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, 1997
                                 -----------------------------------------------

                                       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. [ ]

83,535,671 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 35

                                TOTAL OF 37 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, 1996, and 1997, 4,930, 15,312 and 3,000 Units,  respectively,
were relinquished leaving 86,530,671 Units outstanding as of December 31, 1997.

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, 1997, 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:

Pursuant  to the  Partnership's  previously  announced  liquidation  plans,  the
Partnership  has recently  retained  PaineWebber,  Incorporated as its exclusive
financial  advisor  to  explore  alternatives  to  maximize  the  value  of  the
Partnership.  The  alternatives  being  considered by the  Partnership  include,
without limitation,  a transaction in which limited partnership interests in the
Partnership  are converted into cash. The General  Partner of the Partnership or
entities or persons  affiliated with the General Partner will not be involved as
a purchaser in any of the transactions  contemplated above. Any transaction will
be subject to certain conditions  including (i) approval by the limited partners
of the Partnership, and (ii) receipt of an opinion from an independent financial
advisory  firm  as  to  the  fairness  of  the  consideration  received  by  the
Partnership  pursuant to such  transaction.  Finally,  there can be no assurance
that any transaction will be consummated, or as to the terms thereof.

The Partnership placed Edison Ford Square on the market for sale effective April
1, 1996. The Partnership has received an offer from a non-affiliate  to purchase
Edison Ford Square for $3.55  million and is currently  evaluating  the terms of
this offer.

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, 1997.  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>
Environmental Matters:

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.

Other Information:

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, 1998, High River has purchased approximately 1.03% 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.

Management  has begun to review its  information  technology  infrastructure  to
identify any systems that could be affected by the year 2000  problem.  The year
2000 problem is the result of computer  programs  being written using two digits
rather  than  four to  define  the  applicable  year.  Any  programs  that  have
time-sensitive  software may recognize a date using "00" as the year 1900 rather
than  the  year  2000.   This  could   result  in  major   systems   failure  or
miscalculations.  The information  systems used by the Partnership for financial
reporting and  significant  accounting  functions  were made year 2000 compliant
during  recent  systems  conversions.  The  Partnership  is in  the  process  of
evaluating the computer systems at the various properties.  The Partnership also
intends to communicate  with  suppliers,  financial  institutions  and others to
coordinate  year 2000 issues.  Management  believes that the  remediation of any
outstanding  year 2000  conversion  issues  will not have a material  or adverse
effect on the Partnership's operations.




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

The  following  table sets forth the real  estate  investment  portfolio  of the
Partnership  at December 31, 1997.  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                          1997            Date
Property              Description            Property            Debt        Property Taxes     Acquired
--------              -----------           ------------         ----        --------------     --------

Real Estate Investments:
<S>                   <C>                 <C>                <C>               <C>                 <C>
Amargosa Creek        Apartments
   Lancaster, CA      216 units           $    5,335,647     $   4,705,850     $      75,339       12/86

Continental Plaza     Office Building
   Scottsdale, AZ     54,537 sq. ft.           2,143,648                 -            36,442       11/86

Northway Mall         Retail Center
   Pittsburgh, PA     390,745 sq. ft.         22,848,483        14,578,464           403,027        6/87

Westwood Center       Office Building
   Tampa, FL          121,517 sq. ft.          6,931,534         2,157,731           180,871        3/87
                                           -------------      ------------      ------------
                                          $   37,259,312     $  21,442,045     $     695,679
                                           =============      ============      ============
Asset held for sale:

Edison Ford
Square                Retail Center
   Fort Myers, FL     145,417 sq. ft.     $    3,047,765     $           -     $      57,040         7/87
                                           =============      ============      ============
</TABLE>
-----------------------------------------
Total:   Apartments  -  216 Units
         Retail Centers - 536,162 sq. ft.
         Office Buildings - 176,054 sq. ft.


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

                                        1997           1996            1995           1994          1993
                                    -------------  -------------  --------------  -------------  -----------
<S>                                       <C>             <C>            <C>            <C>             <C>
Amargosa Creek
   Occupancy Rate............             94%             91%            92%            89%             86%
   Rent Per Square Foot......           $7.39           $6.96          $7.15          $7.17           $6.94

Continental Plaza
   Occupancy Rate............            100%            100%           100%            98%             98%
   Rent Per Square Foot......          $13.12          $12.55         $12.03         $10.50          $10.30

Northway Mall
   Occupancy Rate............             94%             90%            87%            61%             53%
   Rent Per Square Foot......          $11.99          $11.19          $8.97          $5.74           $6.59

Westwood Center
   Occupancy Rate............             98%             99%            92%            90%             95%
   Rent Per Square Foot......          $14.46          $13.44         $11.95         $11.78          $11.58

Asset held for sale:

Edison Ford Square
   Occupancy Rate............             59%             56%            46%            54%             80%
   Rent Per Square Foot......           $3.48           $4.50          $4.80          $5.84           $6.43
</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 94%, which is above the market
average of 91%. The rental rates at Amargosa Creek are comparable to the average
market rate.  Amargosa Creek is expected to continue to  demonstrate  stabilized
economic  growth during 1998 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%.  New
construction  in the area is adding an  additional  250,000  square  feet to the
market.  During  1998,  a major  tenant  occupying  12,753  square  feet will be
vacating.  Management  is  currently  searching  for tenants to fill the vacated
space.

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

Northway  Mall,  built in the early 1960's and opened in 1962,  is a multi-level
facility  consisting of  approximately  391,000  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, 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  15,000 square feet.  The occupancy  rate at
December 31, 1997 was 92% and is projected to reach 97% during 1998. The greater
Pittsburgh  area is very stable with  occupancies  approaching  the 90% mark and
shopping centers adjacent to Northway Mall are currently 92% occupied.

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 93% and  Westwood  Center  ended the year with a 98%  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. Westwood Center is
located in a stable market and management  does not anticipate any difficulty in
re-leasing the space that may come available during the year.

Asset held for sale:

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 these  historical  attractions;  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 deferred maintenance.
<PAGE>
The following  schedule shows lease  expirations  for each of the  Partnership's
commercial properties for 1998 through 2007:

<TABLE>
<CAPTION>
                           Number of                                   Annual           % of Gross
                           Expirations           Square Feet            Rent            Annual Rent
                           -----------           -----------           ------           -----------
<C>                              <C>                 <C>             <C>                     <C>
Continental Plaza
1998                             8                   14,570          $   187,411             29%
1999                             3                    4,237               55,663              9%
2000                             8                   21,954              273,747             43%
2001                             2                    3,374               44,968              7%
2002                             3                    4,794               74,027             11%
2003-2007                        -                        -                    -              -

Northway Mall
1998                            6                    12,271          $   108,999              3%
1999                            5                    79,821              388,519              9%
2000                           10                    21,694              248,301              6%
2001                            8                    33,215              390,158              9%
2002                            8                    23,892              288,415              7%
2003                            2                     7,019               77,690              2%
2004                            2                    73,232              478,471             11%
2005                            3                    39,304              436,390             10%
2006                            -                         -                    -              -
2007                            1                    11,096               88,768              2%

Westwood Center
1998                            8                    22,240          $   324,611             19%
1999                           10                    38,372              566,469             33%
2000                            3                    10,955              171,648             10%
2001                            7                    36,264              507,756             29%
2002                            3                    10,076              155,125              9%
2003-2007                       -                         -                    -              -

Asset held for sale:

Edison Ford Square
1998                            7                    20,072          $   109,812             25%
1999                            7                    23,635              140,594             32%
2000                            1                       705                4,230              1%
2001                            3                     3,960               32,216              7%
2002                            2                     7,430               58,910             13%
2003                            -                         -                    -              -
2004                            3                     7,367               83,522             19%
2005                            -                         -                    -              -
2006                            1                     1,673               12,179              3%
2007                            -                         -                    -              -

</TABLE>


<PAGE>
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
---------                      --------------                 -----------                     ----------
<S>                                  <C>                       <C>                               <C>
Continental Plaza
-----------------
   General Business                  12,753                    $   162,204                       1998
   General Business                   5,952                         74,400                       2000
   General Business                  10,433                        114,763                       2000

Northway Mall
-------------
   Department Store                  73,500                    $   275,625                       1999
   Department Store                  69,639                        431,762                       2004

Westwood Center
---------------
   General Office                    18,018                    $   266,446                       1998
   General Office                    26,534                        392,703                       1999
   General Office                    36,264                        507,756                       2001
</TABLE>

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)   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  (the   "Partnerships").
     Plaintiffs  allege that McNeil  Investors,  Inc., its affiliate McNeil Real
     Estate Management, Inc. and three of their senior officers and/or directors
     (collectively,  the  "Defendants")  breached  their  fiduciary  duties  and
     certain  obligations under the respective  Amended  Partnership  Agreement.


<PAGE>
     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.

     Defendants filed a demurrer to the consolidated and amended complaint and a
     motion to strike on February 14, 1997,  seeking to dismiss the consolidated
     and amended  complaint in all respects.  A hearing on Defendant's  demurrer
     and motion to strike was held on May 5, 1997. The Court granted Defendants'
     demurrer,  dismissing the consolidated and amended  complaint with leave to
     amend. On October 31, 1997, the Plaintiffs filed a second  consolidated and
     amended complaint. Defendants must move, answer or otherwise respond to the
     second consolidated and amended complaint by June 30, 1998.

2)   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.

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


<PAGE>
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           6,924 as of January 31, 1998

(C)   Distributions  of $749,988 and $374,965 were paid to the limited  partners
      in 1997 and 1996,  respectively.  During the last week of March 1998,  the
      Partnership distributed approximately $1.5 million to the limited partners
      of record as of March 1,  1998.  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".

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                              1997           1996            1995           1994           1993
------------------                  -------------  -------------  --------------  -------------  --------------
<S>                                 <C>            <C>            <C>             <C>            <C>
Rental revenue...............       $   8,824,653  $   8,579,073  $    7,568,361  $   6,385,998  $   6,708,736
Write-down for impair-
   ment of real estate.......                   -     (1,087,000)     (2,200,000)             -     (7,239,353)
Net loss.....................          (1,003,689)    (2,347,920)     (5,063,046)    (1,938,063)    (8,843,767)

Loss per thousand limited
   partnership units.........       $      (11.48) $      (26.86) $       (57.91) $      (22.17) $     (101.15)
                                     ============   ============   =============   ============   ============

Distributions per thousand
   limited partnership
   units.....................       $        8.67  $        4.33  $            -  $           -  $           -
                                     ============   ============   =============   ============   ============
</TABLE>






<PAGE>
<TABLE>
<CAPTION>
                                                                 As of December 31,
Balance Sheets                          1997            1996            1995           1994           1993
--------------                      ------------   -------------  --------------  -------------  -------------
<S>                                <C>            <C>                <C>            <C>            <C>
Real estate investments,
   net.......................      $   37,259,312 $   38,979,116     $44,629,001    $41,738,690    $39,917,222
Asset held for sale..........           3,047,765      3,008,374               -              -              -
Total assets.................          45,464,752     47,124,512      54,217,223     45,208,188     45,097,635
Mortgage notes payable.......          21,442,045     21,815,746      23,097,459      9,350,045      8,343,376
Partners' equity.............          22,862,247     24,615,924      27,338,809     32,401,855     34,339,918
</TABLE>

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.

Edison  Ford Square is a 145,417 sq. ft.  retail  center in Fort Myers,  Florida
that has evolved  from  primarily  retail to more of a service  center use.  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.  Plans for a major  renovation  began in 1993;
however,  with the loss of two  major  anchors  in 1994,  it was not  viable  to
continue this project.  An unsolicited offer from an unaffiliated third party to
purchase the center was received  during 1995 which 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.  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 after a major  tenant  announced  termination  of their lease in
1997 and  determination  that its carrying  value could not be realized  through
future cash flows.

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

1997 compared to 1996

Revenue:

Partnership  revenues  increased  by $227,178 or 3% in 1997 as compared to 1996.
Rental revenue increased $245,580 and interest income decreased $18,402.




<PAGE>
Rental revenue  increases  were mainly due to increased  occupancies at Amargosa
Creek,  Northway Mall and Edison Ford Square. The increase in rental revenue can
also be attributed to the increase in rental rates at four of the  Partnership's
five properties.

Expenses:

Total  expenses  decreased by $1,117,053 or 10% in 1997 as compared to 1996. The
decrease was mainly due to a write-down  for impairment of real estate at Edison
Ford Square of $1,087,000 in 1996. No such write-down was recorded in 1997.

Interest expense - affiliates decreased $16,090 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  taxes  increased  by $78,966 or 12% in 1997 as compared to 1996.  This
increase is due to an increase in  estimated  tax  liability  at Northway  Mall.
During 1996, the Partnership also received a tax refund relating to Westwood; no
such refund was received in 1997.

Bad debt expense  increased  $91,384 in 1997 as compared to 1996.  This increase
can be  attributed  to  the  write-off  of  tenant  balances  that  were  deemed
uncollectible at Northway Mall

General and administrative expenses decreased $101,815 or 37% for the year ended
December  31,  1997 as  compared  to the  same  period  in 1996.  In  1996,  the
Partnership incurred costs to evaluate and disseminate  information regarding an
unsolicited  tender offer. The decrease in 1997 as compared to 1996 was slightly
offset by charges for investor services,  which beginning in 1997, were provided
by a third party vendor.  In 1996,  these costs were paid to an affiliate of the
General Partner and were included in general and administrative - affiliates.

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.

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.



<PAGE>
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% in 1996 as compared to
the prior year 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% in  1996 as
compared to the prior year due to the  increased  rental income at Northway Mall
and Westwood Center as discussed above.

General and  administrative  expenses increased $209,212 in 1996 compared to the
prior year 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.

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

The Partnership has experienced positive cash flow from operations of $2,601,872
for the three years ended  December  31,  1997.  During  1995,  the  Partnership
received net cash  proceeds of  $13,878,527  for the mortgage  notes on Northway
Mall.  Over  the  last  three  years  the  Partnership  has  used  cash  to fund
$11,873,444  in  additions  to real estate  investments,  $833,989 in  principal
payments, $215,592 for additions to deferred borrowing costs, $1,083,055 for the
repayment of advances and  mortgage  loans from  affiliates  and  $1,124,953  in
limited partner distributions.

The Partnership  generated  $2,718,546  through operating  activities in 1997 as
compared  to cash  used in  operating  activities  of  $1,588,873  in 1996.  The
increase in cash  provided of  $4,307,419  can be  attributed to the decrease of
$3,047,898 in the cash paid to  affiliates.  In 1996, the  Partnership  used the
proceeds from the mortgage note refinancing on Northway Mall to pay all deferred
asset management fees and overhead reimbursements to McREMI.

The Partnership  used $1,588,873 in operating  activities in 1996 as compared to
cash provided  from  operating  activities of $1,472,199 in 1995.  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 refinancing,  the Partnership was able to pay all deferred asset
management fees and overhead  reimbursements to McREMI,  bringing the balance of





<PAGE>
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.

Expenditures  related to additions to real estate in 1997  utilized  $982,670 of
Partnership  cash flows as compared  to  $1,158,736  during 1996 and  $9,732,038
during 1995.  The increase in the additions to real estate in 1995 was primarily
due to the major renovation at Northway Mall as previously disclosed.

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.

Principal  payments on mortgage  notes payable were $373,701 in 1997 as compared
to  $329,175  in 1996 and  $131,113  in 1995.  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.

Short-term liquidity:

At  December  31,  1997,  the  Partnership  held  cash and cash  equivalents  of
$2,823,216.  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
$1.2 million for necessary capital improvements for all properties in 1998.

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.

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  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.


<PAGE>
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.

Pursuant  to the  Partnership's  previously  announced  liquidation  plans,  the
Partnership  has recently  retained  PaineWebber,  Incorporated as its exclusive
financial  advisor  to  explore  alternatives  to  maximize  the  value  of  the
Partnership.  The  alternatives  being  considered by the  Partnership  include,
without limitation,  a transaction in which limited partnership interests in the
Partnership  are converted into cash. The General  Partner of the Partnership or
entities or persons  affiliated with the General Partner will not be involved as
a purchaser in any of the transactions  contemplated above. Any transaction will
be subject to certain conditions  including (i) approval by the limited partners
of the Partnership, and (ii) receipt of an opinion from an independent financial
advisory  firm  as  to  the  fairness  of  the  consideration  received  by  the
Partnership  pursuant to such  transaction.  Finally,  there can be no assurance
that any transaction will be consummated, or as to the terms thereof.

The Partnership placed Edison Ford Square on the market for sale effective April
1, 1996. The Partnership has received an offer from a non-affiliate  to purchase
Edison Ford Square for $3.55  million and is currently  evaluating  the terms of
this offer.

Distributions:

The  Partnership  distributed  $749,988  to the  limited  partners  in 1997  and
$374,965  in  1996.  During  the  last  week  of  March  1998,  the  Partnership
distributed  approximately  $1.5 million to the limited partners of record as of
March 1, 1998.  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
                                                                                                      -------
INDEX TO FINANCIAL STATEMENTS

Financial Statements:

<S>                                                                                                      <C>
   Report of Independent Public Accountants.......................................                       16

   Balance Sheets at December 31, 1997 and 1996...................................                       17

   Statements of Operations for each of the three years in the period
      ended December 31, 1997.....................................................                       18

   Statements of Partners' Equity (Deficit) for each of the three years in
      the period ended December 31, 1997..........................................                       19

   Statements of Cash Flows for each of the three years in the period
      ended December 31, 1997.....................................................                       20

   Notes to Financial Statements..................................................                       22

   Financial Statement Schedule -
      Schedule III - Real Estate Investments and Accumulated
         Depreciation and Amortization............................................                       30


</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, 1997 and 1996, and
the related statements of operations,  partners' equity (deficit) and cash flows
for each of the  three  years in the  period  ended  December  31,  1997.  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, 1997 and 1996, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1997, 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 20, 1998


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

                                 BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                   December 31,
                                                                        ----------------------------------
                                                                             1997                 1996
                                                                        --------------       -------------

ASSETS
------
<S>                                                                    <C>                  <C>

Real estate investments:
   Land.....................................................           $     6,750,456      $    6,750,456
   Buildings and improvements...............................                54,854,340          53,911,061
                                                                        --------------       -------------
                                                                            61,604,796          60,661,517
   Less:  Accumulated depreciation and amortization.........               (24,345,484)        (21,682,401)
                                                                        --------------       -------------
                                                                            37,259,312          38,979,116

Asset held for sale.........................................                 3,047,765           3,008,374

Cash and cash equivalents...................................                 2,823,216           2,211,029
Cash segregated for security deposits.......................                   235,617             233,426
Accounts receivable, net of allowance for doubtful
   accounts of $572,392 at December 31, 1997
   and 1996.................................................                 1,221,528           1,276,997
Prepaid commissions.........................................                   381,923             349,018
Prepaid expenses and other assets...........................                   229,664             709,030
Deferred borrowing costs, net of accumulated
   amortization of $307,435 and $215,640 at
   December 31, 1997 and 1996, respectively.................                   265,727             357,522
                                                                        --------------       -------------
                                                                       $    45,464,752      $   47,124,512
                                                                        ==============       =============
LIABILITIES AND PARTNERS' EQUITY (DEFICIT)
------------------------------------------

Mortgage notes payable......................................           $    21,442,045      $   21,815,746
Accounts payable and accrued expenses.......................                   488,719             306,284
Accrued property taxes......................................                    81,308              58,660
Payable to affiliates - General Partner.....................                   292,574              91,462
Security deposits and deferred rental income................                   297,859             236,436
                                                                        --------------       -------------
                                                                            22,602,505          22,508,588
                                                                        --------------       -------------

Partners' equity (deficit):
   Limited  partners - 90,000,000   limited   partnership
   units  authorized; 86,530,671 and 86,533,671 limited
   partnership units issued and outstanding at
   December 31, 1997 and 1996, respectively.................                23,273,176          25,016,816
   General Partner..........................................                  (410,929)           (400,892)
                                                                        --------------       -------------
                                                                            22,862,247          24,615,924

                                                                        --------------       -------------
                                                                       $    45,464,752      $   47,124,512
                                                                        ==============       =============

</TABLE>

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

                            STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                For the Years Ended December 31,
                                                   ----------------------------------------------------
                                                        1997                1996              1995
                                                   --------------      -------------     --------------

Revenue:
<S>                                                <C>                <C>               <C>
   Rental revenue..........................        $    8,824,653     $    8,579,073    $     7,568,361
   Interest ...............................               157,968            176,370             98,207
   Gain on legal settlement................                     -                  -             59,874
                                                    -------------      -------------     --------------
     Total revenue.........................             8,982,621          8,755,443          7,726,442
                                                    -------------      -------------     --------------

Expenses:
   Interest................................             1,742,458          1,770,932          1,148,546
   Interest - affiliates...................                     -             16,090            120,765
   Depreciation and amortization...........             2,663,083          2,713,247          2,682,731
   Property taxes..........................               752,719            673,753            654,260
   Bad debt................................               105,143             13,759            (13,025)
   Personnel expenses......................               816,221            799,842            781,301
   Utilities...............................               985,081            996,025          1,060,645
   Repairs and maintenance.................               942,549            971,273            962,791
   Property management fees -
     affiliates............................               524,356            499,835            437,006
   Other property operating expenses.......               559,091            584,823            623,705
   General and administrative..............               170,098            271,913             62,701
   General and administrative -
     affiliates............................               725,511            704,871            820,122
   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........................             9,986,310         11,103,363         12,789,488
                                                    -------------      -------------     --------------

Net loss...................................        $   (1,003,689)    $   (2,347,920)   $    (5,063,046)
                                                    =============      =============     ==============

Net loss allocable to limited
   partners................................        $     (993,652)    $   (2,324,441)   $    (5,012,416)
Net loss allocable to General
   Partner.................................               (10,037)           (23,479)           (50,630)
                                                    -------------      -------------     --------------
Net loss...................................        $   (1,003,689)    $   (2,347,920)   $    (5,063,046)
                                                    =============      =============     ==============


Net loss per thousand limited
   partnership units.......................        $       (11.48)    $       (26.86)   $        (57.91)
                                                    =============      =============     ==============

Distribution per thousand limited
   partnership units.......................        $         8.67     $         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, 1997, 1996 and 1995


<TABLE>
<CAPTION>
                                                                                                   Total
                                                     General                 Limited               Partners'
                                                     Partner                 Partners              Equity
                                                 ----------------       -----------------      ---------------
<S>                                              <C>                    <C>                    <C>
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

Net loss..................................               (10,037)               (993,652)           (1,003,689)

Distributions.............................                     -                (749,988)             (749,988)
                                                  --------------          --------------        --------------

Balance at December 31, 1997..............       $      (410,929)        $    23,273,176       $    22,862,247
                                                  ==============          ==============        ==============
</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,
                                                   ----------------------------------------------------
                                                         1997               1996             1995
                                                   ---------------    ---------------   ---------------
<S>                                                <C>                <C>               <C>
Cash flows from operating activities:
   Cash received from tenants..............        $    8,834,211     $    8,380,164    $     7,284,225
   Cash received from legal settlement.....                     -                  -             59,874
   Cash paid to suppliers..................            (2,840,370)        (3,723,971)        (3,729,096)
   Cash paid to affiliates.................            (1,048,755)        (4,096,653)          (425,333)
   Interest received.......................               157,968            176,370             98,207
   Interest paid...........................            (1,653,436)        (1,587,720)        (1,008,659)
   Interest paid to affiliates.............                     -            (53,903)          (107,937)
   Property taxes paid.....................              (731,072)          (683,160)          (699,082)
                                                    -------------      -------------     --------------
Net cash provided by (used in)
     operating activities..................             2,718,546         (1,588,873)         1,472,199
                                                    -------------      -------------     --------------

Net cash used in investing activities:
   Additions to real estate
     investments...........................              (982,670)        (1,158,736)        (9,732,038)
                                                    -------------      -------------     --------------

Cash flows from financing activities:
   Principal payments on mortgage
     notes payable.........................              (373,701)          (329,175)          (131,113)
   Proceeds from mortgage notes
     refinancing...........................                     -                  -         13,878,527
   Retirement of mortgage note -
     affiliate.............................                     -           (952,538)                 -
   Repayment of advances from
     affiliates - General Partner..........                     -           (130,517)                 -
   Deferred borrowing costs paid...........                     -            (15,683)          (199,909)
   Distributions...........................              (749,988)          (374,965)                 -
                                                    -------------      -------------     --------------
Net cash provided by (used in)
     financing activities..................            (1,123,689)        (1,802,878)        13,547,505
                                                    -------------      -------------    ---------------

Net increase (decrease) in cash and
   cash equivalents........................               612,187         (4,550,487)         5,287,666

Cash and cash equivalents at
     beginning of year.....................             2,211,029          6,761,516          1,473,850
                                                    -------------      -------------     --------------

Cash and cash equivalents at end
     of year...............................        $    2,823,216     $    2,211,029    $     6,761,516
                                                    =============      =============     ==============
</TABLE>

                 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,
                                                   -----------------------------------------------------
                                                         1997                1996             1995
                                                    -------------      -------------     --------------
<S>                                                <C>                <C>               <C>
Net loss...................................        $   (1,003,689)    $   (2,347,920)   $    (5,063,046)
                                                    -------------      -------------     --------------

Adjustments to reconcile net loss
   to net cash provided by (used in)
   operating activities:
   Depreciation and amortization...........             2,663,083          2,713,247          2,682,731
   Amortization of deferred borrowing
     costs.................................                91,795             89,999            156,331
   Allowance for doubtful accounts.........                     -            (23,764)          (267,858)
   Interest added to advances from
     affiliates - General Partner, net.....                     -            (37,813)            12,828
   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............................                (2,191)           (31,030)            31,363
     Accounts receivable...................                55,469           (156,296)           (39,438)
     Prepaid commissions...................               (32,905)            30,426             25,099
     Prepaid expenses and other
       assets..............................               479,366              7,061           (536,646)
     Accounts payable and accrued
       expenses............................               182,435            (52,572)           187,789
     Accrued property taxes................                22,648             (1,204)            24,539
     Payable to affiliates - General
       Partner.............................               201,112         (2,891,947)           831,795
     Security deposits and deferred
       rental income.......................                61,423             25,940            (21,228)
                                                    -------------      -------------     --------------

         Total adjustments.................             3,722,235            759,047          6,535,245
                                                    -------------      -------------     --------------

Net cash provided by (used in)
     operating activities..................        $    2,718,546     $   (1,588,873)   $     1,472,199
                                                    =============      =============     ==============
</TABLE>


                 See accompanying notes to financial statements.
<PAGE>

                       McNEIL REAL ESTATE FUND XXVI, L.P.

                          NOTES TO FINANCIAL STATEMENTS

                                DECEMBER 31, 1997

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. At December 31, 1997, the Partnership  owned five  income-producing
properties as described in Note 4 - Real Estate Investments.

Pursuant  to the  Partnership's  previously  announced  liquidation  plans,  the
Partnership  has recently  retained  PaineWebber,  Incorporated as its exclusive
financial  advisor  to  explore  alternatives  to  maximize  the  value  of  the
Partnership.  The  alternatives  being  considered by the  Partnership  include,
without limitation,  a transaction in which limited partnership interests in the
Partnership  are converted into cash. The General  Partner of the Partnership or
entities or persons  affiliated with the General Partner will not be involved as
a purchaser in any of the transactions  contemplated above. Any transaction will
be subject to certain conditions  including (i) approval by the limited partners
of the Partnership, and (ii) receipt of an opinion from an independent financial
advisory  firm  as  to  the  fairness  of  the  consideration  received  by  the
Partnership  pursuant to such  transaction.  Finally,  there can be no assurance
that any transaction will be consummated, or as to the terms thereof.

The Partnership placed Edison Ford Square on the market for sale effective April
1, 1996. The Partnership has received an offer from a non-affiliate  to purchase
Edison Ford Square for $3.55  million and is currently  evaluating  the terms of
this offer.

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.
<PAGE>
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 fair
value.

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.
<PAGE>
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.

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 1997, 1996 and 1995 have been made
in accordance with these provisions.







<PAGE>
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
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.

The  Partnership  distributed  $749,988  to the  limited  partners  in 1997  and
$374,965 in 1996. There were no  distributions  to partners in 1995.  During the
last week of March 1998, the Partnership plans to distribute  approximately $1.5
million to the limited partners of record as of March 1, 1998.

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 86,531 thousand
Units outstanding in 1997, 86,534 thousand Units outstanding in 1996, and 86,549
thousand Units outstanding in 1995.

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.







<PAGE>
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.

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,
                                                   ----------------------------------------------------
                                                         1997               1996              1995
                                                   --------------     --------------    ---------------
<S>                                                <C>                <C>               <C>
Property management fees - affiliates......        $      524,356     $      499,835    $       437,006
Charged to interest  - affiliates:
   Interest on mortgage note payable -
     affiliate.............................                     -             11,398            107,937
   Interest on advances from
     affiliates - General Partner..........                     -              4,692             12,828
Charged to general and administrative -
   affiliates:
   Partnership administration..............               147,389            198,810            300,846
   Asset management fee....................               578,122            506,061            519,276
                                                    -------------      -------------     --------------
                                                   $    1,249,867     $    1,220,796    $     1,377,893
                                                    =============      =============     ==============
</TABLE>

Payable to affiliates - General  Partner at December 31, 1997 and 1996 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 1997,  the  Partnership  paid or accrued a total of
$525,094 to McREMI for 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  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 8.25% 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 $38,816,004 in 1997,
$38,453,377 in 1996 and $39,813,538 in 1995.

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

The basis and accumulated  depreciation  and  amortization of the  Partnership's
real  estate  investments  at December  31, 1997 and 1996,  are set forth in the
following tables:

<TABLE>
<CAPTION>
                                                                        Accumulated
                                                   Buildings and        Depreciation         Net Book
       1997                         Land           Improvements        & Amortization          Value
       ----                    --------------      ------------        --------------     ---------------
<S>                            <C>                <C>                 <C>                  <C>
Amargosa Creek
   Lancaster, CA               $      794,635     $     8,626,877     $    (4,085,865)     $    5,335,647
Continental Plaza
   Scottsdale, AZ                   1,975,324           2,072,184          (1,903,860)          2,143,648
Northway Mall
   Pittsburgh, PA                   2,965,329          31,280,032         (11,396,878)         22,848,483
Westwood Center
   Tampa, FL                        1,015,168          12,875,247          (6,958,881)          6,931,534
                                -------------      --------------      --------------       -------------
                               $    6,750,456     $    54,854,340     $   (24,345,484)     $   37,259,312
                                =============      ==============      ==============       =============


                                                                        Accumulated
                                                   Buildings and        Depreciation         Net Book
       1996                         Land           Improvements        & Amortization          Value
       ----                    --------------      ------------        --------------     ---------------

Amargosa Creek                 $      794,635     $     8,591,890     $    (3,718,390)    $     5,668,135
Continental Plaza                   1,975,324           2,036,191          (1,800,164)          2,211,351
Northway Mall                       2,965,329          30,680,454          (9,851,567)         23,794,216
Edison Ford Square (a)
Westwood Center                     1,015,168          12,602,526          (6,312,280)          7,305,414
                                -------------      --------------      --------------       -------------
                               $    6,750,456     $    53,911,061     $   (21,682,401)    $    38,979,116
                                =============      ==============      ==============       =============
</TABLE>


<PAGE>
(a)  On April 1, 1996, the General Partner placed Edison Ford Square, located in
     Fort  Myers,  Florida,  on the  market  for  sale.  Edison  Ford  Square is
     classified  as such at December  31, 1997 and 1996 with a net book value of
     $3,047,765 and  $3,008,374,  respectively.  The Partnership has received an
     offer of $3.55 million from a non-affiliate  to purchase Edison Ford Square
     and is currently evaluating the terms of this offer.

The results of  operations  for the asset held for sale at December 31, 1997 are
$213,631, $312,321 and $89,164 for 1997, 1996 and 1995, respectively. Results of
operations are operating revenues less operating expenses including depreciation
and interest expense.

Edison  Ford Square is a 145,417 sq. ft.  retail  center in Fort Myers,  Florida
that has evolved  from  primarily  retail to more of a service  center use.  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.  Plans for a major  renovation  began in 1993;
however,  with the loss of two  major  anchors  in 1994,  it was not  viable  to
continue this project.  An unsolicited offer from an unaffiliated third party to
purchase the center was received  during 1995 which 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.  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 after a major  tenant  announced  termination  of their lease in
1997 and  determination  that its carrying  value could not be realized  through
future cash flows.

The Partnership leases its commercial properties under non-cancelable  operating
leases.  Future  minimum  rents to be received  as of  December  31, 1997 are as
follows:

         1998....................................        $  5,707,126
         1999....................................           4,806,912
         2000....................................           4,227,744
         2001....................................           3,283,918
         2002....................................           2,593,733
         Thereafter..............................          10,165,331
                                                          -----------
           Total                                         $ 30,784,764
                                                          ===========

Future minimum rents do not include  contingent rentals based on sales volume of
tenants.  Contingent rents amounted to $21,625, $7,943 and $15,094 for the years
ended December 31, 1997, 1996 and 1995, respectively.  Future minimum rents also
do not include  expense  reimbursements  for common area  maintenance,  property
taxes, and other expenses.  These expense reimbursements amounted to $1,398,132,
$1,563,150 and $1,176,119 for the years ended December 31, 1997, 1996, and 1995,
respectively.  These contingent rents and expense reimbursements,  which include
amounts  for the asset  held for sale,  are  included  in rental  revenue on the
Statement of Operations.







<PAGE>
NOTE 5 - MORTGAGE NOTES PAYABLE
-------------------------------

The  following  sets forth the  mortgage  notes  payable of the  Partnership  at
December 31, 1997 and 1996.  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(b)      1997               1996
--------                 -------------------           -------------------  -------------      --------------
<S>                      <C>              <C>         <C>          <C>      <C>                <C>
Amargosa Creek           First            7.875       $   35,528   12/98    $   4,705,850      $    4,759,298

Northway Mall            First            7.500         110,849    12/02       14,578,464          14,805,922

Westwood Center          First            8.000           22,457   12/98        2,157,731           2,250,526
                                                                             ------------       -------------
                                                                            $  21,442,045      $   21,815,746
                                                                             ============       =============
</TABLE>

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

(b)   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

The  Partnership  plans to  refinance  the  mortgage  notes  payable  secured by
Amargosa Creek and Westwood Center upon their maturation in December 1998.

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

         1998....................................        $  7,108,696
         1999....................................             264,144
         2000....................................             284,650
         2001....................................             306,749
         2002....................................             330,562
         Thereafter..............................          13,147,244
                                                          -----------
           Total                                         $ 21,442,045
                                                          ===========

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 $21,404,000 at December 31, 1997 and $20,745,000
at December 31, 1996.


<PAGE>
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.

NOTE 7 - 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)   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  (the   "Partnerships").
     Plaintiffs  allege that McNeil  Investors,  Inc., its affiliate McNeil Real
     Estate Management, Inc. and three of their senior officers and/or directors
     (collectively,  the  "Defendants")  breached  their  fiduciary  duties  and
     certain  obligations under the respective  Amended  Partnership  Agreement.



<PAGE>
     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.

     Defendants filed a demurrer to the consolidated and amended complaint and a
     motion to strike on February 14, 1997,  seeking to dismiss the consolidated
     and amended  complaint in all respects.  A hearing on Defendant's  demurrer
     and motion to strike was held on May 5, 1997. The Court granted Defendants'
     demurrer,  dismissing the consolidated and amended  complaint with leave to
     amend. On October 31, 1997, the Plaintiffs filed a second  consolidated and
     amended complaint. Defendants must move, answer or otherwise respond to the
     second consolidated and amended complaint by June 30, 1998.

2)   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.






<PAGE>

                       McNEIL REAL ESTATE FUND XXVI, L.P.
                                  SCHEDULE III
      REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION AND AMORTIZATION
                                December 31, 1997

<TABLE>
<CAPTION>
                                                                                                        Costs
                                                       Initial Cost              Cumulative          Capitalized
                            Related                           Buildings and      Write-down          Subsequent
Description                 Encumbrances          Land        Improvements      for Impairment     To Acquisition
-----------                 ------------          ----        -------------     --------------     ---------------
Apartments:
<S>                        <C>               <C>               <C>              <C>                <C>
Amargosa Creek
   Lancaster, CA (b)       $    4,705,850    $      947,277    $    9,578,026   $   (1,696,024)    $     592,233

Office Buildings:

Continental Plaza
   Scottsdale, AZ (c)                   -         4,211,854         4,059,113       (5,662,360)        1,438,901

Westwood Center
   Tampa, FL (d)                2,157,731         1,465,168        14,814,477       (5,000,000)        2,610,770

Retail Center:

Northway Mall
   Pittsburgh, PA (e)          14,578,464         4,523,305        17,186,915       (6,000,000)       18,535,141
                           --------------    --------------    --------------     ------------     -------------

                          $    21,442,045   $    11,147,604   $    45,638,531    $ (18,358,384)   $   23,177,045
                           ==============    ==============    ==============     ============     =============


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,  becomes 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, 1997

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

Apartment:
<S>                           <C>                <C>              <C>                 <C>
Amargosa Creek
   Lancaster, CA (b)          $      794,635     $    8,626,877   $      9,421,512    $   (4,085,865)

Office Buildings:

Continental Plaza
   Scottsdale, AZ (c)              1,975,324          2,072,184          4,047,508        (1,903,860)

Westwood Center
   Tampa, FL (d)                   1,015,168         12,875,247         13,890,415        (6,958,881)

Retail Center:

Northway Mall
   Pittsburgh, PA (e)              2,965,329         31,280,032         34,245,361       (11,396,878)
                              --------------     --------------   ----------------     -------------
                             $     6,750,456    $    54,854,340  $      61,604,796    $  (24,345,484)
                              ==============     ==============   ================     =============

Asset Held for Sale:

Edison Ford
   Square (f)(g)
   Fort Myers, FL                                                $       3,047,765
                                                                  ================
</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
     $90,409,902  and accumulated  depreciation  was $25,400,673 at December 31,
     1997.

(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 costs to sell. Historical cost, net of accumulated  depreciation
     and  cumulative  write-downs,  becomes 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, 1997

<TABLE>
<CAPTION>

                                 Date of                    Date                Depreciable
Description                   Construction                Acquired              lives (years)
-----------                   ------------                --------              -------------
Apartment:
<S>                             <C>                         <C>                     <C>
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 (f)(g)        1960                        07/87

</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,  becomes 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.

                              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,
                                                   ----------------------------------------------------
                                                         1997               1996              1995
                                                   --------------     --------------    ---------------
<S>                                                <C>                <C>               <C>
Real estate investments:

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

Improvements...............................               943,279          1,002,815          9,020,982

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.....................        $   61,604,796     $   60,661,517    $    65,884,142
                                                    =============      =============     ==============


Accumulated depreciation and amortization:

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

Depreciation and amortization..............             2,663,083          2,713,247          2,682,731

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.....................        $   24,345,484     $   21,682,401    $    21,255,141
                                                    =============      =============     ==============


Asset held for sale:

Balance at beginning of year...............        $    3,008,374     $            -     $            -

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

Improvements...............................                39,391            155,921                  -

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

Balance at end of year.....................        $    3,047,765     $    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:
<TABLE>
<CAPTION>

                                        Other Principal Occupations and Other
Name and Position             Age       Directorships During the Past 5 Years
-----------------             ---       -------------------------------------
<S>                            <C>      <C>
Robert A. McNeil,              77       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               54       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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                        Other Principal Occupations and Other
Name and Position             Age       Directorships During the Past 5 Years
-----------------             ---       -------------------------------------
<S>                            <C>      <C>
Ron K. Taylor                  40       Mr.  Taylor is the  President  and Chief
President and Chief                     Executive   Officer   of   McNeil   Real
Executive Officer                       President  and Chief  Estate  Management
                                        which  is an  affiliate  of the  General
                                        Partner.  Mr.  Executive  Officer 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.
</TABLE>

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

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,  1997,  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, 1997. 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.

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.


<PAGE>
(B) Security ownership of Management.

      The General Partner and the officers or directors of its general  partner,
      collectively,  own 2,995,000 Units at January 31, 1998, which is 3% of the
      outstanding 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,  1997,  the
Partnership paid or accrued $578,122 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, 1997, the Partnership paid or accrued  $671,745 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".



<PAGE>
                                     PART IV

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

See accompanying Index to Financial  Statements at Item 8 - Financial Statements
and Supplementary Data.

(A)   Exhibits
<TABLE>
<CAPTION>

      Exhibit
      Number                      Description
      -------                     -----------
      <S>                         <C>
      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)
</TABLE>

<PAGE>
<TABLE>
<CAPTION>

      Exhibit
      Number                      Description
      -------                     -----------
      <S>                         <C>
      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)

      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.
</TABLE>

(B)   Reports  on Form  8-K.  There  were no  reports  on Form 8-K  filed by the
      Partnership during the quarter ended December 31, 1997.


<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 31, 1998                    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 31, 1998                    By:  /s/  Ron K. Taylor
--------------                         -----------------------------------------
Date                                   Ron K. Taylor
                                       President and Director of McNeil
                                         Investors, Inc.
                                       (Principal Financial Officer)




March 31, 1998                    By:  /s/  Carol A. Fahs
--------------                         -----------------------------------------
Date                                   Carol A. Fahs
                                       Vice President of McNeil Investors, Inc.
                                       (Principal Accounting Officer)