the operators and tenants of such facilities, the continuing ability of
operators and tenants to meet their obligations to the Company under existing
or restructured agreements, changes in operators or ownership of operators, the
viability of alternative uses for the Company's properties when necessary,
changes in government policy relating to the health care industry including
reductions in reimbursement levels under the Medicare and Medicaid programs,
operators' and tenants' continued eligibility to participate in the Medicare or
Medicaid programs, reductions in reimbursement by other third- party payors,
the impact of managed care pricing pressures, the requirement to provide care
on a fixed-price basis, lower occupancy levels at the Company's facilities, a
downturn in market lease rates for medical office space, higher than expected
costs associated with the maintenance and operation of the Company's medical
office/clinic facilities, higher than expected turnover at the Company's
medical office/clinic facilities, a reduction in demand for the services
provided at the Company's facilities, the strength and financial resources of
the Company's competitors, the availability and cost of capital, the Company's
ability to make additional real estate investments at attractive yields,
increases in general and administrative expenses attributable to the Core Group
as Core Group revenues increase relative to those of the Psychiatric Group and
changes in tax laws and regulations affecting real estate investment trusts.
For a further discussion of certain of these factors, see "- Future Operating
Results" herein.

OPERATING RESULTS

Second Quarter and Year to Date 1998 Compared With 1997

For the second quarter of 1998, the Core Group reported net income
attributable to Core Group Common Stock of $10,559,000, or $.43 per share on a
diluted basis, compared with $11,129,000, or $.47 per share on a diluted basis,
for the second quarter of 1997. For the six months ended June 30, 1998, the
Core Group reported

29
31
AMERICAN HEALTH PROPERTIES, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF CORE GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS

income before extraordinary item attributable to Core Group Common Stock of
$20,993,000, or $.87 per share on a diluted basis, compared with $21,059,000 or
$.89, per share on a diluted basis, for the six months ended June 30, 1997.
For the six months ended June 30, 1998, the Core Group reported net income
attributable to Core Group Common Stock of $20,993,000, or $.87 per share on a
diluted basis, compared with $9,632,000, or $.41 per share on a diluted basis,
for the six months ended June 30, 1997, which included an extraordinary loss on
debt prepayment of ($11,427,000), or ($.48) per share on a diluted basis.

Rental income was $22,129,000 for the second quarter of 1998, an
increase of $4,654,000 or 27% from $17,475,000 for the second quarter of 1997.
Rental income was $43,132,000 for the six months ended June 30, 1998, an
increase of $8,428,000 or 24% for 1998 compared with $34,704,000 for the six
months ended June 30, 1997. This increase was primarily attributable to rental
income from new properties acquired subsequent to the first quarter of 1997.
These property additions also resulted in an increase in depreciation and
amortization of $1,270,000 or 34% to $4,971,000 for the second quarter of 1998
compared with $3,701,000 for the second quarter of 1997 and an increase in
depreciation and amortization of $2,314,000 or 32% to $9,657,000 for the six
months ended June 30, 1998 compared with $7,343,000 for the six months ended
June 30, 1997.

Mortgage interest income of $117,000 for the second quarter of 1998
and $230,000 for the six months ended June 30, 1998 was attributable to the
funding of a mortgage note receivable in the second quarter of 1997.

Additional rental and interest income was $3,130,000 for the second
quarter of 1998, an increase of $150,000 or 5% from $2,980,000 for the second
quarter of 1997. Additional rental and interest income was $6,256,000 for the
six months ended June 30, 1998, an increase of $504,000 or 9% from $5,752,000
for the six months ended June 30, 1997. The increase in additional rental and
interest income for the second quarter of 1998 was attributable to increases in
additional rent of $133,000 from acute care properties and $27,000 from
long-term care properties, partially offset by a $10,000 decrease in additional
rent from rehabilitation properties. The increase in additional rental and
interest income for the six months ended June 30, 1998 was attributable to
increases in additional rent of $473,000 from acute care properties and $52,000
from long-term care properties, partially offset by a $21,000 decrease in
additional rent from rehabilitation properties.

Other interest income decreased $16,000 or 10% to $141,000 for the
second quarter of 1998 from $157,000 for the second quarter of 1997. Other
interest income decreased $786,000 or 72% to $302,000 for the six months ended
June 30, 1998 from $1,088,000 for the six months ended June 30, 1997. This
decrease resulted primarily from lower investable cash balances and a lower
average balance of direct financing leases during the second quarter and first
six months of 1998 compared to the same periods in 1997. The decrease is
partially offset by interest income from a subordinated note receivable due
from the operator of an Alzheimer's care facility, which was funded during the
second quarter of 1998. Investable cash balances were significantly higher
during the first quarter of 1997 due to the temporary investment of a portion
of the proceeds of a public debt offering in late January 1997 until used to
prepay the Company's private placement debt in late February 1997 after the
prepayment notice period had expired.

Interest income on inter-Group loans to the Psychiatric Group was
$347,000 for the second quarter of 1998, a decrease of $47,000 or 12% from
$394,000 for the second quarter of 1997. Interest income on inter-Group loans
to the Psychiatric Group was $712,000 for the six months ended June 30, 1998, a
decrease of $72,000 or 9% from $784,000 for the six months ended June 30, 1997.
This decrease reflects a lower average balance

30
32
AMERICAN HEALTH PROPERTIES, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF CORE GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS

outstanding on loans to the Psychiatric Group as a result of repayments by the
Psychiatric Group from its available undistributed cash flow.

Property operating expense was $1,277,000 for the second quarter of
1998, an increase of $1,225,000 from $52,000 for the second quarter of 1997.
Property operating expense was $2,267,000 for the six months ended June 30,
1998, an increase of $2,204,000 from $63,000 for the six months ended June 30,
1997. This increase was attributable to operating expenses associated with
medical office/clinic facilities acquired subsequent to the first quarter 1997.

General and administrative expenses were $1,936,000 for the second
quarter of 1998, an increase of $288,000 or 17% from $1,648,000 for the second
quarter of 1997. General and administrative expenses were $3,790,000 for the
six months ended June 30, 1998, an increase of $557,000 or 17% from $3,233,000
for the six months ended June 30, 1997. This variation was attributable to an
increase in the Company's consolidated general and administrative expenses
which are allocated between the Core Group and Psychiatric Group primarily
based on revenues, and an increase in Core Group revenues relative to the
Company's consolidated revenues. The increase in the Company's consolidated
general and administrative expenses affecting the Core Group was primarily
attributable to hiring of additional personnel, higher compensation and
benefits expense and an increase in travel expense.

Future Operating Results

31
33
AMERICAN HEALTH PROPERTIES, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF CORE GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS

and passed by both Houses of Congress. These plans generally include revisions
to and limits on Medicare and federal programs providing Medicaid reimbursement
to state health care programs and have had and potentially would have an
adverse impact on the level of funds available in the future to health care
facilities. The Balanced Budget Act of 1997 contains extensive changes to the
Medicare and Medicaid programs intended to reduce the projected amount of
increase in Medicare spending by an estimated $115 billion and Medicaid
spending by an estimated $13 billion over five years. In addition, the Budget
Act repealed certain limits on states' ability to reduce their Medicaid
reimbursement levels. The Budget Act has the potential to reduce significantly
federal spending on health care services provided at each of the Core Group's
facilities and provided by the physician tenants of the Core Group's medical
office/clinic facilities, and to affect revenues of the Core Group's operators
and tenants adversely. In particular, the Budget Act's limitations on
reimbursable costs and reductions in payment incentives and capital related
payments, as well as the change toward a prospective payment system, may have a
material adverse effect on operator revenues at the Core Group's rehabilitation
and long-term acute care hospitals. The Budget Act's freeze on acute care
hospital reimbursement rates may also have an adverse effect on the operator
revenues at the Core Group's acute care hospitals. In addition, the
prospective payment system imposed by the Budget Act on the operators of the
Core Group's skilled nursing facilities may have a material adverse effect on
the operator revenues at such facilities if the operators are unable to
effectively respond to the financial incentives provided by the prospective
payment system. The Company cannot be assured that the changes effected by the
Budget Act will not have a material adverse effect on the Core Group's
financial condition or results of operation.

The Company's Board and management are monitoring the effect of the
Budget Act on the Core Group's facilities and potential changes to
reimbursement programs closely. The Company believes that the changes effected
by the Budget Act and changes proposed at the federal and state level may pose
risks for certain institutions that are unwilling or unable to respond. At the
same time, the Company believes that this changing health care environment will
provide the Core Group with new opportunities for investment.

The ongoing changes in the health care industry include trends toward
shorter lengths of hospital stay, increased use of outpatient services,
increased federal, state and third-party oversight of health care company
operations and business practices, and increased demand for discounted or
capitated health care services (delivery of services at a fixed price per
capita basis to a defined group of covered parties). Furthermore, federal,
state and third-party payors continue to propose and adopt various cost
containment measures that restrict the scope of reimbursable health care
services and limit increases in reimbursement rates for such services. Payors
also are continuing to enforce compliance with program requirements
aggressively and to pursue providers that they believe have not complied with
such requirements. Outpatient business is expected to increase as advances in
medical technologies allow more procedures to be performed on an outpatient
basis and as payors continue to direct more patients from inpatient care to
outpatient care. In addition, the entrance of insurance companies into managed
care programs is accelerating the introduction of managed care in new
localities, and states and insurance companies continue to negotiate actively
the amounts they will pay for services. Moreover, the percentage of health care
services that are reimbursed under the Medicare and Medicaid programs continues
to increase as the population ages. States are also expanding their Medicaid
programs. Continued eligibility to participate in these programs is crucial to
a provider's financial strength. As a result of the foregoing, revenues and
margins may decrease at the Core Group's facilities.

32
34
AMERICAN HEALTH PROPERTIES, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF CORE GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS

outpatient surgery centers, long-term acute care hospitals, skilled nursing
facilities, assisted living and Alzheimer's care facilities and medical
office/clinic facilities. In general, the Core Group facilities are part of
local or regional health care delivery systems or are in the process of
becoming integrated into such systems.

The Core Group's future operating results could be affected by the
operating performance of the Core Group's lessees and borrowers. The rental and
interest obligations of its facility operators are primarily supported by the
facility-specific operating cash flow. Real estate investments in the Core
Group's portfolio are generally further supported by one or more credit
enhancements that take the form of cross-default provisions, letters of credit,
corporate and personal guarantees, security interests in cash reserve funds,
accounts receivable or other personal property and requirements to maintain
specified financial ratios.

Financial effects arising from the Psychiatric Group that affect the
Company's consolidated results of operations, financial condition or borrowing
costs may also affect the results of operations, financial condition or
borrowing costs of the Core Group. In July 1998, the Company's Psychiatric
Group received $35 million as payment in full of mortgage loans owed to the
Psychiatric Group by the operator of its two New York Four Winds psychiatric
facilities. The proceeds from the payment of the Four Winds mortgage loans
were first used to repay the entire $11.2 million outstanding balance of fixed
and revolving inter-Group loans owed to the Core Group by the Psychiatric
Group. The Core Group's interest income from these inter-Group loans was
$347,000 for the second quarter of 1998 ($.014 per common share). In addition,
as a result of the Four Winds mortgage loans payoff, the allocation of the
Company's consolidated general and administrative expenses, which is primarily
based on the relative revenues of the two Groups, will be increased to the Core
Group by approximately $80,000 per quarter (less than $.005 per common share).
Since the Company's consolidated general and administrative expenses are
allocated between the Core Group and Psychiatric Group primarily based on
revenues, the amount of such expenses allocated to the Core Group will further
increase in the future if revenues of the Psychiatric Group decline for any
reason, including the disposition or restructuring of the remaining Psychiatric
Group assets or the nonpayment by Psychiatric Group operators of their rent and
interest obligations to the Psychiatric Group. Accordingly, the Core Group's
financial statements should be read in conjunction with the financial
statements of the Psychiatric Group and the Company's consolidated financial
statements.

Aggregate revenues from a lease maturing in February 1999 accounted
for 12% of the Core Group's total revenues in 1997. The property is leased to
a subsidiary of Columbia/HCA Healthcare Corporation (Columbia). The lease
grants the operator options to extend the term of the lease for eight
consecutive five-year renewal terms. Base and additional rent during the first
three extended terms would be on the same terms and conditions as the current
initial term. Minimum rent during the final five extended terms would be fair
market rental but without separate additional rent. The lease also grants the
operator the option to purchase the leased property at fair market value at the
expiration of any term of the lease. If the lease is not renewed and the
current operator does not exercise its option to purchase the property, the
Company will be required to seek a new operator for the property.

The future operating results of the Core Group will be affected by
additional factors including the amount, timing and yield of additional real
estate investments and the competition for such investments. Operating results
also will be affected by the availability and terms of the Company's future
equity and debt financing. The Company's financing strategy to facilitate
future growth includes objectives to reduce its cost of capital over time and
enhance its liquidity and financial flexibility.

33
35
AMERICAN HEALTH PROPERTIES, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF CORE GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Many existing information systems currently record years in a
two-digit format and will be unable to properly interpret dates beyond the year
1999 which could lead to business disruptions (the Year 2000 Issue). The
Company is currently upgrading its internal information systems in the normal
course of business and does not expect the Year 2000 Issue to have a material
impact on the future operations or financial results of the Company's Core
Group. However, the future operations of the Company's Core Group could be
disrupted and/or its financial results could be negatively impacted by the Year
2000 Issue if the Company's Core Group lessees and borrowers do not adequately
address the Year 2000 Issue with respect to their information systems. As
health care providers, the Company's Core Group lessees and borrowers generally
rely extensively on information systems, including systems for capturing
patient and cost information and for billing and collecting reimbursement for
health care services provided. Furthermore, the Company's Core Group lessees
and borrowers likewise are dependent on a variety of third parties who must
also adequately address the Year 2000 Issue, including private and government
payors. Although, the Company believes that the Core Group lessees and
borrowers are generally addressing their Year 2000 Issues, it is not possible
for the Company to determine or be assured that adequate remediation of the
Year 2000 Issue will be accomplished by such lessees and borrowers.
Furthermore, it is not possible for the Company to determine or be assured that
the various payors and other third parties upon which the Company's Core Group
lessees and borrowers are dependent for reimbursement and information will
accomplish adequate remediation of their Year 2000 Issues. Accordingly,
although the Company believes that the impact of the Year 2000 Issue, as it
relates to its internal information systems, will not be material to the
Company's Core Group, the Company cannot be assured that the Year 2000 Issues
of its Core Group lessees and borrowers, and the third parties upon which they
are dependent, will not have a material impact on the future operations and/or
financial results of the Company's Core Group.

LIQUIDITY AND CAPITAL RESOURCES

As of August 11, 1998, the Core Group had no borrowings outstanding
under its fixed rate or revolving inter- Group loans to the Psychiatric Group.
Under management policies currently in effect, the Core Group may provide the
Psychiatric Group with revolving inter-Group loans of up to $7,870,000.

As of August 11, 1998, the Core Group had a remaining commitment of
approximately $9.1 million to fund the development of two skilled nursing
facilities. In addition, the Company had a $35 million forward funding
commitment to develop up to five assisted living facilities to be managed by an
experienced operator of assisted living facilities. As of August 11, 1998,
$5.0 million has been funded under this commitment for the development of three
facilities having total development costs of approximately $18.6 million. The
Core Group has a similar commitment of $22.5 million to develop up to 11
Alzheimer's care facilities to be managed by an experienced operator of
Alzheimer's care facilities. The Core Group also has agreed to provide an
additional $9.4 million of real estate financing to an experienced operator of
long-term acute care facilities for which there are currently no identified
projects.

Thus far in 1998, the Company's Core Group has raised additional
equity of approximately $35.5 million. In February 1998, the Company completed
an offering of 353,201 additional shares of Core Group Common Stock resulting
in net proceeds of approximately $9.5 million. In May 1998, the Company issued
62,160 additional shares of Core Group Common Stock in connection with the
acquisition of a medical office/clinic facility, representing additional equity
of approximately $1.7 million. In July 1998, the Core

34
36
AMERICAN HEALTH PROPERTIES, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF CORE GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Group sold 833,067 shares of Core Group Common Stock to the Company's
Psychiatric Group resulting in proceeds to the Core Group of approximately
$21.6 million. In addition, options to purchase 130,000 shares of Core Group
Common Stock were exercised during the first six months of 1998, resulting in
additional equity of $2.7 million. The Core Group also received $11.2 million
in July 1998 from the Psychiatric Group for the payoff of the entire
outstanding balance of fixed and revolving inter-Group loans owed to the Core
Group by the Psychiatric Group. The Core Group used the proceeds from the
payoff of the inter-Group loans and the sale of additional shares to pay down
outstanding borrowings under the Company's bank credit facility.

As of August 11, 1998, the Company had $45.5 million of outstanding
borrowings under its $250 million bank credit facility and had $2.2 million in
cash and short-term investments. The Company's total indebtedness as of August
11, 1998 was $289.3 million. The Company expects to utilize its bank credit
facility to fund its future Core Group acquisitions and its other commitments.
The Company may incur additional indebtedness or refinance existing
indebtedness if the Company determines that opportunities to pursue such
transactions would be attractive. The Company currently believes it has
sufficient capital to meet its commitments and that its cash flow and liquidity
will continue to be sufficient to fund current operations and to provide for
the payment of dividends to stockholders in compliance with the applicable
sections of the Internal Revenue Code governing real estate investment trusts.

35
37

AMERICAN HEALTH PROPERTIES, INC.
PSYCHIATRIC GROUP COMBINED CONDENSED BALANCE SHEETS
(In thousands)

June 30, December 31,
1998 1997
------------ ------------

ASSETS (Unaudited)
Real estate investments
Real property and mortgage notes, net $ 46,907 $ 49,622
Accumulated depreciation (2,118) (1,742)
------------ ------------
44,789 47,880
Other notes receivable 2,500 2,500
Other assets 613 614
------------ ------------

$ 47,902 $ 50,994
============ ============
ATTRIBUTED LIABILITIES AND TOTAL ATTRIBUTED EQUITY
Revolving loan from Core Group $ 2,028 $ 3,379
Fixed rate loan from Core Group 9,175 9,175
Accounts payable and accrued liabilities 1,284 433
Dividends payable 1,333 1,292
Deferred income 250 22
------------ ------------
14,070 14,301
------------ ------------
Commitments and contingencies

Total Attributed Psychiatric Group Equity 33,832 36,693
------------ ------------

$ 47,902 $ 50,994
============ ============

The accompanying notes are an integral part of these financial statements.

36
38

AMERICAN HEALTH PROPERTIES, INC.
PSYCHIATRIC GROUP COMBINED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except per share amounts)

Three Months Ended June 30, Six Months Ended June 30,
-------------------------- --------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------

REVENUES
Rental income $ 355 $ 342 $ 710 $ 923
Mortgage interest income 1,538 1,516 3,078 3,033
Additional rental and interest income 270 167 564 371
Other interest income 79 85 159 184
---------- ---------- ---------- ----------
2,242 2,110 4,511 4,511
---------- ---------- ---------- ----------
EXPENSES
Depreciation and amortization 188 188 376 374
Property operating 75 25 300 25
Interest expense on loans from Core Group 347 394 712 784
General and administrative 386 300 638 595
Impairment loss on real estate
and notes receivable 2,730 -- 2,730 11,000
---------- ---------- ---------- ----------
3,726 907 4,756 12,778
---------- ---------- ---------- ----------

NET INCOME (LOSS) $ (1,484) $ 1,203 $ (245) $ (8,267)
========== ========== ========== ==========

Basic per share amounts -
Net income (loss) $ (0.71) $ 0.58 $ (0.12) $ (3.97)

Weighted average depositary shares 2,084 2,084 2,084 2,084

Diluted per share amounts -
Net income (loss) $ (0.71) $ 0.57 $ (0.12) $ (3.97)

Weighted average depositary shares and
dilutive potential depositary shares 2,084 2,098 2,084 2,084

Dividends declared per depositary share $ 0.6400 $ 0.6300 $ 1.2800 $ 1.3800

The accompanying notes are an integral part of these financial statements.

37
39
AMERICAN HEALTH PROPERTIES, INC.
PSYCHIATRIC GROUP COMBINED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)

Six Months Ended June 30,
--------------------------
1998 1997
---------- ----------

CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) $ (245) $ (8,267)
Depreciation, amortization and other non-cash items 428 442
Deferred income (8) (18)
Impairment loss on real estate and notes receivable 2,730 11,000
Change in other assets 1 108
Change in accounts payable and accrued liabilities 1,033 (141)
---------- ----------
3,939 3,124
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Principal payments on mortgage notes receivable 39 35
Other notes receivable -- 114
---------- ----------
39 149
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on revolving loan from Core Group (1,351) (43)
Dividends paid (2,627) (3,230)
---------- ----------
(3,978) (3,273)
---------- ----------
INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS -- --
CASH AND SHORT-TERM INVESTMENTS, BEGINNING OF PERIOD -- --
---------- ----------
CASH AND SHORT-TERM INVESTMENTS, END OF PERIOD $ -- $ --
========== ==========

The accompanying notes are an integral part of these financial statements.

38
40
AMERICAN HEALTH PROPERTIES, INC.

NOTES TO PSYCHIATRIC GROUP COMBINED CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

1. GENERAL

The Psychiatric Group Depositary Shares are intended to reflect the
separate financial performance of the Company's investments in psychiatric
hospitals (the Psychiatric Group). The Company's common stock (the Core Group
Common Stock) is intended to reflect the separate financial performance of the
Company's investments in acute care, rehabilitation and long-term acute care
hospitals, skilled nursing, assisted living, Alzheimer's care and medical
office/clinic facilities (the Core Group). The Company's Series B Depositary
Shares, and the Series B Preferred Stock represented thereby, are attributed to
the Company's Core Group for financial accounting and reporting purposes. The
Series B Depositary Shares, and the Series B Preferred Stock represented
thereby, rank senior to the Company's Core Group Common Stock and its
Psychiatric Group Depositary Shares with respect to dividend payments and
liquidation rights.

Basis of Presentation The combined condensed financial statements of
the Psychiatric Group included herein have been prepared by the Company without
audit and include all normal, recurring adjustments which are, in the opinion
of management, necessary for a fair presentation of the results of operations
pursuant to the rules and regulations of the Securities and Exchange
Commission. These financial statements should be read in conjunction with
those included in the Company's annual report on Form 10-K for the year ended
December 31, 1997.

The financial statements of the Psychiatric Group include the
financial position, results of operations and cash flows of the Company's
psychiatric hospital investments, an allocated portion of the Company's general
and administrative expense, an attributed amount of inter-Group debt payable to
the Core Group and an attributed amount of the Company's stockholders' equity.
The Psychiatric Group financial statements are prepared using the amounts
included in the Company's consolidated financial statements.

Although the financial statements of the Psychiatric Group and the
Core Group separately report the assets, liabilities (including contingent
liabilities), stockholders' equity and items of income, expense and cash flow
of the Company attributed to each such Group, such attribution does not affect
the legal title to assets or responsibility for liabilities of the Company or
any of its subsidiaries. Furthermore, such attribution does not affect the
rights of creditors of the Company or any subsidiary, including rights under
financing covenants.

Each holder of Psychiatric Group Depositary Shares, Core Group Common
Stock or Series B Depositary Shares is a holder of an issue of capital stock of
the entire Company and is subject to risks associated with an investment in the
Company and all of its businesses, assets and liabilities. Financial effects
arising from one Group that affect the Company's consolidated results of
operations, financial condition, cash flows or borrowing costs may also affect
the results of operations, financial condition, cash flows or borrowing costs
of the other Group. In addition, net losses of either Group, as well as
dividends and distributions on, and repurchases or redemptions of, Psychiatric
Group Depositary Shares, Core Group Common Stock or Series B Depositary Shares
will reduce the funds of the Company legally available for dividends on
Psychiatric Group Depositary Shares, Core Group Common Stock and Series B
Depositary Shares. Accordingly, the Psychiatric Group's financial statements
should be read in conjunction with the Company's consolidated financial
statements and the financial statements of the Core Group.

39
41
AMERICAN HEALTH PROPERTIES, INC.

NOTES TO PSYCHIATRIC GROUP COMBINED CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

These financial statements include the accounts of the Psychiatric
Group business. The Psychiatric Group and the Core Group financial statements,
taken together, comprise all of the accounts included in the Company's
consolidated financial statements.

Interest Paid Interest paid by the Psychiatric Group on inter-Group
loans from the Core Group was $712,000 and $784,000 for the six months ended
June 30, 1998 and 1997, respectively.

40
42
AMERICAN HEALTH PROPERTIES, INC.

NOTES TO PSYCHIATRIC GROUP COMBINED CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

2. DEBT

Inter-Group Loans Subsequent to the end of the second quarter, in
July 1998, the Psychiatric Group paid off the entire $11.2 million outstanding
balance of fixed and revolving inter-Group loans owed to the Core Group by the
Psychiatric Group. The Company's Board has established certain policies
relating to the Core Group's inter-Group loans to the Psychiatric Group. Under
the policies currently in effect, which may be modified or rescinded at any
time in the sole discretion of the Company's Board, the aggregate revolving
inter-Group loans owed by the Psychiatric Group to the Core Group are limited
to a maximum of $7,870,000 at any one time outstanding, which limit is to be
reduced dollar-for- dollar by any permanent repayment in the future of
borrowings under a revolving credit agreement provided to a Psychiatric Group
hospital operator; provided that the limit on the aggregate revolving
inter-Group loans will not be reduced below $5,000,000. Except for such
revolving inter-Group loans, no additional fixed rate or other inter-Group
loans will be advanced by the Core Group to the Psychiatric Group.

3. ATTRIBUTED EQUITY

Special Stock Dividend Subsequent to the end of the second quarter,
on July 24, 1998, the Psychiatric Group purchased 833,067 new shares of Core
Group Common Stock from the Company's Core Group at a price of $25.9407 per
share, which the Psychiatric Group concurrently distributed to holders of
Psychiatric Group Depositary Shares as a special stock dividend. Holders of
Psychiatric Group Depositary Shares received 0.4 shares of Core Group Common
Stock for each Psychiatric Group Depositary Share held and were paid
cash-in-lieu of fractional shares of Core Group Common Stock based on the price
of $25.9407.

Stock Incentive Plans Options to purchase 10,000 shares of
Psychiatric Group Depositary Shares at a weighted average exercise price of
$20.96 per share expired during the six months ended June 30, 1998.

4. EARNINGS PER SHARE

Basic EPS components $ (1,484) 2,084 $ 1,203 2,084 $ (245) 2,084 $ (8,267) 2,084

Effect of dilutive potential
depositary shares -
Stock options -- -- -- -- -- -- -- --
DER's -- -- -- 14 -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Diluted EPS components $ (1,484) 2,084 $ 1,203 2,098 $ (245) 2,084 $ (8,267) 2,084
========== ========== ========== ========== ========== ========== ========== ==========

5. STATUS OF PSYCHIATRIC GROUP INVESTMENTS

41
43
AMERICAN HEALTH PROPERTIES, INC.

NOTES TO PSYCHIATRIC GROUP COMBINED CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

were first used to repay the entire balance of approximately $11.2 million of
fixed and revolving inter-Group loans owed to the Company's Core Group by the
Psychiatric Group and to maintain a cash reserve of approximately $2.3 million
for the net current liabilities of the Psychiatric Group. Substantially all of
the remaining proceeds were distributed to holders of Psychiatric Group
Depositary Shares on July 24, 1998 as a special dividend paid in the form of
0.4 shares of Core Group Common Stock per Psychiatric Group Depositary Share.
In order to effectuate the stock dividend, the Psychiatric Group purchased
833,067 shares of Core Group Common Stock from the Core Group at a price of
$25.9407 per share, which represented the average trading price of the Core
Group Common Stock for the last ten trading days prior to the July 17, 1998
record date for the special dividend, as provided in the certificate of
designation for the Psychiatric Group Stock.

The fundamental ongoing changes in the psychiatric industry and the
resulting negative impact on operator financial performance have resulted in
significant impairment losses on the three remaining psychiatric investments
and the periodic restructuring of psychiatric operator payment obligations in
previous years. The Psychiatric Group recorded an $11 million charge in the
first quarter of 1997 for impairment of the carrying value of its two
psychiatric investments in Florida. The Northpointe property, at which the
operator ceased paying its obligations to the Psychiatric Group in February
1997 and ceased hospital operations in the second quarter of 1997, continues to
remain idle. The Psychiatric Group incurred costs of approximately $75,000
during the second quarter of 1998 ($.04 per depositary share) and $225,000 for
the first quarter of 1998 ($.11 per depositary share) to protect and maintain
this property, including approximately $150,000 for unexpected expenditures.
Although on an ongoing basis, the Psychiatric Group expects to incur costs of
approximately $75,000 per quarter ($.04 depositary share) to protect and
maintain this property while various alternatives for the property are
evaluated and pursued, the Psychiatric Group cannot be assured that other
unexpected costs will not be incurred. Numerous discussions with health care
operators and others regarding a potential sale or lease of the property
continue. However, no agreement for sale or lease has been reached. If
efforts to identify a health care operator for the property prove unsuccessful,
the property will most likely have to be sold for its real estate value,
however, the Psychiatric Group cannot be assured that the current carrying
value of the property would be realized through a sale. Early in the fourth
quarter of 1997, a restructuring of The Retreat's obligations to the
Psychiatric Group was completed. The Retreat's restructured base rent is
$35,000 per month ($105,000 per quarter or $.05 per depositary share) and
additional rent will not accrue or be payable until August 1, 2000. The
Psychiatric Group has received the base rent payments under the restructured
terms through August 1998 but The Retreat is currently in default on other
obligations owed to the Psychiatric Group. Although the restructured agreement
with The Retreat was a positive step in stabilizing the cash flow and
operations of this facility, as evidenced by the current default, the
Psychiatric Group cannot be assured that The Retreat will be able to continue
to meet its restructured obligations or continue operations. While the
Psychiatric Group has now reached an agreement in principle regarding the
assumption of operations at The Retreat by a new operator, certain of the
required key agreements remain under negotiation. The transfer of operations
to the new operator will not occur unless those terms are satisfactorily
resolved. If not

42
44
AMERICAN HEALTH PROPERTIES, INC.

NOTES TO PSYCHIATRIC GROUP COMBINED CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

resolved, the Psychiatric Group may decide to exercise any or all of its
remedies. Even if there is a change in the operator of The Retreat, continued
operations at The Retreat will remain uncertain until the new operator has
demonstrated its ability to operate the facility successfully. In light of the
volatile circumstances of the two Florida psychiatric properties, the
Psychiatric Group cannot be assured that further impairment losses on these
investments will not be required.

Although the $2,500,000 balance outstanding under Rock Creek Center's
(RCC) revolving credit agreement matured in June 1997 and the initial term of
the RCC lease expired in December 1997, RCC has continued to make interest
payments on the revolving credit agreement and the initial lease term has been
extended to September 30, 1998, with a further extension pending as described
below. RCC has met its rent and interest obligations to the Psychiatric Group
through August 1998, however, the Psychiatric Group cannot be assured that RCC
will not experience future operational and cash flow difficulties as it has in
the past. At the end of June 1998, the operator of the Rock Creek Center (RCC)
facility informed the Psychiatric Group that it had incurred a material,
unanticipated liability to Medicare, which imperils the continuing operation of
the facility. In response, the operator has commenced a significant revision
and downsizing of its operations to focus on geriatric psychiatric care. In
order to implement that change, the operator has given a WARN Act notice to its
employees notifying them that the operations of the facility in its current
mode will cease within 60 days of such notice and inviting them to reapply for
positions in the proposed downsized operation. Under the currently applicable
lease extension, the Psychiatric Group has the right, effective July 1, 1998,
to negotiate with other potential health care operators regarding operating the
facility and the Psychiatric Group has commenced marketing the property to
potential new operators. An agreement in principle has been reached with the
existing operator extending the current lease to March 31, 1999, and extending
the maturity of the revolving credit agreement to March 31, 1999. Under the
proposed arrangement, the operator will continue to pay interest on all
outstanding obligations and will pay $5,000 per month against the principal
balance of the revolving credit agreement. Although discussions with the
current operator have not yet been successful in reaching a mutually acceptable
long-term lease, purchase and sale agreement, and/or payment schedule for the
payment of the balance of the revolving credit agreement, the operator of the
facility has approached the Psychiatric Group with a proposal that may be
practicable depending, in part, on the operator's ability to negotiate an
acceptable compromise with Medicare regarding the unanticipated Medicare
liability. Local and national operators have expressed interest in the
facility; however, the Psychiatric Group cannot be assured that either a
long-term lease extension or a new lease will be accomplished. If the current
operator is unsuccessful in formulating a program which permits it to pay the
newly-determined Medicare liability and to make suitable payments to the
Psychiatric Group, and a facility lease with a new operator is not
accomplished, a significant negative impact to the Psychiatric Group likely
will result. Furthermore, if a new operator assumes operation of the RCC
facility, the Psychiatric Group cannot be assured that the current operator
will be able to pay the balance owed under the revolving credit agreement or
that a new operator will be able to operate the facility successfully. The
total revenue contribution to the Psychiatric Group from the RCC investment for
the second quarter was $.17 per depositary share.

43
45
AMERICAN HEALTH PROPERTIES, INC.

NOTES TO PSYCHIATRIC GROUP COMBINED CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

repay their borrowings from the Psychiatric Group, as the case may be. Subject
to the rights of the holders of the Company's Series B Depositary Shares, and
the Series B Preferred Stock represented thereby, and any other preferred stock
of the Company then outstanding, the Psychiatric Group expects to use the net
proceeds of any future property sales and/or operator borrowing repayments to
first repay then outstanding inter-Group loans and/or other liabilities owed by
the Psychiatric Group and to distribute all remaining net proceeds, if any, in
cash or Core Group Common Stock of the Company to holders of Psychiatric Group
Depositary Shares. The Psychiatric Group cannot be assured that the efforts of
psychiatric operators to obtain alternative financing will be successful or, if
successful, that the amounts of such financing would be sufficient to enable
the Psychiatric Group to realize the carrying amounts of its investments. The
Company continues to retain an investment banking firm to provide financial
advisory services to the Psychiatric Group. These services include supplemental
monitoring of the performance of individual assets, assistance in potential
sales or restructurings of particular investments and continuing assessments of
available strategic alternatives for the portfolio. The cost of the financial
advisory services are specifically charged to the operating results of the
Psychiatric Group.

The Psychiatric Group's dividend is determined quarterly based upon
each quarter's operating results. Historically, the level of dividends of the
Psychiatric Group have varied quarter-to-quarter. Any significant advance of
additional funds to operators of the Psychiatric Group's properties,
modification of terms covering the rental or interest obligations of its
properties or nonpayment or deferral of such obligations as they become due
likely will have an adverse impact on the Psychiatric Group results of
operations and cash flows, as well as on the quarterly dividend payment on
Psychiatric Group Depositary Shares. In addition to the foregoing, future
operating results, cash flows and dividends of the Psychiatric Group will be
affected by changes in the level of additional rent, the amount of additional
financial advisory fees and, to the extent necessary, various costs which might
be incurred in an effort to protect, maintain and pursue alternatives for its
investments. With the repayment of the Four Winds loans, future quarterly cash
flows and dividends will decrease very substantially from previous quarters.
Also, small events with respect to the Psychiatric Group's three remaining
facilities will likely have a more significant effect on the Psychiatric
Group's cash flows and dividends, and therefore the price of the Psychiatric
Group Depositary Shares. The liquidity of the Psychiatric Group Depositary
Shares will also likely be adversely affected.

44
46
AMERICAN HEALTH PROPERTIES, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF PSYCHIATRIC GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Following is a discussion of the combined financial condition and
results of operations of the Psychiatric Group, which should be read in
conjunction with (a) the combined financial statements and accompanying notes
of the Psychiatric Group and (b) management's discussion and analysis of
financial condition and results of operations and the financial statements and
accompanying notes of the Company and the Core Group included elsewhere herein.

Factors Regarding Future Results and Forward-Looking Statements This
report includes and incorporates by reference statements that are not purely
historical and are "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, including statements regarding the
Company's expectations, beliefs, intentions or strategies regarding the future.
All statements other than historical fact contained in this report, including
without limitation statements regarding rent or interest to be received from
the Company's operators, plans with respect to individual facilities,
expectations with respect to the specific terms and renewals of leases of the
Company's facilities, the Company's anticipated dividend and dividend payout
ratios, the potential redemption of the Company's Shares, the Company's
liquidity position, projected expenses associated with maintaining individual
properties, the Company's ability to realize the recorded amounts of its
investments and the potential effect of new or existing regulations on the
operations conducted at the Company's facilities, are forward-looking
statements. All forward-looking statements included or incorporated by
reference in this report are based on information available to the Company on
the date hereof, and the Company assumes no obligation to update such
forward-looking statements. Although the Company believes that the assumptions
and expectations reflected in such forward-looking statements are reasonable,
it can give no assurance that such expectations will prove to have been correct
or that the Company will take any actions that may presently be planned.

Certain factors that could cause actual results to differ materially
from those expected include, among others: the financial success of the
operations conducted at the Company's facilities and the financial strength of
the operators of such facilities, the continuing ability of operators to meet
their obligations to the Company under existing or restructured agreements,
changes in operators or ownership of operators, the viability of alternative
uses for the Company's properties when necessary, changes in government policy
relating to the health care industry including reductions in reimbursement
levels under the Medicare and Medicaid programs, operators' continued
eligibility to participate in the Medicare or Medicaid programs, reductions in
reimbursement by other third-party payors, the impact of managed care pricing
pressures, the requirement to provide care on a fixed-price basis, lower
occupancy levels at the Company's facilities, a reduction in demand for the
services provided at the Company's facilities, the strength and financial
resources of the Company's competitors, the availability and cost of capital,
the Company's ability to make additional real estate investments at attractive
yields and changes in tax laws and regulations affecting real estate investment
trusts. For a further discussion of certain of these factors, see "- Future
Operating Results" herein.

OPERATING RESULTS

Second Quarter and Year to Date 1998 Compared With 1997

For the second quarter of 1998, the Psychiatric Group reported a net
loss of ($1,484,000), or ($.71) per Psychiatric Group Depositary Share on a
diluted basis, compared with net income of $1,203,000, or $.57 per Psychiatric
Group Depositary Share on a diluted basis, for the second quarter of 1997. For
the six months ended June 30, 1998, the Psychiatric Group reported a net loss
of ($245,000), or ($.12) per Psychiatric Group Depositary Share on a diluted
basis, compared with a net loss of ($8,267,000), or ($3.97) per Psychiatric
Group Depositary Share on a diluted basis. The net loss for the second quarter
of 1998 and six months ended June 30, 1998 includes an impairment loss on notes
receivable of ($2,730,000), or ($1.31) per Psychiatric Group Depositary Share
on a

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AMERICAN HEALTH PROPERTIES, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF PSYCHIATRIC GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS

diluted basis. The net loss for the six months ended June 30, 1997 includes an
impairment loss on real estate and notes receivable of ($11,000,000), or
($5.28) per Psychiatric Group Depositary Share on a diluted basis.

Rental income was $710,000 for the six months ended June 30, 1998, a
decrease of $213,000 or 23% from $923,000 for the six months ended June 30,
1997. The decrease in rental income for the six months ended June 30, 1998 was
primarily due to the reduction of base rent from one of the Florida properties
as a result of a lease restructuring early in the fourth quarter of 1997.
Additionally, the first quarter of 1997 included base rent received for one
month from the other Florida property before the operator stopped paying rent
and subsequently ceased operations in the second quarter of 1997.

Additional rental and interest income was $270,000 for the second
quarter of 1998, an increase of $103,000 or 62% from $167,000 for the second
quarter of 1997. Additional rental and interest income was $564,000 for the six
months ended June 30, 1998, an increase of $193,000 or 52% from $371,000 for
the six months ended June 30, 1997. This increase was primarily attributable
to an increase in additional interest received from the Four Winds Hospital -
Katonah facility.

Property operating expense of $75,000 for the second quarter of 1998
and $300,000 for the six months ended June 30, 1998 represents costs related to
the protection and maintenance of one of the properties in Florida, including
approximately $150,000 for unexpected expenditures, incurred after the operator
ceased operations in the second quarter of 1997.

Interest expense on inter-Group loans from the Core Group was $347,000
for the second quarter of 1998, a decrease of $47,000 or 12% from $394,000 for
the second quarter of 1997. Interest expense on inter-Group loans from the
Core Group was $712,000 for the six months ended June 30, 1998 a decrease of
$72,000 or 9% from $784,000 for the six months ended June 30, 1997. This
decrease reflects a lower average balance outstanding on loans from the Core
Group as a result of repayments by the Psychiatric Group from its available
undistributed cash flow.

General and administrative expenses were $386,000 for the second
quarter of 1998, an increase of $86,000 or 29% from $300,000 for the second
quarter of 1997. General and administrative expenses were $638,000 for the six
months ended June 30, 1998, an increase of $43,000 or 7% from $595,000 for the
six months ended June 30, 1997. The Company's consolidated general and
administrative expenses are allocated between the Core Group and Psychiatric
Group primarily based on revenues, however significant costs directly related
to either Group are specifically charged to the applicable Group. Costs
allocated to the Psychiatric Group based on revenues and direct costs charged
to the Psychiatric Group both decreased for the second quarter and first half
of 1998 compared to the comparable periods in 1997. The Psychiatric Group was
specifically charged for $225,000 and $302,000 of costs in the second quarter
and first six months of 1998, respectively, for financial advisory services
provided primarily by an investment banking firm which included supplemental
monitoring of the performance of the Psychiatric Group's properties and
assistance in addressing operational and cash flow difficulties of certain
operators of the properties. On a comparative basis, general and administrative
expenses for the second quarter and first six months of 1997 included $132,000
and $248,000 of such financial advisory costs.

Future Operating Results

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AMERICAN HEALTH PROPERTIES, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF PSYCHIATRIC GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS

authorities to assure continued compliance with mandated procedures, licensure
requirements under state law and certification standards under the Medicare and
Medicaid programs. A reduction in reimbursement levels under the Medicare or
Medicaid programs, a reduction in reimbursement by other third-party payors or
an operator's or tenant's failure to maintain its certification under Medicare
or Medicaid programs could adversely affect revenues to the Company's
facilities.

The nature of health care delivery in the United States continues to
undergo change and further review at both the national and state levels.
Generally accepted goals of reform continue to include controlling costs and
improving access to medical care. Various plans to decrease the growth in
Medicare spending have been proposed and passed by both Houses of Congress.
These plans generally include revisions to and limits on Medicare and federal
programs providing Medicaid reimbursement to state health care programs and
have had and potentially would have an adverse impact on the level of funds
available in the future to health care facilities. The Balanced Budget Act of
1997 contains extensive changes to the Medicare and Medicaid programs intended
to reduce the projected amount of increase in Medicare spending by an estimated
$115 billion and Medicaid spending by an estimated $13 billion over five years.
In addition, the Budget Act repealed certain limits on states' ability to
reduce their Medicaid reimbursement levels. The Budget Act has the potential to
reduce significantly federal spending on health care services provided at each
of the Psychiatric Group's facilities, and to affect revenues of the
Psychiatric Group's operators adversely. In particular, the Budget Act's
limitations on reimbursable costs and reductions in payment incentives and
capital related payments, as well as the change toward a prospective payment
system, may have a material adverse effect on operator revenues at the
Psychiatric Group's hospitals. The Company cannot be assured that the changes
effected by the Budget Act will not have a material adverse effect on the
Psychiatric Group's financial condition or results of operation.

The Company's Board and management are monitoring the effect of the
Budget Act on the Psychiatric Group's facilities and potential changes to
reimbursement programs closely. The Company believes that the changes effected
by the Budget Act and changes proposed at the federal and state level may pose
risks for certain institutions that are unwilling or unable to respond.

The ongoing changes in the health care industry include trends toward
shorter lengths of hospital stay, increased use of outpatient services,
increased federal, state and third-party oversight of health care company
operations and business practices, and increased demand for discounted or
capitated health care services (delivery of services at a fixed price per
capita basis to a defined group of covered parties). Furthermore, federal,
state and third-party payors continue to propose and adopt various cost
containment measures that restrict the scope of reimbursable health care
services and limit increases in reimbursement rates for such services. Payors
also are continuing to enforce compliance with program requirements
aggressively and to pursue providers that they believe have not complied with
such requirements. Outpatient business is expected to increase as advances in
treatment techniques and pharmacology allow more care to be provided on an
outpatient basis and as payors continue to direct more patients from inpatient
care to outpatient care. In addition, the entrance of insurance companies into
managed care programs is accelerating the introduction of managed care in new
localities, and states and insurance companies continue to negotiate actively
the amounts they will pay for services. Moreover, the percentage of health care
services that are reimbursed under the Medicare and Medicaid programs continues
to increase as the population ages. States are also expanding their Medicaid
programs. Continued eligibility to participate in these programs is crucial to
a provider's financial strength. As a result of the foregoing, revenues and
margins may decrease at the Psychiatric Group's facilities.

Fundamental changes in the psychiatric industry continue to impact
negatively the facility-specific operating cash flow at the Psychiatric Group's
properties. Institutions responsible for the reimbursement of care provided to
patients who use inpatient psychiatric treatment services have directed efforts
toward decreasing their payments for such services, thereby reducing hospital
operating revenues. Some cost-cutting measures used by

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AMERICAN HEALTH PROPERTIES, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF PSYCHIATRIC GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS

such institutions include decreasing the inpatient length of stay, intensively
reviewing utilization, directing patients from inpatient care to outpatient
care and negotiating reduced reimbursement rates for services. The wider use
of psychotropic drugs also has resulted in significant declines in the average
length of stay. In addition, aggressive program compliance enforcement and
increased scrutiny of past and current billing practices has resulted in the
filing of lawsuits against some providers and significant negative publicity
which has further exacerbated the financial and operational difficulties of
providers. Although the operators of the psychiatric hospitals are responding
by increasing case management, developing lower cost outpatient and daypatient
programs and reducing operating costs, their efforts are generally not
consistently mitigating the negative impact of these fundamental psychiatric
industry changes. As a result, certain of the Psychiatric Group hospital
operators have not consistently met their contractual payment obligations to
the Psychiatric Group as scheduled and the Psychiatric Group cannot be assured
that hospital operators will be able to meet such payment obligations in the
future.

In general, the operators of the Psychiatric Group's properties have
very limited access to financing for their operating and capital needs. The
Psychiatric Group provided such financing under a revolving credit agreement to
the operator of one of its psychiatric properties. As of June 30, 1998,
outstanding borrowings under such agreement totaled $2,500,000, which amount
remains outstanding even though the financing matured June 30, 1997. In the
past, the Psychiatric Group has provided similar financing to other operators
of its properties which have been unable to pay off their outstanding
borrowings. The Psychiatric Group cannot be assured that the operator currently
borrowing under a revolving credit agreement will be able to secure replacement
financing from third-party lenders or to pay off its outstanding borrowings.
To the extent the operators of the Psychiatric Group's properties have
increased working capital needs in the future, the Psychiatric Group may be the
only source of such financing. In the event the Company's Board of Directors
determines that it is appropriate to provide additional working capital
financing to a psychiatric hospital operator, it may cause the Core Group to
make revolving inter-Group loans to the Psychiatric Group to fund such
financing (to the extent consistent with its then-existing policies), although
the Company's Board of Directors is under no obligation to do so.

Subsequent to the end of the second quarter, on July 1, 1998, the
Psychiatric Group received $35 million as payment in full of its two New York
Four Winds mortgage loans resulting in the accrual of a $2.73 million
impairment loss in the second quarter of 1998. Proceeds from the payment of
the Four Winds mortgage loans were first used to repay the entire balance of
approximately $11.2 million of fixed and revolving inter-Group loans owed to
the Company's Core Group by the Psychiatric Group and to maintain a cash
reserve of approximately $2.3 million for the net current liabilities of the
Psychiatric Group. Substantially all of the remaining proceeds were
distributed to holders of Psychiatric Group Depositary Shares on July 24, 1998
as a special dividend paid in the form of 0.4 shares of Core Group Common Stock
per Psychiatric Group Depositary Share. In order to effectuate the stock
dividend, the Psychiatric Group purchased 833,067 shares of Core Group Common
Stock from the Core Group at a price of $25.9407 per share, which represented
the average trading price of the Core Group Common Stock for the last ten
trading days prior to the July 17, 1998 record date for the special dividend,
as provided in the certificate of designation for the Psychiatric Group Stock.

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AMERICAN HEALTH PROPERTIES, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF PSYCHIATRIC GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS

expense on inter-Group loans to the Core Group was $347,000 for the second
quarter of 1998. Due to these various factors, future quarterly cash flows and
dividends will decrease very substantially.

The fundamental ongoing changes in the psychiatric industry and the
resulting negative impact on operator financial performance have resulted in
significant impairment losses on the three remaining psychiatric investments
and the periodic restructuring of psychiatric operator payment obligations in
previous years. The Psychiatric Group recorded an $11 million charge in the
first quarter of 1997 for impairment of the carrying value of its two
psychiatric investments in Florida. The Northpointe property, at which the
operator ceased paying its obligations to the Psychiatric Group in February
1997 and ceased hospital operations in the second quarter of 1997, continues to
remain idle. The Psychiatric Group incurred costs of approximately $75,000
during the second quarter of 1998 ($.04 per depositary share) and $225,000 for
the first quarter of 1998 ($.11 per depositary share) to protect and maintain
this property, including approximately $150,000 for unexpected expenditures.
Although on an ongoing basis, the Psychiatric Group expects to incur costs of
approximately $75,000 per quarter ($.04 depositary share) to protect and
maintain this property while various alternatives for the property are
evaluated and pursued, the Psychiatric Group cannot be assured that other
unexpected costs will not be incurred. Numerous discussions with health care
operators and others regarding a potential sale or lease of the property
continue. However, no agreement for sale or lease has been reached. If
efforts to identify a health care operator for the property prove unsuccessful,
the property will most likely have to be sold for its real estate value,
however, the Psychiatric Group cannot be assured that the current carrying
value of the property would be realized through a sale. Early in the fourth
quarter of 1997, a restructuring of The Retreat's obligations to the
Psychiatric Group was completed. The Retreat's restructured base rent is
$35,000 per month ($105,000 per quarter or $.05 per depositary share) and
additional rent will not accrue or be payable until August 1, 2000. The
Psychiatric Group has received the base rent payments under the restructured
terms through August 1998 but The Retreat is currently in default on other
obligations owed to the Psychiatric Group. Although the restructured agreement
with The Retreat was a positive step in stabilizing the cash flow and
operations of this facility, as evidenced by the current default, the
Psychiatric Group cannot be assured that The Retreat will be able to continue
to meet its restructured obligations or continue operations. While the
Psychiatric Group has now reached an agreement in principle regarding the
assumption of operations at The Retreat by a new operator, certain of the
required key agreements remain under negotiation. The transfer of operations
to the new operator will not occur unless those terms are satisfactorily
resolved. If not resolved, the Psychiatric Group may decide to exercise any or
all of its remedies. Even if there is a change in the operator of The Retreat,
continued operations at The Retreat will remain uncertain until the new
operator has demonstrated its ability to operate the facility successfully. In
light of the volatile circumstances of the two Florida psychiatric properties,
the Psychiatric Group cannot be assured that further impairment losses on these
investments will not be required.

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AMERICAN HEALTH PROPERTIES, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF PSYCHIATRIC GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS

operators. An agreement in principle has been reached with the existing
operator extending the current lease to March 31, 1999, and extending the
maturity of the revolving credit agreement to March 31, 1999. Under the
proposed arrangement, the operator will continue to pay interest on all
outstanding obligations and will pay $5,000 per month against the principal
balance of the revolving credit agreement. Although discussions with the
current operator have not yet been successful in reaching a mutually acceptable
long-term lease, purchase and sale agreement, and/or payment schedule for the
payment of the balance of the revolving credit agreement, the operator of the
facility has approached the Psychiatric Group with a proposal that may be
practicable depending, in part, on the operator's ability to negotiate an
acceptable compromise with Medicare regarding the unanticipated Medicare
liability. Local and national operators have expressed interest in the
facility; however, the Psychiatric Group cannot be assured that either a
long-term lease extension or a new lease will be accomplished. If the current
operator is unsuccessful in formulating a program which permits it to pay the
newly-determined Medicare liability and to make suitable payments to the
Psychiatric Group, and a facility lease with a new operator is not
accomplished, a significant negative impact to the Psychiatric Group likely
will result. Furthermore, if a new operator assumes operation of the RCC
facility, the Psychiatric Group cannot be assured that the current operator
will be able to pay the balance owed under the revolving credit agreement or
that a new operator will be able to operate the facility successfully. The
total revenue contribution to the Psychiatric Group from the RCC investment for
the second quarter was $.17 per depositary share.

Although management currently believes that the recorded amounts of
its psychiatric investments are realizable, if the psychiatric operators are
unable to adapt to the fundamental ongoing changes in the psychiatric industry
successfully and consistently mitigate the negative impact of the ongoing
changes on their financial performance, the Psychiatric Group may be required
to restructure payment obligations further, identify alternative operators,
pursue alternative uses for or dispositions of the properties and/or recognize
additional impairment losses on its investments. If the Psychiatric Group is
required to take any of these actions, various costs are likely to be incurred
by the Psychiatric Group in an effort to protect, maintain and pursue
alternatives for its investments. The Psychiatric Group does not currently
intend to make new investments, and over time, may sell, restructure or seek
other means to reduce its investments. In addition, the Psychiatric Group
continues to encourage each of the psychiatric operators to pursue financing
alternatives which might enable them to acquire the properties and/or repay
their borrowings from the Psychiatric Group, as the case may be. Subject to the
rights of the holders of the Company's Series B Depositary Shares, and the
Series B Preferred Stock represented thereby, and any other preferred stock of
the Company then outstanding, the Psychiatric Group expects to use the net
proceeds of any future property sales and/or operator borrowing repayments to
first repay then outstanding inter-Group loans and/or other liabilities owed by
the Psychiatric Group and to distribute all remaining net proceeds, if any, in
cash or Core Group Common Stock of the Company to holders of Psychiatric Group
Depositary Shares. The Psychiatric Group cannot be assured that the efforts of
psychiatric operators to obtain alternative financing will be successful or, if
successful, that the amounts of such financing would be sufficient to enable
the Psychiatric Group to realize the carrying amounts of its investments. The
Company continues to retain an investment banking firm to provide financial
advisory services to the Psychiatric Group. These services include supplemental
monitoring of the performance of individual assets, assistance in potential
sales or restructurings of particular investments and continuing assessments of
available strategic alternatives for the portfolio. The cost of the financial
advisory services are specifically charged to the operating results of the
Psychiatric Group.

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AMERICAN HEALTH PROPERTIES, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF PSYCHIATRIC GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS

rent, the amount of additional financial advisory fees and, to the extent
necessary, various costs which might be incurred in an effort to protect,
maintain and pursue alternatives for its investments. With the repayment of
the Four Winds loans, future quarterly cash flows and dividends will decrease
very substantially from previous quarters. Also, small events with respect to
the Psychiatric Group's three remaining facilities will likely have a more
significant effect on the Psychiatric Group's cash flows and dividends, and
therefore the price of the Psychiatric Group Depositary Shares. The liquidity
of the Psychiatric Group Depositary Shares will also likely be adversely
affected.

Many existing information systems currently record years in a
two-digit format and will be unable to properly interpret dates beyond the year
1999 which could lead to business disruptions (the Year 2000 Issue). The
Company is currently upgrading its internal information systems in the normal
course of business and does not expect the Year 2000 Issue to have a material
impact on the future operations or financial results of the Company's
Psychiatric Group. However, the future operations of the Company's Psychiatric
Group could be disrupted and/or its financial results could be negatively
impacted by the Year 2000 Issue if the Company's Psychiatric Group lessees and
borrowers do not adequately address the Year 2000 Issue with respect to their
information systems. As health care providers, the Company's Psychiatric Group
lessees and borrowers generally rely extensively on information systems,
including systems for capturing patient and cost information and for billing
and collecting reimbursement for health care services provided. Furthermore,
the Company's Psychiatric Group lessees and borrowers likewise are dependent on
a variety of third parties who must also adequately address the Year 2000
Issue, including private and government payors. Although, the Company believes
that the Psychiatric Group lessees and borrowers are generally addressing their
Year 2000 Issues, it is not possible for the Company to determine or be assured
that adequate remediation of the Year 2000 Issue will be accomplished by such
lessees and borrowers. Furthermore, it is not possible for the Company to
determine or be assured that the various payors and other third parties upon
which the Company's Psychiatric Group lessees and borrowers are dependent for
reimbursement and information will accomplish adequate remediation of their
Year 2000 Issues. Accordingly, although the Company believes that the impact of
the Year 2000 Issue, as it relates to its internal information systems, will
not be material to the Company's Psychiatric Group, the Company cannot be
assured that the Year 2000 Issues of its Psychiatric Group lessees and
borrowers, and the third parties upon which they are dependent, will not have a
material impact on the future operations and/or financial results of the
Company's Psychiatric Group.

LIQUIDITY AND CAPITAL RESOURCES

At August 11, 1998, the Psychiatric Group had no borrowings
outstanding under its fixed rate or revolving inter-Group loans from the Core
Group. The Company's Board of Directors has established certain management
policies relating to the Psychiatric Group's inter-Group loans from the Core
Group. Under the policies currently in effect, which may be modified or
rescinded at any time in the sole discretion of the Company's Board of
Directors, the aggregate revolving inter-Group loans owed by the Psychiatric
Group to the Core Group are limited to a maximum of $7,870,000 at any one time
outstanding, which limit is to be reduced dollar-for-dollar by any permanent
repayment in the future of borrowings under a revolving credit agreement
provided to a Psychiatric Group hospital operator; provided that the limit on
the aggregate revolving inter-Group loans will not be reduced below $5,000,000.
Except for such revolving inter-Group loans, no additional fixed rate or other
inter-Group loans will be advanced to the Psychiatric Group by the Core Group.
The Psychiatric Group has no third-party sources of additional financing and,
as a result, is dependent on the Core Group for all such financing. Although
the Core

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AMERICAN HEALTH PROPERTIES, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF PSYCHIATRIC GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Group may make this financing available, there is no obligation of the
Company's Board of Directors to cause the Core Group to provide funds to the
Psychiatric Group if the Board of Directors determines that it is in the
Company's best interest not to do so. To the extent needed funds are not
advanced by the Core Group, the Psychiatric Group would experience immediate,
significant negative effects.

The Psychiatric Group does not expect to make any additional
acquisitions or capital investments. Future dividend payments will be
determined quarterly and will be primarily dependent upon the financial
performance of the Psychiatric Group. Subject to the rights of the holders of
the Company's Series B Depositary Shares, and the Series B Preferred Stock
represented thereby, and any other preferred stock of the Company then
outstanding, the Psychiatric Group expects to distribute a substantial portion
of its funds from operations and net proceeds from asset dispositions, after
payments of inter-Group loan obligations, to holders of Psychiatric Group
Depositary Shares. In general, the Psychiatric Group will not retain any
significant amount of its cash flow, and as discussed above, its sources of
financing and liquidity will be limited.

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PART II. OTHER INFORMATION

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

(a) The Annual Meeting of Shareholders of American Health Properties, Inc.
was held on May 22, 1998 ("Annual Meeting").

(b) Not applicable.

(c) (i) At the Annual Meeting, Peter K. Kompaniez and Joseph P. Sullivan,
were elected as Class II directors to serve for a three-year term until
the 2001 Annual Meeting of Shareholders. Voting results for these
directors are summarized as follows:

Peter K. Kompaniez Votes For--22,894,824; Votes Withheld--145,158
Joseph P. Sullivan Votes For--22,903,801; Votes Withheld--136,181

Class III directors whose term of office continues until the 1999
Annual Meeting of Shareholders include Sheldon S. King, John P. Mamana,
M.D. and Louis T. Rosso. Class I directors whose term of office
continues until the 2000 Annual Meeting of Shareholders include James
L. Fishel and James D. Harper, Jr..

(ii) At the Annual Meeting, shareholders approved the appointment of the
accounting firm of Arthur Andersen LLP as the auditors and as
independent public accountants for the Company for the fiscal year
ending December 31, 1998. Votes For--22,870,024; Votes
Against--57,920; Votes Abstained--112,038.

(d) Not Applicable.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

27 Financial Data Schedule

(b) Reports on Form 8-K

On April 20, 1998, the Company filed a Current Report on Form 8-K for the
purpose of reporting selected financial information (statements of
operations, funds from operations, net income (loss) per share on both a
basic and diluted basis, funds from operations per share on both a basic
and diluted basis, dividends per share, preferred dividends, weighted
average shares, weighted average shares and dilutive potential shares,
total assets, total debt and total shareholders' equity) with respect to
the consolidated Company, Core Group and Psychiatric Group for the three
months ended March 31, 1998 and 1997.

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SIGNATURES

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

Date: August 11, 1998

AMERICAN HEALTH PROPERTIES, INC.

By: JOSEPH P. SULLIVAN By: MICHAEL J. MCGEE
---------------------------------- -----------------------------------
Joseph P. Sullivan Michael J. McGee
Chairman of the Board, President & Senior Vice President &
Chief Executive Officer Chief Financial Officer
(Principal Executive Officer) (Principal Financial and Accounting
Officer)

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EXHIBIT INDEX

EXHIBIT NO. DESCRIPTION
- ----------- -----------

27 FINANCIAL DATA SCHEDULE