UNITED STATES SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549
                       ----------------------------------

                                    FORM 10-K

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

                      FOR FISCAL YEAR ENDED MARCH 31, 1998

                                       OR

          |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

               For the transition period from ______ to _______ .


Commission File Number: 0-15705


               PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
        ----------------------------------------------------------------
             (Exact name of registrant as specified in its charter)


            Virginia                                           04-2918819
            --------                                           ----------
(State or other jurisdiction of                             (I.R.S. Employer
incorporation or organization)                              Identification No.)


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


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

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

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

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

                      UNITS OF LIMITED PARTNERSHIP INTEREST
                                (Title of class)

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

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days. Yes |X| No |_|.

State the aggregate market value of the voting stock held by  non-affiliates  of
the registrant. Not applicable.

                       DOCUMENTS INCORPORATED BY REFERENCE

Documents                                               Form 10-K Reference
----------                                              -------------------

Prospectus of registrant dated                          Parts II and IV
July 21, 1986,  as supplemented

<PAGE>
               PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
                                 1998 FORM 10-K

                                TABLE OF CONTENTS


Part   I                                                                Page

Item  1     Business                                                    I-1

Item  2     Properties                                                  I-3

Item  3     Legal Proceedings                                           I-4

Item  4     Submission of Matters to a Vote of Security Holders         I-5


Part  II

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

Item  6     Selected Financial Data                                     II-1

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

Item  8     Financial Statements and Supplementary Data                 II-10

Item  9     Changes in and Disagreements with Accountants on
               Accounting and Financial Disclosure                      II-10


Part III

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

Item  11    Executive Compensation                                      III-2

Item  12    Security Ownership of Certain Beneficial Owners
               and Management                                           III-2

Item  13    Certain Relationships and Related Transactions              III-3


Part  IV

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

Signatures                                                              IV-2

Index to Exhibits                                                       IV-3

Financial Statements and Supplementary Data                          F-1 to F-37

<PAGE>



      This Form 10-K contains  forward-looking  statements within the meaning of
Section 27A of the  Securities  Act of 1933 and  Section  21E of the  Securities
Exchange Act of 1934. The  Partnership's  actual results could differ materially
from those set forth in the  forward-looking  statements.  Certain  factors that
might cause such a difference  are  discussed in Item 7 in the section  entitled
"Certain Factors Affecting Future Operating  Results"  beginning on page II-8 of
this Form 10-K.

                                    PART I

Item 1.  Business

      PaineWebber Equity Partners Two Limited Partnership (the "Partnership") is
a  limited  partnership  formed  on May 16,  1986,  under  the  Uniform  Limited
Partnership Act of the State of Virginia to invest in a diversified portfolio of
existing, newly-constructed or to-be-built income-producing real properties such
as  apartments,  shopping  centers,  hotels,  office  buildings  and  industrial
buildings.  The  Partnership  had  authorized  the  issuance  of  a  maximum  of
150,000,000  Partnership  Units  (the  "Units")  at $1 per Unit,  pursuant  to a
Registration  Statement  on Form S-11  filed  under the  Securities  Act of 1933
(Registration  No.  33-5929).  On June 2,  1988,  the  offering  of Units in the
Partnership was completed and gross proceeds of  $134,425,741  had been received
by the Partnership. Limited Partners will not be required to make any additional
capital contributions.

      As of  March  31,  1998  the  Partnership  owned,  through  joint  venture
partnership,  interests in the operating  properties  set forth in the following
table:
<TABLE>
<CAPTION>

Name of Joint Venture                            Date of
Name and Type of Property                        Acquisition     Type of
Location                           Size          of Interest     Ownership (1)
-------------------------          ----          -----------     ----------------------
<S>                                <C>            <C>            <C>    <C> 

Chicago-625 Partnership           .38 acres;      12/16/86       Fee ownership  of land
625 North Michigan Avenue         324,829 net                    and improvements
Office Tower                      leasable                       (through joint venture)
Chicago, Illinois                 square feet

Richmond Gables Associates        15.55 acres;    9/1/87         Fee ownership of land
The Gables at Erin Shades         224 units                      and improvements
 Apartments                                                      (through joint venture)
Richmond, Virginia

Daniel/Metcalf Associates         19 acres;       9/30/87        Fee  ownership  of land
  Partnership                     142,363 net                    and improvements
Loehmann's Plaza Shopping         leasable                       (through joint venture)
 Center                           square feet
Overland Park, Kansas

Hacienda Park Associates          12.6 acres;     12/24/87       Fee ownership of land
Saratoga Center & EG&G Plaza      184,905 net                    and improvements
Office Buildings                  leasable                       (through joint venture)
Pleasanton, California            square feet

West Ashley Shoppes Associates    17.25 acres;   3/10/88         Fee ownership of land
West Ashley Shoppes               134,406 net                    and improvements
Charleston, South Carolina        leasable                       (through joint venture)
                                  square feet

Atlanta Asbury Partnership        5.87 acres;     4/7/88         Fee  ownership  of land
Asbury Commons Apartments         204 units                      and improvements
Atlanta, GA                                                      (through joint venture)
</TABLE>


(1)   See Notes to the Financial  Statements of the  Registrant  filed with this
      Annual  Report  for a  description  of the  agreements  through  which the
      Partnership has acquired these real estate investments.

      Originally,   the   Partnership   had   interests  in  ten  joint  venture
partnerships,  four of which have since been  liquidated  following the sales of
their operating  investment  properties.  On November 2, 1995, the joint venture
which owned the Richmond Park  Apartments and Richland  Terrace  Apartments sold
the properties to a third party for $11 million.  The  Partnership  received net
proceeds  of  approximately  $8  million  after  deducting  closing  costs,  the
co-venturer's  share of the  proceeds  and  repayment of a $2 million loan which
encumbered  the  property.  In addition,  on December 29, 1995 the joint venture
which owned the Treat Commons II  Apartments  sold the property to a third party
for  approximately  $12.1  million.  The  Partnership  received  net proceeds of
approximately  $4.1 million after  deducting  closing costs and the repayment of
the existing mortgage note of approximately  $7.3 million.  On May 31, 1990, the
joint venture that owned the Highland Village  Apartments sold the property at a
gross sales price of $8.5 million. Net proceeds from the sale were split between
the  Partnership  and its co-venture  partner,  with the  Partnership  receiving
approximately $7.7 million.  Also, on November 29, 1989, the Partnership entered
into an agreement with Awbrey's Road II Associates Limited  Partnership (ARA) to
sell the rights to its interest in Ballston  Place - Phase II  Associates  which
was to own and  operate  Ballston  Place - Phase II,  an  apartment  complex  in
Arlington,  Virginia.  The  Partnership  received the $9 million  which had been
funded into escrow during the  construction  phase of the project.  In addition,
the  Partnership  received  certain other  compensation  in connection with this
transaction.  As a result of these sale transactions,  the Partnership no longer
owns any interest in the Richmond Park Apartments,  Richland Terrace Apartments,
Treat Commons II  Apartments,  Highland  Village  Apartments or Ballston Place -
Phase II Apartments.

      The Partnership's  investment objectives are to invest the proceeds raised
from the offering of limited  partnership  units in a  diversified  portfolio of
income-producing properties in order to:

(1)   preserve and protect Limited Partners' capital;
(2)   provide the Limited Partners with quarterly cash distributions,  a portion
      of which will be sheltered from current federal income tax liability; and
(3)   achieve long-term capital  appreciation in the value of the  Partnership's
      investment properties.

      Through March 31, 1998, the Limited Partners had received  cumulative cash
distributions totalling approximately  $84,752,000,  or $660 per original $1,000
investment for the  Partnership's  earliest  investors.  This return  includes a
distribution of $38 per original $1,000 investment from the sale of the Richland
Terrace  Apartments  and Richmond  Park  Apartments  in November  1995,  $23 per
original  $1,000  investment from the sale of the Treat Commons II Apartments in
December  1995  and $57 per  original  $1,000  investment  from  the sale of the
Highland  Village  Apartments  in May 1990.  The proceeds of the Ballston  Place
transaction  described  above were retained by the  Partnership to pay down debt
and to bolster reserves in light of expected future capital needs. The remaining
cash distributions  have been from net rental income, and a substantial  portion
of such  distributions  has been  sheltered  from  current  federal  income  tax
liability.  As a result of the reduction in Partnership cash flow resulting from
the fiscal 1996 sale transactions  described above, the Partnership  reduced the
annualized  distribution  rate from 2% to 1% effective  with the payment made on
February 15, 1996 for the quarter ended December 31, 1995. As of March 31, 1998,
the Partnership was paying regular  quarterly  distributions at a rate of 1% per
annum on remaining invested capital of $882 per original $1,000  investment.  In
addition,  the  Partnership  retains  its  ownership  interest in six of its ten
original investment properties.

      The Partnership's  success in meeting its capital  appreciation  objective
will  depend  upon the  proceeds  received  from the  final  liquidation  of the
remaining  investments,   which  comprise  73%  of  the  Partnership's  original
investment  portfolio.  The amount of such proceeds will ultimately  depend upon
the  value  of the  underlying  investment  properties  at  the  time  of  their
liquidation,  which cannot  presently be  determined.  As of March 31, 1998, the
Partnership's  portfolio  of real  estate  investments  consists  of two  retail
shopping  centers,  two  office/R&D  properties and two  multi-family  apartment
complexes.  While market values for  commercial  office  buildings  continued to
recover  during fiscal 1998 after several  years of depressed  conditions,  such
values,  for the most  part,  remain  below  the  levels  which  existed  in the
mid-1980's,  which is when the  Partnership's  properties  were  acquired.  Such
conditions are due, in part, to the residual effects of the  overbuilding  which
occurred  in the late  1980's  and the trend  toward  corporate  downsizing  and
restructurings  which  occurred in the wake of the last national  recession.  In
addition,  at the present time real estate values for retail shopping centers in
certain markets are being adversely  impacted by the effects of overbuilding and
consolidations among retailers which have resulted in an oversupply of space and
by  the  generally  flat  rate  of  growth  in  retail  sales.  The  market  for
multi-family  residential  properties  in most  markets  throughout  the country
remained  strong  during fiscal 1998  although  estimated  market values in some
markets  appear to have  plateaued  as a result of the  increase in  development
activity  referred to below.  Management  is  currently  focusing  on  potential
disposition strategies for the remaining investments in its portfolio.  Although
no  assurances  can be given,  it is  currently  contemplated  that sales of the
Partnership's  remaining  assets  could be  completed  within  the next 2- to- 3
years.

      All of the Partnership's  investment properties are located in real estate
markets  in which  they  face  significant  competition  for the  revenues  they
generate. The apartment complexes compete with numerous projects of similar type
generally  on the  basis of price and  amenities.  Apartment  properties  in all
markets also compete  with the local single  family home market for  prospective
tenants. The continued availability of low interest rates on home mortgage loans
has increased the level of this  competition  over the past few years.  However,
the impact of the competition from the  single-family  home market has generally
been  offset by a  significant  increase in the funds  available  in the capital
markets  for  investment  in real  estate  and by the  lack of  significant  new
construction  activity in the  multi-family  apartment  market over most of this
period.  Over  the  past  two  years,   development  activity  for  multi-family
properties  in many  markets  has  escalated  significantly.  The  Partnership's
shopping centers and office/R&D  buildings also compete for long-term commercial
tenants with numerous  projects of similar type generally on the basis of price,
location and tenant improvement allowances.

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

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

      The general  partners of the  Partnership  (the  "General  Partners")  are
Second Equity Partners, Inc., and Properties Associates 1986, L.P. Second Equity
Partners,  Inc. (the "Managing General Partner"),  a wholly-owned  subsidiary of
PaineWebber  Group Inc.  is the  managing  general  partner of the  Partnership.
Properties  Associates 1986, L.P. (the "Associate General Partner"),  a Virginia
limited partnership,  certain limited partners of which are also officers of the
Managing  General Partner and the Adviser,  is the associate  general partner of
the Partnership.

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

Item 2.  Properties

      As of March 31, 1998,  the  Partnership  had  interests  in six  operating
properties through joint venture partnerships.  These joint venture partnerships
and the related properties are referred to under Item 1 above to which reference
is made for the name, location and description of each property.

      Occupancy  figures  for each fiscal  quarter  during  1998,  along with an
average for the year, are presented below for each property:

                                               Percent Occupied At
                                 ----------------------------------------------
                                                                        Fiscal
                                                                        1998
                                 6/30/97     9/30/97  12/31/97  3/31/98 Average
                                 -------     -------  --------  ------- -------

625 North Michigan Avenue         87%         89%        89%     88%     88%

The Gables at Erin Shades         96%         96%        95%     93%     95%

Gateway Plaza Shopping Center     89%         89%        89%     89%     89%

Saratoga Center & EG&G Plaza     100%        100%       100%     94%     99%

West Ashley Shoppes               64%         94%        95%     95%     87%

Asbury Commons Apartments         84%         96%        92%     91%     91%

Item 3.  Legal Proceedings

     In  November  1994,  a series of  purported  class  actions  (the "New York
Limited Partnership Actions") were filed in the United States District Court for
the Southern District of New York concerning PaineWebber Incorporated's sale and
sponsorship of various limited partnership investments,  including those offered
by the Partnership.  The lawsuits were brought against PaineWebber  Incorporated
and PaineWebber Group Inc. (together "PaineWebber"),  among others, by allegedly
dissatisfied  partnership  investors.  In March  1995,  after the  actions  were
consolidated under the title In re PaineWebber Limited  Partnership  Litigation,
the  plaintiffs  amended their  complaint to assert claims  against a variety of
other  defendants,   including  Second  Equity  Partners,  Inc.  and  Properties
Associates  1986,  L.P.  ("PA1986"),  which  are  the  General  Partners  of the
Partnership and affiliates of PaineWebber.  On May 30, 1995, the court certified
class action treatment of the claims asserted in the litigation.

     The amended complaint in the New York Limited  Partnership  Actions alleged
that, in connection  with the sale of interests in PaineWebber  Equity  Partners
Two Limited Partnership,  PaineWebber,  Second Equity Partners,  Inc. and PA1986
(1) failed to provide adequate disclosure of the risks involved;  (2) made false
and  misleading  representations  about the  safety of the  investments  and the
Partnership's  anticipated  performance;  and (3)  marketed the  Partnership  to
investors for whom such  investments  were not  suitable.  The  plaintiffs,  who
purported  to be suing on behalf of all  persons  who  invested  in  PaineWebber
Equity Partners Two Limited Partnership, also alleged that following the sale of
the partnership interests,  PaineWebber, Second Equity Partners, Inc. and PA1986
misrepresented   financial   information  about  the  Partnership's   value  and
performance.  The amended  complaint  alleged that  PaineWebber,  Second  Equity
Partners,  Inc.  and  PA1986  violated  the  Racketeer  Influenced  and  Corrupt
Organizations  Act  ("RICO") and the federal  securities  laws.  The  plaintiffs
sought  unspecified  damages,  including  reimbursement for all sums invested by
them in the  partnerships,  as well as disgorgement of all fees and other income
derived  by  PaineWebber  from  the  limited  partnerships.   In  addition,  the
plaintiffs also sought treble damages under RICO.

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

     In February 1996,  approximately  150 plaintiffs  filed an action  entitled
Abbate v.  PaineWebber  Inc. in  Sacramento,  California  Superior Court against
PaineWebber   Incorporated  and  various  affiliated   entities  concerning  the
plaintiffs' purchases of various limited partnership interests,  including those
offered by the  Partnership.  The complaint  alleged,  among other things,  that
PaineWebber and its related entities committed fraud and  misrepresentation  and
breached  fiduciary  duties  allegedly  owed to the  plaintiffs  by  selling  or
promoting  limited   partnership   investments  that  were  unsuitable  for  the
plaintiffs and by overstating the benefits,  understating  the risks and failing
to state  material  facts  concerning  the  investments.  The  complaint  sought
compensatory  damages of $15 million plus punitive damages against  PaineWebber.
In June 1996, approximately 50 plaintiffs filed an action entitled Bandrowski v.
PaineWebber Inc. in Sacramento,  California  Superior Court against  PaineWebber
Incorporated  and  various  affiliated   entities   concerning  the  plaintiffs'
purchases of various limited partnership  interests,  including those offered by
the  Partnership.  The complaint was very similar to the Abbate action described
above and sought  compensatory  damages of $3.4  million plus  punitive  damages
against  PaineWebber.  In  September  1996,  the  court  dismissed  many  of the
plaintiffs'  claims  in both the  Abbate  and  Bandrowski  actions  as barred by
applicable  securities  arbitration  regulations.  Mediation with respect to the
Abbate and  Bandrowski  actions was held in December  1996.  As a result of such
mediation, a settlement between PaineWebber and the plaintiffs was reached which
provided  for the  complete  resolution  of both  actions.  Final  releases  and
dismissals with regard to these actions were received during fiscal 1998.

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

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

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

      None.


<PAGE>

                                   PART II

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

     At  March  31,  1998,  there  were  8,626  record  holders  of Units in the
Partnership.  There is no public market for the Units, and it is not anticipated
that a public  market for the Units will  develop.  Upon  request  the  Managing
General  Partner will  endeavor to assist a Unitholder  desiring to transfer his
Units and may utilize the services of PWI in this  regard.  The price to be paid
for the Units will be subject to  negotiation  by the  Unitholder.  The Managing
General  Partner will not redeem or  repurchase  Units.  

     The  Partnership  had a Distribution  Reinvestment  Plan designed to enable
Unitholders  to have  their  distributions  from  the  Partnership  invested  in
additional Units of the  Partnership.  The  Distribution  Reinvestment  Plan was
discontinued during fiscal 1998. The terms of the Plan are outlined in detail in
the Prospectus,  a copy of which  Prospectus,  as supplemented,  is incorporated
herein by reference.

     Reference  is made to Item 6 below for a discussion  of cash  distributions
made to the Limited Partners during fiscal 1998.

Item 6. Selected  Financial Data

               PaineWebber Equity Partners Two Limited Partnership
          For the years ended March 31, 1998, 1997, 1996, 1995 and 1994
                    (in thousands, except for per Unit data)

<TABLE>
<CAPTION>
                                                    Years  ended March 31,
                                   ------------------------------------------------------
                                       1998     1997 (1)   1996       1995 (2)     1994
                                       ----     --------   ----       --------     ----
<S>                                   <C>        <C>         <C>       <C>         <C>   

Revenues                             $  5,487   $   5,369   $  5,069  $  4,729    $   4,338

Operating loss                       $   (991)  $  (3,667)  $ (1,508) $ (2,229    $  (2,391)

Partnership's share of
  unconsolidated ventures' incom     $    728   $     383   $   18    $  1,818    $   2,207

Interest income on note
  receivable from unconsolidated
  venture                                    -         -    $    80   $    107    $     106

Partnership's share of gains on
  sale of unconsolidated operating
  investment properties                      -         -    $ 6,766          -           -

Net income (loss)                    $    (263) $ (3,266)   $ 5,523   $   (304)   $     (78)

Per 1,000 Limited Partnership Units:
  Net income (loss)                  $   (1.94) $ (24.04)   $ 40.68   $  (2.26)   $   (0.57)

  Cash distributions from 
     operations                      $    8.84  $   8.84    $ 16.52   $  34.20    $   49.52

  Cash distributions from
    sale transactions                        -         -    $ 61.00          -            -

Total assets                         $  72,274  $ 74,278    $78,722   $ 84,148    $ 103,391

Long-term debt                       $  21,540  $ 21,947    $22,315   $ 22,635    $  36,828

</TABLE>


(1)   The  Partnership's  operating  loss for  fiscal  1997  reflects  a loss of
      $2,700,000  recognized to reflect an  impairment in the carrying  value of
      one of the consolidated operating investment properties. See Note 4 to the
      accompanying financial statements for a further discussion.

(2)   During  fiscal 1995,  as further  discussed in Note 4 to the  accompanying
      financial statements, the Partnership assumed control of the joint venture
      which  owns  and  operates  the  West  Ashley  Shoppes   Shopping  Center.
      Accordingly,  this joint  venture,  which had been accounted for under the
      equity method in prior years, has been  consolidated in the  Partnership's
      financial statements beginning in fiscal 1995.

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

      The above per 1,000 Limited  Partnership  Units  information is based upon
the 134,425,741 Limited Partnership Units outstanding during each year.

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

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

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

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

      The  Partnership  commenced an offering to the public on July 21, 1986 for
up to 150,000,000 units (the "Units") of limited partnership interest (at $1 per
Unit)  pursuant to a  Registration  Statement  filed under the Securities Act of
1933. The  Partnership  raised gross proceeds of  $134,425,741  between July 21,
1986 and June 2, 1988.  The  Partnership  also received  proceeds of $23 million
from the  issuance of zero coupon  loans.  The loan  proceeds,  net of financing
expenses  of  approximately   $908,000,  were  used  to  pay  the  offering  and
organization  costs,  acquisition fees and  acquisition-related  expenses of the
Partnership  and to  fund  the  Partnership's  cash  reserves.  The  Partnership
originally invested approximately  $132,200,000 (net of acquisition fees) in ten
operating properties through joint venture investments.  Through March 31, 1998,
four of these investments had been sold. The Partnership  retains an interest in
six  operating  properties,  which are comprised of two  multi-family  apartment
complexes,  two  office/R&D  complexes  and two  retail  shopping  centers.  The
Partnership does not have any commitments for additional  investments but may be
called upon to fund its  portion of  operating  deficits or capital  improvement
costs of its joint venture  investments in accordance with the respective  joint
venture agreements.

      In light of the continued strength in the national real estate market with
respect to multi-family  apartment properties and the recent improvements in the
office/R&D  property markets,  management believes that this may be an opportune
time to sell the Partnership's portfolio of properties.  As a result, management
is currently  focusing on potential  disposition  strategies  for the  remaining
investments in the Partnership's  portfolio.  As part of that plan, as discussed
further below, The Gables Apartments is being actively marketed for sale now and
the Hacienda Business Park property is expected to be marketed for sale sometime
during the second half of calendar 1998. In addition, management is working with
each property's  leasing and management  team to develop and implement  programs
that will  protect and enhance  value and maximize  cash flow at each  property.
These  programs  include  pursuing a new  leasing  opportunity  at the 625 North
Michigan Office  Building,  completing the leasing  programs which are currently
underway  at Gateway  Plaza and West Ashley  Shoppes,  and  improving  operating
efficiency  and  implementing   property  enhancements  at  the  Asbury  Commons
Apartments.  These programs are expected to result in higher net sale prices for
these four assets than could otherwise be achieved if these properties were sold
today. Although there are no assurances, it is currently contemplated that sales
of the Partnership's  remaining assets could be completed within the next 2-to-3
years.

      As previously  reported,  management  discovered  the existence of certain
potential  construction  problems at the Asbury Commons Apartments during fiscal
1997.  The initial  analysis  of the  construction  problems  at Asbury  Commons
revealed  extensive  deterioration  of the wood trim and  evidence of  potential
structural  problems  affecting  the exterior  breezeways,  the decks of certain
apartment unit types and the stairway towers. A design and construction team was
organized  to further  evaluate  the  potential  problems,  make  cost-effective
remediation  recommendations  and  implement the repair  program.  Based on this
evaluation, the structural problems may be more extensive and cost significantly
more than originally estimated. It will also require further investigation which
together with eventual  construction  repair work may result in  disruptions  to
property  operations  while units are possibly  taken out of service for testing
and repairs. The cost of the repair work required to remediate this situation is
currently  estimated  at between  approximately  $1.5 to $2 million.  During the
third  quarter of fiscal 1998,  bid  application  packages were  distributed  to
pre-qualified  contractors.  The construction contracts were executed during the
fourth quarter, and the repair and replacement work has commenced.  This work is
expected to be completed by late Fall 1998.  During the first  quarter of fiscal
1998, the  Partnership  filed a warranty claim against the  manufacturer  of the
wood-composite siding used throughout Asbury Commons. During the second quarter,
the  Partnership  filed  a  warranty  claim  against  the  manufacturer  of  the
fiberglass-composite  roofing  shingles  installed  when the property was built.
Subsequent  to year-end,  the  manufacturer  of the roofing  shingles  agreed to
provide the  Partnership  with the  materials  to replace the  existing  roofing
shingles.  While there can be no assurances regarding the Partnership's  ability
to successfully  recover any further damages  relating to the siding and roofing
shingles,  the  Partnership  will  diligently  pursue these and other  potential
recovery  sources.  During the fourth  quarter of fiscal 1998,  the  Partnership
reached a settlement agreement with the original developer of the Asbury Commons
property whereby the original developer agreed to pay the Partnership  $200,000.
Under  the terms of this  agreement,  the  Partnership  received  a  payment  of
$100,000  during the fourth  quarter of 1998,  and  received a final  payment of
$100,000 subsequent to year-end.  The Partnership  believes that it has adequate
cash  reserves to fund the repair work at Asbury  Commons  regardless of whether
any additional recoveries are realized.

      The average  occupancy level at the Asbury Commons  Apartments was 91% for
the year ended March 31, 1998,  unchanged  from the prior fiscal year.  In March
1997, a national  property  management firm was hired to take over management at
Asbury Commons  effective  April 1, 1997. The property's  management and leasing
team is confident that the property will perform at average  occupancies similar
to comparable properties in the market, including newly constructed communities,
once the repair program  discussed above has been  completed.  The team has also
indicated  that  effective  rents can be  increased  at Asbury  Commons  through
improved signage, targeted advertising and promotion, and selected unit interior
upgrades. In order to attract prospective tenants, the property's management and
leasing team has undertaken a number of marketing  efforts which are expected to
increase  the  number  of  prospective  tenants  looking  to lease  units at the
property and retain as much of the  existing  resident  base as possible.  These
efforts  include the  targeting of potential  tenants at area  corporations  and
relocation departments. In order to minimize tenant turnover, modest rental rate
increases  of 2% are  being  implemented  as  current  leases  are  renewed.  In
addition,  new tenants are being  offered one month of free rent as an incentive
to sign a 12-month  lease on certain  difficult  to lease unit types in order to
maximize the occupancy level.

      The Gateway Plaza Shopping Center (formerly  Loehmann's Plaza) in Overland
Park,  Kansas was 89% occupied  throughout  fiscal 1998,  compared to an average
level of 80% achieved during fiscal 1997. As previously reported,  during fiscal
1997 the property's leasing team signed a 13,410 square foot lease, representing
9% of the Center's leasable area, with Gateway 2000 Country Stores to occupy the
former  Loehmann's  space.  Gateway  2000 Country  Stores,  a  manufacturer  and
retailer  of  personal  computers,  opened its new store on June 30,  1997.  The
property's  management  team reports that customer  traffic levels in the Center
have  increased  since the openings of both the 13,410 square foot Gateway store
and the  re-opening  of the expanded  13,000 square foot Alpine Hut store during
the first quarter of fiscal 1998.  During the third quarter of fiscal 1998,  the
property's leasing team signed a lease expansion and extension agreement with an
existing  3,815 square foot tenant to occupy 4,830 square feet. The 1,015 square
foot  expansion  area was carved out of the rear  portion of an  adjacent  2,958
square  foot space  that has been  available  for lease for over two years.  The
2,958  square foot space has been  difficult to lease due to its narrow but very
deep configuration.  With the signing of this expansion  agreement,  the leasing
team is now  marketing  the more  attractive  1,943 square foot front portion of
this space.  Subsequent  to  year-end,  the leasing  team also  completed  final
negotiations  with a tenant to lease a vacant 4,980 square foot space.  Now that
this lease is executed, only three spaces, comprising 5,879 square feet, or less
than 4% of the Center remain available for lease.

      A portion of the funds  required to pay for the capital  improvement  work
related to the leasing and  expansion  projects at Gateway Plaza was expected to
come from a $550,000 Renovation and Occupancy Escrow withheld by the lender from
the proceeds of a $4 million loan secured by the property  which was obtained in
February  1995.  Funds were to be released  from the  Renovation  and  Occupancy
Escrow to reimburse the venture for the costs of the planned  renovations in the
event that the venture satisfied certain requirements,  which included specified
occupancy and rental income thresholds. If such requirements were not met within
18 months from the date of the loan closing,  the lender would have the right to
apply the balance of the escrow account to the payment of loan principal.  As of
August 1996, 18 months from the date of the loan closing,  such requirements had
not been met.  Therefore,  the lender had the right to apply the  balance of the
escrow  account  to the  payment  of loan  principal.  In  addition,  the lender
required that the Partnership  unconditionally  guaranty up to $1,400,000 of the
loan  obligation.  This  guaranty was to be released in the event that the joint
venture  satisfied  the  requirement  for  the  release  of the  Renovation  and
Occupancy Escrow funds or upon the repayment, in full, of the entire outstanding
mortgage  loan  liability.  Once the Gateway  store opened for  business  during
fiscal 1998,  the joint venture met the  occupancy and rental income  thresholds
specified  in the escrow  agreement.  Despite  not  meeting  the  thresholds  in
accordance with the timing set forth in the escrow  agreement,  during the third
quarter of fiscal 1998  management  requested  and  received  the release of the
Renovation and Occupancy  Escrow Funds and the termination of the  unconditional
guaranty.  The escrow funds,  along with  accumulated  interest  earnings,  were
distributed to the Partnership and were used to replenish cash reserves.

      During the second  quarter of fiscal  1998,  the leasing  team at the West
Ashley Shoppes  Shopping Center signed a lease for the previously  vacant 36,416
square foot former Children's Palace space. As previously  reported,  Children's
Palace closed its retail store at the center in May 1991 and subsequently  filed
for  bankruptcy  protection  from  creditors.  This anchor  space at West Ashley
Shoppes  had been  vacant  for the past six and a half  years.  The new  tenant,
Waccamaw,  a national  home goods  retailer,  opened its new store in March 1998
which brought the occupancy  level at the property up to 95%. As Waccamaw should
generate  significant  additional  customer traffic into the Center, the leasing
team anticipates  stronger  interest from prospective  tenants for the remaining
available 7,350 square feet of shop space.

      The 625 North  Michigan  Office  Building  in Chicago,  Illinois,  was 88%
leased on average  for the year  ended  March 31,  1998,  up  slightly  from the
average of 87% achieved for fiscal 1997. As previously reported,  the property's
leasing team had been  negotiating a lease with a  prospective  new tenant which
would occupy approximately 22,000 square feet of space.  Subsequent to year-end,
a lease was signed with this  prospective  tenant for 24,276  square  feet.  The
space is now being renovated in preparation for the tenant's expected  occupancy
in September  1998.  Once this tenant moves into the  building,  the  property's
occupancy level will increase by 7%. Over the next year, ten leases representing
a total of 22,024 square feet will expire.  The property's  leasing team expects
that eight of these tenants  occupying a total of 17,262 square feet will renew,
and that the remaining space will be leased to new tenants. The downtown Chicago
real estate market continues to display an improving trend. A competitive office
property within the local market has recently obtained  approvals to convert its
lower floors into a hotel.  This should result in the removal of 290,000  square
feet of office  space from the market.  In  addition,  an office  tenant at that
property has recently completed a 62,000 square foot expansion, which brings the
occupancy level in the building's  office portion to 100%. In this local market,
where  there is no current or planned new  construction  of office  space,  this
reduction  in vacant  office  space has  resulted in a  reduction  in the market
vacancy level at March 31, 1998 to 12% and places more upward pressure on rental
rates. The higher effective rents currently being achieved at 625 North Michigan
are  expected  to increase  cash flow and value as new  tenants  sign leases and
existing  tenants sign lease  renewals in calendar  year 1998.  Retail and hotel
development  in  the  local  market  continues,  as  evidenced  by  plans  for a
Nordstrom's-anchored  95,000  square  foot  retail  development  which  recently
received  preliminary approval from the city. This proposed  development,  which
will be located  two blocks  from 625 North  Michigan,  is part of a master plan
that  includes  several  new  hotels,   entertainment  and  parking   facilities
encompassing  five city  blocks.  Management  continues  to analyze a  potential
project for the property which includes an upgrade to the building lobby and the
addition of a major retail  component to the building's  North  Michigan  Avenue
frontage.  Rental rates paid by high-end  retailers on North Michigan Avenue are
substantially greater than those paid by office tenants. While the costs of such
a project would be substantial, it could have a significantly positive effect on
the  market  value  of  the  625  North  Michigan   property.   A  comprehensive
cost-benefit analysis of this potential project is expected to be completed over
the next several months.

      The four  buildings  comprising  the  Hacienda  Business  Park  investment
property in Pleasanton,  California,  were 94% leased to four tenants at the end
of fiscal 1998. The overall market remains strong with  increasing  rental rates
and a low vacancy  level.  Selective  development in the area is continuing as a
result  of  this  low  vacancy  level.   Construction   of  two  new  Pleasanton
build-to-suit office developments,  totalling 410,000 square feet, was completed
during the fourth  quarter of fiscal 1998. Two other office  projects  totalling
435,000  square  feet  are  under  construction  in this  market.  One of  these
properties  is 100%  pre-leased  and the other is 95%  pre-leased.  In addition,
Peoplesoft Corporation, a major employer in the local market, purchased 17 acres
in Hacienda  Business Park and has begun  construction  of an owner/user  campus
totalling  350,000 square feet.  The project is expected to be completed  within
the next several  months.  The  existing  rental rates on the leases at Hacienda
Park are  significantly  below  current  market rates.  Provided  there is not a
dramatic  increase in either planned  speculative  development or  build-to-suit
development with current tenants in the local market,  the Partnership  would be
expected  to  achieve a  materially  higher  sale  price for the  Hacienda  Park
property as the existing  leases with  below-market  rental rates approach their
expiration  dates.  The  Partnership had been planning to hold the Hacienda Park
property over the near term in order to capture this expected increase in value.
However,  during the quarter  ended  September  30, 1997,  a 51,683  square foot
tenant  occupying 28% of the  property's  leasable area  relocated from Hacienda
Business Park and consolidated its operations into a newly-constructed  building
in the local market.  This tenant has several  leases with  expiration  dates in
1998,  1999 and 2001 and fully leases one of the four  buildings  comprising the
Hacienda Park investment plus 10,027 square feet in an adjoining building. While
this tenant has the right to  sublease  the space,  subject to various  approval
rights, it remains  responsible for rental payments and its contractual share of
operating expenses until the leases expire.  During the fourth quarter of fiscal
1998,  the  Partnership  accepted a net  payment of $34,000  from this tenant in
return  for a release  from all of the  tenant's  obligations  under the  10,027
square foot lease that was  scheduled  to expire in January  2001.  In addition,
this tenant waived its sub-lease and renewal rights on the remaining five leases
which  expire  within the next 12 months.  This lease  termination  agreement is
expected  to  provide  the  property's  leasing  team with more  flexibility  in
re-leasing  the space and may provide the  Partnership  with an  opportunity  to
capture a significant  portion of the expected increase in the value of Hacienda
Park sooner than had been anticipated. In light of this situation, and given the
current  strength  of the  local  market  conditions,  management  is  currently
reviewing the Pleasanton office market and has interviewed potential real estate
brokers in preparation for a possible marketing effort during the second half of
calendar 1998.

      The average  occupancy level at The Gables Apartments was 95% for the year
ended March 31, 1998,  compared to 93% for the previous year. The high occupancy
figures, coupled with favorable rental rate growth over the past year, reflect a
healthy demand for apartments resulting from strong job, household formation and
population  growth in the Richmond,  Virginia market. As job growth is projected
to continue during the next few years, the economic outlook for Richmond remains
positive. Two significant new employers in the Richmond market include the White
Oaks  semiconductor  plant,  which is nearly  completed  and projected to employ
1,500 people, and the recently completed Capital One credit facility, which will
employ  up to  1,000  people.  While  there  are  three  apartment  communities,
comprising approximately 900 units, under construction in the local market, only
one 280-unit community is considered competition for The Gables Apartments.  The
other  communities  are  located  at least  five miles from The Gables and offer
larger units at significantly higher rents. Given the currently favorable market
conditions in Richmond and for apartment  properties in general,  management has
decided to market The Gables  Apartments for sale in calendar year 1998.  During
the quarter ended March 31, 1998, the  Partnership  and its  co-venture  partner
held  discussions   concerning  marketing  strategies  for  selling  The  Gables
Apartments.  As a  follow-up  to  these  discussions,  the  Partnership  and its
co-venture partner solicited marketing proposals from area real estate brokerage
firms.   After  reviewing  these  proposals  and  conducting   interviews,   the
Partnership  and its  co-venture  partner  selected  a regional  brokerage  firm
subsequent to year-end. A marketing package has been prepared, and comprehensive
sale efforts began in late May 1998.

      At March 31, 1998, the Partnership and its consolidated joint ventures had
available cash and cash equivalents of approximately  $6,202,000.  Such cash and
cash equivalent amounts will be utilized for the working capital requirements of
the Partnership,  for reinvestment in certain of the  Partnership's  properties,
including the  anticipated  construction  repair work at Asbury  Commons and the
capital needs of the Partnership's  commercial  properties (as discussed further
above),  and for  distributions to the partners.  The source of future liquidity
and  distributions to the partners is expected to be through cash generated from
operations  of the  Partnership's  income-producing  investment  properties  and
proceeds received from the sale or refinancing of such properties.  Such sources
of liquidity are expected to be sufficient  to meet the  Partnership's  needs on
both a short-term and long-term basis.

      As noted above, the Partnership  expects to be liquidated  within the next
2- to -3 years.  Notwithstanding this, the Partnership believes that it has made
all  necessary  modifications  to its  existing  systems  to make them year 2000
compliant and does not expect that  additional  costs  associated with year 2000
compliance,  if any, will be material to the Partnership's results of operations
or financial position.

Results of Operations
1998 Compared to 1997
---------------------

      The  Partnership  reported  a net  loss of  $263,000  for  fiscal  1998 as
compared to a net loss of $3,266,000 in fiscal 1997. This $3,003,000 decrease in
net  loss is a result  of a  decrease  in the  Partnership's  operating  loss of
$2,676,000  and  an  increase  in  the  Partnership's  share  of  unconsolidated
ventures'  income of $345,000.  The decrease in operating  loss was  primarily a
result of the  recognition  of an impairment  loss of $2,700,000 on the carrying
value of the  consolidated  West Ashley Shoppes  property during fiscal 1997. In
addition,  rental income and expense  reimbursements from the consolidated joint
ventures  increased by $73,000 and  depreciation  expense  decreased by $64,000.
Rental income and expense reimbursements increased as a result of an increase in
rental income of $54,000 and an increase in expense  reimbursements  of $166,000
at the  Hacienda  Park  joint  venture.  These  increases  were the result of an
increase   in  rental   rates  and  the  timing  of  certain   real  estate  tax
reimbursements and expense escalation  billings.  This increase in rental income
and expense  reimbursements  at Hacienda Park was partially offset by a decrease
in rental  income at Asbury  Commons  of  $125,000  which was  partly  due to an
increase in leasing  concessions  granted  during the  current  year in order to
maintain  occupancy  levels  at  the  property,   as  discussed  further  above.
Depreciation  expense  decreased mainly as a result of a decrease in deprecation
at West  Ashley  Shoppes.  Depreciation  decreased  at this  consolidated  joint
venture due to the lower depreciable basis of the venture's  operating  property
due to the  impairment  loss  recognized  in the prior  year.  The  decrease  in
impairment  loss, the increase in rental income and expense  reimbursements  and
the  decrease in  depreciation  expense  were  partially  offset by increases in
general and  administrative  and  property  operating  expenses of $104,000  and
$91,000,  respectively.  General and administrative expenses increased primarily
due to an increase in certain required  professional fees,  including legal fees
related to the examination of potential recovery sources for repair costs at the
Asbury  Commons  Apartments,  as discussed  further  above.  Property  operating
expenses  increased  primarily  due to  increases  in  repairs  and  maintenance
expenses at Hacienda Park and West Ashley Shoppes and administrative expenses at
Asbury Commons.  Repairs and maintenance  expense increased at Hacienda Park due
to the  replacement of an aging lawn sprinkler  system.  Repairs and maintenance
increased at West Ashley  Shoppes due to roof repairs.  Administrative  expenses
increased  at Asbury  Commons  mainly as a result of an increase in  advertising
costs.

      The increase in the Partnership's share of unconsolidated ventures' income
of $345,000 was primarily the result of an increase in the  Partnership's  share
of income from the Gateway Plaza Shopping Center (formerly  Loehmann's Plaza) of
$349,000.  The  increase in net income from  Gateway  Plaza was the result of an
increase in rental income of $316,000. Rental income increased mainly due to the
13,410 square foot lease,  representing 9% of the Center's leasable area, signed
with Gateway 2000 Country Stores which took occupancy in June 1997, as discussed
further above. In addition,  net income increased at The Gables joint venture by
$59,000 for the current year. Net income  increased at this joint venture due to
an increase in rental  income  resulting  from an increase in average  occupancy
during the year.  The increases in net income at Gateway Plaza  Shopping  Center
and The Gables  were  partially  offset by a decrease in net income at 625 North
Michigan of $54,000.  Net income at 625 North Michigan  decreased as a result of
increases in real estate taxes and repairs and maintenance  expenses of $147,000
and $149,000,  respectively.  Real estate taxes  increased due to an increase in
the assessed value of the 625 North Michigan  property.  Repairs and maintenance
expense  increased mainly due to the  modernization  of the building's  elevator
controls which was completed during the current year.

1997 Compared to 1996
---------------------

      The  Partnership  reported a net loss of  $3,266,000  for the fiscal  year
ended March 31, 1997 as compared to net income of $5,523,000 for the prior year.
This unfavorable change in the Partnership's net operating results was primarily
due to the gains recognized on the sales of the Richland  Terrace/Richmond  Park
and  Treat  Commons  II  properties  during  fiscal  1996  and  the  loss on the
impairment  of the West Ashley  Shoppes  property  recognized in fiscal 1997, as
discussed further above. The Partnership's share of the gains on the sale of the
Richland  Terrace/Richmond  Park and Treat  Commons II properties in fiscal 1996
(including  the  write-off  of  unamortized  excess  basis) was  $4,344,000  and
$2,422,000,  respectively.  As noted above,  during fiscal 1997 the  Partnership
recognized an impairment  loss on the carrying  value of the  consolidated  West
Ashley Shoppes property of $2,700,000.

      These unfavorable  changes in the Partnership's net operating results were
partially offset by an increase in rental income and expense  reimbursements and
reductions  in  interest  expense  and  property  operating  expenses  from  the
consolidated  joint  ventures,  along with a decline in Partnership  general and
administrative  expenses.  Rental revenues increased primarily due to a $280,000
increase  in income at Hacienda  Park due to an increase in both the  property's
average  occupancy  level and rental rates.  Occupancy at Hacienda Park averaged
100% for fiscal 1997 as compared to 98% for the prior year while the  property's
average  rental rate  increased  substantially  due to the  expansion of a major
tenant and a lease renewal of another major tenant, both at substantially higher
rates.  Small  increases  in  rental  revenues  at the  other  two  consolidated
properties,  Asbury  Commons and West Ashley  Shoppes,  also  contributed to the
increase in total rental  revenues for fiscal 1997.  Interest  expense  declined
mainly  due  to the  write  off  of  certain  unamortized  deferred  loan  costs
attributable  to the pay off zero coupon loans  refinanced  in fiscal 1996.  The
decline in property operating expenses was mainly attributable to a reduction in
repairs and  maintenance  costs at the  consolidated  West Ashley  Shoppes joint
venture. Partnership general and administrative expenses decreased primarily due
to the additional  professional fees incurred in fiscal 1996 associated with the
sales of the Treat Commons,  Richland Terrace and Richmond Park  properties,  as
well as a reduction in certain other  required  professional  fees during fiscal
1997.

      The Partnership's share of unconsolidated  ventures' income, excluding the
gains  recognized  from the sale of  Treat  Commons  II,  Richland  Terrace  and
Richmond Park in fiscal 1996, increased by $198,000 primarily due to an increase
of $81,000 in rental revenues from The Gables  Apartments,  an increase in other
income of  $71,000 at the 625 North  Michigan  joint  venture,  a  reduction  of
$86,000 in interest expense from the Loehmann's Plaza joint venture and declines
in property  operating  expenses  at all three  remaining  unconsolidated  joint
ventures. This favorable change occurred despite the fact that the Partnership's
share of unconsolidated  ventures' income in fiscal 1996 included the operations
of the Richland Terrace and Richmond Park properties which were sold on November
2, 1995 and  Treat  Commons  II which  was sold on  December  29,  1995.  Rental
revenues at The Gables  improved due to increases in both average  occupancy and
rental rates due to  improving  market  conditions.  Rental  revenues  were down
slightly  at both 625 North  Michigan  and  Loehmann's  Plaza due to declines in
occupancy.  The  reduction  in interest  expense at the  Loehmann's  Plaza joint
venture was due to the fact that a portion of the venture's  interest costs were
capitalized  during  fiscal  1997 as a  result  of the  property  expansion  and
renovation  project.  The  declines in  property  operating  expenses  include a
$114,000  reduction  in bad debt  expense at  Loehmann's  Plaza,  a decrease  of
$35,000 in repairs and  maintenance  expenses at 625 North Michigan and declines
in salary and utility expenses  totalling  $49,000 at The Gables.  The favorable
changes  in  rental  revenues,  other  income,  interest  expense  and  property
operating  expenses  were  partially  offset by an  increase of $207,000 in real
estate tax expense of the 625 North Michigan joint venture during fiscal 1997.

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

      The  Partnership  reported a net income of $5,523,000  for the fiscal year
ended March 31, 1996 as compared to a net loss of $304,000 for fiscal 1995. This
favorable change in the Partnership's net operating results was primarily due to
the gains  recognized  on the sales of the  Richland  Terrace/Richmond  Park and
Treat Commons II properties during fiscal 1996. The sale of the Richland Terrace
and  Richmond  Park   Apartments   generated  a  gain  of  $4,774,000   for  the
unconsolidated  joint venture which owned the properties.  The sale of the Treat
Commons  II  Apartments  resulted  in a  gain  of  $3,594,000  for  the  related
unconsolidated  joint venture.  The Partnership's share of such gains (including
the  write-off of  unamortized  excess  basis) was  $4,344,000  and  $2,422,000,
respectively. Also contributing to the favorable change in net operating results
was a decrease in the Partnership's operating loss of $721,000 in fiscal 1996.

      The Partnership's  operating loss decreased primarily due to the change in
the entity reporting the interest expense associated with the borrowings secured
by the  Partnership's  operating  investment  properties  and the lower interest
rates  on the  refinanced  loans.  As  discussed  further  in the  notes  to the
Partnership's  financial  statements which accompany this Annual Report,  all of
the zero coupon loans secured by the operating investment properties, except for
the loan secured by the 625 North Michigan Office  Building,  were refinanced by
the  respective  joint  venture  partnerships  in fiscal  1995.  As part of such
refinancing  transactions,  the proceeds of new loans issued in the names of the
joint  ventures were used to repay debt which had been issued in the name of the
Partnership,  which  effectively  decreased the  Partnership's  interest expense
while at the same time increasing the interest  expense of the respective  joint
ventures.  For the  unconsolidated  joint  ventures,  such  increase in interest
expense was reflected in the  Partnership's  share of  unconsolidated  ventures'
income on the Partnership's  fiscal 1996  consolidated  statement of operations.
The Partnership's  operating loss, prior to the effect of the change in interest
expense,  increased by $34,000  primarily due to an increase in rental  revenues
which was  partially  offset by an increase  in  depreciation  and  amortization
expense.  Rental  revenues  increased at the  consolidated  Hacienda  Park joint
venture by $228,000 primarily due to increases in average occupancy from a level
of 85% in calendar  1994 to 95% for  calendar  1995.  Rental  revenues at Asbury
Commons  increased  by $166,000  primarily  due to  increases in rental rates in
calendar 1994 and 1995 made possible by the strong Atlanta  market.  The average
occupancy level at the Asbury Commons Apartments  actually declined from 96% for
calendar 1994 to 94% for calendar 1995. Revenues at West Ashley Shoppes improved
by $100,000  in calendar  1995,  as compared to calendar  1994,  due to a slight
increase in average  occupancy and an increase in tenant  reimbursement  income.
Depreciation and amortization  expense  increased by $378,000 in fiscal 1996 due
to the acceleration of depreciation on the consolidated  Hacienda Park property,
as discussed further in the notes to the accompanying financial statements,  and
the capitalized tenant improvements and leasing commissions  associated with the
increased leasing activity at Hacienda Park.

      The Partnership's share of unconsolidated  ventures' income, excluding the
gains  recognized  from the sale of  Treat  Commons  II,  Richland  Terrace  and
Richmond  Park,  decreased  by  $1,633,000  primarily  due  to  an  increase  of
$1,226,000 in interest  expense  recorded by the  unconsolidated  joint ventures
associated with the  refinancings  referred to above. In addition,  the combined
effect of a decrease in rental  revenues  and an increase  in  depreciation  and
amortization  expense contributed to the unfavorable change in the Partnership's
share of unconsolidated  ventures' income. Rental revenues decreased by $360,000
due to a decrease in average  occupancy levels at Loehmann's Plaza, from 96% for
calendar  1994  to 89% for  calendar  1995,  primarily  due to a  buyout  of the
property's  anchor tenant lease.  In addition,  the fiscal 1996 results  include
less than twelve months of operations for the Richland Terrace and Richmond Park
properties  which were sold on November 2, 1995.  Increases  in occupancy at 625
North  Michigan  and Treat  Commons II, as well as  increases in rental rates at
Richmond  Gables,  helped  offset a  portion  of the  above  decrease  in rental
revenues. Average occupancy at 625 North Michigan increased from 83% in calendar
1994 to 88% in  calendar  1995 due to a  strengthening  Chicago  office  market.
Increases  in average  occupancy  at Treat  Commons II resulted  from the strong
local market which  contributed to  management's  decision to sell the property.
Depreciation  and  amortization  expense  increased by $274,000 mainly due to an
acceleration  of the  depreciation  rate at 625 North  Michigan  and  additional
capital improvements made to the Loehmann's Plaza property during fiscal 1996.

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

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

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

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

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

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

      Remediation of Construction  Defects.  As discussed further above,  during
fiscal 1997 management  discovered the existence of certain structural  problems
at the  Asbury  Commons  Apartments.  Based  upon  an  initial  evaluation,  the
remediation of these problems may involve the disruption of property  operations
while apartment units are possibly taken out of service for testing and repairs.
The magnitude of the repairs have been  preliminarily  estimated to cost between
approximately  $1.5 million to $2 million to  complete.  The  prospects  for any
recoveries  of these  costs,  beyond the  $200,000  recovered  from the original
developer  during  fiscal 1998,  from  insurance or from the building  materials
manufacturers are uncertain at the present time.  Furthermore,  while management
believes that these problems can be remediated without a long-term impact on the
market value of the property,  there can be no assurances that the disruption of
property  operations and the repair process itself will not adversely impact the
Partnership's  ability  to  realize  the fair  market  value  of the  investment
property  within the next 2- to- 3 years,  which is the expected  time frame for
the completion of a liquidation of the Partnership.

      Competition. The financial performance of the Partnership's remaining real
estate  investments  will be  significantly  impacted  by the  competition  from
comparable  properties  in their local market areas.  The  occupancy  levels and
rental rates  achievable at the  properties are largely a function of supply and
demand in the markets.  In many markets  across the country,  development of new
multi-family  properties  has increased  significantly  over the past two years.
Existing  apartment  properties  in such markets could be expected to experience
increased vacancy levels, declines in effective rental rates and, in some cases,
declines in estimated  market values as a result of the  increased  competition.
The commercial  office segment has begun to experience  limited new  development
activity in selected  areas after several years of virtually no new supply being
added to the market.  The retail  segment of the real estate market is currently
suffering   from  an  oversupply  of  space  in  many  markets   resulting  from
overbuilding in recent years and the trend of  consolidations  and  bankruptcies
among retailers  prompted by the generally flat rate of growth in overall retail
sales.  There  are no  assurances  that  these  competitive  pressures  will not
adversely  affect  the  operations  and/or  market  values of the  Partnership's
investment properties in the future.

      Impact  of Joint  Venture  Structure.  The  ownership  of  certain  of the
remaining  investments through joint venture partnerships could adversely impact
the timing of the Partnership's planned dispositions of its remaining assets and
the amount of proceeds received from such dispositions.  It is possible that the
Partnership's  co-venture  partners  could have  economic or business  interests
which are  inconsistent  with those of the  Partnership.  Given the rights which
both parties have under the terms of the joint venture agreements,  any conflict
between the partners  could result in delays in completing a sale of the related
operating  property and could lead to an impairment in the  marketability of the
property to third  parties for purposes of achieving  the highest  possible sale
price. In the cases of the Hacienda Park, Asbury Commons and West Ashley Shoppes
joint ventures,  the co-venture  partner is the Managing  General Partner of the
Partnership  as a result  of  certain  prior  assignment  transactions.  No such
conflicts should exist on these investments.

      Availability of a Pool of Qualified Buyers.  The availability of a pool of
qualified  and  interested  buyers  for the  Partnership's  remaining  assets is
critical  to the  Partnership's  ability to realize  the  estimated  fair market
values of such  properties  at the time of their final  dispositions.  Demand by
buyers of multi-family  apartment,  office and retail  properties is affected by
many factors,  including the size,  quality,  age, condition and location of the
subject property,  the quality and stability of the tenant roster,  the terms of
any long-term leases,  potential  environmental liability concerns, the existing
debt  structure,  the  liquidity  in the  debt  and  equity  markets  for  asset
acquisitions,  the general  level of market  interest  rates and the general and
local economic climates.

Inflation
---------

      The  Partnership  completed its eleventh full year of operations in fiscal
1998.  The  effects of  inflation  and  changes  in prices on the  Partnership's
operating results to date have not been significant.

      Inflation  in future  periods may  increase  revenues as well as operating
expenses  at the  Partnership's  operating  investment  properties.  Most of the
existing leases with tenants at the  Partnership's  shopping  centers and office
buildings contain rental escalation and/or expense  reimbursement  clauses based
on  increases  in tenant sales or property  operating  expenses.  Tenants at the
Partnership's apartment properties have short-term leases, generally of one year
or less in duration.  Rental rates at these  properties  can be adjusted to keep
pace with inflation,  to the extent market  conditions  allow, as the leases are
renewed or turned over.  Such increases in rental income would be expected to at
least partially offset the  corresponding  increases in Partnership and property
operating  expenses  resulting from inflation.  As noted above,  the West Ashley
Shoppes,  Gateway Plaza and 625 North Michigan  properties  have, or have had in
recent  years,  a  significant  amount  of  unleased  space.  During a period of
significant inflation,  increased operating expenses attributable to space which
remained  unleased  at such time would not be  recoverable  and would  adversely
affect the Partnership's net cash flow.

Item 8.  Financial Statements and Supplementary Data

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

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

      None.



<PAGE>
                                 
                                   PART III

Item 10.  Directors and Executive Officers of the Partnership

      The Managing General Partner of the Partnership is Second Equity Partners,
Inc., a Virginia corporation,  which is a wholly-owned subsidiary of PaineWebber
Group,  Inc. The  Associate  General  Partner of the  Partnership  is Properties
Associates 1986, L.P., a Virginia limited partnership,  certain limited partners
of which are also officers of the Managing General Partner. The Managing General
Partner  has  overall  authority  and   responsibility   for  the  Partnership's
operations.

(a) and (b) The names and ages of the directors and principal executive officers
of the Managing General Partner of the Partnership are as follows:
                                                                     Date
                                                                     elected
  Name                        Office                           Age   to Office
  ----                        ------                           ---   ---------

Bruce J. Rubin          President and Director                 38    8/22/96
Terrence E. Fancher     Director                               44    10/10/96
Walter V. Arnold        Senior Vice President and Chief 
                          Financial Officer                    50    10/29/85
David F. Brooks         First Vice President and 
                          Assistant Treasurer                  55    4/17/85 *
Timothy J. Medlock      Vice President and Treasurer           37    6/1/88
Thomas W. Boland        Vice President and Controller          35    12/1/91

*  The date of incorporation of the Managing General Partner.

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

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

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

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

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

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

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

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

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

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

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

      Based solely on its review of the copies of such forms received by it, the
Partnership  believes  that,  during the year ended March 31,  1998,  all filing
requirements  applicable to the officers and  directors of the Managing  General
Partner and ten-percent beneficial holders were complied with.

Item 11.  Executive Compensation

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

      The General  Partners are entitled to receive a share of Partnership  cash
distributions  and a share of profits and losses.  These items are  described in
Item 13.

      The  Partnership  paid cash  distributions  to the  Limited  Partners on a
quarterly basis at a rate of 5.25% per annum on invested capital from January 1,
1991  through the  quarter  ended June 30, 1994 and at a rate of 2% per annum on
invested  capital from July 1, 1994 through  September 30, 1995.  Effective with
the payment for the quarter ended December 31, 1995, the annualized distribution
rate was reduced to 1% on a Limited Partner's  remaining capital account,  where
it  has  remained  through  fiscal  1998.  However,  the  Partnership's  Limited
Partnership  Units  are not  actively  traded  on any  organized  exchange,  and
accordingly,  no accurate price information exists for these Units. Therefore, a
presentation of historical Unitholder total returns would not be meaningful.

Item 12.  Security Ownership of Certain Beneficial Owners and Management

      (a) The  Partnership  is a limited  partnership  issuing  Units of limited
partnership  interest,  not voting securities.  All the outstanding stock of the
Managing  General  Partner,  Second  Equity  Partners  Fund,  Inc.  is  owned by
PaineWebber. Properties Associates 1986, L.P., the Associate General Partner, is
a Virginia  limited  partnership,  certain  limited  partners  of which are also
officers of the Managing  General  Partner.  No limited  partner is known by the
Partnership to own beneficially more than 5% of the outstanding interests of the
Partnership.

      (b) The  directors  and  officers of the Managing  General  Partner do not
directly own any Units of limited  partnership  interest of the Partnership.  No
director or officer of the Managing General Partner,  nor any limited partner of
the Associate General Partner, possesses a right to acquire beneficial ownership
of Units of limited partnership interest of the Partnership.

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

Item 13.  Certain Relationships and Related Transactions

      All  distributable  cash,  as  defined,  for  each  fiscal  year  shall be
distributed  quarterly in the ratio of 99% to the Limited Partners and 1% to the
General  Partners until the Limited  Partners have received an amount equal to a
7.5% noncumulative  annual return on their adjusted capital  contributions.  The
General  Partners  will then receive  distributions  until they have received an
amount equal to 1.01% of total  distributions  of  distributable  cash which has
been made to all  partners and PWPI has received an amount equal to 3.99% of all
distributions  to all  partners.  The  balance  will be  distributed  95% to the
Limited Partners,  1.01% to the General Partners and 3.99% to PWPI.  Payments to
PWPI  represent  asset  management  fees for PWPI's  services  in  managing  the
business of the Partnership.  No management fees were earned for the fiscal year
ended March 31, 1998. All sale or  refinancing  proceeds shall be distributed in
varying  proportions  to the Limited and General  Partners,  as specified in the
amended Partnership Agreement.

      All taxable  income (other than from a Capital  Transaction)  in each year
will be allocated to the Limited Partners and the General Partners in proportion
to the amounts of  distributable  cash  distributed to them (excluding the asset
management fee) in that year or, if there are no  distributions of distributable
cash, 98.95% to the Limited Partners and 1.05% to the General Partners.  All tax
losses (other than from a Capital  Transaction)  will be allocated 98.95% to the
Limited Partners and 1.05% to the General  Partners.  Taxable income or tax loss
arising from a sale or refinancing of investment properties will be allocated to
the Limited  Partners and the General  Partners in  proportion to the amounts of
sale or  refinancing  proceeds  to which they are  entitled;  provided  that the
General Partners shall be allocated at least 1% of taxable income arising from a
sale or refinancing.  If there are no sale or refinancing proceeds,  tax loss or
taxable  income  from a sale or  refinancing  will be  allocated  98.95%  to the
Limited  Partners  and  1.05%  to  the  General  Partner.   Allocations  of  the
Partnership's  operations  between the General Partners and the Limited Partners
for  financial  accounting  purposes  have  been  made in  conformity  with  the
allocations of taxable income or tax loss.

      The Managing  General  Partner and its affiliates are reimbursed for their
direct expenses  relating to the offering of Units,  the  administration  of the
Partnership and the acquisition  and operations of the  Partnership's  operating
property investment.

      An affiliate of the Adviser performs certain accounting,  tax preparation,
securities law compliance and investor communications and relations services for
the  Partnership.  The total costs  incurred by this affiliate in providing such
services are  allocated  among  several  entities,  including  the  Partnership.
Included in general  and  administrative  expenses  for the year ended March 31,
1998 is $230,000,  representing reimbursements to this affiliate of the Managing
General Partner for providing such services to the Partnership.

      The  Partnership  uses the  services  of Mitchell  Hutchins  Institutional
Investors,  Inc. ("Mitchell Hutchins") for the managing of cash assets. Mitchell
Hutchins is a  subsidiary  of  Mitchell  Hutchins  Asset  Management,  Inc.,  an
independently operated subsidiary of PaineWebber.  Mitchell Hutchins earned fees
of $17,000  included in general and  administrative  expenses  for  managing the
Partnership's  cash assets during fiscal 1998. Fees charged by Mitchell Hutchins
are based on a percentage of invested  cash  reserves  which varies based on the
total amount of invested cash which Mitchell  Hutchins  manages on behalf of the
PWPI.


<PAGE>



                                   PART IV


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

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

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

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

        (3)  Exhibits:

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

   (b)  No  reports on Form 8-K were  filed  during  the last  quarter of fiscal
        1998.

   (c)  Exhibits

             See (a)(3) above.

   (d)  Financial Statement Schedules

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

























<PAGE>

                                  SIGNATURES


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

                                 PAINEWEBBER EQUITY PARTNERS
                                 TWO LIMITED PARTNERSHIP


                                 By: Second Equity Partners, Inc.
                                     ---------------------------
                                     Managing General Partner



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


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


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


Dated:  June 26, 1998

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



By:/s/ Bruce J. Rubin                     Date: June 26, 1998
   ---------------------------                  -------------
   Bruce J. Rubin
   Director




By:/s/ Terrence E. Fancher                 Date: June 26, 1998
  -----------------------------                  -------------
   Terrence E. Fancher
   Director



<PAGE>

<TABLE>

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

               PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP

                                INDEX TO EXHIBITS  
                          
<CAPTION>

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

      (3) and (4)    Prospectus of the Partnership          Filed with the Commission
                     dated   July  21, 1986,   as            pursuant to Rule 424(c) and
                     supplemented, with particular          incorporated herein by reference.
                     reference to the Amended and
                     Restated Certificate and
                     Agreement of Limited Partnership


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


      (13)           Annual Report to Limited Partners      No Annual Report for fiscal year
                                                            1998 has been sent to the Limited
                                                            Partners.  An Annual Report will be
                                                            sent to the Limited Partners
                                                            subsequent to this filing.


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

      (27)           Financial data schedule                Filed as the last  page of EDGAR
                                                            submission following  the Financial
                                                            Statements and Financial Statement
                                                            Schedule required  by Item 14.
</TABLE>
                             





<PAGE>
<TABLE>

                          ANNUAL REPORT ON FORM 10-K
                     Item 14(a)(1) and (2) and Item 14(d)

             PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP

       INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
<CAPTION>

                                                                                    Reference
                                                                                    ---------
<S>                                                                                  <C>  

PaineWebber Equity Partners Two Limited Partnership:

   Report of independent auditors                                                    F-2

   Consolidated balance sheets as of March 31, 1998 and 1997                         F-3

   Consolidated  statements of operations  for the years ended March 31, 1998,
     1997 and 1996                                                                   F-4

   Consolidated  statements of changes in partners'  capital (deficit) for the
     years ended March 31, 1998, 1997 and 1996                                       F-5

   Consolidated  statements  of cash flows for the years ended March 31, 1998,
     1997 and 1996                                                                   F-6

   Notes to consolidated  financial statements                                       F-7

   Schedule III - Real Estate and Accumulated Depreciation                           F-25

Combined   Joint  Ventures  of   PaineWebber   Equity   Partners  Two  Limited Partnership:

   Report of independent auditors                                                    F-26

   Combined balance sheets as of December 31, 1997 and 1996                          F-27

   Combined  statements  of income and changes in  venturers'  capital for the
     years ended December 31, 1997, 1996 and 1995                                    F-28

   Combined  statements  of cash flows for the years ended  December 31, 1997,
     1996 and 1995                                                                   F-29

   Notes to combined financial statements                                            F-30

   Schedule III - Real Estate and Accumulated Depreciation                           F-37

</TABLE>


   Other  schedules  have been  omitted  since the required  information  is not
present or not  present  in amounts  sufficient  to  require  submission  of the
schedule,  or because the  information  required  is  included in the  financial
statements, including the notes thereto.



<PAGE>


                        REPORT OF INDEPENDENT AUDITORS






The Partners
PaineWebber Equity Partners Two Limited Partnership:

      We  have  audited  the   accompanying   consolidated   balance  sheets  of
PaineWebber  Equity  Partners Two Limited  Partnership  as of March 31, 1998 and
1997,  and  the  related  consolidated  statements  of  operations,  changes  in
partners' capital  (deficit),  and cash flows for each of the three years in the
period ended March 31, 1998.  Our audits also included the  financial  statement
schedule  listed in the Index at Item  14(a).  These  financial  statements  and
schedule  are  the   responsibility   of  the  Partnership's   management.   Our
responsibility  is to  express  an opinion  on these  financial  statements  and
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 consolidated  financial  statements referred to above
present fairly, in all material respects, the consolidated financial position of
PaineWebber Equity Partners Two Limited  Partnership at March 31, 1998 and 1997,
and the  consolidated  results of its  operations and its cash flows for each of
the three years in the period ended March 31, 1998, in conformity with generally
accepted  accounting  principles.  Also, in our opinion,  the related  financial
statement  schedule,   when  considered  in  relation  to  the  basic  financial
statements  taken as a whole,  presents  fairly  in all  material  respects  the
information set forth therein.








                              /S/ ERNST & YOUNG LLP
                              ---------------------
                              ERNST & YOUNG LLP

Boston, Massachusetts
June 12, 1998


<PAGE>


                       PAINEWEBBER EQUITY PARTNERS TWO
                             LIMITED PARTNERSHIP

                         CONSOLIDATED BALANCE SHEETS
                           March 31, 1998 and 1997
                   (In thousands, except for per Unit data)

                                    ASSETS
                                                       1998            1997
                                                       ----            ----
Operating investment properties:
   Land                                            $   7,351       $    7,351
   Building and improvements                          40,616           40,018
                                                   ---------       ----------
                                                      47,967           47,369
   Less accumulated depreciation                     (14,044)         (12,155)
                                                   ---------       ----------
                                                      33,923           35,214

Investments in unconsolidated joint ventures,
  at equity                                           30,237           31,784
Cash and cash equivalents                              6,202            5,322
Escrowed cash                                            398              279
Accounts receivable                                      236              151
Prepaid expenses                                          31               50
Deferred rent receivable                                 737              832
Deferred expenses, net of accumulated
  amortization of $883 ($734 in 1997)                    510              646
                                                   ---------       ----------
                                                   $  72,274       $   74,278
                                                   =========       ==========

                      LIABILITIES AND PARTNERS' CAPITAL

Accounts payable and accrued expenses              $     427       $      271
Net advances from consolidated ventures                  115              400
Tenant security deposits                                 111              116
Bonds payable                                          2,171            2,297
Mortgage notes payable                                19,369           19,650
Other liabilities                                        331              331
                                                   ---------       ----------
      Total liabilities                               22,524           23,065

Partners' capital:
  General Partners:
   Capital contributions                                   1                1
   Cumulative net income                                 158              161
   Cumulative cash distributions                        (713)            (701)

  Limited Partners ($1 per Unit;
    134,425,741 Units issued):
   Capital contributions, net of offering costs      119,747          119,747
   Cumulative net income                              15,309           15,569
   Cumulative cash distributions                     (84,752)         (83,564)
                                                   ---------       ----------
      Total partners' capital                         49,750           51,213
                                                   ---------       ----------
                                                   $  72,274       $   74,278
                                                   =========       ==========


                           See accompanying notes.


<PAGE>
                         PAINEWEBBER EQUITY PARTNERS TWO
                               LIMITED PARTNERSHIP

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                For the years ended March 31, 1998, 1997 and 1996
                    (In thousands, except for per Unit data)


                                               1998         1997        1996
                                               ----         ----        ----
Revenues:
   Rental income and expense reimbursements   $ 5,084    $  5,011     $ 4,706
   Interest and other income                      403         358         363
                                              -------    --------     -------
                                                5,487       5,369       5,069
Expenses:
   Loss on impairment of operating 
     investment property                            -       2,700           -
   Interest expense                             1,961       1,990       2,083
   Depreciation expense                         1,889       1,953       1,886
   Property operating expenses                  1,370       1,279       1,320
   Real estate taxes                              521         479         422
   General and administrative                     632         528         729
   Amortization expense                           105         107         137
                                              -------    --------     -------
                                                6,478       9,036       6,577
                                              -------    --------     -------

Operating loss                                   (991)     (3,667)     (1,508)

Venture partner's share of consolidated
  venture's operations                              -          18           -

Investment income:
   Partnership's share of unconsolidated
     ventures' income                             728         383         185
   Interest income on note receivable from
     unconsolidated venture                         -           -          80
   Partnership's share of gains on
     sale of unconsolidated operating
     investment properties                          -           -       6,766
                                              -------    --------     -------
                                                  728         383       7,031
                                              -------    --------     -------
Net income (loss)                             $  (263)   $ (3,266)    $ 5,523
                                              =======    ========     =======

Net income (loss) per 1,000
  Limited Partnership Units                   $ (1.94)    $(24.04)     $40.68
                                              =======     =======      ======

Cash distributions per 1,000
  Limited Partnership Units                   $  8.84     $  8.84      $77.52
                                              =======     =======      ======


      The above per 1,000 Limited  Partnership  Units  information is based upon
the 134,425,741 Limited Partnership Units outstanding during each year.




                           See accompanying notes.


<PAGE>
                         PAINEWEBBER EQUITY PARTNERS TWO
                               LIMITED PARTNERSHIP

        CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
                For the years ended March 31, 1998, 1997 and 1996
                                 (In thousands)


                                       General      Limited
                                       Partners     Partners      Total
                                       --------     --------      -----

Balance at March 31, 1995              $ (527)       $61,126      $ 60,599

Cash distributions                        (22)       (10,421)      (10,443)

Net income                                 55          5,468         5,523
                                       ------        -------      --------

Balance at March 31, 1996                (494)        56,173        55,679

Cash distributions                        (13)        (1,187)       (1,200)

Net loss                                  (32)        (3,234)       (3,266)
                                       ------        -------      --------

Balance at March 31, 1997                (539)        51,752        51,213

Cash distributions                        (12)        (1,188)       (1,200)

Net loss                                   (3)          (260)         (263)
                                       ------        -------      --------

Balance at March 31, 1998              $ (554)       $50,304      $ 49,750
                                       ======        =======      ========























                           See accompanying notes.


<PAGE>
<TABLE>
                         PAINEWEBBER EQUITY PARTNERS TWO
                               LIMITED PARTNERSHIP

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                For the years ended March 31, 1998, 1997 and 1996
                Increase (Decrease) in Cash and Cash Equivalents
                                 (In thousands)
<CAPTION>

                                                             1998        1997         1996
                                                             ----        ----         ----
<S>                                                          <C>         <C>          <C> 


Cash flows from operating activities:
  Net income (loss)                                         $  (263)  $  (3,266)   $  5,523
  Adjustments to reconcile net income (loss) to net
    cash provided by (used in) operating activities:
   Loss on impairment of operating investment property            -       2,700           -
   Partnership's share of unconsolidated ventures' income      (728)       (383)       (185)
   Partnership's share of gains on sale of unconsolidated
     operating investment properties                              -           -      (6,766)
   Depreciation and amortization                              1,994       2,060       2,023
   Amortization of deferred financing costs                      44          44          44
   Changes in assets and liabilities:
     Escrowed cash                                             (119)       (129)        (93)
     Accounts receivable                                        (85)        110        (132)
     Accounts receivable - affiliates                             -          15          63
     Prepaid expenses                                            19         (21)         (1)
     Deferred rent receivable                                    95        (101)       (255)
     Accounts payable and accrued expenses                      156         (12)       (151)
     Advances to/from consolidated ventures                    (285)        478        (107)
     Tenant security deposits                                    (5)         20          (7)
     Other liabilities                                            -         (18)           1
                                                            -------   ---------    ---------
      Total adjustments                                       1,086       4,763      (5,566)
                                                            -------   ---------    ---------
      Net cash provided by (used in)
         operating activities                                   823       1,497         (43)
                                                            -------   ---------    ---------
Cash flows from investing activities:
  Distributions from unconsolidated ventures                  3,240       2,744      15,566
  Additional investments in unconsolidated ventures            (965)     (1,939)       (934)
  Additions to operating investment properties                 (598)       (444)       (421)
  Payment of leasing commissions                                (13)        (94)       (128)
                                                            -------   ---------    ---------
      Net cash provided by investing activities               1,664         267      14,083
                                                            -------   ---------    ---------

Cash flows from financing activities:
  Distributions to partners                                  (1,200)     (1,200)    (10,443)
  Repayment of principal on notes payable                      (281)       (257)       (230)
  Refund of deferred financing costs                              -           -          22
  Payments on district bond assessments                        (126)       (111)        (90)
                                                            -------   ---------    ---------
      Net cash used in financing activities                  (1,607)     (1,568)    (10,741)
                                                            -------   ---------    ---------

Net increase in cash and cash equivalents                       880         196       3,299

Cash and cash equivalents, beginning of year                  5,322       5,126       1,827
                                                            -------   ---------    ---------

Cash and cash equivalents, end of year                      $ 6,202   $   5,322    $  5,126
                                                            =======   =========    ========

Supplemental disclosures:
   Cash paid during the year for interest                   $ 1,917   $   1,974    $  1,974
                                                            =======   =========    ========
</TABLE>

                           See accompanying notes.


<PAGE>


             PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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

      PaineWebber Equity Partners Two Limited Partnership (the "Partnership") is
a limited partnership organized pursuant to the laws of the State of Virginia on
May 16,  1986  for the  purpose  of  investing  in a  diversified  portfolio  of
existing, newly-constructed or to-be-built income-producing real properties. The
Partnership  authorized  the  issuance of a maximum of  150,000,000  Partnership
Units  (the  "Units")  of  which   134,425,741   Units,   representing   capital
contributions of $134,425,741,  were subscribed and issued between June 1986 and
June 1988.

      The Partnership  originally  invested  approximately  $132,200,000 (net of
acquisition fees) in ten operating properties through joint venture investments.
Through March 31, 1998, four of these investments had been sold. The Partnership
retains an interest in six  operating  properties,  which are  comprised  of two
multi-family  apartment  complexes,  two  office/R&D  complexes  and two  retail
shopping centers. The Partnership is currently focusing on potential disposition
strategies for the  investments in its portfolio.  Although no assurances can be
given, it is currently  contemplated that sales of the  Partnership's  remaining
assets could be completed within the next 2- to 3- years.

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

      The  accompanying  financial  statements have been prepared on the accrual
basis of accounting in accordance with generally accepted accounting  principles
which  requires  management to make  estimates and  assumptions  that affect the
reported amounts of assets and liabilities and disclosures of contingent  assets
and liabilities as of March 31, 1998 and 1997 and revenues and expenses for each
of the three years in the period  ended March 31,  1998.  Actual  results  could
differ from the estimates and assumptions used.

      The   accompanying   financial   statements   include  the   Partnership's
investments in certain joint venture  partnerships  which own or owned operating
properties.  Except  as  described  below,  the  Partnership  accounts  for  its
investments in joint  ventures  using the equity method because the  Partnership
does not have majority  voting control in the ventures.  Under the equity method
the ventures are carried at cost  adjusted  for the  Partnership's  share of the
ventures'  earnings  or  losses  and  distributions.  All of the  joint  venture
partnerships  are required to maintain  their  accounting  records on a calendar
year basis for income  tax  reporting  purposes.  As a result,  the  Partnership
recognizes  its share of the  earnings or losses from the  unconsolidated  joint
ventures based on financial information which is three months in arrears to that
of the  Partnership.  See Note 5 for a description of the  unconsolidated  joint
venture partnerships.

      As  discussed  further  in Note 4, the  Partnership  acquired  control  of
Hacienda Park Associates on December 10, 1991 and the Atlanta Asbury Partnership
on February 14, 1992.  In addition,  the  Partnership  acquired  control of West
Ashley Shoppes Associates in May of 1994. Accordingly,  these joint ventures are
presented on a consolidated basis in the accompanying  financial statements.  As
discussed  above,  these joint  ventures  also have a December  31 year-end  and
operations  of the ventures  continue to be reported on a  three-month  lag. All
material  transactions  between the Partnership and the joint ventures have been
eliminated upon  consolidation,  except for lag-period cash transfers.  Such lag
period cash  transfers are  accounted  for as advances to and from  consolidated
ventures on the accompanying balance sheets.

      The  operating  investment  properties  owned  by the  consolidated  joint
ventures are carried at cost, net of accumulated depreciation, or an amount less
than cost if indicators of impairment  are present in accordance  with Statement
of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment
of  Long-Lived  Assets and for  Long-Lived  Assets to Be Disposed Of," which the
Partnership  adopted in fiscal 1996. SFAS No. 121 requires  impairment losses to
be  recorded  on  long-lived  assets  used  in  operations  when  indicators  of
impairment are present and the undiscounted cash flows estimated to be generated
by those  assets  are less than the  assets' carrying  amount.  The  Partnership
generally assesses indicators of impairment by a review of independent appraisal
reports on each operating  investment  property.  Such  appraisals make use of a
combination of certain generally accepted valuation techniques, including direct
capitalization,  discounted  cash flows and comparable  sales  analysis.  During
fiscal 1997,  the  independent  appraisal of the West Ashley  Shoppes  operating
investment property indicated that certain operating assets,  consisting of land
and improvements  and building and  improvements,  were impaired.  In accordance
with SFAS No. 121, the consolidated West Ashley Shoppes joint venture recorded a
reduction  in the net  carrying  value of such assets  amounting  to  $2,700,000
relating to the land and  improvements  ($1,457,000),  building and improvements
($1,822,000) and related accumulated depreciation ($579,000).

      Through March 31, 1995,  depreciation  expense on the operating investment
properties carried on the Partnership's  consolidated balance sheet was computed
using the straight-line  method over the estimated useful lives of the operating
investment  properties,  generally five years for the furniture and fixtures and
thirty-one  and a half years for the buildings and  improvements.  During fiscal
1996,  circumstances  indicated  that the  consolidated  Hacienda Park operating
investment   property  might  be  impaired.   The   Partnership's   estimate  of
undiscounted  cash  flows  indicated  that the  property's  carrying  amount was
expected to be recovered,  but that the  reversion  value could be less than the
carrying amount at the time of disposition.  As a result of such assessment, the
joint venture  commenced  recording an additional  annual charge to depreciation
expense  of  $250,000  in  calendar  1995 to adjust  the  carrying  value of the
Hacienda Park property such that it will match the expected  reversion  value at
the  time  of  disposition.   Such  amount  is  included  in  depreciation   and
amortization  on the  accompanying  fiscal  1998,  1997  and  1996  consolidated
statements of operations.  Such an annual charge will continue to be recorded in
future periods. Acquisition fees paid to PaineWebber Properties Incorporated and
costs of identifiable improvements have been capitalized and are included in the
cost of the operating  investment  properties.  Capitalized  construction period
interest  and  taxes  of  West  Ashley  Shoppes,  in  the  aggregate  amount  of
approximately  $485,000,  is  included in the  balance of  operating  investment
properties on the  accompanying  consolidated  balance  sheets.  Maintenance and
repairs are charged to expense when incurred.

      For  long-term  commercial  leases,  rental  income is  recognized  on the
straight-line  basis over the term of the related lease  agreement,  taking into
consideration   scheduled  cost  increases  and  free-rent  periods  offered  as
inducements to lease the property.  Deferred rent receivable  represents  rental
income earned by Hacienda Park  Associates  and West Ashley  Shoppes  Associates
which  has  been  recognized  on the  straight-line  basis  over the term of the
related lease agreement.

      Deferred  expenses at March 31, 1998 and 1997 include loan costs  incurred
in connection  with the Asbury  Commons and Hacienda Park mortgage notes payable
described in Note 6, which are being amortized using the  straight-line  method,
which approximates the effective  interest method,  over their respective terms.
The  amortization  of  such  costs  is  included  in  interest  expense  on  the
accompanying statements of operations. Deferred expenses also include legal fees
associated with the organization of the Hacienda Park joint venture,  which were
amortized  on the  straight-line  basis over a  sixty-month  term,  and deferred
commissions  and lease  cancellation  fees of Hacienda Park  Associates and West
Ashley Shoppes  Associates,  which are being amortized on a straight-line  basis
over the term of the respective lease.

      Escrowed cash includes  funds  escrowed for the payment of property  taxes
and  tenant   security   deposits  of  the  Asbury  Commons  and  Hacienda  Park
consolidated joint ventures.

      For purposes of reporting cash flows, the Partnership considers all highly
liquid  investments  with  original  maturities  of 90  days  or less to be cash
equivalents.

      No  provision  for income  taxes has been made as the  liability  for such
taxes is that of the partners rather than the Partnership.

      The cash and cash  equivalents,  escrowed cash, bonds payable and mortgage
notes  payable  appearing  on  the  accompanying   consolidated  balance  sheets
represent   financial   instruments  for  purposes  of  Statement  of  Financial
Accounting  Standards  No.  107,  "Disclosures  about  Fair  Value of  Financial
Instruments."  The carrying  amounts of cash and cash  equivalents  and escrowed
cash  approximate  their  fair  values as of March 31,  1998 and 1997 due to the
short-term maturities of these instruments. It is not practicable for management
to estimate  the fair value of the bonds  payable  without  incurring  excessive
costs due to the unique nature of such  obligations.  The fair value of mortgage
notes payable is estimated  using  discounted  cash flow analysis,  based on the
current market rates for similar types of borrowing arrangements (see Note 6).

      Certain prior year amounts have been reclassified to conform to the fiscal
1998 presentation.

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

      The General Partners of the Partnership are Second Equity  Partners,  Inc.
(the "Managing General Partner"), a wholly-owned subsidiary of PaineWebber Group
Inc.  ("PaineWebber")  and  Properties  Associates  1986,  L.P. (the  "Associate
General Partner"),  a Virginia limited partnership,  certain limited partners of
which are also  officers of the  Managing  General  Partner.  Affiliates  of the
General Partners will receive fees and compensation determined on an agreed-upon
basis, in  consideration  of various  services  performed in connection with the
sale of the Units and the acquisition,  management, financing and disposition of
Partnership  properties.  The Managing  General  Partner and its  affiliates are
reimbursed  for their direct  expenses  relating to the  offering of Units,  the
administration  of the  Partnership  and the  acquisition  and operations of the
Partnership's operating property investment.

      All  distributable  cash,  as  defined,  for  each  fiscal  year  shall be
distributed  quarterly in the ratio of 99% to the Limited Partners and 1% to the
General  Partners until the Limited  Partners have received an amount equal to a
7.5% noncumulative  annual return on their adjusted capital  contributions.  The
General  Partners  will then receive  distributions  until they have received an
amount equal to 1.01% of total  distributions  of  distributable  cash which has
been made to all  partners and PWPI has received an amount equal to 3.99% of all
distributions  to all  partners.  The  balance  will be  distributed  95% to the
Limited Partners,  1.01% to the General Partners and 3.99% to PWPI.  Payments to
PWPI  represent  asset  management  fees for PWPI's  services  in  managing  the
business of the Partnership. Due to the reduction in the Partnership's quarterly
distribution  rate to 2% during fiscal 1992, no management  fees were earned for
the fiscal years ended March 31, 1998,  1997 and 1996,  in  accordance  with the
advisory  agreement.  All sale or  refinancing  proceeds shall be distributed in
varying  proportions  to the Limited and General  Partners,  as specified in the
amended Partnership Agreement.

      All taxable  income (other than from a Capital  Transaction)  in each year
will be allocated to the Limited Partners and the General Partners in proportion
to the amounts of  distributable  cash  distributed to them (excluding the asset
management fee) in that year or, if there are no  distributions of distributable
cash, 98.95% to the Limited Partners and 1.05% to the General Partners.  All tax
losses (other than from a Capital  Transaction)  will be allocated 98.95% to the
Limited Partners and 1.05% to the General  Partners.  Taxable income or tax loss
arising from a sale or refinancing of investment properties will be allocated to
the Limited  Partners and the General  Partners in  proportion to the amounts of
sale or  refinancing  proceeds  to which they are  entitled;  provided  that the
General Partners shall be allocated at least 1% of taxable income arising from a
sale or refinancing.  If there are no sale or refinancing proceeds,  tax loss or
taxable  income  from a sale or  refinancing  will be  allocated  98.95%  to the
Limited  Partners  and  1.05%  to  the  General  Partner.   Allocations  of  the
Partnership's  operations  between the General Partners and the Limited Partners
for  financial  accounting  purposes  have  been  made in  conformity  with  the
allocations of taxable income or tax loss.

      Included in general and administrative  expenses for the years ended March
31,  1998,  1997 and 1996 is  $230,000,  $224,000  and  $260,000,  respectively,
representing  reimbursements to an affiliate of the Managing General Partner for
providing certain financial,  accounting and investor  communication services to
the Partnership.

      The  Partnership  uses the  services  of Mitchell  Hutchins  Institutional
Investors,  Inc. ("Mitchell Hutchins") for the managing of cash assets. Mitchell
Hutchins is a  subsidiary  of  Mitchell  Hutchins  Asset  Management,  Inc.,  an
independently operated subsidiary of PaineWebber.  Mitchell Hutchins earned fees
of $17,000, $13,000 and $4,000 (included in general and administrative expenses)
for managing the  Partnership's  cash assets during fiscal 1998,  1997 and 1996,
respectively.

4.  Operating Investment Properties
    -------------------------------

      The Partnership's  balance sheets at March 31, 1998 and 1997 include three
operating  investment  properties:  Saratoga  Center  and EG&G  Plaza,  owned by
Hacienda Park Associates; the Asbury Commons Apartments, owned by Atlanta Asbury
Partnership;  and the West Ashley Shoppes Shopping Center,  owned by West Ashley
Shoppes Associates. In May 1994, the Partnership and the co-venturer in the West
Ashley joint venture  executed a settlement  agreement  whereby the  Partnership
assumed  control  over the  affairs of the  venture.  The  Partnership  obtained
controlling  interests  in the other  two joint  ventures  during  fiscal  1992.
Accordingly,  all three joint ventures are presented on a consolidated  basis in
the accompanying financial statements. The Partnership's policy is to report the
operations of these consolidated joint ventures on a three-month lag.

      Hacienda Park Associates
      ------------------------

      On December 24,  1987,  the  Partnership  acquired an interest in Hacienda
Park  Associates  (the  "joint  venture"),   a  California  general  partnership
organized in accordance with a joint venture  agreement  between the Partnership
and  Callahan  Pentz  Properties  (the  "co-venturer").  The joint  venture  was
organized to own and operate  three  buildings in the  Hacienda  Business  Park,
which is located in Pleasanton,  California,  consisting of Saratoga  Center,  a
multi-tenant  office  building  and  EG&G  Plaza,  originally  a  single  tenant
facility,  now  leased  to two  tenants.  Saratoga  Center,  completed  in 1985,
consists  of   approximately   83,000  net  rentable   square  feet  located  on
approximately 5.6 acres of land. Phase I of EG&G Plaza was completed in 1985 and
Phase II was completed in 1987.  Both phases together  consist of  approximately
102,000 net rentable  square feet located on  approximately 7 acres of land. The
aggregate cash  investment by the  Partnership  for its interest was $24,930,043
(including an acquisition fee of $890,000 paid to PWPI and certain closing costs
of $40,043).

      During the guaranty  period,  which was to have run from December 24, 1987
to December 24, 1991,  the  co-venturer  had  guaranteed  to fund all  operating
deficits,  capital costs and the Partnership's preference return distribution in
the event  that  cash  flow  from  property  operations  was  insufficient.  The
co-venturer   defaulted  on  the  guaranty   obligations   in  fiscal  1990  and
negotiations  between the  Partnership and the co-venturer to reach a resolution
of the default were ongoing  until fiscal  1992,  when the  venturers  reached a
settlement agreement. During fiscal 1992, the co-venturer assigned its remaining
joint venture interest to the Managing  General Partner of the Partnership.  The
co-venturer also executed a five-year promissory note in the initial face amount
of $300,000 payable to the Partnership  without  interest.  Unless prepaid,  the
balance of the note  escalates  as to the  principal  balance  annually  up to a
maximum of $600,000.  In  exchange,  it was agreed that the  co-venturer  or its
affiliates would have no further liability to the Partnership for any guaranteed
preference payments. Due to the uncertainty regarding the collection of the note
receivable,  such compensation will be recognized as payments are received.  Any
amounts  received will be reflected as  reductions to the carrying  value of the
operating  investment  properties.  No payments have been received to date.  The
$600,000  balance of the note  receivable  became due and payable on October 31,
1996. The Partnership will continue to pursue  collection of this balance during
fiscal 1999.  However,  there are no assurances that any portion of this balance
will be collected.  Concurrent  with the execution of the settlement  agreement,
the  property's  management  contract with an affiliate of the  co-venturer  was
terminated.

      Per the terms of the joint venture  agreement,  net cash flow of the joint
venture is to be distributed monthly in the following order of priority: (1) the
Partnership  will  receive  a  cumulative  preferred  return of 9.25% on its net
investment  until December 31, 1989,  9.75% for the next two years,  and 10% per
annum  thereafter,  (2) to pay any capital  expenditures  and leasing costs,  as
defined (3) to the co-venturer in an amount up to their mandatory  contribution,
(4) to capital  reserves (5) to pay interest on accrued  preferences  and unpaid
advances, and (6) the balance will be distributed 75% to the Partnership and 25%
to the co-venturer.

      Net proceeds from sales or  refinancings  shall be distributed as follows:
(1) to the Partnership to the extent of any unpaid  preferred return and accrued
interest  thereon;  (2) to the  Partnership  to the extent of its net investment
plus $2,400,000 and (3) 75% to the Partnership and 25% to the  co-venturer.  The
co-venturer  and the  Partnership  will also receive pro rata,  any  outstanding
advances,  including interest thereon,  from proceeds from sales or refinancings
prior to a return of capital.

      Net income from operations  shall be allocated first to the Partnership to
the extent of its preference  return and then 75% to the  Partnership and 25% to
the  co-venturer.  Net losses  from  operations  shall be  allocated  75% to the
Partnership and 25% to the co-venturer.

      Atlanta Asbury Partnership
      --------------------------

      On March 12, 1990, the Partnership  acquired an interest in Atlanta Asbury
Partnership (the "joint venture"),  a Georgia general  partnership  organized in
accordance  with a joint venture  agreement  between the  Partnership and Asbury
Commons/Summit  Limited  Partnership,  an  affiliate of Summit  Properties  (the
"co-venturer").  The joint  venture  was  organized  to own and  operate  Asbury
Commons Apartments,  a newly constructed 204-unit residential  apartment complex
located in Atlanta,  Georgia.  The aggregate cash  investment by the Partnership
for its  interest  was  $14,417,791  (including  an  acquisition  fee of $50,649
payable to PWPI and certain closing costs of $67,142).

      During  fiscal 1997,  the  Partnership  became aware of certain  potential
construction  problems at the Asbury Common Apartments.  The initial analysis of
the construction problems revealed extensive  deterioration of the wood trim and
evidence of potential structural problems affecting the exterior breezeways, the
decks of certain  apartment  unit types and the  stairway  towers.  A design and
construction team was organized to further evaluate the potential problems, make
cost-effective  remediation  recommendations  and implement the repair  program.
Based on this evaluation, the structural problems may be more extensive and cost
significantly  more than  originally  estimated.  It will also  require  further
investigation  which together with eventual  construction repair work may result
in  disruptions  to property  operations  while units are possibly  taken out of
service  for  testing  and  repairs.  The cost of the repair  work  required  to
remediate this situation is currently estimated at between approximately $1.5 to
$2 million.  During fiscal 1998, the  Partnership  distributed  bid  application
packages to pre-qualified  contractors and executed  construction  contracts for
the repair work.  Repair and replacement work commenced  subsequent to year-end.
Also during  fiscal 1998,  the  Partnership  filed a warranty  claim against the
manufacturer  of the  wood-composite  siding used  throughout the Asbury Commons
property  and  filed  a  warranty   claim  against  the   manufacturer   of  the
fiberglass-composite  roofing  shingles  installed  when the property was built.
Subsequent  to year-end,  the  manufacturer  of the roofing  shingles  agreed to
provide the  Partnership  with the  materials  to replace the  existing  roofing
shingles.  While there can be no assurances regarding the Partnership's  ability
to successfully  recover any further damages  relating to the siding and roofing
shingles,  the  Partnership  will  diligently  pursue these and other  potential
recovery sources.  Subsequent to year-end,  the Partnership reached a settlement
agreement with the original developer of the Asbury Commons property whereby the
developer  agreed  to pay the  Partnership  $200,000.  Under  the  terms of this
agreement,  the  Partnership  received a payment of  $100,000  during the fourth
quarter of fiscal 1998,  and received a final payment of $100,000  subsequent to
year-end.  The  Partnership  believes that it has adequate cash reserves to fund
the  repair  work  at  Asbury  Commons  regardless  of  whether  any  additional
recoveries are realized.

      During the  Guaranty  Period,  from March 13, 1990 to March 15,  1992,  as
defined,  the  co-venturer had agreed to  unconditionally  guarantee to fund all
operating  deficits,  capital  costs  and the  Partnership's  preference  return
distribution  in  the  event  that  cash  flow  from  property   operations  was
insufficient.  The co-venturer was not in compliance with the mandatory  payment
provisions of the Partnership agreement for the period from November 30, 1990 to
February 14, 1992.  On February  14,  1992, a settlement  agreement  between the
Partnership and the co-venturer was executed  whereby the co-venturer  agreed to
do the  following:  1) pay the  Partnership  $275,000;  (2) release all escrowed
purchase price funds,  amounting to $230,489,  to the joint venture;  (3) assign
99% of its joint venture interest to the Partnership and 1% of its joint venture
interest to the Managing  General  Partner and withdraw from the joint  venture;
and 4) reimburse the Partnership for legal expenses up to $10,000. In return the
co-venturer was released from its obligations under the joint venture agreement.

      Subsequent to the  withdrawal of the original  co-venture  partner and the
assignments of its interest in the venture to the  Partnership  and the Managing
General Partner,  on September 26, 1994, the joint venture agreement was amended
and restated.  The terms of the amended and restated venture  agreement call for
net cash flow from operations of the joint venture to be distributed as follows:
(1)  to  the  Partnership  until  the  Partnership  has  received  a  cumulative
non-compounded  return  of 10% on  the  Partnership's  net  investment  and  any
additional  contributions  made  by  the  Partnership  (2) to  the  Partners  in
proportion to their joint venture interests.

      Proceeds from the sale or  refinancing of the property will be distributed
in the following  order of priority:  (1) to the  Partnership  an amount of gain
equal to the aggregate  negative capital account of the Partnership,  (2) to the
Managing  General  Partner  in an amount of gain equal to the  negative  capital
account  of the  Managing  General  Partner,  (3) to the  Partnership  until the
Partnership   has  been   allocated  an  amount   equal  to  a  10%   cumulative
non-compounded  return on the  Partnership's  net  investment and any additional
contributions  made  by  the  Partnership,  (4)  to the  Partnership  until  the
Partnership  has  received an amount equal to 1.10 times the  Partnership's  net
investment and any additional contributions made by the Partnership, and (5) any
remaining gain shall be allocated 99% to the  Partnership and 1% to the Managing
General Partner. Net losses from the sale or refinancing of the property will be
allocated  to the  Partners  in the  following  order  of  priority:  (1) to the
Partnership  in an amount of loss equal to the positive  capital  account of the
Partnership,  (2) to the Managing  General Partner in an amount of loss equal to
the positive  capital account of the Managing  General  Partner,  and (3) to the
extent the net losses exceed the aggregate capital accounts of the Partners, all
losses in excess of such capital accounts shall be allocated to the Partnership.

      Net income will be allocated as follows: (1) 100% to the Partnership until
the  Partnership  has  been  allocated  an  amount  equal  to a  10%  cumulative
non-compounded  return on the  Partnership's  net  investment and any additional
contributions  made  by  the  Partnership,   and  (2)  thereafter,  99%  to  the
Partnership and 1% to the Managing General Partner. Losses will be allocated 99%
to the Partnership and 1% to the Managing General Partner.

      West Ashley Shoppes Associates
      ------------------------------

      On March 10,  1988 the  Partnership  acquired  an  interest in West Ashley
Shoppes Associates (the "joint venture"),  a South Carolina general  partnership
organized in accordance with a joint venture  agreement  between the Partnership
and Orleans Road Development  Company, an affiliate of the Leo Eisenberg Company
(the  "co-venturer").  The joint  venture was  organized to own and operate West
Ashley Shoppes, a newly constructed shopping center located in Charleston, South
Carolina.  The  property  consists  of  134,000  net  rentable  square  feet  on
approximately 17.25 acres of land.

      The  aggregate  cash  investment by the  Partnership  for its interest was
$10,503,841  (including an acquisition  fee of $365,000 paid to PWPI and certain
closing costs of $123,841).  During the Guaranty Period,  from March 10, 1988 to
March 10, 1993, the co-venturer had agreed to unconditionally  guarantee to fund
any  deficits  and to ensure  that the joint  venture  could  distribute  to the
Partnership its preference return. During fiscal 1990, the co-venturer defaulted
on its  guaranty  obligation.  On  April  25,  1990,  the  Partnership  and  the
co-venturer entered into the second amendment to the joint venture agreement. In
accordance with the amendment, the Partnership contributed $300,000 to the joint
venture,  in  exchange  for the  co-venturer's  transfer  of rights  to  certain
out-parcel  land.  The  $300,000  was  then  repaid  to  the  Partnership  as  a
distribution  to  satisfy  the  co-venturer's  obligation  to fund net cash flow
shortfalls  in arrears at December 31, 1989.  Subsequent to the amendment to the
joint venture agreement,  the co-venturer  defaulted on the guaranty obligations
again. Net cash flow shortfall contributions of approximately $1,060,000 were in
arrears at December  31,  1993.  During  1991,  the  Partnership  had filed suit
against the co-venturer  and the individual  guarantors to collect the amount of
the cash flow shortfall  contributions in arrears.  In May 1994, the Partnership
and the co-venturer executed a settlement agreement to resolve their outstanding
disputes  regarding the net cash flow shortfall  contributions  described above.
Under the terms of the settlement agreement, the co-venturer assigned 96% of its
interest in the joint  venture to the  Partnership  and the  remaining 4% of its
interest in the joint venture to Second Equity Partners,  Inc. (SEPI),  Managing
General  Partner  of  the  Partnership.  In  return  for  such  assignment,  the
Partnership agreed to release the co-venturer from all claims regarding net cash
flow shortfall  contributions owed to the joint venture. In conjunction with the
assignment  of  its  interest  and  withdrawal  from  the  joint  venture,   the
co-venturer  agreed to release  certain  outstanding  counter claims against the
Partnership.

      Subsequent to the  settlement  agreement  and  assignment of joint venture
interest  described above, the terms of the joint venture agreement call for net
cash flow from operations of the joint venture to be distributed as follows: (1)
the  Partnership  will receive a  preference  return of 10% per annum on its net
cash  investment;  (2) next to the  partners on a pro rata basis to repay unpaid
additional  contribution  returns and return on accrued preference,  as defined;
(3) net, until all additional  contributions,  tenant improvement  contributions
and accrued  preference  returns have been paid in full,  50% of remaining  cash
flow to the  partners  on a pro rata  basis to repay  such  items,  49.5% to the
Partnership, and 0.5% to the co-venturer; and (4) thereafter, any remaining cash
would be distributed 99% to the Partnership and 1% to the co-venturer.

      Proceeds from the sale or  refinancing of the property will be distributed
in the  following  order of  priority:  (1) the  Partnership  will  receive  the
aggregate amount of its cumulative  annual preferred return not previously paid,
(2) to the Partnership and co-venturer to pay additional contributions,  (3) the
Partnership will receive an amount equal to the Partnership's net investment and
(4)  thereafter,   any  remaining  proceeds  will  be  distributed  99%  to  the
Partnership and 1% to the co-venturer.

      Net  income  or  loss  will  be  allocated  to  the  Partnership  and  the
co-venturer  in the same  proportion  as cash  distributions  except for certain
items which are specifically allocated to the partners, as defined, in the joint
venture  agreement.  Such items  include  amortization  of  acquisition  fee and
organization expenses and allocation of depreciation related to recording of the
building at fair value based upon its purchase price.

      The following is a combined summary of property operating expenses for the
consolidated joint ventures for the years ended December 31, 1997, 1996 and 1995
(in thousands):

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

      Property operating expenses:
        Utilities                            $    207    $    205   $     219
        Repairs and maintenance                   451         425         385
        Salaries and related costs                224         210         216
        Administrative and other                  282         225         300
        Insurance                                  53          53          51
        Management fees                           153         161         149
                                             --------    --------   ---------
                                             $  1,370    $  1,279   $   1,320
                                             ========    ========   =========

5.  Investments in Unconsolidated Joint Ventures
    --------------------------------------------

      The  Partnership  has  investments in three  unconsolidated  joint venture
partnerships  which own  operating  investment  properties at March 31, 1998 and
1997 (five at March 31, 1996,  including two ventures  which were in the process
of liquidating as a result of the sales of their operating investment properties
during calendar 1995).

    Condensed  combined  financial   statements  of  the  unconsolidated   joint
ventures, for the periods indicated, are as follows:

                        Condensed Combined Balance Sheets
                          December 31, 1997 and 1996
                                (in thousands)

                                    Assets
                                                         1997         1996
                                                         ----         ----

      Current assets                                   $  1,234      $  1,264
      Operating investment properties, net               54,902        55,402
      Other assets                                        4,367         4,992
                                                       --------      --------
                                                       $ 60,503      $ 61,658
                                                       ========      ========

                      Liabilities and Venturers' Capital

      Current liabilities                              $  2,740      $  2,515
      Other liabilities                                     318           315
      Long-term debt                                      8,720         8,857
      Partnership's share of venturers' capital          29,874        30,726
      Co-venturers' share of venturers' capital          18,851        19,245
                                                       --------      --------
                                                       $ 60,503      $ 61,658
                                                       ========      ========
<PAGE>

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

                                              1997         1996         1995
                                              ----         ----         ----
     Revenues:
      Rental revenues and expense 
        reimbursements                    $   9,814     $   9,297   $  11,844
      Interest and other income                 481           343         330
                                          ---------     ---------   ---------
                                             10,295         9,640      12,174

     Expenses:
      Property operating and other expenses   3,230         3,009       4,177
      Real estate taxes                       2,323         2,212       2,248
      Interest on long-term debt                661           663       1,535
      Interest on note payable to venturer        -             -         100
      Depreciation and amortization           3,177         3,158       3,704
                                          ---------     ---------   ---------
                                              9,391         9,042      11,764
                                          ---------     ---------   ---------

     Operating income                           904           598         410
     Gains on sale of operating 
       investment properties                      -             -       8,368
                                          ---------     ---------   ---------
     Net income                           $     904     $     598   $   8,778
                                          =========     =========   =========

     Net income:
        Partnership's share of
          combined income                 $     786     $     441   $   7,512
        Co-venturers' share of
          combined income                       118           157       1,266
                                          ---------     ---------   ---------
                                          $     904     $     598   $   8,778
                                          =========     =========   =========


                  Reconciliation of Partnership's Investment
                           March 31, 1998 and 1997
                                (in thousands)
                                                            1998        1997
                                                            ----        ----

      Partnership's share of capital at
        December 31, as shown above                      $ 29,874    $  30,726
      Excess basis due to investments in 
        joint ventures, net (1)                             1,036        1,094
      Timing differences (2)                                 (673)         (36)
                                                         --------    ---------
         Investments in unconsolidated joint
          ventures, at equity at March 31                $ 30,237    $ 31,784
                                                         ========    ========

      (1)At March 31, 1998 and 1997, the  Partnership's  investment  exceeds its
         share  of  the  joint  venture   partnerships'   capital   accounts  by
         approximately  $1,036,000 and  $1,094,000,  respectively.  This amount,
         which  relates  to  certain  costs  incurred  by  the   Partnership  in
         connection  with  acquiring  its joint  venture  investments,  is being
         amortized over the estimated  useful life of the investment  properties
         (generally 30 years).

      (2)The  timing  differences  between  the  Partnership's  share of capital
         account  balances  and its  investments  in joint  ventures  consist of
         capital  contributions  made to joint  ventures and cash  distributions
         received from joint ventures  during the period from January 1 to March
         31 in each year.  These  differences  result from the lag in  reporting
         period discussed in Note 2.

               Reconciliation of Partnership's Share of Operations
               For the years ended March 31, 1998, 1997 and 1996
                                 (in thousands)

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

      Partnership's share of operations,
         as shown above                    $   786     $    441      $  7,512
      Amortization of excess basis             (58)         (58)         (561)
                                           -------     --------      --------
      Partnership's share of
         unconsolidated ventures' 
         net income                        $   728     $    383      $  6,951
                                           =======     ========      ========
<PAGE>

      The  Partnership's  share of the net  income of the  unconsolidated  joint
ventures is presented as follows in the accompanying statements of operations:

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

      Partnership's share of unconsolidated
         ventures' income                  $   728      $   383      $    185
      Partnership's share of gains on
        sale of unconsolidated operating
        investment properties                    -            -         6,766
                                           -------      -------      --------
                                           $   728      $   383      $  6,951
                                           =======      =======      ========

      Investments  in   unconsolidated   joint  ventures,   at  equity,  is  the
Partnership's  net  investment  in the joint venture  partnerships.  These joint
ventures are subject to Partnership  agreements which determine the distribution
of available  funds,  the disposition of the venture's  assets and the rights of
the partners,  regardless of the Partnership's  percentage ownership interest in
the venture. As a result,  substantially all of the Partnership's investments in
these joint ventures are restricted as to distributions.

      Investments  in   unconsolidated   joint  ventures,   at  equity,  on  the
accompanying balance sheets is comprised of the following equity method carrying
values (in thousands):
                                                          1998         1997
                                                          ----         ----

        Chicago-625 Partnership                        $ 18,131      $ 18,937
        Richmond Gables Associates                         (244)           34
        Daniel/Metcalf Associates Partnership            12,350        12,813
                                                       --------      --------
         Investments in unconsolidated joint ventures  $ 30,237      $ 31,784
                                                       ========      ========

      The  Partnership  received  cash  distributions  from  the  unconsolidated
ventures during the years ended March 31, 1998, 1997 and 1996 as set forth below
(in thousands):

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

        Chicago-625 Partnership                $ 1,504     $ 1,689    $  1,158
        Richmond Gables Associates                 206         198         158
        Daniel/Metcalf Associates Partnership    1,530         641         600
        TCR Walnut Creek Limited Partnership         -         182       3,216
        Portland Pacific Associates                  -          34      10,434
                                               -------     -------    --------
                                               $ 3,240     $ 2,744    $ 15,566
                                               =======     =======    ========

      A  description  of the  ventures'  properties  and the  terms of the joint
venture agreements are summarized as follows:

      a.  Chicago - 625 Partnership
          -------------------------

      The  Partnership  acquired an interest in Chicago - 625  Partnership  (the
"joint venture"), an Illinois general partnership organized on December 16, 1986
in  accordance  with a joint  venture  agreement  between  the  Partnership,  an
affiliate of the Partnership and  Michigan-Ontario  Limited, an Illinois limited
partnership and an affiliate of Golub & Company (the "co-venturer"),  to own and
operate 625 North Michigan Avenue Office Tower (the "property"). The property is
a 27-story  commercial  office tower  containing an aggregate of 324,829  square
feet of leasable space on approximately .38 acres of land.
The property is located in Chicago, Illinois.

      The aggregate  cash  investment  made by the  Partnership  for its current
interest was  $26,010,000  (including an acquisition  fee of $1,316,600  paid to
PWPI and certain  closing costs of $223,750).  At the same time the  Partnership
acquired  its interest in the joint  venture,  PaineWebber  Equity  Partners One
Limited  Partnership  (PWEP1), an affiliate of the Managing General Partner with
investment  objectives  similar  to  the  Partnership's  investment  objectives,
acquired an interest in this joint  venture.  PWEP1's  cash  investment  for its
current interest was $17,278,000  (including an acquisition fee of $383,400 paid
to PWPI).  During 1990,  the joint  venture  agreement  was amended to allow the
Partnership  and PWEP1 the  option to make  contributions  to the joint  venture
equal to total costs of capital improvements, leasehold improvements and leasing
commissions ("Leasing Expense Contributions")  incurred since April 1, 1989, not
in excess of the accrued and unpaid Preference Return due to the Partnership and
PWEP1.  The  Partnership  had  made  Leasing  Expense  Contributions   totalling
$3,748,000 through December 31, 1997.

      During   calendar   1995,   circumstances   indicated   that  Chicago  625
Partnership's  operating  investment  property  might  be  impaired.  The  joint
venture's  estimate of  undiscounted  cash flows  indicated  that the property's
carrying amount was expected to be recovered, but that the reversion value could
be less than the carrying amount at the time of disposition. As a result of such
assessment,  the venture commenced  recording an additional annual  depreciation
charge  of  $350,000  in  calendar  1995 to  adjust  the  carrying  value of the
operating  investment  property  such that it will match the expected  reversion
value at the time of  disposition.  The  Partnership's  share of such  amount is
reflected  in the  Partnership's  share of  unconsolidated  ventures'  income in
fiscal  1997 and 1996.  Such an annual  charge  will  continue to be recorded in
future periods.

      The joint venture agreement  provides for aggregate  distributions of cash
flow and sale or  refinancing  proceeds  to the  Partnership  and  PWEP1.  These
amounts  are  then  distributed  to the  Partnership  and  PWEP1  based on their
respective cash investments in the joint venture  exclusive of acquisition fees.
As a  result  of the  transfers  of the  Partnership's  interests  to  PWEP1  as
discussed above, cash flow  distributions and sale or refinancing  proceeds will
now be split approximately 59% to the Partnership and 41% to PWEP1.

      Net cash flow will be distributed as follows:  First, a preference return,
payable monthly, to the Partnership and PWEP1 of 9% of their respective net cash
investments,  as defined.  Second, to the payment of any unpaid accrued interest
and principal on all  outstanding  default notes.  Third,  to the payment of any
unpaid  accrued  interest and  principal  on all  outstanding  operating  notes.
Fourth,  70% in total to the Partnership  and PWEP1 and 30% to the  co-venturer.
The cumulative  unpaid and unaccrued  Preference  Return due to the  Partnership
totalled $8,704,000 at December 31, 1997.

      Profits for each fiscal year shall be  allocated,  to the extent that such
profits do not exceed the net cash flow for such fiscal year,  in  proportion to
the amount of such net cash flow  distributed  to the  Partners  for such fiscal
year.  Profits in excess of net cash flow shall be allocated 99% in total to the
Partnership and PWEP1 and 1% to the  co-venturer.  Losses shall be allocated 99%
in total to the Partnership and PWEP1 and 1% to the co-venturer.

      Proceeds from the sale or  refinancing  of the property shall be allocated
as follows:

      First, to the payment of all unpaid accrued  interest and principal on all
outstanding default notes. Second, to the Partnership, PWEP1 and the co-venturer
for the payment of all unpaid accrued  interest and principal on all outstanding
operating  notes.  Third,  100% to the  Partnership  and PWEP1  until  they have
received the  aggregate  amount of their  respective  Preference  Return not yet
paid.  Fourth,  100% to the  Partnership  and PWEP1 until they have  received an
amount equal to their respective net investments. Fifth, 100% to the Partnership
and PWEP1 until they have  received an amount equal to the PWEP Leasing  Expense
Contributions  less  any  amount  previously   distributed,   pursuant  to  this
provision.  Sixth, 100% to the co-venturer until it has received an amount equal
to  $6,000,000,  less any  amount  of  proceeds  previously  distributed  to the
co-venturer,  as defined. Seventh, 100% to the co-venturer until it has received
an amount  equal to any  reduction  in the amount of net cash flow that it would
have  received  had the  Partnership  not incurred  indebtedness  in the form of
operating  notes.  Eighth,  100% to the  Partnership  and PWEP1  until they have
received $2,067,500,  less any amount of proceeds previously  distributed to the
Partnership and PWEP1,  pursuant to this provision.  Ninth,  75% in total to the
Partnership and PWEP1 and 25% to the co-venturer until the Partnership and PWEP1
have  received  $20,675,000,  less  any  amount  previously  distributed  to the
Partnership  and  PWEP1,  pursuant  to  this  provision.   Tenth,  100%  to  the
Partnership  and PWEP1 until the  Partnership  and PWEP1 have received an amount
equal to a cumulative  return of 9% on the PWEP Leasing  Expense  Contributions.
Eleventh,  any  remaining  balance  will  be  distributed  55% in  total  to the
Partnership and PWEP1 and 45% to the co-venturer.

      Gains  resulting  from the sale of the  property  shall  be  allocated  as
follows:

      First,  capital  profits  shall be allocated to Partners  having  negative
capital  account  balances,  until the balances of the capital  accounts of such
Partners equal zero.  Second,  any remaining capital profits up to the amount of
capital  proceeds  distributed  to the  Partners  pursuant  to  distribution  of
proceeds of a sale or refinancing with respect to the capital transaction giving
rise to such capital profits shall be allocated to the Partners in proportion to
the amount of capital  proceeds so distributed to the Partners.  Third,  capital
profits in excess of capital  proceeds,  if any, shall be allocated  between the
Partners in the same proportions  that capital proceeds of a subsequent  capital
transaction  would be  distributed  if the  capital  proceeds  were equal to the
remaining amount of capital profits to be allocated.

      Capital losses shall be allocated as follows:
    
      First,  capital  losses shall be allocated to the Partners in an amount up
to and in proportion to their respective  positive capital  balances.  Then, all
remaining  capital losses shall be allocated 70% in total to the Partnership and
PWEP1 and 30% to the co-venturer.

      The Partnership has a property  management  agreement with an affiliate of
the co-venturer  that provides for management and leasing  commission fees to be
paid to the property  manager.  The  management fee is 4% of gross rents and the
leasing  commission  is 7%, as  defined.  The  property  management  contract is
cancellable  at the  Partnership's  option upon the occurrence of certain events
and is currently cancellable by the co-venturer at any time.

      b)  Richmond Gables Associates
          --------------------------

      On  September  1, 1987 the  Partnership  acquired  an interest in Richmond
Gables  Associates  (the  "joint  venture"),   a  Virginia  general  partnership
organized in accordance with a joint venture  agreement  between the Partnership
and  Richmond  Erin Shades  Company  Limited  Partnership,  an  affiliate of The
Paragon  Group (the  "co-venturer").  The joint venture was organized to own and
operate the Gables at Erin Shades, a newly constructed apartment complex located
in Richmond,  Virginia.  The property  consists of 224 units with  approximately
156,000 net rentable square feet on approximately 15.6 acres of land.

      The  aggregate  cash  investment by the  Partnership  for its interest was
$9,076,982  (including an  acquisition  fee of $438,500 paid to PWPI and certain
closing costs of $84,716).  On November 7, 1994,  the joint  venture  obtained a
$5,200,000  first mortgage note payable which bears interest at 8.72% per annum.
Principal and interest  payments of $42,646 are due monthly  through October 15,
2001 at which time the entire  unpaid  balance of principal and interest is due.
The net proceeds of the loan were recorded as a distribution  to the Partnership
by the  joint  venture.  The  Partnership  used  the  proceeds  of the  loan  in
conjunction  with the  retirement of the zero coupon loans  described in Note 6.
The Partnership  has  indemnified  the joint venture and the related  co-venture
partners,  against all  liabilities,  claims and  expenses  associated  with the
borrowing.

      Net cash flow from  operations of the joint venture will be distributed in
the following order of priority: first, a preference return, payable monthly, to
the  Partnership  of 9% on its net cash  investment as defined;  second,  to pay
interest on additional capital contributions; thereafter, 70% to the Partnership
and 30% to the co-venturer.

      Proceeds from the sale or  refinancing of the property will be distributed
in the  following  order of  priority:  (1) the  Partnership  will  receive  the
aggregate amount of its cumulative  annual preferred return not previously paid,
(2) the  Partnership  will  receive  an amount  equal to the  Partnership's  net
investment,  (3) $450,000 each to the Partnership and the  co-venturer,  (4) the
Partnership and co-venturer  will receive proceeds in proportion to contribution
loans made plus  accrued  interest,  (5) 70% to the  Partnership  and 30% to the
co-venturer until the Partnership has received an additional $5,375,000; and (6)
thereafter,  any remaining  proceeds will be distributed  60% to the Partnership
and 40% to the co-venturer.

      Net income and loss will be allocated as follows: (1) depreciation will be
allocated to the  Partnership,  (2) income will be allocated to the  Partnership
and  co-venturer in the same  proportion as cash  distributions.  Losses will be
allocated in amounts equal to the positive  capital  accounts of the Partnership
and  co-venturer  and (3) all other  profits and losses will be allocated 70% to
the Partnership and 30% to the co-venturer.

      During  the  Guaranty  Period,   which  expired  in  September  1990,  the
co-venturer  agreed to  unconditionally  guarantee  to fund any  deficits and to
ensure that the joint venture could distribute to the Partnership its preference
return.  Total mandatory  payments  contributed by the  co-venturer  amounted to
$152,048 in 1990. At December 31, 1997, there was a cumulative  unpaid preferred
distribution payable to the Partnership of $1,096,000.  This amount will be paid
to the Partnership if and when there is available cash flow.

      The joint venture has entered into a management contract with an affiliate
of the co-venturer  which is cancellable at the option of the  Partnership  upon
the  occurrence  of certain  events.  The annual  management  fee is 5% of gross
rents, as defined.

      c)  Daniel/Metcalf Associates Partnership
          -------------------------------------

      The  Partnership   acquired  an  interest  in  Daniel/Metcalf   Associates
Partnership (the "joint venture"),  a Virginia general partnership  organized on
September 30, 1987 in  accordance  with a joint  venture  agreement  between the
Partnership  and Plaza 91 Investors,  L.P., an affiliate of Daniel Realty Corp.,
organized to own and operate Gateway Plaza Shopping Center (formerly  Loehmann's
Plaza),  a community  shopping  center  located in Overland  Park,  Kansas.  The
property  consists  of  approximately   142,000  net  rentable  square  feet  on
approximately 19 acres of land.

      The  aggregate  cash  investment by the  Partnership  for its interest was
$15,488,352  (including an acquisition  fee of $689,000 paid to PWPI and certain
closing costs of $64,352).  On February 10, 1995,  the joint venture  obtained a
first mortgage loan secured by the operating  investment property in the initial
principal amount of $4,000,000.  The proceeds of the loan, along with additional
funds contributed by the Partnership, were used to repay the portion of the zero
coupon note  liability  of the  Partnership  which was secured by the  operating
property (see Note 6). In addition, a portion of the proceeds were used to repay
the $700,000  mortgage  loan of the joint  venture and to establish a Renovation
and  Occupancy  Escrow in the amount of $550,000 as required by the new mortgage
loan.  The new first  mortgage loan was issued in the name of the joint venture,
bears  interest at an annual rate of 9.04% and matures on February 15, 2003. The
loan requires monthly principal and interest payments of $33,700.  Funds were to
be released from the  Renovation  and Occupancy  Escrow to reimburse the Gateway
Plaza joint venture for the costs of certain  planned  renovations  in the event
that the joint venture satisfied certain  requirements  which included specified
occupancy  and rental  income  thresholds.  As of August 1996,  eighteen  months
subsequent to the date of the loan closing,  such requirements had not been met.
Therefore,  the lender had the right to apply the balance of the escrow  account
to the payment of loan  principal.  In addition,  the lender  required  that the
Partnership  unconditionally  guaranty up to $1,400,000 of the loan  obligation.
This guaranty was to be released in the event that the joint  venture  satisfied
the requirement for the release of the Renovation and Occupancy  Escrow funds or
upon the repayment,  in full, of the entire outstanding mortgage loan liability.
During fiscal 1998, the venture achieved the aforementioned occupancy and rental
income thresholds. During the third quarter of fiscal 1998, management requested
and received the release of the  Renovation  and Occupancy  Escrow Funds and the
termination of the unconditional  guaranty. The escrow funds were distributed to
the Partnership and were used to replenish cash reserves.

      The closing of the February 1995 financing transaction described above was
executed in  conjunction  with an amendment to the  Partnership  Agreement.  The
purpose of the amendment was to establish the portion of the new first  mortgage
loan which was used to repay the borrowing of the Partnership  described in Note
6 (the "Partnership  Component") as the sole  responsibility of the Partnership.
Accordingly, any debt service payments attributable to the Partnership Component
will  be  deducted  from  the   Partnership's   share  of  operating  cash  flow
distributions  or  sale  or  refinancing  proceeds.  Furthermore,  all  expenses
associated with such portion of the new borrowing will be specifically allocated
to the  Partnership.  The  Partnership has agreed to indemnify the joint venture
and co-venture partner against all losses, damages, liabilities,  claims, costs,
fees and expenses  incurred in connection with the Partnership  Component of the
first  mortgage  loan. The portion of the new first mortgage loan which was used
to repay  the  joint  venture's  $700,000  mortgage  loan and to  establish  the
Renovation  and Occupancy  Escrow will be treated as a joint  venture  borrowing
subject to the terms and conditions of the original joint venture agreement.

      Net cash flow of the joint  venture  is to be  distributed  monthly in the
following  order of  priority:  (1) the  Partnership  will  receive a cumulative
preferred return (the "Preferred Return") of 9.25% on its initial net investment
of $14,300,000 from October,  1987 through September,  1989, 9.75% from October,
1989 through  September,  1990 and 10%  thereafter,  (2) to the  Partnership and
co-venturer for the payment of all unpaid accrued  interest and principal on all
outstanding  notes.  Any additional  cash flow shall be  distributed  75% to the
Partnership and 25% to the co-venturer.

      The  co-venturer  agreed to contribute to the joint venture all funds that
were  necessary so the joint venture could  distribute  to the  Partnership  its
preference  return  for 36  months  from  the  date of  closing  (the  "Guaranty
Period").  Contributions  for the final 12 months of the Guaranty Period,  which
ended  September 30, 1990, were in the form of mandatory  loans.  Such loans are
non-interest  bearing  and  will  be  repaid  upon  sale or  refinancing  of the
Property. The Partnership's cumulative unpaid preferential return as of December
31, 1997 amounted to $3,797,000.  If the joint venture requires additional funds
after the Guaranty  Period,  and such funds are not  available  from third party
sources,  they are to be provided in the form of operating  and capital  deficit
loans, 75% by the Partnership and 25% by the co-venturer.  At December 31, 1997,
the  co-venturer was obligated to make additional  capital  contributions  of at
least   $88,644  with  respect  to   cumulative   unfunded   shortfalls  in  the
Partnership's preferential return through September 30, 1990.

      Proceeds from the sale or  refinancing of the property will be distributed
in  the  following  order  of  priority:  (1)  to  the  Partnership  and  to the
co-venturer,  to repay any additional capital contributions and loans and unpaid
preferential  returns,  (2) $15,015,000 to the Partnership,  (3) $200,000 to the
co-venturer and (4) 75% to the Partnership and 25% to the co-venturer.

      Taxable income will be allocated to the Partnership and the co-venturer in
any year in the same  proportions  as actual cash  distributions,  except to the
extent partners are required to make capital contributions,  as defined, then an
amount equal to such contribution will be allocated to the partners.  Profits in
excess  of net cash flow are  allocated  75% to the  Partnership  and 25% to the
co-venturer.  Losses  are  allocated  99%  to  the  Partnership  and  1% to  the
co-venturer. Contributions or loans made to the joint venture by the Partnership
or  co-venturer  will  result  in  a  loss  allocation  to  the  Partnership  or
co-venturer of an equal amount.

      The joint venture has entered into a management contract with an affiliate
of the  co-venturer  cancellable  at the  option  of the  Partnership  upon  the
occurrence of certain events.  The annual management fee is equal to 3% of gross
rents, as defined.  In addition,  the affiliate of the co-venturer  also earns a
subordinated  management  fee of 2% of gross rents  during any year in which the
net cash flow of the operating  property  exceeds the  Partnership's  preference
return.  Otherwise the fee is accrued subject to a maximum amount of $50,000 and
payable only from the proceeds of a capital transaction.

      d)  TCR Walnut Creek Limited Partnership
          ------------------------------------

      The  Partnership   acquired  an  interest  in  TCR  Walnut  Creek  Limited
Partnership  (the "joint  venture"),  a Texas limited  partnership  organized on
December  24, 1987 in  accordance  with a joint  venture  agreement  between the
Partnership  and  Trammell  S. Crow  (the  "co-venturer")  organized  to own and
operate Treat  Commons  Phase II  Apartments,  an apartment  complex  located in
Walnut Creek,  California.  The property  consists of 160 units on approximately
3.98 acres of land.

      The  aggregate  cash  investment by the  Partnership  for its interest was
$13,143,079  (including  an  acquisition  fee of  $602,400  payable  to PWPI and
certain closing costs of $40,679). The initial cash investment also included the
sum of $1,000,000  that was  contributed in the form of a permanent  nonrecourse
loan to the venture on which the Partnership  received  interest payments at the
rate of 10% per annum until the  commencement of the guaranty  period,  9.5% per
annum during the guaranty period and 10% per annum thereafter.  On September 27,
1994, the joint venture  obtained a $7,400,000 first mortgage note payable which
bore  interest at 8.54% per annum.  Principal  and interest  payments of $31,598
were due monthly through  September 2001 at which time the entire unpaid balance
of principal and interest was to be due.

      On December 29, 1995, TCR Walnut Creek Limited  Partnership sold the Treat
Commons Phase II Apartments to a third party for  approximately  $12.1  million.
The  Partnership  received net  proceeds of  approximately  $4.1  million  after
deducting  closing  costs and the  repayment  of the existing  mortgage  note of
approximately $7.3 million. The Partnership was entitled to 100% of the net sale
proceeds and cash flow from  operations  of the venture in  accordance  with the
joint venture agreement. The Partnership distributed  approximately $3.1 million
of these net sale  proceeds  to the Limited  Partners in a Special  Distribution
made on February 15, 1996.  The  remaining  sale  proceeds of  approximately  $1
million  were  retained  by  the  Partnership   for  potential   future  capital
requirements.

      e)  Portland Pacific Associates
          ---------------------------

      On January  12,  1988 the  Partnership  acquired  an  interest in Portland
Pacific  Associates  (the "joint  venture"),  a California  limited  partnership
organized in accordance with a joint venture  agreement  between the Partnership
and Pacific Union Investment Corporation (the "co-venturer").  The joint venture
was organized to own and operate  Richland  Terrace and Richmond Park Apartments
located in  Portland,  Oregon.  The  property  consists  of a total of 183 units
located on 9.52 acres of land. The aggregate cash  investment by the Partnership
for its interest was $8,251,500  (including an acquisition  fee of $380,000 paid
to PWPI and certain closing costs of $33,500).

      On November 2, 1995,  Portland  Pacific  Associates sold the Richmond Park
and  Richland  Terrace  Apartments  to  a  third  party  for  $11  million.  The
Partnership  received net proceeds of  approximately  $8 million after deducting
closing  costs,  the  co-venturer's  share of the proceeds and repayment of a $2
million  borrowing  secured  by the  Partnership's  share of the  proceeds.  The
Partnership distributed  approximately $5.1 million of these net proceeds to the
Limited  Partners in a Special  Distribution  made on  December  27,  1995.  The
remaining  sale  proceeds  were  retained by the  Partnership  for the potential
future capital needs of the Partnership's commercial property investments.

6.  Mortgage Notes Payable
    -----------------------

      Mortgage  notes  payable  on  the  consolidated   balance  sheets  of  the
Partnership at March 31, 1998 and 1997 consist of the following (in thousands):

                                                      1998              1997
                                                      ----              ----

     9.125%  mortgage note payable to an
     insurance  company  secured  by the
     625 North Michigan Avenue operating
     investment property (see discussion
     below).  The loan requires  monthly
     principal and interest  payments of
     $83  through  maturity  on  May  1,
     1999.  The  terms of the note  were
     modified  effective  May 31,  1994.
     The fair value of the mortgage note
     approximated  its carrying value at
     March 31, 1998 and 1997.                          $ 9,282     $ 9,418

     8.75%  mortgage  note payable to an
     insurance  company  secured  by the
     Asbury Commons operating investment
     property  (see  discussion  below).
     The loan requires monthly principal
     and   interest   payments   of  $58
     through  maturity  on  October  15,
     2001.   The   fair   value  of  the
     mortgage  note   approximated   its
     carrying value at December 31, 1997
     and 1996.                                           6,707       6,806

     9.04%  mortgage  note payable to an
     insurance  company  secured  by the
     Saratoga  Center and Hacienda Plaza
     operating  investment property (see
     discussion    below).    The   loan
     requires   monthly   principal  and
     interest  payments  of $29  through
     maturity on January 20,  2002.  The
     fair  value  of the  mortgage  note
     approximated  its carrying value at
     December  31, 1997 and 1996.                        3,380       3,426 
                                                       -------     -------

                                                       $19,369     $19,650
                                                       =======     =======

      The scheduled annual  principal  payments to retire mortgage notes payable
are as follows (in thousands):

             Year ended March 31,

               1999          $   308
               2000            9,305
               2001              189
               2002            6,417
               2003            3,150
                             -------
                             $19,369
                             =======

      On April 29, 1988, the  Partnership  borrowed  $6,000,000 in the form of a
zero coupon loan which had a scheduled  maturity  date in May of 1995.  The note
bore interest at an effective  compounded annual rate of 9.8% and was secured by
the 625 North  Michigan  Avenue  Office  Building.  Payment of all  interest was
deferred  until  maturity,  at  which  time  principal  and  interest  totalling
approximately  $11,556,000 was to be due and payable.  The carrying value on the
Partnership's  balance sheet at March 31, 1994 of the loan plus accrued interest
aggregated approximately  $10,404,000.  The terms of the loan agreement required
that if the loan ratio,  as defined,  exceeded 80%, the Partnership was required
to deposit  additional  collateral  in an amount  sufficient  to reduce the loan
ratio to 80%. During fiscal 1994, the lender informed the Partnership that based
on an interim property appraisal, the loan ratio exceeded 80% and that a deposit
of additional collateral was required.  Subsequently,  the Partnership submitted
an appraisal  which  demonstrated  that the loan ratio exceeded 80% by an amount
less than previously demanded by the lender.  During the third quarter of fiscal
1994, the Partnership  deposited additional collateral of $208,876 in accordance
with the higher appraised value. The lender accepted the  Partnership's  deposit
of additional  collateral (included in escrowed cash on the accompanying balance
sheet at March 31, 1994) but disputed  whether the Partnership had complied with
the terms of the loan agreement regarding the 80% loan ratio. During the quarter
ended June 30, 1994, an agreement was reached with the lender of the zero coupon
loan on a proposal to refinance the loan and resolve the  outstanding  disputes.
The terms of the agreement  called for the  Partnership  to make a principal pay
down  of  $801,000,  including  the  application  of the  additional  collateral
referred to above. The maturity date of the loan,  which now requires  principal
and interest payments on a monthly basis as set forth above, was extended to May
31, 1999. The terms of the loan agreement also required the  establishment of an
escrow account for real estate taxes,  as well as a capital  improvement  escrow
which is to be funded with monthly  deposits  from the  Partnership  aggregating
approximately $1 million through the scheduled  maturity date. Formal closing of
the modification and extension agreement occurred on May 31, 1994.

      On June 20, 1988, the Partnership borrowed $17,000,000 in the form of zero
coupon loans due in June of 1995. These notes bore interest at an annual rate of
10%,  compounded  annually.  As of March 31, 1994, such loans had an outstanding
balance,  including  accrued  interest,  of  approximately  $23,560,000 and were
secured by Saratoga  Center and EG&G Plaza,  Loehmann's  Plaza Shopping  Center,
Richland Terrace and Richmond Park Apartments,  West Ashley Shoppes,  The Gables
Apartments,  Treat Commons Phase II Apartments  and Asbury  Commons  Apartments.
During fiscal 1995, the remaining  balances of the zero coupon loans were repaid
from  the  proceeds  of five  new  conventional  mortgage  loans  issued  to the
Partnership's  joint venture  investees,  together with funds contributed by the
Partnership, as set forth below.

      On September 27, 1994, the Partnership  refinanced the portion of the zero
coupon  loan  secured  by the  Treat  Commons  Phase II  apartment  complex,  of
approximately $3,353,000,  with the proceeds of a new $7.4 million loan obtained
by the TCR Walnut Creek Limited Partnership joint venture. The $7.4 million loan
was secured by the Treat Commons apartment  complex,  carried an annual interest
rate of 8.54% and was  scheduled  to mature in 7 years.  As discussed in Note 5,
the Treat Commons  property was sold and this loan obligation was repaid in full
on December 29, 1995. On September 28, 1994, the Partnership  repaid the portion
of the zero coupon loan  secured by the Asbury  Commons  apartment  complex,  of
approximately $3,836,000, with the proceeds of a new $7 million loan obtained by
the consolidated Asbury Commons joint venture. The $7 million loan is secured by
the Asbury Commons apartment  complex,  carries an annual interest rate of 8.75%
and  matures  in 7 years.  The loan  requires  monthly  principal  and  interest
payments of $88,000.  On October 22, 1994, the Partnership  applied a portion of
the  excess  proceeds  from the  refinancings  of the Treat  Commons  and Asbury
Commons  properties  described  above and repaid the  portion of the zero coupon
loan which had been secured by West Ashley Shoppes of  approximately  $2,703,000
and made a partial prepayment toward the portion of the zero coupon loan secured
by Hacienda  Business Park of $3,000,000.  On November 7, 1994, the  Partnership
repaid the portion of the zero coupon loans secured by The Gables Apartments and
the Richland  Terrace and Richmond  Park  apartment  complexes of  approximately
$2,353,000 and $2,106,000, respectively, with the proceeds of a new $5.2 million
loan secured by The Gables Apartments.  The new $5.2 million loan bears interest
at 8.72%  and  matures  in 7 years.  The loan  requires  monthly  principal  and
interest  payments of $43,000.  On February 9, 1995, the Partnership  repaid the
remaining portion of the zero coupon loan secured by the Hacienda Business Park,
of  approximately  $3,583,000,  with the  proceeds  of a new $3.5  million  loan
obtained by the  consolidated  Hacienda Park Associates joint venture along with
additional  funds  contributed  by the  Partnership.  The $3.5  million  loan is
secured by the Hacienda Business Park property,  carries an annual interest rate
of 9.04%  and  matures  in 7 years.  The loan  requires  monthly  principal  and
interest payments of $36,000.  On February 10, 1995, the Partnership  repaid the
portion of the zero coupon loan secured by the Gateway Plaza Shopping Center, of
approximately $4,093,000, with the proceeds of a new $4 million loan obtained by
the  Daniel/Metcalf  Associates  Partnership joint venture along with additional
funds  contributed  by the  Partnership.  The $4 million  loan is secured by the
Gateway  Plaza  Shopping  Center,  carries an annual  interest rate of 9.04% and
matures on February 15, 2003. The loan requires  monthly  principal and interest
payments of $34,000. Legal liability for the repayment of the new mortgage loans
secured by the Gables and Gateway  Plaza  properties  rests with the  respective
joint ventures.  Accordingly  the mortgage loan  liabilities are recorded on the
books of these  unconsolidated  joint ventures.  The Partnership has indemnified
Richmond Gables  Associates and  Daniel/Metcalf  Associates  Partnership and the
related  co-venture  partners,  against  all  liabilities,  claims and  expenses
associated with these borrowings.

7.  Bonds Payable
    -------------

      Bonds  payable  consist  of the  Hacienda  Park joint  venture's  share of
liabilities  for bonds issued by the City of  Pleasanton,  California for public
improvements  that benefit Hacienda  Business Park and the operating  investment
property  and are secured by liens on the  operating  investment  property.  The
bonds for which the operating  investment property is subject to assessment bear
interest  at  rates  ranging  from  5%  to  7.87%,   with  an  average  rate  of
approximately   7.2%.   Principal  and  interest  are  payable  in   semi-annual
installments  and mature in years 2004 through  2017. In the event the operating
investment  property is sold,  the liability for the bond  assessments  would be
transferred to the buyer. Accordingly,  the Hacienda Park joint venture would no
longer be liable for the bond assessments.

      Future scheduled principal payments on bond assessments are as follows (in
thousands):

      Year ended December 31,

                  1998            $    110
                  1999                 119
                  2000                 128
                  2001                 137
                  2002                 148
                  Thereafter         1,529
                                  --------
                                  $  2,171
                                  ========
8.  Rental Revenue
    --------------

      The buildings  owned by Hacienda Park  Associates  and West Ashley Shoppes
Associates are leased under  noncancellable,  multi-year leases.  Minimum future
rentals due under the terms of these  leases at December 31, 1997 are as follows
(in thousands):

                                   Future
                                   Minimum
                                   Contractual
                                   Payments
                                   --------

                  1998            $  3,029
                  1999               2,167
                  2000               1,930
                  2001               1,446
                  2002               1,069
                  Thereafter         1,112
                                  --------
                                  $ 10,753
                                  ========

9.  Subsequent Events
    -----------------

      On May 15, 1998, the  Partnership  paid  distributions  to the Limited and
General  Partners in the amounts of $297,000 and $3,000,  respectively,  for the
quarter ended March 31, 1998.


<PAGE>
<TABLE>

Schedule III - Real Estate and Accumulated Depreciation

                                      PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
                                     SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
                                                     March 31, 1998
                                                     (In thousands)
<CAPTION>

                                                Cost
                          Initial Cost to    Capitalized                                                               Life on Which
                          Consolidated       (Removed)                                                                  Depreciation
                               Joint         Subsequent to      Gross Amount at Which Carried at                        in Latest
                               Ventures      Acquisition                      End of Year                               Income
                               Buildings &   Buildings &        Buildings &         Accumulated  Date of      Date      Statement
Description Encumbrances Land  Improvements  Improvements  Land Improvements  Total Depreciation Construction Acquired  is Computed
----------- ------------ ----  ------------  ------------  ---- ------------  ----- ------------ ------------ --------  -----------
<S>            <C>       <C>       <C>       <C>           <C>        <C>        <C>       <C>        <C>     <C>       <C>


Shopping
 Center
Charleston, 
 SC            $    -     $4,243    $ 5,669  $ (2,383)     $  2,342    $ 5,187   $ 7,529   $ 1,977    1988    3/10/88   5 - 31.5 yrs

Business 
 Center
Pleasanton, 
 CA             5,551      3,315     23,337      (211)        3,370     23,071    26,441     8,389    1985    12/24/87  5 - 25 yrs

Apartment
  Complex
Atlanta, GA     6,707      1,702     11,950       345         1,639     12,358    13,997     3,678    1990    3/12/90   10 -27.5 yrs
              -------    -------    -------  -------        -------    -------   -------   -------
              $12,258     $9,260    $40,956  $ (2,249)      $ 7,351    $40,616   $47,967   $14,044
              =======     ======    =======  ========       =======    =======   =======   =======
Notes

(A) The  aggregate  cost of real estate  owned at December  31, 1997 for Federal income  tax  purposes  is  approximately  $54,730.

(B) See Notes 6 and 7 to the Financial  Statements for a description of the terms of the debt encumbering the
    properties.

(C) Reconciliation of real estate owned:
                                                               1997         1996       1995
                                                               ----         ----       ----

  Balance at beginning of period                            $  47,369   $  50,204    $ 49,783
  Acquisitions and improvements                                   598         444         421
  Write off due to permanent impairment (see Note 2)                -      (3,279)          -
                                                            ---------   ---------    --------
          
  Balance at end of period                                  $  47,967   $  47,369    $ 50,204
                                                            =========   =========    ========

(D) Reconciliation of accumulated depreciation:

  Balance at beginning of period                            $  12,155   $  10,781    $  8,895
  Depreciation expense                                          1,889       1,953       1,886
  Write off due to permanent impairment (see Note 2)                -        (579)          -
                                                            ---------   ---------    --------
            
  Balance at end of period                                  $  14,044   $  12,155    $ 10,781
                                                            =========   =========    ========

(E)Costs removed subsequent to acquisition  includes an impairment  writedown on
   the West Ashley  Shoppes  property in fiscal 1997 (see Note 2),  $3,026 of fully
   depreciated  tenant  improvements  of the Hacienda joint venture  written off in
   calendar  1994,  as  well  as  certain  guaranty   payments  received  from  the
   co-venturers in the consolidated joint ventures (see Note 4).
</TABLE>



<PAGE>




                         REPORT OF INDEPENDENT AUDITORS






The Partners of
PaineWebber Equity Partners Two Limited Partnership:

      We have audited the  accompanying  combined balance sheets of the Combined
Joint  Ventures of  PaineWebber  Equity  Partners Two Limited  Partnership as of
December 31, 1997 and 1996,  and the related  combined  statements of income and
changes in venturers' capital, and cash flows for each of the three years in the
period ended December 31, 1997. Our audits also included the financial statement
schedule  listed in the Index at Item  14(a).  These  financial  statements  and
schedule  are  the   responsibility   of  the  Partnership's   management.   Our
responsibility  is to  express  an opinion  on these  financial  statements  and
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  combined  financial  statements  referred  to above
present fairly, in all material respects, the combined financial position of the
Combined Joint Ventures of PaineWebber  Equity Partners Two Limited  Partnership
at December 31, 1997 and 1996, and the combined  results of their operations and
their cash flows for each of the three years in the period  ended  December  31,
1997, in conformity with generally accepted accounting principles.  Also, in our
opinion,  the related financial statement schedule,  when considered in relation
to the  basic  financial  statements  taken as a whole,  presents  fairly in all
material respects the information set forth therein.






                                          /s/ERNST & YOUNG LLP
                                          --------------------
                                          ERNST & YOUNG LLP





Boston, Massachusetts
February 18, 1998



<PAGE>

                           COMBINED JOINT VENTURES OF
               PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP

                             COMBINED BALANCE SHEETS
                           December 31, 1997 and 1996
                                 (In thousands)

                                     Assets

                                                            1997         1996
                                                            ----         ----
Current assets:
   Cash and cash equivalents                            $     395     $   600
   Accounts receivable, net of allowance for
     doubtful accounts of $45 ($146 in 1996)                  774         637
   Prepaid distribution to venturer                            37           -
   Prepaid expenses                                            28          27
                                                        ---------     -------
      Total current assets                                  1,234       1,264

Operating investment properties:
   Land                                                    15,222      15,222
   Buildings, improvements and equipment                   61,649      59,902
   Construction in progress                                 3,161       2,528
                                                        ---------     -------
                                                           80,032      77,652
   Less accumulated depreciation                          (25,130)    (22,250)
                                                        ---------     -------
                                                           54,902      55,402

Escrowed funds                                              1,144       1,747
Due from affiliates                                           269         269
Deferred expenses, net of accumulated
 amortization of $1,767 ($1,428 in 1996)                    1,635       1,608
Other assets                                                1,319       1,368
                                                        ---------     -------
                                                        $  60,503     $61,658
                                                        =========     =======

                       Liabilities and Venturers' Capital

Current liabilities:
   Accounts payable and accrued expenses                $     481     $   372
   Accrued real estate taxes                                2,122       2,017
   Distributions payable to venturers                           -           1
   Current portion - long-term debt                           137         125
                                                        ---------     -------
      Total current liabilities                             2,740       2,515

Tenant security deposits                                      268         265

Subordinated management fee payable to affiliate               50          50

Long-term debt                                              8,720       8,857

Venturers' capital                                         48,725      49,971
                                                        ---------     -------
                                                        $  60,503     $61,658
                                                        =========     =======



                             See accompanying notes.


<PAGE>
                           COMBINED JOINT VENTURES OF
               PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP

         COMBINED STATEMENTS OF INCOME AND CHANGES IN VENTURERS' CAPITAL

              For the years ended December 31, 1997, 1996 and 1995
                                 (In thousands)

                                                1997        1996        1995
                                                ----        ----        ----
Revenues:
   Rental income and expense
     reimbursements                         $   9,814    $  9,297    $ 11,844
   Interest and other income                      481         343         330
                                            ---------    --------    --------
                                               10,295       9,640      12,174

Expenses:
   Real estate taxes                            2,323       2,212       2,248
   Depreciation expense                         2,880       2,896       2,756
   Property operating expenses                    641         602         908
   Repairs and maintenance                      1,047         879       1,093
   Management fees                                314         318         459
   Professional fees                              107          82          88
   Salaries                                       634         591         882
   Advertising                                     60          46          71
   Interest expense on long-term debt             661         663       1,535
   Interest on note payable to venturer             -           -         100
   General and administrative                     417         438         564
   Amortization expense                           297         262         948
   Bad debt expense                                 -          45           1
   Other                                           10           8         111
                                            ---------    --------    --------
                                                9,391       9,042      11,764
                                            ---------    --------    --------

Operating income                                  904         598         410

Gains on sale of operating investment
   properties                                      -            -       8,368
                                           ---------     --------    --------

Net income                                        904         598       8,778

Contributions from venturers                    2,160       2,303       1,494

Distributions to venturers                     (4,310)     (3,735)    (19,187)

Venturers' capital, beginning of year          49,971      50,805      59,720
                                            ---------    --------    --------

Venturers' capital, end of year             $  48,725    $ 49,971    $ 50,805
                                            =========    ========    ========












                             See accompanying notes.


<PAGE>
<TABLE>

                           COMBINED JOINT VENTURES OF
               PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP

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

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

Cash flows from operating activities:
   Net income                                               $    904    $     598   $   8,778
   Adjustments to reconcile net income to
     net cash provided by operating activities:
     Depreciation and amortization                             3,177        3,158       3,704
     Amortization of deferred financing costs                     42           41         169
     Gains on sale of operating investment properties              -            -      (8,368)
     Changes in assets and liabilities:
      Accounts receivable, net                                  (137)          57         228
      Prepaid expenses                                            (1)         (18)          5
      Escrowed funds                                              43           20         129
      Deferred expenses                                         (366)        (230)       (269)
      Other assets                                                49          172          16
      Accounts payable and accrued expenses                      109          102        (144)
      Accounts payable - affiliates                                -          (21)          6
      Tenant security deposits                                     3           12          75
      Accrued real estate taxes                                  105          (30)       (262)
                                                            --------    ---------   ---------
          Total adjustments                                    3,024        3,263      (4,711)
                                                            --------    ---------   ---------
           Net cash provided by operating activities           3,928        3,861       4,067
                                                            --------    ---------   ---------

Cash flows from investing activities:
   Additions to operating investment properties               (2,380)      (2,206)     (2,044)
   Proceeds from sales of operating
     investment properties                                         -            -      15,542
   Selling costs from sale                                         -         (190)       (587)
   Increase in restricted cash                                   560          (18)       (550)
                                                            --------    ---------   ---------
           Net cash (used in) provided by
               investing activities                           (1,820)      (2,414)     12,361
                                                            --------    ---------   ---------
Cash flows from financing activities:
   Proceeds from issuance of long-term debt                        -            -       3,829
   Principal payments on long-term debt                         (125)        (115)       (891)
   Repayment of partner advances                                   -            -         (86)
   Repayment of note payable to partner                            -            -      (1,000)
   Distributions to venturers                                 (4,348)      (3,786)    (19,241)
   Capital contributions from venturers                        2,160        2,303       1,494
   Payment of deferred loan costs                                  -            -         (31)
                                                            --------    ---------   ---------
           Net cash used in financing activities              (2,313)      (1,598)   (15,926)
                                                            --------    ---------   ---------

Net (decrease) increase in cash and cash equivalent             (205)        (151)        502
Cash and cash equivalents, beginning of year                     600          751         249
                                                            --------    ---------   ---------
Cash and cash equivalents, end of year                      $    395    $     600   $     751
                                                            ========    =========   =========

Cash paid during the year for interest                      $    791    $     801   $   1,071
                                                            ========    =========   =========
</TABLE>

                             See accompanying notes.


<PAGE>
                           COMBINED JOINT VENTURES OF
               PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
                     NOTES TO COMBINED FINANCIAL STATEMENTS


1.  Organization
    ------------

      The  accompanying  financial  statements of the Combined Joint Ventures of
PaineWebber  Equity Partners Two Limited  Partnership  (Combined Joint Ventures)
include  the  accounts  of   Chicago-625   Partnership,   an  Illinois   general
partnership;   Richmond  Gables  Associates,  a  Virginia  general  partnership;
Daniel/Metcalf Associates Partnership, a Kansas general partnership;  TCR Walnut
Creek Limited  Partnership,  a Texas limited  partnership  and Portland  Pacific
Associates,  a California general  partnership.  The financial statements of the
Combined  Joint Ventures are presented in combined form due to the nature of the
relationship  between each of the co-venturers  and PaineWebber  Equity Partners
Two Limited Partnership ("EP2").

      The financial statements of the Combined Joint Ventures have been prepared
based on the periods that EP2 held an interest in the individual joint ventures.
The  dates of EP2's  acquisition  of  interests  in the  joint  ventures  are as
follows:
                                                       Date of Acquisition
                  Joint Venture                        of Interest
                  -------------                        -----------

            Chicago-625 Partnership                   December 16, 1986
            Richmond Gables Associates                September 1, 1987
            Daniel/Metcalf Associates Partnership     September 30, 1987
            TCR Walnut Creek
                 Limited Partnership                  December 24, 1987 (1)
            Portland Pacific Associates               January 12, 1988 (2)

      (1)On December 29, 1995,  the TCR Walnut Creek  Limited  Partnership  sold
         its operating  investment  property.  The joint venture was  liquidated
         during 1996.

      (2)On  November  2,  1995,   Portland  Pacific  Associates  sold  its  two
         operating  investment  properties.   Portland  Pacific  Associates  was
         liquidated during 1996.

2.  Summary of Significant Accounting Policies
    ------------------------------------------

      Use of estimates
      ----------------

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

      Deferred expenses
      -----------------

      Deferred expenses include  capitalized debt issuance costs which are being
amortized on a straight-line  basis,  which  approximates the effective interest
method, over the terms of the related loans. Amortization of deferred loan costs
is  included  in  interest  expense  on the  accompanying  statement  of income.
Deferred expenses also include organization costs which are being amortized over
5 years and lease  commissions and rental  concessions which are being amortized
over the life of the applicable leases.

      Income tax matters
      ------------------

      The  Combined  Joint  Ventures  are  comprised  of entities  which are not
taxable and,  accordingly,  the results of their  operations are included on the
tax returns of the various  partners.  Accordingly,  no income tax  provision is
reflected in the accompanying combined financial statements.

      Cash and cash equivalents
      -------------------------

      For purposes of reporting cash flows, the Combined Joint Ventures consider
all highly liquid  investments,  money market funds and  certificates of deposit
purchased  with  original  maturities  of  three  months  or  less  to  be  cash
equivalents.

      Rental revenues
      ---------------

      Certain joint ventures have long-term  operating leases with tenants which
provide for fixed minimum rents and  reimbursements  of certain operating costs.
Rental  revenues are  recognized on a  straight-line  basis over the term of the
related lease agreements.

      Fair value of financial instruments
      -----------------------------------

      The  carrying  amounts of cash and cash  equivalents  and  escrowed  funds
approximate  their  respective  fair values at December 31, 1997 and 1996 due to
the short-term maturities of such instruments. Where practicable, the fair value
of long-term debt is estimated using discounted cash flow analysis, based on the
current market rates for similar types of borrowing arrangements.

      Operating investment properties
      -------------------------------

      Operating  investment  properties  are stated at cost,  net of accumulated
depreciation,  or an amount  less  than cost if  indicators  of  impairment  are
present in accordance with Statement of Financial  Accounting  Standards  (SFAS)
No. 121,  "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be  Disposed  Of," which was  adopted in 1995.  SFAS No. 121  requires
impairment  losses to be recorded on long-lived  assets used in operations  when
indicators of impairment are present and the  undiscounted  cash flows estimated
to be generated by those assets are less than the assets carrying amount.

     Through  December  31,  1994,   depreciation  expense  was  computed  on  a
straight-line basis over the estimated useful lives of the operating  investment
properties,  generally 5 years for the equipment and fixtures and 31.5 years for
the  buildings  and  improvements.  During 1995,  circumstances  indicated  that
Chicago 625 Partnership's  operating investment property might be impaired.  The
joint  venture's   estimate  of  undiscounted  cash  flows  indicated  that  the
property's carrying amount was expected to be recovered,  but that the reversion
value could be less that the carrying  amount at the time of  disposition.  As a
result of such assessment,  the venture commenced recording an additional annual
depreciation  charge of  $350,000  in 1995 to adjust the  carrying  value of the
operating  investment  property  such that it will match the expected  reversion
value at the time of  disposition.  Such an annual  charge  will  continue to be
recorded in future  periods.  The Combined Joint Ventures  capitalized  property
taxes and interest incurred during the construction period of the projects along
with the costs of  identifiable  improvements.  The Combined Joint Ventures also
capitalized  certain  acquisition,   construction  and  guaranty  fees  paid  to
affiliates.  In  certain  circumstances  the  carrying  values of the  operating
properties  have been  adjusted for  mandatory  payments  received  from venture
partners.

3.  Joint Ventures
    -------------

      See Note 5 to the  financial  statements  of EP2  included  in this Annual
Report for a more detailed  description of the joint  ventures.  Descriptions of
the ventures' properties are summarized below:

      a.  Chicago-625 Partnership
          -----------------------

     The joint venture owns and operates 625 North  Michigan  Avenue,  a 325,000
square foot office building located in Chicago, Illinois.

      b.  Richmond Gables Associates
          --------------------------

      The joint venture owns and operates The Gables of Erin Shades,  a 224-unit
apartment complex located in Richmond, Virginia.

      c.  Daniel/Metcalf Associates Partnership
          -------------------------------------

      The joint  venture  owns and operates the Gateway  Plaza  Shopping  Center
(formerly  Loehmann's  Plaza),  a 142,000 square foot shopping center located in
Overland Park, Kansas.

      d.  TCR Walnut Creek Limited Partnership
          ------------------------------------

      The joint  venture  formerly  owned and operated  Treat  Commons  Phase II
Apartments, a 160-unit apartment complex located in Walnut Creek, California. On
December 29, 1995, TCR Walnut Creek Limited  Partnership  sold the Treat Commons
Phase II  Apartments  to a third  party for  approximately  $12.1  million.  EP2
received net proceeds of  approximately  $4.1 million  after  deducting  closing
costs and the  repayment of the existing  mortgage  note of  approximately  $7.3
million.  EP2 was  entitled to 100% of the net sale  proceeds and cash flow from
operations of the venture in accordance  with the joint venture  agreement.  The
joint  venture  recognized a gain of $3,594,000  on the sale,  representing  the
amount  by which  the sale  proceeds  exceeded  the net  carrying  amount of the
operating investment property at the date of the sale.

      e.  Portland Pacific Associates
          ---------------------------

      The joint venture  formerly  owned and operated two  apartment  complexes,
Richmond Park Apartments and Richland Terrace Apartments,  which contain a total
of 183 units located in Washington County, Oregon. On November 2, 1995, Portland
Pacific  Associates sold the Richmond Park and Richland Terrace  Apartments to a
third party for $11  million.  EP2 received  net  proceeds of  approximately  $8
million after deducting closing costs, the  co-venturer's  share of the proceeds
and repayment of a $2 million  borrowing of EP2's which encumbered the property.
The joint venture recognized a gain of $4,774,000 on the sale,  representing the
amount  by which  the sale  proceeds  exceeded  the net  carrying  amount of the
operating investment properties at the date of the sale.

      The following description of the joint venture agreements provides certain
general information.

      Allocations of net income and loss
      ----------------------------------

      Except for certain items which are specifically allocated to the partners,
as  defined  in the  joint  venture  agreements,  the joint  venture  agreements
generally  provide that profits up to the amount of net cash flow  distributable
shall be allocated  between EP2 and the co-venturers in proportion to the amount
of net cash flow distributed to each partner for such year. Profits in excess of
net cash flow  shall be  allocated  between  59% -99% to EP2 and 1% - 41% to the
co-venturers.  Losses are allocated in varying proportions 59% - 100% to EP2 and
0% - 41% to the co-venturers as specified in the joint venture agreements.

      Gains or losses resulting from sales or other dispositions of the projects
shall be allocated as specified in the joint venture agreements.

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

      The joint venture  agreements provide that distributions will generally be
paid from net cash flow monthly or  quarterly,  equivalent to 9% - 10% per annum
return on EP2's net investment in the joint ventures. Any remaining cash flow is
generally to be distributed  first,  to repay accrued  interest and principal on
certain loans and second,  to EP2 and the co-venturers  until they have received
their  accrued  preference  returns.  The  balance of any net cash flow is to be
distributed  in  amounts  ranging  from  59% - 75% to EP2  and  25% - 41% to the
co-venturers as specified in the joint venture agreements.

      Distributions of net proceeds upon the sale or disposition of the projects
shall  be made  in  accordance  with  formulas  provided  in the  joint  venture
agreements.

      Guaranty Period
      ---------------

      The joint venture agreements provided that during the Guaranty Periods (as
defined in the joint  venture  agreements),  in the event that net cash flow was
insufficient to fund operations including amounts necessary to pay EP2 preferred
distributions,  the  co-venturers  were to be required to fund amounts  equal to
such deficiencies. The co-venturers' obligation to fund such amounts pursuant to
their guarantees was generally to be in the form of capital contributions to the
joint  ventures.  For a  specified  period of time  subsequent  to the  Guaranty
Period,  one of the joint venture  agreements  required that mandatory  loans be
made to the joint  venture  by the  co-venturer  to the  extent  that  operating
revenues were insufficient to pay operating expenses.

      The  Guaranty  and  Mandatory  Loan  Periods  of the joint  ventures  were
generally  from the date EP2 entered a joint  venture for a period  ranging from
one to five years.

      The  expiration  dates of the Guaranty and Mandatory  Loan Periods for the
joint ventures were as follows:

                                   Guaranty Period        Mandatory Loan Period
                                   ---------------        ---------------------

      Chicago-625 Partnership       December 15, 1989             N/A
      Richmond Gables Associates    September 1, 1990             N/A
      Daniel/Metcalf Associates
        Partnership                 September 30, 1989      September 30, 1990
      TCR Walnut Creek
        Limited Partnership         August 31, 1990               N/A
      Portland Pacific Associates   February 1, 1991              N/A

      As of December 31, 1997, the co-venturer in the Daniel/Metcalf  Associates
Partnership is obligated to make additional  capital  contributions  of at least
$89,000 (subject to adjustment pending the venture partners' determination of an
additional  amount,  if any,  of working  capital  reserves  to be funded by the
co-venturer) with respect to cumulative  unfunded  shortfalls in EP2's preferred
return through September 30, 1990. Such additional capital contributions are not
recorded as a receivable in the accompanying financial statements.

4.  Related Party Transactions
    --------------------------

      The Combined Joint Ventures  originally  entered into property  management
agreements with affiliates of the co-venturers, cancellable at EP2's option upon
the occurrence of certain  events.  The management  fees are equal to 3.5%-5% of
gross receipts, as defined in the agreements. Affiliates of certain co-venturers
also receive leasing commissions with respect to new leases acquired.

      The related  property  manager for the 625 North Michigan  property leases
space in the property  under a lease  agreement  extending  through  October 31,
2001. The 1997, 1996 and 1995 revenues include $178,000,  $175,000 and $236,000,
respectively, relating to this lease.

5.  Capital Reserves
    ----------------

      The joint venture  agreements  generally  provide that reserves for future
capital  expenditures  be  established  and  administered  by  affiliates of the
co-venturers.  The  co-venturers  are to pay  periodically  into the reserve (as
defined) as funds are available  after paying all expenses and the EP2 preferred
distribution. No contributions were made to the reserves in 1997, 1996 or 1995.

6.  Rental Revenues
    ---------------

      Certain joint  ventures have  operating  leases with tenants which provide
for fixed minimum rents and  reimbursements of certain  operating costs.  Rental
revenues are  recognized on a  straight-line  basis over the life of the related
lease agreements.

      Minimum rental revenues to be recognized on the straight-line basis in the
future on noncancellable leases are as follows (in thousands):

                  1998           $   6,873
                  1999               6,617
                  2000               6,034
                  2001               3,867
                  2002               2,699
                  Thereafter         5,876
                                 ---------
                                 $  31,966
                                 =========

      Leases  with  four  tenants  of the 625  North  Michigan  Office  Building
accounted for approximately  $2,234,000, or 44%, of the rental revenue generated
by that property for 1997.

7.  Long-Term Debt
    --------------

      Long term debt  payable at  December  31,  1997 and 1996  consists  of the
following (in thousands):

                                                       1997         1996
                                                       ----         ---- 

     9.04%  mortgage  note payable to an
     insurance  company  secured  by the
     Gateway Plaza operating  investment
     property. The loan requires monthly
     principal and interest  payments of
     $34  through  maturity  on February
     15, 2003 (see discussion  below).                 $ 3,862     $ 3,915

     8.72%  mortgage  note payable to an
     insurance  company  secured  by the
     The  Gables  operating   investment
     property. The loan requires monthly
     principal and interest  payments of
     $43 through maturity on October 15,
     2001 (see discussion below).                        4,995       5,067  
                                                       -------     -------
                                                         8,857       8,982  

     Less:  current  portion                              (137)       (125)
                                                       -------     -------
                                                       $ 8,720     $ 8,857
                                                       =======     =======

      On  November 7, 1994,  a mortgage  note  payable was  obtained by Richmond
Gables  Associates in the initial  principal amount of $5,200,000.  The mortgage
payable  is  secured by a deed of trust on the  venture's  operating  investment
property and a collateral  assignment of the  venture's  interest in the leases.
The net proceeds from this  mortgage note payable were remitted  directly to EP2
per the  agreement  of the  partners.  EP2  used  the  proceeds  of the  loan in
conjunction with the repayment of the encumbrances described in Note 8. The fair
value of this mortgage note  approximated  its carrying value as of December 31,
1997 and 1996.

      On January  27,  1995 the Gateway  Plaza  joint  venture  obtained a first
mortgage  loan,  secured by the operating  investment  property,  in the initial
principal amount of $4,000,000.  The proceeds of the loan were used to repay, in
full, a $700,000 mortgage loan outstanding at December 31, 1994 and to establish
a renovation  and occupancy  escrow in the amount of $550,000.  The remainder of
the  proceeds,  along with  additional  funds  contributed  by EP2, were used to
repay,  in full, the borrowing  described in Note 8. The new first mortgage loan
bears  interest at an annual rate of 9.04% and matures on February 15, 2003. The
loan requires monthly principal and interest payments of $34,000. On October 10,
1997, the  renovation and occupancy  escrow of $550,000 plus interest of $60,000
was released by the lender to EP2. At December 31, 1997 and 1996, the fair value
of the  mortgage  note  payable  approximated  its  carrying  value  based on an
estimate of the current  market  interest  rate which would have been charged if
the borrowing had been originated as of such dates.

      The closing of the Gateway Plaza financing transaction described above was
executed in conjunction  with an amendment to the Joint Venture  Agreement.  The
purpose of the amendment was to establish the portion of the new first  mortgage
loan which was used to repay the borrowing of EP2 described in Note 8 ("the PWEP
Component") as the sole  responsibility  of EP2.  Accordingly,  any debt service
payments  attributable  to the PWEP Component will be deducted from PWEP's share
of  operating  cash  flow   distributions  or  sale  or  refinancing   proceeds.
Furthermore, all expenses associated with such portion of the new borrowing will
be  specifically  allocated  to PWEP.  PWEP has  agreed to  indemnify  the joint
venture and the co-venturer against all losses,  damages,  liabilities,  claims,
costs,  fees and expenses  incurred in connection with the PWEP Component of the
first  mortgage  loan. The portion of the new first mortgage loan which was used
to repay the venture's  $700,000  mortgage loan and to establish the  Renovation
and Occupancy Escrow will be treated as a joint venture borrowing subject to the
terms and conditions of the original Joint Venture Agreement.

      The scheduled  annual  principal  payments to retire long-term debt are as
follows (in thousands):

                  1998             $     137
                  1999                   150
                  2000                   163
                  2001                 4,810
`                 2002                    82
                  Thereafter           3,515
                                   ---------
                                   $   8,857
                                   =========

8.  Encumbrances on Operating Investment Properties
    -----------------------------------------------

      Under the terms of the joint  venture  agreements,  EP2 is entitled to use
the joint  venture  operating  properties  as security  for certain  borrowings,
subject  to  various  restrictions.  EP2  (together  in  one  instance  with  an
affiliated  partnership)  had exercised its options pursuant to this arrangement
by  issuing  certain  zero  coupon  notes  between  April and June of 1988.  The
operating  investment  properties of all of the Combined Joint Ventures had been
pledged as  security  for these loans  which were  scheduled  to mature in 1995.
During  calendar  1994,  the portion of the zero loans secured by Treat Commons,
The Gables,  Richmond Park and Richland  Terrace  properties were repaid in full
from the  proceeds  of new  mortgage  loans  obtained  by  certain  of the joint
ventures  as  described  in Note 7. On  February  10,  1995 the zero coupon note
secured by Gateway Plaza, due to mature in June of 1995, was repaid in full with
the proceeds of a loan obtained by this joint venture (see Note 7).

      The zero coupon loan secured by the 625 North Michigan Office Building had
required that if the loan ratio,  as defined,  exceeded 80%, then EP2,  together
with its affiliated  partnership,  was required to deposit additional collateral
in an amount sufficient to reduce the loan ratio to 80%. During 1993, the lender
informed EP2 and its affiliated  partnership  that based on an interim  property
appraisal,  the loan ratio exceeded 80% and demanded that additional  collateral
be deposited.  Subsequently,  EP2 and its  affiliated  partnership  submitted an
appraisal which  demonstrated that the loan ratio exceeded 80% by an amount less
than previously  demanded by the lender and deposited  additional  collateral in
accordance with the higher  appraised  value. The lender accepted the deposit of
additional  collateral,  but disputed whether EP2 and its affiliated partnership
had complied with the terms of the loan agreement  regarding the 80% loan ratio.
On May 31, 1994,  an agreement was reached with the lender to refinance the loan
and resolve the outstanding  disputes.  The terms of the agreement  extended the
maturity date of the loan to May 1999.  The new  principal  balance of the loan,
after a  principal  paydown  of  $1,342,000,  which  was  funded  by EP2 and its
affiliated  partnership  in  the  ratios  of  59%  and  41%,  respectively,  was
$16,225,000.  The new loan  bears  interest  at a rate of  9.125%  per annum and
requires the current  payment of interest and principal on a monthly basis based
on a  25-year  amortization  period.  Under the  terms of the  modification  and
extension  agreement,  this  loan  remains a direct  obligations  of EP2 and its
affiliate  and,  therefore,  is  not  reflected  in the  accompanying  financial
statements.  EP2 is required to make all loan payments and has  indemnified  the
joint  venture  and the other  partners  against  all  liabilities,  claims  and
expenses  associated  with this  borrowing.  At December 31, 1997, the aggregate
indebtedness of EP2 and its affiliated  partnership  which is secured by the 625
North Michigan Office Building was approximately  $15,644,000.  The terms of the
loan  agreement  also required the  establishment  of an escrow account for real
estate taxes, as well as a capital improvement escrow which is to be funded with
monthly deposits from EP2 and its affiliated partnership  aggregating $1,750,000
through  the  scheduled  maturity  date of the loan.  Such escrow  accounts  are
recorded on the books of the joint  venture  and are  included in the balance of
escrowed cash on the accompanying balance sheets.

9.  Property Renovation
    -------------------

      During 1997 and 1996,  the Gateway  Plaza joint venture  incurred  certain
architectural, engineering and other costs relating to a major renovation of its
operating  property.  These costs have been  capitalized and are included in the
construction in progress  account in the  accompanying  balance sheet. The total
cost of the renovation has amounted to  approximately  $3,200,000 as of December
31, 1997. EP2 is expected to make additional capital  contributions,  as needed,
sufficient to cover the cost of this renovation.




<PAGE>
<TABLE>



Schedule III - Real Estate and Accumulated Depreciation

                                               COMBINED JOINT VENTURES OF
                                  PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
                                  SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
                                                   December 31, 1997
                                                     (In thousands)
<CAPTION>

                                              Cost
                          Initial Cost to    Capitalized                                                               Life on Which
                             Combined        (Removed)                                                                 Depreciation
                            Joint           Subsequent to  Gross Amount at Which Carried at                            in Latest
                           Ventures         Acquisition            End of Year                                         Income
                               Buildings &  Buildings &        Buildings &          Accumulated  Date of      Date     Statement
 Description Encumbrances Land Improvements Improvements  Land Improvements   Total Depreciation Construction Acquired is Computed
 ----------- ------------ ---- ------------ ------------  ---- ------------   ----- ------------ ------------ -------- -----------
<S>              <C>       <C>       <C>        <C>        <C>      <C>       <C>       <C>        <C>        <C>       <C>

 COMBINED JOINT VENTURES:
Office Building
 Chicago, IL     $ 15,644  $ 8,112    $35,682   $ 7,785    $ 8,112  $43,467   $51,579   $17,693    1968       12/16/86  5 -17 yrs

Shopping Center
 Overland Park,
  KS                3,862    6,265      8,874     4,526      6,215   13,450    19,665     3,577    1980       9/30/87   7 - 31.5yrs

Apartment Complex
 Richmond, VA       4,995      963      7,906       (81)       895    7,893     8,788     3,860    1987       9/1/87    10 -27.5 yrs
                 --------  -------    -------   -------    ------- --------   ------    ------- 

                 $ 24,326  $15,340    $52,462   $12,230    $15,222  $64,810   $80,032   $25,130
                 ========  =======    =======   =======    =======  =======   =======   =======
Notes
(A) The  aggregate  cost of real estate  owned at December  31, 1997 for Federal  income tax  purposes is  approximately $77,601.
(B) See Notes 7 and 8 to the Combined  Financial  Statements for a description of the terms of the debt  encumbering the
    properties.
(C) Reconciliation of real estate owned:
                                                  1997        1996        1995
                                                  ----        ----        ----

  Balance at beginning of period              $ 77,652   $  75,772   $  92,328
  Acquisitions and improvements                  2,380       2,206       2,044
  Decrease due to sales                              -           -     (18,600)
  Write-offs due to disposals                        -        (326)          -
                                              --------   ---------   ---------
  Balance at end of period                    $ 80,032   $  77,652   $  75,772
                                              ========   =========   =========

(D) Reconciliation of accumulated depreciation:

  Balance at beginning of period              $ 22,250   $  19,680   $  20,971
  Depreciation expense                           2,880       2,896       2,756
  Decrease due to sales                              -           -      (4,047)
  Write-offs due to disposals                        -        (326)          -
                                              --------   ---------   ---------
  Balance at end of period                    $ 25,130   $  22,250   $  19,680
</TABLE>
                                              ========   =========   =========