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

                                  FORM 10-K405

[x]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE 
     ACT OF 1934

     For the fiscal year ended      December 31, 1996
                               -------------------------------------------------

                                                        OR

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

     For the transition period from ______________ to_____________

     Commission file number  0-15460
                            --------


                       MCNEIL REAL ESTATE FUND XXVI, L.P.
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)


         California                                   33-0168395
--------------------------------------------------------------------------------
(State or other jurisdiction of                      (I.R.S. Employer
incorporation or organization)                        Identification No.)


             13760 Noel Road, Suite 600, LB70, Dallas, Texas, 75240
--------------------------------------------------------------------------------
         (Address of principal executive offices)            (Zip code)

Registrant's telephone number, including area code   (972)  448-5800
                                                  ------------------------------

Securities registered pursuant to Section 12(b) of the Act:   None
----------------------------------------------------------

Securities registered pursuant to Section 12(g) of the Act:  Limited partnership
                                                             units
----------------------------------------------------------

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,  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. [ ]

83,583,671 of the registrant's  86,530,671 limited partnership units are held by
non-affiliates.  The aggregate market value of units held by  non-affiliates  is
not determinable since there is no public trading market for limited partnership
units and transfers of units are subject to certain restrictions.

Documents Incorporated by Reference:        See Item 14, Page 38

                                TOTAL OF 40 PAGES

<PAGE>
                                     PART I

ITEM 1.      BUSINESS
-------      --------

ORGANIZATION
------------

McNeil Real Estate  Fund XXVI,  L.P.,  (the  "Partnership"),  formerly  known as
Southmark Equity Partners III, Ltd., was organized on March 4, 1985 as a limited
partnership under the provisions of the California  Revised Limited  Partnership
Act to acquire and operate  residential and commercial  properties.  The general
partner of the Partnership is McNeil Partners,  L.P. (the "General Partner"),  a
Delaware limited partnership,  an affiliate of Robert A. McNeil ("McNeil").  The
General Partner was elected at a meeting of limited  partners on March 30, 1992,
at which  time an amended  and  restated  partnership  agreement  (the  "Amended
Partnership  Agreement")  was  adopted.  Prior to March 30,  1992,  the  general
partner  of the  Partnership  was  Southmark  Investment  Group  86,  Inc.  (the
"Original General Partner"), a wholly-owned  subsidiary of Southmark Corporation
("Southmark").  The  principal  place of business  for the  Partnership  and the
General Partner is 13760 Noel Road, Suite 600, LB70, Dallas, Texas 75240.

On July 22, 1986, the  Partnership  registered  with the Securities and Exchange
Commission  ("SEC")  under the  Securities  Act of 1933 (File No.  33-5568)  and
commenced a public offering for sale of $90,000,000 of limited partnership units
("Units").  The Units represent  equity interests in the Partnership and entitle
the holders thereof to participate in certain  allocations and  distributions of
the Partnership. The sale of Units closed on July 21, 1987 with 86,553,913 Units
sold at one dollar each, or gross proceeds of  $86,553,913  to the  Partnership.
The Partnership  subsequently  filed a Form 8-A Registration  Statement with the
SEC and registered its Units under the Securities Exchange Act of 1934 (File No.
0-15460).  In  1995  and  1996,  4,930  and  15,312  Units,  respectively,  were
relinquished leaving 86,533,671 Units outstanding as of December 31, 1996.

SOUTHMARK BANKRUPTCY AND CHANGE IN GENERAL PARTNER
--------------------------------------------------

On July 14, 1989,  Southmark filed a voluntary petition for reorganization under
Chapter 11 of the U.S.  Bankruptcy Code.  Neither the  Partnership,  the General
Partner  nor  the  Original   General  Partner  were  included  in  the  filing.
Southmark's  reorganization  plan became  effective  August 10, 1990.  Under the
plan, most of Southmark's assets,  which included  Southmark's  interests in the
Original General Partner, were sold or liquidated for the benefit of creditors.

In  accordance  with  Southmark's  reorganization  plan,  Southmark,  McNeil and
various of their affiliates  entered into an asset purchase agreement on October
12, 1990,  providing for, among other things,  the transfer of control to McNeil
or his affiliates of 34 limited partnerships  (including the Partnership) in the
Southmark portfolio.

On February 14,  1991,  pursuant to the asset  purchase  agreement as amended on
that date,  McNeil Real Estate  Management,  Inc.  ("McREMI"),  an  affiliate of
McNeil,  acquired the assets relating to the property management and partnership
administrative  business of  Southmark  and its  affiliates.  On March 13, 1991,
McREMI  commenced  management  of the  Partnership's  properties  pursuant to an
assignment of the existing  property  management  agreements  from the Southmark
affiliates.


<PAGE>
On March 30, 1992, the limited partners  approved a restructuring  proposal that
provided  for (i) the  replacement  of the Original  General  Partner with a new
general  partner,  McNeil  Partners,  L.P.;  (ii) the  adoption  of the  Amended
Partnership  Agreement which substantially alters the provisions of the original
partnership   agreement   relating   to,  among  other   things,   compensation,
reimbursement  of expenses and voting  rights;  (iii) the approval of an amended
property management  agreement with McREMI, the Partnership's  property manager;
and (iv) the  approval  to change the  Partnership's  name to McNeil Real Estate
Fund XXVI, L.P. Under the Amended Partnership  Agreement,  the Partnership began
accruing  an asset  management  fee,  retroactive  to March 13,  1991,  which is
payable  to  the  General  Partner.  For a  discussion  of the  methodology  for
calculating  the asset  management  fee, see Item 13 Certain  Relationships  and
Related Transactions.  The proposals approved at the March 30, 1992 meeting were
implemented as of that date.

Settlement of Claims:

The  Partnership  filed claims with the United States  Bankruptcy  Court for the
Northern  District of Texas,  Dallas Division (the  "Bankruptcy  Court") against
Southmark for damages relating to improper  overcharges,  breach of contract and
breach of fiduciary duty. The Partnership settled these claims in 1991, and such
settlement was approved by the Bankruptcy Court.

An Order Granting  Motion to Distribute  Funds to Class 8 Claimants  dated April
14, 1995 was issued by the Bankruptcy  Court.  In accordance  with the Order, in
May 1995 the Partnership received in full satisfaction of its claims, $45,263 in
cash,  and  common  and  preferred  stock  in the  reorganized  Southmark  which
represents the  Partnership's  pro-rata share of Southmark  assets available for
Class 8 Claimants. The Partnership sold the Southmark common and preferred stock
in May 1995 for $14,611,  which combined with the cash proceeds from  Southmark,
resulted in a gain on legal settlement of $59,874.

CURRENT OPERATIONS
------------------

General:

The Partnership is engaged in diversified real estate activities,  including the
ownership, operation and management of residential, commercial office and retail
real estate. At December 31, 1996, the Partnership  owned five  income-producing
properties as described in Item 2 - Properties.

The  Partnership  does not directly  employ any personnel.  The General  Partner
conducts the business of the  Partnership  directly and through its  affiliates.
The Partnership  reimburses  affiliates of the General Partner for such services
rendered in accordance with the Amended Partnership Agreement.

The business of the Partnership to date has involved only one industry  segment.
See Item 8 - Financial Statements and Supplementary Data. The Partnership has no
foreign operations. The business of the Partnership is not seasonal.









<PAGE>
Business Plan:

The Partnership  determined to evaluate market and other economic  conditions to
establish  the  optimum  time  to  commence  an  orderly   liquidation   of  the
Partnership's  assets in  accordance  with the terms of the Amended  Partnership
Agreement.  Taking such conditions as well as other pertinent  information  into
account,  the Partnership has determined to begin orderly liquidation of all its
assets.  Although there can be no assurance as to the timing of the  liquidation
due to real estate  market  conditions,  the general  difficulty of disposing of
real estate,  and other general  economic  factors,  it is anticipated that such
liquidation  would result in the  dissolution of the  Partnership  followed by a
liquidating  distribution to Unit holders by December 1998. In this regard,  the
Partnership  has placed  Edison Ford  Square on the market for sale.  Until such
time as the  Partnership's  assets are  liquidated,  the  Partnership's  plan of
operations  is to preserve or increase  the net  operating  income of its assets
whenever possible,  while at the same time making whatever capital  expenditures
are  reasonable  under the  circumstances  in order to preserve  and enhance the
value of the Partnership's assets.

Competitive Conditions:

Since the  principal  business of the  Partnership  is to own and  operate  real
estate,  the Partnership is subject to all of the risks incident to ownership of
real estate and interests  therein,  many of which relate to the  illiquidity of
this type of  investment.  These  risks  include  changes  in  general  or local
economic conditions,  changes in supply or demand for competing properties in an
area,  changes in interest rates and  availability  of permanent  mortgage funds
which  may  render  the  sale  or  refinancing   of  a  property   difficult  or
unattractive, changes in real estate and zoning laws, increases in real property
tax rates and Federal or local  economic or rent  controls.  The  illiquidity of
real estate  investments  generally  impairs the ability of the  Partnership  to
respond  promptly  to  changed  circumstances.  The  Partnership  competes  with
numerous established companies, private investors (including foreign investors),
real estate investment trusts,  limited partnerships and other entities (many of
which have greater  resources than the Partnership) in connection with the sale,
financing and leasing of properties. The impact of these risks on the

Partnership,   including   losses  from  operations  and   foreclosures  of  the
Partnership's  properties,  is described in Item 7 - Management's Discussion and
Analysis  of  Financial  Condition  and  Results of  Operations.  For a detailed
discussion of the competitive  conditions for the  Partnership's  properties see
Item 2 - Properties.

Forward-Looking Information

Within this document,  certain  statements are made as to the expected occupancy
trends,  financial  condition,  results  of  operations,  and cash  flows of the
Partnership  for periods after  December 31, 1996.  All of these  statements are
forward-looking  statements  made pursuant to the safe harbor  provisions of the
Private  Securities  Litigation  Reform Act of 1995.  These  statements  are not
historical  and  involve  risks  and  uncertainties.  The  Partnership's  actual
occupancy trends, financial condition, results of operations, and cash flows for
future  periods may differ  materially  due to several  factors.  These  factors
include,  but are not limited to, the  Partnership's  ability to control  costs,
make necessary  capital  improvements,  negotiate  sales or  refinancings of its
properties and respond to changing economic and competitive factors.



<PAGE>
Other Information:

The environmental  laws of the Federal government and of certain state and local
governments  impose  liability  on current  property  owners for the clean-up of
hazardous and toxic substances discharged on the property. This liability may be
imposed  without  regard  to the  timing,  cause or person  responsible  for the
release of such substances onto the property.  The Partnership  could be subject
to such liability in the event that it owns properties having such environmental
problems.  The Partnership has no knowledge of any pending claims or proceedings
regarding such environmental problems.

In  September  1996,  High  River  Limited   Partnership,   a  Delaware  limited
partnership  controlled  by Carl C. Icahn  ("High  River")  made an  unsolicited
tender offer (the "HR Offer") to purchase any and all of the  outstanding  Units
of the  Partnership  for a purchase price of $0.092 (the original offer price of
$0.096 was  reduced  by the August  1996  distribution  of $0.004 per Unit).  In
addition,   High  River  made  unsolicited   tender  offers  for  certain  other
partnerships controlled by the General Partner. The Partnership recommended that
the limited  partners  reject the HR Offer made with respect to the  Partnership
and not tender their Units  pursuant to the HR Offer.  The HR Offer  terminated,
after numerous  extensions,  on November 22, 1996. The General Partner  believes
that as of January 31, 1997, High River has purchased approximately 1.01% of the
Partnership's  outstanding  Units.  In addition,  all  litigation  filed by High
River,  Mr. Icahn and his  affiliates in  connection  with the HR Offer has been
dismissed without prejudice.



<PAGE>
ITEM 2.      PROPERTIES
-------      ----------

The  following  table sets forth the real  estate  investment  portfolio  of the
Partnership  at December 31, 1996.  All of the  buildings  and the land on which
they are  located  are owned by the  Partnership  in fee and are  encumbered  by
mortgage indebtedness,  with the exception of Edison Ford Square and Continental
Plaza. See Item 8 - Note 5 "Mortgage Notes Payable".  See also Item 8 - Note 4 -
"Real  Estate  Investments"  and Schedule  III - "Real  Estate  Investments  and
Accumulated  Depreciation and  Amortization." In the opinion of management,  the
properties are adequately covered by insurance.

<TABLE>
<CAPTION>
                                            Net Basis of                          1996            Date
Property              Description            Property            Debt        Property Taxes     Acquired
--------              -----------           -------------        ----        --------------     --------
<S>                   <C>                 <C>                <C>               <C>                 <C>  
Real Estate Investments:

Amargosa Creek        Apartments
   Lancaster, CA      216 units           $    5,668,135     $   4,759,298     $      73,931       12/86

Continental Plaza     Office Building
   Scottsdale, AZ     54,533 sq. ft.           2,211,351                 -            43,542       11/86

Northway Mall         Retail Center
   Pittsburgh, PA     390,045 sq. ft.         23,794,216        14,805,922           353,388        6/87

Westwood Center       Office Building
   Tampa, FL          126,479 sq. ft.          7,305,414         2,250,526           146,979        3/87

Asset Held for Sale:

Edison Ford
Square                Retail Center
   Fort Myers, FL     144,069 sq. ft.          3,008,374                 -            55,913        7/87
                                           -------------      ------------      ------------
                                          $   41,987,490     $  21,815,746     $     673,753
                                           =============      ============      ============
</TABLE>
-----------------------------------------
Total:   Apartments  -  216 Units
         Retail Centers - 534,114 sq. ft.
         Office Buildings - 181,012 sq. ft.



<PAGE>
The  following  table sets  forth the  properties'  occupancy  rate and rent per
square foot for the last five years:

<TABLE>
<CAPTION>
                                        1996           1995            1994           1993          1992
                                    -------------  -------------  --------------  -------------  ----------
<S>                                       <C>             <C>            <C>            <C>             <C>
Amargosa Creek
   Occupancy Rate............             91%             92%            89%            86%             95%
   Rent Per Square Foot......       $    6.96      $     7.15     $     7.17      $    6.94      $     6.87

Edison Ford Square
   Occupancy Rate............             56%             46%            54%            80%             83%
   Rent Per Square Foot......       $    4.50      $     4.80     $     5.84      $    6.43      $     6.28

Continental Plaza
   Occupancy Rate............            100%            100%            98%            98%             72%
   Rent Per Square Foot......       $   12.55      $    12.03     $    10.50      $   10.30      $     8.68

Northway Mall
   Occupancy Rate............             90%             87%            61%            53%             78%
   Rent Per Square Foot......       $   11.19      $     8.97     $     5.74      $    6.59      $     8.37

Westwood Center
   Occupancy Rate............             99%             92%            90%            95%             88%
   Rent Per Square Foot......       $   13.44      $    11.95     $    11.78      $   11.58      $     8.77
</TABLE>

Occupancy rate  represents all units leased divided by the total number of units
for  residential  properties  and square  footage leased divided by total square
footage for other  properties  as of  December  31 of the given  year.  Rent per
square foot represents all revenue, except interest, derived from the property's
operations divided by the leasable square footage of the property.

Competitive Conditions
----------------------

Amargosa Creek Apartments
-------------------------

Amargosa Creek Apartments,  built in 1984, is located in the Mojave Desert, east
of the Antelope Valley Freeway,  south of downtown  Lancaster,  California.  The
major  industry in the Antelope  Valley is aerospace and Edward's Air Force Base
is located 26 miles from the property.  During the past three years the property
has had interior and exterior  upgrades that were  necessary to compete with the
market as well as to overcome the negative  reputation  created by being located
in a high-crime locale.  These improvements have proven to be effective,  as the
property ended the year at an occupancy rate of 91% which is three percent ahead
of the market  average.  Amargosa  Creek is expected to continue to  demonstrate
stabilized economic growth during 1997 and beyond;  however, since the market is
strongly  affected  by the  aerospace  industry;  any  layoffs  or growth  would
significantly impact the property's performance.






<PAGE>
Continental Plaza
-----------------

Continental Plaza is an office building located in prestigious north Scottsdale,
Arizona, an eastern suburb of Phoenix. The garden-style property consists of two
Spanish style  buildings  surrounding a courtyard.  Continental  Plaza ended the
year at a 100%  occupancy  rate as compared to a market  average of 97%.  Rental
rates in the Scottsdale market declined in the early 1990's due to an oversupply
of office space.  Minimal commercial growth since then is allowing the market to
recover.  Occupancy rates at Continental Plaza are expected to remain at current
levels during 1997 and revenue growth is expected due to escalating lease rates.

Edison Ford Square
------------------

Edison Ford Square,  built in 1960 and located in downtown Fort Myers,  Florida,
has evolved from  primarily a retail  center to more of a service  center.  This
transformation  occurred as a result of  demographic  changes that reduced major
retailers'  interest in this location.  Formerly known as Boulevard  Plaza,  the
property  was  renamed  to  Edison  Ford  Square  in 1993 due to the  property's
proximity to the Thomas Edison and Henry Ford  estates.  The property is located
within walking distance of this historical attraction; thus the name was changed
to capitalize on the tourism  market.  Plans for a major  renovation  that would
capture the architecture and style of the Edison home began in 1993; however the
loss of two  major  anchors  in  1994  made  this  renovation  impractical.  The
property,  located in the center of the downtown entertainment district,  offers
easy access,  high  visibility  and expansive  parking;  however the property is
dated in appearance and has a lot of deferred maintenance. On April 1, 1996, the
Partnership placed Edison Ford Square on the market for sale.

Northway Mall
-------------

Northway  Mall,  built in the early 1960's and opened in 1962,  is a multi-level
facility  consisting of  approximately  397,000  square feet of retail space and
mezzanine level office suites.  It is located 12 miles south of the Pennsylvania
State  Turnpike in the North Hills area of Pittsburgh,  Pennsylvania.  In August
1994 after the  construction  financing was secured,  the mall was renovated and
had a grand opening and ribbon  cutting on May 6, 1995.  Management is currently
searching  for one  tenant to  occupy  approximately  11,000  square  feet.  The
occupancy rate at December 31, 1996 was 90% and is projected to reach 97% during
1997. The greater  Pittsburgh area is very stable with  occupancies  approaching
the 90% mark and shopping  centers  adjacent to Northway  Mall are currently 92%
occupied.


<PAGE>
Westwood Center
---------------

Westwood Center, an eight-story office building built in 1984, is located in the
Westshore  Business District of Tampa,  Florida.  Improvements over the past few
years have  allowed  the  property to  maintain  competitiveness  with the local
market.  Overall,  the  Westshore  Business  District  continues  to hold stable
occupancies  of 91% and  Westwood  Center  ended the year with a 99%  occupancy.
Current  market  concerns  include  the  property's  location  near a  declining
neighborhood and the area's higher than average crime rate. Presently,  there is
no new office building construction in the Westshore Business District,  and the
property is  positioned  for steady  growth in the coming  years.  Management is
currently  working on  renewing  the leases that expire  during  1997.  Westwood
Center is located in a stable  market and  management  does not  anticipate  any
difficulty in releasing the space that may come available during the year.

The following  schedule shows lease  expirations  for each of the  Partnership's
commercial properties for 1997 through 2006:

<TABLE>
<CAPTION>
                           Number of                                   Annual           % of Gross
                           Expirations           Square Feet            Rent            Annual Rent
                           -----------           -----------         -----------        -----------
<C>                             <C>                  <C>             <C>                     <C>
Continental Plaza
1997                            10                   14,077          $   189,595             28%
1998                             8                   14,570              183,025             27%
1999                             3                    4,237               53,676              8%
2000                             5                   18,279              205,799             30%
2001                             2                    3,374               43,886              7%
2002-2006                        -                        -                    -              -

Edison Ford Square
1997                            4                    32,646          $    65,863              8%
1998                            4                    11,179               85,477             10%
1999                           12                    37,603              226,058             28%
2000                            2                     6,029               37,057              5%
2001                            3                     3,960               31,718              4%
2002                            2                     7,430               56,273              7%
2003                            -                         -                    -              -
2004                            2                     5,028               60,238              7%
2005                            -                         -                    -              -
2006                            1                     1,673               11,711              1%
</TABLE>


<PAGE>

<TABLE>
<CAPTION>
                           Number of                                   Annual           % of Gross
                           Expirations           Square Feet            Rent            Annual Rent
                           -----------           -----------           ------           -----------
Northway Mall
<C>                             <C>                   <C>            <C>                      <C>
1997                            5                     5,623          $    57,148              2%
1998                            3                     8,656               70,107              2%
1999                            7                    84,615              445,458             12%
2000                           10                    20,099              231,689              6%
2001                           10                    34,844              419,503             11%
2002                            5                    14,409              165,136              5%
2003                            2                     7,019               77,690              2%
2004                            1                    69,639              405,299             11%
2005                            3                    39,304              436,390             12%
2006                            -                         -                    -              -

Westwood Center
1997                           15                    40,054          $   556,690             32%
1998                            2                     2,392               33,151              2%
1999                           11                    41,405              590,588             34%
2000                            -                         -                    -              -
2001                            7                    36,264              498,179             29%
2002-2006                       -                         -                    -              -

</TABLE>

No  residential  tenant  leases 10% or more of the available  rental space.  The
following  schedule reflects  information on commercial tenants occupying 10% or
more of the leasable square feet for each property:

<TABLE>
<CAPTION>

Nature of
Business                       Square Footage                                             Lease
   Use                              Leased                    Annual Rent               Expiration
---------                      --------------                 -----------               ---------- 
Continental Plaza
<S>                                   <C>                      <C>                         <C> 
   General Business                   5,952                    $  72,912                   2000
   General Business                  10,433                      109,547                   2000

Edison Ford Square
   Office Storage                    25,546                    $  60,000                   1997

Northway Mall
   Department Store                  73,500                    $ 275,625                   1999
   Department Store                  69,639                      405,299                   2004

Westwood Center
   General Office                    13,009                    $ 167,426                   1997
   General Office                    14,640                      209,352                   1999
   General Office                    17,225                      241,152                   2001
</TABLE>



<PAGE>
ITEM 3.      LEGAL PROCEEDINGS
-------      -----------------

The Partnership is not party to, nor are any of the Partnership's properties the
subject of, any material pending legal proceedings, other than ordinary, routine
litigation incidental to the Partnership's business, except for the following:

1)   HCW Pension Real Estate Fund, Ltd. et al. v. Ernst & Young,  BDO Seidman et
     al. (Case  #92-06560-A).  This suit was filed on behalf of the  Partnership
     and other  affiliated  partnerships  (as  defined  in this  Section  1, the
     "Affiliated  Partnerships")  on May 26, 1992, in the 14th Judicial District
     Court  of  Dallas  County.   The  petition  sought  recovery   against  the
     Partnership's  former auditors,  Ernst & Young, for negligence and fraud in
     failing to detect and/or report  overcharges of fees/expenses by Southmark,
     the  former  general  partner.   The  former  auditors  initially  asserted
     counterclaims   against  the  Affiliated   Partnerships  based  on  alleged
     fraudulent misrepresentations made to the auditors by the former management
     of  the  Affiliated   Partnerships   (Southmark)  in  the  form  of  client
     representation  letters executed and delivered to the auditors by Southmark
     management.  The counterclaims sought recovery of attorneys' fees and costs
     incurred in defending this action.  The counterclaims  were later dismissed
     on appeal, as discussed below.

     The  trial  court  granted   summary   judgment   against  the   Affiliated
     Partnerships based on the statute of limitations;  however,  on appeal, the
     Dallas Court of Appeals reversed the trial court and remanded for trial the
     Affiliated  Partnerships'  fraud claims  against  Ernst & Young.  The Texas
     Supreme  Court  denied  Ernst &  Young's  application  for writ of error on
     January 11, 1996. Shortly before trial, the district court judge once again
     granted summary judgment against the Affiliated Partnerships on December 2,
     1996. The Partnership is continuing to pursue vigorously its claims against
     Ernst & Young;  however,  the final  outcome of this  litigation  cannot be
     determined at this time.

2)   James F. Schofield, Gerald C. Gillett, Donna S. Gillett, Jeffrey Homburger,
     Elizabeth Jung,  Robert Lewis,  and Warren Heller et al. v. McNeil Partners
     L.P., McNeil Investors,  Inc., McNeil Real Estate Management,  Inc., Robert
     A. McNeil,  Carole J. McNeil,  McNeil Pacific  Investors  Fund 1972,  Ltd.,
     McNeil Real Estate Fund IX, Ltd.,  McNeil Real Estate Fund X, Ltd.,  McNeil
     Real Estate Fund XI, Ltd.,  McNeil Real Estate Fund XII, Ltd.,  McNeil Real
     Estate Fund XIV, Ltd., McNeil Real Estate Fund XV, Ltd., McNeil Real Estate
     Fund XX, L.P.,  McNeil Real Estate Fund XXI, L.P.,  McNeil Real Estate Fund
     XXII,  L.P.,  McNeil Real Estate Fund XXIV,  L.P.,  McNeil Real Estate Fund
     XXV, L.P.,  McNeil Real Estate Fund XXVI, L.P., and McNeil Real Estate Fund
     XXVII,  L.P., et al. - Superior  Court of the State of  California  for the
     County of Los  Angeles,  Case No.  BC133799  (Class and  Derivative  Action
     Complaint).

     The action  involves  purported  class and  derivative  actions  brought by
     limited  partners of each of the fourteen  limited  partnerships  that were
     named as nominal  defendants as listed above (as defined in this Section 2,
     the  "Partnerships").  Plaintiffs allege that McNeil  Investors,  Inc., its
     affiliate  McNeil Real Estate  Management,  Inc.  and three of their senior
     officers and/or directors (as defined in this Section 2, collectively,  the





<PAGE>
     "Defendants") breached their fiduciary duties and certain obligations under
     the  respective  Amended  Partnership  Agreement.  Plaintiffs  allege  that
     Defendants  have  rendered  such Units  highly  illiquid  and  artificially
     depressed  the prices that are  available  for Units on the resale  market.
     Plaintiffs  also allege that  Defendants  engaged in a course of conduct to
     prevent  the  acquisition  of  Units  by an  affiliate  of  Carl  Icahn  by
     disseminating  purportedly  false,  misleading and inadequate  information.
     Plaintiffs  further  allege  that  Defendants  acted to  advance  their own
     personal interests at the expense of the Partnerships'  public unit holders
     by failing to sell Partnership properties and failing to make distributions
     to unitholders.

     On December 16,  1996,  the  Plaintiffs  filed a  consolidated  and amended
     complaint.  Plaintiffs  are suing for breach of fiduciary  duty,  breach of
     contract  and  an  accounting,  alleging,  among  other  things,  that  the
     management  fees paid to the McNeil  affiliates over the last six years are
     excessive,  that these fees  should be reduced  retroactively  and that the
     respective Amended  Partnership  Agreements  governing the Partnerships are
     invalid.  On January 7, 1997,  the Court ordered  consolidation  with three
     other similar actions.

     The  Partnerships  filed a demurrer to the complaint and a motion to strike
     on February 14, 1997, seeking to dismiss the complaint in all respects. The
     demurrer  is  pending.  The  Partnerships  deny that  there is any merit to
     Plaintiff's allegations and intend to vigorously defend this action.

For a discussion of the Southmark bankruptcy, see Item 1 - Business.

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

None.

                                     PART II

ITEM 5.      MARKET FOR THE REGISTRANT'S UNITS OF LIMITED PARTNERSHIP AND
-------      ------------------------------------------------------------
             RELATED SECURITY HOLDER MATTERS
             -------------------------------

(A)   There  is  no   established  public trading market for limited partnership
      units, nor is one expected to develop.

(B)   Title of Class                        Number of Record Unit Holders
      --------------                        -----------------------------
     
      Limited partnership units             7,023 as of January 31, 1997

(C)   Distributions  of $374,965  were paid to the limited  partners in 1996. No
      distributions  were made to the  partners  in 1995 and 1994.  See Item 7 -
      Management's Discussion and Analysis of Financial Condition and Results of
      Operations and Item 8 - Note 1 - "Organization  and Summary of Significant
      Accounting Policies Distributions".






<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
------- -----------------------

The  following  table sets forth a summary  of  certain  financial  data for the
Partnership.  This summary should be read in  conjunction  with the notes to the
Partnership's  financial  statements  appearing in Item 8 - Financial Statements
and Supplementary Data.

<TABLE>
<CAPTION>
Statements of                                             Years Ended December 31,
Operations                              1996           1995            1994           1993           1992
------------------                  -------------  -------------  --------------  -------------  -------------
<S>                                 <C>            <C>            <C>             <C>            <C>          
Rental revenue...............       $   8,579,073  $   7,568,361  $    6,385,998  $   6,708,736  $   6,942,367
Write-down for impair-
   ment of real estate.......          (1,087,000)    (2,200,000)              -     (7,239,353)    (4,602,377)
Loss before extraordinary
   items.....................          (2,347,920)    (5,063,046)     (1,938,063)    (8,843,767)    (6,795,983)
Extraordinary items..........                   -              -               -              -         91,952
Net loss.....................          (2,347,920)    (5,063,046)     (1,938,063)    (8,843,767)    (6,704,031)

Loss per thousand limited
   partnership units:
   Loss before
     extraordinary items.....       $      (26.86)$      (57.91)  $       (22.17)  $    (101.15) $      (77.73)
   Extraordinary items.......                   -              -               -              -           1.05
                                     ------------   ------------   -------------    -----------   ------------
   Net loss..................       $      (26.86) $      (57.91) $       (22.17)  $    (101.15) $      (76.68)
                                     ============   ============   =============    ===========   ============

Distributions per thousand
   limited partnership
   units.....................       $        4.33  $           -  $            -   $          -  $           -
                                     ============   ============   =============    ===========   ============

                                                              As of December 31,
Balance Sheets                         1996            1995            1994           1993           1992
--------------                      ------------   -------------  --------------  -------------  -------------

Real estate investments,
   net.......................       $  38,979,116  $  44,629,001  $   41,738,690   $ 39,917,222  $  48,201,116
Asset held for sale..........           3,008,374              -               -              -              -
Total assets.................          47,124,512     54,217,223      45,208,188     45,097,635     49,921,437
Mortgage notes payable.......          21,815,746     23,097,459       9,350,045      8,343,376      4,871,326
Partners' equity.............          24,615,924     27,338,809      32,401,855     34,339,918     43,183,685
</TABLE>












<PAGE>
ITEM 7.      MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-------      -----------------------------------------------------------
             AND RESULTS OF OPERATIONS
             -------------------------

FINANCIAL CONDITION
-------------------

The  Partnership was formed to engage in the business of acquiring and operating
income-producing  real  properties,  and holding the properties for  investment.
Since  completion of its capital  formation and property  acquisition  phases in
1987,  when it completed the purchase of five  properties,  the  Partnership has
operated its properties for production of income.  The original  acquisitions of
properties  were all cash. In 1993,  the  Partnership  obtained  refinancing  on
Amargosa  Creek  Apartments,  financing  on  Westwood  Center and also  obtained
financing on  Continental  Plaza from an affiliate of the General  Partner.  The
affiliate loan was paid off in January 1996. In 1994, the Partnership obtained a
construction loan to finance the major capital  improvement  program at Northway
Mall. The capital improvement program at Northway Mall was completed during 1995
and the property  obtained  permanent  financing in December  1995, as discussed
below.

Edison  Ford Square is a 141,000 sq. ft.  retail  center in Fort Myers,  Florida
that has evolved from  primarily  retail to more of a service center use. It was
56%,  46% and 54% occupied at December  31,  1996,  1995 and 1994.  The downtown
area, where the shopping center is located, has experienced decay due to a shift
in demographics.  The center is within walking distance of the Thomas Edison and
Henry Ford estates,  which are significant  historical  attractions in the area.
Plans for a major renovation that would have captured the architecture and style
of the Edison home began in 1993. However, with the loss of two major anchors in
1994, it was not viable to continue this project.  During 1995, a full, in-depth
market analysis was performed to determine the center's highest and best use. It
was  determined   that  the  only  viable   alternative   would  be  a  complete
redevelopment and renovation of the center; however, the Partnership decided not
to  pursue  this  alternative   because  of  the  inherent  risks  and  economic
uncertainties. An unsolicited offer from an unaffiliated third party to purchase
the center was received during 1995. These facts led management to conclude that
the asset was impaired.  Accordingly,  the Partnership recorded a write-down for
impairment  of $2.2 million  against  Edison  Ford's  building and  improvements
during the fourth  quarter of 1995, to record the property at its estimated fair
value. In accordance with management's plans to begin an orderly  liquidation of
the Partnership,  the property was placed on the market for sale effective April
1, 1996.  During 1996,  management  was informed that a major tenant,  occupying
approximately  10,900 sq. ft., was terminating its lease in 1997.  Additionally,
based on a shorter  holding period of the property  established in  management's
liquidation  plans; it was determined that the Partnership  could not ultimately
realize its adjusted carrying value through future cash flows.  Accordingly,  an
additional  write-down  for  impairment in the amount of $1,087,000 was recorded
against the property's  buildings and improvements  during the fourth quarter of
1996.









<PAGE>
The  Partnership has undergone a major capital  improvements  program to convert
Northway Mall into a value oriented retail shopping center specializing in brand
name merchandise at  less-than-retail  prices during 1994 and 1995. The decision
to renovate the mall was made after exhaustive analyses and studies conducted by
management  to  determine  future  cash flows of the mall based upon  stabilized
leases. In the third quarter of 1994,  management  finalized a construction loan
on  Northway  Mall  totaling  $11  million to  finance a portion of the  capital
improvement  program.  The mortgage note allowed for monthly  principal draws in
the amount of approved  invoices.  The principal  amount was due August 1996 and
accrued interest at a variable rate. The interest rate at December 17, 1995 (the
date the mortgage  note was repaid) was 9.75%.  Interest  payments were due from
the  Partnership  upon  repayment  of the note.  During  1995,  $91,000  of this
interest was  capitalized as an addition to real estate  investments,  which was
the portion related to the vacant square footage of Northway Mall that was under
construction during the year. The Partnership incurred loan costs of $214,218 in
1994 related to the construction mortgage note financing,  of which $70,000 were
capitalized in 1995 as an addition to real estate  investments to be depreciated
over the life of the related  asset.  The remaining  loan costs of $144,218 were
amortized over the life of the  construction  mortgage note. The Partnership was
provided cash flow of $1,121,473  during 1994 due to the  construction  mortgage
note as discussed above.

Management obtained permanent financing for the capital  improvements program in
December  1995.  The new mortgage  note, in the amount of $15 million,  bears an
interest rate of 7.5% with monthly  principal and interest  payments of $110,849
and matures in December 2002. The proceeds from the refinancing were used to pay
off the construction  mortgage note, the affiliate  mortgage note, the affiliate
advances  from General  Partner,  as well as deferred  payable to  affiliates as
discussed  below.  The renovations  were completed during 1995. As a part of the
renovations,  assets  valued at  approximately  $1,248,000  were  demolished  or
removed and written off in the fourth quarter of 1995.

RESULTS OF OPERATIONS
---------------------

1996 compared to 1995

Revenue:

Partnership  revenues  increased  by  $1,029,001  or 13% in 1996 as  compared to
1995.   Rental   revenue  increased   $1,010,712  and interest  income increased
$78,163.

Rental revenue  increases  were mainly due to increased  occupancies at Northway
Mall and Westwood Center. Average occupancy at Northway Mall was 89% in 1996 and
79% in 1995 with  rental  income  increasing  approximately  $865,000 in 1996 as
compared  to prior  year.  Occupancy  at  Westwood  Center  increased  to 99% at
December  31, 1996 from 92% at December 31, 1995 with rental  income  increasing
approximately $192,000.

Interest  income  increased  $78,163  or 80%  due to a  greater  amount  of cash
available for short-term  investment  during most of 1996.  Although there was a
decrease in total cash and cash equivalents in 1996, the decrease was mainly due
to the payment of payable to affiliates, repayments of advances from affiliates,
as well as distribution to limited partners.




<PAGE>
In 1995 the  Partnership  received  cash and common and  preferred  stock in the
reorganized  Southmark in settlement of its bankruptcy claims against Southmark.
The  Partnership  recognized  a  $59,874  gain  during  1995 as a result of this
settlement. No such gain was recognized in 1996.

Expenses:

Total  expenses  decreased by $1,686,125 or 13% in 1996 as compared to 1995. The
decrease was mainly due to a loss on the Northway Mall  renovation of $1,247,940
for the 1995  demolition and removal of assets  previously  capitalized in 1995.
During 1996 and 1995,  Edison Ford Square  recorded  impairment  write-downs  of
$1,087,000 and $2,200,000, respectively.

Interest  expense  increased   $622,386 or 54% in 1996 as compared to prior year
due to the December  1995  mortgage refinancing of Northway Mall.

Interest expense - affiliate  decreased  $104,675 or 87% due to the repayment of
the loan from McNeil Real Estate Fund XXVII,  L.P. in January  1996,  as well as
the repayment of all advances from affiliates in May 1996.

Property  management  fees - affiliates  increased  $62,829  or 14%  due  to the
increased rental income at Northway Mall and Westwood Center as discussed above.

General and administrative  expenses increased $209,212 due to costs incurred by
the Partnership to evaluate and disseminate information regarding an unsolicited
1996 tender offer as discussed in Item 1 - Business.

General and  administrative - affiliates  expenses decreased $115,251 or 14% due
to  decreased   overhead   reimbursement   to  McREMI  for   administering   the
Partnership's affairs.

1995 compared to 1994

Revenue:

Partnership revenues increased by $1,271,972 or 20% in 1995 as compared to 1994.
Rental  revenue  and  interest  income  increased  by  $1,182,363  and  $29,735,
respectively.

Rental revenue for 1995 were $7,568,361 as compared to $6,385,998 for 1994. This
increase is primarily due to the increase in occupancy rates at four of the five
Partnership's properties, with the largest increase occurring at Northway Mall.

Interest income increased  $29,735 for 1995 as compared to 1994 primarily due to
the  Partnership's  increased cash balance.  The proceeds from the Northway Mall
refinancing  of  approximately   $5,800,000  were  deposited  in  December  1995
resulting  in an  increase  of  approximately  $11,000  of  interest  income for
December 1995.

In 1995 the  Partnership  received  cash and common and  preferred  stock in the
reorganized  Southmark in settlement of its bankruptcy claims against Southmark.
The  Partnership  recognized  a  $59,874  gain  during  1995 as a result of this
settlement. No such gain was recognized in 1994.






<PAGE>
Expenses:

Total  expenses  increased  $4,396,955 or 52% in 1995 as compared 1994 primarily
due to an increase in interest,  depreciation and amortization expense, the loss
on demolition and replacement of assets at Northway Mall, and the write-down for
impairment on Edison Ford Square, as discussed below.

Interest expense  increased  $469,121 or 69% in 1995 as compared 1994 due to the
construction financing at Northway Mall.

Interest  expense - affiliates  increased  $26,553 or 28% in 1995 as compared to
1994 due to a higher interest rate on the affiliate mortgage.

Depreciation and amortization  increased  $241,374 or 10% in 1995 as compared to
1994 due to the renovation at Northway Mall.

Personnel  expenses  increased $66,274 or 9% in 1995 as compared to 1994, due to
an increase in personnel at Northway Mall because of the increased occupancy, as
well  as  higher  compensation  for  property  personnel  at  the  Partnership's
remaining properties.

Property  management  fees -  affiliates  increased  $51,890  or 13% in  1995 as
compared to 1994. The increased occupancy at Northway Mall led to an increase in
tenant receipts on which the management fee is based.

Bad debt expense decreased approximately $122,000 in 1995 as compared to 1994 at
Westwood  Center,  Edison Ford Square,  and Northway  Mall due to 1994's  tenant
evictions and relocations.

Other property operating expenses increased $51,470 or 9% in 1995 as compared to
1994 due to an increase in marketing and leasing expenses at Northway Mall.

General and  administrative  expenses  decreased  $48,079 or 43% in 1995. During
1994, Westwood Center incurred $22,500 in professional fees for an appraisal; no
such fees were  incurred  during  1995.  The  decrease was also due to decreased
expenses  relating  to legal  proceedings  against  an  unaffiliated  management
company for mismanagement and other causes of action at Northway Mall.

General and  administrative - affiliates  expenses  increased $109,627 or 15% in
1995 as compared to 1994.  There was an increase of $54,364 in asset  management
fees in 1995 due to the increase in the tangible assets of the  Partnership,  on
which the fee is based.  There was an  increase of $55,263 in  reimbursement  to
affiliates  due to an  increase  in services  provided  in  connection  with the
Northway Mall renovation.

The  Partnership  recognized a loss on Northway Mall renovation of $1,247,940 in
1995.  This  loss was due to the  demolition  or  removal  of  assets  that were
previously capitalized.


<PAGE>

LIQUIDITY AND CAPITAL RESOURCES
-------------------------------

Cash flow used in the Partnership  operations was $1,588,873 in 1996 as compared
to $1,472,199 of cash provided in 1995 and $966,845 in 1994.  The change in cash
flow  from  operations  in 1996 as  compared  to 1995  was  primarily  due to an
increase of  $3,671,320  in cash paid to  affiliates.  With the loan proceeds of
Northway  Mall's  financing,  the Partnership was able to pay all deferred asset
management fees and overhead  reimbursements to McREMI,  bringing the balance of
payable to affiliates - General  Partner to $91,462 as of December 31, 1996 from
$2,983,409  as of  December  31,1995.  Interest  paid  also  increased  with the
December 1995 mortgage  refinancing of Northway Mall. The increased occupancy at
Northway  Mall and  Westwood  Center led to an increase in tenant  receipts  and
partially offset the decrease in cash flow.

The  change  in cash  provided  by  operations  in 1995 as  compared  to 1994 is
primarily due to an increase in tenant  receipts,  a decrease in property  taxes
paid and a gain on the  settlement of  bankruptcy  claims  against  Southmark as
discussed  in Item 1 - Business -  "Southmark  Bankruptcy  and Change in General
Partner".  These cash changes were offset by an increase in interest  paid.  The
increased  occupancy at Northway Mall and  Continental  Plaza was  substantially
responsible  for the increase in tenant  receipts.  The decrease in property tax
payments is  primarily  due to a change in the due date of the tax  payments for
Edison Ford Square. The 1993 taxes were paid in February 1994 and the 1994 taxes
were paid in December 1994.

Expenditures  related to additions to real estate in 1996 utilized $1,158,736 of
Partnership  cash flows as compared  to  $9,732,038  during 1995 and  $3,551,769
during 1994.  The increase in the additions to real estate in 1995 was primarily
due to the capital improvement program at Northway Mall. In the third quarter of
1994,  management  finalized a  construction  loan on Northway Mall totaling $11
million to finance the capital  improvement  program.  The mortgage note allowed
for monthly  withdrawals  of principal in the amount of approved  invoices.  The
principal  amount was due August 1996 and accrued  interest at a variable  rate.
The interest  rate at December 17, 1995 (the date the mortgage  note was repaid)
was 9.75%. Interest payments were due from the Partnership upon repayment of the
note.  During 1995,  $91,000 of this interest was  capitalized as an addition to
real  estate  investments,  which is the  portion  related to the vacant  square
footage  of  Northway  Mall that was under  construction  during  the year.  The
Partnership  incurred loan costs of $214,218 in 1994 related to the construction
mortgage  note  financing,  of  which  $70,000  were  capitalized  in 1995 as an
addition  to real  estate  investments  to be  depreciated  over the life of the
related asset. The remaining loan costs of $144,218 were amortized over the life
of the  construction  mortgage note. The  Partnership  was provided cash flow of
$1,121,473 during 1994 due to the construction mortgage note as discussed above.

Principal  payments on mortgage  notes payable were $329,175 in 1996 as compared
to  $131,113  in 1995 and  $114,804  in 1994.  The  increase  in 1996 was due to
Northway Mall's December 1995 permanent  financing for the capital  improvements
program. The new mortgage note, in the amount of $15 million,  bears an interest
rate of 7.5% with  monthly  principal  and  interest  payments of  $110,849  and
matures in December 2002.

The  proceeds  from  the  Northway  Mall  refinancing  were  used to pay off the
construction  mortgage  note, a $952,538  mortgage  loan from McNeil Real Estate
Fund  XXVII,  L.P.,  as well as  $130,517  advances  from  affiliates  - General
Partner.

<PAGE>
The  Partnership  distributed  $374,965 to the limited  partners in 1996 of cash
from operations.

Short-term liquidity:

At  December  31,  1996,  the  Partnership  held  cash and cash  equivalents  of
$2,211,029.  The present  cash  balance  plus cash to be  provided by  operating
activities  is  considered  adequate  to meet the  Partnership's  needs for debt
service,  normal amounts of repairs and maintenance and capital  improvements to
preserve and enhance the value of the  properties.  The Partnership has budgeted
$2,041,000 for necessary capital improvements for all properties in 1997.

The General Partner has, at its discretion, advanced funds to the Partnership to
fund working capital requirements.  All outstanding advances from affiliates and
the related  accrued  interest were repaid in 1996.  The General  Partner is not
obligated to advance funds to the Partnership and there is no assurance that the
Partnership will receive additional funds.

The  advances  from  affiliates  at December  31,  1996 and 1995  consist of the
following:

                                                1996             1995
                                           -------------     ------------
    Advances from General Partner          $           -     $    130,518
    Accrued interest payable                           -           37,812
                                            ------------      -----------
                                           $           -     $    168,330
                                            ============      ===========

The advances  were  unsecured,  due on demand and accrued  interest at the prime
lending rate of Bank of America plus 1%. The prime lending rate was 8.25% at May
20,  1996,  when the  Partnership  repaid the  advances and 8.5% at December 31,
1995.

Long-term liquidity:

While the present  outlook for  Partnership's  liquidity  is  favorable,  market
conditions may change and property operations could deteriorate.  In that event,
the Partnership  would require other sources of working  capital.  No such other
sources have been  identified,  and the Partnership has no established  lines of
credit.  Other possible actions to resolve working capital  deficiencies include
refinancing or  renegotiating  terms of existing loans,  deferring major capital
expenditures on Partnership properties except where improvements are expected to
enhance the  competitiveness  or marketability  of the properties,  or arranging
working  capital support from  affiliates.  There is no assurance that affiliate
support could be arranged,  since neither the General Partner nor any affiliates
have any obligation in this regard.

The Partnership has significant  mortgage maturities during 1998, and management
expects to refinance these mortgage notes as they mature. However, if management
is unable to refinance the mortgage notes as they mature,  the Partnership  will
require other sources of cash. No such sources have been identified.







<PAGE>
The Partnership  determined to evaluate market and other economic  conditions to
establish  the  optimum  time  to  commence  an  orderly   liquidation   of  the
Partnership's  assets in  accordance  with the terms of the Amended  Partnership
Agreement.  Taking such conditions as well as other pertinent  information  into
account,  the Partnership has determined to begin orderly liquidation of all its
assets.  Although there can be no assurance as to the timing of the  liquidation
due to real estate  market  conditions,  the general  difficulty of disposing of
real estate,  and other general  economic  factors,  it is anticipated that such
liquidation  would result in the  dissolution of the  Partnership  followed by a
liquidating  distribution to Unit holders by December 1998. In this regard,  the
Partnership has placed Edison Ford Square on the market for sale.

Distributions:

In 1996,  the  Partnership  distributed  $374,965 to the limited  partners.  The
General  Partner will continue to monitor the cash reserves and working  capital
needs of the Partnership to determine when cash flows will support distributions
to the limited partners.


<PAGE>

ITEM 8.      FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------      -------------------------------------------

<TABLE>
<CAPTION>

                                                                                                      Page
                                                                                                      Number
                                                                                                      ------

<S>                                                                                                      <C>
INDEX TO FINANCIAL STATEMENTS

Financial Statements:

   Report of Independent Public Accountants.......................................                       18

   Balance Sheets at December 31, 1996 and 1995...................................                       19

   Statements of Operations for each of the three years in the period
      ended December 31, 1996.....................................................                       20

   Statements of Partners' Equity (Deficit) for each of the three years in
      the period ended December 31, 1996..........................................                       21

   Statements of Cash Flows for each of the three years in the period
      ended December 31, 1996.....................................................                       22

   Notes to Financial Statements..................................................                       24

   Financial Statement Schedule -
      Schedule III - Real Estate Investments and Accumulated
         Depreciation and Amortization............................................                       33


</TABLE>


All other  schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.

<PAGE>
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To the Partners of McNeil Real Estate Fund XXVI, L.P.:

We have audited the accompanying balance sheets of McNeil Real Estate Fund XXVI,
L.P. (a California  limited  partnership)  as of December 31, 1996 and 1995, and
the related statements of operations,  partners' equity (deficit) and cash flows
for each of the  three  years in the  period  ended  December  31,  1996.  These
financial  statements and the schedule referred to below are the  responsibility
of the Partnership's management.  Our responsibility is to express an opinion on
these financial statements and the schedule 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 McNeil Real Estate Fund XXVI,
L.P. as of December 31, 1996 and 1995, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.

Our  audits  were  made for the  purpose  of  forming  an  opinion  on the basic
financial  statements  taken as a whole.  The  schedule  listed  in the index to
financial  statements is presented for purposes of complying with the Securities
and  Exchange  Commission's  rules  and  is not  part  of  the  basic  financial
statements.  This schedule has been subjected to the auditing procedures applied
in our audits of the basic  financial  statements  and, in our  opinion,  fairly
states in all material  respects  the  financial  data  required to be set forth
therein in relation to the basic financial statements taken as a whole.


/s/  Arthur Andersen LLP


Dallas, Texas
   March 17, 1997



<PAGE>
                       McNEIL REAL ESTATE FUND XXVI, L.P.

                                 BALANCE SHEETS

<TABLE>
<CAPTION>

                                                                                 December 31,
                                                                       -----------------------------------
                                                                             1996                 1995
                                                                       ---------------      --------------
<S>                                                                    <C>                  <C>           
ASSETS
------

Real estate investments:

   Land.....................................................           $     6,750,456      $    9,189,092
   Buildings and improvements...............................                53,911,061          56,695,050
                                                                        --------------       -------------
                                                                            60,661,517          65,884,142
   Less:  Accumulated depreciation and amortization.........               (21,682,401)        (21,255,141)
                                                                        --------------       -------------
                                                                            38,979,116          44,629,001

Asset held for sale.........................................                 3,008,374                   -

Cash and cash equivalents...................................                 2,211,029           6,761,516
Cash segregated for security deposits.......................                   233,426             202,396
Accounts receivable, net of allowance for doubtful
   accounts of $572,392 and $596,156 at
   December 31, 1996 and 1995, respectively.................                 1,276,997           1,096,937
Prepaid commissions.........................................                   349,018             379,444
Prepaid expenses and other assets...........................                   709,030             716,091
Deferred borrowing costs, net of accumulated
   amortization of $215,640 and $125,641 at
   December 31, 1996 and 1995, respectively.................                   357,522             431,838
                                                                        --------------       -------------
                                                                       $    47,124,512      $   54,217,223
                                                                        ==============       =============
LIABILITIES AND PARTNERS' EQUITY (DEFICIT)
------------------------------------------

Mortgage notes payable......................................           $    21,815,746      $   22,144,921
Mortgage note payable - affiliate...........................                         -             952,538
Accounts payable and accrued expenses.......................                   306,284             358,856
Accrued property taxes......................................                    58,660              59,864
Payable to affiliates - General Partner.....................                    91,462           2,983,409
Advances from affiliates - General Partner..................                         -             168,330
Security deposits and deferred rental income................                   236,436             210,496
                                                                        --------------       -------------
                                                                            22,508,588          26,878,414
                                                                        --------------       -------------

Partners' equity (deficit):
   Limited  partners  -  90,000,000 limited partnership 
     units  authorized;  86,533,671 and 86,548,983
     limited partnership units issued and outstanding
     at December 31, 1996 and 1995, respectively............                25,016,816          27,716,222
   General Partner..........................................                  (400,892)           (377,413)
                                                                        --------------       -------------
                                                                            24,615,924          27,338,809
                                                                        --------------       -------------
                                                                       $    47,124,512      $   54,217,223
                                                                        ==============       =============
</TABLE>
                 See accompanying notes to financialstatements.
<PAGE>

                       McNEIL REAL ESTATE FUND XXVI, L.P.

                            STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                             For the Years Ended December 31,
                                                   ----------------------------------------------------
                                                        1996                1995               1994
                                                   --------------     --------------    ---------------
<S>                                                <C>                <C>               <C>            
Revenue:
   Rental revenue..........................        $    8,579,073     $    7,568,361    $     6,385,998
   Interest ...............................               176,370             98,207             68,472
   Gain on legal settlement................                     -             59,874                  -
                                                    -------------      -------------     --------------
     Total revenue.........................             8,755,443          7,726,442          6,454,470
                                                    -------------      -------------     --------------

Expenses:
   Interest................................             1,770,932          1,148,546            679,425
   Interest - affiliates...................                16,090            120,765             94,212
   Depreciation and amortization...........             2,713,247          2,682,731          2,441,357
   Property taxes..........................               673,753            654,260            614,985
   Bad debt................................                13,759            (13,025)           109,404
   Personnel expenses......................               799,842            781,301            715,027
   Utilities...............................               996,025          1,060,645          1,003,866
   Repairs and maintenance.................               971,273            962,791            955,631
   Property management fees -
     affiliates............................               499,835            437,006            385,116
   Other property operating expenses.......               584,823            623,705            572,235
   General and administrative..............               271,913             62,701            110,780
   General and administrative -
     affiliates............................               704,871            820,122            710,495
   Write-down for impairment
     of real estate........................             1,087,000          2,200,000                  -
   Loss on demolition and replacement
     of assets.............................                     -          1,247,940                  -
                                                    -------------      -------------     --------------
     Total expenses........................            11,103,363         12,789,488          8,392,533
                                                    -------------      -------------     --------------

Net loss...................................        $   (2,347,920)    $   (5,063,046)   $    (1,938,063)
                                                    =============      =============     ==============

Net loss allocable to limited
   partners................................        $   (2,324,441)    $   (5,012,416)   $    (1,918,682)
Net loss allocable to General
   Partner.................................               (23,479)           (50,630)           (19,381)
                                                    -------------      -------------     --------------
Net loss...................................        $   (2,347,920)    $   (5,063,046)   $    (1,938,063)
                                                    =============      =============     ==============

Net loss per thousand limited
   partnership units.......................        $       (26.86)    $       (57.91)   $        (22.17)
                                                    =============      =============     ==============

Distribution per thousand limited
   partnership units.......................        $         4.33     $            -    $             -
                                                    =============      =============     ==============
</TABLE>

                 See accompanying notes to financial statements.
<PAGE>
                       McNEIL REAL ESTATE FUND XXVI, L.P.

                    STATEMENTS OF PARTNERS' EQUITY (DEFICIT)

              For the Years Ended December 31, 1996, 1995 and 1994

<TABLE>
<CAPTION>
                                                                                                   Total
                                                    General                  Limited               Partners'
                                                    Partner                  Partners              Equity
                                                 ----------------        ----------------      ----------------
<S>                                             <C>                     <C>                   <C>            
Balance at December 31, 1993..............       $      (307,402)        $    34,647,320       $    34,339,918

Net loss..................................               (19,381)             (1,918,682)           (1,938,063)
                                                  --------------          --------------        --------------

Balance at December 31, 1994..............              (326,783)             32,728,638            32,401,855

Net loss..................................               (50,630)             (5,012,416)           (5,063,046)
                                                  --------------          --------------        --------------

Balance at December 31, 1995..............              (377,413)             27,716,222            27,338,809

Net loss..................................               (23,479)             (2,324,441)           (2,347,920)

Distributions.............................                     -                (374,965)             (374,965)
                                                  --------------          --------------        --------------

Balance at December 31, 1996..............       $      (400,892)        $    25,016,816       $    24,615,924
                                                  ==============          ==============        ==============
</TABLE>



                 See accompanying notes to financial statements.

<PAGE>
                       McNEIL REAL ESTATE FUND XXVI, L.P.

                            STATEMENTS OF CASH FLOWS

                Increase (Decrease) in Cash and Cash Equivalents

<TABLE>
<CAPTION>
                                                            For the Years Ended December 31,
                                                   ----------------------------------------------------
                                                        1996                1995             1994
                                                   --------------     ---------------   ----------------
<S>                                                <C>                <C>               <C>            
Cash flows from operating activities:
   Cash received from tenants..............        $    8,380,164     $    7,284,225    $     6,369,873
   Cash received from legal settlement.....                     -             59,874                  -
   Cash paid to suppliers..................            (3,723,971)        (3,729,096)        (3,625,342)
   Cash paid to affiliates.................            (4,096,653)          (425,333)          (408,803)
   Interest received.......................               176,370             98,207             68,472
   Interest paid...........................            (1,587,720)        (1,008,659)          (581,020)
   Interest paid to affiliates.............               (53,903)          (107,937)           (98,941)
   Property taxes paid.....................              (683,160)          (699,082)          (757,394)
                                                    -------------      -------------     --------------
Net cash provided by (used in)
     operating activities..................            (1,588,873)         1,472,199            966,845
                                                    -------------      -------------     --------------

Net cash used in investing activities:
   Additions to real estate
     investments...........................            (1,158,736)        (9,732,038)        (3,551,769)
                                                    -------------      -------------     --------------

Cash flows from financing activities:
   Principal payments on mortgage
     notes payable.........................              (329,175)          (131,113)          (114,804)
   Proceeds from mortgage notes
     refinancing...........................                     -         13,878,527          1,121,473
   Retirement of mortgage note -
     affiliate.............................              (952,538)                 -                  -
   Repayment of advances from
     affiliates - General Partner..........              (130,517)                 -                  -
   Deferred borrowing costs paid...........               (15,683)          (199,909)          (214,218)
   Distributions...........................              (374,965)                 -                  -
                                                    -------------      -------------     --------------
Net cash provided by (used in)
     financing activities..................            (1,802,878)        13,547,505            792,451
                                                    -------------      -------------    ---------------

Net increase (decrease) in cash and
   cash equivalents........................            (4,550,487)         5,287,666         (1,792,473)

Cash and cash equivalents at
     beginning of year.....................             6,761,516          1,473,850          3,266,323
                                                    -------------      -------------     --------------

Cash and cash equivalents at end
     of year...............................        $    2,211,029     $    6,761,516    $     1,473,850
                                                    =============      =============     ==============
</TABLE>

     See discussion of noncash investing and financing activities in Note 4


                 See accompanying notes to financial statements.

<PAGE>
                       McNEIL REAL ESTATE FUND XXVI, L.P.

                            STATEMENTS OF CASH FLOWS

          Reconciliation of Net Loss to Net Cash Provided by (Used in)
                              Operating Activities

<TABLE>
<CAPTION>
                                                             For the Years Ended December 31,
                                                   -----------------------------------------------------
                                                        1996                1995              1994
                                                   ---------------    ---------------   ----------------         
<S>                                                <C>                <C>               <C>             
Net loss...................................        $   (2,347,920)    $   (5,063,046)   $    (1,938,063)
                                                    -------------      -------------     --------------

Adjustments to reconcile net loss
   to net cash provided by (used in)
   operating activities:
   Depreciation and amortization...........             2,713,247          2,682,731          2,441,357
   Amortization of deferred borrowing
     costs.................................                89,999            156,331             99,166
   Allowance for doubtful accounts.........               (23,764)          (267,858)            28,391
   Interest added to advances from
     affiliates - General Partner, net.....               (37,813)            12,828             10,624
   Write-down for impairment
     of real estate........................             1,087,000          2,200,000                  -
   Loss on demolition and replacement
      of assets............................                     -          1,247,940                  -
   Changes in assets and liabilities:
     Cash segregated for security
       deposits............................               (31,030)            31,363            (14,079)
     Accounts receivable...................              (156,296)           (39,438)            72,453
     Prepaid commissions...................                30,426             25,099            (65,834)
     Prepaid expenses and other
       assets..............................                 7,061           (536,646)            12,563
     Accounts payable and accrued
       expenses............................               (52,572)           187,789           (215,007)
     Accrued property taxes................                (1,204)            24,539           (142,695)
     Payable to affiliates - General
       Partner.............................            (2,891,947)           831,795            671,455
     Security deposits and deferred
       rental income.......................                25,940            (21,228)             6,514
                                                    -------------      -------------     --------------

         Total adjustments.................               759,047          6,535,245          2,904,908
                                                    -------------      -------------     --------------

Net cash provided by (used in)
     operating activities..................        $   (1,588,873)    $    1,472,199    $       966,845
                                                    =============      =============     ==============
</TABLE>

                 See accompanying notes to financialstatements.

<PAGE>
                       McNEIL REAL ESTATE FUND XXVI, L.P.

                          NOTES TO FINANCIAL STATEMENTS

                                DECEMBER 31, 1996


NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
--------------------------------------------------------------------

Organization
------------

McNeil Real Estate  Fund XXVI,  L.P.,  (the  "Partnership"),  formerly  known as
Southmark Equity Partners III, Ltd., was organized on March 4, 1985 as a limited
partnership under the provisions of the California  Revised Limited  Partnership
Act to acquire and operate  residential and commercial  properties.  The general
partner of the Partnership is McNeil Partners,  L.P. (the "General Partner"),  a
Delaware limited partnership,  an affiliate of Robert A. McNeil ("McNeil").  The
General Partner was elected at a meeting of limited  partners on March 30, 1992,
at which  time an amended  and  restated  partnership  agreement  (the  "Amended
Partnership  Agreement")  was adopted.  The principal  place of business for the
Partnership and the General Partner is 13760 Noel Road, Suite 600, LB70, Dallas,
Texas 75240.

The Partnership is engaged in diversified real estate activities,  including the
ownership, operation and management of residential, commercial office and retail
real  estate.  The  Partnership  has  determined  to  evaluate  market and other
economic  conditions  to  established  the  optimum  time to commence an orderly
liquidation  of the  Partnership's  assets in  accordance  with the terms of the
Amended Partnership Agreement.  At December 31, 1996, the Partnership owned five
income-producing properties as described in Note 4 - Real Estate Investments.

Basis of Presentation
---------------------

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

Real Estate Investments
-----------------------

Real estate investments are generally stated at the lower of depreciated cost or
fair value. Real estate investments are reviewed for impairment  whenever events
or changes in  circumstances  indicate  that their  carrying  amounts may not be
recoverable.  When the  carrying  value  of a  property  exceeds  the sum of all
estimated  future cash flows, an impairment loss is recognized.  At such time, a
write-down  is  recorded to reduce the basis of the  property  to its  estimated
recoverable amount.





<PAGE>
The  Partnership's  method  of  accounting  for real  estate  investments  is in
accordance with Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of" ("SFAS 121"),  which the Partnership  adopted effective January 1, 1996. The
adoption  of  SFAS  121 did  not  have a  material  impact  on the  accompanying
financial statements.

Improvements and betterments are capitalized and expensed  through  depreciation
charges. Repairs and maintenance are charged to operations as incurred.

Asset Held for Sale
-------------------

The asset held for sale is stated at the lower of depreciated cost or fair value
less costs to sell.  Depreciation on this asset ceased at the time it was placed
on the market for sale.

Depreciation and Amortization
-----------------------------

Buildings and improvements are depreciated using the  straight-line  method over
the  estimated  useful lives of the assets,  ranging from 5 to 25 years.  Tenant
improvements  are  capitalized  and are amortized  over the terms of the related
tenant lease using the straight-line method.

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

Cash and cash equivalents  include cash on hand and cash on deposit in financial
institutions with original  maturities of three months or less. Carrying amounts
for cash and cash equivalents approximate fair value.

Deferred Borrowing Costs
------------------------

Loan fees and other related costs incurred to obtain long-term financing on real
property are  capitalized  and amortized  using a method that  approximates  the
effective  interest method over the terms of the related mortgage notes payable.
Amortization of deferred  borrowing costs is included in interest expense on the
Statements of Operations.

Prepaid Commissions
-------------------

Leasing  commissions  incurred to obtain  leases on  commercial  properties  are
capitalized  and amortized using the  straight-line  method over the term of the
related  leases.  Amortization  of  leasing  commissions  is  included  in other
property operating expenses in the Statement of Operations.

Rental Revenue
--------------

The  Partnership  leases its  residential  property under  short-term  operating
leases. Lease terms generally are less than one year in duration.  Rental income
is recognized as earned.




<PAGE>
The Partnership leases its commercial properties under non-cancelable  operating
leases.  Certain leases provide concessions and/or periods of escalating or free
rent. Rental income is recognized on a straight-line  basis over the life of the
related leases. The excess of the rental revenue recognized over the contractual
rental  payments  is  recorded  as accrued  rent  receivable  and is included in
accounts receivable on the Balance Sheets.

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

No provision for Federal  income taxes is necessary in the financial  statements
of the  Partnership  because,  as a  partnership,  it is not  subject to Federal
income tax and the tax effect of its activities accrues to the partners.

Allocation of Net Income and Net Loss
-------------------------------------

The Amended  Partnership  Agreement  generally  provides that net income and net
loss  (other  than  net  income  arising  from  sales or  refinancing)  shall be
allocated one percent (1%) to the General Partner and ninety-nine  percent (99%)
to the limited partners.

For financial statement purposes,  net income and net loss arising from sales or
refinancing  shall be  allocated  one percent  (1%) to the  General  Partner and
ninety-nine percent (99%) to the limited partners.

For tax reporting  purposes,  net income arising from sales or refinancing shall
be  allocated  as  follows:  (a)  first,  amounts  of such net  income  shall be
allocated among the General  Partner and limited  partners in proportion to, and
to the extent of, the  portion of such  partner's  share of the net  decrease in
Partnership Minimum Gain determined under Treasury  Regulations,  (b) second, to
the General Partner and limited partners in proportion to, and to the extent of,
the amount by which their  respective  capital account  balances are negative by
more than their respective  remaining shares of the  Partnership's  Minimum Gain
attributable  to properties  still owned by the Partnership and (c) third, 1% of
such net income shall be  allocated  to the General  Partner and 99% of such net
income shall be allocated to the limited partners.

Federal  income tax law provides  that the  allocation of loss to a partner will
not be  recognized  unless the  allocation  is in  accordance  with a  partner's
interest in the partnership or the allocation has substantial  economic  effect.
Internal  Revenue  Code Section  704(b) and  accompanying  Treasury  Regulations
establish  criteria for allocation of  Partnership  deductions  attributable  to
debt. The  Partnership's  tax allocations for 1996, 1995 and 1994 have been made
in accordance with these provisions.

Distributions
-------------

At the discretion of the General  Partner,  distributable  cash (other than cash
from sales or refinancings)  shall be distributed 100% to the limited  partners,
with such  distributions  first paying the limited partners' Priority Return and
then to all limited  partners on a per limited  partnership unit ("Unit") basis.
Also at the discretion of the General Partner, the limited partners will receive
100% of distributable  cash from sales or refinancings  with such  distributions
first paying the limited partners Priority Return; as defined,  then the limited



<PAGE>
partners'  Additional  Priority  Return,  then  repayment  of Original  Invested
Capital, and of the remainder,  to the limited partners on a per Unit basis. The
limited partners' Priority Return represents a 8 1/4% cumulative return on their
Adjusted Invested Capital balance, as defined.  The limited partners' Additional
Priority  Return  represents a 1% cumulative  return on their Adjusted  Invested
Capital balance, as defined.

In connection  with a Terminating  Disposition,  as defined,  cash from sales or
refinancings   and  any  remaining   reserves  shall  be  allocated  among,  and
distributed to, the General  Partner and limited  partners in proportion to, and
to the extent of, their positive  capital account  balances after the net income
has been allocated pursuant to the above.

In 1996, the Partnership  distributed  $374,965 to the limited  partners.  There
were no distributions to partners in 1995 and 1994.

Net Loss Per Thousand Limited Partnership Units
-----------------------------------------------

Net loss per thousand  Units is computed by dividing  net loss  allocated to the
limited partners by the weighted average number of Units  outstanding  expressed
in thousands.  Per Unit  information  has been computed based on 86,534 thousand
Units outstanding in 1996, 86,549 thousand Units outstanding in 1995, and 86,554
thousand Units outstanding in 1994.

NOTE 2 - TRANSACTIONS WITH AFFILIATES
-------------------------------------

The  Partnership  pays property  management fees equal to 5% of the gross rental
receipts for its  residential  property and 6% of gross rental  receipts for its
commercial  properties to McNeil Real Estate  Management,  Inc.  ("McREMI"),  an
affiliate of the General Partner, for providing property management services for
the Partnership's residential and commercial properties and leasing services for
its residential  properties.  McREMI may also choose to provide leasing services
for the Partnership's  commercial properties,  in which case McREMI will receive
property  management  fees from such  commercial  properties  equal to 3% of the
property's  gross  rental  receipts  plus  leasing   commissions  based  on  the
prevailing market rate for such services where the property is located.

The  Partnership  reimburses  McREMI  for  its  costs,  including  overhead,  of
administering the Partnership's affairs.

Under the terms of the Amended Partnership Agreement,  the Partnership is paying
an  asset  management  fee to the  General  Partner.  Through  1999,  the  asset
management  fee is calculated as 1% of the  Partnership's  tangible asset value.
Tangible  asset  value is  determined  by using  the  greater  of (i) an  amount
calculated  by  applying  a  capitalization  rate  of 9% to the  annualized  net
operating  income of each property or (ii) a value of $10,000 per apartment unit
for residential  property and $50 per gross square foot for commercial  property
to arrive at the property  tangible  asset value.  The property  tangible  asset
value is then added to the book value of all other assets  excluding  intangible
items. The fee percentage decreases subsequent to 1999.







<PAGE>
Compensation  and  reimbursements  paid to or  accrued  for the  benefit  of the
General Partner or its affiliates are as follows:

<TABLE>
<CAPTION>
                                                               For the Years Ended December 31,
                                                   ----------------------------------------------------
                                                          1996               1995               1994
                                                   --------------     --------------    ---------------
<S>                                                <C>                <C>               <C>            
Property management fees - affiliates......        $      499,835     $      437,006    $       385,116
Charged to interest  - affiliates:
   Interest on mortgage note payable -
     affiliate.............................                11,398            107,937             83,588
   Interest on advances from
     affiliates - General Partner..........                 4,692             12,828             10,624
Charged to general and administrative -
   affiliates:
   Partnership administration..............               198,810            300,846            245,583
   Asset management fee....................               506,061            519,276            464,912
                                                    -------------      -------------     --------------
                                                   $    1,220,796     $    1,377,893    $     1,189,823
                                                    =============      =============     ==============
</TABLE>

The  payable to  affiliates  - General  Partner at  December  31,  1996 and 1995
consisted primarily of unpaid property management fees,  Partnership general and
administrative  expenses and asset  management  fees and is due and payable from
current  operations.  During 1996, the Partnership paid a total of $3,599,772 to
McREMI,  which  included  repayment of all deferred  asset  management  fees and
overhead reimbursements.

The General Partner has, at its discretion, advanced funds to the Partnership to
meet its working capital requirements. The advances were repaid during 1996. The
General  Partner is not obligated to advance funds to the  Partnership and there
is no assurance that the Partnership will receive additional funds.

The  advances  from  affiliates  at December  31,  1996 and 1995  consist of the
following:

                                                   1996              1995
                                              -------------     ------------
         Advances from General Partner        $           -     $    130,518
         Accrued interest payable                         -           37,812
                                               ------------      -----------
                                              $           -     $    168,330
                                               ============      ===========

The advances  were  unsecured,  due on demand and accrued  interest at the prime
lending rate of the Bank of America plus 1%. The prime  lending rate was 8.5% at
December  31,  1995 and 8.25% on May 20,  1996,  the date  when the  Partnership
repaid all outstanding affiliate advances and the related accrued interest.

In 1993,  the  Partnership  obtained a loan from  McNeil Real Estate Fund XXVII,
L.P.,  an  affiliate of the General  Partner,  totaling  $952,538.  The note was
secured by Continental Plaza and required monthly  interest-only  payments equal
to the prime  lending  rate of Bank of  America  plus 2 1/2% with the  principal
balance  due March 1,  1996.  On January 8,  1996,  the  Partnership  repaid the
mortgage loan.
<PAGE>
NOTE 3 - TAXABLE INCOME
-----------------------

McNeil  Real  Estate  Fund XXVI,  L.P.  is a  partnership  and is not subject to
Federal and state income taxes.  Accordingly,  no recognition  has been given to
income taxes in the accompanying  financial  statements of the Partnership since
the income or loss of the  Partnership  is to be  included in the tax returns of
the  individual  partners.  The tax  returns of the  Partnership  are subject to
examination by Federal and state taxing authorities. If such examinations result
in  adjustments  to  distributive  shares of  taxable  income  or loss,  the tax
liability of the partners could be adjusted accordingly.

The  Partnership's  net assets and liabilities for tax purposes exceeded the net
assets and liabilities for financial  reporting purposes by $38,453,377 in 1996,
$39,813,538 in 1995 and $35,628,694 in 1994.

NOTE 4 - REAL ESTATE INVESTMENTS
--------------------------------

The basis and accumulated  depreciation  and  amortization of the  Partnership's
real  estate  investments  at December  31, 1996 and 1995,  are set forth in the
following tables:

<TABLE>
<CAPTION>
                                                                         Accumulated
                                                   Buildings and        Depreciation         Net Book
       1996                         Land           Improvements        & Amortization          Value
       ----                    --------------      ------------        --------------     ---------------
<S>                            <C>                <C>                 <C>                 <C>            
Amargosa Creek
   Lancaster, CA               $      794,635     $     8,591,890     $    (3,718,390)    $     5,668,135
Continental Plaza
   Scottsdale, AZ                   1,975,324           2,036,191          (1,800,164)          2,211,351
Northway Mall
   Pittsburgh, PA                   2,965,329          30,680,454          (9,851,567)         23,794,216
Westwood Center
   Tampa, FL                        1,015,168          12,602,526          (6,312,280)          7,305,414
                                -------------      --------------      --------------       -------------
                               $    6,750,456     $    53,911,061     $   (21,682,401)     $   38,979,116
                                =============      ==============      ==============       =============

                                   Accumulated
                                                   Buildings and        Depreciation         Net Book
       1995                         Land           Improvements        & Amortization          Value
       ----                    --------------      ------------        --------------     ----------------

Amargosa Creek                 $      794,635     $     8,517,021     $    (3,340,699)     $    5,970,957
Edison Ford Square                  2,438,636           3,786,804          (2,243,237)          3,982,203
Continental Plaza                   1,975,324           1,955,198          (1,669,636)          2,260,886
Northway Mall                       2,965,329          29,897,021          (8,393,175)         24,469,175
Westwood Center                     1,015,168          12,539,006          (5,608,394)          7,945,780
                                -------------      --------------      --------------       -------------
                               $    9,189,092     $    56,695,050     $   (21,255,141)     $   44,629,001
                                =============      ==============      ==============       =============
</TABLE>



<PAGE>
Edison  Ford Square is a 141,000 sq. ft.  retail  center in Fort Myers,  Florida
that has evolved from primarily  retail, to more of a service center use. It was
56%,  46% and 54% occupied at December  31,  1996,  1995 and 1994.  The downtown
area, where the shopping center is located, has experienced decay due to a shift
in demographics.  The center is within walking distance of the Thomas Edison and
Henry Ford estates,  which are significant  historical  attractions in the area.
Plans for a major renovation that would have captured the architecture and style
of the Edison home began in 1993. However, with the loss of two major anchors in
1994, it was not viable to continue this project.  During 1995, a full, in-depth
market analysis was performed to determine the center's highest and best use. It
was  determined   that  the  only  viable   alternative   would  be  a  complete
redevelopment and renovation of the center; however, the Partnership decided not
to  pursue  this  alternative   because  of  the  inherent  risks  and  economic
uncertainties. An unsolicited offer from an unaffiliated third party to purchase
the center was received during 1995. These facts led management to conclude that
the asset was impaired.  Accordingly,  the Partnership recorded a write-down for
impairment  of $2.2 million  against  Edison  Ford's  building and  improvements
during the fourth  quarter of 1995, to record the property at its estimated fair
value. In accordance with management's plans to begin an orderly  liquidation of
the Partnership,  the property was placed on the market for sale effective April
1, 1996.  During 1996,  management  was informed that a major tenant,  occupying
approximately   10,900  square  feet,  was   terminating   its  lease  in  1997.
Additionally,  based on a shorter holding period of the property  established in
management's liquidation plans; it was determined that the Partnership could not
ultimately  realize  its  adjusted  carrying  value  through  future cash flows.
Accordingly, an additional write-down for impairment in the amount of $1,087,000
was recorded against the property's buildings and improvements during the fourth
quarter of 1996.  The net book value of Edison  Ford  Square was  $3,008,374  at
December 31, 1996.

The results of  operations  for the asset held for sale at December 31, 1996 are
$312,321, $89,164 and $161,170 for 1996, 1995 and 1994, respectively. Results of
operations are operating revenues less operating expenses including depreciation
and interest expense.

During the third quarter of 1994,  management  finalized a construction  loan on
Northway Mall totaling $11 million to finance a capital improvement program. The
decision to renovate  the mall was made after  exhaustive  analyses  and studies
conducted by  management  to determine  future cash flows of the mall based upon
stabilized  leases. The mortgage note allowed for monthly principal draws in the
amount of  approved  invoices.  The  principal  amount was due  August  1996 and
accrued interest at a variable rate. The interest rate at December 17, 1995 (the
date the mortgage  note was repaid) was 9.75%.  Interest  payments were due from
the  Partnership  upon  repayment  of the note.  During  1995,  $91,000  of this
interest was capitalized as an addition to real estate investments, which is the
portion  related to the vacant  square  footage of Northway  Mall that was under
construction during the year. The Partnership incurred loan costs of $214,218 in
1994 related to the construction  mortgage note financing,  of which $70,000 was
capitalized in 1995 as an addition to real estate  investments to be depreciated
over the life of the related  asset.  The remaining  loan costs of $144,218 were
amortized over the life of the  construction  mortgage note. The Partnership was
provided cash flow of $1,121,473  during 1994 due to the  construction  mortgage
note as discussed above.






<PAGE>
Management obtained permanent financing for the capital  improvements program in
December  1995.  The new mortgage  note, in the amount of $15 million,  bears an
interest rate of 7.5% with monthly  principal and interest  payments of $110,849
and matures in December 2002. The proceeds from the refinancing were used to pay
off the construction mortgage note, as well as the affiliate mortgage note which
was secured by Continental Plaza. The renovations were completed during 1995. As
a part  of the  renovation,  assets  valued  at  approximately  $1,248,000  were
demolished or removed and written off in the fourth quarter of 1995.

The Partnership leases its commercial properties under non-cancelable  operating
leases.  Future  minimum  rents to be received  as of  December  31, 1996 are as
follows:

      1997....................................        $  5,747,000
      1998....................................           5,257,000
      1999....................................           4,317,000
      2000....................................           3,649,000
      2001....................................           2,778,000
      Thereafter..............................          11,970,000
                                                       -----------
        Total                                         $ 33,718,000
                                                       ===========

Future minimum rents do not include  contingent rentals based on sales volume of
tenants.  Contingent rents amounted to $7,943, $15,094 and $11,793 for the years
ended December 31, 1996, 1995 and 1994, respectively.  Future minimum rents also
do not include  expense  reimbursements  for common area  maintenance,  property
taxes, and other expenses.  These expense reimbursements amounted to $1,563,150,
$1,176,119 and $886,698 for the years ended  December 31, 1996,  1995, and 1994,
respectively.  These  contingent  rents and  expense  reimbursements,  which are
include  amounts for the asset held for sale,  are included in rental revenue on
the Statement of Operations.

NOTE 5 - MORTGAGE NOTES PAYABLE
-------------------------------

The  following  sets forth the  mortgage  notes  payable of the  Partnership  at
December 31, 1996 and 1995.  The mortgage  notes are secured by the related real
estate investments.

<TABLE>
<CAPTION>
                         Mortgage         Annual          Monthly
                         Lien             Interest        Payments/                   December 31,
Property                 Position (a)Rates %              Maturity Date(c)      1996                1995
--------                 -------------------           -------------------  -------------      --------------
<S>                      <C>              <C>         <C>          <C>      <C>                <C>           
Amargosa Creek           First            7.875       $   35,528   12/98    $   4,759,298      $    4,808,711
                                                                             ------------       -------------

Northway Mall (b)        First            7.500         110,849    12/02       14,805,922          15,000,000
                                                                             ------------       -------------

Westwood Center          First            8.000           22,457   12/98        2,250,526           2,336,210
                                                                             ------------       -------------
                                                                            $  21,815,746      $   22,144,921
                                                                             ============       =============
</TABLE>

<PAGE>
(a)   The debt is non-recourse to the Partnership.

(b)   In December 1995, the  Partnership  obtained  permanent  financing for the
      capital improvements program at Northway Mall (see Note 6 - Refinancing of
      Mortgage Note Payable).

(c)   Balloon payments on the mortgage notes are due as follows:

              Property             Balloon             Payment Date
              --------             -------             ------------

         Amargosa Creek          $  4,653,031              12/98
         Westwood Center            2,074,545              12/98
         Northway Mall             13,118,565              12/02

Scheduled principal maturities of the mortgage notes payable are as follows:

         1997....................................        $    373,700
         1998....................................           7,108,696
         1999....................................             264,144
         2000....................................             284,650
         2001....................................             306,749
         Thereafter..............................          13,477,807
                                                          -----------
                    Total                                $ 21,815,746
                                                          ===========

Based on borrowing  rates  currently  available to the  Partnership for mortgage
loans with similar terms and average maturities,  the fair value of the mortgage
notes payable was approximately $20,745,000 at December 31, 1996 and $22,871,000
at December 31, 1995.

NOTE 6 - REFINANCING OF MORTGAGE NOTE PAYABLE
---------------------------------------------

On December 17, 1995,  the  Partnership  refinanced the mortgage note payable on
Northway  Mall.  The new mortgage loan bears an interest rate of 7.5%,  requires
monthly  principal  and  interest  payments of $110,849  and matures in December
2002. The following is a summary of the transaction:

       New loan proceeds.......................        $   15,000,000
       Existing debt retired...................            (9,153,530)
                                                        -------------
       Cash proceeds from refinancing..........        $    5,846,470
                                                        =============

The Partnership  deposited  $591,500 into property tax and deferred  maintenance
escrows and incurred loan costs of $269,910.

In August 1994, the Partnership  obtained financing for the capital improvements
program at Northway  Mall.  The  construction  mortgage note allowed for monthly
principal draws in the amount of approved  invoices up to $11 million.  Interest
payments  were due from the  Partnership  to the extent of the excess  cash flow
from the property  with the remaining  interest due upon  repayment of the note.
The  principal  amount was due August  1996 and  accrued  interest at a variable
rate. During 1995, the Partnership  received  additional  proceeds of $8,032,057
from the construction loan for Northway Mall's capital  improvement  program. On
December 17, 1995, the Partnership  obtained permanent  financing and repaid the
construction loan in full.
<PAGE>
NOTE 7 - MORTGAGE NOTE PAYABLE - AFFILIATE
------------------------------------------

The  following  sets  forth  the  mortgage  note  payable  -  affiliate  of  the
Partnership  at December 31, 1996 and 1995. The mortgage note was secured by the
underlying real estate investment.

<TABLE>
<CAPTION>
                         Mortgage         Annual          Monthly
                         Lien             Interest        Payments/                 December 31,
Property                 Position(a)      Rates %         Maturity Date         1996               1995
--------                 ------------     -------      ------------------  --------------      ------------
<S>                        <C>              <C>        <C>         <C>      <C>                <C>         
Continental Plaza (b)      First            (c)        Variable    03/96    $           -      $    952,538
                                                                             ============       ===========
</TABLE>

(a)   The debt was non-recourse to the Partnership.

(b)   In 1993,  the  Partnership  obtained a loan from McNeil Real  Estate  Fund
      XXVII,  L.P.,  an  affiliate  of the General Partner, totaling   $952,538.
      The   principal   balance  was due March 1, 1996.  On January 8, 1996, the
      Partnership repaid the mortgage loan.

(c)   The note  required  monthly  payments of interest  only equal to the prime
      lending rate of the Bank of America  plus 2 1/2%.  The prime rate was 8.5%
      both at  December  31,  1995 and at  January  8,  1996,  the date when the
      Partnership repaid the mortgage loan in full.

Under the terms of the Amended Partnership Agreement, borrowings from affiliates
approximate fair market value.

NOTE 8 - LEGAL PROCEEDINGS
--------------------------

The Partnership is not party to, nor are any of the Partnership's properties the
subject of, any material pending legal proceedings, other than ordinary, routine
litigation incidental to the Partnership's business, except for the following:

1)   HCW Pension Real Estate Fund, Ltd. et al. v. Ernst & Young,  BDO Seidman et
     al. (Case  #92-06560-A).  This suit was filed on behalf of the  Partnership
     and other  affiliated  partnerships  (as  defined  in this  Section  1, the
     "Affiliated  Partnerships")  on May 26, 1992, in the 14th Judicial District
     Court  of  Dallas  County.   The  petition  sought  recovery   against  the
     Partnership's  former auditors,  Ernst & Young, for negligence and fraud in
     failing to detect and/or report  overcharges of fees/expenses by Southmark,
     the  former  general  partner.   The  former  auditors  initially  asserted
     counterclaims   against  the  Affiliated   Partnerships  based  on  alleged
     fraudulent misrepresentations made to the auditors by the former management
     of  the  Affiliated   Partnerships   (Southmark)  in  the  form  of  client
     representation  letters executed and delivered to the auditors by Southmark
     management.  The counterclaims sought recovery of attorneys' fees and costs
     incurred in defending this action.  The counterclaims  were later dismissed
     on appeal, as discussed below.




<PAGE>
     The  trial  court  granted   summary   judgment   against  the   Affiliated
     Partnerships based on the statute of limitations;  however,  on appeal, the
     Dallas Court of Appeals reversed the trial court and remanded for trial the
     Affiliated  Partnerships'  fraud claims  against  Ernst & Young.  The Texas
     Supreme  Court  denied  Ernst &  Young's  application  for writ of error on
     January 11, 1996. Shortly before trial, the district court judge once again
     granted summary judgment against the Affiliated Partnerships on December 2,
     1996. The Partnership is continuing to pursue vigorously its claims against
     Ernst & Young;  however,  the final  outcome of this  litigation  cannot be
     determined at this time.

2)   James F. Schofield, Gerald C. Gillett, Donna S. Gillett, Jeffrey Homburger,
     Elizabeth Jung,  Robert Lewis,  and Warren Heller et al. v. McNeil Partners
     L.P., McNeil Investors,  Inc., McNeil Real Estate Management,  Inc., Robert
     A. McNeil,  Carole J. McNeil,  McNeil Pacific  Investors  Fund 1972,  Ltd.,
     McNeil Real Estate Fund IX, Ltd.,  McNeil Real Estate Fund X, Ltd.,  McNeil
     Real Estate Fund XI, Ltd.,  McNeil Real Estate Fund XII, Ltd.,  McNeil Real
     Estate Fund XIV, Ltd., McNeil Real Estate Fund XV, Ltd., McNeil Real Estate
     Fund XX, L.P.,  McNeil Real Estate Fund XXI, L.P.,  McNeil Real Estate Fund
     XXII,  L.P.,  McNeil Real Estate Fund XXIV,  L.P.,  McNeil Real Estate Fund
     XXV, L.P.,  McNeil Real Estate Fund XXVI, L.P., and McNeil Real Estate Fund
     XXVII,  L.P., et al. - Superior  Court of the State of  California  for the
     County of Los  Angeles,  Case No.  BC133799  (Class and  Derivative  Action
     Complaint).

     The action  involves  purported  class and  derivative  actions  brought by
     limited  partners of each of the fourteen  limited  partnerships  that were
     named as nominal  defendants as listed above (as defined in this Section 2,
     the  "Partnerships").  Plaintiffs allege that McNeil  Investors,  Inc., its
     affiliate  McNeil Real Estate  Management,  Inc.  and three of their senior
     officers and/or directors (as defined in this Section 2, collectively,  the
     "Defendants") breached their fiduciary duties and certain obligations under
     the  respective  Amended  Partnership  Agreement.  Plaintiffs  allege  that
     Defendants  have  rendered  such Units  highly  illiquid  and  artificially
     depressed  the prices that are  available  for Units on the resale  market.
     Plaintiffs  also allege that  Defendants  engaged in a course of conduct to
     prevent  the  acquisition  of  Units  by an  affiliate  of  Carl  Icahn  by
     disseminating  purportedly  false,  misleading and inadequate  information.
     Plaintiffs  further  allege  that  Defendants  acted to  advance  their own
     personal interests at the expense of the Partnerships'  public unit holders
     by failing to sell Partnership properties and failing to make distributions
     to unitholders.

     On December 16,  1996,  the  Plaintiffs  filed a  consolidated  and amended
     complaint.  Plaintiffs  are suing for breach of fiduciary  duty,  breach of
     contract  and  an  accounting,  alleging,  among  other  things,  that  the
     management  fees paid to the McNeil  affiliates over the last six years are
     excessive,  that these fees  should be reduced  retroactively  and that the
     respective Amended  Partnership  Agreements  governing the Partnerships are
     invalid.  On January 7, 1997,  the Court ordered  consolidation  with three
     other similar actions.

     The  Partnerships  filed a demurrer to the complaint and a motion to strike
     on February 14, 1997, seeking to dismiss the complaint in all respects. The
     demurrer  is  pending.  The  Partnerships  deny that  there is any merit to
     Plaintiff's allegations and intend to vigorously defend this action.

<PAGE>

                       McNEIL REAL ESTATE FUND XXVI, L.P.
                                  SCHEDULE III
      REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION AND AMORTIZATION
                                December 31, 1996

<TABLE>
<CAPTION>
                                                                                                       Costs
                                                       Initial Cost              Cumulative         Capitalized
                          Related                             Buildings and      Write-down         Subsequent
Description               Encumbrances            Land        Improvements      for Impairment     To Acquisition
------------              ------------            ----        --------------    --------------     --------------
<S>                        <C>               <C>               <C>              <C>                <C>          
Apartments:

Amargosa Creek
   Lancaster, CA (b)       $    4,759,298    $      947,277    $    9,578,026   $   (1,696,024)    $     557,246

Office Buildings:

Continental Plaza
   Scottsdale, AZ (c)                   -         4,211,854         4,059,113       (5,662,360)        1,402,908

Westwood Center
   Tampa, FL (d)                2,250,526         1,465,168        14,814,477       (5,000,000)        2,338,049

Retail Center:

Northway Mall
   Pittsburgh, PA (e)          14,805,922         4,523,305        17,186,915       (6,000,000)       17,935,563
                           --------------    --------------    --------------     ------------     -------------

                          $    21,815,746   $    11,147,604   $    45,638,531    $ (18,358,384)   $   22,233,766
                           ==============    ==============    ==============     ============     =============


Asset Held for Sale:

Edison Ford
   Square (f)(g)
   Fort Myers, FL         $             -
                           ==============
</TABLE>


(b)  The  carrying  value of Amargosa Creek apartments was reduced by $1,696,024
     in 1992.

(c)  The carrying value of  continental Plaza was reduced by $1,239,353 in 1993,
     $1,803,007 in 1992,  $620,000 in 1991 and $2,000,000 in 1989.

(d)  The carrying value of Westwood Center was reduced by $5,000,000 in 1989.

(e)  The carrying value of Northway Mall was reduced by $6,000,000 in 1993.

(f)  The  carrying value of Edison Ford Square was reduced by $1,087,000 in 1996
     and $2,200,000 in 1995.

(g)  Asset  held for sale is  stated at the  lower of  depreciated  cost or fair
     value less cost to sell.  Historical cost, net of accumulated  depreciation
     and  cumulative  write-downs,  become  the new cost basis when the asset is
     classified as "Held for Sale."


                     See accompanying notes to Schedule III.

<PAGE>
                       McNEIL REAL ESTATE FUND XXVI, L.P.
                                  SCHEDULE III
      REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION AND AMORTIZATION
                                December 31, 1996


<TABLE>
<CAPTION>
                                            Gross Amount at
                                     Which Carried at Close of Period                 Accumulated
                                                 Buildings and                        Depreciation
Description                      Land            Improvements          Total (a)      and Amortization
-----------                      ----            -------------         ---------      ----------------
<S>                           <C>                <C>              <C>                 <C>            
Apartment:

Amargosa Creek
   Lancaster, CA (b)          $      794,635     $    8,591,890   $      9,386,525    $   (3,718,390)

Office Buildings:

Continental Plaza
   Scottsdale, AZ (c)              1,975,324          2,036,191          4,011,515        (1,800,164)

Westwood Center
   Tampa, FL (d)                   1,015,168         12,602,526         13,617,694        (6,312,280)

Retail Center:

Northway Mall
   Pittsburgh, PA (e)              2,965,329         30,680,454         33,645,783        (9,851,567)
                              --------------     --------------   ----------------     -------------
                             $     6,750,456    $    53,911,061  $      60,661,517    $  (21,682,401)
                              ==============     ==============   ================     =============

Asset Held for Sale:

Edison Ford
   Square (f)(g)
   Fort Myers, FL                                                $       3,008,374
                                                                  ================
</TABLE>

(a)  For Federal  Income tax purposes,  the  properties  are  depreciated   over
     lives ranging from 5-39 years using ACRS or MACRS methods.  The   aggregate
     cost    of  real  estate  investments  for  Federal income tax purposes was
     approximately   $89,575,976 and accumulated depreciation was $20,548,121 at
     December 31, 1996.

(b)  The  carrying value of Amargosa Creek apartments was reduced by  $1,696,024
     in 1992.

(c)  The carrying value of  Continental Plaza was reduced by $1,239,353 in 1993,
     $1,803,007 in 1992,  $620,000 in 1991 and $2,000,000 in 1989.

(d)  The carrying value of Westwood Center was reduced by $5,000,000 in 1989.

(e)  The carrying value of Northway Mall was reduced by $6,000,000 in 1993.

(e)  The  carrying value of Edison Ford Square was reduced by $1,087,000 in 1996
     and $2,200,000 in 1995.

(g)  Asset  held for sale is  stated at the  lower of  depreciated  cost or fair
     value less costs to sell. Historical cost, net of accumulated  depreciation
     and  cumulative  write-downs,  become  the new cost basis when the asset is
     classified as "Held for Sale." Depreciation ceases at the time the asset is
     placed on the market for sale.


                     See accompanying notes to Schedule III.

<PAGE>
                       McNEIL REAL ESTATE FUND XXVI, L.P.
                                  SCHEDULE III
      REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION AND AMORTIZATION
                                December 31, 1996


<TABLE>
<CAPTION>

                                 Date of                    Date                Depreciable
Description                   Construction                Acquired              lives (years)
-----------                   ------------                --------              -------------
<S>                             <C>                         <C>                     <C> 
Apartment:

Amargosa Creek
   Lancaster, CA (b)            1984/85                     12/86                   5-25

Office buildings:

Continental Plaza
   Scottsdale, AZ (c)           1984                        11/86                   5-25

Westwood Center
   Tampa, FL (d)                1984                        03/87                   5-25

Retail center:

Northway Mall
   Pittsburgh, PA (e)           1962                        06/87                   5-25

Asset Held for Sale:

Edison Ford Square
   Fort Myers, FL               1960                        07/87

</TABLE>





<PAGE>
                       McNEIL REAL ESTATE FUND XXVI, L.P.

                              Notes to Schedule III
      Real Estate Investments and Accumulated Depreciation and Amortization


A  summary  of  activity  for the  Partnership's  real  estate  investments  and
accumulated depreciation and amortization is as follows:

<TABLE>
<CAPTION>
                                                            For the Years Ended December 31,
                                                   ----------------------------------------------------
                                                          1996              1995               1994
                                                   --------------     --------------    ---------------
<S>                                                <C>                <C>               <C>            
Real estate investments:

Balance at beginning of year...............        $   65,884,142     $   60,934,261    $    56,671,436

Improvements...............................             1,002,815          9,020,982          4,262,825

Reclassification to asset held for sale....            (6,225,440)                 -                  -

Write-down for impairment
   of real estate..........................                     -         (2,200,000)                 -

Demolition and replacement of assets
   due to capital improvements.............                     -         (1,871,101)                 -
                                                    -------------      -------------     --------------

Balance at end of year.....................        $   60,661,517     $   65,884,142    $    60,934,261
                                                    =============      =============     ==============


Accumulated depreciation and amortization:

Balance at beginning of year...............        $   21,255,141     $   19,195,571    $    16,754,214

Depreciation and amortization..............             2,713,247          2,682,731          2,441,357

Reclassification to asset held for sale....            (2,285,987)                 -                  -

Demolition and replacement of assets
   due to capital improvements.............                     -           (623,161)                 -
                                                    -------------      -------------     --------------

Balance at end of year.....................        $   21,682,401     $   21,255,141    $    19,195,571
                                                    =============      =============     ==============


Asset held for sale:

Balance at beginning of year...............        $            -     $            -     $            -

Reclassification to asset held for sale....             3,939,453                  -                  -


Improvements...............................               155,921                  -                  -

Write-down for impairment
   of real estate..........................            (1,087,000)                 -                  -
                                                    -------------      -------------     --------------

Balance at end of year.....................        $    3,008,374     $            -    $             -
                                                    =============      =============     ==============
</TABLE>




<PAGE>
ITEM 9.       CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
-------       ---------------------------------------------------------------
              FINANCIAL DISCLOSURE
              --------------------

None.

                                    PART III

ITEM 10.      DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------      --------------------------------------------------

Neither the  Partnership  nor the General Partner has any directors or executive
officers.  The names and ages of, as well as the positions held by, the officers
and  directors of McNeil  Investors,  Inc.,  the general  partner of the General
Partner, are as follows:
 
                                        Other Principal Occupations and Other
Name and Position             Age       Directorships During the Past 5 Years
-----------------             ---       -------------------------------------

Robert A. McNeil,              76       Mr.  McNeil  is also  Chairman  of   the
Chairman of the                         Board and Director of McNeil Real Estate
Board and Director                      Management,  Inc. ("McREMI") which is an
                                        affiliate of the General Partner. He has
                                        held the foregoing  positions  since the
                                        formation  of such  entity in 1990.  Mr.
                                        McNeil  received  his B.A.  degree  from
                                        Stanford  University  in  1942  and  his
                                        L.L.B.  degree from  Stanford Law School
                                        in 1948. He is a member of the State Bar
                                        of  California  and has been involved in
                                        real  estate  financing  since  the late
                                        1940's  and  real  estate  acquisitions,
                                        syndications  and   dispositions   since
                                        1960. From 1986 until active  operations
                                        of  McREMI  and  McNeil  Partners,  L.P.
                                        began in February 1991, Mr. McNeil was a
                                        private investor. Mr. McNeil is a member
                                        of the International  Board of Directors
                                        of the Salk  Institute,  which  promotes
                                        research in improvements in health care.

Carole J. McNeil               53       Mrs.    McNeil    is  Co-Chairman,  with
Co-Chairman of the                      husband  Robert  A.  McNeil,  of  McNeil
Board                                   Investors,  Inc. Mrs.  McNeil has twenty
                                        years of real  estate  experience,  most
                                        recently as a private investor from 1986
                                        to 1993.  In 1982,  she founded  Ivory &
                                        Associates,  a  commercial  real  estate
                                        brokerage  firm  in San  Francisco,  CA.
                                        Prior to that, she was a commercial real
                                        estate   associate   with  the   Madison
                                        Company and, earlier, a commercial sales
                                        associate  and  analyst  with Marcus and
                                        Millichap  in San  Francisco.  In  1978,
                                        Mrs. McNeil  established Escrow Training
                                        Centers,  California's  first accredited
                                        commercial  training  program  for title
                                        company escrow  officers and real estate
                                        agents   needing   college   credits  to
                                        qualify  for  brokerage  licenses.   She
                                        began  in real  estate  as  Manager  and
                                        Marketing  Director  of Title  Insurance
                                        and  Trust in  Marin  County,  CA.  Mrs.
                                        McNeil serves on the International Board
                                        of Directors of the Salk Institute.
<PAGE>
                                        Other Principal Occupations and Other
Name and Position             Age       Directorships During the Past 5 Years
-----------------             ---       -------------------------------------

Ron K. Taylor                  39       Mr.  Taylor is the  President  and Chief
President and Chief                     Executive  Officer of McNeil Real Estate
Executive Officer                       Management  which is an affiliate of the
                                        General Partner.  Mr. Taylor has been in
                                        this capacity  since the  resignation of
                                        Donald K. Reed on March 4,  1997.  Prior
                                        to       assuming       his      current
                                        responsibilities, Mr. Taylor served as a
                                        Senior  Vice  President  of McREMI.  Mr.
                                        Taylor has been in this  capacity  since
                                        McREMI  commenced  operations  in  1991.
                                        Prior  to  joining  McREMI,  Mr.  Taylor
                                        served as an  Executive  Vice  President
                                        for  a   national   syndication/property
                                        management  firm. In this capacity,  Mr.
                                        Taylor  had the  responsibility  for the
                                        management  and leasing of a  21,000,000
                                        square  foot   portfolio  of  commercial
                                        properties. Mr. Taylor has been actively
                                        involved  in the  real  estate  industry
                                        since 1983.

Each director  shall serve until his successor  shall have been duly elected and
qualified.

Section 16 (a) of the Securities Exchange Act of 1934 requires the Partnership's
General  Partner and the directors and executive  offers of the General  Partner
(Including McNeil Investors,  Inc. as the general partner of the General Partner
and the officers and directors of McNeil Investors, Inc.) to file, with the SEC,
reports of ownership and changes in ownership of the  Partnership's  Units.  The
Partnership is required to identify any of those persons who failed to file such
reports on a timely basis.

ITEM 11.     EXECUTIVE COMPENSATION
--------     ----------------------

No direct  compensation  was paid or payable by the  Partnership to directors or
officers  (since it does not have any  directors or officers) for the year ended
December  31,  1996,  nor was any  direct  compensation  paid or  payable by the
Partnership  to  directors  or officers  of the  general  partner of the General
Partner for the year ended  December 31, 1996. The  Partnership  has no plans to
pay any such remuneration to any directors or officers of the General Partner in
the future.

See Item 13 - Certain  Relationships  and  Related  Transactions  for amounts of
compensation and  reimbursements  paid by the Partnership to the General Partner
and its affiliates.


<PAGE>
ITEM 12.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------     --------------------------------------------------------------

(A)   Security ownership of certain beneficial owners.

      No individual or group,  as defined by Section  13(d)(3) of the Securities
      Exchange Act of 1934,  known to the Partnership is the beneficial owner of
      more than 5 percent of the Partnership's securities.

(B)   Security ownership of Management.

      The General Partner and the officers or directors of its general  partner,
      collectively,  own 2,950,000  Units,  which is 3% of the  outstanding  any
      Units.

(C)   Change in control.

      None.

ITEM 13.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------     ----------------------------------------------

The amendments to the Partnership compensation structure included in the Amended
Partnership  Agreement  provide for an asset management fee to replace all other
forms of General Partner  compensation  other than property  management fees and
reimbursements  of certain  costs.  Through 1999,  the asset  management  fee is
calculated as 1% of the Partnership's tangible asset value. Tangible asset value
is  determined  by using the greater of (i) an amount  calculated  by applying a
capitalization  rate of 9 percent to the annualized net operating income of each
property or (ii) a value of $10,000 per apartment unit for residential  property
and $50 per gross square foot for commercial  property to arrive at the property
tangible  asset value.  The property  tangible  asset value is then added to the
book value of all other assets  excluding  intangible  items. The fee percentage
decreases  subsequent  to 1999.  For the  year  ended  December  31,  1996,  the
Partnership paid or accrued $506,061 of such asset management fees.

The Partnership pays property  management fees equal to 5% of the gross receipts
of its  residential  property and 6% for  commercial  properties  to McREMI,  an
affiliate of the General Partner,  for providing property  management  services.
Additionally,  the  Partnership  reimburses  McREMI  for  its  costs,  including
overhead of administering the Partnership's affairs. For the year ended December
31, 1996, the Partnership paid or accrued  $698,645 of such property  management
fees and reimbursements. See Item 1 - Business, Item 7 - Management's Discussion
and Analysis of Financial  Condition and Results of Operations and Item 8 - Note
2 - "Transactions With Affiliates".

The General Partner has, at its discretion, advanced funds to the Partnership to
meet working capital requirements. The advances, which were unsecured and due on
demand,  accrued  interest at a rate equal to the prime lending rate of the Bank
of America,  plus 1%. All outstanding affiliate advances and the related accrued
interest were repaid on May 20, 1996.

In 1993,  the  Partnership  obtained a loan from  McNeil Real Estate Fund XXVII,
L.P.,  an  affiliate of the General  Partner,  totaling  $952,538.  The note was
secured by Continental Plaza and required monthly  interest-only  payments equal
to the prime  lending  rate of Bank of  America  plus  2.5%  with the  principal
balance  due March 1,  1996.  On January 8,  1996,  the  Partnership  repaid the
mortgage loan.

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

See accompanying Index to Financial Statements at Item 8.

(A)   Exhibits

      Exhibit
      Number                      Description
      -------                     -----------

      4.                          Amended  and  Restated   Limited   Partnership
                                  Agreement dated March 30, 1992.  (Incorporated
                                  by   reference   to  Current   Report  of  the
                                  Registrant  on Form 8-K dated March 30,  1992,
                                  as filed on April 10, 1992).

      4.1                         Amendment  No. 1 to the Amended  and  Restated
                                  Limited  Partnership  Agreement of McNeil Real
                                  Estate   Fund   XXVI,   L.P  dated  June  1995
                                  (incorporated  by reference  to the  Quarterly
                                  Report of the  registrant on Form 10-Q for the
                                  period ended June 30, 1995, as filed on August
                                  14, 1995).

      10.1                        Assignment of Partnership Advances dated March
                                  13, 1991 between  Southmark  Investment  Group
                                  86,   Inc.   and   McNeil    Partners,    L.P.
                                  (Incorporated   by  reference  to  the  Annual
                                  Report of the  registrant on Form 10-K for the
                                  period ended  December  31, 1990,  as filed on
                                  March 29, 1991).

      10.5                        Property  Management Agreement dated March 30,
                                  1992,  between  McNeil  Real Estate Fund XXVI,
                                  L.P.   and  McNeil  Real  Estate   Management,
                                  Inc.(1)

      10.6                        Amendment  of  Property  Management  Agreement
                                  dated March 5, 1993 by McNeil Real Estate Fund
                                  XXVI, L.P. and McNeil Real Estate  Management,
                                  Inc.(1)

      10.7                        Promissory  Note   dated    October   7, 1993,
                                  between  McNeil Real  Estate  Fund XXVI,  L.P.
                                  .and  John  Hancock   Mutual  Life   Insurance
                                  Company    relating    to    Amargosa    Creek
                                  Apartments.(2)

      10.8                        Secured  Promissory   Note   dated October 27,
                                  1993,  between  McNeil  Real Estate Fund XXVI,
                                  L.P. and Sun Life Assurance  Company of Canada
                                  (U.S.) relating to Westwood Center.(2)

      10.9                        Promissory  Note dated March 1, 1993,  between
                                  McNeil Real Estate Fund XXVI,  L.P. and McNeil
                                  Real Estate Fund XXVII, L.P.(2)


<PAGE>
      Exhibit
      Number                      Description
      -------                     -----------

      10.10                       Mortgage  note payable  dated  August  24,1994
                                  between  McNeil Real Estate Fund XXVI L.P. and
                                  PNC Bank,  National  Association  relating  to
                                  Northway  Mall.(Incorporated  by  reference to
                                  the Quarterly Report of the registrant on Form
                                  10-Q for the period ended  September 30, 1994,
                                  as filed on November 14, 1994).

      10.11                       Promissory  note payable  dated   December 15,
                                  1995,  between  McNeil  Real Estate Fund XXVI,
                                  L.P. and The Variable  Annuity Life Insurance.
                                  (Incorporated   by  reference  to  the  Annual
                                  Report of the  registrant on Form 10-K for the
                                  period ended  December  31, 1995,  as filed on
                                  March 29, 1996).

      11.                         Statement   regarding  computation of Net Loss
                                  per  Limited  Partnership  Unit  (see Item 8 -
                                  Note  1  -   "Organization   and   Summary  of
                                  Significant Accounting Policies").

                  (1)             Incorporated  by reference   to   the   Annual
                                  Report of the  registrant on Form 10-K for the
                                  period ended  December  31, 1992,  as filed on
                                  March 30, 1993.

                  (2)             Incorporated  by   reference   to   the Annual
                                  Report of the  registrant on Form 10-K for the
                                  period ended  December  31, 1993,  as filed on
                                  March 31, 1994.

(B)   Reports  on Form  8-K.  There  were no  reports  on Form 8-K  filed by the
      Partnership during the quarter ended December 31, 1996.


<PAGE>
                       McNEIL REAL ESTATE FUND XXVI, L.P.
                              A Limited Partnership

                                 SIGNATURE PAGE


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


                            McNEIL REAL ESTATE FUND XXVI, L.P.


                              By:  McNeil Partners, L.P., General Partner

                              By:  McNeil Investors, Inc., General Partner



March 28, 1997                     By:  /s/ Robert A. McNeil
--------------                          ---------------------------------------
Date                                    Robert A. McNeil
                                        Chairman of the Board and Director
                                        Principal Executive Officer


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  registrant and
in the capacities and on the dates indicated.



March 28, 1997                     By:  /s/  Ron K. Taylor
--------------                          ---------------------------------------
Date                                    Ron K. Taylor
                                        President and Director of McNeil
                                        Investors, Inc.
                                        (Principal Financial Officer)




March 28, 1997                     By:  /s/  Carol A. Fahs
--------------                          ---------------------------------------
Date                                    Carol A. Fahs
                                        Vice President of McNeil Investors, Inc.
                                        (Principal Accounting Officer)