UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                           Washington, D.C.  20549

                                  FORM 10-K

              |X|  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                       SECURITIES EXCHANGE ACT OF 1934

                   FOR 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 _____.

Commission File Number:  0-17151

                        PAINE WEBBER/CMJ PROPERTIES LP
                        ------------------------------
            (Exact name of registrant as specified in its charter)

          Delaware                                            04-2780288
          --------                                          ----------------
(State of organization)                                     (I.R.S. Employer
                                                           Identification  No.)

 265  Franklin  Street, Boston Massachusetts                      02110
--------------------------------------------------------------------------------
(Address of principal executive office)                          (Zip Code)

Registrant's telephone number, including area code (617) 439-8118
                                                   --------------

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

                                                      Name of each exchange on
Title of each class                                      which registered
-------------------                                      ----------------
       None                                                     None

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

                    UNITS OF LIMITED PARTNERSHIP INTEREST
                    -------------------------------------
                               (Title of class)

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 |_|

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|

State the aggregate market value of the voting stock held by  non-affiliates  of
the registrant. Not applicable.
                     DOCUMENTS INCORPORATED BY REFERENCE
Documents                                                   Form 10-K Reference
---------                                                   -------------------
Prospectus of registrant dated                              Part IV
May 25, 1983, as supplemented

<PAGE>
                       PAINE WEBBER/CMJ PROPERTIES, LP
                                1997 FORM 10-K

                               TABLE OF CONTENTS

Part I                                                                 Page
------                                                                 ----

Item  1           Business                                              I-1

Item  2           Properties                                            I-3

Item  3           Legal Proceedings                                     I-3

Item  4           Submission of Matters to a Vote of Security Holders   I-4

Part  II
--------

Item  5           Market for the Partnership's  Limited Partnership
                    Interests and Related Security Holder Matters      II-1

Item  6           Selected Financial Data                              II-1

Item  7           Management's Discussion and Analysis of Financial
                    Condition and Results of Operations                II-2

Item  8           Financial Statements and Supplementary Data          II-8

Item  9           Changes in and Disagreements with Accountants on
                    Accounting and Financial Disclosure                II-8

Part III
--------

Item 10           Directors and Executive Officers of the Partnership III-1

Item 11           Executive Compensation                              III-2

Item 12           Security Ownership of Certain Beneficial Owners
                    and Management                                    III-3

Item 13           Certain Relationships and Related Transactions      III-3

Part  IV
--------

Item 14           Exhibits, Financial Statement Schedules and
                  Reports on Form 8-K                                  IV-1

Signatures                                                             IV-2

Index to Exhibits                                                      IV-3

Financial Statements and Supplementary Data                     F-1 to F-73



<PAGE>

      This Form 10-K contains  forward-looking  statements within the meaning of
Section 27A of the  Securities  Act of 1933 and  Section  21E of the  Securities
Exchange Act of 1934. The  Partnership's  actual results could differ materially
from those set forth in the  forward-looking  statements.  Certain  factors that
might cause such a difference  are  discussed in Item 7 in the section  entitled
"Certain Factors Affecting Future Operating  Results"  beginning on page II-6 of
this Form 10-K.

                                    PART I

Item 1.  Business

      Paine  Webber/CMJ   Properties,   LP  (the  "Partnership")  is  a  limited
partnership formed in December 1982 under the Uniform Limited Partnership Act of
the State of Delaware  for the  purpose of  investing  in a  portfolio  of local
limited  partnerships  owning  apartment  projects which  received  governmental
assistance in the form of low interest rate  mortgages and rent  subsidies.  The
Partnership sold $8,745,000 in Limited  Partnership units (8,745 units at $1,000
per unit) from May 1983 to April  1984,  pursuant  to a  Registration  Statement
filed on Form S-11 under the Securities Act of 1933  (Registration No. 2-81003).
In addition,  the Initial  Limited  Partner  contributed  $1,000 for one unit (a
"Unit") of Limited Partnership  Interest.  Limited Partners will not be required
to make any additional capital contributions.

      As of December 31, 1997,  the  Partnership  owned,  through  local limited
partnerships,  interests  in  six  apartment  properties  as  set  forth  in the
following table:

                                                                  Percent
Name of Local                                                     Interest in
Limited Partnership                               Date of         Local
Limited Name of Property                          Acquisition     Partnership
Location                            Size          of Interest     (1) (2)
--------------------------------    ----          -----------     -------

Fawcett's  Pond
  Apartments Company
Village at Fawcett's Pond          100            6/30/83            95%
Hyannis, Massachusetts             units

Quaker Meadows
  Apartments Company
Quaker Court and The Meadows       104            6/30/83            95%
Lynn, Massachusetts                units

South Laurel Apartments
  Limited Partnership
Villages at Montpelier             520            6/30/83            85%
Laurel, Maryland                   units

Marvin Gardens Associates
Marvin Gardens                     37             7/29/83            95%
Cotati, California                 units

Colonial Farms Ltd.
Colonial Farms                     100            7/29/83            95%
Modesto, California                units

Holbrook Apartments Company
Ramblewood Apartments              170            8/30/83            85%
Holbrook, Massachusetts            units

(1)  The  Partnership  owns limited  partnership  interests in the local limited
     partnerships owning the apartment properties and improvements.

(2)  See Notes to the  Financial  Statements  filed with this Annual  Report for
     current  outstanding  mortgage  balances and a description of the long-term
     mortgage indebtedness  collateralized by the operating property investments
     of the  local  limited  partnerships  and for a  description  of the  local
     limited  partnership  agreements through which the Partnership has acquired
     these real estate investments.

      The Partnership's  original  investment  objectives were to invest the net
cash proceeds from the offering of limited partnership units in rental apartment
properties  receiving  various forms of federal,  state or local assistance with
the goals of providing:

(1)  tax  losses  from  deductions   generated  by   investments;
(2)  capital preservation;
(3)  potential capital appreciation; and
(4)  potential future cash  distributions  from operations (on a limited basis),
     or from the sale or  refinancing of the projects owned by the local limited
     partnerships,   or  from  the  sale  of  interests  in  the  local  limited
     partnerships.

      The Partnership  has generated tax losses since  inception.  However,  the
benefits of such losses to investors have been significantly  reduced by changes
in federal income tax law subsequent to the organization of the Partnership. The
Partnership continues to retain an ownership interest in all six of its original
operating investment properties.  As of December 31, 1997, all of the properties
are generating  sufficient  cash flow from  operations to cover their  operating
expenses  and debt service  payments,  and the  majority of the  properties  are
generating  excess  cash flow,  a portion of which is being  distributed  to the
Partnership on an annual basis in accordance with the respective  regulatory and
limited  partnership  agreements.  Given the  improvements  in cash flow and the
strong  operating  performances  of the  investment  properties in recent years,
management had instituted a program of regular  quarterly  distributions in 1994
at an annual rate of 2% on original invested capital.  During 1996 distributions
to the  Partnership  from  the  local  limited  partnerships  declined,  causing
management to suspend  distributions  effective  for the fourth  quarter of 1996
until further notice. In the future,  to the extent there is distributable  cash
flow from the properties  after the payment of Partnership  management  fees and
operating  expenses,  the  Partnership  plans  to  make an  annual  distribution
payment.  Because of ongoing capital expenditure requirements at the properties,
which  are  expected  to  maintain  and  enhance  their  long-term  values,  the
Partnership did not make an annual distribution  payment to the Limited Partners
in 1997.  However,  payment of an annual  distribution  of 1% in 1998 is likely,
provided current  projections for cash distributions from the properties in 1998
are met.

      The Partnership's  success in meeting its capital  appreciation  objective
will depend upon the proceeds  received from the final sales of its investments.
The  amount  of such  proceeds  will  ultimately  depend  upon the  value of the
underlying investment  properties at the time of their final disposition,  which
cannot presently be determined. Because of the government restrictions on rental
revenues and the related capital expenditure reserve  requirements and cash flow
distribution limitations,  there are a limited number of potential buyers in the
market for government  subsidized,  low-income  housing  properties  such as the
Partnership  has invested in.  Furthermore,  the current  uncertainty  regarding
potential future  reductions in the level of federal  government  assistance for
these programs may further restrict the properties' marketability.  Accordingly,
management   does  not  expect  the  General   Partners  of  the  local  limited
partnerships,  which receive  management  fee revenues from the  properties,  to
attempt to sell any of the properties in the near term. As discussed  further in
Item  7,  as  a  limited  partner  in  the  local  limited   partnerships,   the
Partnership's  ability to influence  major  business  decisions,  including  any
decision  to  sell  the  properties,  is  restricted  under  the  terms  of  the
agreements.

      All of the properties owned by the local limited partnerships in which the
Partnership  invested  are  located  in real  estate  markets in which they face
competition  for  the  revenues  they  generate.  The  Partnership's   apartment
complexes,  all but one of which  are  government-assisted,  low-income  housing
facilities, compete with several projects of similar type generally on the basis
of  price,  location  and  amenities.  The  sixth  property  had been  partially
subsidized until July 1997 when the subsidy agreement expired.  This property is
currently  transitioning  to a 100% market rent facility which will compete with
other  non-subsidized  properties  in its local  sub-market.  The tenants at the
Partnership's subsidized apartment properties are not as likely to be candidates
for single-family  home ownership as tenants of non-subsidized  properties would
be.  Therefore,  competition  from  the  single  family  home  market  is  not a
significant factor.

      The  Partnership  is  engaged  solely  in  the  business  of  real  estate
investment,  therefore,  presentation of information  about industry segments is
not applicable.  The Partnership has no real estate investments  located outside
the United States.

      The  Partnership  has no  employees;  it  has,  however,  entered  into an
Advisory  Contract with  PaineWebber  Properties  Incorporated  (the "Adviser"),
which is  responsible  for the  day-to-day  operations of the  Partnership.  The
Adviser is a  wholly-owned  subsidiary  of  PaineWebber  Incorporated  (PWI),  a
wholly-owned subsidiary of PaineWebber Group, Inc. ("PaineWebber").

      The Managing  General  Partner of the Partnership is PW Shelter Fund, Inc.
(the "Managing  General  Partner"),  a wholly-owned  subsidiary of  PaineWebber.
Subject to the Managing General Partner's overall authority, the business of the
Partnership  is  managed  by the  Adviser.  The  associate  general  partner  is
Properties Associates (the "Associate General Partner"), a Massachusetts general
partnership,  certain general partners of which are also officers of the Adviser
and the Managing General Partner.

      The terms of  transactions  between the  Partnership and affiliates of the
Managing  General  Partner of the  Partnership  are set forth in Items 11 and 13
below to which  reference  is hereby  made for a  description  of such terms and
transactions.

Item 2.  Properties

      The Partnership has acquired interests in six operating properties through
investments in local limited  partnerships.  The local limited  partnerships and
related properties are referred to under Item 1 above to which reference is made
for the description, name, location, and ownership interest in each property.

      Occupancy  figures for each quarter during 1997, along with an average for
the year, are presented below for each property:

                                                Percent Occupied At
                                    --------------------------------------------
                                                                         1997
                                    3/31/97  6/30/97  9/30/97  12/31/97 Average
                                    -------  -------  -------  -------- -------

Village at Fawcett's Pond
  Apartments                        100%     100%       99%     100%    100%

Quaker Court and The Meadows         99%      98%       98%     100%     99%

Villages at Montpelier Apartments    96%      94%       88%      90%     92%

Marvin Gardens Apartments           100%      97%       98%     100%     99%

Colonial Farms Apartments           100%      99%       99%     100%    100%

Ramblewood Apartments                99%      98%       99%     100%     99%

Item 3. Legal Proceedings

      In November  1994,  a series of  purported  class  actions  (the "New York
Limited Partnership Actions") were filed in the United States District Court for
the Southern District of New York concerning PaineWebber Incorporated's sale and
sponsorship of various limited partnership investments,  including those offered
by the Partnership.  The lawsuits were brought against PaineWebber  Incorporated
and Paine Webber Group Inc. (together "PaineWebber"), among others, by allegedly
dissatisfied  partnership  investors.  In March  1995,  after the  actions  were
consolidated under the title In re PaineWebber Limited  Partnership  Litigation,
the  plaintiffs  amended their  complaint to assert claims  against a variety of
other  defendants,  including  PaineWebber  Shelter  Fund,  Inc. and  Properties
Associates  ("PA")  which  are  the  General  Partners  of the  Partnership  and
affiliates of  PaineWebber.  On May 30, 1995, the court  certified  class action
treatment of the claims asserted in the litigation.

     The amended complaint in the New York Limited  Partnership  Actions alleged
that, in connection  with the sale of interests in  PaineWebber/CMJ  Properties,
LP,  PaineWebber,  PaineWebber  Shelter Fund,  Inc. and PA (1) failed to provide
adequate  disclosure  of the  risks  involved;  (2) made  false  and  misleading
representations  about  the  safety  of the  investments  and the  Partnership's
anticipated performance;  and (3) marketed the Partnership to investors for whom
such investments were not suitable. The plaintiffs, who purported to be suing on
behalf of all persons who invested PaineWebber/CMJ  Properties, LP, also alleged
that following the sale of the partnership interests,  PaineWebber,  PaineWebber
Shelter  Fund,  Inc.  and PA  misrepresented  financial  information  about  the
Partnerships   value  and  performance.   The  amended  complaint  alleged  that
PaineWebber,  PaineWebber  Shelter  Fund,  Inc.  and PA violated  the  Racketeer
Influenced  and Corrupt  Organizations  Act ("RICO") and the federal  securities
laws. The plaintiffs sought unspecified damages, including reimbursement for all
sums invested by them in the  partnerships,  as well as disgorgement of all fees
and other  income  derived by  PaineWebber  from the  limited  partnerships.  In
addition, the plaintiffs also sought treble damages under RICO.

      In January 1996, PaineWebber signed a memorandum of understanding with the
plaintiffs in the New York Limited Partnership Actions outlining the terms under
which the  parties  agreed to settle the case.  Pursuant to that  memorandum  of
understanding,  PaineWebber  irrevocably  deposited  $125 million into an escrow
fund under the  supervision of the United States District Court for the Southern
District of New York to be used to resolve the  litigation in accordance  with a
definitive  settlement  agreement  and plan of  allocation.  On July  17,  1996,
PaineWebber and the class plaintiffs submitted a definitive settlement agreement
which  provides for the  complete  resolution  of the class  action  litigation,
including  releases  in  favor  of the  Partnership  and  PaineWebber,  and  the
allocation of the $125 million  settlement  fund among  investors in the various
partnerships  and  REITs  at  issue  in the  case.  As part  of the  settlement,
PaineWebber  also  agreed  to  provide  class  members  with  certain  financial
guarantees  relating to some of the  partnerships  and REITs. The details of the
settlement  are  described in a notice  mailed  directly to class members at the
direction  of the  court.  A  final  hearing  on the  fairness  of the  proposed
settlement was held in December 1996, and in March 1997 the court  announced its
final approval of the settlement.  The release of the $125 million of settlement
proceeds had been delayed  pending the resolution of an appeal of the settlement
agreement by two of the plaintiff class members. In July 1997, the United States
Court  of  Appeals  for the  Second  Circuit  upheld  the  settlement  over  the
objections  of the two  class  members.  As part  of the  settlement  agreement,
PaineWebber agreed not to seek indemnification from the related partnerships and
real  estate  investment  trusts  at  issue  in the  litigation  (including  the
Partnership) for any amounts that it is required to pay under the settlement.

      In February 1996,  approximately  150 plaintiffs  filed an action entitled
Abbate v.  PaineWebber  Inc. in  Sacramento,  California  Superior Court against
PaineWebber   Incorporated  and  various  affiliated   entities  concerning  the
plaintiffs' purchases of various limited partnership interests,  including those
offered by the  Partnership.  The complaint  alleged,  among other things,  that
PaineWebber and its related entities committed fraud and  misrepresentation  and
breached  fiduciary  duties  allegedly  owed to the  plaintiffs  by  selling  or
promoting  limited   partnership   investments  that  were  unsuitable  for  the
plaintiffs and by overstating the benefits,  understating  the risks and failing
to state  material  facts  concerning  the  investments.  The  complaint  sought
compensatory  damages of $15 million plus punitive damages against  PaineWebber.
In September  1996, the court  dismissed many of the  plaintiffs'  claims in the
Abbate  action as  barred  by  applicable  securities  arbitration  regulations.
Mediation  with  respect to the Abbate  action was held in December  1996.  As a
result of such mediation,  a settlement  between  PaineWebber and the plaintiffs
was reached  which  provided for the complete  resolution  of the action.  Final
releases and dismissals with regard to this action were received during 1997.

      Based on the  settlement  agreements  discussed  above covering all of the
outstanding  unitholder  litigation,  management believes that the resolution of
these  matters will not have a material  impact on the  Partnership's  financial
statements, taken as a whole.

      The  Partnership  is not  subject  to any  other  material  pending  legal
proceedings.

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

      None.


<PAGE>

                                   PART II

Item 5.  Market  for the  Partnership's  Limited  Partnership  Interests  and
Related Security Holder Matters

      At  December  31,  1997  there  were 875  record  holders  of Units in the
Partnership.  There is no public market for the Units, and it is not anticipated
that a public market for Units will develop.  Upon request, the Managing General
Partner will endeavor to assist a Unitholder  desiring to transfer his Units and
may utilize the  services  of PWI in this  regard.  The price to be paid for the
Units will be subject to negotiation  by the  Unitholder.  The Managing  General
Partner will not redeem or repurchase Units.

      No cash distributions were made to the Limited Partners during 1997.

Item 6.  Selected Financial Data

                       Paine Webber/CMJ Properties, LP
                     (In thousands, except per Unit data)

                                        Years Ended December 31,
                         ----------------------------------------------------
                             1997        1996        1995    1994       1993
                             ----        ----        ----    ----       ----

Revenues                $    147     $     98     $  244   $  179    $  293

Expenses                $    288     $    280     $  288   $  268    $  289

Partnership's share
 of local limited
 partnerships' income   $    184     $    157     $  174   $  186    $  203

Net income (loss)       $     43     $    (25)    $  130   $   97    $  207

Cash distributions per
 Limited
 Partnership Unit              -     $  20.00     $20.00  $ 10.00         -

Net income (loss) per
 Limited
 Partnership Unit       $   4.85     $ (2.82)     $14.75  $ 11.01    $ 23.45

Total assets            $   520      $   415      $  486  $   525    $   729


     (a) The above selected  financial  data should be read in conjunction  with
         the financial  statements and related notes appearing elsewhere in this
         Annual Report.

     (b) The above per Limited  Partnership  Unit  information is based upon the
         8,746 Limited Partnership Units outstanding during each year.

Item 7.   Management's  Discussion  and Analysis of Financial  Condition  and
Results of Operations

Information Relating to Forward-Looking Statements
--------------------------------------------------

      The following  discussion of financial condition includes  forward-looking
statements  which  reflect  management's  current  views with  respect to future
events and  financial  performance  of the  Partnership.  These  forward-looking
statements  are  subject to certain  risks and  uncertainties,  including  those
identified below under the heading  "Certain Factors  Affecting Future Operating
Results",  which could cause actual results to differ materially from historical
results or those anticipated. The words "believe",  "expect",  "anticipate," and
similar expressions identify forward-looking  statements.  Readers are cautioned
not to place undue reliance on these forward-looking statements, which were made
based on facts and conditions as they existed as of the date of this report. The
Partnership   undertakes  no  obligation  to  publicly   update  or  revise  any
forward-looking  statements,  whether  as a result  of new  information,  future
events or otherwise.

Liquidity and Capital Resources
-------------------------------

      The Partnership offered limited  partnership  interests to the public from
May 1983 to April 1984  pursuant  to a  Registration  Statement  filed under the
Securities Act of 1933. The  Partnership  received gross proceeds of $8,746,000,
and after  deducting  selling  expenses  and  offering  costs,  the  Partnership
invested  approximately  $6,960,000  in six local  limited  partnerships  owning
housing  projects  that  received  various  forms  of  federal,  state  or local
assistance  and that  could be  classified  as  "low-income  housing"  under the
Internal  Revenue  Code.  The  Partnership  does not have  any  commitments  for
additional  capital  expenditures or investments.  The Partnership  continues to
retain an  ownership  interest in all six of its original  operating  investment
properties.  As of December  31,  1997,  all of the  properties  are  generating
sufficient cash flow from operations to cover their operating  expenses and debt
service payments,  and the majority of the properties are generating excess cash
flow, a portion of which is being  distributed  to the  Partnership on an annual
basis in  accordance  with the  respective  regulatory  and limited  partnership
agreements.  Given  the  improvements  in cash  flow  and the  strong  operating
performances  of the  investment  properties  in recent  years,  management  had
instituted a program in 1994 which provided for the payment of regular quarterly
distributions at an annual rate of 2% on original invested capital. During 1996,
distributions to the Partnership from the local limited  partnerships  declined,
causing management to suspend distributions  effective for the fourth quarter of
1996 until  further  notice.  In the future,  to the extent there is  sufficient
distributable  cash flow from the  properties  after the payment of  Partnership
management fees and operating expenses,  the Partnership plans to make an annual
distribution  payment.  As discussed  further below,  because of ongoing capital
expenditure  requirements at the properties,  which are expected to maintain and
enhance  their  long-term  values,  the  Partnership  did  not  make  an  annual
distribution payment to the Limited Partners in 1997.

      During 1996, the Partnership  received  distributions  totalling  $310,000
from four of the six local limited partnership investments:  Ramblewood,  Quaker
Meadows,  Colonial  Farms and  Fawcett's  Pond.  During  1997,  the  Partnership
received  annual  distributions  totalling  $366,000  from the same  four  local
limited  partnership  investments,  plus a  distribution  of $4,000  from Marvin
Gardens.  The  amounts  received  in 1996 and  1997  represented  the cash  flow
available for  distribution as of December 31, 1995 and 1996,  respectively,  as
determined  by  the  general  partners  of the  local  limited  partnerships  in
accordance  with the  partnership,  financing and regulatory  agreements.  Total
distributions  from the  Partnership's  investments  increased  slightly  in the
current  year due to an increase in  distributions  from the Quaker  Meadows and
Ramblewood   partnerships   and  the   distribution   from  the  Marvin  Gardens
partnership,  but remain below the level of  distributions  received in 1994 and
1995. As previously  reported,  during the second quarter of 1997  management of
the Partnership  completed a detailed review of each property with the affiliate
of the operating general partners which manages the day-to-day operations of the
investment  properties.  As a result of such review,  management determined that
the Partnership  should not make an annual  distribution to the Limited Partners
for 1997. Based on the current environment of rising property operating expenses
and capital improvement costs, as well as the restrictions on distributable cash
flow from the  properties,  there was not  sufficient  cash flow to support  the
payment of a distribution by the Partnership for 1997.  Management  believes the
next likely  distribution  would be a distribution  to be made during 1998 at an
annualized rate of 1% on invested capital, provided that current projections for
cash  distributions  from  the  properties  in 1998  are met.  The  annual  cash
distributions from the local limited partnerships  typically occur in the second
or third quarters.

      As  of  December  31,  1997,  five  of  the  Partnership's  six  operating
investment  properties were receiving  rental subsidy  payments from the federal
government  under Section 8 of the National  Housing Act. The subsidy  agreement
covering The Villages at Montpelier Apartments expired in July 1997. The subsidy
agreements covering the other five operating investment properties do not expire
for  another  4-to-6  years.  Due  to the  limited  availability  of  government
subsidized housing,  these properties  consistently  achieve occupancy levels of
99% to  100%.  Cash  flow  from  these  five  properties  is  restricted  by the
Department of Housing and Urban  Development  ("HUD") and other applicable state
housing  agencies,  which set  rental  rates for  low-income  units and  require
significant cash reserves to be established for future capital improvements.  In
addition,  a substantial  amount of the revenues  generated by these  properties
comes  from the  rental  subsidy  payments  made by  federal  or  state  housing
agencies.  These features, which are characteristic of all subsidized low-income
housing  properties,  significantly limit the pool of potential buyers for these
real estate assets.  Furthermore,  the current  uncertainty  regarding potential
future  reductions  in the  level of  federal  government  assistance  for these
programs  may  further  restrict  the  properties'  marketability.  Accordingly,
management   does  not  expect  the  general   partners  of  the  local  limited
partnerships,  which receive management fee revenues from the properties through
an affiliated  management  company,  to attempt to sell any of the properties in
the near term.  As a limited  partner  of the local  limited  partnerships,  the
Partnership does not control  property  disposition  decisions.  The partnership
agreements  state that the  limited  partner may cause the sale of the assets of
the local limited partnerships subsequent to June 30, 1995, but not earlier than
one year after it has given written notice to the operating  general  partner of
its intent to cause such sale,  and only if,  during such one-year  period,  the
operating  general  partner  does  not  cause  the sale of such  assets.  If the
operating  general  partner has not caused the assets of the  partnership  to be
sold within such one-year  period,  the limited partner may cause such sale, but
only after it has offered to sell such assets to the operating  general partner,
and either the  operating  general  partner does not accept such offer within 90
days of receiving  it, or the  operating  general  partner does not complete the
sale in accordance with such offer after accepting the terms.

      As  previously  reported,  80%  of  the  apartments  at  The  Villages  at
Montpelier were rented at market rates while 20% received  government  subsidies
under the  Section  8 rental  assistance  program.  With the  expiration  of the
subsidy  agreement in July 1997, the property  management team began the process
of converting the former  subsidized  units at the property to market rent units
during the third  quarter of 1997.  As expected,  the  conversion  resulted in a
decline in occupancy at the property as a number of subsidized  tenants  vacated
the property and their units were  prepared to be  re-leased.  Subsequent to the
expiration  of the  Section  8  contract,  the  average  occupancy  level at the
property  fell to 88% for the third  quarter but rebounded to 90% for the fourth
quarter. As of December 31, 1997, the property was 93% leased. A majority of the
remaining vacancies at the property are in the larger 3 and 4 bedroom units. The
property's  management and leasing team is offering rental  concessions on these
units  until a majority  of them are leased.  Based on  existing  market  rental
rates,  management  believes  that the  rental  revenues  from The  Villages  at
Montpelier Apartments will be comparable to the prior subsidized levels once the
occupancy has stabilized.  If the market for conventional multi-family apartment
properties remains strong in the near term, the expiration of the rental subsidy
agreement at The Villages at Montpelier  Apartments could enhance the property's
marketability for a potential sale by increasing the pool of interested  buyers.
However, there are no assurances that such market conditions will remain strong,
and the ability of the  Partnership  to cause a sale of the property will remain
restricted by the terms of the limited  partnership  agreement discussed further
above.  If market  conditions  were to  deteriorate,  The Villages at Montpelier
Apartments  could  experience  extended  declines in occupancy and revenues as a
result of the expiration of the subsidy agreement.

      For the  remaining  five  properties,  which each contain 100%  low-income
housing  units,  the  government  subsidy  payments range from 75% to 82% of the
total revenues of the related local limited  partnerships.  At the present time,
certain  legislative  initiatives and  governmental  budget  negotiations  could
result  in a  reduction  in funds  available  for the  various  HUD-administered
housing  programs and new  limitations on subsidized  rent levels.  Such changes
could adversely  impact the net operating  income generated by the local limited
partnerships.  In light of the uncertainty regarding the near term prospects for
government   assisted,   low-income   housing  and  the   restrictions   on  the
Partnership's  ability to cause a sale of the operating  properties,  management
does not have any  immediate  plans to initiate the sale process under the terms
of the agreements  described  above.  Notwithstanding  this, the  Partnership is
currently in the process of developing potential disposition strategies for each
of the  properties.  A decision as to when actions will be taken to initiate the
sale process with respect to any or all of the operating  investment  properties
in the future will be based upon a number of factors including, the availability
of a pool of  qualified  buyers,  an  evaluation  of the future of the  relevant
subsidy programs,  the availability of financing,  an assessment of local market
conditions and future appreciation potential.  Now that the regulatory agreement
on The Villages at Montpelier Apartments has expired, the decision of whether to
initiate a sale process for that  property  will be based on a more  traditional
analysis of existing market conditions and future appreciation  potential. It is
currently  contemplated that  dispositions of the Partnership's  assets could be
completed  within the next 2 to 3 years. The disposition of the remaining assets
would be followed by the formal  liquidation  of the  Partnership.  There are no
assurances,  however,  that  the  disposition  of  the  remaining  assets  and a
liquidation of the Partnership will be completed within this time frame.

      At  December  31,  1997,  the  Partnership  had  available  cash  and cash
equivalents of approximately  $493,000,  which it intends to use for its working
capital  requirements.  The source of future liquidity and  distributions to the
partners  is  expected  to be from cash  generated  from the  operations  of the
Partnership's  real estate  investments and from the proceeds  received from the
sale or refinancing of the properties  owned by the local limited  partnerships.
Such  sources  of  liquidity   are  expected  to  be   sufficient  to  meet  the
Partnership's needs on both a short-term and long-term basis.

Results of Operations
1997 Compared to 1996
---------------------

      For the year ended December 31, 1997, the Partnership  reported net income
of $43,000, as compared to a net loss of $25,000 for 1996. This favorable change
in the Partnership's net operating results is attributable to a $41,000 increase
in  the   Partnership's   operating   income  and  a  $27,000  increase  in  the
Partnership's share of local limited  partnerships'  income. The increase in the
Partnership's  operating  income is  attributable to an increase in other income
from local limited partnerships of $37,000 and an increase in interest income of
$12,000. An increase in general and administrative  expenses of $8,000 partially
offset these favorable changes in operating income.

      As discussed further in Note 2 to the accompanying  financial  statements,
the Partnership accounts for its investments in local limited partnerships using
the equity method.  In accordance with the equity method,  the Partnership  does
not record losses for those limited partnership  investments whose equity method
basis has been reduced to zero and recognizes  future income from these entities
only when it exceeds the previously  unrecorded losses.  Distributions  received
from  investments in limited  partnerships  whose basis has been reduced to zero
are recorded as other income from the local limited  partnerships.  Other income
from the local limited partnerships in 1997 represents distributions from Quaker
Meadows,  Colonial  Farms and Marvin  Gardens  while the 1996 amount  represents
distributions from Quaker Meadows,  Colonial Farms and Fawcett's Pond.  Overall,
other  income  from local  limited  partnerships  increased  by $37,000 due to a
$41,000 increase in  distributions  from Quaker Meadows,  a $4,000  distribution
from Marvin  Gardens,  which did not make a distribution  in 1996, and an $8,000
reduction  attributable to Fawcett's Pond.  Although the  distribution  from the
Fawcett's Pond  partnership  remained  unchanged from 1996 to 1997, other income
from local limited  partnerships  decreased because the entire distribution from
Fawcett's  Pond was recorded as a reduction of the equity method  carrying value
of the  investment  in 1997.  The increase in interest  income  resulted from an
increase in invested  cash reserves due to the  suspension of the  Partnership's
quarterly  distributions  during the fourth  quarter of 1996 and an  increase in
distributions  from local limited  partnerships in 1997. The increase in general
and  administrative  expenses was mainly due to  increases  in certain  required
professional services during 1997.

      At December 31, 1997, only two of the six local limited partnerships,  The
Holbrook  Apartments  Company  (Ramblewood  Apartments)  and the Fawcett's  Pond
Apartment Company, had positive equity method carrying values. The Partnership's
share  of  income  from the  Ramblewood  Apartments  for 1997 and 1996  totalled
$154,000 and $141,000,  respectively,  while the  Partnership's  share of income
from the  Fawcett's  Pond  Apartments  for 1997 and 1996  totalled  $30,000  and
$16,000,  respectively. The favorable change in the Partnership's share of local
limited  partnerships'  income  attributable  to the Fawcett's Pond  partnership
resulted  from a portion of the  income  from  Fawcett's  Pond  ($55,000)  being
allocated to offset  previously  unrecorded  losses in 1996.  As a result,  only
$16,000 of the $71,000  income  allocable  to the  Partnership  in that year was
recognized  by the  Partnership  in its  share  of local  limited  partnerships'
income.  In 1997, the entire  $30,000 of Fawcett's Pond income  allocable to the
Partnership was recognized in its share of local limited  partnerships'  income.
The favorable  change in the  Partnership's  share of income from the Ramblewood
partnership  resulted mainly from an increase in total revenues and decreases in
real  estate  taxes and  interest  expense  which  were  partially  offset by an
increase in incentive  management fees and property operating  expenses.  In the
aggregate,  total  revenues  increased  or remained  the same at five of the six
local limited  partnerships due to stable occupancy levels which averaged in the
99% to 100% range during 1996 and 1997.  The Villages at  Montpelier  Apartments
was the only  local  limited  partnership  to  experience  a notable  decline in
occupancy  which resulted in a 1% decline in rental  revenues for 1997.  Average
occupancy at The Villages at Montpelier  Apartments declined from 95% in 1996 to
92% for  the  current  year  due to the  expiration  of the  government  subsidy
agreement  in July 1997,  as  discussed  further  above.  Despite the decline in
rental  revenues,  the net  operating  results  of The  Villages  at  Montpelier
partnership improved by $192,000 during 1997, mainly due to a $214,000 reduction
in property operating  expenses,  which was principally due to lower repairs and
maintenance costs.  Total expenses at the other five local limited  partnerships
increased  mainly  due to  increases  in repairs  and  maintenance  expenses  at
Colonial  Farms,   Fawcett's  Pond,   Quaker  Meadows  and  Marvin  Gardens,   a
reimbursement of subsidy payments  required at Colonial Farms and an increase in
incentive management fees at Ramblewood and Quaker Meadows.

1996 Compared to 1995
---------------------

      For the year ended December 31, 1996, the Partnership  reported a net loss
of $25,000,  as compared to net income of $130,000  for 1995.  This  unfavorable
change in the  Partnership's  net operating results of $155,000 was attributable
to a $138,000 increase in the Partnership's operating loss and a $17,000 decline
in the Partnership's share of local limited partnerships' income.

      As noted above,  in accordance  with the equity  method of accounting  for
limited  partnership  interests,  the  Partnership  does not record  losses from
investment  properties when losses exceed the Partnership's  equity method basis
in these  properties,  and future income is recognized  only when it exceeds the
previously  unrecorded losses.  Five of the Partnership's six investments had an
equity  method  basis of zero as of  December  31, 1996 and 1995.  The  Holbrook
Apartments  Company  (Ramblewood  Apartments) was the only remaining  investment
with a positive  equity method  carrying value as of December 31, 1996 and 1995.
The  Partnership's  share of income from the Ramblewood  Apartments for 1996 and
1995 totalled $141,000 and $174,000,  respectively.  This unfavorable  change in
the net operating results of the Ramblewood  partnership resulted mainly from an
increase in property operating  expenses.  Property operating expenses increased
as a result of sidewalk  repairs,  exterior  painting,  and the  replacement  of
playground  equipment,  which occurred in 1996.  During 1996,  cumulative income
allocations  to the  Partnership  from the Fawcett's  Pond  investment  exceeded
previously unrecorded losses. As a result, the Partnership  recognized a portion
of the 1996 income  allocation from the Fawcett's Pond partnership  ($16,000) in
its share of local limited  partnerships' income in 1996, which partially offset
the decline in income from the Ramblewood  partnership.  Distributions  from the
Fawcett's  Pond  partnership  were  recorded  as  reductions  to the  investment
carrying value to the extent of the income recognition in 1996 which reduced the
carrying value of the investment to zero as of December 31, 1996.  Overall,  the
combined net operating  results of the six local limited  partnerships  improved
from a net loss of  $6,000  in 1995 to net  income  of  $17,000  in  1996.  This
favorable  change  resulted  from an increase  in combined  revenues of $67,000,
which exceeded the increase in combined expenses of $44,000.

      The  Partnership's  operating loss increased due to a $146,000 decrease in
total revenues,  which was partially offset by an $8,000 decrease in Partnership
general and administrative  expenses. The major portion of the decrease in total
revenues  was  attributable  to a $137,000  decline in other  income  from local
limited  partnerships.   As  discussed  further  in  Note  2  to  the  financial
statements,  distributions  from the local limited  partnerships are recorded as
other income for those  investments  for which the  Partnership's  equity method
carrying value has been reduced to zero.  With the exception of Fawcett's  Pond,
distributions from which remained  unchanged,  distributions from the five local
limited partnerships with carrying values of zero declined by varying amounts in
1996  generally  due to rising  operating  expenses  and  increases  in  capital
expenditures.  In  addition,  as  discussed  further  above,  a  portion  of the
distributions received from the Fawcett's Pond partnership in 1996 were recorded
as reductions to the  investment's  carrying  value.  Also  contributing  to the
decrease in total revenues was a $9,000  decline in interest  income on invested
cash reserves. The decline in general and administrative expenses was mainly due
to decreases in certain required professional services.

1995 Compared to 1994
---------------------

      The  Partnership  recorded  net  income  of  $130,000  for the year  ended
December 31, 1995,  as compared to net income of $97,000 for 1994.  The increase
in net income of $33,000 was mainly the result of an  increase  in other  income
from local limited  partnerships of $64,000. As noted above,  distributions from
the local limited  partnerships are recorded as income for those investments for
which the  Partnership's  equity method carrying value has been reduced to zero.
Distributions  totalling  $221,000 from five partnerships were recorded as other
income in the year ended  December  31, 1995,  as compared to $157,000  from the
same five partnerships for 1994. The favorable change in other income from local
limited  partnerships  was  partially  offset by an  increase  of $20,000 in the
Partnership's general and administrative expenses in 1995.

      In accordance with the equity method of accounting for limited partnership
interests,  the Partnership does not recognize losses from investment properties
when losses exceed the  Partnership's  equity method basis in these  properties.
Five of the  Partnership's six investments had an equity method basis of zero as
of  December  31,  1995 and 1994.  Distributions  from the  Holbrook  Apartments
Company (Ramblewood Apartments), the only remaining investment which still had a
positive  equity  method  carrying  value at December  31,  1995 and 1994,  were
recorded as reductions of the investment  carrying  value and totalled  $214,000
and $250,000 for 1995 and 1994, respectively.  Distributions from the other five
limited partnerships increased by $64,000 in 1995, as reflected in the change in
other income.  This increase  resulted  primarily from an increase of $47,000 in
distributions  from The Villages at  Montpelier  Apartments.  The  distributions
received in 1995 reflected the available cash flow from 1994 operations.

      The Partnership's  recorded share of local limited partnerships' income in
1995  consisted of income of $174,000  from the  Ramblewood  Apartments  limited
partnership,  as  compared to income of $186,000  from the same  partnership  in
1994.  Net  income  was down  slightly  at  Ramblewood  in 1995,  mainly  due to
increases in salaries  expense and real estate  taxes.  Overall,  an increase in
combined  property  operating  expenses  of $282,000  for the six local  limited
partnerships  exceeded the increase in combined  revenues of $75,000.  Occupancy
levels  remained high  throughout  1995 with average  occupancy above 95% at all
properties.  Revenues  were  up at all  properties  except  at The  Villages  at
Montpelier  Apartments.  At The  Villages  at  Montpelier  Apartments,  revenues
decreased  slightly  during  1995  due  to  a  temporary  decline  in  occupancy
experienced  in the third  quarter.  Occupancy  at The  Villages  at  Montpelier
Apartments  averaged 95% for 1995, but dropped to 91% in August 1995 as a result
of  management's  efforts to increase  rental rates for the  market-rate  units.
Management  stepped  up its  marketing  efforts  in  conjunction  with  the rate
increases.  After the  initial  decline  in  occupancy,  the  marketing  efforts
generated  positive  results as the occupancy  level recovered and the number of
prospective tenants visiting the property increased. Expenses in general were up
at all of the local limited  partnerships with repairs and maintenance  expenses
running  higher in 1995 at these  properties due to a combination of their ages,
applicable regulatory  requirements and management's operating philosophy.  Such
expenses do, however, fluctuate from year to year.

Certain Factors Affecting Future Operating Results
--------------------------------------------------

      The following factors could cause actual results to differ materially from
historical results or those anticipated:

      Risks  of  Government-Assisted  Housing  Complexes.  In  certain  respects
government-assisted   housing   complexes  differ  from   conventional   housing
complexes.  These  include  (a)  greater  financing  leverage  than is  usual in
conventional  complexes,  (b) review of compliance with  construction  and other
standards and (c) various contingency  reserves required in connection with such
government assistance programs.  Government-assisted  housing is also subject to
special  conditions  and  risks  including,  but not  limited  to,  (a)  general
surveillance  by the  appropriate  governmental  assistance  agency,  which  may
include  the  application  of  rental  and  other  guidelines  affecting  tenant
eligibility,  operating  costs and rental levels,  (b)  maintenance of a reserve
fund for replacements in an amount paid  concurrently  with  amortization of the
mortgage and in addition to payments of principal and interest,  restricted such
that  withdrawals  from  the fund  are  subject  to the  prior  approval  of the
appropriate  governmental  assistance  agency,  (c)  compliance  with the United
States Department of Housing and Urban Development ("HUD") regulations regarding
management of the premises,  (d)  limitations  on  saleability,  as contained in
regulatory agreements with the appropriate  governmental  assistance agency, (e)
limitations  on rent  increases,  and (f) the  uncertain  effects  of changes in
complex rules and regulations  governing such  government-assisted  programs, or
changes in the manner in which those regulations are interpreted.

      Government  assistance payments may be reduced in the event that a project
rents less than 100% of its units eligible for rental subsidies to qualified low
income tenants.  HUD generally elects to reduce subsidies only in the event that
occupancy levels for qualified tenants drop below 95% for a period of two years.
Finally,  HUD  commitments are subject to HUD's  appropriation  of federal funds
sufficient  to meet its  obligations  in any given year.  At the  present  time,
certain  legislative  initiatives and  governmental  budget  negotiations  could
result  in a  reduction  of funds  available  for the  various  HUD-administered
housing  programs and could also result in new  limitations  on subsidized  rent
levels.  This in turn could adversely  impact the net operating income generated
by the Partnership's properties.

      Real Estate  Investment  Risks.  Real property  investments are subject to
varying degrees of risk.  Revenues and property values may be adversely affected
by the  general  economic  climate,  the local  economic  climate and local real
estate conditions,  including (i) the perceptions of prospective  tenants of the
attractiveness of the property; (ii) the ability to retain qualified individuals
to provide  adequate  management  and  maintenance  of the  property;  (iii) the
inability  to  collect  rent due to  bankruptcy  or  insolvency  of  tenants  or
otherwise;  and (iv) increased  operating costs.  Real estate values may also be
adversely  affected by such  factors as  applicable  laws,  including  tax laws,
interest rate levels and the availability of financing.

      Effect  of  Uninsured   Loss.   The  local  limited   partnerships   carry
comprehensive  liability,   fire,  flood,  extended  coverage  and  rental  loss
insurance  with  respect  to their  properties  with  insured  limits and policy
specifications  that management  believes are customary for similar  properties.
There are, however,  certain types of losses (generally of a catastrophic nature
such as wars,  floods or earthquakes)  which may be either  uninsurable,  or, in
management's  judgment,  not  economically  insurable.  Should an uninsured loss
occur,  the Partnership  could lose both its invested capital in and anticipated
profits from the affected property.

      Possible Environmental Liabilities. Under various federal, state and local
environmental laws,  ordinances and regulations,  a current or previous owner or
operator of real property may become liable for the costs of the  investigation,
removal and  remediation  of  hazardous or toxic  substances  on,  under,  in or
migrating from such property. Such laws often impose liability without regard to
whether the owner or operator knew of, or was  responsible  for, the presence of
such hazardous or toxic substances.

      The  Partnership is not aware of any  notification by any private party or
governmental  authority  of any  non-compliance,  liability  or  other  claim in
connection  with  environmental  conditions  at any of its  properties  that  it
believes  will  involve  any   expenditure   which  would  be  material  to  the
Partnership,  nor is the Partnership aware of any  environmental  condition with
respect to any of its properties that it believes will involve any such material
expenditure.  However,  there  can  be no  assurance  that  any  non-compliance,
liability, claim or expenditure will not arise in the future.

      Competition.  The financial  performance of the Partnership's  real estate
investments  will be impacted by the competition  from comparable  properties in
their local market areas. Due to the limited  availability of low-income housing
programs  like the ones that  cover  five of the  Partnership's  six  investment
properties,  the competitive  pressures faced by these  properties are much less
than for  non-subsidized,  market rate  facilities.  Nonetheless,  the occupancy
levels  achievable at the properties and the rental rates at the  non-subsidized
property  are  largely a function of supply and demand in the  markets.  In many
markets  across the country,  development  of new  multi-family  properties  has
surged in the past 12 months. Existing apartment properties in such markets have
generally  experienced  increased  vacancy levels,  declines in effective rental
rates and, in some cases, declines in estimated market values as a result of the
increased competition.  There are no assurances that these competitive pressures
will  not  adversely   affect  the  operations   and/or  market  values  of  the
Partnership's investment properties in the future and, in particular, subsequent
to the expiration of the existing subsidy agreements.

      Impact  of Local  Limited  Partnership  Structure.  The  ownership  of the
Partnership's  investments  through local limited  partnerships  could adversely
impact the timing of the  Partnership's  planned  dispositions  of its remaining
assets  and the  amount  of  proceeds  received  from such  dispositions.  It is
possible that the general partners of the local limited  partnerships could have
economic  or  business  interests  which  are  inconsistent  with  those  of the
Partnership.  Given the limited rights which the Partnership has under the terms
of the local limited partnership  agreements,  any conflict between the partners
could result in delays in  completing a sale of the related  operating  property
and could lead to an  impairment in the  marketability  of the property to third
parties for purposes of achieving the highest possible sale price.

      Availability of a Pool of Qualified Buyers.  The availability of a pool of
qualified  and  interested  buyers  for the  Partnership's  remaining  assets is
critical to the Partnership's  ability to realize the fair market values of such
properties  at the  time of  their  final  dispositions.  Demand  by  buyers  of
multi-family  apartment  properties is affected by many  factors,  including the
size,  quality,  age, condition and location of the subject property,  potential
environmental liability concerns, the existing debt structure,  the liquidity in
the debt and equity markets for asset acquisitions,  the general level of market
interest rates and the general and local economic climates. In addition, because
of the  government  restrictions  on rental  revenues  and the  related  capital
expenditure reserve requirements and cash flow distribution  limitations,  there
are  a  limited  number  of  potential  buyers  in  the  market  for  government
subsidized,  low-income  housing properties such as the Partnership has invested
in. Furthermore,  the current uncertainty  regarding potential future reductions
in the level of federal  government  assistance  for these  programs may further
restrict the properties' marketability.

Inflation
---------

      The Partnership  completed its fourteenth full year of operations in 1997.
To date,  the effects of  inflation  and changes in prices on the  Partnership's
operating results have not been significant.  In the future,  with regard to the
local limited  partnerships,  contract rental rates under "Section 8" agreements
may be  increased  at the  discretion  of the  Department  of Housing  and Urban
Development  in  response  to  inflationary  pressures  to  cover  increases  in
operating expenses due to inflation.

Item 8.  Financial Statements and Supplementary Data

      The financial statements and supplementary data are included under Item 14
of this Annual Report.

Item 9.  Changes in and  Disagreements  with  Accountants  on Accounting  and
Financial Disclosure

      None


<PAGE>

                                   PART III

Item 10.  Directors and Principal Executive Officers of the Partnership

      The Managing  General Partner of the Partnership is PW Shelter Fund, Inc.,
a Delaware  corporation which is a wholly-owned  subsidiary of PaineWebber.  The
Associate  General  Partner  of the  Partnership  is  Properties  Associates,  a
Massachusetts  general  partnership,  certain general partners of which are also
officers of the Adviser and the Managing General  Partner.  The Managing General
Partner  has  overall  authority  and   responsibility   for  the  Partnership's
operation, however, the day-to-day business of the Partnership is managed by the
Adviser pursuant to an advisory contract.

      (a) and (b) The names and ages of the directors  and  principal  executive
officers of the Managing General Partner of the Partnership are as follows:

                                                                    Date
                                                                    Elected
     Name                   Office                          Age     to Office
     ----                   ------                          ---     ---------

Bruce J. Rubin          President and Director              38      8/22/96
Terrence E. Fancher     Director                            44      10/10/96
Walter V. Arnold        Senior Vice President
                          and Chief Financial Officer       50      10/29/85
David F. Brooks         First Vice President and
                          Assistant Treasurer               55      12/10/82 *
Timothy J. Medlock      Vice President and Treasurer        36      6/1/88
Thomas W. Boland        Vice President and Controller       35      12/1/91

*  The date of incorporation of the Managing General Partner

      (c) There are no other significant  employees in addition to the directors
and executive officers mentioned above.

      (d) There is no family  relationship among any of the foregoing  directors
and/or  executive  officers of the Managing  General Partner of the Partnership.
All of the foregoing directors and executive officers have been elected to serve
until the annual meeting of the Managing General Partner.

      (e) All of the directors and officers of the Managing General Partner hold
similar  positions in affiliates of the Managing General Partner,  which are the
corporate general partners of other real estate limited  partnerships  sponsored
by PWI, and for which PaineWebber Properties Incorporated serves as the Adviser.
The  business  experience  of  each of the  directors  and  principal  executive
officers of the Managing General Partner is as follows:

      Bruce  J.  Rubin is  President  and  Director  of the  Managing  General
Partner.  Mr. Rubin was named  President and Chief  Executive  Officer of PWPI
in August 1996. Mr. Rubin joined  PaineWebber Real Estate  Investment  Banking
in November  1995 as a Senior Vice  President.  Prior to joining  PaineWebber,
Mr.  Rubin was  employed  by Kidder,  Peabody and served as  President  for KP
Realty Advisers,  Inc. Prior to his association  with Kidder,  Mr. Rubin was a
Senior Vice  President  and  Director of Direct  Investments  at Smith  Barney
Shearson.  Prior  thereto,  Mr.  Rubin was a First Vice  President  and a real
estate  workout  specialist  at  Shearson  Lehman  Brothers.  Prior to joining
Shearson  Lehman  Brothers in 1989, Mr. Rubin practiced law in the Real Estate
Group at  Willkie  Farr &  Gallagher.  Mr.  Rubin is a  graduate  of  Stanford
University and Stanford Law School.

      Terrence E.  Fancher was  appointed a Director of the  Managing  General
Partner in October  1996.  Mr.  Fancher is the Managing  Director in charge of
PaineWebber's  Real Estate Investment  Banking Group. He joined PaineWebber as
a result  of the  firm's  acquisition  of  Kidder,  Peabody.  Mr.  Fancher  is
responsible  for the origination  and execution of all of  PaineWebber's  REIT
transactions,  advisory assignments for real estate clients and certain of the
firm's real estate debt and principal  activities.  He joined Kidder,  Peabody
in 1985 and,  beginning in 1989, was one of the senior executives  responsible
for  building   Kidder,   Peabody's  real  estate   department.   Mr.  Fancher
previously  worked for a major law firm in New York City.  He has a J.D.  from
Harvard  Law  School,  an M.B.A.  from  Harvard  Graduate  School of  Business
Administration and an A.B. from Harvard College.

      Walter V. Arnold is a Senior Vice President and Chief Financial Officer of
the  Managing  General  Partner and Senior Vice  President  and Chief  Financial
Officer of the Adviser which he joined in October 1985. Mr. Arnold joined PWI in
1983 with the  acquisition  of Rotan  Mosle,  Inc.  where he had been First Vice
President and Controller  since 1978,  and where he continued  until joining the
Adviser.  Mr. Arnold is a Certified Public  Accountant  licensed in the state of
Texas.

      David F. Brooks is a First Vice  President and Assistant  Treasurer of the
Managing  General Partner and a First Vice President and an Assistant  Treasurer
of the Adviser.  Mr. Brooks joined the Adviser in March 1980. From 1972 to 1980,
Mr. Brooks was an Assistant  Treasurer of Property  Capital  Advisors,  Inc. and
also,  from March 1974 to February 1980, the Assistant  Treasurer of Capital for
Real  Estate,  which  provided  real estate  investment,  asset  management  and
consulting services.

      Timothy J.  Medlock is a Vice  President  and  Treasurer  of the  Managing
General  Partner and Vice President and Treasurer of the Adviser which he joined
in 1986.  From June 1988 to August 1989, Mr. Medlock served as the Controller of
the Managing General Partner and the Adviser. From 1983 to 1986, Mr. Medlock was
associated  with Deloitte  Haskins & Sells.  Mr. Medlock  graduated from Colgate
University  in 1983  and  received  his  Masters  in  Accounting  from  New York
University in 1985.

      Thomas W. Boland is a Vice  President  and  Controller  of the  Managing
General  Partner and a Vice  President and  Controller of the Adviser which he
joined in 1988.  From  1984 to 1987 Mr.  Boland  was  associated  with  Arthur
Young & Company.  Mr. Boland is a Certified Public Accountant  licensed in the
state of  Massachusetts.  He holds a B.S. in Accounting from Merrimack College
and an M.B.A. from Boston University.

      (f) None of the directors and officers were involved in legal  proceedings
which are  material to an  evaluation  of her or his ability or  integrity  as a
director or officer.

      (g)  Compliance  With  Exchange Act Filing  Requirements:  The  Securities
Exchange Act of 1934 requires the officers and directors of the Managing General
Partner, and persons who own more than ten percent of the Partnership's  limited
partnership units, to file certain reports of ownership and changes in ownership
with the Securities and Exchange Commission. Officers, directors and ten-percent
beneficial  holders are required by SEC  regulations to furnish the  Partnership
with copies of all Section 16(a) forms they file.

      Based solely on its review of the copies of such forms received by it, the
Partnership  believes that,  during the year ended December 31, 1997, all filing
requirements  applicable to the officers and  directors of the Managing  General
Partner and ten-percent beneficial holders were complied with.

Item 11.  Executive Compensation

      The directors and officers of the  Partnership's  Managing General Partner
receive no current or proposed remuneration from the Partnership.

      The  Partnership  is required to pay certain fees to the Adviser,  and the
General  Partners  are entitled to receive a share of cash  distributions  and a
share of profits or losses. These items are described under Item 13.

      The Partnership paid distributions to the Unitholders on a quarterly basis
at a rate of 2% per annum on  original  invested  capital  from June 30, 1994 to
September 30, 1996. The  Partnership's  quarterly  distributions  were suspended
effective for the quarter ended  December 31, 1996 due to an unexpected  decline
in the cash flow distributions from the local limited  partnerships in which the
Partnership  has  invested.  In  addition,  the  Partnership's  Units of Limited
Partnership  Interest are not actively traded on any organized exchange,  and no
efficient secondary market exists. Accordingly, no accurate price information is
available for these Units.  Therefore,  a presentation of historical  Unitholder
total returns would not be meaningful.

Item 12.  Security Ownership of Certain Beneficial Owners and Management

      (a) The  Partnership  is a limited  partnership  issuing  Units of limited
partnership  interest,  not voting securities.  All the outstanding stock of the
Managing  General  Partner,  PW Shelter  Fund,  Inc.,  is owned by  PaineWebber.
Properties Associates, the Associate General Partner, is a Massachusetts general
partnership,  general partners of which are also officers of the Adviser and the
Managing  General  Partner.  Properties  Associates is also the Initial  Limited
Partner of the Partnership and owns one Unit of limited partnership interest. No
limited partner is known by the Partnership to own beneficially  more than 5% of
the outstanding interests of the Partnership.

      (b) Neither officers and directors of the Managing General Partner nor the
general partners of the Associate General Partner,  individually,  own any Units
of limited  partnership  interest of the Partnership.  No officer or director of
the Managing General Partner,  nor any general partner of the Associate  General
Partner,  possesses a right to acquire beneficial  ownership of Units of limited
partnership interest of the Partnership.

      (c) There exists no arrangement,  known to the Partnership,  the operation
of  which  may at a  subsequent  date  result  in a  change  in  control  of the
Partnership.

Item 13.  Certain Relationships and Related Transactions

      The General  Partners of the  Partnership  are PW Shelter Fund,  Inc. (the
"Managing General  Partner"),  a wholly-owned  subsidiary of PaineWebber  Group,
Inc.   ("PaineWebber")   and  Properties   Associates  (the  "Associate  General
Partner"),  a Massachusetts  general  partnership,  certain general  partners of
which  are  also  officers  of the  Managing  General  Partner  and  PaineWebber
Properties  Incorporated  (the  "Adviser").  Subject  to  the  Managing  General
Partner's overall  authority,  the business of the Partnership is managed by the
Adviser  pursuant  to  an  advisory  contract.  The  Adviser  is a  wholly-owned
subsidiary of PaineWebber  Incorporated  ("PWI"),  a wholly-owned  subsidiary of
PaineWebber.  The  General  Partners,  the  Adviser  and PWI  receive  fees  and
compensation,  determined on an agreed-upon  basis, in  consideration of various
services  performed in connection with the sale of the Units,  the management of
the Partnership and the  acquisition,  management,  financing and disposition of
Partnership  investments.  In  addition,  the Managing  General  Partner and the
Adviser are reimbursed for their out-of-pocket expenses relating to the offering
of  Units,  the  administration  of the  Partnership  and  the  acquisition  and
operation of the Partnership's real property investments.

      Distributable  cash,  as  defined,  if any,  for each fiscal year shall be
distributed  annually in the ratio of 99% to the Limited  Partners and 1% to the
General  Partners.  All sale or  refinancing  proceeds  will be  distributed  in
varying  proportions  to the Limited and General  Partners,  as specified in the
Partnership Agreement.

      Pursuant to the terms of the Partnership Agreement,  taxable income or tax
loss of the Partnership  will be allocated 99% to the Limited Partners and 1% to
the  General  Partners.  Taxable  income  or tax  loss  arising  from a sale  or
refinancing of investment  properties will be allocated to the Limited  Partners
and the General  Partners in  proportion  to the amounts of sale or  refinancing
proceeds to which they are entitled; provided that the General Partners shall be
allocated at least 1% of taxable income arising from a sale or  refinancing.  If
there are no sale or  refinancing  proceeds,  taxable  income or tax loss from a
sale or refinancing  will be allocated 99% to the Limited Partners and 1% to the
General  Partners.  Allocations  of the  Partnership's  operations  between  the
General Partner and the Limited Partners for financial  accounting purposes have
been made in conformity with the allocations of taxable income or tax loss.

      Under  the  advisory  contract,   the  Adviser  has  specific   management
responsibilities, to administer the day-to-day operations of the Partnership and
to report  periodically  the  performance  of the  Partnership  to the  Managing
General  Partner.  The Adviser earns a basic  management  fee of .5% of invested
assets for these services.  Invested assets is the sum of the amount invested by
the Partnership in each local limited partnership plus a proportionate  interest
in the mortgage debt initially incurred by the local limited  partnerships.  The
Adviser earned management fees of $199,000 for the year ended December 31, 1997.
Accounts  payable - affiliates at December 31, 1997 consists of management  fees
of $199,000 payable to the Adviser.

      In connection  with the sale of each  property,  the Adviser may receive a
disposition  fee in an  amount  equal to 1% based  on the  selling  price of the
property,  subordinated  to the  payment  of  certain  amounts  to  the  Limited
Partners.

      An affiliate of the Managing General Partner performs certain  accounting,
tax  preparation,  securities  law compliance  and investor  communications  and
relations  services  for the  Partnership.  The  total  costs  incurred  by this
affiliate in  providing  such  services are  allocated  among  several  entities
including the Partnership.  Included in general and administrative  expenses for
the year ended December 31, 1997 is $35,000, representing reimbursements to this
affiliate for providing such services to the Partnership.

      The  Partnership  uses the  services  of Mitchell  Hutchins  Institutional
Investors,  Inc. ("Mitchell Hutchins") for the managing of cash assets. Mitchell
Hutchins is a  subsidiary  of  Mitchell  Hutchins  Asset  Management,  Inc.,  an
independently operated subsidiary of PaineWebber.  Mitchell Hutchins earned fees
of $2,000  (included in general and  administrative  expenses)  for managing the
Partnership's  cash assets during the year ended December 31, 1997. Fees charged
by Mitchell  Hutchins are based on a percentage of invested cash reserves  which
varies  based on the total  amount of  invested  cash  which  Mitchell  Hutchins
manages on behalf of PWPI.

      See Note 3 to the accompanying financial statements of the Partnership for
a further discussion of certain relationships and related party transactions.



<PAGE>



                                   PART IV



Item 14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K

   (a) The following documents are filed as part of this report:

        (1) and (2)     Financial Statements and Schedules:

                  The  response  to this  portion of Item 14 is  submitted  as a
                  separate  section  of this  report.  See  Index  to  Financial
                  Statements at page F-1.

        (3)  Exhibits:

                  The exhibits listed on the  accompanying  index to exhibits at
                  page IV-3 are filed as part of this report.

   (b) No reports on Form 8-K were filed during the last quarter of 1997.

   (c)  Exhibits

             See (a) (3) above.

   (d)  Financial Statement Schedules

                  The  response  to this  portion of Item 14 is  submitted  as a
                  separate  section  of this  report.  See  Index  to  Financial
                  Statements at page F-1.

























<PAGE>


                                  SIGNATURES


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

                       PAINE WEBBER/CMJ PROPERTIES, LP
                             LIMITED PARTNERSHIP


                                      By:  PW Shelter Fund, Inc.
                                           ---------------------
                                           Managing General Partner



                                      By:  /s/ Bruce J. Rubin
                                           ------------------
                                           Bruce J. Rubin
                                           President
                                           and Chief Executive Officer


                                      By:  /s/ Walter V. Arnold
                                           --------------------
                                           Walter V. Arnold
                                           Senior Vice President and
                                           Chief Financial Officer



                                      By:  /s/ Thomas W. Boland
                                           ---------------------
                                           Thomas W. Boland
                                           Vice President and Controller


Dated:  March 30, 1998

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following  persons on behalf of the Partnership and
in the capacities and on the dates indicated.



By:  /s/ Bruce J. Rubin                Date:  March 30, 1998
     -------------------                      --------------
     Bruce J. Rubin
     Director



By:  /s/ Terrence E. Fancher           Date:  March 30, 1998
     -----------------------                  --------------
     Terrence E. Fancher
     Director






<PAGE>


                          ANNUAL REPORT ON FORM 10-K
                                Item 14(a)(3)

                       PAINE WEBBER/CMJ PROPERTIES, LP


                              INDEX TO EXHIBITS
<TABLE>
<CAPTION>

                                                       Page Number in the Report
Exhibit No.   Description of Document                  Or Other Reference
-----------   -----------------------                  -----------------------------
<S>           <C>                                      <C>

(3) and (4)  Prospectus of the Partnership             Filed  with  the  Commission
             dated May 25, 1983, as                    pursuant to Rule  424(c)  and
             supplemented, with particular             incorporated herein by reference.
             reference to the Restated
             Certificate and Agreement of
             Limited Partnership


(10)         Material contracts previously             Filed  with  the  Commission
             filed as exhibits to registration         pursuant to Section 13or  15(d)
             statements and amendments thereto         of the Securities Act of  1934
             of the registrant together with all       and incorporated herein by
             previously filed Forms 8-K and Forms      reference.
             such contracts filed as exhibits of
             10-K are hereby incorporated herein
             by reference.


(13)         Annual Reports to Limited Partners        No  Annual  Report  for  the
                                                       year  ended   December   31,
                                                       1997  has  been  sent to the
                                                       Limited     Partners.     An
                                                       Annual  Report  will be sent
                                                       to  the   Limited   Partners
                                                       subsequent to this filing.

(22)         List of subsidiaries                      Included  in  Item 1 of Part
                                                       1 of this  Report  Page I-1,
                                                       to   which    reference   is
                                                       hereby made.

(27)         Financial Data Schedule                   Filed  as the  last  page of
                                                       EDGAR submission   following
                                                       the Financial  Statements
                                                       required by Item 14.

</TABLE>

<PAGE>


                          ANNUAL REPORT ON FORM 10-K

                       Item 14(a) (1) and (2) and 14(d)

                       PAINE WEBBER/CMJ PROPERTIES, LP

                        INDEX TO FINANCIAL STATEMENTS

                                                                     Reference
                                                                     ---------
Paine Webber/CMJ Properties, LP

   Independent Auditors' Report                                           F-4

   Balance sheets at December 31, 1997 and 1996                           F-5

   Statements of operations  for the years ended  December 31, 1997,
    1996 and 1995                                                         F-6

   Statements of changes in partners' capital (deficit) for the years
    ended December 31, 1997, 1996 and 1995                                F-7

   Statement of cash flows for the years ended December 31, 1997, 1996
    and 1995                                                              F-8

   Notes to financial statements                                          F-9

Fawcett's Pond Apartments Company

   Independent Auditors' Report                                           F-20

   Balance sheets at December 31, 1997 and 1996                           F-21

   Statements of operations  for the years ended  December 31, 1997,
    1996 and 1995                                                         F-22

   Statements of partners' deficit for the years ended
     December 31, 1997, 1996 and 1995                                     F-23

   Statements  of cash flows for the years ended  December 31, 1997,
    1996 and 1995                                                         F-24

   Notes to financial statements                                          F-26

Quaker Meadows Apartments Company

   Independent Auditors' Report                                           F-29

   Balance sheets at December 31, 1997 and 1996                           F-30

   Statements of operations  for the years ended  December 31, 1997,
    1996 and 1995                                                         F-31

   Statements of partners' deficit for the years ended December 31,
    1997, 1996 and 1995                                                   F-32

   Statements  of cash flows for the years ended  December 31, 1997,
    1996 and 1995                                                         F-33

   Notes to financial statements                                          F-35



<PAGE>


                       PAINE WEBBER/CMJ PROPERTIES, LP

                  INDEX TO FINANCIAL STATEMENTS - continued

                                                                       Reference
                                                                       ---------

South Laurel Apartments Limited Partnership

   Independent Auditors' Report                                           F-38

   Balance sheets at December 31, 1997 and 1996                           F-39

   Statements of operations  for the years ended  December 31, 1997,
    1996 and 1995                                                         F-40

   Statements of partners' deficit for the years ended December 31,
    1997, 1996 and 1995                                                   F-41

   Statements  of cash flows for the years ended  December 31, 1997,
    1996 and 1995                                                         F-42

   Notes to financial statements                                          F-44

Marvin Gardens Associates

   Independent Auditors' Report                                           F-47

   Balance sheets at December 31, 1997 and 1996                           F-48

   Statements of operations  for the years ended  December 31, 1997,
    1996 and 1995                                                         F-49

   Statements of partners' deficit for the years ended December 31,
    1997, 1996 and 1995                                                   F-50

   Statements of cash flows for the years ended December 31, 1997,
    1996 and 1995                                                         F-51

   Notes to financial statements                                          F-53

Colonial Farms, Ltd.

   Independent Auditors' Report                                           F-56

   Balance sheets at December 31, 1997 and 1996                           F-57

   Statements of operations  for the years ended  December 31, 1997,
    1996 and 1995                                                         F-58

   Statements  of  partners' deficit for the years ended  December
    31, 1997, 1996 and 1995                                               F-59

   Statements  of cash flows for the years ended  December 31, 1997,
    1996 and 1995                                                         F-60

   Notes to financial statements                                          F-62


<PAGE>


                       PAINE WEBBER/CMJ PROPERTIES, LP

                  INDEX TO FINANCIAL STATEMENTS - continued

                                                                      Reference
                                                                      ---------


Holbrook Apartments Company

   Independent Auditors' Report                                           F-65

   Balance sheets at December 31, 1997 and 1996                           F-66

   Statements of operations  for the years ended  December 31, 1997
   1996 and 1995                                                          F-67

   Statements  of  partners'  deficit for the years ended  December
    31, 1997, 1996 and 1995                                               F-68

   Statements  of cash flows for the years ended  December 31, 1997,
    1996 and 1995                                                         F-69

   Notes to financial statements                                          F-71



All  schedules  have  been  omitted  since  the  required   information  is  not
applicable,  or because the  information  required is included in the  financial
statements, including the notes thereto.



<PAGE>



                          INDEPENDENT AUDITORS' REPORT






The Partners of
Paine Webber/CMJ Properties, LP

      We have  audited  the  accompanying  balance  sheets  of Paine  Webber/CMJ
Properties,  LP (a Limited  Partner-ship)  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 three  years in the  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 audit 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 Paine Webber/CMJ Properties,
LP at December 31, 1997 and 1996, and the results of its operations,  changes in
partners' capital  (deficit),  and its cash flows for each of the three years in
the period  ended  December  31,  1997 in  conformity  with  generally  accepted
accounting principles.






                         /s/ Reznick Fedder & Silverman
                         ------------------------------
                           REZNICK FEDDER & SILVERMAN


Baltimore, Maryland
March 20, 1998




<PAGE>


                       PAINE WEBBER/CMJ PROPERTIES, LP

                                BALANCE SHEETS
                          December 31, 1997 and 1996
                   (In thousands, except per Unit amounts)

                                    ASSETS

                                                           1997        1996
                                                           ----        ----

Investments in local limited partnerships, at equity     $     27    $     92
Cash and cash equivalents                                     493         323
                                                         --------    --------
                                                         $    520    $    415
                                                         ========    ========



                      LIABILITIES AND PARTNERS' CAPITAL


Accrued expenses and accounts payable                    $     16    $     21
Accounts payable - affiliates                                 199         132
                                                         --------    --------
                                                              215         153

Partners' capital:
  General Partners:
   Capital contributions                                        1           1
   Cumulative net losses                                      (69)        (70)
   Cumulative distributions                                    (5)         (5)

  Limited Partners ($1,000 per Unit; 15,000 Units
  authorized; 8,746 Units issued and outstanding):
   Capital contributions, net of offering costs             7,679       7,679
   Cumulative net losses                                   (6,864)     (6,906)
   Cumulative distributions                                  (437)       (437)
                                                         --------    --------
      Total partners' capital                                 305         262
                                                         --------    --------
                                                         $    520    $    415
                                                         ========    ========















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


<PAGE>


                       PAINE WEBBER/CMJ PROPERTIES, LP

                           STATEMENTS OF OPERATIONS
             For the years ended December 31, 1997, 1996 and 1995
                   (In thousands, except per Unit amounts)

                                                1997       1996       1995
                                                ----       ----       ----

Revenues:
   Interest income                            $    26     $    14    $     23
   Other income from local limited
     partnerships                                 121          84         221
                                              -------     -------    --------
                                                  147          98         244

Expenses:
   Management fees                                199         199         199
   General and administrative                      89          81          89
                                              -------     -------    --------
                                                  288         280         288
                                              -------     -------    --------
Operating loss                                   (141)       (182)        (44)

Partnership's share of local limited
  partnerships' income                            184         157         174
                                              -------     -------    --------

Net income (loss)                             $    43     $   (25)   $    130
                                              =======     =======    ========


Net income (loss) per Limited
  Partnership Unit                            $  4.85     $ (2.82)   $  14.75
                                              =======     ========   ========

Cash distributions per Limited
  Partnership Unit                            $     -     $ 20.00    $  20.00
                                              =======     ========   ========



   The above net income (loss) and cash  distributions  per Limited  Partnership
Unit are based upon the 8,746 Limited  Partnership Units outstanding during each
year.


















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



<PAGE>


                         PAINE WEBBER/CMJ PROPERTIES, LP

              STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
              For the years ended December 31, 1997, 1996 and 1995
                                 (In thousands)



                                          General         Limited
                                          Partners        Partners       Totals
                                          --------        --------       ------


Balance at December 31, 1994             $  (71)        $  582         $  511

Cash distributions                           (2)          (175)          (177)

Net income                                    1            129            130
                                        -------         ------         ------

Balance at December 31, 1995                (72)           536            464

Cash distributions                           (2)          (175)          (177)

Net loss                                      -            (25)           (25)
                                        -------         ------         ------

Balance at December 31, 1996                (74)           336            262

Net income                                    1             42             43
                                        -------         ------         ------

Balance at December 31, 1997            $   (73)        $  378         $  305
                                        =======         ======         ======























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



<PAGE>


                         PAINE WEBBER/CMJ PROPERTIES, LP

                            STATEMENTS OF CASH FLOWS
              For the years ended December 31, 1997, 1996 and 1995
                Increase (Decrease) in Cash and Cash Equivalents
                                 (In thousands)

<TABLE>
<CAPTION>

                                                              1997          1996        1995
                                                              ----          ----        ----
<S>                                                          <C>            <C>         <C>

Cash flows from operating activities:
  Net income (loss)                                         $   43         $   (25)    $   130
  Adjustments to reconcile net income (loss)
   to net cash used in operating activities:
   Other income from local limited partnerships               (121)            (84)       (221)
   Partnership's share of local limited
      partnerships' income                                    (184)           (157)       (174)
   Changes in assets and liabilities:
     Accrued expenses and accounts payable                      (5)             (1)          8
     Accounts payable - affiliates                              67             132           -
                                                            ------         -------    --------
        Total adjustments                                     (243)           (110)       (387)
                                                            ------         -------    --------
        Net cash used in operating activities                 (200)           (135)       (257)
                                                            ------         -------    --------

Cash flows from investing activities:
   Distributions from local limited
     partnerships                                              370             310         435
                                                            ------         -------    --------
        Net cash provided by investing activities              370             310         435
                                                            ------         -------    --------

Cash flows from financing activities:
   Distributions to partners                                     -            (177)       (177)
                                                            ------         -------    --------
        Net cash used in financing activities                    -            (177)       (177)
                                                            ------         -------    --------

Net increase (decrease) in cash and cash equivalents           170              (2)          1

Cash and cash equivalents, beginning of year                   323             325         324
                                                            ------         -------    --------

Cash and cash equivalents, end of year                      $  493         $   323    $    325
                                                            ======         =======    ========


</TABLE>















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


<PAGE>


                       PAINE WEBBER/CMJ PROPERTIES, LP

                        NOTES TO FINANCIAL STATEMENTS

                              December 31, 1997



1.  Organization and Nature of Operations
    -------------------------------------

      Paine  Webber/CMJ   Properties,   LP  (the  "Partnership")  is  a  limited
partnership  organized pursuant to the laws of the State of Delaware in December
1982 for the purpose of investing  in a portfolio of interests in local  limited
partnerships owning apartment projects which received governmental assistance in
the form of low rate mortgages and rent subsidies.  All of the properties  owned
by the local limited partnerships were developed by Corcoran, Mullins, Jennison,
Inc.  ("CMJ") or its affiliates.  The initial  capital was $2,000,  representing
capital  contributions of $1,000 by the General Partners and $1,000 for one unit
(a "Unit") by the  Initial  Limited  Partner.  The  Partnership  authorized  the
issuance of a maximum of 15,000 Partnership Units of which 8,745 were subscribed
and issued between May 25, 1983 and April 30, 1984.

      The  Partnership  originally  invested  the  net  proceeds  of the  public
offering,  through local limited  partnerships,  in six apartment projects which
receive  governmental  assistance in the form of low interest rate mortgages and
rent subsidies.  The Partnership's original investment objectives were to invest
the net cash proceeds from the offering of limited  partnership  units in rental
apartment  properties  receiving  various  forms  of  federal,  state  or  local
assistance with the goals of providing: (1) tax losses from deductions generated
by investments;  (2) capital  preservation;  (3) potential capital appreciation;
and (4)  potential  future  cash  distributions  from  operations  (on a limited
basis),  or from the sale or  refinancing  of the  projects  owned by the  local
limited  partnerships,  or from  the  sale of  interests  in the  local  limited
partnerships.

      The Partnership  has generated tax losses since  inception.  However,  the
benefits of such losses to investors have been significantly  reduced by changes
in federal income tax law subsequent to the organization of the Partnership. The
Partnership continues to retain an ownership interest in all six of its original
operating investment properties.  As of December 31, 1997, all of the properties
are generating  sufficient  cash flow from  operations to cover their  operating
expenses  and debt service  payments,  and the  majority of the  properties  are
generating  excess  cash flow,  a portion of which is being  distributed  to the
Partnership on an annual basis in accordance with the respective  regulatory and
limited  partnership  agreements.  Given the  improvements  in cash flow and the
strong  operating  performances  of the  investment  properties in recent years,
management had instituted a program of regular  quarterly  distributions in 1994
at an annual rate of 2% on original invested  capital.  Effective for the fourth
quarter  of  1996,  due to an  unexpected  decline  in the  level  of cash  flow
distributions from the local limited partnerships, distributions to the partners
were  suspended  until  further  notice.  In the future,  to the extent there is
distributable  cash flow from the  properties  after the payment of  Partnership
management fees and operating expenses,  the Partnership plans to make an annual
distribution payment.

      The Partnership's  success in meeting its capital  appreciation  objective
will depend upon the proceeds  received from the final sales of its investments.
The  amount  of such  proceeds  will  ultimately  depend  upon the  value of the
underlying investment  properties at the time of their final disposition,  which
cannot presently be determined. Because of the government restrictions on rental
revenues and the related capital expenditure reserve  requirements and cash flow
distribution limitations,  there are a limited number of potential buyers in the
market for government  subsidized,  low-income  housing  properties  such as the
Partnership  has invested in.  Furthermore,  the current  uncertainty  regarding
potential future  reductions in the level of federal  government  assistance for
these programs may further restrict the properties' marketability.  Accordingly,
management   does  not  expect  the  General   Partners  of  the  local  limited
partnerships,  which receive  management  fee revenues from the  properties,  to
attempt to sell any of the properties in the near term. As discussed  further in
Note  4,  as  a  limited  partner  in  the  local  limited   partnerships,   the
Partnership's  ability to influence  major  business  decisions,  including  any
decision  to  sell  the  properties,  is  restricted  under  the  terms  of  the
agreements.

2.  Use of Estimates and Summary of Significant Accounting Policies
    ---------------------------------------------------------------

      The  accompanying  financial  statements have been prepared on the accrual
basis of accounting in accordance with generally accepted accounting  principles
which require  management  to make  estimates  and  assumptions  that affect the
reported amounts of assets and liabilities and disclosures of contingent  assets
and  liabilities  as of December 31, 1997 and 1996 and revenues and expenses for
each of the three years in the period ended  December 31, 1997.  Actual  results
could differ from the estimates and assumptions used.

      The   accompanying   financial   statements   include  the   Partnership's
investments in six local limited  partnerships  which own operating  properties.
The Partnership accounts for its investments in local limited partnerships using
the equity method.  Under the equity  method,  the investment is carried at cost
adjusted for the Partnership's share of the local limited partnerships' earnings
and losses and distributions. In accordance with the equity method of accounting
for limited  partnership  interests,  the Partnership does not record losses for
those limited partnership investments whose equity method basis has been reduced
to zero,  recognizing future income from these entities only when it exceeds the
previously unrecorded losses. Distributions received from investments in limited
partnerships  whose basis has been  reduced to zero are recorded as other income
in the  Partnership's  statement of operations.  See Note 4 for a description of
the local limited partnerships.

      For purposes of reporting cash flows,  cash and cash  equivalents  include
all highly liquid  investments with original  maturities of 90 days or less when
acquired.  The Partnership's cash reserves are invested in financial instruments
which potentially  subject the Partnership to concentrations of credit risk. The
Partnership  currently  invests primarily in  investment-grade  rated commercial
paper  with  overnight  maturities.  Management  believes  that  no  significant
concentration of credit risk exists with respect to these cash investments as of
December 31, 1997. The carrying amount of cash and cash equivalents approximates
their fair value as of December  31, 1997 due to the  short-term  maturities  of
these instruments.

      No provision  for income taxes has been made,  as the  liability  for such
taxes is that of the  partners  rather  than  the  Partnership.  The  cumulative
difference between the book basis and tax basis of the Partnership's  investment
in local limited  partnerships is  approximately  $17,811,000 as of December 31,
1997 due to the losses on  investments  recognized on the tax basis in excess of
the book basis.

3.  The Partnership Agreement and Related Party Transactions
    --------------------------------------------------------

      The General  Partners of the  Partnership  are PW Shelter Fund,  Inc. (the
"Managing General  Partner"),  a wholly-owned  subsidiary of PaineWebber  Group,
Inc.   ("PaineWebber")   and  Properties   Associates  (the  "Associate  General
Partner"),  a Massachusetts  general  partnership,  certain general  partners of
which  are  also  officers  of the  Managing  General  Partner  and  PaineWebber
Properties  Incorporated  (the  "Adviser").  Subject  to  the  Managing  General
Partner's overall  authority,  the business of the Partnership is managed by the
Adviser  pursuant  to  an  advisory  contract.  The  Adviser  is a  wholly-owned
subsidiary of PaineWebber  Incorporated  ("PWI"),  a wholly-owned  subsidiary of
PaineWebber.  The  General  Partners,  the  Adviser  and PWI  receive  fees  and
compensation,  determined on an agreed-upon  basis, in  consideration of various
services  performed in connection with the sale of the Units,  the management of
the Partnership and the  acquisition,  management,  financing and disposition of
Partnership investments.

      Distributable  cash,  as  defined,  if any,  for each fiscal year shall be
distributed  annually in the ratio of 99% to the Limited  Partners and 1% to the
General  Partners.  All sale or  refinancing  proceeds  will be  distributed  in
varying  proportions  to the Limited and General  Partners,  as specified in the
Partnership Agreement.

      Pursuant to the terms of the Partnership Agreement,  taxable income or tax
loss of the Partnership  will be allocated 99% to the Limited Partners and 1% to
the  General  Partners.  Taxable  income  or tax  loss  arising  from a sale  or
refinancing of investment  properties will be allocated to the Limited  Partners
and the General  Partners in  proportion  to the amounts of sale or  refinancing
proceeds to which they are entitled; provided that the General Partners shall be
allocated at least 1% of taxable income arising from a sale or  refinancing.  If
there are no sale or  refinancing  proceeds,  taxable  income or tax loss from a
sale or refinancing  will be allocated 99% to the Limited Partners and 1% to the
General  Partners.  Allocations  of the  Partnership's  operations  between  the
General Partner and the Limited Partners for financial  accounting purposes have
been made in conformity with the allocations of taxable income or tax loss.

      Under  the  advisory  contract,   the  Adviser  has  specific   management
responsibilities, to administer the day-to-day operations of the Partnership and
to report  periodically  the  performance  of the  Partnership  to the  Managing
General  Partner.  The Adviser earns a basic  management  fee of .5% of invested
assets for these services.  Invested assets is the sum of the amount invested by
the Partnership in each local limited partnership plus a proportionate  interest
in the mortgage debt initially incurred by the local limited  partnerships.  The
Adviser  earned  management  fees of $199,000 for each of the three years in the
period ended December 31, 1997. Accounts payable affiliates at December 31, 1997
consists of management fees of $199,000 payable to the Adviser.

      In connection  with the sale of each  property,  the Adviser may receive a
disposition  fee in an  amount  equal to 1% based  on the  selling  price of the
property,  subordinated  to the  payment  of  certain  amounts  to  the  Limited
Partners.
<PAGE>
      Included  in  general  and  administrative  expenses  for the years  ended
December 31, 1997, 1996 and 1995 is $35,000, $32,000 and $32,000,  respectively,
representing  reimbursements to an affiliate of the Managing General Partner for
providing certain financial,  accounting and investor  communication services to
the Partnership.

      The  Partnership  uses the  services  of Mitchell  Hutchins  Institutional
Investors,  Inc.  ("Mitchell  Hutchins"),  an affiliate of the Managing  General
Partner,  for the managing of cash assets.  Mitchell Hutchins is a subsidiary of
Mitchell Hutchins Asset Management,  Inc., an independently  operated subsidiary
of PaineWebber.  Mitchell  Hutchins earned fees of $2,000,  (included in general
and  administrative  expenses) for managing the Partnership's cash assets during
each of the three years ended December 31, 1997.

4.  Local Limited Partnerships
    --------------------------

      The Partnership has investments in six local limited  partnerships.  These
local  limited  partnerships  are  accounted  for on the  equity  method  in the
Partnership's  financial statements.  Condensed combined financial statements of
these local limited partnerships follow:

                       Condensed Combined Balance Sheets
                          December 31, 1997 and 1996
                                (In thousands)
                                    Assets
                                                           1997        1996
                                                           ----        ----

     Current assets                                      $  1,964    $  2,060
     Restricted deposits and funded reserves                1,816       1,877
     Operating investment property, net                    24,629      25,621
     Other assets                                           1,004       1,046
                                                         --------    --------
                                                         $ 29,413    $ 30,604
                                                         ========    ========
                            Liabilities and Capital

     Current liabilities and tenant security deposits    $  1,290    $  1,461
     Due to general partner                                 2,508       2,508
     Long-term mortgage debt, less current portion         32,279      32,847

     Partnership's share of combined
       partners' deficit accounts                          (3,511)     (3,104)
     Local partners' shares of combined
       partners' deficit accounts                          (3,153)     (3,108)
                                                         --------    --------
                                                         $ 29,413    $ 30,604
                                                         ========    ========

                    Condensed Combined Summary of Operations
              For the years ended December 31, 1997, 1996 and 1995
                                 (In thousands)

                                            1997           1996          1995
                                            ----           ----          ----
     Rental revenues, including
       government subsidies             $  9,963       $  9,949       $ 9,864
     Other income                            130            112           130
                                        --------       --------       -------
                                          10,093         10,061         9,994

     Property operating expenses           5,834          5,733         5,701
     Interest expense and mortgage
       insurance                           2,904          2,964         3,005
     Depreciation and amortization         1,389          1,347         1,294
                                        --------       --------       -------
                                          10,127         10,044        10,000
                                        --------       --------       -------
     Net income (loss)                  $    (34)      $     17       $    (6)
                                        ========       ========       ========
     Net income (loss):
       Partnership's share of
         operations                     $    (37)      $     32       $   (15)
       Local partners' share of
         operations                            3            (15)            9
                                        --------       --------       -------
                                        $    (34)      $     17       $    (6)
                                        ========       ========       =======
<PAGE>
              Reconciliation of Partnership's Share of Operations
                                (In thousands)

                                            1997           1996           1995
                                            ----           ----           ----
     Partnership's share of
       operations, as shown above         $  (37)        $   32       $   (15)
     Losses in excess of basis not
       recognized by Partnership             221            278           234
     Income offset with prior year
       unrecognized losses                     -           (153)          (45)
                                          ------         ------       -------
     Partnership's share of local
       limited partnerships' income       $  184         $  157       $   174
                                          ======         ======       =======

                  Reconciliation of Partnership's Investments
                                (In thousands)
                                                           1997         1996
                                                           ----         ----
     Partnership's share of combined partners'
       deficit accounts, as shown above                $ (3,511)     $ (3,104)
     Accumulated losses in excess of basis
       not recognized by Partnership                      2,324         2,103
     Cumulative distributions in excess
       of investment basis                                1,199         1,078
     Excess basis in local limited partnerships              15            15
                                                       --------      --------
     Investments in local limited
       partnerships, at equity                         $     27      $     92
                                                       ========      ========

      "Investments   in  local   limited   partnerships,   at   equity"  is  the
      Partnership's  net  investment  in the local limited  partnerships.  These
      local  limited  partnerships  are  subject to  regulatory  agreements  and
      partnership  agreements  which  determine  the  distribution  of available
      funds, the disposition of the limited  partnership's assets and the rights
      of the partners,  regardless  of the  Partnership's  percentage  ownership
      interest in the local  limited  partnership.  As a limited  partner of the
      local limited  partnerships,  the  Partnership  does not control  property
      disposition  decisions.  The partnership agreements state that the limited
      partner may cause the sale of the assets of the local limited partnerships
      subsequent  to June 30,  1995,  but not earlier than one year after it has
      given  written  notice to the operating  general  partner of its intent to
      cause such sale,  and only if, during such one year period,  the operating
      general  partner does not cause the sale of such assets.  If the operating
      general  partner has not caused the assets of the  partnership  to be sold
      within such one year period the limited  partner may cause such sale,  but
      only after it has  offered to sell such  assets to the  operating  general
      partner,  and either the  operating  general  partner does not accept such
      offer within 90 days of receiving  it, or the  operating  general  partner
      does not complete the sale in accordance  with such offer after  accepting
      the terms.

      "Investments  in local  limited  partnerships,  at equity" on the  balance
      sheets  is  comprised  of  the   following   local   limited   partnership
      investments, at the balances indicated (in thousands):

                                                       1997            1996
                                                       ----            ----

     Fawcett's Pond Apartments Company              $    6             $    -
     Quaker Meadows Apartments Company                   -                  -
     South Laurel Apartments Limited Partnership         -                  -
     Marvin Gardens Associates                           -                  -
     Colonial Farms Ltd.                                 -                  -
     Holbrook Apartments Company                        21                 92
                                                    ------             ------
       Investments in local limited partnerships,
          at equity                                 $   27             $   92
                                                    ======             ======

      The Partnership  received cash distributions from the limited partnerships
as set forth below (in thousands):
                                             1997         1996         1995
                                             ----         ----         ----

     Fawcett's Pond Apartments Company    $     24       $   24       $    24
     Quaker Meadows Apartments Company          90           50            66
     South Laurel Apartments Limited
       Partnership                               -            -            63
     Marvin Gardens Associates                   4            -            27
     Colonial Farms Ltd.                        27           27            40
     Holbrook Apartments Company               225          209           215
                                          --------       ------       -------
                                          $    370       $  310       $   435
                                          ========       ======       =======
<PAGE>

      The  investments  in  Quaker  Meadows  Apartments  Company,  South  Laurel
Apartments  Limited  Partnership,  Marvin Gardens  Associates and Colonial Farms
Ltd.  at  December  31,  1997 do not reflect  accumulated  losses  therefrom  of
$1,234,000,  $785,000, $176,000 and $129,000,  respectively,  because the equity
method carrying  values of such  investments  have been reduced to zero.  Future
income from these  entities will not be recorded until it exceeds the previously
unrecognized accumulated losses.

      A description of the local limited partnership properties and the terms of
the local limited partnership agreements is summarized below:

     a)  Village at Fawcett's Pond - Hyannis, Massachusetts
         --------------------------------------------------

      On June 30,  1983,  the  Partnership  acquired a 95%  limited  partnership
interest in Fawcett's Pond Apartments Company, an existing Massachusetts limited
partnership  ("Fawcett's  Pond"),  that owns and  operates  a  100-unit  housing
project in Hyannis,  Massachusetts.  The Federal  Housing  Administration  (FHA)
contracted  with the  limited  partnership  under  Section  8 of Title II of the
Housing  and  Community  Development  Act of  1974 to  make  housing  assistance
payments  to the  limited  partnership  on  behalf  of  qualified  tenants.  The
agreement expires August 19, 2002. Total rent subsidies  received by the limited
partnership  during 1997, 1996 and 1995 were $752,000,  $756,000,  and $768,000,
respectively.   Such  amounts   comprised   approximately   76%,  77%  and  79%,
respectively, of the limited partnership's total revenues for such years.

      The  aggregate  investment  by the  Partnership  for the 95%  interest was
$879,606,  comprised  of cash and notes  payable  to the  seller  (including  an
acquisition  fee of $63,025  payable to the  Adviser  of the  Partnership).  The
Partnership's  interest is held subject to a permanent nonrecourse mortgage loan
due April 1, 2024 from the Government National Mortgage  Association (GNMA) with
an outstanding balance at December 31, 1997 of approximately $4,232,000, payable
in monthly installments of $30,746 including principal and interest at 7.5%.

      The partnership  agreement  generally  provides that the Partnership  will
receive 95% of annual  distributable  cash flow  payable  annually  and that the
local partners will be entitled to receive 5% of annual distributable cash flow.
Cash  distributions  and  incentive  management  fees are limited by  agreements
between the limited partnership and HUD to 6% of the initial equity investment.

      The agreement  also provides that taxable income and tax loss in each year
will be allocated, generally, in the same proportion as cash flow is distributed
in that year.

      Generally,  the first  $1,105,725 of proceeds from the sale or refinancing
of the investment property will be distributed to the Partnership. The remaining
proceeds will be distributed to the local general  partners and the  Partnership
in accordance with the local limited partnership agreement.

      The local limited  partnership entered into a property management contract
with an affiliate of the local general  partners.  The  management  fee is 5% of
gross receipts. An incentive management fee will also be paid on an annual basis
in the event that the  property's  cash flow  exceeds  certain  target  amounts.
Incentive  management  fees of  $6,000  were paid to an  affiliate  of the local
general partners for each of the three years ended December 31, 1997.

      b)  Quaker Court and The Meadows - Lynn, Massachusetts
          --------------------------------------------------

      On June 30,  1983,  the  Partnership  acquired a 95%  limited  partnership
interest in Quaker Meadows Apartments Company, an existing Massachusetts limited
partnership  ("Quaker Meadows"),  that owns and operates two apartment complexes
in Lynn,  Massachusetts.  There  are a total of 104  apartment  units in the two
complexes.  FHA contracted with the limited partnership under Section 8 of Title
II of the  Housing  and  Community  Development  Act of  1974  to  make  housing
assistance  payments to the limited  partnership on behalf of qualified tenants.
The agreement expires in May 2002 and has two five-year  renewal options.  Total
rent subsidies  received by the limited  partnership  during 1997, 1996 and 1995
were $1,313,000, $1,320,000 and $1,335,000, respectively. Such amounts comprised
approximately  81%, 82% and 82% of the limited  partnership's  total revenues in
each of such years.

      The  aggregate  investment  by the  Partnership  for the 95%  interest was
$1,378,906  (including an acquisition fee of $104,525 paid to the Adviser of the
Partnership).  The  Partnership's  interest  is  held  subject  to  a  permanent
nonrecourse  mortgage loan payable to the  Massachusetts  Housing Finance Agency
(MHFA).  The mortgage loan is due September 1, 2013 with an outstanding  balance
at  December  31,  1997  of   approximately   $5,095,000,   payable  in  monthly
installments of $62,930 including principal and interest at 12.5%.

      The restated partnership agreement generally provides that the Partnership
will receive 95% of annual distributable cash flow payable annually and that the
local partners will be entitled to receive 5% of annual distributable cash flow.
Cash distributions are limited by agreements between the limited partnership and
MHFA to the extent funds available for distribution as defined by MHFA.
<PAGE>

      The agreement  also provides that taxable income and tax loss in each year
will be allocated, generally, in the same proportion as cash flow is distributed
in that year.

      Generally,  the first  $1,739,424 of proceeds from the sale or refinancing
of the investment  properties will be distributed to the Partnership.  Remaining
proceeds will be distributed to the local venture  partners and the  Partnership
in accordance with the local limited partnership agreement.

      The local limited  partnership entered into a property management contract
with an affiliate of the local general  partners.  The  management  fee is 4% of
gross receipts. An incentive management fee will also be paid on an annual basis
in the event that the  property's  cash flow  exceeds  certain  target  amounts.
Incentive  management  fees of  $69,000,  $29,000  and  $45,000  were paid to an
affiliate of the local general  partners for the years ended  December 31, 1997,
1996 and 1995, respectively.

      c)  Villages at Montpelier - Laurel, Maryland
          -----------------------------------------

      On June 30,  1983,  the  Partnership  acquired an 85% limited  partnership
interest in South Laurel Apartments  Limited  Partnership,  an existing Maryland
limited partnership ("South Laurel"),  that owns and operates a 520-unit housing
project in Laurel,  Maryland.  FHA contracted with the limited partnership under
Section 8 of Title II of the Housing and  Community  Development  Act of 1974 to
make  housing  assistance  payments  to the  limited  partnership  on  behalf of
qualified  tenants for 20% of the rental units. The subsidy agreement expired on
July 31, 1997,  and  management did not apply for an extension of the agreement.
The property is currently in the process of  transitioning to a 100% market rent
facility.  Based on the market  conditions,  management  believes that the units
previously  designated  as  low-income  units will be  re-leased at market rates
which would keep the total revenues of the local limited partnership  relatively
unchanged from the previously  subsidized level. In addition,  if the market for
conventional multi-family apartment properties remains strong, the expiration of
the rental  subsidy  agreement at The Villages at Montpelier  Apartments and the
conversion  of the property to 100%  market-rate  apartments  could  enhance the
property's  marketability  for a  potential  sale  by  increasing  the  pool  of
interested buyers.  However, there are no assurances that such market conditions
will remain  strong,  and the ability of the  Partnership to cause a sale of the
property  will  remain  restricted  by  the  terms  of the  limited  partnership
agreement  discussed  further  above.  If conditions  were to  deteriorate,  The
Villages  at  Montpelier   Apartments  could  experience  extended  declines  in
occupancy and revenues as a result of the  expiration of the subsidy  agreement.
Total rent subsidies  received by the limited  partnership during 1997, 1996 and
1995 were $506,000, $686,000 and $677,000,  respectively. Such amounts comprised
approximately 12%, 17% and 17%, respectively, of the limited partnership's total
revenues for each of such years.

      The  aggregate  investment  by the  Partnership  for the 85%  interest was
$2,446,135  (including an acquisition fee of $186,725 paid to the Adviser of the
Partnership).  The  Partnership's  interest  is  held  subject  to  a  permanent
nonrecourse  mortgage loan due December 1, 2023 with an  outstanding  balance at
December  31,  1997 of  approximately  $11,845,000,  payable  to GNMA in monthly
installments of $86,395 including principal and interest at 7.5%.

      The restated partnership agreement generally provides that the Partnership
will receive 85% of annual distributable cash flow payable annually and that the
local  partners  will be entitled to receive  15% of annual  distributable  cash
flow.  Cash   distributions  are  limited  by  agreements  between  the  limited
partnership and HUD to the extent of surplus cash, as defined by HUD.

      The agreement  also provides that taxable income and tax loss in each year
will  be  allocated,   generally,  in  the  same  proportion  as  cash  flow  is
distributable in that year.

      Generally,  the first  $3,107,104 of proceeds from the sale or refinancing
of the investment  property will be distributed  to the  Partnership.  Remaining
proceeds will be distributed to the local venture  partners and the  Partnership
in accordance with the local limited partnership agreement.

      The local limited  partnership entered into a property management contract
with an affiliate of the local general partners.  The management fee is 5.25% of
gross receipts. An incentive management fee will also be paid on an annual basis
in the event that the  property's  cash flow  exceeds  certain  target  amounts.
Incentive  management  fees of  $1,000  were paid to an  affiliate  of the local
general  partners  for 1995.  No incentive  management  fees were earned for the
years ended December 31, 1997 and 1996.

      d)  Marvin Gardens Apartments, Cotati, California
          ---------------------------------------------

      On July 29,  1983,  the  Partnership  acquired a 95%  limited  partnership
interest  in  Marvin  Gardens   Associates,   an  existing   California  limited
partnership that owns a 37-unit apartment complex project in Cotati, California.
The apartment  complex operates under Section 8 of the National Housing Act and,
therefore,  receives  monthly rental  subsidies  from the Federal  Department of
Housing and Urban Development  (HUD). The agreement expires in July 2003 and has
two five-year  renewal  options.  Total rent  subsidies  received by the limited
partnership  during 1997,  1996 and 1995 were  $329,000,  $324,000 and $337,000,
respectively.   Such  amounts   comprised   approximately   77%,  77%  and  81%,
respectively, of the limited partnership's total revenues for such years.

      The  aggregate  investment  by the  Partnership  for the 95%  interest was
$379,581  (including  an  acquisition  fee of $27,800 paid to the Adviser of the
Partnership).  The  Partnership's  interest was acquired  subject to a permanent
nonrecourse  mortgage  loan due June 1,  2013  with an  outstanding  balance  at
December 31, 1997 of approximately $1,611,000, payable to the California Housing
Finance Agency (CHFA) in monthly  installments of $15,310,  including  principal
and interest at 8.15%.

      The restated partnership agreement generally provides that the Partnership
will receive 95% of annual distributable cash flow payable annually and that the
local partners will be entitled to receive 5% of annual distributable cash flow.
Cash distributions are limited by agreements between the limited partnership and
CHFA to $20,151  per year to the extent of surplus  cash and stated  equity,  as
defined by CHFA.  Undistributed amounts are cumulative and may be distributed in
subsequent years if future operations  provide surplus cash in excess of current
requirements.

      The agreement  also provides that taxable income and tax loss in each year
will be allocated, generally, in the same proportion as cash flow is distributed
in that year.

      Generally,  the first $462,336 of proceeds from the sale or refinancing of
the  investment  property  will be  distributed  to the  Partnership.  Remaining
proceeds will be distributed to the local venture  partners and the  Partnership
in accordance with the local limited partnership agreement.

      The local limited  partnership entered into a property management contract
with  an  affiliate  of  the  local  general  partners  who  in  turn  hired  an
unaffiliated management agent to provide management services on their behalf. An
incentive  management fee will also be paid on an annual basis in the event that
the property's cash flow exceeds certain target  amounts.  Incentive  management
fees of $12,000 were paid to an affiliate of the local general  partners for the
year ended December 31, 1995. No incentive  management  fees were earned for the
years ended December 31, 1997 and 1996.

      e)  Colonial Farms - Modesto, California
          ------------------------------------

      On July 29,  1983,  the  Partnership  acquired a 95%  limited  partnership
interest in Colonial Farms Ltd. an existing  California limited partnership that
owns a 100-unit apartment project in Modesto,  California. The apartment complex
operates under Section 8 of the National  Housing Act and,  therefore,  receives
monthly  rental  subsidies  from the  Federal  Department  of Housing  and Urban
Development  (HUD).  The  agreement  expires in July 2002 and has two  five-year
renewal options. Total rent subsidies received by the limited partnership during
1997,  1996 and 1995 were $579,000,  $613,000 and $586,000,  respectively.  Such
amounts comprised  approximately 71%, 76% and 74%, respectively,  of the limited
partnership's total revenues for such years.

      The  aggregate  investment  by the  Partnership  for the 95%  interest was
$623,351  (including  an  acquisition  fee of $48,125 paid to the Adviser to the
Partnership).  The  Partnership's  interest  is  held  subject  to  a  permanent
nonrecourse  mortgage  loan due June 1,  2013  with an  outstanding  balance  at
December  31,  1997 of  approximately  $2,713,000,  payable  to CHFA in  monthly
installments of $27,411, including principal and interest at 9.15%

      The restated partnership agreement generally provides that the Partnership
will receive 95% of annual distributable cash flow payable annually and that the
local partners will be entitled to receive 5% of annual distributable cash flow.
Cash distributions are limited by agreements between the limited partnership and
CHFA to $35,299  per year to the extent of surplus  cash and stated  equity,  as
defined by CHFA.  Undistributed amounts are cumulative and may be distributed in
subsequent years if future operations  provide surplus cash in excess of current
requirements.

      The agreement  also provides that taxable income and tax loss in each year
will be allocated, generally, in the same proportion as cash flow is distributed
in that year.

      Generally,  the first $800,928 of proceeds from the sale or refinancing of
the  investment  property  will be  distributed  to the  Partnership.  Remaining
proceeds will be distributed to the local venture  partners and the  Partnership
in accordance with the local limited partnership agreement.

      The local limited  partnership entered into a property management contract
with  an  affiliate  of  the  local  general  partners  who  in  turn  hired  an
unaffiliated management agent to provide management services on their behalf. An
incentive management fee will also be paid to the affiliate of the local general
partners on an annual basis in the event that the  property's  cash flow exceeds
certain target amounts.  Incentive management fees of $7,000, $7,000 and $16,000
were paid to an  affiliate  of the local  general  partners  for the years ended
December 31, 1997, 1996 and 1995, respectively.
<PAGE>

      f)  Ramblewood Apartments - Holbrook, Massachusetts
          -----------------------------------------------

      On August 30, 1983, the  Partnership  acquired an 85% limited  partnership
interest in Holbrook  Apartments  Company,  an  existing  Massachusetts  limited
partnership  that owns and  operates a  170-unit  housing  project in  Holbrook,
Massachusetts.  FHA contracted with the limited  partnership  under Section 8 of
Title II of the Housing and  Community  Development  Act of 1974 to make housing
assistance  payments to the limited  partnership on behalf of qualified tenants.
The agreement expires July 1, 2001. Total rent subsidies received by the limited
partnership  during  1997,  1996  and  1995  were  $1,565,000,   $1,577,000  and
$1,587,000,  respectively. Such amounts comprised approximately 74%, 75% and 75%
respectively, of the limited partnership's total revenues for such years.

      The  aggregate  investment  by the  Partnership  for the 85%  interest was
$1,250,583,  (including an acquisition fee of $94,500 paid to the Adviser of the
Partnership).  The Partnership's  interest was acquired subject to a nonrecourse
first mortgage loan due February 1, 2023 with an outstanding balance at December
31, 1997 of approximately $7,352,000, payable to GNMA in monthly installments of
$54,207 including principal and interest at 7.5%.

      The restated partnership agreement generally provides that the Partnership
will receive 85% of annual distributable cash flow payable annually and that the
local  partners  will be entitled to receive  15% of annual  distributable  cash
flow.  Cash   distributions  are  limited  by  agreements  between  the  limited
partnership and HUD to the extent of surplus cash, as defined by HUD.

      The agreement  also provides that taxable income and tax loss in each year
will be allocated, generally, in the same proportion as cash flow is distributed
in that year.

      Generally,  the first  $1,571,956 of proceeds from the sale or refinancing
of the investment  property will be distributed  to the  Partnership.  Remaining
proceeds  will be  distributed  to the local  partners  and the  Partnership  in
accordance with the local limited partnership agreement.

      The local limited  partnership entered into a property management contract
with an affiliate of the local general partners.  The management fee is 4.75% of
gross receipts. An incentive management fee will also be paid on an annual basis
in the event that the  property's  cash flow  exceeds  certain  target  amounts.
Incentive  management  fees of $146,000,  $134,000 and $138,000  were paid to an
affiliate of the local general  partners for the years ended  December 31, 1997,
1996 and 1995, respectively.


<PAGE>



                         INDEPENDENT AUDITORS' REPORT



To the Partners
Fawcett's Pond Apartments Company

      We  have  audited  the  accompanying  balance  sheets  of  Fawcett's  Pond
Apartments  Company as of December 31, 1997 and 1996, and the related statements
of operations,  partners'  deficit and cash flows for each of the three years in
the  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 audit 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 Fawcett's Pond Apartments
Company as of December 31, 1997 and 1996, and the results of its operations, the
changes in  partners'  deficit and its cash flows for each of the three years in
the period ended  December 31,  1997,  in  conformity  with  generally  accepted
accounting principles.



                         /s/ Reznick Fedder & Silverman
                             --------------------------
                             REZNICK FEDDER & SILVERMAN



Baltimore, Maryland
January 22, 1998


<PAGE>


                      Fawcett's Pond Apartments Company

                                BALANCE SHEETS

                          December 31, 1997 and 1996

                                    ASSETS
                                                      1997        1996
                                                      ----        ----

CURRENT ASSETS
   Cash and cash equivalents                      $  353,884  $  323,202
   Accounts receivable                                 2,011       1,617
   Prepaid expenses                                   12,581      13,556
                                                  ----------  ----------

      Total current assets                           368,476     338,375

RESTRICTED DEPOSITS AND FUNDED RESERVES
   Tenants' security deposits                         21,461      25,439
   Mortgage escrow deposits                           67,627      35,682
   Reserve for replacements                          265,204     251,321
                                                  ----------  ----------

                                                     354,292     312,442
PROPERTY AND EQUIPMENT, net of accumulated
   depreciation of $2,192,094 and $2,037,707       3,378,778   3,454,822

DEFERRED FINANCING COSTS, net of accumulated
   amortization of $122,110 and $113,948             214,645     222,807
                                                  ----------  ----------

      Total assets                                $4,316,191  $4,328,446
                                                  ==========  ==========

                      LIABILITIES AND PARTNERS' DEFICIT

CURRENT LIABILITIES
   Current maturities of mortgage payable         $   53,320  $   49,479
   Accounts payable and accrued expenses              54,347      22,673
   Accrued interest payable                           26,453      26,762
   Rent deferred credits                                 488         807
                                                  ----------  ----------
      Total current liabilities                      134,608      99,721

LONG-TERM LIABILITIES
   Mortgage payable, less current maturities       4,179,174   4,232,494
   Due to general partner                            277,400     277,400
   Tenants' security deposits                         20,447      20,680
                                                  ----------  ----------

      Total liabilities                            4,611,629   4,630,295

PARTNERS' DEFICIT                                   (295,438)   (301,849)
                                                  ----------  ----------

      Total liabilities and partners' deficit     $4,316,191  $4,328,446
                                                  ==========  ==========




                      See notes to financial statements


<PAGE>


                      Fawcett's Pond Apartments Company

                           STATEMENTS OF OPERATIONS

                       December 31, 1997, 1996 and 1995

                                          1997        1996        1995
                                          ----        ----        ----
Revenue
   Rental income, net                 $  941,478  $  942,059  $  940,355
   Financial revenue                      25,534      19,420      16,052
   Other income                           16,701      16,066      16,371
                                      ----------  ----------  ----------
      Total revenue                      983,713     977,545     972,778

Expenses
  Operating expenses
   Marketing                               1,756       1,090         804
   Administration                         59,354      55,198      53,043
   Utilities                              30,591      33,018      35,578
   Management fee                         47,098      47,114      46,933
   Maintenance and repairs               126,573      79,914     129,259
   Salaries                               76,232      85,196      73,337
   Payroll taxes                           7,648       7,252           -
   Insurance                              25,206      22,073      21,667
   Real estate taxes                      67,717      66,913      65,567
                                      ----------  ----------  ----------

      Total operating expenses           442,175     397,768     426,188

  Nonoperating expenses
   Interest                              319,161     322,748     326,076
   Mortgage insurance premium             21,275      21,515      21,737
   Depreciation and amortization         162,549     153,348     144,403
   Incentive management fee                6,303       6,303       6,303
   Miscellaneous financial expenses          625         633         632
                                      ----------  ----------  ----------
      Total nonoperating expenses        509,913     504,547     499,151
                                      ----------  ----------  ----------

      Total expenses                     952,088     902,315     925,339
                                      ----------  ----------  ----------


      EXCESS OF REVENUE OVER EXPENSES $   31,625  $   75,230  $   47,439
                                      ==========  ==========  ==========














                      See notes to financial statements


<PAGE>


                      Fawcett's Pond Apartments Company

                       STATEMENTS OF PARTNERS' DEFICIT

                 Years ended December 31, 1997, 1996 and 1995


                                         General    Limited
                                         Partner    Partner     Total
                                         -------    -------     -----

Partners' deficit, December 31, 1994    $(75,564)  $(298,526)  $(374,090)

Distributions                             (1,261)    (23,953)    (25,214)

Excess of revenue over expenses            2,372      45,067      47,439
                                        --------   ---------   ---------

Partners' deficit, December 31, 1995     (74,453)   (277,412)   (351,865)

Distributions                             (1,261)    (23,953)    (25,214)

Excess of revenue over expenses            3,762      71,468      75,230
                                        --------   ---------   ---------

Partners' deficit, December 31, 1996     (71,952)   (229,897)   (301,849)

Distributions                             (1,261)    (23,953)    (25,214)

Excess of revenue over expenses            1,581      30,044      31,625
                                        --------   ---------   ---------

Partners' deficit, December 31, 1997    $(71,632)  $(223,806)  $(295,438)
                                        ========   =========   =========

Profit and loss sharing percentage             5%         95%        100%
                                               =          ==         ===























                      See notes to financial statements


<PAGE>


                      Fawcett's Pond Apartments Company

                           STATEMENTS OF CASH FLOWS

                 Years ended December 31, 1997, 1996 and 1995

                                                1997        1996        1995
                                                ----        ----        ----

 Cash flows from operating activities
   Rental income received                  $  941,319  $  942,011  $  938,666
   Interest received                           15,978      12,900       9,468
   Other income received                       16,600      15,939      15,625
   Administrative expenses paid               (97,068)    (88,517)    (83,865)
   Management fees paid                       (47,098)    (47,114)    (46,933)
   Utilities paid                             (28,522)    (32,268)    (35,266)
   Maintenance and repairs expenses paid     (171,100)   (133,004)   (160,520)
   Real estate taxes paid                     (33,859)    (66,913)    (65,567)
   Payroll taxes paid                          (7,648)     (7,252)     (7,107)
   Property insurance paid                     (8,275)     (9,614)    (10,191)
   Other taxes and insurance paid             (16,038)    (12,074)    (11,664)
   Interest paid on mortgage                 (319,470)   (323,035)   (326,342)
   Mortgage insurance paid                    (21,193)    (21,440)    (21,667)
   Miscellaneous financial expenses paid         (625)       (633)       (632)
   (Increase) decrease in mortgage escrow
      deposits                                (31,945)       (858)        378
   Mortgagor entity expenses paid              (6,303)     (6,303)     (6,303)
   Net security deposits received (paid)        3,745      (1,529)       (138)
                                           ----------  ----------  ----------

      Net cash provided by operating
        activities                            188,498     220,296     187,942
                                           ----------  ----------  ----------

 Cash flows from investing activities
   Additions to property and equipment        (78,343)    (43,567)    (41,945)
   Deposits to reserve for replacements       (22,092)    (21,948)    (21,948)
   Withdrawals from reserve for
     replacements                              17,312           -           -
                                           ----------  ----------  ----------

      Net cash used in investing
        activities                           (83,123)     (65,515)    (63,893)
                                          ----------   ----------  ----------

 Cash flows from financing activities
   Repayment of mortgage payable             (49,479)     (45,914)    (42,607)
   Distributions                             (25,214)     (25,214)    (25,214)
                                          ----------   ----------  ----------

      Net cash used in financing
        activities                           (74,693)     (71,128)    (67,821)
                                          ----------   ----------  ----------

      NET INCREASE IN CASH AND
            CASH EQUIVALENTS                   30,682      83,653      56,228

 Cash and cash equivalents, beginning         323,202     239,549     183,321
                                           ----------  ----------  ----------

 Cash and cash equivalents, ending         $  353,884  $  323,202  $  239,549
                                           ==========  ==========  ==========






                      See notes to financial statements


<PAGE>


                      Fawcett's Pond Apartments Company

                     STATEMENTS OF CASH FLOWS (CONTINUED)

                       December 31, 1997, 1996 and 1995


                                                1997        1996        1995
                                                ----        ----        ----

 Reconciliation of excess of revenue over
  expenses to net cash provided by
  operating activities
   Excess of revenue over expenses          $  31,625   $  75,230   $  47,439
   Adjustments to reconcile excess of
     revenue over expenses to net cash
     provided by operating activities
     Depreciation                             154,387     145,186     136,241
     Amortization                               8,162       8,162       8,162
     Interest earned on reserve for
       replacements                            (9,103)     (6,520)     (6,584)
     Changes in assets and liabilities
      Increase in accounts receivable            (394)       (399)       (746)
      Decrease (increase) in prepaid expenses     975         460        (118)
      (Increase) decrease in mortgage escrow
        deposits                              (31,945)       (858)        378
      Increase (decrease) in tenants'
        security deposits - net                 3,745      (1,529)       (138)
      Increase in accounts payable and
        accrued expenses                       31,674         627       5,263
      Decrease in accrued interest payable       (309)       (287)       (266)
      (Decrease) increase in rent-deferred
        credits                                  (319)        224      (1,689)
                                             --------    --------    --------

         Net cash provided by operating
           activities                        $188,498    $220,296    $ 187,942
                                             ========    ========    =========



























                      See notes to financial statements


<PAGE>
                      Fawcett's Pond Apartments Company

                        NOTES TO FINANCIAL STATEMENTS

                       December 31, 1997, 1996 and 1995


NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
--------------------------------------------------------------------

      Fawcett's  Pond  Apartments  Company  (the  Partnership)  was  formed as a
limited  partnership  under the laws of the State of  Massachusetts  on June 30,
1983, for the purpose of  constructing  and operating a rental  housing  project
under Section 221(d)(4) of the National Housing Act. The project consists of 100
units located in Hyannis,  Massachusetts,  and is currently  operating under the
name of Fawcett's Pond  Apartments.  All leases between the  Partnership and the
tenants of the property are operating leases.

      Cash distributions and incentive management fees are limited by agreements
between the Partnership and HUD to 6% of the initial equity investment.

Use of Estimates
----------------

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

Cash and Cash Equivalents
-------------------------

      Cash and cash equivalents  consist of cash and repurchase  agreements with
maturities  of  three  months  or less  when  acquired,  stated  at  cost  which
approximate fair value.

Property and Equipment
----------------------

      Property and equipment are carried at cost.  Depreciation  is provided for
in amounts  sufficient  to relate the cost of  depreciable  assets to operations
over  their  estimated  service  lives by use of the  straight-line  method  for
financial  reporting  purposes.  For income tax purposes,  accelerated lives and
methods are used.

Deferred Financing Costs
------------------------

      Deferred financing costs are amortized over the term of the mortgage using
the straight-line method.

Rental Income
-------------

      Rental  income is  recognized  as  rentals  become  due.  Rental  payments
received in advance are deferred until earned.

Income Taxes
------------

      No  provision  or benefit  for  income  taxes has been  included  in these
financial  statements  since  taxable  income or loss passes  through to, and is
reportable by, the partners individually.

NOTE B - RESTRICTED DEPOSITS AND FUNDED RESERVES
------------------------------------------------

      At December 31, 1997 and 1996, the Partnership  maintained tenant security
deposits of $21,460 and $25,439 in  interest-bearing  escrow bank  accounts  and
U.S.  Treasury Bills. The investment in a U.S. Treasury Bill is held to maturity
and is carried at cost which approximates fair value.

      The  Partnership  also has a reserve  for  replacements  and escrow  funds
totaling $332,831 and $287,003 at December 31, 1997 and 1996,  respectively,  on
deposit   with   Reilly   Mortgage   Group,   Inc.   These  funds  are  held  in
interest-bearing  bank accounts and U.S.  Treasury  Bills,  which are carried at
cost and approximate fair value.

NOTE C - MORTGAGE PAYABLE
-------------------------

      The mortgage payable  represents a permanent  mortgage from the Government
National  Mortgage  Association  (GNMA) which is insured by the Federal  Housing
Administration  (FHA)  and is  collateralized  by a deed of trust on the  rental
property. The mortgage,  which is due April 1, 2024, is payable in equal monthly
installments of principal and interest  totaling $30,746 and bears interest at a
rate of 7.5%. Interest incurred during December 31, 1997, 1996 and 1995 amounted
to $319,161, $322,748 and $326,076, respectively.

      Under  agreements  with the mortgage  lender and FHA, the  Partnership  is
required to make monthly escrow deposits for taxes, insurance and replacement of
project assets, and is subject to restrictions as to operating policies,  rental
charges, operating expenditures and distributions to partners.

      The  liability  of the  Partnership  under the  mortgage is limited to the
underlying  value of the real  estate,  plus other  amounts  deposited  with the
lender.

      Aggregate  maturities of the mortgage payable for the five years following
December 31, 1997, are as follows:

               December 31,
               ------------
                  1998       $  53,320
                  1999       $  57,459
                  2000       $  61,920
                  2001       $  66,727
                  2002       $  71,907

      Management  believes it is not practical to estimate the fair value of the
mortgage  payable insured by HUD because  programs with similar  characteristics
are not currently available to the Partnership.

NOTE D - HOUSING ASSISTANCE PAYMENT AGREEMENT
---------------------------------------------

      The FHA contracted with the Partnership under Section 8 of Title II of the
Housing  and  Community  Development  Act of 1974,  to make  housing  assistance
payments to the  Partnership on behalf of qualified  tenants for all units.  The
agreement  expires August 19, 2002. Total housing  assistance  payments received
during 1997, 1996 and 1995 were $751,930, $755,658 and $768,409, respectively.

NOTE E - RELATED PARTY TRANSACTIONS
-----------------------------------

Due to General Partners
-----------------------

      At December 31, 1997 and 1996, due to general partner  consisted of unpaid
developer  advances of $277,400.  These  advances are  non-interest  bearing and
payable from  proceeds  upon sale or  refinancing  of the project  after certain
priority payments, as defined in the Partnership agreement.

Management Fees
---------------

      Management  fees  of 5% of  gross  receipts  are  paid  to CMJ  Management
Company, Inc., an affiliate of the general partner, for its services as managing
agent to the project  pursuant to a management  agreement  approved by HUD. Such
fees amounted to $47,098,  $47,114, and $46,933 for the years ended December 31,
1997, 1996 and 1995, respectively.  In addition, CMJ Management Company received
incentive  management  fees of $6,303 for each of the three years ended December
31, 1997.

Reimbursed Costs
----------------

      CMJ Management Company,  Inc., an affiliate of the general partner,  makes
monthly  expenditures  (primarily payroll,  central office accounting  services,
direct marketing and insurance  costs) on behalf of the  Partnership,  which are
reimbursed the following month.

NOTE F - TAX BASIS INCOME
-------------------------

      The  reconciliation of the excess of revenue over expenses reported in the
accompanying  statements  of operations  with the income (loss)  reported on the
Federal income tax basis follows:

                                                1997        1996        1995
                                                ----        ----        ----

Excess of revenue over expenses per
   statements of operations                   $ 31,625    $ 75,230   $  47,439
Additional depreciation and amortization
   on tax basis                                (56,395)    (65,916)    (75,550)
(Decrease) increase in deferred rental
   income                                         (328)        224      (1,689)
                                             ---------    --------   ---------

(Loss) income for Federal income tax
    purposes                                 $ (25,098)   $  9,538   $ (29,800)
                                             =========    ========   =========
<PAGE>

NOTE G - CONCENTRATION OF CREDIT RISK
-------------------------------------

      The Partnership  maintains operating cash balances,  including  repurchase
agreements and security deposits held in trust with major financial institutions
and its funded  reserves  with the  mortgage  lender.  The  Partnership  has not
experienced  any losses with  respect to bank  balances in excess of  government
provided  insurance.  Management  believes that no significant  concentration to
credit risks exists with respect to these cash balances as of December 31, 1997.

<PAGE>



                         INDEPENDENT AUDITORS' REPORT



To the Partners
Quaker Meadows Apartments Company

      We  have  audited  the  accompanying  balance  sheets  of  Quaker  Meadows
Apartments  Company as of December 31, 1997 and 1996, and the related statements
of operations,  partners'  deficit and cash flows for each of the three years in
the  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 audit 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 Quaker Meadows Apartments
Company as of December 31, 1997 and 1996, and the results of its operations, the
changes in  partners'  deficit and its cash flows for each of the three years in
the period ended  December 31,  1997,  in  conformity  with  generally  accepted
accounting principles.



                         /s/ Reznick Fedder & Silverman
                             --------------------------
                             REZNICK FEDDER & SILVERMAN


Baltimore, Maryland
January 27, 1998


<PAGE>


                      Quaker Meadows Apartments Company

                                BALANCE SHEETS

                          December 31, 1997 and 1996

                                    ASSETS
                                                         1997       1996
                                                         ----       ----

 CURRENT ASSETS
   Cash and cash equivalents                        $  215,117  $  263,637
   Accounts receivable                                  43,303       2,572
   Other receivables                                    48,428      15,092
   Prepaid expenses                                      8,483       9,785
                                                    ----------  ----------

      Total current assets                             315,331     291,086

 RESTRICTED DEPOSITS AND FUNDED RESERVES
   Tenant security deposits                             18,113      18,787
   Mortgage escrow deposits                             13,369      12,774
   Reserve for replacements                            210,559     297,906
                                                    ----------  ----------

                                                       242,041     329,467

 PROPERTY AND EQUIPMENT, net of accumulated
   depreciation of $4,057,912 and $3,787,391         3,768,007   3,979,215

 DEFERRED FINANCING COSTS, net of accumulated
   amortization of $62,526 and $58,461                  67,625      71,690
                                                    ----------  ----------

      Total assets                                  $4,393,004  $4,671,458
                                                    ==========  ==========

                       LIABILITIES AND PARTNERS' DEFICIT

 CURRENT LIABILITIES
   Current maturities of mortgage payable           $  119,880  $  106,768
   Accounts payable and accrued expenses                40,379      55,280
   Accrued interest payable                             60,082      60,082
   Rent deferred credits                                 4,013       3,787
                                                    ----------  ----------

      Total current liabilities                        224,354     225,917

 LONG-TERM LIABILITIES
   Mortgage payable, less current maturities         4,974,964   5,094,845
   Due to general partner                            1,072,952   1,072,952
   Tenants' security deposits                           16,472      16,617
                                                    ----------  ----------

      Total liabilities                              6,288,742   6,410,331

 PARTNERS' DEFICIT                                  (1,895,738) (1,738,873)
                                                    ----------  ----------
      Total liabilities and partners' deficit       $4,393,004  $4,671,458
                                                    ==========  ==========


                       See notes to financial statements


<PAGE>


                       Quaker Meadows Apartments Company

                           STATEMENT OF OPERATIONS

                 Years ended December 31, 1997, 1996 and 1995

                                                1997        1996        1995
                                                ----        ----        ----

 Revenue
   Rental income                           $1,600,492  $1,592,837  $1,596,066
   Vacancies                                   (1,774)     (6,464)     (5,331)
   Financial revenue                           24,836      26,166      26,799
   Other income                                 1,718         371       1,035
                                           ----------  ----------  ----------

      Total revenue                         1,625,272   1,612,910   1,618,569

 Expenses
  Operating expenses
   Administration                             116,675     106,695     122,910
   Management fees to affiliate                63,958      63,511      63,546
   Utilities                                  136,254     125,632     125,584
   Maintenance and repairs                    287,880     252,230     310,136
   Insurance                                   14,026      15,286      15,416
   Real estate taxes                           50,624      43,376      65,161
                                           ----------  ----------  ----------

      Total operating expenses                669,417     606,730     702,753

  Nonoperating expenses
   Interest                                   641,632     660,698     671,237
   Depreciation and amortization              274,586     265,184     261,148
   Incentive management fee to affiliate       68,655      29,375      45,390
   Social services expenses                    32,757      16,387      23,062
                                           ----------  ----------  ----------

      Total nonoperating expenses           1,017,630     971,644   1,000,837
                                           ----------  ----------  ----------

      Total expenses                        1,687,047   1,578,374   1,703,590
                                           ----------  ----------  ----------

      EXCESS (DEFICIENCY) OF
         REVENUE OVER EXPENSES             $  (61,775) $   34,536  $  (85,021)
                                           ==========  ==========  ==========















                       See notes to financial statements


<PAGE>


                       Quaker Meadows Apartments Company

                       STATEMENTS OF PARTNERS' DEFICIT

                 Years ended December 31, 1997, 1996 and 1995

                                         General    Limited
                                         Partner    Partner      Total
                                         -------    -------      -----

 Partners' deficit, December 31, 1994  $(323,862) $(1,242,095) $(1,565,957)

 Distributions                            (3,494)     (66,396)     (69,890)

 Excess of expenses over revenue          (4,251)     (80,770)     (85,021)
                                       ---------  -----------  -----------

 Partners' deficit, December 31, 1995   (331,607)  (1,389,261)  (1,720,868)

 Distributions                            (2,627)     (49,914)     (52,541)

 Excess of revenue over expenses           1,727       32,809       34,536
                                       ---------  -----------  -----------

 Partners' deficit, December 31, 1996   (332,507)  (1,406,366)  (1,738,873)

 Distributions                            (4,753)     (90,337)     (95,090)

 Excess of expenses over revenue          (3,089)     (58,686)     (61,775)
                                       ---------  -----------  -----------

 Partners' deficit, December 31, 1997  $(340,349) $(1,555,389  $(1,895,738)
                                       =========  ===========  ===========

 Profit and loss sharing percentage            5%         95%        100%
                                               =          ==         ===
























                      See notes to financial statements


<PAGE>


                      Quaker Meadows Apartments Company

                           STATEMENTS OF CASH FLOWS

                    Years ended December 31, 1997 and 1996

                                                1997        1996        1995
                                                ----        ----        ----
 Cash flows from operating activities
   Rental income received                  $1,558,213  $1,591,659  $1,572,590
   Interest received                            6,268       9,327       3,163
   Other income received                       16,194           -      10,547
   Administrative expenses paid              (149,432)   (123,082)   (122,910)
   Management fees paid                       (63,958)    (68,922)    (63,546)
   Utilities paid                            (137,125)   (123,121)   (119,506)
   Maintenance and repair expenses paid      (301,910)   (240,803)   (315,873)
   Real estate taxes paid                     (50,624)    (43,376)    (65,161)
   Property insurance paid                    (12,724)    (14,677)    (16,081)
   Interest paid on mortgage                 (641,632)   (660,698)   (670,747)
   Incentive fees paid                        (68,655)    (29,375)    (68,452)
   (Increase) decrease in mortgage escrow
      deposits                                   (595)      4,164        (547)
   Net security deposits received (paid)          529       1,947      (1,148)
                                            ---------  ----------  ----------

      Net cash provided by operating
        activities                            154,549     303,043     142,329
                                           ----------  ----------  ----------

 Cash flows from investing activities
   Acquisition of land, building and
    equipment                                 (59,313)    (32,288)    (23,969)
   Decrease (increase) in reserve for
    replacements                               58,103     (14,208)     (7,313)
                                           ----------  ----------  ----------

      Net cash used in investing
        activities                             (1,210)    (46,496)    (31,282)
                                           ----------  ----------  -----------
 Cash flows from financing activities
   Repayment of mortgage payable             (106,769)    (94,935)    (84,413)
   Distributions                              (95,090)    (52,541)    (69,890)
                                           ----------  ----------  ----------
      Net cash used in financing
        activities                           (201,859)   (147,476)   (154,303)
                                           ----------  ----------  ----------

      NET (DECREASE) INCREASE IN
            CASH AND CASH EQUIVALENTS         (48,520)    109,071     (43,256)

 Cash and cash equivalents, beginning         263,637     154,566     197,822
                                           ----------  ----------  ----------
 Cash and cash equivalents, ending         $  215,117  $  263,637  $  154,566
                                           ==========  ==========  ==========












                       See notes to financial statements


<PAGE>


                      Quaker Meadows Apartments Company

                     STATEMENTS OF CASH FLOWS (CONTINUED)

                 Years ended December 31, 1997, 1996 and 1995

                                                  1997        1996        1995
                                                  ----        ----        ----

 Reconciliation  of excess  (deficiency)
  of revenue  over  expenses to net cash
  provided by operating activities
   Excess (deficiency) of revenue over expenses  $ (61,775) $ 34,536  $ (85,021)
   Adjustments to reconcile excess
    (deficiency) of revenue over expenses
     to net cash provided by operating activities
       Depreciation and amortization               274,586   265,184    261,148
       Interest earned on reserve for
        replacement                                (18,568)  (18,345)   (18,880)
       Changes in assets and liabilities
        (Increase) decrease in accounts
          receivable                               (26,255)    1,222    (10,806)
        (Increase) decrease in mortgage escrow
          deposits                                    (595)    4,164       (547)
      Decrease (increase) in tenants' security
          deposits - net                               529     1,947     (1,148)
      Decrease (increase) in prepaid expenses        1,302       609       (175)
      (Decrease) increase in accounts payable
         and accrued expenses                      (14,901)   12,458        341
      Increase (decrease) in rent deferred
         credits                                       226     1,268     (2,583)
                                                  --------  --------  ---------

         Net cash provided by operating
           activities                            $ 154,549  $303,043  $ 142,329
                                                 =========  ========  =========





























                      See notes to financial statements


<PAGE>
                      Quaker Meadows Apartments Company

                        NOTES TO FINANCIAL STATEMENTS

                       December 31, 1997, 1996 and 1995



NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
--------------------------------------------------------------------

      Quaker  Meadows  Apartments  Company  (the  Partnership)  was  formed as a
limited  partnership under the laws of the State of Massachusetts on February 1,
1982, for the purpose of  constructing  and operating a rental  housing  project
under Massachusetts Housing Finance Agency's (MHFA) housing program. The project
consists of 104 units located in Lynn, Massachusetts, and is currently operating
under the name of Quaker Meadows Apartments.  All leases between the Partnership
and tenants of the property are operating leases.

      Under a  regulatory  agreement  with MHFA,  the project is regulated as to
cash distributions.  Cash distributions,  incentive management fees and resident
council fees are limited to funds available for distribution as defined by MHFA.

Use of Estimates
----------------

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

Cash and Cash Equivalents
-------------------------

      Cash and cash equivalents  consist of cash and repurchase  agreements with
maturities  of  three  months  or less  when  acquired,  stated  at  cost  which
approximates fair value.

Property and Equipment
----------------------

      Property and equipment are carried at cost. The  Partnership  provides for
depreciation by use of the  straight-line  method over estimated useful lives of
the assets as follows: buildings, 30 years, and equipment, 3-8 years.

Deferred Financing Costs
------------------------

      Deferred financing costs, which consist  principally of financing fees are
amortized by the straight-line method over the life of the related debt.

Rental Income
-------------

      Rental  income is  recognized  as  rentals  become  due.  Rental  payments
received in advance are deferred until earned.

Income Taxes
------------

      No  provision  or benefit  for  income  taxes has been  included  in these
financial  statements  since  taxable  income or loss passes  through to, and is
reportable by, the partners individually.

Reclassifications
-----------------

      Certain amounts in the 1996 financial statements have been reclassified in
order to remain consistent with the 1997 financial statement presentation.

NOTE B - RESTRICTED DEPOSITS AND FUNDED RESERVES
------------------------------------------------

      At December 31, 1997 and 1996, the Partnership  maintained tenant security
deposits of $18,113 and $18,787,  respectively,  in interest bearing escrow bank
accounts and U.S. Treasury Bills. The investment in a U.S. Treasury Bill is held
to maturity and is carried at cost and approximates fair value.

      The  Partnership  also has a reserve  for  replacements  and escrow  funds
totalling $223,928 and $310,680 at December 31, 1997 and 1996, respectively,  on
deposit with MHFA.  These funds are held in interest bearing bank accounts which
are carried at cost and approximate fair value.
<PAGE>

NOTE C - MORTGAGE PAYABLE
-------------------------

      The   mortgage   payable   represents  a  permanent   mortgage   from  the
Massachusetts  Housing Finance Agency (MHFA), due September 1, 2013, and payable
in equal monthly installments of $62,930 (principal and interest) at an interest
rate of 12.5%.  The terms of the permanent  mortgage also require monthly escrow
deposits for real estate taxes and a replacement reserve.

      The  liability  of the  Partnership  under the  mortgage is limited to the
underlying  value of the real  estate,  plus other  amounts  deposited  with the
lender.

      Aggregate  maturities of the mortgage payable for the five years following
December 31, 1997, are as follows:

                  December 31
                  -----------
                    1998          $119,880
                    1999          $135,044
                    2000          $151,877
                    2001          $170,808
                    2002          $190,640

      Management  believes it is not practical to estimate the fair value of the
mortgage payable to MHFA because programs with similar  characteristics  are not
currently available to the Partnership.

NOTE D - HOUSING ASSISTANCE PAYMENT AGREEMENT
---------------------------------------------

      The  Federal  Housing   Administration   (FHA)  has  contracted  with  the
Partnership under Section 8 of Title II of the Housing and Community Development
Act of 1974, to make housing assistance payments to the Partnership on behalf of
qualified tenants. The agreement expires May 2002, and has two five-year renewal
options.  Total housing assistance  payments received during 1997, 1996 and 1995
were $1,312,610, $1,319,893 and $1,335,437, respectively.

NOTE E - RECONCILIATION OF FINANCIAL  STATEMENT EXCESS (DEFICIENCY) OF REVENUE
         OVER EXPENSES TO TAX BASIS (LOSS) INCOME
-------------------------------------------------------------------------------

      The  reconciliation  of the excess  (deficiency)  of revenue over expenses
reported in the  accompanying  statement of  operations  with the (loss)  income
reported on the Federal income tax basis follows:

                                            1997       1996         1995
                                            ----       ----         ----
      Excess (deficiency) of revenue
        over expenses per statement
        of operations                   $(61,775)    $34,536    $(85,021)
      Decrease in depreciation            26,048      22,002       8,071
      Increase (decrease) in deferred
        rental income                        226       1,268      (2,583)
                                        --------     -------    --------

      (Loss) income for Federal income
         tax purposes                   $(35,501)    $57,806    $(79,533)
                                        ========     =======    ========
NOTE F - RELATED PARTY TRANSACTIONS
-----------------------------------

      At December  31, 1997 and 1996,  due to the  general  partner  consists of
development  advances  totaling  $1,072,952.  These  advances  are  non-interest
bearing and payable from proceeds upon the sale or refinancing of the project as
defined in the Partnership agreement.

      Management  fees  of 4% of  gross  receipts  are  paid  to CMJ  Management
Company,  Inc.,  an  affiliate  of the  general  partner,  for its  services  as
management agent to the project,  pursuant to a management agreement approved by
MHFA.  Such fees  amounted to  $63,958,  $63,511 and $63,546 for the years ended
December 31, 1997,  1996 and 1995,  respectively.  In addition,  CMJ  Management
Company,  Inc.,  received  incentive  management  fees of  $68,655,  $29,375 and
$45,390 for the years ended December 31, 1997, 1996 and 1995 respectively.

      CMJ Management Company,  Inc., an affiliate of the general partner,  makes
monthly  expenditures  (primarily  payroll,  central office  accounting,  direct
marketing and insurance costs) on behalf of the Partnership which are reimbursed
the following month.
<PAGE>

NOTE G - CONCENTRATION OF CREDIT RISK
-------------------------------------

      The Partnership  maintains operating cash balances,  including  repurchase
agreements and security deposits held in trust with major financial institutions
and its funded  reserves  with the  mortgage  lender.  The  Partnership  has not
experienced  any losses with  respect to bank  balances in excess of  government
provided  insurance.  Management  believes that no significant  concentration to
credit risk exists with respect to these cash balances as of December 31, 1997.

<PAGE>



                         INDEPENDENT AUDITORS' REPORT



To the Partners
South Laurel Apartments
    Limited Partnership

      We have audited the accompanying balance sheets of South Laurel Apartments
Limited Partnership as of December 31, 1997 and 1996, and the related statements
of operations,  partners'  deficit and cash flows for each of the three years in
the  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 audit 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 South Laurel  Apartments
Limited  Partnership  as of December  31, 1997 and 1996,  and the results of its
operations,  the changes in partners' deficit and its cash flows for each of the
three years in the period ended December 31, 1997, in conformity  with generally
accepted accounting principles.


                         /s/ Reznick Fedder & Silverman
                             --------------------------
                             REZNICK FEDDER & SILVERMAN



Baltimore, Maryland
January 27, 1998


<PAGE>


                 South Laurel Apartments Limited Partnership

                                BALANCE SHEETS

                          December 31, 1997 and 1996

                                    ASSETS
                                                     1997         1996
                                                     ----         ----

 CURRENT ASSETS
   Cash and cash equivalents                      $  234,973   $   155,483
   Accounts receivable                                33,057        64,339
   Other receivables                                  11,258         9,324
   Prepaid expenses                                  152,302       158,653
                                                  ----------   -----------

      Total current assets                           431,590       387,799

 RESTRICTED DEPOSITS AND FUNDED RESERVES
   Tenants' security deposits                        111,904       107,903
   Mortgage escrow deposits                          160,348       183,239
   Reserve for replacement                           115,619       144,890
                                                  ----------   -----------

                                                     387,871       436,032

 PROPERTY AND EQUIPMENT, net of accumulated
   depreciation of $6,871,824 and $6,404,117       8,546,454     8,876,209

 DEFERRED FINANCING COSTS, net of accumulated
   amortization of $185,596 and $173,434             325,130       337,292
                                                  ----------   -----------

      Total assets                                $9,691,045   $10,037,332
                                                  ==========   ===========

                       LIABILITIES AND PARTNERS' DEFICIT

 CURRENT LIABILITIES
   Current maturities of mortgage payable         $  153,608   $   142,542
   Accounts payable and accrued expenses              81,431       139,704
   Accrued interest payable                           74,028        74,919
   Rent deferred credits                              11,392        23,237
   Deferred income - laundry                          35,000        40,000
                                                  ----------   -----------

      Total current liabilities                      355,459       420,402

 LONG-TERM LIABILITIES
   Mortgage payable, less current maturities      11,690,911    11,844,519
   Due to general partner                            645,989       645,989
   Tenants' security deposits                        111,904       104,816
                                                  ----------   -----------

      Total liabilities                           12,804,263    13,015,726

 PARTNERS' DEFICIT                                (3,113,218)   (2,978,394)
                                                  ----------   -----------

      Total liabilities and partners' deficit     $9,691,045   $10,037,332
                                                  ==========   ===========

                      See notes to financial statements


<PAGE>


                  South Laurel Apartments Limited Partnership

                           STATEMENT OF OPERATIONS

                 Years ended December 31, 1997, 1996 and 1995

                                               1997        1996        1995
                                               ----        ----        ----

 Revenue
   Rental income                           $4,298,989  $4,246,199  $4,188,172
   Vacancies                                 (306,701)   (223,408)   (210,793)
   Financial revenue                           18,629      16,422      27,955
   Other income                               109,369      98,411      87,625
                                           ----------  ----------  ----------

      Total revenue                         4,120,286   4,137,624   4,092,959

 Expenses
  Operating expenses
   Marketing                                  148,625      73,482      56,439
   Administration                             334,976     375,096     368,243
   Utilities                                  485,153     505,851     556,935
   Management fee                             214,497     213,145     215,298
   Maintenance and repairs                    810,621   1,031,681     783,968
   Salaries                                   484,608     481,739     471,061
   Insurance                                   79,520      89,852      68,236
   Real estate taxes                          260,632     259,349     264,590
                                           ----------  ----------  ----------

      Total operating expenses              2,818,632   3,030,195   2,784,770

  Nonoperating expenses
   Interest                                   893,305     903,638     913,226
   Mortgage insurance premium                  59,553      60,243      60,882
   Depreciation and amortization              479,869     467,072     445,511
   Incentive management fee                         -           -         806
   Miscellaneous financial expenses             3,750       3,710       4,142
                                           ----------  ----------  ----------

      Total nonoperating expenses           1,436,477   1,434,663   1,424,567
                                           ----------  ----------  ----------

      Total expenses                        4,255,109   4,464,858   4,209,337
                                           ----------  ----------  ----------

 EXCESS OF EXPENSES OVER REVENUE           $ (134,823) $ (327,234) $ (116,378)
                                           ==========  ==========  ==========













                       See notes to financial statements


<PAGE>


                  South Laurel Apartments Limited Partnership

                       STATEMENTS OF PARTNERS' DEFICIT

                 Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>


                                                  Special       Class A       Class B
                                    General       Limited       Limited       Limited
                                    Partners      Partners      Partner       Partners        Total
                                    --------      --------      -------       --------        -----
<S>                                 <C>           <C>           <C>           <C>             <C>


Partners' deficit,
   December 31, 1994               $(101,603)   $(1,257,548)  $  (614,534)    $(486,903)    $(2,460,588)

Distributions                           (742)        (2,967)      (63,065)       (7,420)        (74,194)

Excess of expenses over revenue       (1,164)        (4,655)      (98,921)      (11,638)       (116,378)

                                   ---------    -----------   -----------     ---------     -----------

Partners' deficit,
   December 31, 1995                (103,509)    (1,265,170)     (776,520)     (505,961)     (2,651,160)

Excess of expenses over revenue       (3,272)       (13,089)     (278,150)      (32,723)       (327,234)
                                   ---------    -----------   -----------     ----------    -----------

Partners' deficit,
   December 31, 1996                (106,781)    (1,278,259)   (1,054,670)     (538,684)     (2,978,394)

Excess of expenses over revenue       (1,348)        (5,394)     (114,600)      (13,482)       (134,824)
                                   ---------    -----------   -----------     ----------    -----------

Partners' deficit,
   December 31, 1997               $(108,129)   $(1,283,653)  $(1,169,270)   $ (552,166)    $(3,113,218)
                                   =========    ===========   ===========    ==========     ===========

Profit and loss sharing percentage        1%             4%           85%           10%            100%
                                          =              =            ==            ==             ===
</TABLE>






















                      See notes to financial statements


<PAGE>


                  South Laurel Apartments Limited Partnership

                           STATEMENTS OF CASH FLOWS

                 Years ended December 31, 1997, 1996 and 1995

                                              1997          1996      1995
                                              ----          ----      ----

 Cash flows from operating activities
   Rental income received                  $4,011,723  $4,023,207  $3,970,997
   Interest received                           15,309      13,441      21,737
   Other income received                      102,435      94,716      82,130
   Administrative expenses paid              (671,622)   (624,524)   (616,037)
   Management fees paid                      (214,497)   (213,145)   (215,298)
   Utilities paid                            (492,180)   (516,504)   (543,544)
   Maintenance and repairs expenses paid   (1,113,418) (1,286,408) (1,026,412)
   Real estate taxes paid                    (260,467)   (252,822)   (265,876)
   Payroll taxes paid                         (39,245)    (45,010)    (45,663)
   Property insurance paid                    (44,875)    (47,772)    (46,696)
   Other taxes and insurance paid             (34,645)    (42,796)    (36,565)
   Mortgage insurance paid                    (59,158)    (60,243)     (1,465)
   Interest paid on mortgage                 (894,196)   (904,465)   (913,993)
   Miscellaneous financial expenses paid       (3,750)     (3,710)     (4,142)
   Decrease (increase) in mortgage escrow
      deposits                                 22,891     (24,153)     11,980
   Mortgagor entity expenses paid                   -           -        (806)
   Net security deposits received               3,088       1,129      10,659
                                            ---------   ----------  ---------

      Net cash provided by operating
        activities                            327,393      110,941    381,006
                                            ---------   ----------  ---------

 Cash flows from investing activities
   Additions to property and equipment       (137,952)    (141,563)  (270,501)
   Deposits to reserve for replacements       (52,520)     (52,520)   (52,520)
   Withdrawals from reserve for replacements   85,111       88,357     91,859
                                            ---------   ----------  ---------

      Net cash used in investing activities  (105,361)    (105,726)  (231,162)
                                            ---------   ----------  ---------

 Cash flows from financing activities
   Mortgage principal payments               (142,542)    (132,273)  (122,744)
   Distributions to partners                        -            -    (74,194)
                                            ---------   ----------  ---------

      Net cash used in financing activities  (142,542)    (132,273)  (196,938)
                                            ---------   ----------  ---------
      NET INCREASE (DECREASE) IN
             CASH AND CASH EQUIVALENTS         79,490    (127,058)    (47,094)

 Cash and cash equivalents, beginning         155,483      282,541    329,635
                                            ---------   ----------  ---------

 Cash and cash equivalents, ending          $ 234,973   $  155,483  $ 282,541
                                            =========   ==========  =========






                       See notes to financial statements


<PAGE>


                  South Laurel Apartments Limited Partnership

                     STATEMENTS OF CASH FLOWS (CONTINUED)

                 Years ended December 31, 1997, 1996 and 1995

                                               1997        1996      1995
                                               ----        ----      ----

  Reconciliation of excess of expenses
    over revenue to net cash provided
    by operating activities
  Excess of expenses over revenue           $(134,824)  $(327,234)  $ (116,378)
  Adjustments to reconcile excess of
   expenses over revenue to net cash
   provided by operating activities
   Depreciation                               467,707     454,910      433,349
   Amortization                                12,162      12,162       12,162
   Interest earned on reserve for
     replacements                              (3,320)     (2,981)      (6,218)
   Changes in assets and liabilities
      Decrease (increase) in tenant accounts
        receivable                             31,282      33,847      (30,976)
      Decrease (increase) in accounts
        receivable - other                     (1,934)      1,305         (495)
      Decrease in prepaid expenses              6,351      12,513       43,106
      Decrease (increase) in mortgage
        escrow deposit                         22,891     (24,153)      10,659
      (Decrease) increase in accounts payable
        and accrued expenses                  (58,273)    (11,299)       4,990
      Decrease in accrued interest payable       (891)       (827)        (767)
      Tenants' security deposits received -
        net                                     3,087       1,129       11,980
      (Decrease) increase in rent - deferred
        credits                               (11,845)    (33,431)      24,594
      Decrease in deferred laundry income      (5,000)     (5,000)      (5,000)
                                            ---------   ---------   ----------

        Net cash provided by operating
          activities                       $  327,393   $ 110,941   $  381,006
                                           ==========   =========   ==========
























                      See notes to financial statements




<PAGE>


                 South Laurel Apartments Limited Partnership

                        NOTES TO FINANCIAL STATEMENTS

                       December 31, 1997, 1996 and 1995


NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
--------------------------------------------------------------------

      South Laurel Apartments  Limited  Partnership (the Partnership) was formed
as a limited  partnership  under the laws of the State of  Maryland  on June 30,
1983, for the purpose of  constructing  and operating a rental  housing  project
under Section 221(d)(4) of the National Housing Act. The project consists of 520
units located in Laurel,  Maryland, and is currently operating under the name of
Villages at Montpelier.  All leases between the  Partnership  and the tenants of
the property are operating leases.

      Cash  distributions are limited by agreements  between the Partnership and
HUD to the extent of surplus cash as defined by HUD.

Use of Estimates
----------------

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

Cash and Cash Equivalents
-------------------------

      Cash and cash equivalents  consist of cash and repurchase  agreements with
maturities  of  three  months  or less  when  acquired,  stated  at  cost  which
approximates fair value.

Property and Equipment
----------------------

      Property and equipment are carried at cost.  Depreciation  is provided for
in amounts  sufficient  to relate the cost of  depreciable  assets to operations
over  their  estimated  service  lives by use of the  straight-line  method  for
financial  reporting  purposes.  For income tax purposes,  accelerated lives and
methods are used.

Deferred Financing Costs
------------------------

      Deferred financing costs are amortized over the term of the mortgage using
the straight-line method.

Rental Income
-------------

      Rental  income is  recognized  as  rentals  become  due.  Rental  payments
received in advance are deferred until earned.

Income Taxes
------------

      No  provision  or benefit  for  income  taxes has been  included  in these
financial  statements  since  taxable  income or loss passes  through to, and is
reportable by, the partners individually.

NOTE B - RESTRICTED DEPOSITS AND FUNDED RESERVES
------------------------------------------------

      At December 31, 1997 and 1996, the Partnership  maintained tenant security
deposits of $111,904 and $107,903 in interest-bearing escrow bank accounts which
are carried at cost and approximate fair value.

      The  Partnership  also has a reserve  for  replacements  and escrow  funds
totaling $275,967 and $328,129 at December 31, 1997 and 1996,  respectively,  on
deposit   with   Reilly   Mortgage   Group,   Inc.   These  funds  are  held  in
interest-bearing  bank accounts and a money market  account which are carried at
cost and approximate fair value.

NOTE C - MORTGAGE PAYABLE
-------------------------

      The mortgage is insured by the Federal  Housing  Administration  (FHA) and
collateralized by a deed of trust on the rental property. The mortgage, which is
due December 1, 2023, is payable in equal monthly  installments of principal and
interest  totaling  $86,395  and  bears  interest  at a rate of  7.5%.  Interest
incurred during 1997, 1996 and 1995 amounted to $893,305, $903,638 and $913,226,
respectively.

      Under  agreements  with the mortgage  lender and FHA, the  Partnership  is
required to make monthly escrow deposits for taxes, insurance and replacement of
partnership  assets,  and is subject to restrictions  as to operating  policies,
rental charges, operating expenditures and distributions to partners.

      The  liability  of the  Partnership  under the  mortgage is limited to the
underlying  value of the real  estate,  plus other  amounts  deposited  with the
lender.

      Aggregate  maturities of the mortgage payable for the five years following
December 31, 1997, are as follows:

               December 31,
               ------------
                  1998            $153,608
                  1999            $165,533
                  2000            $178,384
                  2001            $192,232
                  2002            $207,155

      Management  believes it is not practical to estimate the fair value of the
mortgage  payable insured by HUD because  programs with similar  characteristics
are not currently available to the Partnership.

NOTE D - HOUSING ASSISTANCE PAYMENT AGREEMENT
---------------------------------------------

      FHA  contracted  with the  Partnership  under Section 8 of Title II of the
Housing  and  Community  Development  Act of 1974,  to make  housing  assistance
payments to the Partnership on behalf of qualified tenants for 20% of the rental
units.  The agreement  expired July 31, 1997, and management has not applied for
an extension of the agreement. Total housing assistance payments received during
1997, 1996 and 1995 were $506,366, $686,293 and $677,108, respectively.

NOTE E - RELATED PARTY TRANSACTIONS
-----------------------------------

Due to General Partner
----------------------

      At December 31, 1997 and 1996, due to general  partner  consists of unpaid
development  advances of $645,989.  These advances are non-interest  bearing and
payable from  proceeds  upon sale or  refinancing  of the project  after certain
priority payments as defined in the Partnership agreement.

Management Fees
---------------

      Management  fees of  5.25% of gross  receipts  are paid to CMJ  Management
Company,  Inc.,  an  affiliate  of the  general  partner,  for its  services  as
management agent to the project pursuant to a management  agreement  approved by
HUD. Such fees  amounted to $214,497,  $213,145 and $215,298 for the years ended
December 31, 1997,  1996 and 1995,  respectively.  In addition,  CMJ  Management
Company, Inc., received incentive management fees of $-0-, $-0- and $806 for the
years ended December 31, 1997, 1996 and 1995, respectively.

Reimbursed Costs
----------------

      CMJ Management Company,  Inc., an affiliate of the general partner,  makes
monthly  expenditures  (primarily  payroll,  central office  accounting,  direct
marketing and insurance costs) on behalf of the Partnership which are reimbursed
the following month.

NOTE F - TAX BASIS LOSS
-----------------------

      The  reconciliation of the excess of expenses over revenue reported in the
accompanying  statement of operations with the loss reported on a Federal income
tax basis follows:

                                            1997        1996        1995
                                            ----        ----        ----

      Excess of expenses over revenue
         per statements of operations     $(134,824)  $(327,234)  $(116,378)
      (Decrease) increase in deferred
         rental income and laundry
         income                             (16,844)   (138,431)     19,593
      Additional depreciation and
         amortization                      (166,665)   (186,827)   (181,224)
                                          ---------   ---------   ---------

      Loss for Federal income tax
         purposes                         $(318,333)  $(652,492)  $(278,009)
                                          =========   =========   =========

NOTE G - CONCENTRATION OF CREDIT RISK
-------------------------------------

      The Partnership  maintains operating cash balances,  including  repurchase
agreements and security deposits held in trust with major financial institutions
and its funded  reserves  with the  mortgage  lender.  The  Partnership  has not
experienced  any losses with  respect to bank  balances in excess of  government
provided  insurance.  Management  believes that no significant  concentration to
credit risk exists with respect to these cash balances as of December 31, 1997.

<PAGE>

                         INDEPENDENT AUDITORS' REPORT



To the Partners
Marvin Gardens Associates

      We  have  audited  the  accompanying  balance  sheets  of  Marvin  Gardens
Associates  as of December  31, 1997 and 1996,  and the  related  statements  of
operations,  partners' deficit and cash flows for each of the three years in the
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 audit 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 Marvin Gardens Associates as
of December 31, 1997 and 1996, and the results of its operations, the changes in
partners'  deficit  and its cash flows for each of the three years in the period
ended  December 31, 1997,  in  conformity  with  generally  accepted  accounting
principles.




                         /s/ Reznick Fedder & Silverman
                             --------------------------
                             REZNICK FEDDER & SILVERMAN


Baltimore, Maryland
January 28, 1998


<PAGE>


                          Marvin Gardens Associates

                                BALANCE SHEETS

                          December 31, 1997 and 1996

                                    ASSETS
                                                      1997             1996
                                                      ----             ----

 CURRENT ASSETS
   Cash                                           $   30,259       $   21,173
   Accounts receivable                                 3,024            1,020
   Accounts receivable - tenant subsidy                1,441                -
   Prepaid expenses                                    4,022            6,532
                                                  ----------       ----------

      Total current assets                            38,746           28,725

 RESTRICTED DEPOSITS AND FUNDED RESERVES
   Tenant security deposits                            9,989            9,682
   Real estate tax impound fund                        7,190            6,290
   Replacement reserve fund                          118,306          138,463
   Insurance impound fund                             10,794            5,771
   Interest income receivable - impounds               1,665            1,206
                                                  ----------       ----------

                                                     147,944          161,412

 PROPERTY AND EQUIPMENT, net of accumulated
   depreciation of $1,112,978 and $1,038,242       1,308,333        1,376,899

 DEFERRED FINANCING COSTS, net of accumulated
   amortization of $20,945 and $19,572                25,424           26,797
                                                  ----------       ----------

      Total assets                                $1,520,447       $1,593,833
                                                  ==========       ==========

                       LIABILITIES AND PARTNERS' DEFICIT

 LIABILITIES
   Current maturities of mortgage payable         $   54,555       $   50,299
   Accounts payable                                   15,073           15,506
   Accrued expenses                                    5,063            3,947
   Deferred rental income                                366              264
                                                  ----------       ----------

      Total current liabilities                       75,057           70,016

 Mortgage payable, less current maturities         1,556,072        1,610,628
 Due to general partner                              194,019          194,019
 Tenants' security deposits                            7,217            7,105
                                                  ----------       ----------

      Total liabilities                            1,832,365        1,881,768

 PARTNERS' DEFICIT                                  (311,918)        (287,935)
                                                  ----------       ----------

      Total liabilities and partners' deficit     $1,520,447       $1,593,833
                                                  ==========       ==========

                       See notes to financial statements


<PAGE>


                          Marvin Gardens Associates

                           STATEMENT OF OPERATIONS

                       December 31, 1997, 1996 and 1995


                                                1997        1996       1995
                                                ----        ----       ----
 Revenue
   Rental income                             $410,401    $410,364   $409,395
   Vacancies                                   (1,496)     (1,639)    (1,533)
   Financial revenue                            7,742       6,815      7,817
   Other income                                 8,405       4,321      3,174
                                             --------    --------   --------

      Total revenue                           425,052     419,861    418,853

 Expenses
  Operating expenses
   Administration                              25,512      17,356     15,866
   Utilities                                   29,201      23,833     27,992
   Management fee                              17,738      17,533     17,052
   Maintenance and repairs                     75,504      51,999     73,953
   Salaries                                    56,766      59,441     57,141
   Insurance                                    8,102       8,378      7,839
   Real estate taxes                           22,556      22,271     21,824
                                             --------    --------   --------

      Total operating expenses                235,379     200,811    221,667

 Nonoperating expenses
   Interest                                   133,514     137,438    141,056
   Depreciation and amortization               76,109      75,338     74,377
   Incentive management fee                         -           -     12,090
                                             --------    --------   --------

      Total nonoperating expenses             209,623     212,776    227,523
                                             --------    --------   --------
      Total expenses                          445,002     413,587    449,190
                                             --------    --------   --------

      EXCESS (DEFICIENCY) OF
          REVENUE OVER EXPENSES              $(19,950)   $  6,274   $(30,337)
                                             ========    ========   ========










                       See notes to financial statements


<PAGE>


                          Marvin Gardens Associates

                       STATEMENTS OF PARTNERS' DEFICIT

                       December 31, 1997, 1996 and 1995

<TABLE>
<CAPTION>

                                                   Special
                                     General       Limited      Limited
                                     Partners      Partners     Partner      Total
                                     --------      --------     -------      -----
<S>                                  <C>           <C>           <C>         <C>

 Balance, December 31, 1994         $(8,282)      $(67,248)     $(160,129)   $(235,659)

 Distributions                         (282)        (1,129)       (26,802)     (28,213)

 Excess of expenses over revenue       (303)        (1,214)       (28,820)     (30,337)
                                    -------       --------      ---------    ---------

 Balance, December 31, 1995          (8,867)       (69,591)      (215,751)    (294,209)

 Excess of revenue over expenses         63            251          5,960        6,274
                                    -------       --------      ---------    ---------

 Balance, December 31, 1996          (8,804)       (69,340)      (209,791)    (287,935)

 Distributions                          (40)          (161)        (3,832)      (4,033)

 Excess of expenses over revenue       (199)          (798)       (18,953)     (19,950)
                                    -------       --------      ---------    ---------

 Balance, December 31, 1997         $(9,043)      $(70,299)     $(232,576)   $(311,918)
                                    =======       ========      =========    =========

 Profit and loss sharing percentage      1%             4%            95%         100%
                                         =              =             ==          ===

</TABLE>























                       See notes to financial statements


<PAGE>


                          Marvin Gardens Associates

                           STATEMENTS OF CASH FLOWS

                       December 31, 1997, 1996 and 1995


                                                1997        1996        1995
                                                ----        ----        ----

 Cash flows from operating activities
   Rental income received                    $405,562    $409,972    $409,707
   Interest received                            1,256       1,011       1,797
   Other income received                        8,405       4,321       3,074
   Administrative expenses paid               (25,512)    (17,356)    (15,866)
   Management fees paid                       (17,738)    (17,533)    (16,952)
   Utilities paid                             (28,085)    (23,833)    (26,892)
   Salaries and wages paid                    (52,567)    (46,384)    (43,690)
   Maintenance and repairs expenses paid      (75,937)    (51,326)    (74,165)
   Real estate taxes paid                     (22,556)    (22,271)    (21,824)
   Payroll taxes paid                          (4,199)    (13,057)    (13,281)
   Property and other insurance paid           (5,592)     (8,267)     (8,436)
   Interest paid on mortgage                 (133,514)   (137,438)   (141,056)
   (Increase) decrease in real estate tax
      impound fund                               (900)       (162)        191
   Incentive management fee paid                    -           -     (12,090)
   Increase in insurance impound fund          (5,023)     (1,581)       (288)
   Net security deposits paid                    (195)       (296)       (189)
                                             --------    --------    --------

      Net cash provided by operating
        activities                             43,405      75,800      40,040
                                             --------    --------    --------

 Cash flows from investing activities
   Additions to property and equipment         (6,170)     (7,425)    (32,836)
   Deposits to reserve for replacements       (16,128)    (16,128)    (16,064)
   Withdrawals from reserve for
     replacements                              42,312           -      29,398
                                             --------    --------    --------

      Net cash provided by (used in)
        investing activities                   20,014     (23,553)    (19,502)
                                             --------    --------    --------


 Cash flows from financing activities
   Repayment of mortgage payable              (50,300)    (46,375)    (42,757)
   Distributions                               (4,033)          -     (28,213)
                                             --------    --------    --------

      Net cash used in financing activities   (54,333)    (46,375)    (70,970)
                                             --------    --------    --------

   NET INCREASE (DECREASE) IN CASH              9,086       5,872     (50,432)

 Cash and cash equivalents, beginning          21,173      15,301      65,733
                                             --------    --------    --------

 Cash and cash equivalents,  ending          $ 30,259    $ 21,173    $ 15,301
                                             ========    ========    ========


                       See notes to financial statements


<PAGE>


                          Marvin Gardens Associates

                     STATEMENTS OF CASH FLOWS (CONTINUED)

                       December 31, 1997, 1996 and 1995


                                                1997        1996        1995
                                                ----        ----        ----

 Reconciliation of excess (deficiency) of
 revenue over expenses to net cash
 provided by operating activities
   Excess  (deficiency)  of revenue
     over  expenses                          $ (19,950)     $  6,274 $  (30,337)
   Adjustments to reconcile excess
     (deficiency) of revenue over
     expenses to net cash provided
     by operating activities
   Depreciation                                 74,736        73,965     73,037
   Amortization of deferred financing costs      1,373         1,373      1,340
   Interest earned on reserve for
     replacements                               (6,027)       (5,796)    (6,020)
   Changes in assets and liabilities:
     (Increase) decrease in accounts
       receivable - tenant subsidy              (1,441)        3,221       (185)
     Increase in accounts receivable            (2,004)         (183)       (25)
     Increase in interest income
       receivable -impounds                       (459)           (8)      (100)
     Decrease (increase) in prepaid expenses     2,510           111       (597)
     (Increase) decrease in real estate
       tax impound fund                           (900)         (162)       191
     Increase in insurance impound fund         (5,023)       (1,581)      (288)
     (Decrease) increase in accounts
       payable - trade                            (433)          967        803
     Increase (decrease) in accrued expenses     1,116          (294)       355
     Decrease (increase) in deferred rent
       credits                                     102        (1,791)     2,055
     Net security deposits paid                   (195)         (296)      (189)
                                             ---------      -------- ----------

        Net cash provided by operating
           activities                        $  43,405      $ 75,800 $   40,040
                                             =========      ======== ==========


















                       See notes to financial statements



<PAGE>


                          Marvin Gardens Associates

                        NOTES TO FINANCIAL STATEMENTS

                       December 31, 1997, 1996 and 1995



NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
--------------------------------------------------------------------

      Marvin  Gardens  Associates  (the  Partnership)  is a  California  limited
partnership  which commenced  operations in February 1983. The Partnership  owns
and  operates a 37-unit  rental  housing  project  (the  Project).  The  Project
operates under Section 8 of the National  Housing Act and,  therefore,  receives
monthly  rental  subsidies  from  the  U.S.  Department  of  Housing  and  Urban
Development  (HUD).  The agreement  expires in July 2003,  and has two five year
renewal  options.  For the years ended December 31, 1997, 1996 and 1995,  rental
subsidies   for  the  Project   totaled   $328,830,   $324,129,   and  $337,072,
respectively. All leases between the Partnership and the tenants of the property
are operating leases.

      Cash  distributions are limited by agreements  between the Partnership and
the California  Housing  Finance Agency (CHFA) to $20,151 per year to the extent
of surplus cash and stated equity, as defined by CHFA. Undistributed amounts are
cumulative  and may be  distributed  in  subsequent  years if future  operations
provide surplus cash in excess of current requirements.

Use of Estimates
----------------

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

Property and Equipment
----------------------

      Property and equipment are carried at cost. The  Partnership  provides for
depreciation by use of the  straight-line  method over estimated useful lives as
follows: buildings, 30 years and equipment, 3-8 years.

Deferred Financing Costs
------------------------

      Deferred  financing costs are amortized by the  straight-line  method over
the life of the related debt.

Rental Income
-------------

      Rental  income is  recognized  as  rentals  become  due.  Rental  payments
received in advance are deferred until earned.

Income Taxes
------------

      No  provision  or benefit  for  income  taxes has been  included  in these
financial  statements  since  taxable  income or loss passes  through to, and is
reportable by, the partners individually.

NOTE B - RESTRICTED DEPOSITS AND FUNDED RESERVES
------------------------------------------------

      At December 31, 1997 and 1996, the Partnership  maintained tenant security
deposits of $9,989 and $9,682, respectively,  in an interest bearing escrow bank
account and a certificate  of deposit which are carried at cost and  approximate
fair value.

      The  Partnership  also has a reserve  for  replacements  and escrow  funds
totalling $137,955 and $151,730 at December 31, 1997 and 1996, respectively,  on
deposit with CHFA.  These funds are held in interest bearing bank accounts which
are carried at cost and approximate fair value.

NOTE C - MORTGAGE PAYABLE
-------------------------

      The mortgage  payable  represents a mortgage from the CHFA which is due on
June 1, 2013, and is  collateralized  by a deed of trust on the rental  property
and the CHFA has been granted a security interest in rental subsidies. The terms
of the mortgage require monthly  principal and interest  payments of $15,310 and
bear interest at the rate of 8.15%.  Interest charged to operations during 1997,
1996 and 1995 amounted to $133,514, $137,438 and $141,056,  respectively.  Terms
of the mortgage  agreement also require  monthly  escrow  deposits to be made to
fund real estate tax, insurance, and a replacement reserve account.

      The  liability  of the  Partnership  under the  mortgage is limited to the
underlying  value of the real  estate,  plus other  amounts  deposited  with the
lender.

      Aggregate  maturities of the mortgage payable for the five years following
December 31, 1997, are as follows:

                   December 31,
                   ------------

                       1998        $54,555
                       1999        $59,171
                       2000        $64,178
                       2001        $69,908
                       2002        $75,498

      Management  believes it is not practical to estimate the fair value of the
mortgage payable to CHFA because programs with similar  characteristics  are not
currently available to the Partnership.

NOTE D - RECONCILIATION OF FINANCIAL STATEMENT INCOME (LOSS) TO TAX BASIS LOSS
------------------------------------------------------------------------------

      The  reconciliation  of the excess  (deficiency)  of revenue over expenses
reported in the  accompanying  statements of operations with the loss reportable
on a Federal  income tax basis for the years ended  December 31, 1997,  1996 and
1995, are as follows:

                                                1997        1996        1995
                                                ----        ----        ----

      Excess (deficiency) of revenue
        over expenses per
        statements of operations            $  (19,950)  $   6,274   $ (30,337)
      Additional depreciation for
        tax purposes                           (11,448)    (13,924)    (12,556)
      Deferred rental income adjustments           102      (1,790)      2,055
                                            ----------   ---------   ---------

      Loss for Federal income tax purposes  $  (31,296)  $  (9,440)  $ (40,838)
                                            ==========   =========   =========

NOTE E - RELATED PARTY TRANSACTIONS
-----------------------------------

      At December 31, 1997 and 1996, due to developer/general  partner consisted
of development advances of $194,019. These advances are non-interest bearing and
payable from  proceeds  upon sale or  refinancing  of the Project  after certain
priority payments as defined in the Partnership agreement.

      The Partnership has a contractual management agreement with CMJ Management
Company,  Inc.,  an  affiliate  of the  general  partner,  to  provide  property
management services for the Project.  CMJ Management Company,  Inc. has hired an
unaffiliated  management  agent to provide those  services on its behalf.  Total
management  fees paid for each of the years ended  December 31,  1997,  1996 and
1995 were $17,738, $17,533 and $17,052, respectively.  Effective September 1994,
CMJ  Management  Company,  Inc.  receives  30% of the monthly fee which  totaled
$5,321,  $5,112 and $5,082 for the year ended December 31, 1997,  1996 and 1995,
respectively.  In addition,  CMJ Management  Company,  Inc.  received  incentive
management  fees totalling  $12,090 in 1995. No incentive  management  fees have
been incurred for 1997 and 1996.

NOTE F - CONCENTRATION OF CREDIT RISK
-------------------------------------

      The Partnership  maintains  operating cash balances and security  deposits
held in trust with major financial institutions and its funded reserves with the
mortgage lender.  The Partnership has not experienced any losses with respect to
bank balances in excess of government  provided  insurance.  Management believes
that no  significant  concentration  to credit risk exists with respect to these
cash balances as of December 31, 1997.


<PAGE>





                         INDEPENDENT AUDITORS' REPORT



To the Partners
Colonial Farms, Ltd.

      We have audited the accompanying balance sheets of Colonial Farms, Ltd. as
of  December  31,  1997 and 1996,  and the  related  statements  of  operations,
partners' deficit and cash flows for each of the three years in the 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 audit 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 Colonial Farms, Ltd. as of
December 31, 1997 and 1996,  and the results of its  operations,  the changes in
partners'  deficit  and its cash flows for each of the three years in the period
ended  December 31, 1997,  in  conformity  with  generally  accepted  accounting
principles.




                         /s/ Reznick Fedder & Silverman
                             --------------------------
                             REZNICK FEDDER & SILVERMAN


Baltimore, Maryland
February 6, 1998



<PAGE>


                             Colonial Farms Ltd.

                                BALANCE SHEETS

                          December 31, 1997 and 1996

                                    ASSETS
                                                      1997            1996
                                                      ----            ----

 CURRENT ASSETS
   Cash and cash equivalents                       $  72,579       $  136,724
   Rents receivable                                   12,634            4,624
   Prepaid expenses                                    3,021            9,446
                                                   ---------       ----------

      Total current assets                            88,234          150,794

 RESTRICTED DEPOSITS AND FUNDED RESERVES
   Tenants' security deposits                         23,520           22,193
   Real estate tax impound fund                       13,228           12,435
   Replacement reserve fund                          235,940          227,316
   Insurance impound fund                             16,164            9,510
   Reserve fund for operations                        41,172           41,139
   Interest income receivable - impounds               3,631            2,349
                                                  ----------       ----------

                                                     333,655          314,942

 PROPERTY AND EQUIPMENT, net of accumulated
   depreciation of $1,938,862 and $1,812,966       2,164,787        2,269,317

 DEFERRED FINANCING COSTS, net of accumulated
   amortization of $35,863 and $33,586                39,904           42,181
                                                  ----------       ----------

      Total assets                                $2,626,580       $2,777,234
                                                  ==========       ==========

                      LIABILITIES AND PARTNERS' DEFICITS

 LIABILITIES
   Current maturities of mortgage payable         $   84,159       $   76,827
   Accounts payable                                   21,127           31,634
   Accrued expenses                                   27,789           33,494
   Deferred rental income                                464              372
                                                  ----------       ----------

      Total current liabilities                      133,539          142,327

 Mortgage payable, less current maturities         2,628,942        2,713,101
 Due to general partner                              318,115          318,115
 Tenants' security deposits                           18,166           17,238
                                                  ----------       ----------

      Total liabilities                            3,098,762        3,190,781

 PARTNERS' DEFICIT                                  (472,182)        (413,547)
                                                  ----------       ----------

      Total liabilities and partners' deficit     $2,626,580       $2,777,234
                                                  ==========       ==========


                       See notes to financial statements

<PAGE>


                             Colonial Farms, Ltd.

                           STATEMENT OF OPERATIONS

                 Years ended December 31, 1997, 1996 and 1995


                                                1997        1996        1995
                                                ----        ----        ----

 Revenue
   Rental income                             $785,784    $786,180    $785,378
   Vacancies                                   (7,410)     (9,462)    (24,535)
   Financial revenue                           17,490      15,910      16,256
   Other income                                23,694      19,315      10,237
                                             --------    --------    --------

      Total revenue                           819,558     811,943     787,336

 Operating expenses
   Administrative                              34,428      29,578      22,779
   Utilities                                   34,619      32,942      31,659
   Management fee                              42,640      38,060      39,600
   Maintenance and repairs                    155,984     129,475     144,185
   Salaries                                    79,871      73,791      65,249
   Insurance                                   12,135      12,794      12,074
   Property taxes                              41,368      40,322      39,762
                                             --------    --------    --------

      Total operating expenses                401,045     356,962     355,308

  Nonoperating expenses
   Interest                                   244,011     258,803     264,913
   Depreciation and amortization              128,173     124,258     119,893
   Incentive management fee                     7,060       7,060      16,435
   Earned surplus reimbursement                69,666       2,610      63,571
                                             --------    --------    --------

      Total nonoperating expenses             448,910     392,731     464,812
                                             --------    --------    --------

      Total expenses                          849,955     749,693     820,120
                                             --------    --------    --------

      EXCESS (DEFICIENCY) OF
          REVENUE OVER EXPENSES              $(30,397)  $  62,250    $(32,784)
                                             ========   =========    ========














                       See notes to financial statements


<PAGE>


                             Colonial Farms, Ltd.

                       STATEMENTS OF PARTNERS' DEFICIT

                 Years ended December 31, 1997, 1996 and 1995

<TABLE>
<CAPTION>
                                                  Special
                                   General        Limited     Limited
                                   Partner        Partner     Partner     Total
                                   -------        -------     -------     -----
<S>                                <C>             <C>        <C>           <C>

 Balance, December 31, 1994        $(22,211)     $(92,943)   $(257,320)  $(372,474)

 Distributions                         (846)       (1,269)     (40,186)    (42,301)

 Excess of expenses over revenue       (656)         (983)     (31,145)    (32,784)
                                   --------      --------    ---------   ---------

 Balance, December 31, 1995         (23,713)      (95,195)    (328,651)   (447,559)

 Distributions                         (565)         (846)     (26,827)    (28,238)

 Excess of revenue over expenses      1,245         1,868       59,137      62,250
                                   --------      --------    ---------   ---------

 Balance, December 31, 1996         (23,033)      (94,173)    (296,341)   (413,547)

 Distributions                         (565)         (847)     (26,826)    (28,238)

 Excess of expenses over revenue       (608)         (912)     (28,877)    (30,397)
                                   --------      --------    ---------   ---------

 Balance, December 31, 1997        $(24,206)     $(95,932)   $(352,044)  $(472,182)
                                   ========      ========    =========   =========

 Profit and loss sharing percentage      2%            3%          95%        100%
                                         ==            ==          ===        ====


</TABLE>





















                       See notes to financial statements


<PAGE>


                             Colonial Farms, Ltd.

                           STATEMENTS OF CASH FLOWS

                 Years ended December 31, 1997, 1996 and 1995

                                                1997        1996        1995
                                                ----        ----        ----

 Cash flows from operating activities
   Rental income received                    $770,456    $778,056    $751,795
   Interest received                            5,597       5,311       5,901
   Other income received                       23,694      19,315      10,237
   Residual receipts reimbursement paid       (69,666)     (2,610)    (63,571)
   Administrative expenses paid               (34,427)    (29,578)    (22,779)
   Management fees paid                       (42,640)    (38,060)    (39,500)
   Utilities paid                             (40,324)    (32,942)    (33,372)
   Salaries and wages paid                    (67,643)    (64,278)    (56,258)
   Maintenance and repairs expenses paid     (166,492)   (120,190)   (141,608)
   Real estate taxes paid                     (41,368)    (40,322)    (39,762)
   Payroll taxes paid                         (12,228)     (9,513)     (8,116)
   Property and other insurance paid           (5,710)    (13,451)    (12,658)
   Interest paid on mortgage                 (244,011)   (258,803)   (264,913)
   Incentive management fee paid               (7,060)     (7,060)    (16,435)
   (Increase) decrease in reserve fund
      for operations                              (33)       (358)      2,697
   (Increase) decrease in real estate tax
      impound fund                               (793)      2,083      (1,007)
   Increase in insurance impound fund          (6,654)     (2,487)     (1,852)
   Net security deposits (paid) received         (399)        241        (407)
                                            ---------    --------   ---------

      Net cash provided by operating
        activities                             60,299     185,354      68,392
                                            ---------    --------   ---------

 Cash flows from investing activities
   Purchases of equipment                     (21,366)    (25,928)    (37,922)
   Deposits to reserve for replacements       (22,404)    (22,404)    (22,384)
   Withdrawals from reserve for
     replacements                              24,391      37,933      13,139
                                            ---------    --------   ---------

      Net cash used in investing
        activities                            (19,379)    (10,399)    (47,167)
                                            ---------    --------   ---------

 Cash flows from financing activities
   Repayment of mortgage payable              (76,827)    (70,134)    (64,024)
   Distributions                              (28,238)    (28,238)    (42,301)
                                            ---------    --------   ---------

      Net cash used in financing activities  (105,065)    (98,372)   (106,325)
                                            ---------    --------   ---------

      NET (DECREASE) INCREASE IN CASH AND
            CASH EQUIVALENTS                  (64,145)     76,583     (85,100)

 Cash and cash equivalents, beginning         136,724      60,141     145,241
                                            ---------    --------   ---------

 Cash and cash equivalents, ending          $  72,579   $ 136,724   $  60,141
                                            =========   =========   =========





                      See notes to financial statements


<PAGE>


                             Colonial Farms, Ltd.

                     STATEMENTS OF CASH FLOWS (CONTINUED)

                 Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>

                                                                1997        1996        1995
                                                                ----        ----        ----
<S>                                                          <C>        <C>         <C>

Reconciliation of excess (deficiency) of revenue over
   expenses to net cash provided by operating activities
   Excess (deficiency) of revenue over expenses             $  (30,397) $  62,250   $  (32,784)
   Adjustments to reconcile excess (deficiency) of
   revenue over expenses to net cash provided by
   operating activities
      Depreciation                                             125,896    121,981      117,616
      Amortization of deferred financial costs                   2,277      2,277        2,277
      Interest earned on reserve for replacements              (10,611)   (10,681)     (10,189)
      Changes in assets and liabilities
        (Increase) decrease in tenant accounts receivable       (8,010)     1,337       (2,275)
        Decrease (increase) in prepaid expenses                  6,425       (657)        (584)
        (Increase) decrease in interest income
           receivable - impounds                                (1,282)        82         (166)
        Net tenants' security deposits (paid) received            (399)       241         (407)
        (Increase) decrease in real estate tax impound fund       (793)     2,083       (1,007)
        Increase in insurance impound fund                      (6,654)    (2,487)      (1,852)
        Increase in reserve fund for operations                    (33)      (358)       2,697
        (Decrease) increase in accounts payable                (10,507)     9,525       (5,615)
        (Decrease) increase in accrued expenses                 (5,705)      (242)         406
        Increase in rent deferred credits                           92          3          275
                                                            ----------  ---------  -----------
            Net cash provided by operating activities       $   60,299  $ 185,354  $    68,392
                                                            ==========  =========  ===========


</TABLE>























                      See notes to financial statements


<PAGE>

                             Colonial Farms, Ltd.

                        NOTES TO FINANCIAL STATEMENTS

                       December 31, 1997, 1996 and 1995


NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
--------------------------------------------------------------------

      Colonial Farms, Ltd. (the Partnership) is a California limited partnership
which commenced operations in February 1983. The Partnership owns and operates a
100-unit residential project (the Project) located in Modesto,  California.  The
Project  operates  under  Section 8 of the National  Housing Act and  therefore,
receives monthly rental subsidies from the U.S.  Department of Housing and Urban
Development  (HUD).  The  agreement  expires  June 2002,  and has two  five-year
renewal  options.  For the years ended December 31, 1997, 1996 and 1995,  rental
subsidies for the Project totaled $579,485, $613,093 and $586,267, respectively.
All leases between the Partnership and the tenants of the property are operating
leases.

      Cash  distributions are limited by agreements  between the Partnership and
the California  Housing  Finance Agency (CHFA) to $35,299 per year to the extent
of surplus cash and stated equity, as defined by CHFA. Undistributed amounts are
cumulative  and may be  distributed  in  subsequent  years if future  operations
provide surplus cash in excess of current requirements.

Use of Estimates
----------------

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

Cash and Cash Equivalents
-------------------------

      Cash and cash  equivalents  include cash,  money market  accounts and U.S.
Treasury bills, with a maturity of three months or less when acquired, stated at
cost which approximate fair value.

Property and Equipment
----------------------

      Property and equipment are carried at cost. The  Partnership  provides for
depreciation by using the straight-line method over estimated useful lives.

Deferred Financing Costs
------------------------

      Deferred  financing costs are amortized by the  straight-line  method over
the life of the related debt.

Rental Income
-------------

      Rental  income is  recognized  as  rentals  become  due.  Rental  payments
received in advance are deferred until earned.

Income Taxes
------------

      No  provision  or benefit  for  income  taxes has been  included  in these
financial  statements  since  taxable  income or loss passes  through to, and is
reportable by, the partners individually.


NOTE B - RESTRICTED DEPOSITS AND FUNDED RESERVES
------------------------------------------------

      At December 31, 1997 and 1996, the Partnership  maintained tenant security
deposits of $23,520 and $22,193 in an interest bearing escrow bank account and a
certificate of deposit which are carried at cost and approximate fair value.

      The  Partnership  also has a reserve  for  replacements  and escrow  funds
totalling $310,135 and $292,749 at December 31, 1997 and 1996, respectively,  on
deposit with CHFA.  These funds are held in interest bearing bank accounts which
are carried at cost and approximate fair value.

NOTE C - MORTGAGE PAYABLE
-------------------------

      The mortgage payable  represents a permanent  mortgage from the CHFA which
is due on June 1, 2013, and is  collateralized  by a deed of trust on the rental
property and the CHFA has been granted a security  interest in rental subsidies.
The terms of the mortgage require annual interest of 9.15% and monthly principal
and interest  payments of $27,411.  Interest charged to operations  during 1997,
1996, and 1995 amounted to $244,011, $258,803, and $264,913, respectively. Terms
of the loan agreement  require that monthly escrow deposits be made to fund real
estate tax, insurance and replacement reserve escrow accounts.

      The  liability  of the  Partnership  under the  mortgage is limited to the
underlying  value of the real  estate,  plus other  amounts  deposited  with the
lender.

      Aggregate  maturities of the mortgage payable for the five years following
December 31, 1997, are as follows:

                        December 31,
                        ------------
                           1998       $   84,159
                           1999       $   92,191
                           2000        $ 110,990
                           2001        $ 110,637
                           2002        $ 121,186

      Management  believes it is not practical to estimate the fair value of the
mortgage payable to CHFA because programs with similar  characteristics  are not
currently available to the Partnership.

NOTE D - RECONCILIATION OF FINANCIAL  STATEMENT OF EXCESS  (DEFICIENCY) TO TAX
BASIS INCOME (LOSS)
-------------------------------------------------------------------------------

      The  reconciliation  of the excess  (deficiency)  of revenue over expenses
reported in the  statements of operations  with the (loss) income  reported on a
Federal income tax return for the years ended December 31, 1997,  1996, and 1995
follows:

                                                1997        1996        1995
                                                ----        ----        ----

(Deficiency) excess of revenue over
   expenses                                  $ (30,397)    $62,250    $(32,784)
Additional depreciation for tax purposes       (19,460)    (20,336)    (17,603)
Deferred rental income adjustments                  90           3         275
                                             ---------     -------    --------

(Loss) income for Federal income
  tax purposes                               $ (49,767)    $41,917    $(50,112)
                                             =========     =======    ========

NOTE E - RELATED PARTY TRANSACTIONS
-----------------------------------

      At December 31, 1997 and 1996, due to developer/general  partner consisted
of development advances of $318,115. These advances are non-interest bearing and
payable from  proceeds  upon sale or  refinancing  of the Project  after certain
priority payments as defined in the Partnership agreement.

      The Partnership has a contractual management agreement with CMJ Management
Company,  Inc.,  an  affiliate  of the  general  partner,  to  provide  property
management services for the Project.  CMJ Management Company,  Inc. has hired an
unaffiliated  management  agent to provide these  services on its behalf.  Total
management  fees for the years ended  December  31,  1997,  1996,  and 1995 were
$42,640, $38,060 and $39,600, respectively. CMJ Management Company, Inc. also is
entitled to receive an incentive  management  fee. For the years ended  December
31, 1997, 1996 and 1995,  incentive fees charged for the project totaled $7,060,
$7,060  and  $16,435,   respectively,  in  accordance  with  the  terms  of  the
supplemental management agreement.

NOTE F - CONCENTRATION OF CREDIT RISK
-------------------------------------

      The Partnership  maintains  operating cash balances and security  deposits
held in trust with major financial institutions and its funded reserves with the
mortgage lender.  The Partnership has not experienced any losses with respect to
bank balances in excess of government  provided  insurance.  Management believes
that no  significant  concentration  to credit risk exists with respect to these
cash balances as of December 31, 1997.


<PAGE>



                         INDEPENDENT AUDITORS' REPORT


To the Partners
Holbrook Apartments Company

      We have audited the  accompanying  balance  sheets of Holbrook  Apartments
Company  as of  December  31,  1997 and  1996,  and the  related  statements  of
operations,  partners' deficit and cash flows for each of the three years in the
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 audit 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 Holbrook Apartments Company
as of December 31, 1997 and 1996, and the results of its operations, the changes
in  partners'  deficit  and its cash  flows for each of the  three  years in the
period ended December 31, 1997, in conformity with generally accepted accounting
principles.





                         /s/ Reznick Fedder & Silverman
                             --------------------------
                             REZNICK FEDDER & SILVERMAN


Baltimore, Maryland
January 23, 1998





<PAGE>


                         Holbrook Apartments Company

                                BALANCE SHEETS

                          December 31, 1997 and 1996

                                    ASSETS
                                                            1997        1996
                                                            ----        ----

 CURRENT ASSETS
   Cash and cash equivalents                          $   507,878 $   631,608
   Accounts receivable                                      3,296       2,153
   Other receivables                                        9,640      28,548
   Prepaid expenses                                        16,022      17,641
   Other current assets                                         -         475
                                                      ----------- -----------

      Total current assets                                536,836     680,425

 RESTRICTED DEPOSITS AND FUNDED RESERVES
   Mortgage escrow deposits                                76,359      61,069
   Reserve for replacements                               458,768     444,420
                                                      ----------- -----------
                                                          535,127     505,489

 PROPERTY AND EQUIPMENT, net of accumulated
   depreciation of $4,160,211 and $3,905,567            5,462,169   5,664,784

 DEFERRED FINANCING COSTS, net of accumulated
   amortization of $222,158 and $208,617                  331,793     345,334
                                                      ----------- -----------

      Total assets                                    $ 6,865,925 $ 7,196,032
                                                      =========== ===========

                       LIABILITIES AND PARTNERS' DEFICIT

 CURRENT LIABILITIES
   Current maturities of mortgage payable             $   102,574 $    95,185
   Accounts payable and accrued expenses                   33,168     179,824
   Accrued interest payable                                45,949      46,543
   Rent deferred credits                                   11,559      15,274
                                                      ----------- -----------

      Total current liabilities                           193,250     336,826

 LONG-TERM LIABILITIES
   Mortgage payable, less current maturities            7,249,207    7,351,781
                                                      ----------- -----------

      Total liabilities                                 7,442,457   7,688,607

 PARTNERS' DEFICIT                                       (576,532)   (492,575)
                                                      ----------- -----------

      Total liabilities and partners' deficit         $ 6,865,925 $ 7,196,032
                                                      =========== ===========





                      See notes to financial statements


<PAGE>


                          Holbrook Apartments Company

                           STATEMENTS OF OPERATIONS

                 Years ended December 31, 1997, 1996 and 1995

                                                1997        1996        1995
                                                ----        ----        ----

 Revenue
   Rental income                           $2,079,319  $2,068,855  $2,062,798
   Vacancies                                   (4,727)     (1,985)       (486)
   Financial revenue                           35,842      27,267      34,734
   Other income                                 8,608       7,176       6,381
                                           ----------  ----------  ----------

      Total revenue                         2,119,042   2,101,313   2,103,427

 Expenses
  Operating expenses
   Marketing                                    1,789         366         208
   Administration                             132,704     126,269     120,673
   Utilities                                  112,614      85,403      77,662
   Management fee                              98,776      99,025      98,221
   Maintenance and repairs                    173,586     200,197     195,276
   Salaries                                   195,869     198,148     170,174
   Insurance                                   34,981      49,036      40,196
   Real estate taxes                          181,311     182,616     197,441
                                           ----------  ----------  ----------


      Total operating expenses                931,630     941,060     899,851

  Nonoperating expenses
   Interest                                   554,700     561,600     568,003
   Mortgage insurance premium                  36,979      37,438      37,865
   Depreciation and amortization              268,185     261,682     248,580
   Incentive management fee                   146,297     133,795     137,695
                                           ----------  ----------  ----------


      Total nonoperating expenses           1,006,161     994,515     992,143
                                           ----------  ----------  ----------

      Total expenses                        1,937,791   1,935,575   1,891,994
                                           ----------  ----------  ----------


      EXCESS OF REVENUE OVER
           EXPENSES                        $  181,251  $  165,738  $  211,433
                                           ==========  ==========  ==========













                      See notes to financial statements


<PAGE>


                          Holbrook Apartments Company

                       STATEMENTS OF PARTNERS' DEFICIT

                 Years ended December 31, 1997, 1996 and 1995


<TABLE>
<CAPTION>

                                           General        Limited
                                           Partner        Partner        Total
                                           -------        -------        -----
<S>                                       <C>             <C>            <C>


 Partners' deficit, December 31, 1994    $ (566,946)      $ 195,960     $ (370,986)

 Distributions                              (37,846)       (214,459)      (252,305)

 Excess of revenue over expenses             31,715         179,718        211,433
                                         ----------      ----------    -----------

 Partners' deficit, December 31, 1995      (573,077)        161,219       (411,858)

 Distributions                              (36,968)       (209,487)      (246,455)

 Excess of revenue over expenses             24,861         140,877        165,738
                                         ----------      ----------    -----------

 Partners' deficit, December 31, 1996      (585,184)         92,609       (492,575)

 Distributions                              (39,781)       (225,427)      (265,208)

 Excess of revenue over expenses             27,188         154,063        181,251
                                         ----------      ----------    -----------

 Partners' deficit, December 31, 1997    $(597,777)      $   21,245    $  (576,532)
                                         =========       ==========    ===========

 Profit and loss sharing percentage          15%               85%           100%
                                             ==                ==            ===

</TABLE>




















                      See notes to financial statements


<PAGE>


                          Holbrook Apartments Company

                           STATEMENTS OF CASH FLOWS

                 Years ended December 31, 1997, 1996 and 1995

                                                1997        1996        1995
                                                ----        ----        ----

 Cash flows from operating activities
   Rental income received                  $2,069,734  $2,083,642  $2,059,803
   Interest received                           15,185      13,786      14,645
   Other income received                       28,030           -       9,418
   Administrative expenses paid              (182,895)   (173,537)   (166,891)
   Management fees paid                       (98,776)    (99,025)    (98,221)
   Utilities paid                            (119,299)    (88,920)    (88,787)
   Maintenance and repairs expenses paid     (446,319)   (197,997)   (303,582)
   Real estate taxes paid                    (181,311)   (182,616)   (197,441)
   Payroll taxes paid                         (14,705)    (15,854)    (16,316)
   Property insurance paid                    (14,811)    (26,982)    (18,192)
   Other taxes and insurance paid             (18,631)    (21,339)    (22,335)
   Interest paid on mortgage                 (555,294)   (562,152)   (568,516)
   Mortgage insurance paid                    (36,899)    (37,367)    (37,797)
   (Increase) decrease in mortgage
      escrow deposits                         (15,290     (18,174)     10,330
   Mortgagor entity expenses paid            (146,297)   (133,795)   (137,695)
                                         ------------  ----------  ----------

      Net cash provided by operating
        activities                            282,422     539,670     438,423
                                         ------------  ----------  ----------

 Cash flows from investing activities
   Additions to property and equipment        (52,029)   (111,023)    (86,045)
   Deposits to reserve for replacements       (40,920)    (40,720)    (40,680)
   Withdrawals from reserve for
      replacements                             47,190      91,862           -
                                         ------------  ----------  ----------

      Net cash used in investing
        activities                            (45,759)    (59,881)   (126,725)
                                         ------------  ----------  ----------

 Cash flows from financing activities
   Repayment of mortgage payable              (95,185)    (88,328)    (81,964)
   Distributions paid to partners            (265,208)   (246,455)   (252,305)
                                         ------------  ----------  ----------

   Net cash used in financing activities     (360,393)   (334,783)   (334,269)
                                         ------------  ----------  ----------

      NET (DECREASE) INCREASE IN
            CASH AND CASH EQUIVALENTS        (123,730)    145,006     (22,571)

 Cash and cash equivalents, beginning         631,608     486,602     509,173
                                         ------------  ----------  ----------

 Cash and cash equivalents, ending       $    507,878  $  631,608  $  486,602
                                         ============  ==========  ==========








                      See notes to financial statements


<PAGE>


                          Holbrook Apartments Company

                     STATEMENTS OF CASH FLOWS (CONTINUED)

                 Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>

                                                             1997        1996        1995
                                                             ----        ----        ----
<S>                                                         <C>        <C>           <C>

 Reconciliation of excess of revenue over expenses to net
   cash provided by operating activities
   Excess of revenue over expenses                          $181,251    $165,738    $211,433
   Adjustments to reconcile excess of revenue over
   expenses to net cash provided by operating activities
     Depreciation                                            254,644     248,141     235,039
     Amortization of deferred financing costs                 13,541      13,541      13,541
     Interest earned on replacement reserves                 (20,618)     (8,912)    (20,089)
     Changes in assets and liabilities
      (Increase) Decrease in tenant accounts receivable       (1,143)      6,087      (2,200)
      Decrease in accounts receivable - HAP                        -           -         570
      Decrease (increase) in accounts receivable - other      18,908     (11,745)     (7,103)
      Decrease (increase) in prepaid expenses                  1,619         786        (263)
      (Increase) decrease in mortgage escrow deposits        (15,290)    (18,174)     10,330
      Decrease in other assets                                   475           -           -
      (Decrease) increase in accounts payable and
        accrued expenses                                    (146,656)    134,075      (1,443)
      Decrease in accrued interest payable                      (594)       (552)       (513)
      (Decrease) increase in rent-deferred credits            (3,715)     10,685        (879)
                                                            --------    --------    --------

         Net cash provided by operating activities          $282,422    $539,670    $438,423
                                                            ========    ========    ========

</TABLE>
























                      See notes to financial statements



<PAGE>




                        NOTES TO FINANCIAL STATEMENTS

                       December 31, 1997, 1996 and 1995

                          Holbrook Apartments Company




NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
--------------------------------------------------------------------

      Holbrook  Apartments  Company  (the  Partnership)  was formed as a limited
partnership  under the laws of the State of  Massachusetts in July 1981, for the
purpose of  constructing  and operating a rental  housing  project under Section
221(d)(4) of the National Housing Act. The project consists of 170 units located
in  Holbrook,  Massachusetts,  and is  currently  operating  under  the  name of
Holbrook  Apartments.  All leases between the Partnership and the tenants of the
property are operating leases.

      Cash  distributions are limited by agreements  between the Partnership and
HUD to the extent of surplus cash as defined by HUD.

Use of Estimates
----------------

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

Cash and Cash Equivalents
-------------------------

      Cash and cash equivalents  consist of cash and repurchase  agreements with
maturities  of three  months  or less  when  acquired,  stated  at  cost,  which
approximates fair value.

Property and Equipment
----------------------

      Property and equipment are carried at cost.  Depreciation  is provided for
in amounts  sufficient  to relate the cost of  depreciable  assets to operations
over  their  estimated  service  lives by use of the  straight-line  method  for
financial  reporting  purposes.  For income tax purposes,  accelerated lives and
methods are used.

Deferred Financing Costs
------------------------

      Deferred financing costs are amortized over the term of the mortgage using
the straight-line method.

Rental Income
-------------

      Rental  income is  recognized  as  rentals  become  due.  Rental  payments
received in advance are deferred until earned.

Income Taxes
------------

      No  provision  or benefit  for  income  taxes has been  included  in these
financial  statements  since  taxable  income or loss passes  through to, and is
reportable by, the partners individually.

NOTE B - RESTRICTED DEPOSITS AND FUNDED RESERVES
------------------------------------------------

      The  Partnership  has a  reserve  for  replacements  and  mortgage  escrow
deposits  totaling  $535,127  and  $505,489  at  December  31,  1997  and  1996,
respectively, on deposit with WMF/Huntoon, Paige Associates Limited. These funds
are held in  interest-bearing  money  market  accounts  and are carried at cost,
which approximates fair value.

NOTE C - MORTGAGE PAYABLE
-------------------------

      The mortgage is insured by the Federal  Housing  Administration  (FHA) and
collateralized by a deed of trust on the rental property. The mortgage, which is
due February 1, 2023, is payable in equal monthly  installments of principal and
interest  totaling  $54,207  and  bears  interest  at a rate of  7.5%.  Interest
incurred during December 31, 1997, 1996 and 1995, amounted to $554,700, $561,600
and $568,003, respectively.

      Under  agreements  with the mortgage  lender and FHA, the  Partnership  is
required to make monthly escrow deposits for taxes, insurance and replacement of
project assets, and is subject to restrictions as to operating policies,  rental
charges, operating expenditures and distributions to partners.

      The  liability  of the  Partnership  under the  mortgage is limited to the
underlying  value of the real  estate,  plus other  amounts  deposited  with the
lender.

      Aggregate  annual  maturities  of the mortgage  payable for the five years
following December 31, 1997, are as follows:

                     December 31,
                     ------------
                        1998      $102,574
                        1999      $110,538
                        2000      $119,119
                        2001      $128,366
                        2002      $138,331

      Management  believes it is not practical to estimate the fair value of the
mortgage  payable insured by HUD because  programs with similar  characteristics
are not currently available to the Partnership.

NOTE D - HOUSING ASSISTANCE PAYMENT AGREEMENT
---------------------------------------------

      FHA  contracted  with the  Partnership  under Section 8 of Title II of the
Housing  and  Community  Development  Act of 1974,  to make  housing  assistance
payments  to the  Partnership  on behalf of  qualified  tenants.  The  agreement
expires July 1, 2001. Total housing  assistance  payments  received during 1997,
1996 and 1995 were $1,565,374, $1,577,392, and $1,587,132, respectively.

NOTE E - MANAGEMENT AGREEMENT
-----------------------------

      Management  fees of  4.75% of gross  receipts  are paid to CMJ  Management
Company,  Inc.,  an  affiliate  of the  general  partner,  for its  services  as
management agent to the Project pursuant to a management  agreement  approved by
HUD.  Such fees  amounted  to  $98,776,  $99,025 and $98,221 for the years ended
1997, 1996 and 1995,  respectively.  In addition,  CMJ Management Company, Inc.,
received  incentive  management fees of $146,297,  $133,795 and $137,695 for the
years ended December 31, 1997, 1996 and 1995, respectively.

      CMJ Management Company,  Inc., an affiliate of the general partner,  makes
monthly  expenditures  (primarily  payroll,  central office  accounting,  direct
marketing and insurance costs) on behalf of the Partnership which are reimbursed
the following month.

NOTE F - TAX BASIS INCOME
-------------------------

      The  reconciliation  of  the  excess  of  revenue  over  expenses  in  the
accompanying  statements  of  operations  with the income  reported on a Federal
income tax basis follows:

                                                1997        1996        1995
                                                ----        ----        ----

      Excess of revenue over expenses
         per statement of operations         $  181,251  $  165,738  $  211,433
      Additional amortization of
         deferred costs                           8,393       8,393       8,393
      Increase (decrease) in deferred
         rental income                           (3,715)     10,688        (879)
      Additional depreciation                   138,197     (32,751)   (126,502)
                                             ----------  ----------  ----------

      Income for Federal income tax
       purposes                              $  324,126  $  152,068  $   92,445
                                             ==========  ==========  ==========

NOTE G - CONCENTRATION OF CREDIT RISK
-------------------------------------

      The Partnership  maintains operating cash balances,  including  repurchase
agreements,  with major financial  institutions and its funded reserves with the
mortgage lender.  The Partnership has not experienced any losses with respect to
bank balances in excess of government  provided  insurance.  Management believes
that no  significant  concentration  to credit risk exists with respect to these
cash balances as of December 31, 1997.