<PAGE>   1
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    Form 10-K

(Mark One)

         [X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE 
                  SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED).

For the fiscal year ended DECEMBER 31, 1997.

                                       OR

         [ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE 
                  SECURITIES EXCHANGE ACT OF 1934(NO FEE REQUIRED).

For the transition period from                to


                            WHITEHALL INCOME FUND-86
             (Exact name of registrant as specified in its charter)

                                   33-3377 LA
                            (Commission File Number)

         CALIFORNIA                                   86-053325
(State or other jurisdiction of                       (IRS Employer
incorporation or organization)                        Identification No.)

6418 E. TANQUE VERDE, SUITE 105, TUCSON, AZ               85715
(Address of principal executive offices)                (zip code)

        Registrant's telephone number, including area code (602) 750-0500

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

                                      NONE

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


                                 Title of Class
                          LIMITED PARTNERSHIP INTERESTS

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 / /

As of December 31, 1997, all shares of registrants's Limited Partnership
interest were outstanding and held by non-affiliates (the officers, directors
and general partner of the registrant, and owners of over 10% of the
registrant's common stock, are considered affiliates for purposes of this
calculation).
<PAGE>   2
WHITEHALL INCOME FUND - 86

                                    FORM 10-K

                                TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I
<S>                                 <C>
         ITEM 1.                    BUSINESS

         ITEM 2.                    PROPERTIES

         ITEM 3.                    LEGAL PROCEEDINGS

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

PART II
         ITEM 5.                    MARKET FOR THE REGISTRANT'S COMMON STOCK AND
                                    RELATED SECURITY HOLDER MATTERS

         ITEM 6.                    SELECTED FINANCIAL DATA

         ITEM 7.                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                                    FINANCIAL CONDITION AND RESULTS OF
                                    OPERATIONS

         ITEM 8.                    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         ITEM 9.                    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
                                    ON ACCOUNTING AND FINANCIAL DISCLOSURES

PART III
         ITEM 10.                   DIRECTORS AND EXECUTIVE OFFICERS OF THE
                                    REGISTRANT

         ITEM 11.                   EXECUTIVE COMPENSATION

         ITEM 12.                   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
                                    OWNERS AND MANAGEMENT

         ITEM 13.                   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
</TABLE>

                                        2
<PAGE>   3
ITEM 1. BUSINESS

GENERAL

Whitehall Income Fund-86 Limited (the "Registrant" or the "Partnership") is a
limited partnership formed in 1985 under the Limited Partnership Act of the
State of California to acquire, improve, operate and hold for investment income
producing real property. The Partnership's purpose is to purchase Properties and
to own and operate the Properties for a period of five to ten years. Currently,
the Partnership employs approximately 9 individuals.

The Registrant has acquired two self storage facilities, a shopping center and
two office buildings for a total cost of $5,876,388 as further described in Item
2.

COMPETITION AND MARKET CONDITIONS

Occupancy rates and the Partnership's ability to maintain or increase rental
rates are affected by numerous factors. These include seasonal demand and
economic conditions. In seeking tenants, the Partnership relies on both internal
and external sources for its properties. Long-term leases with established
tenants for the Pan American Office Building and The Original Honey Baked Ham
Store and McRae Square Shopping Center have provided steady rental rates and
cash flow from operations. The Capitol Self Storage facility continues to
maintain occupancy levels exceeding 85%.

ITEM 2.  PROPERTIES

During 1997, the Registrant owned five income producing real properties as
described below.

MCRAE SQUARE SHOPPING CENTER

On December 30, 1986, the Partnership purchased, from an unaffiliated third
party, the commercial income project known as McRae Square Shopping Center (the
"Shopping Center") located in the southeastern area of Georgia in McRae for a
total of $793,840. The building has a cost basis of $734,611 and the land was
allocated a cost of $59,229 based upon an independent appraisal dated March
1986. The Shopping Center is located directly across the street from the local
Winn Dixie Shopping Center on U.S. Highway 341-Oak Street, one of the primary
traffic arteries in the area. The Shopping Center is approximately two acres in
size and encompasses approximately 12,630 square feet of leasable area with room
for expansion. The Shopping Center was completed in December of 1985 and
commenced operation on December 31, 1985.

                                        3
<PAGE>   4
The Shopping Center's current tenants include Rite Aid Drug, the drugstore chain
subsidiary of Rite Aid Corporation. Another major tenant is Family Dollar
Stores, Inc., a discount variety store. Family Dollar Store's initial lease term
expired during December 31, 1994, with six (6) five-year options; Rite Aid
Drug's initial lease term expired May 25, 1995, with four (4) five-year options.
Each tenant has exercised its first option for a period of five (5) years.
Family Dollar's annual base rent is $26,000; Rite Aid's $48,067.50, with no
change during the first option period.

The Partnership, under the terms of the Shopping Center leases and options, is
entitled to receive as additional rental, subject to certain offsets, percentage
rental participation of two percent (2%) to two and one-half percent (2.5%) of
annual gross sales, above certain sales levels.

The Shopping Center is directly across the highway from the Winn Dixie Shopping
Center which contains two department stores similar to the Family Dollar and
Rite Aid Drug. There are retail shopping areas in Helens, .5 miles to the west
and in McRae .3 miles east, which contain two drug stores. These retail
establishments compete with the establishments which are lessees of the McRae
Square Shopping Center.

Rental income for the Shopping Center was $82,887, $79,886 and $78,396 for 1997,
1996 and 1995, respectively. Operating expenses for the same years were $48,522,
$39,547 and $43,177 respectively.

As of December 31, 1997 the Shopping Center is 100% occupied.

The Partnership paid to, in prior years, an affiliate of the General Partner an
acquisition fee of $44,000 for its efforts in the negotiation, execution and
purchase of the Shopping Center.

The property was unencumbered as of December 31, 1997.

TANQUE VERDE SELF STORAGE

On March 31, 1987, the Partnership acquired the Tanque Verde/Kolb Self Storage
facility (the "Property") in Tucson, Arizona. The original purchase price of the
Property was $1,945,000 plus legal, title, and recording fees of $17,140. Of the
original purchase price, $194,031 was allocated to land and $1,768,109 to the
building, based upon an independent appraisal. The Property is located on a
parcel of land comprising approximately 60,209 square feet, which consists of
approximately 43,200 square feet of self-storage facilities, approximately 950
square feet of office/residence space, and approximately 16,059 square feet of
non-rentable space.

The Property was completed in December 1984, and commenced

                                        4
<PAGE>   5
operations during that month. There are 875 self-storage units within the
Property. One hundred twenty-eight (14.6%) are 4'x5'x9' units, 110 (12.6%) are
3'x 4' units and 90 (10.3%) are 5'x12' units. The remainder of the units vary in
size from 4'x4' to 11'x18'.

Monthly rents vary from $22.00 to $172.00 per unit. During 1997, the Property
was over 90% occupied.

There are four self-storage facilities in the eastern Tucson, Arizona area which
are in direct competition with the Property. They currently have occupancy
ranges of approximately 90% to 95%, with rents substantially similar to the
those charged by the Partnership.

The Property was sold on August 15, 1997 for $1,945,000 realizing a gain of
$543,526.

Rental income from the Property was $301,756, $366,560 and $374,824 for 1997,
1996 and 1995, respectively. Operating expenses for the same years were
$186,947, $306,377 and $324,237, respectively. Expenses in 1997 were lower due
to appointment of new resident managers at lower salaries.

The Partnership paid, in prior years, an affiliate of the General Partner an
acquisition fee of $144,900 for its efforts in negotiations and purchase of the
facility.

CAPITOL SELF STORAGE

On December 19, 1995, the Partnership exchanged Athens Self Storage for Capitol
Self Storage, a 43,890 square foot storage facility on 1.5 acres in Tucson,
Arizona. The purchase price was $1,925,000 which was accounted for in a tax-free
exchange whereby the land, building and improvements were recorded at
$1,725,108. The property consists of 471 storage units and 43 parking spaces.
The storage buildings are built of block with metal roofs, with perimeter
fencing and electronic gates with touch pads. The driveway areas are of both
asphalt and concrete. The managers are a husband and wife who reside at the
apartment on site.

The facility, built in 1984 has maintained an occupancy of 85% to 95% over the
past three years, as have the four area facilities which are in direct
competition with Capitol. Partnership rate ranges are similar to those of the
competing facilities. Located on a main east-west thoroughfare with a traffic
count of 30,000 per day, the facility attracts customers from a heavy
concentration of apartments in the area, winter visitors and a military base.

Occupancy rates were over 85% and rental income from Capitol Self Storage was
$305,996 and $269,112 for 1997 and 1996, respectively.

                                        5
<PAGE>   6
Operating expenses for the same years were $279,424 and $259,841, respectively.
Revenue was increased in 1997 due to rental increases and strict collection
policies. Expenses were higher in 1997 due to computerization of on-site
records. Rental income and operating expenses for 1995 were immaterial.

The exchange property, known as Capitol Self Storage, was acquired with a debt
of $1,250,000 payable in monthly installments of principle and interest of
$10,490 at nine percent (9%)annually, amortized over a twenty-five (25) year
period with a ten (10) year balloon payment.

The property is held as collateral for a $1,250,000 mortgage with an outstanding
balance of $1,220,801 as of December 31, 1997.

PAN AMERICAN OFFICE BUILDING

The office building is 16,315 square feet on a 1.39 acre tract of land (the "Pan
Am Plaza") in Edinburgh, Texas. The Pan Am Plaza is fully occupied by the
Department of Human Resources of the State of Texas on a five year
noncancellable lease with annual increases. The lease was renewed in August of
1993 for a five-year period and also contains options for future renewal. The
original lease commenced on September 9, 1988.

The office building was built specifically for the State of Texas to meet all
its requirements and includes all systems as dictated by the State of Texas.

Rental revenue for the Pan Am Plaza was $83,597, $83,064 and $82,446 for 1997,
1996 and 1995, respectively. Operating expenses for the same years were $79,811,
$72,423 and $65,793, respectively. Operating expenses include a five percent
(5%) management fee and depreciation of approximately $14,000 annually.

The property was held as collateral for a mortgage of $327,337 outstanding as of
December 31, 1997, which the Partnership assumed in 1995. The Partnership holds
as collateral against said mortgage a collateral interest in a mortgage note
against a Krogers in Atlanta, Georgia.

THE RAX/HONEY BAKED HAM IN LOUISIANA

On December 29, 1988, the Partnership purchased land and a 3,500 square foot
building in Gretna, Louisiana for a purchase price of $600,000. The building's
cost basis is $455,072 (including improvements totaling $5,072 made subsequent
to acquisition) and the land cost is $150,000. During 1991, The Original Honey
Baked Ham Co. of Georgia signed a three year lease providing for monthly
payments of $3,000. On July 30, 1993, The Original Honey Baked Ham

                                        6
<PAGE>   7
Co. of Georgia signed a First Amendment to the Lease adding an additional option
period of two years commencing on January 1, 1994 and ending on December 31,
1995 for $36,000 per year. The amendment also provided the lessee with three
options to extend the lease for additional five year terms, which the tenant did
not exercise for 1996. However, the tenant did extend the lease for a one-year
period at the same rate commencing January 1, 1996 and ending December 31, 1996.
The lessee extended its lease for two years commencing January 1, 1997 and
ending December 31, 1998 at an annual rental rate of $37,800.

Rental revenue for this property was $40,606, $36,000 and $36,150 for 1997, 1996
and 1995, respectively. Operating expenses for the same years were $23,198,
$18,628 and $30,897 respectively.

The property was not held as collateral for any mortgages outstanding as of
December 31, 1997.

ATHENS SELF STORAGE

On May 23, 1988, the Partnership purchased a self-storage facility ("Athens Self
Storage") in Athens, Georgia for a purchase price of $1,132,974. Of the original
purchase price, $862,974 was allocated to the building and $270,000 was
allocated to the land. The Athens Self Storage is comprised of a 3.4 acre parcel
of land and mini storage warehouse, which is a 31,630 square foot storage
facility. The property was purchased subject to a first mortgage for $643,872
and the mortgage was paid in full in 1989.

The Athens Self Storage was exchanged for a larger storage facility in Tucson,
Arizona on December 19, 1995 at a difference of $535,000.

ORACLE OFFICE PLAZA IN TUCSON, ARIZONA

On November 29, 1993 the Partnership acquired a 50% undivided preferential
interest in an office building ("Oracle") in Tucson, Arizona for $300,000.

The Partnership's investment was accounted for under the equity method. The
Partnership was entitled to an annual return of 10% of its original investment.
If the available net cash flow from the property was insufficient to pay the
preferred return, 5600 N. Oracle Group, LLC ("5600"), the holder of the
remaining undivided 50% interest, must contribute additional capital to pay the
remainder. In the event the net cash flow exceeded the preferred return, the
excess was to be distributed first to "5600" until they received distributions
equal to the Partnership's preferred return and thereafter in accordance with
the ownership percentages.

                                        7
<PAGE>   8
Operating deficits, if any, were to be funded by "5600" during the ownership of
the property. A preferred return of $44,715, which was collected in monthly
payments of $2,500, was received in 1995. A preferred return of $12,500, which
was collected in monthly payments of $2,500, was received for the months of
January through May of 1996.

The property incorporated three separate buildings, consisting of 6,800, 12,000
and 6,000 square feet, comprising approximately 2 acres located in the northwest
region of Tucson, Arizona.

The Partnership sold its undivided 50% interest to the other 50% holder in
interest on June 15, 1996 for $246,473, realizing a gain of $75,756.


ITEM 3. LEGAL PROCEEDINGS

None


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

The Registrant did not solicit proxies and the Directors/Officers, as previously
reported to the Commission, was re-elected in its entirety.


ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS

There has not been a public market and it is not anticipated that a public
market for Limited Partnership Interests will develop.

As of December 31, 1997 the number of holders of record of Limited Partnership
Interests of the Registrant was 741.


ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth selected operations data with respect to the
Partnership for each of the five years in the period ended December 31, 1997:

                                        8
<PAGE>   9
                        For the Years Ending December 31,
<TABLE>
<CAPTION>
                                           1997                1996              1995              1994              1993
----------------------------------------------------------------------------------------------------------------------------
<S>                                     <C>                 <C>               <C>               <C>               <C>
TOTAL RENTAL REVENUES                    $814,842            $834,622          $755,653          $793,294          $785,080
----------------------------------------------------------------------------------------------------------------------------
RENTAL REVENUES LESS
   RENTAL OPERATING  EXPENSES             196,940             137,806            90,439           159,947            65,779
----------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME                            42,644              46,501            44,629             3,741             7,143
----------------------------------------------------------------------------------------------------------------------------
ADMINISTRATION EXPENSES                    75,355             115,386           100,347            45,651            42,125
----------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS)                         357,132              (8,171)         (237,018)          (46,799)         (105,083)
----------------------------------------------------------------------------------------------------------------------------
NET INCOME(LOSS)PER                         29.63               ( .68)           (19.06)           ( 3.92)           ( 0.01)
  LIMITED PARTNER
  UNITS
----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO                          966,942              83,534            41,762            125,206           41,762
  LIMITED PARTNERS
----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO
  LIMITED PARTNERS
  PER LIMITED
  PARTNER UNIT                              81.00                7.00              3.50             10.50               3.50
----------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE
  NUMBER OF LIMITED
  PARTNER UNITS                            11,932              11,932            11,932            11,932             11,932
----------------------------------------------------------------------------------------------------------------------------
INVESTMENT PROPERTIES                   3,179,037           4,550,355         4,601,517         4,212,531          4,405,677
----------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS                            3,845,719           5,504,064         5,630,206         4,012,790          5,037,511
----------------------------------------------------------------------------------------------------------------------------
LONG-TERM
  OBLIGATIONS                           1,548,138           2,509,922         2,537,422         1,464,792          1,494,373
----------------------------------------------------------------------------------------------------------------------------
NUMBER OF PROPERTIES
  OWNED                                 4                   5                 6                 6                 6
----------------------------------------------------------------------------------------------------------------------------
</TABLE>


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

A real estate limited partnership passes through four phases during its life
cycle. These phases are:

1.       Sale of limited partnership interests (equity-raising).
2.       Acquisition of income producing property and property management.
3.       Management of acquired property.
4.       Sale of appreciated property.


The partnership is currently entering the sale of appreciated property phase of
its life cycle.

                                        9
<PAGE>   10
RESULTS OF OPERATIONS

The Partnership commenced its operations January 1, 1987 with the acquisition of
McRae Shopping Center in McRae, Georgia. Since that time, the Partnership has
acquired five additional income producing properties. As of December 31, 1997,
the Partnership has distributed $2,995,388 to the Limited Partners and $9,763 to
the General Partner.

Revenues for the year ended December 31, 1997 decreased by $19,780 from the year
ended December 31, 1996. The decrease was due primarily to a decrease in rental
revenue from Tanque Verde Self Storage as a result of the sale of the property
and offset somewhat by an increase in other rental income.

Revenues for the year ended December 31, 1996 increased by $154,725 over the
year ended December 31, 1995. The increase in revenue was primarily due to the
increase in rental revenue resulting from the exchange of Athens Self Storage
with Capitol Self Storage and the gain on the sale of the investment in the
Oracle Office Building.

Rental Operating Expenses for the year ended December 31, 1997 increased by
$59,134 over the year ended December 31, 1996. The increase was due primarily to
increased rental operating expenses occurred at the all of the partnership's
properties.


Expenses for the year ended December 31, 1996 decreased by $72,692 from the year
ended December 31, 1995. The decrease was due primarily to a decrease in
operating expenses resulting from a reduction in management fees incurred in
1995 on the exchange of Athens Self Storage with Capitol Self Storage. The
decrease was offset by an increase in rental operating expenses resulting
primarily from the exchange of Athens Self Storage with Capitol Self Storage.

Net income for the year ended December 31, 1997 improved by $365,303 from the
year ended December 31, 1996 because of the decreased expenses discussed above
and the gain on the sale of Tanque Verde Self Storage.

Net loss for the year ended December 31, 1996 increased by $228,847 from the
year ended December 31, 1995 primarily due to the increased revenues and
decreased expenses discussed above.




LIQUIDITY AND CAPITAL RESOURCES

                                       10
<PAGE>   11
The cash position of the Partnership and distributions to Limited Partners
should remain constant or decrease during 1998 depending whether sales of
remaining real properties occur.

Net cash provided by operating activities was $75,899 for the year ended
December 31, 1997 compared to $35,699 for the year ended December 31, 1996. Net
cash provided by investing activities was $1,778,110 for the year ended December
31, 1997 and consisted of proceeds from the sale of the investment in the Tanque
Verde Self Storage and distributions from the investment offset by purchases of
property and equipment and deposits on rental property. Net cash used in
financing activities was $1,938,039 for the year ended December 31, 1997 and
consisted of distributions to partners and repayments of notes payable offset by
proceeds from notes payable.

Net cash provided by operating activities was $35,699 for the year ended
December 31, 1996 compared to($17,955)for the year ended December 31, 1995. Net
cash provided by investing activities was $196,244 for the year ended December
31, 1996 and consisted of proceeds from the sale of the investment in the Oracle
Office Buildings and distributions from the investment offset by purchases of
property and equipment and deposits on rental property. Net cash used in
financing activities was $111,024 for the year ended December 31, 1996 and
consisted of distributions to partners and repayments of notes payable offset by
proceeds from notes payable.

Net cash used in operating activities was $17,955 for the year ended December
31, 1995. Net cash provided by investing activities was $155,725 for the year
ended December 31, 1995 and consisted of proceeds from the sale of rental
property and distributions from the investment in the Oracle Office Building
offset by payments for organization and loan closing costs. Net cash used in
financing activities was $67,092 for the year ended December 31, 1995 and
consisted of distributions to partners and payment on notes payable.


The liquidity of the Partnership relies almost entirely on the financial market
fluctuation and availability of funds with regard to lending and investing in
commercial property. Funds appear to be more readily available and therefore may
provide greater liquidity to the Partnership in 1998 through the sale of the
Partnership assets.

The Partnership believes that it has adequate cash reserves to meet working
capital requirements as they arise.


Inflation has historically been a contributing factor to the increase in capital
appreciation of income producing real estate and may continue to be a
contributing factor in the future. The

                                       11
<PAGE>   12
Partnership's intention is to own and operate the properties for a period of
five to ten years. At this time it is not possible to anticipate what the real
estate market and capital appreciation will be in the future. Currently, the
properties are generating sufficient cash flow to cover their own cash operating
expenses.


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Reports of Independent Auditors and the financial statements as set forth on
pages F-1 to F-17 are hereby incorporated herein.



ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES

The Partnership changed accountants to Hein + Associates LLP from BDO Seidman,
with no disagreement, on January 10, 1996. The form 8-K was filed with the
Securities and Exchange Commission on January 11, 1996.


                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

(a)Neither the Registrant nor W & C Income Company Ltd., its General Partner,
has a Board of Directors.

(b,c,d,&e)The General Partner of the Registrant is W&C Income Company, Ltd., a
California Limited Partnership.

W & C INCOME COMPANY, LTD: a California Limited Partnership, does not have an
operations history; however, the resources from Whitehall Capital Investment
Group, Inc. have been utilized by the Partnership.

JACK C. WEST: Mr. West, age 48, a Managing Member, has been a private investor
since 1988. From 1986 to 1988, Mr. West was President and Director of Whitehall
Capital Corporation. Before that time Mr. West was Senior Vice
President/National Marketing Director as well as director of the Whitehall
Capital Corporation's Irvine, California offices, in charge of the company's
marketing programs. Prior to joining Whitehall Capital Corporation in 1982, he
was active from 1977 until 1982 as a Senior Account Manager-portfolio
management with First National Corporation, an asset portfolio management
corporation.

WHITEHALL CAPITAL INVESTMENT GROUP: The corporation has an

                                       12
<PAGE>   13
interest in over $500 million of income producing real estate projects.
Whitehall Capital Investment Group's investment portfolio includes an interest
in over 100 major credit tenant commercial projects located primarily throughout
the Sun Belt States.

(f)No Managing Members of the General Partner were involved with legal
proceedings.

(g)There were no transactions with promoters or control persons.


ITEM 11. EXECUTIVE COMPENSATION

(a,b,c, & d)The Registrant has not paid and does not propose to pay any
compensation or retirement benefits to members of the General Partner.

(e)There were no termination of employment or change of control arrangements
with members of the General Partner.



ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

(a)No person owns of record or is known by the Registrant to own beneficially
more than 5% of the outstanding Limited Partnership Interests of the Registrant:

(b)W & C Income Company, Ltd. and its members own as a group or individually, 1%
of the Limited Partnership Interests of the Registrant.

(c)There were no changes in control or arrangements for changes in control.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information with respect to certain relationships and related transactions is
incorporated herein by reference to and is set forth in Note 7 of Notes to the
Financial Statements on page F-13 of this Form 10-K.



ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K

                                       13
<PAGE>   14
         (a)      Financial Statements:
                  (1) The index to the Financial Statements is included on F-1
of this report.
                  (2) Financial Statement Schedules - F-15 through F-17.

         (b)      Reports on Form 8-K:
                  The Registrant did file a Form 8-K report during the fiscal
year ended December 31, 1997.

         (c)      Exhibits required by Item 601 of Regulation S-K:
                  The Registrant does not have any exhibits attached to Form
10-K.

         (d)      Financial Statement Schedules required by Regulation S-X:
                  All required information is included in the financial
statements on pages F-12 through F-19, or the financial statements and notes
thereto.



                                   SIGNATURES


Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant had duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.

          Whitehall Income Fund - 86, A California Limited Partnership
                                  (Registrant)

                          By W & C Income Company, Ltd.
                        General Partner of the Registrant




Date: 4/13/98                               By: /s/ Jack C. West
      ------------------                       --------------------------------
                                               Jack C. West
                                               Managing Member

                                       14
<PAGE>   15
                           WHITEHALL INCOME FUND - 86
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                              FINANCIAL STATEMENTS
                               FOR THE YEARS ENDED
                        DECEMBER 31, 1997, 1996 AND 1995
<PAGE>   16
                          INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                                    PAGE
                                                                                                    ----
<S>                                                                                                 <C>
INDEPENDENT AUDITOR'S REPORT.....................................................................    F-2

BALANCE SHEETS - December 31, 1997 and 1996......................................................    F-3

STATEMENTS OF OPERATIONS - For the Years Ended December 31, 1997, 1996 and 1995..................    F-4

STATEMENT OF CHANGES IN PARTNERS' CAPITAL (DEFICIT) - For the Years Ended December 31, 1997,
         1996 and 1995...........................................................................    F-5

STATEMENTS OF CASH FLOWS - For the Years Ended December 31, 1997, 1996 and 1995..................    F-6

NOTES TO FINANCIAL STATEMENTS....................................................................    F-7

FINANCIAL STATEMENT SCHEDULES:

SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION .........................................   F-17

SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE......................................................   F-19
</TABLE>


                                       F-1
<PAGE>   17
                          INDEPENDENT AUDITOR'S REPORT


The Partners
Whitehall Income Fund - 86
(A California limited partnership)
Tucson, Arizona


We have audited the accompanying balance sheets of Whitehall Income Fund - 86 (a
California limited partnership) as of December 31, 1997 and 1996, and the
related statements of operations, changes in partners' capital (deficit), and
cash flows for each of the years in the three year period ended December 31,
1997. These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Whitehall Income Fund - 86 (a
California limited partnership) at December 31, 1997 and 1996, and the results
of its operations and its cash flows for each of the years in the three year
period ended December 31, 1997 in conformity with generally accepted accounting
principles.

Our audits referred to above included audits of the financial statement
schedules listed under Item 14(a)(2) of Form 10-K. In our opinion, these
financial statement schedules present fairly, in all material respects, in
relation to the financial statements taken as a whole, the information required
to be stated therein.




HEIN + ASSOCIATES LLP
Certified Public Accountants

Orange, California
February 11, 1998


                                       F-2
<PAGE>   18
                           WHITEHALL INCOME FUND - 86
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                                 BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                 DECEMBER 31,
                                                                         ------------------------------
                                                                            1997               1996
                                                                         -----------        -----------
<S>                                                                      <C>                <C>
                                      ASSETS

     Rental properties, net of accumulated depreciation                  $ 3,179,037        $ 4,550,355
     Cash and cash equivalents                                               429,057            513,087
     Accounts receivable                                                       8,574             13,461
     Note receivable                                                         161,456            346,268
     Organization and loan closing costs, net of accumulated
         amortization of $9,615 and $46,396                                   36,537             51,693
     Deposits and other assets                                                31,058             30,000
                                                                         -----------        -----------

TOTAL ASSETS                                                             $ 3,845,719        $ 5,504,864
                                                                         ===========        ===========


                              LIABILITIES AND PARTNERS' CAPITAL


     Notes payable                                                       $ 1,548,138        $ 2,509,922
     Accounts payable                                                          6,082             24,480
     Accrued property taxes                                                   18,678             53,073
     Due to general partner                                                   10,607                844
     Due to related party                                                     26,828               --
     Other liabilities                                                        10,798             72,834
                                                                         -----------        -----------
         Total liabilities                                                 1,621,131          2,661,153

COMMITMENTS                                                                       --                 --

PARTNERS' CAPITAL
     Limited partners, 11,932 equity units authorized and
         outstanding for 1997 and 1996                                     2,271,287          2,884,218
     General partner, 1 equity unit authorized and outstanding for
         1997 and 1996                                                       (46,699)           (40,507)
                                                                         -----------        -----------
              Total partners' capital                                      2,224,588          2,843,711
                                                                         -----------        -----------


TOTAL LIABILITIES AND PARTNERS' CAPITAL                                  $ 3,845,719        $ 5,504,864
                                                                         ===========        ===========
</TABLE>


              SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS.


                                       F-3
<PAGE>   19
                           WHITEHALL INCOME FUND - 86
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                            STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                 FOR THE YEARS ENDED DECEMBER 31,
                                                         ---------------------------------------------
                                                            1997            1996               1995
                                                         ----------       ---------        -----------
<S>                                                      <C>              <C>              <C>
REVENUES:
     Rental                                              $  814,842       $ 834,622        $   755,653
     Gain on sale of investment in office building               --          75,756                 --
     Share of net income of office building                      --              --              3,201
     Gain on sale of rental property                        543,526              --                 --
     Other income                                            54,127          51,212             46,581
                                                         ----------       ---------        -----------
              Total Revenues                              1,412,495         961,590            805,435
                                                         ----------       ---------        -----------

EXPENSES:
     Rental operating:
         Depreciation                                       135,676         153,141            171,912
         Payroll and related taxes                           49,636          64,373             58,858
         Interest                                           198,138         229,664            183,074
         Other rental operating expenses                     95,857         110,915             97,330
         Taxes other than payroll                           100,442         106,455            110,440
         Repairs and maintenance                             25,729          12,932             19,879
         Advertising                                         12,424          19,336             15,721
     Operating Expenses:
         General and administrative                          75,355         115,386            100,347
         Payroll and related taxes                          126,360          94,678            210,290
         Professional fees                                   35,778          31,830             46,405
         Amortization                                        15,156          10,387             28,197
     Share of net loss of office building                        --          20,664                 --
     Write down of note receivable to fair value            184,812              --                 --
                                                         ----------       ---------        -----------
              Total expenses                              1,055,363         969,761          1,042,453
                                                         ----------       ---------        -----------

NET INCOME (LOSS)                                        $  357,132       $  (8,171)       $  (237,018)
                                                         ==========       =========        ===========

NET INCOME (LOSS) ATTRIBUTED TO:
     Limited partners                                    $  353,561       $  (8,089)       $  (234,648)
                                                         ==========       =========        ===========
     General partner                                     $    3,571       $     (82)       $    (2,370)
                                                         ==========       =========        ===========

NET INCOME (LOSS) PER LIMITED PARTNER UNIT               $    29.63       $   (0.68)       $    (19.86)
                                                         ==========       =========        ===========

DISTRIBUTIONS PER LIMITED PARTNER UNIT                   $    81.00       $    7.00        $      3.50
                                                         ==========       =========        ===========

WEIGHTED AVERAGE NUMBER OF LIMITED
     PARTNER UNITS                                           11,932          11,932             11,932
                                                         ==========       =========        ===========
</TABLE>


              SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS.

                                       F-4
<PAGE>   20
                           WHITEHALL INCOME FUND - 86
                       (A CALIFORNIA LIMITED PARTNERSHIP)

               STATEMENT OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
              FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995


<TABLE>
<CAPTION>
                                            GENERAL           LIMITED
                                            PARTNER           PARTNERS              TOTAL
                                            --------         -----------         -----------
<S>                                         <C>              <C>                 <C>
BALANCE (DEFICIT), January 1, 1995          $(36,789)        $ 3,252,241         $ 3,215,452

        Net loss for 1995                     (2,370)           (234,648)           (237,018)
        Capital distributions                   (422)            (41,762)            (42,184)
                                            --------         -----------         -----------

BALANCE (DEFICIT), December 31, 1995         (39,581)          2,975,831           2,936,250

        Net loss for 1996                        (82)             (8,089)             (8,171)
        Capital distributions                   (844)            (83,524)            (84,368)
                                            --------         -----------         -----------

BALANCE (DEFICIT), December 31, 1996         (40,507)          2,884,218           2,843,711

        Net income for 1997                    3,571             353,561             357,132
       Capital distributions                  (9,763)           (966,492)           (976,255)
                                            --------         -----------         -----------

BALANCE (DEFICIT), December 31, 1997        $(46,699)        $ 2,271,287         $ 2,224,588
                                            ========         ===========         ===========
</TABLE>


              SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS.

                                       F-5
<PAGE>   21
                           WHITEHALL INCOME FUND - 86
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                            STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                        FOR THE YEARS ENDED DECEMBER 31,
                                                                 -----------------------------------------------
                                                                     1997              1996              1995
                                                                 -----------         ---------         ---------
<S>                                                              <C>                 <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net income (loss)                                           $   357,132         $  (8,171)        $(237,018)
     Adjustments to reconcile net income (loss) to net
         cash provided by (used in) operating activities:
         Depreciation and amortization                               150,832           163,528           200,109
         Share of net (income) loss of office building                    --            20,664            (3,201)
         Gain on sale of investment in office building                    --           (75,756)               --
         Gain on sale of rental property                            (543,526)               --                --
         Write down of note receivable to fair value                 184,812                --                --
         Changes in assets and liabilities:
              Accounts receivable                                      4,887            (1,209)          (12,252)
              Note receivable                                             --           (49,130)               --
              Accounts payable                                       (18,398)            8,126             7,723
              Accrued property taxes                                 (34,395)          (13,856)            4,882
              Due to general partner                                   9,763           (31,087)              422
              Due to related party                                    26,828
              Other liabilities                                      (62,036)           22,590            21,380
                                                                 -----------         ---------         ---------
         Net cash provided by (used in)
              operating activities                                    75,899            35,699           (17,955)
                                                                 -----------         ---------         ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
     Purchase of property and equipment                              (43,116)          (21,979)               --
     Payments for organization and loan closing costs                     --                --           (46,152)
     Deposit on rental property                                           --           (30,000)               --
     Proceeds from sale of rental property                         1,821,226                --           160,363
     Proceeds from sale of investment in office building                  --           235,723                --
     Distribution from investment in office building                      --            12,500            41,514
                                                                 -----------         ---------         ---------
         Net cash provided by investing activities                 1,778,110           196,244           155,725
                                                                 -----------         ---------         ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
     Distributions to partners                                      (976,255)          (84,368)          (42,184)
     Proceeds from notes payable                                          --           113,413                --
     Repayments of notes payable                                    (961,784)         (140,069)          (24,908)
                                                                 -----------         ---------         ---------
         Net cash used in financing activities                    (1,938,039)         (111,024)          (67,092)
                                                                 -----------         ---------         ---------

NET INCREASE (DECREASE) IN CASH                                      (84,030)          120,919            70,678

CASH AND CASH EQUIVALENTS, beginning of year                         513,087           392,168           321,490
                                                                 -----------         ---------         ---------

CASH AND CASH EQUIVALENTS, end of year                           $   429,057         $ 513,087         $ 392,168
                                                                 ===========         =========         =========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW
     INFORMATION:
     Cash paid for interest                                      $   207,000         $ 230,000         $ 183,000
                                                                 ===========         =========         =========
     Non-cash activity:
         Financing of note payable with a note
              receivable                                         $        --         $      --         $ 337,035
                                                                 ===========         =========         =========
         Exchange of property and notes payable, net             $        --         $      --         $ 595,962
                                                                 ===========         =========         =========
</TABLE>


              SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS.

                                       F-6
<PAGE>   22
                           WHITEHALL INCOME FUND - 86
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                         NOTES TO FINANCIAL STATEMENTS


1.   SUMMARY OF ACCOUNTING POLICES:

     Nature of Business - Whitehall Income Fund - 86 (the "Partnership") was
     organized in the State of California on December 15, 1985 for the purpose
     of investing in, holding, developing and managing income producing
     properties.

     Allocations and Distributions - Generally, net losses are allocated 1% to
     W&C Income Company, Ltd. (the "General Partner") and 99% to the Limited
     Partners. Net income is allocated in the same proportion as net losses
     until all such losses have been recaptured, and then in proportion to
     distributions of cash from operations until the partners' capital accounts
     equal their original invested capital. Finally, the remaining net income is
     allocated 15% to the General Partner and 85% to the Limited Partners.

     Distributions of cash from operations, as defined, are divided 1% to the
     General Partner and 99% to the Limited Partners until the Limited Partners
     have received their priority return. The Limited Partners are entitled to a
     non-cumulative non-compounded return on adjusted invested capital, as
     defined in the Partnership Agreement, of 7% in 1986, 8% in 1987, and 9% in
     1988, and 10% per annum thereafter. After this priority return is received,
     distributions are divided 5% to the General Partner and 95% to the Limited
     Partners. As of December 31, 1997 the Limited Partners had not received
     their non-cumulative priority return.

     Fees - The General Partner provides property management and leasing
     services to the Partnership and is compensated at the rate of 5% of the
     gross receipts from the properties (see Note 7). Such fee was paid and
     recognized as an expense for the years ended December 31, 1997, 1996 and
     1995. The General Partner is also entitled to a partnership management fee
     of 5% of all distributions of cash from operations after the Limited
     Partners have received their priority return. As of December 31, 1997, the
     limited partners had not received their non-cumulative priority return (see
     allocations and distributions above); therefore, the general partner is not
     entitled to the partnership management fee.

     The Partnership reimburses the General Partner for a portion of payroll
     relating to an in-house legal counsel and a managing agent and certain
     general and administrative expenses (see Note 7).

     Impairment of Long-Lived Assets - In the event that facts and circumstances
     indicate that the cost of assets may be impaired, an evaluation of
     recoverability would be performed. If an evaluation is required, the
     estimated future undiscounted cash flows associated with the asset would be
     compared to the asset's carrying amount to determine if a write-down to
     market value or discounted cash flow is required.

     Rental Properties - Rental properties and improvements are recorded at
     cost. The Partnership capitalizes and depreciates all buildings used for
     investment income over thirty-one to thirty-nine years, the estimated
     useful lives of the properties, using an accelerated method for financial
     reporting purposes. Depreciation of improvements is calculated using the
     same accelerated method over the estimated useful lives (ranging from 5 to
     10 years) of the respective assets. The cost of normal maintenance and
     repairs is charged to operating expenses as incurred. Material expenditures
     which increase the life of an asset are capitalized


                                      F-7
<PAGE>   23
                           WHITEHALL INCOME FUND - 86
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                          NOTES TO FINANCIAL STATEMENTS


     and depreciated over the estimated remaining useful life of the asset. The
     cost of properties sold, or otherwise disposed of, and the related
     accumulated depreciation or amortization are removed from the accounts, and
     any gains or losses are reflected in current operations.

     Investment in Office Building - Until June 15, 1996, the Partnership owned
     a fifty percent undivided preferential interest in an office building in
     Tucson, Arizona. The Partnership's investment was accounted for under the
     equity method. The Partnership sold its interest in this investment as of
     June 15, 1996. The Partnership's share of earnings or losses and its gain
     on sale of its investment are included in the accompanying financial
     statements.

     Net Income (Loss) Per Limited Partner Unit - Net income (loss) per limited
     partner unit has been computed for each fiscal year on the basis of the
     weighted average number of limited partner units outstanding.

     Amortization - Organization costs of the Partnership are capitalized and
     amortized over five years using the straight line method. Loan closing
     costs are amortized over the lives of the loans using the straight line
     method.

     Income Taxes and Other - The activity of the Partnership is included in the
     respective tax returns of the partners and no income taxes are provided or
     imposed at the Partnership level. These financial statements do not give
     effect to any assets that the partners may have outside their interests in
     the Partnership, nor to any obligations, including income taxes, of the
     partners.

     Use of Estimates - The preparation of the Partnership's financial
     statements in conformity with generally accepted accounting principles
     requires the Partnership's management to make estimates and assumptions
     that affect the amounts reported in these financial statements and
     accompanying notes. Actual results could differ from those estimates.

     The Partnership's financial statements are based upon a number of
     significant estimates, including the estimated useful lives selected for
     property and equipment and intangible assets. Due to the uncertainties
     inherent in the estimation process, it is at least reasonably possible that
     these estimates will be further revised in the near term and such revisions
     could be material.

     Statement of Cash Flows - For purposes of the statement of cash flows, the
     Partnership considers all highly liquid debt instruments purchased with a
     maturity of three months or less to be cash equivalents. Cash equivalents
     consist of certificates of deposit.

     Reclassifications - Certain reclassifications were made to the 1996 and
     1995 financial statements in order to conform to the 1997 presentation.
     Such reclassifications had no effect on the net loss previously reported.

     Impact of Recently Issued Standards - The FASB recently issued Statement of
     Financial Accounting Standards 130 "Reporting Comprehensive Income"
     (FASB130) and Statement of Financial Accounting Standards 131 "Disclosures
     About Segments of an Enterprise and Related Information" (FASB131). FASB130
     establishes standards for reporting and display of comprehensive income,
     its components and accumulated balances. Comprehensive income is defined to
     include all changes in equity except those


                                       F-8
<PAGE>   24
                           WHITEHALL INCOME FUND - 86
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                          NOTES TO FINANCIAL STATEMENTS


     resulting from investments by owners and distributions to owners. Among
     other disclosures, FASB130 requires that all items that are required to be
     recognized under current accounting standards as components of
     comprehensive income be reported in a financial statement that is displayed
     with the same prominence as other financial statements. FASB131 supersedes
     Statement of Financial Accounting Standards 14 "Financial Reporting for
     Segments of a Business Enterprise". FASB131 establishes standards on the
     way that public companies report financial information about operating
     segments in annual financial statements and requires reporting of selected
     information about operating segments in interim financial statements issued
     to the public. It also establishes standards for disclosures regarding
     products and services, geographic areas and major customers. FASB131
     defines operating segments as components of a company 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.

     FASB130 and FASB131 are effective for financial statement for period
     beginning after December 15, 1997 and require comparative information for
     earlier years to be restated. Because of the recent issuance of these
     standards, management has been unable to fully evaluate the impact, if any,
     the standards may have on the future financial statement disclosures.
     Results of operations and financial position, however, will be unaffected
     by implementation of these standards.

2.   RENTAL PROPERTIES:

     The Partnership currently owns four rental properties. On August 14, 1997,
     the Partnership sold Tanque Verde Self Storage for $1,945,000, net of
     related expenses. The gain on the sale of the property was $543,526.

     During 1995, the Partnership exchanged Athens Self Storage for Capitol Self
     Storage in a tax-free transaction. Capitol Self Storage and its related
     note payable (Note 5) were recorded at the net carrying value of Athens
     Self Storage at the time of transfer. No gain or loss was recognized.


                                       F-9
<PAGE>   25
                           WHITEHALL INCOME FUND - 86
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                          NOTES TO FINANCIAL STATEMENTS


     Below is a summary of the properties' cost and related depreciation as of
     December 31, 1997, 1996 and 1995, and revenue and related expenses,
     consisting of rental, depreciation and interest, for the years ended
     December 31, 1997, 1996, and 1995:


<TABLE>
<CAPTION>
     1997

                                                       MCRAE                       PAN AMERICAN    HONEY BAKED
                                                      SHOPPING      TANQUE VERDE     OFFICE          HAM IN         CAPITOL
                                       TOTAL          CENTER        SELF-STORAGE     BUILDING       LOUISIANA     SELF-STORAGE
                                    -----------      ---------      -----------      ---------      ---------      -----------
<S>                                 <C>              <C>            <C>              <C>            <C>            <C>
     Buildings and improvements     $ 3,304,266      $ 734,611      $        --      $ 464,228      $ 468,614      $ 1,636,813
     Accumulated depreciation          (610,146)      (254,929)              --       (126,531)      (134,180)         (94,506)
     Land                               484,917         59,229               --        162,850        150,000          112,838
                                    -----------      ---------      -----------      ---------      ---------      -----------
     Net property                   $ 3,179,037      $ 538,911      $        --      $ 500,547      $ 484,434      $ 1,655,145
                                    ===========      =========      ===========      =========      =========      ===========

     Rental revenue                 $   814,842      $  82,887      $   301,756         83,597      $  40,606      $   305,996
     Expenses                           617,902         48,522          186,947         79,811         23,198          279,424
                                    -----------      ---------      -----------      ---------      ---------      -----------
                                    $   196,940      $  34,365      $   114,809      $   3,786      $  17,408      $    26,572
                                    ===========      =========      ===========      =========      =========      ===========

     1996

     Buildings and improvements     $ 5,182,390      $ 734,611      $ 1,921,240      $ 459,197      $ 455,072      $ 1,612,270
     Accumulated depreciation        (1,325,983)      (231,608)        (815,366)      (111,626)      (119,153)         (48,230)
     Land                               693,948         59,229          209,031        162,850        150,000          112,838
                                    -----------      ---------      -----------      ---------      ---------      -----------
     Net property                   $ 4,550,355      $ 562,232      $ 1,314,905      $ 510,421      $ 485,919      $ 1,676,878
                                    ===========      =========      ===========      =========      =========      ===========

     Rental revenue                 $   834,622      $  79,886      $   366,560      $  83,064      $  36,000      $   269,112
     Expenses                           696,816         39,547          306,377         72,423         18,628          259,841
                                    -----------      ---------      -----------      ---------      ---------      -----------
                                    $   137,806      $  40,339      $    60,183      $  10,641      $  17,372      $     9,271
                                    ===========      =========      ===========      =========      =========      ===========
</TABLE>


                                      F-10
<PAGE>   26
<TABLE>
<CAPTION>
     1995
                                                                 TANQUE           PAN          HONEY
                                                   MCRAE          VERDE         AMERICAN        BAKED          CAPITOL       ATHENS
                                                  SHOPPING        SELF          OFFICE         HAM IN          SELF          SELF
                                    TOTAL          CENTER        STORAGE        BUILDING      LOUISIANA       STORAGE       STORAGE
                                  -----------     ---------     -----------     ---------     ---------     -----------     --------
<S>                               <C>             <C>           <C>             <C>           <C>           <C>             <C>
     Buildings and improvements   $ 5,160,411     $ 734,611     $ 1,921,240     $ 437,218     $ 455,072     $ 1,612,270     $     --
     Accumulated depreciation      (1,172,842)     (208,287)       (755,375)      (97,746)     (104,544)         (6,890)          --
     Land                             693,948        59,229         209,031       162,850       150,000         112,838           --
                                  -----------     ---------     -----------     ---------     ---------     -----------     --------
     Net property                 $ 4,681,517     $ 585,553     $ 1,374,896     $ 502,322     $ 500,528     $ 1,718,218     $     --
                                  ===========     =========     ===========     =========     =========     ===========     ========

     Rental revenue               $   755,653     $  78,396     $   374,824        82,446     $  36,150     $     8,518     $175,319
     Expenses                         657,214        43,177         324,237        65,793        30,897          24,074      169,036
                                  -----------     ---------     -----------     ---------     ---------     -----------     --------
                                  $    98,439     $  35,219     $    50,587     $  16,653     $   5,253     $   (15,556)    $  6,283
                                  ===========     =========     ===========     =========     =========     ===========     ========
</TABLE>


     During 1997 and 1996, two tenants each accounted for approximately 10% of
     rental revenue. During 1995 one tenant accounted for approximately 11% of
     rental revenue.


                                      F-11
<PAGE>   27
                           WHITEHALL INCOME FUND - 86
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                          NOTES TO FINANCIAL STATEMENT

3.   INVESTMENT IN OFFICE BUILDING:

     On November 29, 1993 the Partnership acquired a 50% undivided preferential
     interest in an office building ("Oracle") in Tucson, Arizona for $300,000.

     On June 15, 1996, the Partnership sold its investment in the office
     building for $246,473, net of related expenses. The gain on the sale of the
     investment was $75,756.

     The condensed statement of operations of Oracle for the periods ended June
     15, 1996 and December 31, 1995 are presented below:

<TABLE>
<CAPTION>
                                                        1996             1995
                                                     ---------         --------
<S>                                                  <C>               <C>
     Revenues                                        $ 107,947         $205,362
     Expenses                                          149,275          198,960
                                                     ---------         --------
     Net income (loss)                               $ (41,328)        $  6,402
                                                     =========         ========

     Partnership's share of net income (loss)        $ (20,664)        $  3,201
                                                     =========         ========
</TABLE>

     A condensed balance sheet of Oracle has not been provided due to the
     immateriality of the Company's 50% undivided interest in the office
     building.


4.   NOTE RECEIVABLE:

     Prior to 1995, one of the properties of the Partnership was held as
     collateral for a note payable of the original owner. During 1995, the
     Partnership assumed this note payable in exchange for a note receivable
     with collateral of a second trust deed on an operating property in Atlanta
     from the original note holder. When the note receivable became due in June
     1997, the original owner could not pay the balance due on the note. The
     Partnership took the collateral and wrote down the note receivable to the
     estimated fair value of the collateral.

     The second trust deed has an interest rate of 9.5%. The principal and
     interest is received in monthly installments of $14,074 through November 4,
     2004. Since the second trust deed wraps the first trust deed on the Atlanta
     property, the monthly installments of the second trust deed are reduced by
     the monthly payments of $12,400 to the first trust deed through February
     2004.


                                      F-12
<PAGE>   28
                           WHITEHALL INCOME FUND - 86
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                          NOTES TO FINANCIAL STATEMENT

5.   NOTES PAYABLE:

     Notes payable consisted of:

<TABLE>
<CAPTION>
                                                                                            DECEMBER 31,
                                                                                     -------------------------
                                                                                        1997           1996
                                                                                     ----------     ----------
<S>                                                                                  <C>            <C>
     $1,250,000 non-recourse note payable to bank with interest at 9% through
     February 2006; principal and interest payable in monthly installments of
     $10,490 through February 2006, at which time the remaining balance becomes
     due; collateralized by Capitol real and personal property                       $1,220,801     $1,237,265

     $1,000,000 non-recourse note payable to bank with interest adjusted
     semi-annually to 3.5% above the coupon rate with a 16.65% maximum and 9.66%
     minimum rate, 9.66% at December 31, 1996; principal and interest payable
     monthly with the unpaid balance due September 1999; collateralized by
     Tanque Verde real and personal property. This note was
     paid in full on August 14, 1997                                                         --        940,714

     $337,035 note payable to life insurance company with interest at 9% through
     August 2000; principal and interest due in monthly installments of $2,828
     through August 2000, at which time the remaining balance becomes due;
     collateralized by Pan American real property                                       327,337        331,943
                                                                                     ----------     ----------


                                                                                     $1,548,138     $2,509,922
                                                                                     ==========     ==========
</TABLE>


     Future maturities of notes payable are as follows:

<TABLE>
<CAPTION>
           YEAR                            AMOUNT
           ----                            ------
<S>                                    <C>
           1998                        $     19,500
           1999                              23,184
           2000                             337,814
           2001                              21,672
           2002                              23,705
           Thereafter                     1,122,263
                                       ------------
                                       $  1,548,138
                                       ============
</TABLE>


                                      F-13
<PAGE>   29
                           WHITEHALL INCOME FUND - 86
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                          NOTES TO FINANCIAL STATEMENTS


6.   LEASES:

     Future minimum lease payments to be received on non-cancelable leases are
     as follows:

<TABLE>
<CAPTION>
                     YEAR                      AMOUNT
                     ----                      ------
<S>                                           <C>
                     1998                     $ 167,805
                     1999                        74,080
                     2000                        20,028
                                              ---------
                                              $ 261,913
                                              =========
</TABLE>

7.   RELATED PARTY TRANSACTIONS:

     At December 31, 1997 and 1996 the General Partner was owed $9,763 and $844,
     respectively, for distributions of cash from operations, as defined in the
     partnership agreement.

     In 1997, 1996 and 1995 the Partnership was charged property management and
     leasing fees of $36,921, $43,159 and $42,230 by an affiliate of the former
     General Partner. In 1997, 1996 and 1995, the Partnership incurred payroll
     expenses relating to certain of the former General Partner's employees and
     other administrative expenses totaling $195,728, $267,213, and $275,125,
     respectively. Additionally during 1995, costs related to the exchange of
     Capitol Self Storage for Athens Self Storage of $46,152 were paid to a
     former General Partner and capitalized by the Partnership as organization
     costs. Certain amounts of the administrative expenses paid a former General
     Partner are allocated to the Partnership based upon a former General
     Partner's estimates.


8.   FINANCIAL INSTRUMENTS:

     Concentrations of Credit Risk

     Credit risk represents the accounting loss that would be recognized at the
     reporting date if counterparties failed completely to perform as
     contracted. Concentrations of credit risk (whether on or off balance sheet)
     that arise from financial instruments exist for groups of customers or
     counterparties when they have similar economic characteristics that would
     cause their ability to meet contractual obligations to be similarly
     effected by changes in economic or other conditions. In accordance with
     FASB Statement No. 105, Disclosure of Information about Financial
     Instruments with Off-Balance-Sheet Risk and Financial Instruments with
     Concentrations of Credit Risk, the credit risk amounts shown do not take
     into account the value of any collateral or security.


                                      F-14
<PAGE>   30
                           WHITEHALL INCOME FUND - 86
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                          NOTES TO FINANCIAL STATEMENTS



     Financial instruments that subject the Partnership to credit risk consist
     principally of a note and accounts receivable and cash on deposit.

     At December 31, 1997, the Partnership maintained cash balances with a
     commercial bank which were approximately $315,393 in excess of FDIC
     insurance limits.

     The Partnership's note receivable is described in Note 4.

     The Partnership's properties are located in the states of Texas, Arizona,
     Georgia and Louisiana. A downturn in the economies in any of these states
     could have an adverse impact on the Partnership.

     Fair Value of Financial Instruments

     The estimated fair values of the Partnership financial instruments were
     determined by management using available market information and appropriate
     valuation methodologies. The estimates are not necessarily indicative of
     the amount the Partnership could realize in a current market exchange.

     At December 31, 1997, cash, accounts receivable, accounts payable and notes
     payable have fair values that approximate book values based on their short
     term or demand maturity.

     The fair value of the note receivable is based on estimated discounted cash
     flows. The fair value of these instruments approximates book value at
     December 31, 1997.


                                      F-15
<PAGE>   31
                          FINANCIAL STATEMENT SCHEDULES
<PAGE>   32
                           WHITEHALL INCOME FUND - 86
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                                  SCHEDULE III
                    REAL ESTATE AND ACCUMULATED DEPRECIATION
                                DECEMBER 31, 1997



The following shows the changes in the total amounts at which real estate was
carried during the periods:

<TABLE>
<S>                                          <C>
     Balance at January 1, 1995              $ 5,671,427
           Purchases                           1,725,108
           Cost of real estate sold           (1,542,176)
                                             -----------
     Balance at December 31, 1995              5,854,359
           Purchases                              21,979
                                             -----------
     Balance at December 31, 1996              5,876,338
           Purchases                              43,116
           Cost of real estate sold           (2,130,271)
                                             ------------
     Balance at December 31, 1997            $ 3,789,183
                                             ===========
</TABLE>

     The following shows changes in accumulated depreciation during the periods:

<TABLE>
<S>                                                 <C>
     Balance at January 1, 1995                     $ 1,458,896
           Depreciation during the period               171,912
           Deductions for real estate sold             (457,966)
                                                    -----------
     Balance at December 31, 1995                     1,172,842
           Depreciation during the period               153,141
                                                    -----------
     Balance at December 31, 1996                     1,325,983
           Depreciation during the period               135,676
           Deductions for real estate sold             (851,513)
                                                    -----------
     Balance at December 31, 1997                   $   610,146
                                                    ===========
</TABLE>


                                      F-18
<PAGE>   33
                           WHITEHOUSE INCOME FUND - 86
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                                   SCHEDULE IV
                          MORTGAGE LOANS ON REAL ESTATE
                                DECEMBER 31, 1997


<TABLE>
<CAPTION>
                                             FINAL           PERIODIC                           FACE            CARRYING
                            INTEREST        MATURITY          PAYMENT          PRIOR          AMOUNT OF         AMOUNT OF
      DESCRIPTION              RATE           DATE             TERMS           LIENS          MORTGAGES         MORTGAGES
-----------------------     ---------      ----------       -----------       -------       ------------       -----------
<S>                         <C>            <C>              <C>               <C>           <C>                <C>
Commercial loans:
  Capital Self
      Storage                  9%             2006        $       10,490           -         $ 1,250,000         $ 1,220,801
  Pan American
  Office Building              9%             2000                 2,828           -             337,035             327,337
</TABLE>

      The following shows the changes in the carrying amounts of mortgage loans
during the periods:

<TABLE>
<S>                                          <C>
     Balance at January 1, 1995              $ 1,464,792
           New mortgage loan                   1,587,035
           Payments of principal                 (24,908)
           Payoff old mortgage loan             (489,497)
                                             -----------
     Balance at December 31, 1995              2,537,422
           Payments of principal                 (27,500)
                                             -----------
     Balance at December 31, 1996              2,509,922
           Payments of principal                (961,784)
                                             -----------
     Balance at December 31, 1997            $ 1,548,138
                                             ===========
</TABLE>


                                      F-19
<PAGE>   34
                           WHITEHALL INCOME FUND - 86
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                                  SCHEDULE III
                    REAL ESTATE AND ACCUMULATED DEPRECIATION
                                DECEMBER 31, 1997


<TABLE>
<CAPTION>
                                                                                           COSTS CAPITALIZED
                                        INITIAL COST TO PARTNERSHIP                     SUBSEQUENT TO ACQUISITION
                          ----------------------------------------------------       -------------------------------
                                                                  BUILDING AND
   DESCRIPTION            INCUMBRANCES            LAND            IMPROVEMENTS       IMPROVEMENTS     CARRYING COSTS
   -----------            ------------            ----            ------------       ------------     --------------
<S>                       <C>                  <C>                <C>                <C>              <C>
McRae Shopping
  Center                   $       --          $   59,229          $  734,611          $    --          $     --
Pan American
  Office Building             327,337             162,850             437,217           27,011                --
Honey Baked Ham
  in Louisiana                     --             150,000             450,000           18,614                --
Capitol Self
  Storage                   1,220,801             112,838           1,612,270           24,543                --
                           ----------          ----------          ----------          -------          --------
                           $1,548,138          $  484,917          $3,234,098          $70,168                --
                           ==========          ==========          ==========          =======          ========
</TABLE>


<TABLE>
<CAPTION>
                                                                                                                     LIFE ON WHICH
                                GROSS AMOUNTS AT WHICH CARRIED AT CLOSED OF PERIOD                                   DEPRECIATION
                      ---------------------------------------------------------------                              IN LATEST INCOME
                                       BUILDING AND                    ACCUMULATED       DATE OF         DATE         STATEMENTS IS
   DESCRIPTION            LAND          IMPROVEMENTS        TOTAL       DEPRECIATION   CONSTRUCTION     ACQUIRED        COMPUTED
   -----------            ----          ------------        -----       ------------   ------------     --------       ------------
<S>                   <C>             <C>               <C>            <C>             <C>              <C>            <C>
McRae Shopping
  Center              $   59,229        $  734,611       $  793,840       $254,929          1985          1986          31.5 years
Pan American
  Office Building        162,850           464,228          627,078        126,531          1984          1987          31.5 years
Honey Baked Ham
  in Louisiana           150,000           468,614          618,614        134,180          1978          1988          31.5 years
Capitol Self
  Storage                112,838         1,636,813        1,749,651         94,506          1984          1995          39.0 years
                      ----------        ----------       ----------       --------          ----          ----          ----------
                      $  484,917        $3,304,266       $3,789,183       $610,146          
                      ==========        ==========       ==========       ========          
</TABLE>




                                   (CONTINUED)