<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, 1998.

                                       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, 1998 all units of registrant's Limited Partnership 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 units, are
considered affiliates for purposes of this calculation).


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<PAGE>   2
WHITEHALL INCOME FUND - 86

                                    FORM 10-K
                                TABLE OF CONTENTS

PART I
      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


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<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 7 individuals.

The Registrant has acquired two self storage facilities, a shopping center, a
restaurant building and one office building 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 1998, the Registrant owned four 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.


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<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 is $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 that 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 that are lessees of the McRae Square Shopping
Center.

Rental income for the Shopping Center was $79,841, $82,887 and $79,886 for 1998,
1997, and 1996, respectively. Operating expenses for the same years were
$39,461, $48,522 and $39,547, respectively.

As of December 31, 1998 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, 1998.

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


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<PAGE>   5
operations during that month. 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 and $366,560 for 1997 and 1996,
respectively. Operating expenses for the same years were $186,947 and $306,377,
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 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
$333,264, $305,996 and $269,112 for 1998, 1997 and 1996, respectively. Operating
expenses for the same years were $284,124, $279,424 and $259,841, respectively.
Revenue was increased in 1998 due to rental increases and strict collection
policies. Expenses were higher in 1998 due to computerization of on-site
records.

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 $1,204,115 as of December 31, 1998.


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<PAGE>   6
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
1998 for a one-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 $107,293, $83,597 and $83,064 for 1998,
1997 and 1996, respectively. Operating expenses for the same years were $93,086,
$79,811 and $72,423, respectively. Operating expenses include a five percent
(5%) management fee and depreciation of approximately $14,000 annually.

Income increased in 1998 due to the rental rate being increased by $4.51 per
square foot, because the lease term was reduced. Expenses increase due to
renewal requests for complete interior painting of the facility.

The property was held as collateral for a mortgage of $322,667 outstanding as of
December 31, 1998, 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 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, then exercised its first five-year option commencing
January 1, 1999 through December 31, 2004 at an annual rental rate of $37,800.


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<PAGE>   7
Rental revenue for this property was $43,746, $40,606 and $36,000 for 1998, 1997
and 1996, respectively. Operating expenses for the same years were $25,294,
$23,198 and $18,628, respectively.

The property was not held as collateral for any mortgages outstanding as of
December 31, 1998.

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.

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.


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<PAGE>   8
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, 1998 the number of holders of record of Limited Partnership
Interests of the Registrant was 720.


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, 1998:


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<PAGE>   9
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------------
                                                                        For the Years Ending December 31,
                                                  1998              1997             1996              1995              1994
--------------------------------------------------------------------------------------------------------------------------------
<S>                                           <C>               <C>              <C>               <C>               <C>
TOTAL RENTAL REVENUES                            $564,144          $814,842         $834,622          $755,653          $793,294
--------------------------------------------------------------------------------------------------------------------------------
RENTAL REVENUES LESS
   RENTAL OPERATING  EXPENSES                     123,237           196,940          137,806            90,439           159,947
--------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME                                    31,652            42,644           46,501            44,629             3,741
--------------------------------------------------------------------------------------------------------------------------------
ADMINISTRATION EXPENSES                            64,567            75,355          115,386           100,347            45,651
--------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS)                                 (81,538)          357,132           (8,171)         (237,018)          (46,799)
--------------------------------------------------------------------------------------------------------------------------------
NET INCOME(LOSS)PER                                 (6.77)            29.63             (.68)           (19.06)            (3.92)
  LIMITED PARTNER
  UNITS
--------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO                                        0           966,942           83,534            41,762           125,206
  LIMITED PARTNERS
--------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO
  LIMITED PARTNERS
  PER LIMITED
  PARTNER UNIT                                          0             81.00             7.00              3.50             10.50
--------------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE
  NUMBER OF LIMITED
  PARTNER UNITS                                    11.932            11,932           11,932            11,932            11,932
--------------------------------------------------------------------------------------------------------------------------------
INVESTMENT PROPERTIES                           3,113,601         3,179,037        4,550,355         4,601,517         4,212,531
--------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS                                    3,821,400         3,845,719        5,504,064         5,630,206         4,012,790
--------------------------------------------------------------------------------------------------------------------------------
LONG-TERM
  OBLIGATIONS                                   1,526,784         1,548,138        2,509,922         2,537,422         1,464,792
--------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PROPERTIES
  OWNED                                                 4                 4                5                 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.


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<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, 1998,
the Partnership has distributed $2,978,943 to the Limited Partners and $9,763 to
the General Partner.

Revenues for the year ended December 31, 1998 decreased by $250,698 from the
year ended December 31, 1997. The decrease was due primarily to the sale of
Tanque Verde/Kolb Self Storage. This decrease would have been greater, but for
increases in revenue at three of the four remaining properties.

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.


Rental Operating Expenses for the year ended December 31, 1998 decrease by
$179,995 from the year ended December 31, 1997. The decrease was primarily due
to the elimination of two employees who were previously employed by Tanque
Verde/Kolb Self Storage and the elimination of operating expenses at the
property due to sale of the property.

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 that occurred at the all of the
partnership's properties.

Net income for the year ended December 31, 1998 declined by $438,670 from the
year ended December 31, 1997 primarily due to the sale of Tanque Verde/Kolb.

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.


                                       10
<PAGE>   11
LIQUIDITY AND CAPITAL RESOURCES

The cash position of the Partnership and distributions to Limited Partners
should remain constant or decrease during 1999 depending on whether sales of
remaining real properties occur.

Net cash provided by operating activities was $91,873 for the year ended
December 31, 1998 compared to $75,899 for the year ended December 31, 1997. Net
cash provided by investing activities was $430 for the year ended December 31,
1998.

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.

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 1999 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 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.

YEAR 2000 ISSUES

The company is in a state of readiness for Year 2000 Issues (Y2K) having
installed both new hardware and new software within the last six months. The
hardware is Dell, which is Y2K certified and the software, Adobe, Intuit and
Microsoft, are also Y2K certified. The cost to the company was not material.


                                       11
<PAGE>   12
The Reports of Independent Auditors and the financial statements and schedules
as set forth on pages F-1 to F-19 are hereby incorporated herein.

The company's third-party payroll providers and banks are prepared for Year 2000
Issues. The bank, National Bank of Arizona, and payroll provider, Paychex, have
provided certification of their Y2K readiness. The company's tenants, Rite-Aid
Drug, Family Dollar, Honey Baked Ham and the State of Texas have not certified
their readiness. Capitol Self Storage's computer software and hardware are
certified ready.

There are no material relationships with suppliers or vendors that would
materially affect operations, with the exception of utility companies.

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 50, 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


                                       12
<PAGE>   13
portfolio management corporation.

WHITEHALL CAPITAL INVESTMENT GROUP: The corporation has an 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-15 of this Form 10-K.


                                       13
<PAGE>   14
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K

      (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 Financial Data 
Schedule

      (d)   Financial Statement Schedules required by Regulation S-X:

            All required information is included in the financial statements or
schedules on pages F-12 through F-19.



                                   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: 4-13-99               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, 1998, 1997 AND 1996
<PAGE>   16
                          INDEX TO FINANCIAL STATEMENTS


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

BALANCE SHEETS - December 31, 1998 and 1997.......................................................   F-3

STATEMENTS OF OPERATIONS - For the Years Ended December 31, 1998, 1997 and 1996...................   F-4

STATEMENT OF CHANGES IN PARTNERS' CAPITAL (DEFICIT) - For the Years Ended December 31, 1998,
        1997 and 1996.............................................................................   F-5

STATEMENTS OF CASH FLOWS - For the Years Ended December 31, 1998, 1997 and 1996...................   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, 1998 and 1997, 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,
1998. 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, 1998 and 1997, and the results
of its operations and its cash flows for each of the years in the three year
period ended December 31, 1998 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.


\s\ HEIN + ASSOCIATES LLP

HEIN + ASSOCIATES LLP
Certified Public Accountants

Orange, California
February 18, 1999


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

                                 BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                                 DECEMBER 31,
                                                                         ------------------------------
                                                                            1998               1997
                                                                         -----------        -----------
<S>                                                                      <C>                <C>
                                 ASSETS

     Rental properties, net of accumulated depreciation                   $3,113,601         $3,179,037
     Cash and cash equivalents                                               500,005            429,057
     Accounts receivable                                                      21,032              8,574
     Note receivable                                                         155,140            161,456
     Organization and loan closing costs, net of accumulated
         amortization of $14,530 and $9,615                                   31,622             36,537
     Deposits and other assets                                                    --             31,058
                                                                         -----------        -----------

TOTAL ASSETS                                                              $3,821,400         $3,845,719
                                                                         ===========        ===========

                     LIABILITIES AND PARTNERS' CAPITAL

     Notes payable                                                        $1,526,782         $1,548,138
     Accounts payable                                                          5,515              6,082
     Accrued property taxes                                                   19,862             18,678
     Due to general partner                                                   10,607             10,607
     Due to related party                                                    107,045             26,828
     Other liabilities                                                         8,539             10,798
                                                                         -----------        -----------
         Total liabilities                                                 1,678,350          1,621,131

COMMITMENTS AND CONTINGENCIES (Notes 5 and 8)                                     --                 --

PARTNERS' CAPITAL
     Limited partners, 11,932 equity units authorized and
         outstanding for 1998 and 1997                                     2,190,564          2,271,287
     General partner, 1 equity unit authorized and outstanding for
         1998 and 1997                                                       (47,514)           (46,699)
                                                                         -----------        -----------

TOTAL LIABILITIES AND PARTNERS' CAPITAL                                   $3,821,400         $3,845,719
                                                                         ===========        ===========
</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,
                                                        -------------------------------------------
                                                           1998              1997            1996
                                                        ---------        ----------       ---------
<S>                                                     <C>              <C>              <C>
REVENUES:
    Rental                                               $564,144          $814,842        $834,622
    Gain on sale of investment in office building              --                --          75,756
    Gain on sale of rental property                            --           543,526              --
    Other income                                           32,773            54,127          51,212
                                                        ---------        ----------       ---------
             Total Revenues                               596,917         1,412,495         961,590
                                                        ---------        ----------       ---------

EXPENSES:
    Rental operating:
         Depreciation                                      95,006           135,676         153,141
         Payroll and related taxes                         31,889            49,636          64,373
         Interest                                         135,656           198,138         229,664
         Other rental operating expenses                   76,241            95,857         110,915
         Taxes other than payroll                          69,860           100,442         106,455
         Repairs and maintenance                           21,325            25,729          12,932
         Advertising                                       10,930            12,424          19,336
    Operating Expenses:
         General and administrative                        64,567            75,355         115,386
         Payroll and related taxes                        130,260           126,360          94,678
         Professional fees                                 36,748            35,778          31,830
         Depreciation and amortization                      5,973            15,156          10,387
    Share of net loss of office building                       --                --          20,664
    Write down of note receivable to fair value                --           184,812              --
                                                        ---------        ----------       ---------
             Total expenses                               678,455         1,055,363         969,761
                                                        ---------        ----------       ---------

NET INCOME (LOSS)                                        $(81,538)         $357,132         $(8,171)
                                                        =========        ==========       =========

NET INCOME (LOSS) ATTRIBUTED TO:
    Limited partners                                     $(80,723)         $353,561         $(8,089)
                                                        =========        ==========       =========
    General partner                                         $(815)           $3,571            $(82)
                                                        =========        ==========       =========

NET INCOME (LOSS) PER LIMITED PARTNER UNIT                 $(6.77)           $29.63          $(0.68)
                                                        =========        ==========       =========

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

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, 1998, 1997 AND 1996

<TABLE>
<CAPTION>
                                           GENERAL           LIMITED
                                           PARTNER           PARTNERS            TOTAL
                                           --------        -----------        -----------
<S>                                        <C>             <C>                <C>
BALANCE (DEFICIT), January 1, 1996         $(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

        Net loss for 1998                      (815)           (80,723)           (81,538)
                                           --------        -----------        -----------

BALANCE (DEFICIT), December 31, 1998       $(47,514)        $2,190,564         $2,143,050
                                           ========        ===========        ===========
</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,
                                                               ---------------------------------------------
                                                                  1998               1997             1996
                                                               ---------        -----------        ---------
<S>                                                            <C>              <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net income (loss)                                          $(81,538)          $357,132          $(8,171)
     Adjustments to reconcile net income (loss) to net
         cash provided by operating activities:
         Depreciation and amortization                           100,979            150,832          163,528
         Share of net (income) loss of office building                --                 --           20,664
         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                                (12,458)             4,887           (1,209)
              Note receivable                                      6,316                 --          (49,130)
              Accounts payable                                      (568)           (18,398)           8,126
              Accrued property taxes                               1,184            (34,395)         (13,856)
              Due to general partner                                  --              9,763          (31,087)
              Due to related party                                80,217             26,828
              Other liabilities                                   (2,259)           (62,036)          22,590
                                                               ---------        -----------        ---------
         Net cash provided by operating activities                91,873             75,899           35,699
                                                               ---------        -----------        ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
     Purchase of rental properties                               (29,570)           (43,116)         (21,979)
     Deposit on rental property                                   30,000                 --          (30,000)
     Proceeds from sale of rental property                            --          1,821,226
     Proceeds from sale of investment in office building              --                 --          235,723
     Distribution from investment in office building                  --                 --           12,500
                                                               ---------        -----------        ---------
         Net cash provided by investing activities                   430          1,778,110          196,244
                                                               ---------        -----------        ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
     Distributions to partners                                        --           (976,255)         (84,368)
     Proceeds from notes payable                                      --                 --          113,413
     Repayments of notes payable                                 (21,355)          (961,784)        (140,069)
                                                                                -----------        ---------
         Net cash used in financing activities                   (21,355)        (1,938,039)        (111,024)
                                                               ---------        -----------        ---------

NET INCREASE (DECREASE) IN CASH                                   70,948            (84,030)         120,919

CASH AND CASH EQUIVALENTS, beginning of year                     429,057            513,087          392,168
                                                               ---------        -----------        ---------

CASH AND CASH EQUIVALENTS, end of year                          $500,005           $429,057         $513,087
                                                               =========        ===========        =========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW
     INFORMATION:
     Cash paid for interest                                     $135,656           $207,000         $230,000
                                                               =========        ===========        =========
</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, 1998 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, 1998, 1997 and
     1996. 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, 1998, 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 1997 and
     1996 financial statements in order to conform to the 1998 presentation.
     Such reclassifications had no effect on the net income (loss) previously
     reported.

     Impact of Recently Issued Standards - SFAS 133 "Accounting for Derivative
     Instruments and Hedging Activities," SFAS 132, "Employees' Disclosures
     about Pensions and other Postretirement Benefits," and


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

                          NOTES TO FINANCIAL STATEMENTS


     SFAS 134, "Accounting for Mortgage-Backed Securities Retained after the
     Securitazation of Mortgage Loans Held for Sale by a Mortgage Banking
     Enterprise" were issued in 1998 and are not expected to impact the
     Partnership regarding future financial statement disclosures, results of
     operations and financial position.


2.   RENTAL PROPERTIES AND OTHER SEGMENT INFORMATION:

     Each rental property is an operating segment. The Partnership's management
     evaluates the performance of each segment based on profit or loss from
     operations before allocation of Partnership general and administrative
     expenses, unusual and extraordinary items. The accounting policies of the
     segments are the same as those described in the summary of significant
     accounting policies.

     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 1998, two tenants each accounted for approximately 16% of rental
     revenue. During 1997 and 1996, two tenants each accounted for approximately
     10% of the rental revenue.


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

                          NOTES TO FINANCIAL STATEMENTS


     Below is the segment information:


<TABLE>
<CAPTION>
     1998
                                                                        MCRAE       PAN AMERICAN    HONEY BAKED
                                                       PARTNERSHIP     SHOPPING        OFFICE         HAM IN          CAPITOL
                                         TOTAL           OVERHEAD       CENTER        BUILDING       LOUISIANA     SELF-STORAGE
                                         -----           --------       ------        --------       ---------     ------------
<S>                                    <C>             <C>            <C>           <C>            <C>            <C>
     Buildings and improvements         $3,333,835            $--       $750,731       $477,677       $468,614       $1,636,813
     Accumulated depreciation             (705,151)            --       (278,457)      (141,276)      (148,943)        (136,475)
     Land                                  484,917             --         59,229        162,850        150,000          112,838
                                       -----------      ---------      ---------      ---------      ---------      -----------
     Net property                       $3,113,601            $--       $531,503       $499,251       $469,671       $1,613,176
                                       ===========      =========      =========      =========      =========      ===========

     Rental revenue                       $564,144            $--        $79,841       $107,293        $43,746         $333,264
     Gain on sale of property                   --             --             --             --             --               --
     Other income                              933            933             --             --             --               --
     Interest income                        31,840         17,874            188         13,778             --               --
                                       -----------      ---------      ---------      ---------      ---------      -----------
                                           596,917         18,807         80,029        121,071         43,746          333,264
                                       -----------      ---------      ---------      ---------      ---------      -----------

     Operating expenses                    441,820        230,517         15,933         48,814         10,531          136,025
     Interest expense                      135,656             --             --         29,527             --          106,129
     Depreciation and amortization         100,979          5,973         23,528         14,745         14,763           41,970
                                       -----------      ---------      ---------      ---------      ---------      -----------
                                           678,455        236,490         39,461         93,086         25,294          284,124
                                       -----------      ---------      ---------      ---------      ---------      -----------

     Net income (loss)                    $(81,538)     $(217,683)       $40,568        $27,985        $18,452          $49,140
                                       ===========      =========      =========      =========      =========      ===========
</TABLE>


                                      F-10
<PAGE>   26
                                               WHITEHALL INCOME FUND - 86
                                           (A CALIFORNIA LIMITED PARTNERSHIP)

                                              NOTES TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
     1997
                                                                                               PAN
                                                                    MCRAE                    AMERICAN    HONEY BAKED
                                                   PARTNERSHIP     SHOPPING   TANQUE VERDE   OFFICE        HAM IN        CAPITOL
                                        TOTAL       OVERHEAD        CENTER    SELF-STORAGE   BUILDING     LOUISIANA    SELF-STORAGE
                                        -----       --------        ------    ------------   --------     ---------    ------------
<S>                                  <C>           <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
     Gain on sale of property            543,526           --            --      543,526           --            --              --
     Other income                         10,804          800            --           --       10,004            --              --
     Interest income                      43,323       22,183           217           --       20,923            --              --
                                     -----------    ---------     ---------     --------    ---------     ---------     -----------
                                       1,412,495       22,983        83,104      845,282      114,524        40,606        $305,996
                                     -----------    ---------     ---------     --------    ---------     ---------     -----------

     Operating expenses                  521,581      237,493        25,201       94,959       33,939         8,171         121,818
     Interest expense                    198,138           --            --       56,545       30,967            --         110,626
     Depreciation and amortization       150,832       15,156        23,321       35,443       14,905        15,027          46,980
     Write down of note receivable       184,812      184,812            --           --           --            --              --
                                     -----------    ---------     ---------     --------    ---------     ---------     -----------
                                       1,055,363      437,461        48,522      186,947       79,811        23,198         279,424
                                     -----------    ---------     ---------     --------    ---------     ---------     -----------

     Net income loss                    $357,132    $(414,478)      $34,582     $658,335      $34,713       $17,408         $26,572
                                     ===========    =========     =========     ========    =========     =========     ===========
</TABLE>


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

                          NOTES TO FINANCIAL STATEMENTS


<TABLE>
<CAPTION>
     1996
                                                                                             PAN
                                                                    MCRAE                  AMERICAN     HONEY BAKED
                                                   PARTNERSHIP    SHOPPING   TANQUE VERDE   OFFICE        HAM IN        CAPITOL
                                         TOTAL      OVERHEAD       CENTER    SELF-STORAGE   BUILDING     LOUISIANA    SELF-STORAGE
                                         -----      --------       ------    ------------   --------     ---------    ------------
<S>                                   <C>           <C>            <C>         <C>           <C>          <C>           <C>
     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
     Gain on sale of property             75,756       75,756           --             --           --           --             --
     Other income                         12,403       12,403           --             --           --           --             --
     Interest income                      38,809       18,258          221             --       20,330           --             --
                                     -----------    ---------    ---------    -----------    ---------    ---------    -----------
                                         961,590      106,417       80,107        366,560      103,394       36,000    $   269,112
                                     -----------    ---------    ---------    -----------    ---------    ---------    -----------

     Operating expenses                  555,905      241,894       16,226        155,729       28,477        4,019        109,560
     Interest expense                    229,664           --           --         91,363       30,066           --        108,235
     Depreciation and amortization       163,528       10,387       23,321         59,285       13,880       14,609         42,046
     Share of net loss on office
       building                           20,664       20,664           --             --           --           --             --
                                     -----------    ---------    ---------    -----------    ---------    ---------    -----------
                                         969,761      272,945       39,547        306,377       72,423       18,628        259,841
                                     -----------    ---------    ---------    -----------    ---------    ---------    -----------

     Net income (loss)               $    (8,171)   $(166,528)   $  40,560    $    60,183    $  30,971    $  17,372    $     9,271
                                     ===========    =========    =========    ===========    =========    =========    ===========
</TABLE>


                                      F-12
<PAGE>   28
                           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 period ended June
     15, 1996 is presented below:

<TABLE>
<CAPTION>
                                                   1996
                                                ---------
<S>                                             <C>
     Revenues                                   $ 107,947
     Expenses                                     149,275
                                                ---------
     Net income (loss)                          $ (41,328)
                                                =========

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


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

                          NOTES TO FINANCIAL STATEMENT

5.   NOTES PAYABLE:

     Notes payable consisted of:


<TABLE>
<CAPTION>
                                                                                                      DECEMBER 31,
                                                                                            --------------------------------
                                                                                               1998                  1997
                                                                                            ----------            ----------
<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                              $1,204,115            $1,220,801

     $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                                                                                  322,667               327,337
                                                                                            ----------            ----------

                                                                                            $1,526,782            $1,548,138
                                                                                            ==========            ==========
</TABLE>


     Future maturities of notes payable are as follows:


<TABLE>
<CAPTION>
                             YEAR                             AMOUNT
                             ----                           ----------
<S>                                                         <C>
                             1999                           $   23,184
                             2000                              337,409
                             2001                               21,672
                             2002                               23,705
                             2003                               25,928
                             Thereafter                      1,094,884
                                                            ----------
                                                            $1,526,782
                                                            ==========
</TABLE>

     All interest incurred for years ending December 31, 1998, 1997 and 1996 was
     charged to expense.


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

                          NOTES TO FINANCIAL STATEMENT

6.   LEASES:

     The Partnership has long-term operating lease agreements with unaffliated
     lessees to occupy space in its operating real estate properties.

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

<TABLE>
<CAPTION>
                         YEAR                                AMOUNT
                         ----                                ------
<S>                                                         <C>
                         1999                               $214,621
                         2000                                 57,828
                         2001                                 37,800
                         2002                                 37,800
                         2003                                 37,800
                                                            --------
                                                            $385,849
                                                            ========
</TABLE>


7.   RELATED PARTY TRANSACTIONS:

     At December 31, 1998 and 1997 the General Partner was owed $10,607 for
     distributions of cash from operations, as defined in the partnership
     agreement.

     In 1998, 1997 and 1996 the Partnership was charged property management and
     leasing fees of $26,744, $36,921 and $43,159 by an affiliate of the former
     General Partner. In 1998, 1997 and 1996, the Partnership incurred payroll
     expenses relating to certain of the former General Partner's employees and
     other administrative expenses totaling $189,217, $195,728, and $267,213,
     respectively. Certain amounts of the administrative expenses paid by a
     former General Partner are allocated to the Partnership based upon the
     former General Partner's estimates. At December 31, 1998 and 1997, the
     affiliate of the former General Partners was owed $107,045 and $26,282,
     respectively.


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-15
<PAGE>   31
                           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, 1998, the Partnership maintained cash balances with a
     commercial bank which were approximately $386,161 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, 1998, 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, 1998.


                                      F-16
<PAGE>   32
                          FINANCIAL STATEMENT SCHEDULES


                                      
<PAGE>   33
                           WHITEHALL INCOME FUND - 86
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                                  SCHEDULE III
                    REAL ESTATE AND ACCUMULATED DEPRECIATION
                                DECEMBER 31, 1998

<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         $16,120         $     --
Pan American
  Office Building            322,665            162,850            437,217          40,460               --
Honey Baked Ham
  in Louisiana                    --            150,000            450,000          18,614               --
Capitol Self
  Storage                  1,204,116            112,838          1,612,270          24,543               --
                          ----------         ----------         ----------         -------         ---------
                          $1,526,781         $  484,917         $3,234,098         $99,737         $     --
                          ==========         ==========         ==========         =======         ========
</TABLE>

<TABLE>
<CAPTION>
                                                                                                                   LIFE ON WHICH
                           GROSS AMOUNTS AT WHICH CARRIED AT CLOSE 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      $  750,731      $  809,960         $278,457          1985          1986      31.5 years
Pan American
  Office Building        162,850         477,677         640,527          141,276          1984          1987      31.5 years
Honey Baked Ham
  in Louisiana           150,000         468,614         618,614          148,943          1978          1988      31.5 years
Capitol Self
  Storage                112,838       1,636,813       1,749,651          136,475          1984          1995      39.0 years
                      ----------      ----------      ----------         --------          ----          ----      ----------
                      $  484,917      $3,333,835      $3,818,752         $705,151
                      ==========      ==========      ==========         ========
</TABLE>


                                      F-17
<PAGE>   34
                           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, 1996          $ 5,854,359
               Purchases                           21,979
                                              -----------
          Balance at December 31, 1996          5,876,338
                Purchases                          43,116
                Cost of real estate sold       (2,130,272)
                                              -----------
          Balance at December 31, 1997          3,789,182
                Purchases                          29,570
                                              -----------
          Balance at December 31, 1998        $ 3,818,752
                                              ===========
</TABLE>

      The following shows changes in accumulated depreciation during the
periods:


<TABLE>
<S>                                                  <C>
          Balance at January 1, 1996                 $ 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         (851,514)
                                                     -----------
          Balance at December 31, 1997                   610,145
                Depreciation during the period            95,006
                                                     -----------
          Balance at December 31, 1998               $   705,151
                                                     ===========
</TABLE>


                                      F-18
<PAGE>   35
                           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         $ 1,204,115
  Pan American
  Office Building              9%              2000             2,828             --             337,035             322,667
</TABLE>


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

<TABLE>
<S>                                          <C>
          Balance at January 1, 1996         $ 2,536,577
             Proceeds from note payable          113,413
                Payments of principle           (140,069)
                                             -----------
          Balance at December 31, 1996         2,509,921
                Payments of principal           (961,784)
                                             -----------
          Balance at December 31, 1997         1,548,137
                Payments of principal            (21,355)
                                             -----------
          Balance at December 31, 1998       $ 1,526,782
                                             ===========
</TABLE>


                                      F-19