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, 1998
                               -------------------------------------------------

                                                        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 36 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).  Between  1995  and  1998,  23,242  Units  were  relinquished  leaving
86,530,671 Units outstanding as of December 31, 1998.

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.

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.

<PAGE>


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, 1998, the Partnership  owned four  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.

Business Plan:

As previously announced, the Partnership has retained PaineWebber,  Incorporated
("PaineWebber")  as its exclusive  financial advisor to explore  alternatives to
maximize  the  value  of  the  Partnership,  including,  without  limitation,  a
transaction  in which  limited  partnership  interests  in the  Partnership  are
converted into cash. The Partnership,  through  PaineWebber,  provided financial
and other  information to interested  parties as part of an auction  process and
until early March 1999 was conducting  discussions with one bidder in an attempt
to reach a definitive  agreement  with respect to a sale  transaction.  In early
March 1999, because the Partnership had been unable to conclude negotiations for
a transaction with such bidder, the Partnership  terminated such discussions and
commenced   discussions   with  respect  to  a  sale  transaction  with  another
well-financed  bidder who had been  involved in the  original  auction  process.
During  the last full  week of  March,  the  Partnership  entered  into a 45 day
exclusivity  agreement with such party.  It is possible that the General Partner
and its  affiliates  will receive  non-cash  consideration  for their  ownership
interests in  connection  with any such  transaction.  There can be no assurance
regarding whether any such agreement will be reached nor the terms thereof.

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

<PAGE>


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, 1998.  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.

Environmental Matters:

Environmental laws create potential liabilities that may affect property owners.
The environmental  laws of Federal and certain state  governments,  for example,
impose liability on current and certain past owners of property from which there
is a release  or threat of  release  of  hazardous  substances.  This  liability
includes costs of investigation and remediation of the hazardous  substances and
natural resource  damages.  Liability for costs of investigation and remediation
is strict and may be imposed  irrespective  of whether the property owner was at
fault,  although  there are a number of  defenses.  Both  governments  and third
parties may seek recoveries under these laws.

Third parties also may seek  recovery  under the common law for damages to their
property  or person,  against  owners of  property  from which  there has been a
release of hazardous and other substances.

The presence of  contamination  or the failure to remediate  contaminations  may
adversely  affect the owner's  ability to sell or lease real estate or to borrow
using the real estate as collateral.

Various  buildings at properties do or may contain  building  materials that are
the subject of various  regulatory  programs  intended to protect  human health.
Such building materials include,  for example,  asbestos,  lead-based paint, and
lead plumbing components.  The Company has implemented programs to deal with the
presence  of those  materials,  which  include,  as  appropriate,  reduction  of
potential  exposure  situations.  The Company does not believe that the costs of
such programs are likely to have a material adverse effect. Failure to implement
such programs can result in regulatory  violations or liability claims resulting
from alleged exposure to such materials.

In connection with the proposed sale  transaction as more fully described above,
Phase I  environmental  site  assessments  have been completed for each property
owned  by the  Partnership.  Such  environmental  assessments  performed  on the
properties  have not revealed any  environmental  liability that the Partnership
believes  would have a material  adverse effect on the  Partnership's  business,
assets,  or results of operations.  The Partnership has not been notified by any
governmental  authority  of any  non-compliance,  liability  or  other  claim in
connection with any of its properties. There can be no assurances, however, that
environmental   liabilities   have  not  developed   since  such   environmental
assessments were prepared, or that future uses or conditions (including, without
limitation,  changes in applicable  environmental laws and regulations) will not
result in imposition of environmental liability.

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 February 1, 1999, 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.

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

The  following  table sets forth the real  estate  investment  portfolio  of the
Partnership  at December 31, 1998.  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  Continental  Plaza and Westwood
Center. 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                         1998           Date
Property              Description            Property            Debt       Property Taxes    Acquired
--------              -----------          -------------         ----       --------------    --------

Real Estate Investments:

Amargosa Creek        Apartments
<S>                   <C>                  <C>               <C>              <C>              <C>  
   Lancaster, CA      216 units            $   5,035,018     $ 4,648,038      $    37,440      12/86

Continental Plaza     Office Building
   Scottsdale, AZ     54,537 sq. ft.           2,226,394               -          116,764      11/86

Northway Mall         Retail Center
   Pittsburgh, PA     395,000 sq. ft.         21,637,071      14,333,349          437,204      6/87

Westwood Center       Office Building
   Tampa, FL          126,175 sq. ft.          6,710,205               -          230,676      3/87
                                            ------------     ------------      ----------
                                           $  35,608,688    $  18,981,387     $   822,084
                                            ============     ============      ==========
-----------------------------------
</TABLE>

Total:   Apartments  -  216 Units
         Retail Centers - 395,000 sq. ft.
         Office Buildings - 180,712 sq. ft.


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

<TABLE>
<CAPTION>
                                        1998           1997            1996           1995           1994
                                    -------------  -------------  --------------  -------------  ----------
Amargosa Creek
<S>                                       <C>             <C>            <C>            <C>             <C>
   Occupancy Rate............             93%             94%            91%            92%             89%
   Rent Per Square Foot......          $ 7.77          $ 7.39         $ 6.96         $ 7.15          $ 7.17

Continental Plaza
   Occupancy Rate............             90%            100%           100%           100%             98%
   Rent Per Square Foot......          $13.14          $13.12         $12.55         $12.03          $10.50

Northway Mall
   Occupancy Rate............             94%             94%            90%            87%             61%
   Rent Per Square Foot......          $12.55          $11.99         $11.19         $ 8.97          $ 5.74

Westwood Center
   Occupancy Rate............             99%             98%            99%            92%             90%
   Rent Per Square Foot......          $15.01          $14.46         $13.44         $11.95          $11.78
</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 93%, which is slightly below the
market  average of 94%. 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 1999 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 90%  occupancy  rate as  compared  to a  market  average  of 96%.  New
construction  in the area is adding an  additional  100,000  square  feet to the
market. 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 395,000 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. A $13.5 million renovation
completed early in 1995 has  reestablished  the mall in the area.  Management is
currently searching for two tenants to occupy  approximately 33,000 square feet.
The occupancy rate at December 31, 1998 was 94% and the greater  Pittsburgh area
is very stable with occupancies  approaching the 96% mark, with shopping centers
adjacent to Northway Mall currently 95% 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 94% and  Westwood  Center  ended the year with a 99%  occupancy.
Current  market  concerns  include  the  property's  location  near a  declining
neighborhood and the area's higher than average crime rate. Presently,  there is
no new office building construction in the Westshore Business District,  and the
property is positioned for steady growth in the coming years. 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.



<PAGE>
The following  schedule shows lease  expirations  for each of the  Partnership's
commercial properties for 1999 through 2008:

<TABLE>
<CAPTION>
                           Number of                                   Annual           % of Gross
                           Expirations           Square Feet            Rent            Annual Rent
                           ------------          -----------           ------           -----------
Continental Plaza
<C>                              <C>                  <C>            <C>                      <C>
1999                             2                    1,631          $    23,834              3%
2000                             6                   20,481              282,106             37%
2001                            11                   15,116              246,129             32%
2002                             4                    6,592              114,664             15%
2003                             -                        -                    -              -
2004                             2                    6,124              102,177             13%
2005-2008                        -                        -                    -              -

Northway Mall
1999                             4                    6,321          $   115,073              5%
2000                             9                   18,917              240,313             10%
2001                             9                   34,397              408,074             17%
2002                             7                   16,114              237,245             10%
2003                             3                    8,037               90,924              4%
2004                             4                  157,244              892,646             37%
2005                             2                   15,958              226,276              9%
2006                             -                        -                    -              -
2007                             1                   11,096               99,864              4%
2008                             1                    4,947               71,736              3%

Westwood Center
1999                             5                   10,683          $   157,173              8%
2000                             3                   10,955              177,217              9%
2001                             1                   35,811              525,828             28%
2002                             4                   11,535              179,525             10%
2003                             3                   31,937              453,209             24%
2004                             4                   25,641              377,663             20%
2005-2008                        -                        -                    -              -
</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
---------                      --------------                 -----------                     ----------
Continental Plaza
<S>                                   <C>                      <C>                               <C> 
   General Business                   5,952                    $    75,888                       2000
   General Business                  10,433                        140,846                       2000

Northway Mall
   Department Store                  73,500                    $   294,000                       2004
   Department Store                  69,639                        461,954                       2004

Westwood Center
   General Office                    35,811                    $   525,828                       2001
   General Office                    31,266                        438,944                       2003
   General Office                    19,838                        297,570                       2004

</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 XXIII,  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.,  Hearth  Hollow
     Associates, McNeil Midwest Properties I, L.P. and Regency North Associates,
     L.P.,  - Superior  Court of the State of  California  for the County of Los
     Angeles, Case No. BC133799 (Class and Derivative Action Complaint).


<PAGE>
     The action  involves  purported  class and  derivative  actions  brought by
     limited  partners  of each of the 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.  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.  The case was stayed pending settlement  discussions.  A
     Stipulation of Settlement  dated  September 15, 1998 has been signed by the
     parties.  Preliminary  Court  approval  was  received on October 6, 1998. A
     hearing for Final Approval of Settlement,  initially scheduled for December
     17, 1998, has been continued to May 25, 1999.

     Because  McNeil Real Estate Fund XXIII,  L.P.,  Hearth  Hollow  Associates,
     McNeil Midwest Properties I, L.P. and Regency North Associates,  L.P. would
     be part of the  transaction  contemplated  in the settlement and Plaintiffs
     claim  that an  effort  should  be made to sell  the  McNeil  Partnerships,
     Plaintiffs  have  included  allegations  with respect to McNeil Real Estate
     Fund XXIII,  L.P., Hearth Hollow  Associates,  McNeil Midwest Properties I,
     L.P.  and Regency  North  Associates,  L.P. in the third  consolidated  and
     amended complaint.

     Plaintiff's  counsel intends to seek an order awarding  attorney's fees and
     reimbursements of their out-of-pocket expenses. The amount of such award is
     undeterminable  until final  approval is received from the court.  Fees and
     expenses shall be allocated  amongst the  Partnerships on a pro rata basis,
     based  upon  tangible  asset  value of each such  partnership,  less  total
     liabilities,   calculated  in  accordance  with  the  Amended   Partnership
     Agreements for the quarter most recently ended.

<PAGE>


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.

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         6,204 as of February 1, 1999

(C)   Distributions of $2,538,360 and $749,988 were paid to the limited partners
      in 1998 and 1997,  respectively.  During the last week of March 1999,  the
      Partnership distributed  approximately $500,000 to the limited partners of
      record  as of March 1,  1999.  See Item 7 -  Management's  Discussion  and
      Analysis of Financial  Condition  and Results of  Operations  and Item 8 -
      Note 1 - "Organization  and Summary of Significant  Accounting  Policies -
      Distributions".
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
------- ------------------------

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

<TABLE>
<CAPTION>
Statements of                                             Years Ended December 31,
Operations                              1998           1997            1996           1995           1994
------------------                  -------------  -------------  --------------  -------------  --------
<S>                                 <C>            <C>            <C>             <C>            <C>          
Rental revenue...............       $   8,985,277  $   8,824,653  $    8,579,073  $   7,568,361  $   6,385,998
Write-down for impair-
   ment of real estate.......                   -              -      (1,087,000)    (2,200,000)             -
Net loss.....................            (695,742)    (1,003,689)     (2,347,920)    (5,063,046)    (1,938,063)

Loss per thousand limited
   partnership units.........       $       (7.96)  $     (11.48) $       (26.86) $      (57.91) $     (22.17)
                                     ============    ===========   =============   ============   ===========

Distributions per thousand
   limited partnership
   units.....................       $       29.33   $       8.67  $         4.33  $           -  $          -
                                     ============    ===========   =============   ============   ===========
</TABLE>

<TABLE>
<CAPTION>
                                                                  As of December 31,
Balance Sheets                           1998           1997            1996           1995           1994
--------------                      ------------   -------------  --------------  -------------  --------------
Real estate investments,
<S>                                <C>              <C>             <C>            <C>             <C>         
   net.......................      $   35,608,688   $ 37,259,312    $ 38,979,116   $ 44,629,001    $ 41,738,690
Asset held for sale..........                   -      3,047,765       3,008,374             --              -
Total assets.................          40,048,693     45,464,752      47,124,512     54,217,223      45,208,188
Mortgage notes payable.......          18,981,387     21,442,045      21,815,746     23,097,459       9,350,045
Partners' equity.............          19,628,145     22,862,247      24,615,924     27,338,809      32,401,855
</TABLE>


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

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

The  Partnership was formed to engage in the business of acquiring and operating
income-producing  real  properties,  and holding the properties for  investment.
Since  completion of its capital  formation and property  acquisition  phases in
1987,  when it completed the purchase of five  properties,  the  Partnership has
operated its properties for production of income.  The original  acquisitions of
properties were all cash. On April 27, 1998, the Partnership sold its investment
in Edison Ford Square.

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

1998 compared to 1997

Revenue:

Total  Partnership  revenues for 1998 increased by $292,893 or 3% as compared to
1997.  Rental revenue  increased  $160,624 or 2% while interest income increased
$15,972 or 10%. Interest income increased due to an increase in the average cash
balance  being  invested in interest  bearing  accounts.  A gain of $116,297 was
recognized  in 1998 due to the sale of  Edison  Ford  Square.  No such  gain was
recorded in 1997.

Expenses:

Total  expenses  decreased  by $15,054 in 1998 as compared to 1997.  Edison Ford
Square,  sold in 1998,  accounted  for $180,183 of the  decrease.  The remaining
$165,129  increase in expenses  was mainly due to an increase in property  taxes
and general and administrative expenses. In addition, bad debt expense showed an
increase  in 1998,  which was offset by  decreases  in interest  expense,  other
property operating expense and utilities.

Interest  expense  decreased  $71,133 in 1998  primarily due to mortgage    note
payoff at Westwood  Center in October 1998.

Property taxes for 1998 (excluding Edison Ford Square) increased $126,406 or 17%
as  compared  1997  due  to an  increase  in  the  estimated  tax  liability  at
Continental Plaza, Northway Mall and Westwood Center.

Bad debt expense (excluding Edison Ford Square) increased $17,335 or 17% in 1998
as compared to 1997.  This increase can be attributed to the write-off of tenant
balances that were deemed uncollectible at Northway Mall

General and administrative expenses increased by $207,482 in 1998 as compared to
the same period in 1997.  The increase  was mainly due to the costs  incurred to
explore alternatives to maximize the value of the Partnership.


<PAGE>
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.

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.

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

The Partnership has experienced positive cash flow from operations of $3,165,025
for the three  years  ended  December  31,  1998.  Over the last three years the
Partnership  has  used  cash to fund  $3,056,569  in  additions  to real  estate
investments,  $3,163,534 in principal payments and debt retirement,  $28,183 for
additions to deferred borrowing costs,  $1,083,055 for the repayment of advances
and  mortgage  loans  from   affiliates   and  $3,663,313  in  limited   partner
distributions.

During 1998, the  Partnership  received  $3,324,955 as proceeds from the sale of
Edison Ford Square.

The Partnership  generated  $2,035,352  through operating  activities in 1998 as
compared to $2,718,546 in 1997. The decrease of $683,194 can be attributed to an
increase in cash paid to suppliers and a increase in property taxes paid.  These
increases were offset by a decrease in cash paid to affiliates.


<PAGE>
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  by  operating  activities  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.

Short-term liquidity:

At  December  31,  1998,  the  Partnership  held  cash and cash  equivalents  of
$2,256,842.  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
$1.3 million for necessary capital improvements for all properties in 1999.

The Partnership had significant  mortgage  maturities during 1998. On October 1,
1998, the  Partnership  paid off the mortgage note payable on Westwood Center in
the amount of $2,091,627 and on November 1, 1998 the  Partnership was successful
in  negotiating  a two-year  extension on the mortgage  note payable on Amargosa
Creek.

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.

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.

As previously announced, the Partnership has retained PaineWebber,  Incorporated
("PaineWebber")  as its exclusive  financial advisor to explore  alternatives to
maximize  the  value  of  the  Partnership,  including,  without  limitation,  a
transaction  in which  limited  partnership  interests  in the  Partnership  are
converted into cash. The Partnership,  through  PaineWebber,  provided financial
and other  information to interested  parties as part of an auction  process and
until early March 1999 was conducting  discussions with one bidder in an attempt
to reach a definitive  agreement  with respect to a sale  transaction.  In early
March 1999, because the Partnership had been unable to conclude negotiations for
a transaction with such bidder, the Partnership  terminated such discussions and
commenced   discussions   with  respect  to  a  sale  transaction  with  another
well-financed  bidder who had been  involved in the  original  auction  process.
During  the last full  week of  March,  the  Partnership  entered  into a 45 day
exclusivity  agreement with such party.  It is possible that the General Partner
and its  affiliates  will receive  non-cash  consideration  for their  ownership
interests in  connection  with any such  transaction.  There can be no assurance
regarding whether any such agreement will be reached nor the terms thereof.


<PAGE>
Distributions:

During 1998, the limited  partners  received a cash  distribution of $2,538,360.
The  distribution  consisted of funds from operations and cash reserves.  During
the last week of March 1999, the Partnership distributed  approximately $500,000
to the limited  partners of record as of March 1, 1999. 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.

YEAR 2000 DISCLOSURE
--------------------

State of readiness
------------------

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.

Management has assessed its  information  technology  ("IT")  infrastructure  to
identify  any systems  that could be affected by the year 2000  problem.  The IT
used by the  Partnership  for  financial  reporting and  significant  accounting
functions was made year 2000 compliant  during recent systems  conversions.  The
software  utilized for these  functions  are licensed by third party vendors who
have warranted that their systems are year 2000 compliant.

Management  is  in  the  process  of  evaluating  the  mechanical  and  embedded
technological systems at the various properties.  Management has inventoried all
such systems and queried suppliers,  vendors and manufacturers to determine year
2000 compliance. Management will complete assessment of findings by May 1, 1999.
In  circumstances  of  non-compliance  management  will work with the  vendor to
remedy the  problem or seek  alternative  suppliers  who will be in  compliance.
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. However, no estimates can be made as to the potential adverse impact
resulting  from the failure of third party  service  providers and vendors to be
year 2000 compliant.

Cost
----

The cost of IT and  embedded  technology  systems  testing  and  upgrades is not
expected to be material to the Partnership. Because all the IT systems have been
upgraded  over the last three years,  all such systems were  compliant,  or made
compliant at no additional cost by third party vendors.  Management  anticipates
the costs of assessing,  testing, and if necessary replacing embedded technology
components will be less than $50,000.  Such costs will be funded from operations
of the Partnership.



<PAGE>
Risks
-----

Ultimately,  the potential impact of the year 2000 issue will depend not only on
the corrective measures the Partnership undertakes, but also on the way in which
the year 2000 issue is  addressed  by  government  agencies  and  entities  that
provide services or supplies to the  Partnership.  Management has not determined
the most likely worst case scenario to the  Partnership.  As management  studies
the findings of its property  systems  assessment and testing,  management  will
develop  a better  understanding  of what  would  be the  worst  case  scenario.
Management  believes  that  progress  on all  areas is  proceeding  and that the
Partnership  will  experience  no  adverse  effect  as a result of the year 2000
issue. However, there is no assurance that this will be the case.

Contingency plans
-----------------

Management  is  developing  contingency  plans to  address  potential  year 2000
non-compliance of IT and embedded technology  systems.  Management believes that
failure of any IT system could have an adverse  impact on  operations.  However,
management  believes  that  alternative  systems  are  available  that  could be
utilized to minimize  such impact.  Management  believes that any failure in the
embedded  technology  systems  could have an adverse  impact on that  property's
performance.  Management  will assess these risks and develop  plans to mitigate
possible failures by June, 1999.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
--------  ----------------------------------------------------------

Not Applicable.

<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, 1998 and 1997...................................                       17

   Statements of Operations for each of the three years in the period
      ended December 31, 1998.....................................................                       18

   Statements of Partners' Equity (Deficit) for each of the three years in
      the period ended December 31, 1998..........................................                       19

   Statements of Cash Flows for each of the three years in the period
      ended December 31, 1998.....................................................                       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, 1998 and 1997, and
the related statements of operations,  partners' equity (deficit) and cash flows
for each of the  three  years in the  period  ended  December  31,  1998.  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, 1998 and 1997, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1998, 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 19, 1999



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

                                 BALANCE SHEETS

<TABLE>
<CAPTION>

                                                                                 December 31,
                                                                      ---------------------------------
                                                                          1998                 1997
                                                                      ------------        -------------

ASSETS
------

Real estate investments:
<S>                                                                   <C>                  <C>         
   Land ......................................................        $  6,750,456         $  6,750,456
   Buildings and improvements ................................          55,757,865           54,854,340
                                                                      ------------         ------------
                                                                        62,508,321           61,604,796
   Less:  Accumulated depreciation and amortization ..........         (26,899,633)         (24,345,484)
                                                                      ------------         ------------
                                                                        35,608,688           37,259,312

Asset held for sale ..........................................                  --            3,047,765

Cash and cash equivalents ....................................           2,256,842            2,823,216
Cash segregated for security deposits ........................             232,083              235,617
Accounts receivable, net of allowance for doubtful
   accounts of $203,657 and $572,392 at
   December 31, 1998 and 1997 ................................           1,123,136            1,221,528
Prepaid commissions ..........................................             387,092              381,923
Prepaid expenses and other assets ............................             254,614              229,664
Deferred borrowing costs, net of accumulated
   amortization of $255,443 and $307,435 at
   December 31, 1998 and 1997, respectively ..................             186,238              265,727
                                                                      ------------         ------------
                                                                      $ 40,048,693         $ 45,464,752
                                                                      ============         ============
LIABILITIES AND PARTNERS' EQUITY (DEFICIT)
------------------------------------------

Mortgage notes payable .......................................        $ 18,981,387         $ 21,442,045
Accounts payable and accrued expenses ........................             247,764              488,719
Accrued property taxes .......................................              40,161               81,308
Payable to affiliates - General Partner ......................             931,891              292,574
Security deposits and deferred rental income .................             219,345              297,859
                                                                      ------------         ------------
                                                                        20,420,548           22,602,505
                                                                      ------------         ------------

Partners' equity (deficit):
   Limited  partners - 90,000,000  limited  partnership
     units  authorized; 86,530,671 limited partnership
     units issued and outstanding at December 31,
     1998 and 1997 ...........................................          20,046,031           23,273,176
   General Partner ...........................................            (417,886)            (410,929)
                                                                      ------------         ------------
                                                                        19,628,145           22,862,247
                                                                      ------------         ------------
                                                                      $ 40,048,693         $ 45,464,752
                                                                      ============         ============
</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,
                                                   ------------------------------------------------------
                                                       1998                 1997                 1996
                                                   ------------         ------------         ------------
Revenue:
<S>                                                <C>                  <C>                  <C>         
   Rental revenue .........................        $  8,985,277         $  8,824,653         $  8,579,073
   Interest ...............................             173,940              157,968              176,370
   Gain on sale of real estate ............             116,297                   --                   --
                                                   ------------         ------------         ------------
     Total revenue ........................           9,275,514            8,982,621            8,755,443
                                                   ------------         ------------         ------------

Expenses:
   Interest ...............................           1,671,325            1,742,458            1,770,932
   Interest - affiliates ..................                  --                   --               16,090
   Depreciation and amortization ..........           2,554,149            2,663,083            2,713,247
   Property taxes .........................             838,337              752,719              673,753
   Bad debt ...............................             111,651              105,143               13,759
   Personnel expenses .....................             830,841              816,221              799,842
   Repairs and maintenance ................             935,321              942,549              971,273
   Property management fees -
     affiliates ...........................             516,838              524,356              499,835
   Utilities ..............................             936,911              985,081              996,025
   Other property operating expenses.......             482,950              559,091              584,823
   General and administrative .............             377,580              170,098              271,913
   General and administrative -
     affiliates ...........................             715,353              725,511              704,871
   Write-down for impairment
     of real estate .......................                  --                   --            1,087,000
                                                   ------------         ------------         ------------
     Total expenses .......................           9,971,256            9,986,310           11,103,363
                                                   ------------         ------------         ------------

Net loss ..................................        $   (695,742)        $(1,003,689) $         (2,347,920)
                                                   ============         ============         ============

Net loss allocable to limited
   partners ...............................        $   (688,785)        $   (993,652)        $ (2,324,441)
Net loss allocable to General
   Partner ................................              (6,957)             (10,037)             (23,479)
                                                   ------------         ------------         ------------
Net loss ..................................        $   (695,742)        $ (1,003,689)        $ (2,347,920)
                                                   ============         ============         ============

Net loss per thousand limited
   partnership units ......................        $      (7.96)        $     (11.48)        $     (26.86)
                                                   ============         ============         ============

Distribution per thousand limited
   partnership units ......................        $      29.33         $       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, 1998, 1997 and 1996


<TABLE>
<CAPTION>
                                                                                             Total
                                                   General              Limited            Partners'
                                                   Partner             Partners             Equity
                                                -------------        -------------        -------------
<S>                                             <C>                  <C>                  <C>         
Balance at December 31, 1995 ...........        $   (377,413)        $ 27,716,222         $ 27,338,809

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

Distributions to limited partners.......                  --             (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 to limited partners ......                  --             (749,988)            (749,988)
                                                ------------         ------------         ------------

Balance at December 31, 1997 ...........            (410,929)          23,273,176           22,862,247

Net loss ...............................              (6,957)            (688,785)            (695,742)

Distributions to limited partners ......                  --           (2,538,360)          (2,538,360)
                                                ------------         ------------         ------------

Balance at December 31, 1998 ...........        $   (417,886)        $ 20,046,031         $ 19,628,145
                                                ============         ============         ============
</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,
                                                      ----------------------------------------------------
                                                          1998                 1997               1996
                                                      ------------        ------------        ------------
Cash flows from operating activities:
<S>                                                   <C>                 <C>                 <C>        
   Cash received from tenants ................        $ 8,782,369         $ 8,834,211         $ 8,380,164
   Cash paid to suppliers ....................         (3,832,374)         (2,840,370)         (3,723,971)
   Cash paid to affiliates ...................           (592,874)         (1,048,755)         (4,096,653)
   Interest received .........................            173,940             157,968             176,370
   Interest paid .............................         (1,581,247)         (1,653,436)         (1,587,720)
   Interest paid to affiliates ...............                 --                  --             (53,903)
   Property taxes paid .......................           (914,462)           (731,072)           (683,160)
                                                      -----------         -----------         -----------
Net cash provided by (used in)
     operating activities ....................          2,035,352           2,718,546          (1,588,873)
                                                      -----------         -----------         -----------

Cash flows from investing activities:
   Additions to real estate investments
      and asset held for sale ................           (915,163)           (982,670)         (1,158,736)
   Proceeds from sale of real estate .........          3,324,955                  --                  --
                                                      -----------         -----------         -----------
Net cash provided by (used in)
     investing activities ....................          2,409,792            (982,670)         (1,158,736)
                                                      -----------         -----------         -----------

Cash flows from financing activities:
   Principal payments on mortgage
     notes payable ...........................           (369,031)           (373,701)           (329,175)
   Retirement of mortgage note payable .......         (2,091,627)                 --                  --
   Repayment of mortgage note -
     affiliate ...............................                 --                  --            (952,538)
   Repayment of advances from
     affiliates - General Partner ............                 --                  --            (130,517)
   Deferred borrowing costs paid .............            (12,500)                 --             (15,683)
   Distributions to limited partners .........         (2,538,360)           (749,988)           (374,965)
                                                      -----------         -----------         -----------
Net cash used in financing activities ........         (5,011,518)         (1,123,689)         (1,802,878)
                                                      -----------         -----------         -----------

Net increase (decrease) in cash and
   cash equivalents ..........................           (566,374)            612,187          (4,550,487)

Cash and cash equivalents at
     beginning of year .......................          2,823,216           2,211,029           6,761,516
                                                      -----------         -----------         -----------

Cash and cash equivalents at end
     of year .................................        $ 2,256,842         $ 2,823,216         $ 2,211,029
                                                      ===========         ===========         ===========
</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,
                                                    ----------------------------------------------------
                                                        1998                1997                1996
                                                    ------------        ------------        ------------
<S>                                                 <C>                 <C>                 <C>         
Net loss ...................................        $  (695,742)        $(1,003,689)        $(2,347,920)
                                                    -----------         -----------         -----------

Adjustments to reconcile net loss
   to net cash provided by (used in)
   operating activities:
   Depreciation and amortization ...........          2,554,149           2,663,083           2,713,247
   Amortization of deferred borrowing
     costs .................................             91,989              91,795              89,999
   Allowance for doubtful accounts .........                 --                  --             (23,764)
   Interest added to advances from
     affiliates - General Partner, net .....                 --                  --             (37,813)
   Write-down for impairment
     of real estate ........................                 --                  --           1,087,000
   Gain on sale of real estate .............           (116,297)                 --                  --
   Changes in assets and liabilities:
     Cash segregated for security
       deposits ............................              3,534              (2,191)            (31,030)
     Accounts receivable ...................            (16,277)             55,469            (156,296)
     Prepaid commissions ...................            (39,755)            (32,905)             30,426
     Prepaid expenses and other
       assets ..............................            (24,950)            479,366               7,061
     Accounts payable and accrued
       expenses ............................           (240,955)            182,435             (52,572)
     Accrued property taxes ................            (41,147)             22,648              (1,204)
     Payable to affiliates - General
       Partner .............................            639,317             201,112          (2,891,947)
     Security deposits and deferred
       rental income .......................            (78,514)             61,423              25,940
                                                    -----------         -----------         -----------

         Total adjustments .................          2,731,094           3,722,235             759,047
                                                    -----------         -----------         -----------

Net cash provided by (used in)
     operating activities ..................        $ 2,035,352         $ 2,718,546         $(1,588,873)
                                                    ===========         ===========         ===========

</TABLE>



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

                          NOTES TO FINANCIAL STATEMENTS

                                DECEMBER 31, 1998

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, 1998, the Partnership  owned four  income-producing
properties as described in Note 4 - Real Estate Investments.

As previously announced, the Partnership has retained PaineWebber,  Incorporated
("PaineWebber")  as its exclusive  financial advisor to explore  alternatives to
maximize  the  value  of  the  Partnership,  including,  without  limitation,  a
transaction  in which  limited  partnership  interests  in the  Partnership  are
converted into cash. The Partnership,  through  PaineWebber,  provided financial
and other  information to interested  parties as part of an auction  process and
until early March 1999 was conducting  discussions with one bidder in an attempt
to reach a definitive  agreement  with respect to a sale  transaction.  In early
March 1999, because the Partnership had been unable to conclude negotiations for
a transaction with such bidder, the Partnership  terminated such discussions and
commenced   discussions   with  respect  to  a  sale  transaction  with  another
well-financed  bidder who had been  involved in the  original  auction  process.
During  the last full  week of  March,  the  Partnership  entered  into a 45 day
exclusivity  agreement with such party.  It is possible that the General Partner
and its  affiliates  will receive  non-cash  consideration  for their  ownership
interests in  connection  with any such  transaction.  There can be no assurance
regarding whether any such agreement will be reached nor the terms thereof.

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>
Adoption of Recent Accounting Pronouncements
--------------------------------------------

The Partnership has adopted Statement of Financial Accounting Standards No. 131,
"Disclosures  About  Segments of an Enterprise  and Related  Information  ("SFAS
131"). SFAS 131 requires an enterprise to report financial information about its
reportable operating segments, which are defined as components of a business for
which  separate  financial  information  is  evaluated  regularly  by the  chief
decision  maker  in  allocating   resources  and  assessing   performance.   The
Partnership  does not  prepare  such  information  for  internal  use,  since it
analyzes  the   performance  of  and  allocates   resources  for  each  property
individually.  The Partnership's  management has determined that it operates one
line of business and it would be  impracticable  to report segment  information.
Therefore, the adoption of SFAS 131 has no impact on the Partnership's financial
statements.

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 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". 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.

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  and  amortization 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.


<PAGE>
Prepaid Commissions
-------------------

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

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

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

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 1998, 1997 and 1996 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.

Cash distributions of $2,538,360, $749,988 and $374,965 were made to the limited
partners during 1998, 1997 and 1996, respectively. During the last week of March
1999, the Partnership distributed approximately $500,000 to the limited partners
of record as of March 1, 1999.

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 1998 and 1997 and 86,534  thousand  Units  outstanding in
1996.

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

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

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

Under the terms of its partnership agreement, the Partnership pays a disposition
fee to the General  Partner  equal to 3% of the gross sales price for  brokerage
services performed in connection with the sale of the Partnership's  properties.
The fee is due and payable at the time the sale closes.  The Partnership  paid a
disposition fee of $106,500 in connection with the sale of Edison Ford Square.

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  to .75% in  2000,  .50% in 2001 and .25%
thereafter.
<PAGE>
Compensation  and  reimbursements  paid to or  accrued  for the  benefit  of the
General Partner or its affiliates are as follows:

<TABLE>
<CAPTION>
                                                              For the Years Ended December 31,
                                                      ----------------------------------------------
                                                          1998              1997              1996
                                                      ----------        ----------        ----------
<S>                                                   <C>               <C>               <C>       
Property management fees - affiliates ........        $  516,838        $  524,356        $  499,835
Charged to gain on sale of real estate:
   Disposition fee ...........................           106,500                --                --
Charged to interest  - affiliates:
   Interest on mortgage note payable -
     affiliate ...............................                --                --            11,398
   Interest on advances from
     affiliates - General Partner ............                --                --             4,692
Charged to general and administrative -
   affiliates:
   Partnership administration ................           184,697           147,389           198,810
   Asset management fee ......................           530,656           578,122           506,061
                                                      ----------        ----------        ----------
                                                      $1,338,691        $1,249,867        $1,220,796
                                                      ==========        ==========        ==========
</TABLE>

Payable to affiliates - General  Partner at December 31, 1998 and 1997 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 1998,  the  Partnership  paid or accrued a total of
$715,353 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.

NOTE 3 - TAXABLE INCOME (LOSS)
------------------------------

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.


<PAGE>

The  Partnership's  net assets and liabilities for tax purposes exceeded the net
assets and liabilities for financial  reporting purposes by $19,628,145 in 1998,
$38,816,004 in 1997and $38,453,377 in 1996.

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

The basis and accumulated  depreciation  and  amortization of the  Partnership's
real  estate  investments  at December  31, 1998 and 1997,  are set forth in the
following tables:

<TABLE>
<CAPTION>
                                                                         Accumulated
                                                   Buildings and        Depreciation           Net Book
       1998                         Land           Improvements        & Amortization            Value
       ----                    --------------      ------------        --------------     ----------------
Amargosa Creek
<S>                            <C>                <C>                 <C>                 <C>            
   Lancaster, CA               $      794,635     $     8,697,067     $    (4,456,684)    $     5,035,018
Continental Plaza
   Scottsdale, AZ                   1,975,324           2,232,521          (1,981,451)          2,226,394
Northway Mall
   Pittsburgh, PA                   2,965,329          31,603,934         (12,932,192)         21,637,071
Westwood Center
   Tampa, FL                        1,015,168          13,224,343          (7,529,306)          6,710,205
                                -------------      --------------      --------------      --------------
                               $    6,750,456     $    55,757,865     $   (26,899,633)    $    35,608,688
                                =============      ==============      ==============      ==============

                                                                         Accumulated
                                                   Buildings and        Depreciation          Net Book
       1997                         Land           Improvements        & Amortization           Value
       ----                    --------------      ------------        --------------     ---------------

Amargosa Creek                 $      794,635     $     8,626,877     $    (4,085,865)    $     5,335,647
Continental Plaza                   1,975,324           2,072,184          (1,903,860)          2,143,648
Northway Mall                       2,965,329          31,280,032         (11,396,878)         22,848,483
Westwood Center                     1,015,168          12,875,247          (6,958,881)          6,931,534
                                -------------      --------------      --------------      --------------
                               $    6,750,456     $    54,854,340     $   (24,345,484)    $    37,259,312
                                =============      ==============      ==============      ==============

</TABLE>
<PAGE>
On April 1, 1996,  the General  Partners  placed Edison Ford Square,  located in
Fort Meyers, Florida, on the market for sale. A 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.  Edison Ford Square was sold to
an unaffiliated buyer on April 28, 1998 (See Note 6).

The results of operations for the asset held for sale are $40,483 for the period
from  January 1, 1998 to April 28, 1998 and  $213,631 and $312,321 for the years
ended  December  31,  1997 and 1996,  respectively.  Results of  operations  are
operating   revenues  less  operating   expenses   including   depreciation  and
amortization and interest expense.

The Partnership leases its commercial properties under non-cancelable  operating
leases.  Future  minimum  rents to be received  as of  December  31, 1998 are as
follows:

                  1999..............................        $  5,304,573
                  2000..............................           5,018,352
                  2001..............................           3,647,958
                  2002..............................           2,792,427
                  2003..............................           2,490,304
                  Thereafter........................           7,994,336
                                                             -----------
                    Total                                   $ 27,247,950
                                                             ===========


<PAGE>
Future minimum rents do not include  contingent rentals based on sales volume of
tenants.  Contingent rents amounted to $18,984, $21,625 and $7,943 for the years
ended December 31, 1998, 1997 and 1996, respectively.  Future minimum rents also
do not include  expense  reimbursements  for common area  maintenance,  property
taxes, and other expenses.  These expense reimbursements amounted to $1,518,211,
$1,398,132 and $1,563,150 for the years ended December 31, 1998, 1997, and 1996,
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.

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

The  following  sets forth the  mortgage  notes  payable of the  Partnership  at
December 31, 1998 and 1997.  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(d)       1998               1997
--------                 -------------------           -------------------  -------------      -------------
<S>                                       <C>         <C>           <C>      <C>                <C>         
Amargosa Creek           First (b)        7.875       $   35,528    11/00    $   4,648,038      $  4,705,850

Northway Mall            First            7.500          110,849    12/02       14,333,349        14,578,464

Westwood Center          First (c)        8.000           22,457    12/98                -         2,157,731
                                                                              ------------       -----------
                                                                             $  18,981,387      $ 21,442,045
                                                                              ============       ===========
</TABLE>
(a)   The debt is non-recourse to the Partnership.

(b)   On November 1, 1998,  the  Partnership  extended the maturity  date on the
      mortgage note payable.  The note was extended  until November 1, 2000. The
      Partnership  incurred  $12,500 of deferred  borrowing costs related to the
      extension of the mortgage note.

(c)   On October 1, 1998, the Partnership paid off the mortgage note payable.

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

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

         Amargosa Creek                     $    4,529,511         11/00
         Northway Mall                          13,118,565         12/02



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

                  1999....................................      $   326,677
                  2000....................................        4,870,155
                  2001....................................          306,749
                  2002....................................       13,477,806
                  2003 and thereafter.....................                -
                                                                 ----------
                    Total                                       $18,981,387
                                                                 ==========

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 $19,003,000 at December 31, 1998 and $21,404,000
at December 31, 1997.

NOTE 6 - DISPOSITION OF REAL ESTATE
-----------------------------------

On April 28, 1998, the  Partnership  sold Edison Ford Square,  an 145,417 square
foot shopping center located in Fort Myers, Florida to an unaffiliated buyer for
a cash purchase price of  $3,550,000.  Cash proceeds from this  transaction,  as
well as the gain on sale is detailed below:

<TABLE>
<CAPTION>
                                                                          Gain on Sale       Cash Proceeds
                                                                          ------------       -------------
<S>                                                                     <C>                  <C>          
Cash sales price....................................                    $    3,550,000       $   3,550,000
Selling costs.......................................                          (225,045)           (225,045)
Straight-line rents receivable written off..........                          (114,669)                  -
Prepaid leasing commissions written off.............                           (34,586)
Basis of real estate sold...........................                        (3,059,403)
                                                                         ------------- 

Gain on sale of real estate.........................                    $      116,297
                                                                         =============        ------------    

Proceeds from sale of real estate...................                                         $   3,324,955
                                                                                              ============
</TABLE>

The selling costs above include a disposition fee at 3% of the gross sales price
paid to the General Partner in the amount of $106,500 - see Note 2.


<PAGE>
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 XXIII,  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.,  Hearth  Hollow
     Associates, McNeil Midwest Properties I, L.P. and Regency North Associates,
     L.P.,  - 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 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.  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.


<PAGE>
     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.  The case was stayed pending settlement  discussions.  A
     Stipulation of Settlement  dated  September 15, 1998 has been signed by the
     parties.  Preliminary  Court  approval  was  received on October 6, 1998. A
     hearing for Final Approval of Settlement,  initially scheduled for December
     17, 1998, has been continued to May 25, 1999.

     Because  McNeil Real Estate Fund XXIII,  L.P.,  Hearth  Hollow  Associates,
     McNeil Midwest Properties I, L.P. and Regency North Associates,  L.P. would
     be part of the  transaction  contemplated  in the settlement and Plaintiffs
     claim  that an  effort  should  be made to sell  the  McNeil  Partnerships,
     Plaintiffs  have  included  allegations  with respect to McNeil Real Estate
     Fund XXIII,  L.P., Hearth Hollow  Associates,  McNeil Midwest Properties I,
     L.P.  and Regency  North  Associates,  L.P. in the third  consolidated  and
     amended complaint.

     Plaintiff's  counsel intends to seek an order awarding  attorney's fees and
     reimbursements of their out-of-pocket expenses. The amount of such award is
     undeterminable  until final  approval is received from the court.  Fees and
     expenses shall be allocated  amongst the  Partnerships on a pro rata basis,
     based  upon  tangible  asset  value of each such  partnership,  less  total
     liabilities,   calculated  in  accordance  with  the  Amended   Partnership
     Agreements for the quarter most recently ended.

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>
NOTE 8 - COMMITMENTS AND CONTINGENCIES
--------------------------------------

Environmental laws create potential liabilities that may affect property owners.
The environmental  laws of Federal and certain state  governments,  for example,
impose liability on current and certain past owners of property from which there
is a release  or threat of  release  of  hazardous  substances.  This  liability
includes costs of investigation and remediation of the hazardous  substances and
natural resource  damages.  Liability for costs of investigation and remediation
is strict and may be imposed  irrespective  of whether the property owner was at
fault,  although  there are a number of  defenses.  Both  governments  and third
parties may seek recoveries under these laws.

Third parties also may seek  recovery  under the common law for damages to their
property  or person,  against  owners of  property  from which  there has been a
release of hazardous and other substances.

The presence of  contamination  or the failure to remediate  contaminations  may
adversely  affect the owner's  ability to sell or lease real estate or to borrow
using the real estate as collateral.

Various  buildings at properties do or may contain  building  materials that are
the subject of various  regulatory  programs  intended to protect  human health.
Such building materials include,  for example,  asbestos,  lead-based paint, and
lead plumbing components.  The Company has implemented programs to deal with the
presence  of those  materials,  which  include,  as  appropriate,  reduction  of
potential  exposure  situations.  The Company does not believe that the costs of
such programs are likely to have a material adverse effect. Failure to implement
such programs can result in regulatory  violations or liability claims resulting
from alleged exposure to such materials.

In connection with the proposed sale transaction as more fully described in Note
1 -  "Organization  and Summary of  Significant  Accounting  Policies",  Phase I
environmental  site  assessments  have been completed for each property owned by
the Partnership. Such environmental assessments performed on the properties have
not revealed any  environmental  liability that the  Partnership  believes would
have a material adverse effect on the Partnership's business, assets, or results
of  operations.  The  Partnership  has not  been  notified  by any  governmental
authority of any non-compliance, liability or other claim in connection with any
of its  properties.  There can be no  assurances,  however,  that  environmental
liabilities  have  not  developed  since  such  environmental  assessments  were
prepared,  or that future uses or  conditions  (including,  without  limitation,
changes in applicable  environmental  laws and  regulations)  will not result in
imposition of environmental liability.
<PAGE>


                       McNEIL REAL ESTATE FUND XXVI, L.P.
                                  SCHEDULE III
      REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION AND AMORTIZATION
                                December 31, 1998

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

Amargosa Creek
<S>                        <C>               <C>               <C>              <C>                <C>          
   Lancaster, CA (b)       $    4,648,038    $      947,277    $    9,578,026   $   (1,696,024)    $     662,423

Office Buildings:

Continental Plaza
   Scottsdale, AZ (c)                   -         4,211,854         4,059,113       (5,662,360)        1,599,238

Westwood Center
   Tampa, FL (d)                        -         1,465,168        14,814,477       (5,000,000)        2,959,866

Retail Center:

Northway Mall
   Pittsburgh, PA (e)          14,333,349         4,523,305        17,186,915       (6,000,000)       18,859,043
                           --------------    --------------    --------------    -------------     -------------

                          $    18,981,387   $    11,147,604   $    45,638,531   $  (18,358,384)   $   24,080,570
                           ==============    ==============    ==============    =============     =============

</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.


                     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, 1998

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

Apartment:

Amargosa Creek
<S>                           <C>                <C>              <C>                 <C>            
   Lancaster, CA (b)          $      794,635     $    8,697,067   $      9,491,702    $   (4,456,684)

Office Buildings:

Continental Plaza
   Scottsdale, AZ (c)              1,975,324          2,232,521          4,207,845        (1,981,451)

Westwood Center
   Tampa, FL (d)                   1,015,168         13,224,343         14,239,511        (7,529,306)

Retail Center:

Northway Mall
   Pittsburgh, PA (e)              2,965,329         31,603,934         34,569,263       (12,932,192)
                               -------------      -------------    ---------------     -------------
                              $    6,750,456     $   55,757,865   $     62,508,321    $  (26,899,633)
                               =============      =============    ===============     =============
</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
     $86,128,424  and  accumulated  depreciation   was   $23,180,125 at December
     31, 1998.

(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.

                     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, 1998


<TABLE>
<CAPTION>

                                 Date of                    Date                 Depreciable
Description                   Construction                Acquired              lives (years)
-----------                   ------------                --------              -------------
Apartment:

Amargosa Creek
<S>                             <C>  <C>                    <C>                     <C> 
   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

</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.



                     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,
                                                        -----------------------------------------------------
                                                             1998                1997                1996
                                                        ------------         -------------       ------------

Real estate investments:
<S>                                                     <C>                  <C>                 <C>         
Balance at beginning of year ...................        $ 61,604,796         $ 60,661,517        $ 65,884,142

Improvements ...................................             903,525              943,279           1,002,815

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

Balance at end of year .........................        $ 62,508,321         $ 61,604,796        $ 60,661,517
                                                        ============         ============        ============


Accumulated depreciation and amortization:

Balance at beginning of year ...................        $ 24,345,484         $ 21,682,401        $ 21,255,141

Depreciation and amortization ..................           2,554,149            2,663,083           2,713,247

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

Balance at end of year .........................        $ 26,899,633         $ 24,345,484        $ 21,682,401
                                                        ============         ============        ============


Asset held for sale:

Balance at beginning of year ...................        $  3,047,765         $  3,008,374        $         --

Sale of asset ..................................          (3,059,403)                  --                  --

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

Improvements ...................................              11,638               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:

                                       Other Principal Occupations and Other
Name and Position             Age      Directorships During the Past 5 Years
-----------------             ---      -------------------------------------

Robert A. McNeil,              78       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 an 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 in 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.


<PAGE>
Carole J. McNeil               55       Mrs. McNeil is Co-Chairman, with husband
Co-Chairman of the                      Robert A. McNeil,  of McNeil  Investors,
Board                                   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.

Ron K. Taylor                  41       Mr.  Taylor is the  President  and Chief
President and Chief                     Executive  Officer of McNeil Real Estate
Executive Officer                       Management  which is an affiliate of the
                                        General Partner.  Mr. Taylor has been in
                                        this capacity  since the  resignation of
                                        Donald K. Reed on March 4,  1997.  Prior
                                        to       assuming       his      current
                                        responsibilities, Mr. Taylor served as a
                                        Senior  Vice  President  of McREMI.  Mr.
                                        Taylor has been in this  capacity  since
                                        McREMI  commenced  operations  in  1991.
                                        Prior  to  joining  McREMI,  Mr.  Taylor
                                        served as an  Executive  Vice  President
                                        for  a   national   syndication/property
                                        management  firm. In this capacity,  Mr.
                                        Taylor  had the  responsibility  for the
                                        management  and leasing of a  21,000,000
                                        square  foot   portfolio  of  commercial
                                        properties. Mr. Taylor has been actively
                                        involved  in the  real  estate  industry
                                        since 1983.

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


<PAGE>
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,  1998,  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, 1998. 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.

(B) Security ownership of Management.

      Affiliates  of the General  Partner and the  officers or  directors of its
      general  partner,  collectively,  own 2,995,000 Units at February 1, 1999,
      which is 3.5% of the outstanding Units.

(C)   Change in control.

      None.



<PAGE>
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 to .75% in 2000, .50% in 2001 and .25% thereafter.  For the year ended
December  31,  1998,  the  Partnership  paid or accrued  $530,656  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, 1998, the Partnership paid or accrued  $701,535 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".

Under the terms of its partnership agreement, the Partnership pays a disposition
fee to the General  Partner  equal to 3% of the gross sales price for  brokerage
services performed in connection with the sale of the Partnership's  properties.
The fee is due and payable at the time the sale closes.  The Partnership  paid a
$106,500  disposition  fee to the General Partner during 1998 in connection with
the sale of Edison Ford Square.




<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

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

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

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

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

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

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

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

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

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

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

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

(B)   Reports  on Form  8-K.  There  were no  reports  on Form 8-K  filed by the
      Partnership during the quarter ended December 31, 1998.


<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, 1999                  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, 1999                   By: /s/  Ron K. Taylor
--------------                      --------------------------------------------
Date                                 Ron K. Taylor
                                     President and Director of McNeil 
                                      Investors, Inc.
                                     (Principal Financial Officer)




March 31, 1999                   By: /s/  Carol A. Fahs
--------------                      --------------------------------------------
Date                                 Carol A. Fahs
                                     Vice President of McNeil Investors, Inc.
                                     (Principal Accounting Officer)