U. S. 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, 1997

                                      OR

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

                     For the transition period from_____ to _____ .

                       Commission File Number: 0-15705

             PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP

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

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

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

Securities registered pursuant to Section 12(b) of the Act:
                                                        Name of each exchange on
Title of each class                                         which registered
-------------------                                         ----------------
       None                                                         None

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

                       UNITS OF LIMITED PARTNERSHIP INTEREST
                               (Title of class)

Indicate by check mark 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
                                1997 FORM 10-K

                              TABLE OF CONTENTS

PART I                                                                    Page

Item    1      Business                                                   I-1

Item    2      Properties                                                 I-3

Item    3      Legal Proceedings                                          I-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-9

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

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-39


<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-7 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,  1997  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    
Location                        Size            of Interest    Type of Ownership (1)
--------                        ----            -----------    ---------------------
<S>                             <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, 1997, the Limited  Partners had received  cumulative cash
distributions totalling approximately  $83,564,000,  or $652 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  $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  for the payment made on February 15,
1996 for the  quarter  ended  December  31,  1995.  As of March  31,  1997,  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, 1997, 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 have generally
begun to recover 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
1997 although estimated market values in some markets appeared 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
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 the  lack  of  significant  new  construction  activity  in the
multi-family  apartment market over most of this period.  In the past 12 months,
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,  1997,  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  1997,  along with an
average for the year, are presented below for each property:

                                             Percent Occupied At
                                 ----------------------------------------------
                                                                        Fiscal
                                                                        1997
                                 6/30/96     9/30/96  12/31/96  3/31/97 Average
                                 -------     -------  --------  ---------------

625 North Michigan Avenue         89%         89%        86%     84%     87%

The Gables at Erin Shades         94%         95%        90%     91%     93%



<PAGE>
                                            Percent Occupied At
                                 ----------------------------------------------
                                                                        Fiscal
                                                                        1997
                                 6/30/96     9/30/96  12/31/96  3/31/97 Average
                                 -------     -------  --------  ---------------

(continued)
Loehmann's Plaza Shopping Center  74%         79%        84%     84%     80%

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

West Ashley Shoppes               71%         68%        70%     68%     69%

Asbury Commons Apartments         93%         93%        89%     87%     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  have  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  has not  occurred to date
pending the  resolution  of an appeal of the  settlement by two of the plaintiff
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  subsequent to March 31,
1997.

         Based on the settlement  agreements discussed above covering all of the
outstanding unitholder  litigation,  and notwithstanding the appeal of the class
action  settlement  referred  to  above,  management  does not  expect  that the
resolution  of these  matters will have a material  impact on the  Partnership's
financial statements, taken as a whole.

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

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

     None.


<PAGE>

                                    PART II

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

    At  March  31,  1997,  there  were  9,023  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.  The Managing  General  Partner
will not redeem or repurchase Units.

    The  Partnership  has a  Distribution  Reinvestment  Plan designed to enable
Unitholders  to have  their  distributions  from  the  Partnership  invested  in
additional  Units of the  Partnership.  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 1997.

Item 6. Selected Financial Data

               PaineWebber Equity Partners Two Limited Partnershi
         For the years ended March 31, 1997, 1996, 1995, 1994 and 1993
                    (in thousands, except for per Unit data)

                                          Years ended March 31,
                              ------------------------------------------------
                              1997 (1)   1996      1995 (2)   1994      1993
                              --------   ----      --------   ----      ----

Revenues                      $  5,369   $ 5,069   $ 4,729    $ 4,338  $  4,792

Operating loss                $ (3,667)  $(1,508)  $(2,229)   $(2,391) $ (1,549)

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

Partnership's share 
  of unconsolidated 
  ventures' income            $    383   $    185  $ 1,818    $ 2,207   $ 2,592

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

Net income (loss)             $ (3,266)  $  5,523  $  (304)   $  (78)   $ 1,150

Per 1,000 Limited 
 Partnership Units:
    Net income (loss)         $ (24.04)  $  40.68  $ (2.26)   $(0.57)   $  8.47

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

    Cash distributions 
      from sale 
      transactions                   -   $  61.00          -         -         -

Total assets                  $ 74,278   $ 78,722   $ 84,148  $103,391  $107,382

Long-term debt                $ 21,947   $ 22,315   $ 22,63   $ 36,828  $ 33,845

(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.
<PAGE>

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, 1997,
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. Other than
the guaranty  related to the Loehmann's  Plaza  mortgage loan discussed  further
below, 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 the 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. 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 reported in the  Partnership's  quarterly  report for the period  ended
December 31, 1996,  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. The Partnership
is currently  exploring  all of its options with regard to potential  claims for
recovery of damages caused by these  circumstances.  However,  the prospects for
any future  recoveries  from such claims are uncertain at the present time.  The
Partnership  believes that it has adequate cash reserves to fund the repair work
at  Asbury   Commons   regardless  of  whether  any   recoveries  are  realized.
Nonetheless,  because of the seriousness of the construction  problems at Asbury
Commons,  the  Partnership  has suspended the  distribution  increase  which was
planned  to begin in the fourth  quarter of fiscal  1997.  The  Partnership  had
planned to increase the distribution rate from 1% to 2.5% per annum on a Limited
Partner's  remaining  capital  account of $882 per original  $1,000  investment.
However,  in light of the  magnitude  of the  repair  work  required  at  Asbury
Commons, as well as other potential near-term capital needs of the Partnership's
commercial properties,  as discussed further below, management concluded that it
would be prudent  to  continue  distributions  at a  conservative  level for the
foreseeable future.

      The average  occupancy level at the Asbury Commons  Apartments was 87% for
the quarter ended March 31, 1997,  compared to 89% for the prior quarter and 96%
for the  same  period  one  year  ago.  With  nearly  2,000  recently  completed
apartments still in lease-up at the end of fiscal year 1997,  average  occupancy
levels in the Sandy Springs/Dunwoody local market area decreased to 92% from 98%
at the end of the prior  year and  effective  rental  rates  declined  by 6%. In
addition to the 2,000 units in lease-up,  two additional  communities comprising
536 additional units are under construction.  Therefore,  no growth in effective
rental  rates  is  projected  during  the  next  year.  Nonetheless,   Atlanta's
population is projected to continue to grow at twice the national  average,  and
the  Sandy  Springs/Dunwoody  local  market  is  considered  a highly  desirable
residential  area. It is anticipated that occupancy levels and rental rates will
improve at Asbury  Commons when the newly  constructed  units are  substantially
leased.  In March 1997, a national  property  management  firm was hired to take
over management at Asbury Commons effective April 1, 1997.

      Loehmann's Plaza remained 84% leased at March 31, 1997, unchanged from the
quarter ended December 31, 1996.  However,  physical occupancy  increased to 80%
from 74% the previous quarter, as a new 8,526 square foot tenant that had signed
a lease during the third quarter of fiscal 1997 took occupancy in February 1997.
Furthermore,  construction of a 6,102 square foot expansion,  representing 4% of
the Center's leasable area, of an existing 7,058 square foot tenant is underway.
When the  expansion  is  completed,  this  tenant  will occupy a total of 13,160
square feet.  In addition,  subsequent to year-end the  property's  leasing team
signed a 13,410 square foot lease with Gateway 2000, a manufacturer and retailer
of  personal  computers,  to  occupy  the  anchor  space  formerly  occupied  by
Loehmann's.  This  addition of Gateway  2000 will bring the Center to 93% leased
and is expected to result in increased customer traffic levels and improved shop
tenant  sales.  Once Gateway  2000 takes  occupancy of this anchor space and the
expansion  referred to above is completed,  the property should be in a position
to be marketed for a potential sale.

      A portion of the funds required to pay for the capital improvement work at
Loehmann's  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  may apply the  balance  of the  escrow  account  to the  payment of loan
principal.  As of March 31, 1997, such application of escrow funds by the lender
had not  occurred.  In  addition,  the  lender  required  that  the  Partnership
unconditionally guaranty up to $1,400,000 of the loan obligation.  This guaranty
will be released in the event that the joint venture  satisfies 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.

      A  significant  amount  of funds  may  also be  needed  to pay for  tenant
improvement  costs to re-lease the vacant 36,000 square foot anchor tenant space
at West Ashley Shoppes.  As previously  reported,  Children's  Palace closed its
retail  store at the center in May 1991 and  subsequently  filed for  bankruptcy
protection  from creditors.  West Ashley's other major anchor tenant,  Phar-Mor,
emerged from the  protection  of Chapter 11 of the U.S.  Bankruptcy  Code during
fiscal 1996. While Phar-Mor closed a number of its stores  nationwide as part of
its bankruptcy  reorganization,  the company remains  obligated under a lease at
West Ashley which runs  through  August  2002.  On  September 9, 1996,  Phar-Mor
announced  plans to merge with  ShopKo,  another  major  pharmacy  store  chain.
Subsequent  to year-end,  such merger plans were  terminated.  Because  Phar-Mor
leases 52,000 square feet at West Ashley Shoppes, the property's leasing team is
attempting to ascertain  Phar-Mor's  future plans for their store at the Center.
The property's  leasing team  continues to focus its efforts on finding  another
national credit tenant or tenants to fill the vacant  Children's Palace space at
West Ashley Shoppes.  The leasing team is also developing for the  Partnership's
review a new  marketing  plan for this  anchor  tenant  space  which has several
alternative  approaches  including  non-retail  uses.  In  light  of the lack of
leasing  progress  at West  Ashley  Shoppes  in recent  years,  the  Partnership
concluded  during fiscal 1997 that the carrying value of the West Ashley Shoppes
operating  investment  property was  impaired 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." Accordingly,  an
impairment  loss of $2,700,000  was recognized in the current year to write down
the net  carrying  value of the West  Ashley  Shoppes  property  to its  current
estimated fair market value, as determined by an independent appraisal.

      625 North Michigan  Avenue in Chicago,  Illinois,  was 84% leased at March
31, 1997,  compared to 89% at the end of the prior year. This decrease is mainly
the result of the loss of a 15,639  square foot tenant  which had occupied 5% of
the building's rentable area. This tenant vacated the property at the end of its
lease term to move to another  building which was better able to accommodate the
tenant's  need to expand and its desire to be on one floor.  In  addition,  this
tenant's  new space had been  recently  and  expensively  improved by a previous
tenant with a similar  use.  Although the  building's  current  occupancy  level
reflects the loss of a few larger  tenants with recent  lease  expirations,  the
local office market has been improving and its average occupancy level has risen
to 86%. As a result,  management is cautiously  optimistic  that ongoing leasing
efforts will lead to improved  occupancy at the property  over the near term. In
fiscal 1998,  eight tenants  occupying a total of 15,053 square feet have leases
that will expire.  The property's  leasing team expects four of these tenants to
renew their leases.  The  modernization of the building's  elevator  controls is
currently  underway,  with work on two of the eight elevator cars now completed.
This work is expected to continue for the  remainder of calendar year 1997 at an
estimated total cost of approximately $700,000.

      The four  buildings  comprising  the  Hacienda  Business  Park  investment
property in Pleasanton,  California, remained 100% leased to four tenants at the
end of the fiscal  year.  The local  market  experienced  continued  rental rate
growth  during fiscal 1997,  and the market  occupancy  level  increased to 98%,
largely due to the resurgence in the growth of the high technology industries in
California. Leasing activity within the local market area should benefit further
from the  opening  in early  May 1997 of a new BART  (Bay  Area  Rapid  Transit)
station which will serve this Pleasanton office market.  During fiscal 1997, one
of the property's tenants announced that it will relocate from Hacienda Business
Park into a new building  under  construction  in the local market.  This tenant
occupies  a  total  of  51,683  square  feet  in  two  buildings,  or 28% of the
property's  leasable area,  under several leases with expiration  dates in 1998,
1999 and 2001.  One of the  buildings  contains  41,656 square feet and is fully
leased by this tenant. The tenant's remaining 10,027 square feet is leased in an
adjoining  building.  As previously  reported,  the tenant will  consolidate its
operations into a competing  building which is expected to be completed in early
1998.  This  tenant  will  remain   responsible  for  rental  payments  and  its
contractual share of operating  expenses until the leases expire. The property's
leasing team is diligently working to secure replacement  tenants for the 51,683
square feet. In addition,  a 59,445 square foot tenant,  representing 32% of the
property's  leasable  area,  has one final right to terminate its lease in March
1998 by providing notice by July 19, 1997.  Because the existing rental rates on
the leases of these two tenants are significantly below current market rates, it
may be in the best  interest of the  Partnership  if either one or both  tenants
move from Hacienda  Business Park prior to the expiration of their leases.  This
would provide the Partnership with the opportunity to re-lease any vacated space
at the higher prevailing market rental rates. In any event, provided there is no
dramatic  increase in either planned  speculative  development or  build-to-suit
development  with current  tenants in the local market,  the  Partnership can be
expected  to  achieve a  materially  higher  sale  price for the  Hacienda  Park
property as the existing below-market leases approach their expiration dates.

      The  average  occupancy  level at The  Gables  Apartments  was 91% for the
quarter  ended  March  31,  1997,  compared  to 90% for the prior  quarter.  The
occupancy  level for the month of March 1997 had  increased to 96%, from a level
of 90% in February and 88% in January.  The upward trend reflects a strong local
economy,  the seasonal increase in the number of prospective  tenants looking to
rent apartments,  and the moderate level of newly  constructed  apartments being
offered for rent in the local market. As a result of improving average occupancy
levels  throughout  the local  apartment  market,  the  significant  concessions
offered during the holiday season are no longer  necessary to attract tenants to
The Gables.  As job growth is projected  to continue  during the next few years,
the  economic  outlook  for  Richmond  remains  strong.  The area's  largest new
employer would be a planned  7,500-employee  Motorola  semiconductor chip plant.
While the  plant is not  projected  to be  completed  until  1999,  an  adjacent
Motorola  office building is under  construction  and should be completed by the
fall  of  1998.  Two  other   significant   employers  include  the  White  Oaks
semiconductor  plant,  which is under construction and projected to employ 1,500
people, and the nearly completed Capital One credit facility,  which will employ
1,000 people. The primary property improvements  scheduled at The Gables for the
remainder of calendar 1997 include exterior wood-trim replacement in preparation
for a complete painting of the building exteriors.

      At March 31, 1997, the Partnership and its consolidated joint ventures had
available cash and cash equivalents of approximately  $5,322,000.  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.

Results of Operations
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 is
primarily   due  to  the  gains   recognized   on  the  sales  of  the  Richland
Terrace/Richmond  Park and Treat Commons II properties during the prior year and
the loss on the impairment of the West Ashley Shoppes property recognized in the
current year, 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, in the current year
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 the  current  year 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 the  current  year.  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 the prior year. 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 the prior year 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 in the
current year.

      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 the prior  year,  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 the  prior  year
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 the improving market  conditions
referred to above. 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 in the current year as a result
of the property  expansion and renovation  project  discussed further above. 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 in the current year.

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 noes 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.

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

      The Partnership  reported a net loss of $304,000 for the fiscal year ended
March 31,  1995,  as  compared to a net loss of $78,000  for fiscal  1994.  This
increase in the  Partnership's  net loss was  attributable  to a decrease in the
Partnership's  share of unconsolidated  ventures' income of $389,000,  which was
partially offset by a decrease in the Partnership's  operating loss of $162,000.
The  Partnership's  operating  results in fiscal 1995  include the  consolidated
results of the West Ashley  Shoppes joint venture.  As discussed  further in the
footnotes to the  financial  statements  accompanying  this Annual  Report,  the
Partnership assumed control over the affairs of the joint venture which owns the
West Ashley Shoppes property during the first quarter of fiscal 1995 as a result
of the withdrawal of the co-venture  partner and the assignment of its remaining
interest to the  Partnership  and Second  Equity  Partners,  Inc.,  the Managing
General  Partner of the  Partnership.  In fiscal  1994,  the results of the West
Ashley joint venture are reflected on the equity method.

      The  Partnership's  share of  unconsolidated  ventures'  income  decreased
mainly due to the change in the basis of presentation  of the operating  results
of the West Ashley Shoppes joint venture in fiscal 1995. The Partnership's share
of unconsolidated ventures' income in fiscal 1994 includes $292,000 attributable
to the West Ashley joint  venture.  The  Partnership's  share of  unconsolidated
ventures'  income  excluding  West  Ashley  decreased  by $97,000 in fiscal 1995
mainly due to  increases in interest  expense from the Treat  Commons and Gables
joint  ventures which were  partially  offset by an increase in rental  revenues
from the Richmond  Park and Richland  Terrace  Apartments.  Interest  expense at
Treat Commons and Gables  increased due to the new loans obtained by these joint
ventures in fiscal 1995.  Rental revenues at the Portland  Pacific joint venture
(Richmond Park and Richland Terrace)  increased in calendar 1994 due to a higher
occupancy  rate and rising rental rates  associated  with a strong local market.
Average occupancy at the two Portland,  Oregon apartment  complexes averaged 97%
for calendar 1994, as compared to 95% for calendar 1993.

      The Partnership's operating loss for fiscal 1995 decreased mainly due to a
combination  of a  decrease  in  interest  expense  and  the  inclusion  of  the
operations of the West Ashley joint venture. These positive effects on operating
loss were  partially  offset by a  decrease  in the net income  reported  by the
consolidated  Hacienda and Asbury  Commons  joint  ventures  for calendar  1994.
Interest expense decreased by $735,000 in fiscal 1995 due to the refinancing and
payoff of the zero  coupon  loans  between May 1994 and  February  of 1995.  The
Partnership's  operating  loss in fiscal  1995  includes  net income of $217,000
attributable  the West Ashley  joint  venture,  which  reflects a decline in the
venture's net operating  results of $75,000 from the prior year.  The decline in
net income at West Ashley resulted mainly from a decrease in rental revenues due
to a decline in average occupancy from 69% for calendar 1993 to 67% for calendar
1994.  The net income of the  Hacienda  Park joint  venture  for  calendar  1994
declined  by  $560,000  in  comparison  with the prior year  primarily  due to a
decline in rental  revenues.  Rental  revenues at  Hacienda  Park  decreased  by
$781,000  mainly due to the full 12-month effect of the renewal of a major lease
at lower current market rents in calendar 1993. This decrease in rental revenues
was partially  offset by an increase in the venture's  other income for calendar
1994.  The  net  income  of  the  Asbury  Commons  joint  venture  decreased  by
approximately $214,000, largely due to an increase in interest expense resulting
from the new loan obtained by the joint venture in calendar 1995.
<PAGE>

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  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 surged in the past 12 months.  Existing  apartment
properties in such markets have generally  experienced increased vacancy levels,
declines in  effective  rental  rates and, in some cases,  declines in estimated
market values as a result of the increased  competition.  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  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.

    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 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 tenth full year of operations in fiscal 1997.
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,  Loehmann's  Plaza and 625 North Michigan  properties  presently have 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            37       8/22/96
Terrence E. Fancher     Director                          43       10/10/96
Walter V. Arnold        Senior Vice President and
                          Chief Financial Officer         49       10/29/85
David F. Brooks         First Vice President and 
                           Assistant Treasurer            54       4/17/85  *
Timothy J. Medlock      Vice President and Treasurer      36       6/1/88
Thomas W. Boland        Vice President                    34       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  of the Managing  General  Partner
and a Vice  President and Manager of Financial  Reporting 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,  1997,  all filing
requirements  applicable to the officers and  directors of the Managing  General
Partner and ten-percent beneficial holders were complied with.

Item 11.  Executive Compensation

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

      The 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 for the
quarter ended December 31, 1995, the annualized distribution rate was reduced to
1% on a Limited Partner's remaining capital account.  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.
<PAGE>

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, 1997. 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,
1997 is $224,000,  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 $13,000  included in general and  administrative  expenses  for  managing the
Partnership's  cash assets during fiscal 1997. Fees charged by Mitchell Hutchins
are based on a percentage of invested  cash  reserves  which varies based on the
total amount of invested cash which Mitchell  Hutchins  manages on behalf of 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
        1997.

   (c)  Exhibits

             See (a)(3) above.

   (d)  Financial Statement Schedules

             The  response to this portion of Item 14 is submitted as a separate
             section  of this  Report.  See Index to  Financial  Statements  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


Dated:  June 30, 1997

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 30, 1997
   -----------------------                      -------------
   Bruce J. Rubin
   Director




By:/s/ Terrence E. Fancher                Date: June 30, 1997
   -----------------------                      -------------
   Terrence E. Fancher
   Director



<PAGE>


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

             PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP

                              INDEX TO EXHIBITS

                                                   Page Number in the Report
Exhibit No.   Description of Document              Or Other Reference
-----------   -----------------------------        -------------------------

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


(10)          Material contracts previously        Filed with the Commission
              filed as exhibits to registration    pursuant to Section 13 or
              statements and amendments thereto    15(d) of the Securities
              of the registrant together with all  Act of 1934 and incorporated
              such contracts filed as exhibits of  herein by reference.
              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 1997 has been sent to 
                                                   the Limited Partners. An 
                                                   Annual Report will besent to
                                                   the Limited Partners 
                                                   subsequent to this filing.


(22)       List of subsidiaries                    Included in Item I of Part I
                                                   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.


<PAGE>

                          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

                                                                      Reference
                                                                      ---------
PaineWebber Equity Partners Two Limited Partnership:

   Report of independent auditors                                         F-2

   Consolidated balance sheets as of March 31, 1997 and 1996              F-3

   Consolidated  statements of operations  for the years ended
      March 31, 1997, 1996 and 1995                                       F-4

   Consolidated  statements of changes in partners'  capital 
      (deficit) for the years ended March 31, 1997, 1996 and 1995         F-5

   Consolidated  statements  of cash flows for the years ended
       March 31, 1997, 1996 and 1995                                      F-6

   Notes to consolidated  financial statements                            F-7

   Schedule III - Real Estate and Accumulated Depreciation                F-26

Combined Joint Ventures of PaineWebber Equity Partners Two Limited Partnership:

   Report of independent auditors                                         F-27

   Combined balance sheets as of December 31, 1996 and 1995               F-28

   Combined  statements  of income and changes in  venturers'
       capital for the years ended December 31, 1996, 1995 and 1994       F-29

   Combined  statements  of cash flows for the years ended
       December 31, 1996, 1995 and 1994                                   F-30

   Notes to combined financial statements                                 F-31

   Schedule III - Real Estate and Accumulated Depreciation                F-39



   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, 1997 and 1996, 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, 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 financial  consolidated  statements  referred to above
present fairly, in all material respects, the consolidated financial position of
PaineWebber Equity Partners Two Limited  Partnership at March 31, 1997 and 1996,
and the  consolidated  results of its  operations and its cash flows for each of
the three years in the period ended March 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
June 20, 1997


<PAGE>


                       PAINEWEBBER EQUITY PARTNERS TWO
                             LIMITED PARTNERSHIP

                         CONSOLIDATED BALANCE SHEETS
                           March 31, 1997 and 1996
                   (In thousands, except for per Unit data)

                                    ASSETS
                                                       1997            1996
                                                       ----            ----
Operating investment properties:
   Land                                           $    7,351       $    8,808
   Building and improvements                          40,018           41,396
                                                  ----------       ----------
                                                      47,369           50,204
   Less accumulated depreciation                     (12,155)         (10,781)
                                                  ----------       ----------
                                                      35,214           39,423

Investments in unconsolidated joint
  ventures, at equity                                 31,784           32,206
Cash and cash equivalents                              5,322            5,126
Escrowed cash                                            279              150
Accounts receivable                                      151              261
Accounts receivable - affiliates                           -               15
Net advances to consolidated ventures                      -               78
Prepaid expenses                                          50               29
Deferred rent receivable                                 832              731
Deferred expenses, net of accumulated
  amortization of $640 ($583 in 1996)                    646              703
                                                  ----------       ----------
                                                  $   74,278       $   78,722
                                                  ==========       ==========

                      LIABILITIES AND PARTNERS' CAPITAL


Accounts payable and accrued expenses            $       271       $      283
Net advances from consolidated ventures                  400                -
Tenant security deposits                                 116               96
Bonds payable                                          2,297            2,408
Mortgage notes payable                                19,650           19,907
Other liabilities                                        331              349
                                                 -----------       ----------
         Total liabilities                            23,065           23,043

Partners' capital:
  General Partners:
   Capital contributions                                   1                1
   Cumulative net income                                 161              193
   Cumulative cash distributions                        (701)            (688)

  Limited Partners ($1 per Unit; 
  134,425,741 Units issued):
   Capital contributions, net of offering costs      119,747          119,747
   Cumulative net income                              15,569           18,803
   Cumulative cash distributions                     (83,564)         (82,377)
                                                 -----------       ----------
         Total partners' capital                      51,213           55,679
                                                 -----------       ----------
                                                 $    74,278       $   78,722
                                                 ===========       ==========


                           See accompanying notes.


<PAGE>


                         PAINEWEBBER EQUITY PARTNERS TWO
                               LIMITED PARTNERSHIP

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                For the years ended March 31, 1997, 1996 and 1995
                    (In thousands, except for per Unit data)



                                               1997         1996        1995
                                               ----         ----        ----
Revenues:
   Rental income and expense 
     reimbursements                          $  5,011     $ 4,706    $  4,211
   Interest and other income                      358         363         518
                                             --------     -------    --------
                                                5,369       5,069       4,729
Expenses:
   Loss on impairment of operating
     investment property                        2,700           -           -
   Interest expense                             1,990       2,083       2,838
   Depreciation expense                         1,953       1,886       1,493
   Property operating expenses                  1,279       1,320       1,302
   Real estate taxes                              479         422         473
   General and administrative                     528         729         700
   Amortization expense                           107         137         152
                                            ---------     -------    --------
                                                9,036       6,577       6,958
                                            ---------     -------    --------

Operating loss                                 (3,667)     (1,508)     (2,229)

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

Investment income:
   Interest income on note receivable from
     unconsolidated venture                         -          80         107
   Partnership's share of unconsolidated
     ventures' income                             383         185       1,818
   Partnership's share of gains on
     sale of unconsolidated operating
     investment properties                          -       6,766           -
                                            ---------    --------    --------
                                                  383       7,031       1,925
                                            ---------    --------    --------
Net income (loss)                           $  (3,266)   $  5,523    $   (304)
                                            =========    ========    ========

Net income (loss) per 1,000
  Limited Partnership Units                   $(24.04)     $40.68      $(2.26)
                                              =======      ======      ======

Cash distributions per 1,000
  Limited Partnership Units                   $  8.84      $77.52      $34.20
                                              =======      ======      ======


The above per Limited Partnership Unit 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, 1997, 1996 and 1995
                                 (In thousands)


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

Balance at March 31, 1994             $  (478)      $ 66,025      $ 65,547

Cash distributions                        (46)        (4,598)       (4,644)

Net loss                                   (3)          (301)         (304)
                                      -------      ---------      --------

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
                                      =======      =========      ========























                           See accompanying notes.


<PAGE>

<TABLE>
<CAPTION>

                         PAINEWEBBER EQUITY PARTNERS TWO
                               LIMITED PARTNERSHIP

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

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

<S>                                                         <C>           <C>         <C>  
Cash flows from operating activities:
  Net income (loss)                                         $   (3,266)   $  5,523   $    (304)
  Adjustments to reconcile net income (loss) to net
    cash (used in) provided by operating activities:
   Loss on impairment of operating investment property           2,700           -           -
   Partnership's share of unconsolidated ventures' income         (383)       (185)     (1,818)
   Partnership's share of gains on sale of
     operating investment properties                                 -      (6,766)          -
   Interest expense on zero coupon loans                             -           -       1,610
   Depreciation and amortization                                 2,060       2,023       1,645
   Amortization of deferred financing costs                         44          44         164
   Changes in assets and liabilities:
     Escrowed cash                                                (129)        (93)        205
     Accounts receivable                                           110        (132)         55
     Accounts receivable - affiliates                               15          63          53
     Prepaid expenses                                              (21)         (1)         (1)
     Deferred rent receivable                                     (101)       (255)       (119)
     Accounts payable and accrued expenses                         (12)       (151)         58
     Advances to/from consolidated ventures                        478        (107)       (455)
     Tenant security deposits                                       20          (7)         (3)
     Other liabilities                                             (18)          1          (4)
                                                            ----------    --------   ----------
         Total adjustments                                       4,763      (5,566)      1,390
                                                            ----------    --------   ----------
         Net cash provided by (used in)
           operating activities                                  1,497         (43)      1,086
                                                            ----------    --------   ----------
  
Cash flows from investing activities:
  Distributions from unconsolidated ventures                     2,744      15,566      18,749
  Additional investments in unconsolidated ventures             (1,939)       (934)       (383)
  Additions to operating investment properties                    (444)       (421)     (1,077)
  Payment of leasing commissions                                   (94)       (128)       (303)
                                                            ----------    --------   ---------
                                                      
         Net cash provided by investing activities                 267      14,083      16,986
                                                            ----------    --------   ---------
                                       
Cash flows from financing activities:
  Distributions to partners                                     (1,200)    (10,443)     (4,644)
  Payment of principal and deferred interest on
    notes payable                                                 (257)       (230)    (25,937)
  Proceeds from issuance of notes payable                            -           -      10,500
  Refund (payment) of deferred financing costs                       -          22        (328)
  District bond assessments                                          -           -          85
  Payments on district bond assessments                           (111)        (90)       (451)
                                                            ----------    --------   ---------

         Net cash used in financing activities                  (1,568)    (10,741)    (20,775)
                                                            ----------    --------   ---------

Net increase (decrease) in cash and cash equivalents               196       3,299      (2,703)

Cash and cash equivalents, beginning of year                     5,126       1,827       4,530
                                                            ----------    --------   ---------
Cash and cash equivalents, end of year                      $    5,322    $  5,126   $   1,827
                                                            ==========    ========   =========

Supplemental disclosures:
   Cash paid during the year for interest                   $   1,974    $   1,974   $     956
                                                            =========    =========   =========
   Write-off of fully depreciated tenant improvements       $       -    $       -   $   3,026
                                                            =========    =========   =========
                           See accompanying notes.
</TABLE>
<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, 1997,  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, 1997 and 1996 and revenues
    and expenses for each of the three years in the period ended March 31, 1997.
    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.  SFAS No. 121 also addresses the
    accounting for long-lived assets that are expected to be disposed of. 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  ($1,457,254),
    building and improvements  ($1,821,521) and related accumulated depreciation
    ($578,775).

       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 estimated useful lives of five
    to thirty-one and a half years. 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 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, 1997 and 1996 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 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, 1997 and 1996 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.

       Certain  prior  year  amounts  have been  reclassified  to conform to the
     fiscal 1997 presentation.
<PAGE>

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, 1997, 1996 and 1995, 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, 1997,  1996 and 1995 is $224,000,  $260,000 and $268,000,  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  $13,000,  $4,000  and  $13,000  (included  in  general  and
    administrative  expenses) for managing the Partnership's  cash assets during
    fiscal 1997, 1996 and 1995, respectively.

       Accounts  receivable - affiliates at March 31, 1996 includes  $15,000 due
    from  certain  unconsolidated  joint  ventures  for  expenses  paid  by  the
    Partnership on behalf of the joint ventures.

4.  Operating Investment Properties

       The Partnership's balance sheets at March 31, 1997 and 1996 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.
<PAGE>

    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 1998.  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.  The
    Partnership  is  currently  exploring  all of its  options  with  regard  to
    potential  claims for  recovery  of damages  caused by these  circumstances.
    However,  the  prospects  for any  future  recoveries  from such  claims are
    uncertain at the present time. The Partnership believes that it has adequate
    cash reserves to fund the anticipated  repair work regardless of whether any
    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.
<PAGE>

       The following is a combined  summary of property  operating  expenses for
    the consolidated  joint ventures for the years ended December 31, 1996, 1995
    and 1994 (in thousands):

                                                1996        1995         1994
                                                ----        ----         ----

      Property operating expenses:
        Utilities                          $      205    $    219    $    225
        Repairs and maintenance                   266         385         382
        Salaries and related costs                172         216         147
        Administrative and other                  421         300         367
        Insurance                                  54          51          47
        Management fees                           161         149         134
                                           ----------   ---------    --------
                                           $    1,279   $   1,320    $  1,302
                                           ==========   =========    ========

5.  Investments in Unconsolidated Joint Ventures

       The  Partnership has  investments in three  unconsolidated  joint venture
    partnerships  which own  operating  investment  properties at March 31, 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, 1996 and 1995
                                (in thousands)

                                    Assets
                                                           1996         1995
                                                           ----         ----

      Current assets                                   $  1,264     $   1,454
      Operating investment properties, net               55,402        56,092
      Other assets                                        4,992         5,049
                                                       --------     ---------
                                                       $ 61,658     $  62,595
                                                       ========     =========

                      Liabilities and Venturers' Capital

      Current liabilities                              $  2,515     $   2,505
      Other liabilities                                     315           303
      Long-term debt                                      8,857         8,982
      Partnership's share of venturers' capital          30,726        31,060
      Co-venturers' share of venturers' capital          19,245        19,745
                                                       --------     ---------
                                                       $ 61,658     $  62,595
                                                       =========    =========

                    Condensed Combined Summary of Operations
              For the years ended December 31, 1996, 1995 and 1994
                                 (in thousands)

                                              1996         1995         1994
                                              ----         ----         ----
     Revenues:
      Rental revenues and expense 
         reimbursements                   $   9,297     $  11,844    $ 12,204
      Interest and other income                 343           330         289
                                          ---------     ---------    --------
                                              9,640        12,174      12,493

     Expenses:
      Property operating and other expenses   3,009         4,177       4,170
      Real estate taxes                       2,212         2,248       2,565
      Interest on long-term debt                663         1,535         300
      Interest on note payable to venturer        -           100         100
      Depreciation and amortization           3,158         3,704       3,430
                                          ---------     ---------    --------
                                              9,042        11,764      10,565
                                          ---------     ---------    --------

     Operating income                     $     598     $     410    $  1,928
     Gains on sale of operating 
        investment properties                     -         8,368           -
                                          ---------     ---------    --------
     Net income                           $     598     $   8,778    $  1,928
                                          =========     =========    ========
<PAGE>

     Net income:
         Partnership's share of
            combined income               $     441     $  7,512     $  1,899
         Co-venturers' share of
            combined income                     157        1,266           29

                                          ---------     --------     --------
                                          $     598     $  8,778     $  1,928
                                          =========     ========     ========

                  Reconciliation of Partnership's Investment
                           March 31, 1997 and 1996
                                (in thousands)
                                                            1997        1996
                                                            ----        ----

      Partnership's share of capital at December 31,
         as shown above                                 $  30,726   $  31,060
      Excess basis due to investments in joint
         ventures, net (1)                                  1,094       1,152
      Timing differences (2)                                  (36)         (6)
                                                        ---------   ---------
           Investments in unconsolidated joint
             ventures, at equity at March 31            $  31,784   $  32,206
                                                        =========   =========

    (1)At March 31,  1997 and 1996,  the  Partnership's  investment  exceeds its
       share  of  the  joint   venture   partnerships'   capital   accounts   by
       approximately $1,094,000 and $1,152,000, 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 December 31, 1996, 1995 and 1994
                                 (in thousands)

                                             1996          1995         1994
                                             ----          ----         ----

      Partnership's share of operations,
         as shown above                   $    441     $  7,512      $  1,899
      Amortization of excess basis             (58)        (561)          (81)
                                          --------     --------      --------
      Partnership's share of unconsolidated
         ventures' net income             $    383     $  6,951      $  1,818
                                          ========     ========      ========

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

                                             1996          1995         1994
                                             ----          ----         ----

      Partnership's share of unconsolidated
         ventures' income                  $   383     $    185      $  1,818
      Partnership's share of gains on
        sale of unconsolidated operating
        investment properties                    -        6,766             -
                                           -------     --------      --------
                                           $   383     $  6,951      $  1,818
                                           =======     ========      ========

       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.
<PAGE>

       Investments  in  unconsolidated   joint  ventures,   at  equity,  on  the
   accompanying  balance  sheets is comprised  of the  following  equity  method
   carrying values (in thousands):
                                                          1997         1996
                                                          ----         ----

        Chicago-625 Partnership                      $   18,937     $  19,487
        Richmond Gables Associates                           34           353
        Daniel/Metcalf Associates Partnership            12,813        12,150
        TCR Walnut Creek Limited Partnership                  -           182
        Portland Pacific Associates                           -            34
                                                     ----------     ---------
         Investments in unconsolidated 
           joint ventures                            $   31,784     $  32,206
                                                     ==========     =========

        The  Partnership  received cash  distributions  from the  unconsolidated
    ventures  during the years ended March 31, 1997,  1996 and 1995 as set forth
    below (in thousands):

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

        Chicago-625 Partnership              $  1,689   $   1,158   $   1,114
        Richmond Gables Associates                198         158       5,573
        Daniel/Metcalf Associates Partnership     641         600       3,374
        TCR Walnut Creek Limited Partnership      182       3,216       7,803
        Portland Pacific Associates                34      10,434         885
                                             --------   ---------   ---------
                                             $  2,744   $  15,566   $  18,749
                                             ========   =========   =========

     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  $2,853,000
    through December 31, 1996.

      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 $8,131,000 at December 31, 1996.

      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, 1996,  there was a cumulative
    unpaid preferred distribution payable to the Partnership of $2,086,000. 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  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 may be released from the
    Renovation  and  Occupancy  Escrow to reimburse the  Loehmann's  Plaza joint
    venture for the costs of certain  planned  renovations in the event that the
    joint  venture  satisfies  certain   requirements  which  include  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 may apply the balance of the escrow  account to
    the payment of loan  principal.  As of March 31, 1997,  such  application of
    escrow  funds by the  lender  had not  occurred.  In  addition,  the  lender
    required that the Partnership  unconditionally  guaranty up to $1,400,000 of
    the loan  obligation.  This  guaranty will be released in the event that the
    joint venture  satisfies 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.

      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, 1996 amounted to $3,334,000.  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, 1996,  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 1.5% 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 includes
    the sum of  $1,000,000  that  was  contributed  in the  form of a  permanent
    nonrecourse loan to the venture on which the Partnership  receives  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.  The net  proceeds  of the loan were  recorded as a
    distribution  to the  Partnership  by the joint venture in fiscal 1995.  The
    Partnership used the proceeds of the loan in conjunction with the retirement
    of the zero coupon loans described in Note 6.

      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 reinvestment in the Loehmann's Plaza property.

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 the $2 million  borrowing  described in Note 6. 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,  1997  and  1996  consist  of the  following  (in
    thousands):

                                                      1997              1996
                                                      ----              ----

     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, 1997 and 1996.                      $ 9,418         $ 9,542


     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  $55
     through  maturity  on  October  15,
     2001.   The   fair   value  of  the
     mortgage  note   approximated   its
     carrying value at December 31, 1996
     and 1995.                                       6,806           6,897

     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 $36  through
     maturity on January 20,  2002.  The
     fair  value  of the  mortgage  note
     approximated  its carrying value at
     December  31, 1996 and 1995.                    3,426           3,468
                                                   -------        --------

                                                   $19,650        $ 19,907
                                                   =======        ========

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

             Year ended March 31,

               1998           $   282
               1999               308
               2000             9,305
               2001               189
               2002             6,416
               Thereafter       3,150
                              -------
                              $19,650

         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 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,
    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 Loehmann's 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 Loehmann's 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 Loehmann's  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.  The net  proceeds of these  loans were  recorded as
    distributions to the Partnership by the joint ventures in fiscal 1995.

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.
<PAGE>

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

          Year ended December 31,

                  1997            $    101
                  1998                 110
                  1999                 119
                  2000                 128
                  2001                 137
                  Thereafter         1,702
                                  --------
                                  $  2,297
                                  ========

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, 1996 are
    as follows (in thousands):

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

                  1997            $  2,995
                  1998               2,820
                  1999               1,978
                  2000               1,720
                  2001               1,252
                  Thereafter           877
                                  --------
                                  $ 11,642
                                  ========

9.  Legal Proceedings

    In November 1994, a series of purported class actions (the "New York Limited
    Partnership Actions") were filed in the United States District Court for the
    Southern District of New York concerning PaineWebber Incorporated's sale and
    sponsorship of various  limited  partnership  investments,  including  those
    offered by the  Partnership.  The lawsuits were brought against  PaineWebber
    Incorporated  and Paine Webber Group Inc.  (together  "PaineWebber"),  among
    others,  by allegedly  dissatisfied  partnership  investors.  In March 1995,
    after the  actions  were  consolidated  under  the  title In re  PaineWebber
    Limited  Partnership  Litigation,  the plaintiffs amended their complaint to
    assert claims against a variety of other defendants, including 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  have  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 has not occurred to date
    pending  the  resolution  of an  appeal  of  the  settlement  by  two of the
    plaintiff 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 subsequent to March 31, 1997.

         Based on the settlement  agreements discussed above covering all of the
    outstanding  unitholder  litigation,  and  notwithstanding the appeal of the
    class action settlement  referred to above,  management does not expect that
    the  resolution  of  these  matters  will  have  a  material  impact  on the
    Partnership's financial statements, taken as a whole.


<PAGE>

<TABLE>

Schedule III - Real Estate and Accumulated Depreciation
               PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
              SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
                                 March 31, 1997
                                 (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   $(2,660)    $ 2,342  $ 4,910  $ 7,252   $ 1,760    1988       3/10/88     5 - 31.5 yrs.

Business Center
 Pleasanton, CA    5,723   3,315    23,337      (242)      3,370   23,040   26,410     7,197    1985       12/24/87    5 - 25 yr.

Apartment Complex
 Atlanta, GA       6,806   1,702    11,950        55       1,639   12,068   13,707     3,198    1990       3/12/90     10 -27.5 yrs.
                 -------  ------   -------   -------     -------  -------  -------   -------    

                 $12,529  $9,260   $40,956   $(2,847)    $ 7,351  $40,018  $47,369   $12,155
                 =======  ======   =======   =======     =======  =======  =======   =======
Notes

(A) The  aggregate  cost of real estate  owned at December  31, 1996 for Federal income tax purposes is approximately  $54,161,000.
(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:
                                                            1996         1995       1994
                                                            ----         ----       ----

  Balance at beginning of period                        $  50,204    $ 49,783    $ 41,524
  Consolidation of West Ashley joint venture                    -           -      10,208
  Acquisitions and improvements                               444         421       1,077
  Write off due to permanent impairment (see Note 2)       (3,279)          -           -
  Write-offs due to disposals                                   -           -      (3,026)
                                                        ---------    --------    --------
  Balance at end of period                              $  47,369    $ 50,204    $ 49,783
                                                        =========    ========    ========

(D) Reconciliation of accumulated depreciation:

  Balance at beginning of period                        $  10,781   $   8,895    $  8,947
  Consolidation of West Ashley joint venture                    -           -       1,481
  Depreciation expense                                      1,953       1,886       1,493
  Write off due to permanent impairment (see Note 2)         (579)          -           -
  Write-offs due to disposals                                   -           -     (3,026)
                                                       ---------    ---------    -------
  Balance at end of period                             $  12,155    $  10,781    $ 8,895
                                                       =========    =========    =======

(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, 1996 and 1995, 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, 1996. 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, 1996 and 1995, and the combined  results of their operations and
their cash flows for each of the three years in the period  ended  December  31,
1996, 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
March 13, 1997



<PAGE>


                           COMBINED JOINT VENTURES OF
               PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP

                             COMBINED BALANCE SHEETS
                           December 31, 1996 and 1995
                                 (In thousands)

                                     Assets

                                                            1996         1995
                                                            ----         ----
Current assets:
   Cash and cash equivalents                              $   600     $   751
   Accounts receivable, net of allowance for
     doubtful accounts of $146 ($101 in 1995)                 637         694
   Prepaid expenses                                            27           9
                                                          -------     -------
      Total current assets                                  1,264       1,454

Operating investment properties:
   Land                                                    15,222      15,222
   Buildings, improvements and equipment                   59,902      59,065
   Construction in progress                                 2,528       1,485
                                                          -------     -------
                                                           77,652      75,772
   Less accumulated depreciation                          (22,250)    (19,680)
                                                         --------     -------
                                                           55,402      56,092

Escrowed funds                                              1,747       1,749
Due from affiliates                                           269         269
Deferred expenses, net of accumulated
 amortization of $1,141 ($1,100 in 1995)                    1,608       1,491
Other assets                                                1,368       1,540
                                                        ---------   ---------
                                                        $  61,658   $  62,595
                                                        =========   =========

                       Liabilities and Venturers' Capital

Current liabilities:
   Accounts payable and accrued expenses                $     372   $     270
   Accounts payable - affiliates                                -          21
   Accrued real estate taxes                                2,017       2,047
   Distributions payable to venturers                           1          52
   Current portion - long-term debt                           125         115
                                                        ---------   ---------
      Total current liabilities                             2,515       2,505

Tenant security deposits                                      265         253

Subordinated management fee payable to affiliate               50          50

Long-term debt                                              8,857       8,982

Venturers' capital                                         49,971      50,805
                                                        ---------   ---------
                                                        $  61,658   $  62,595
                                                        =========   =========



                             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, 1996, 1995 and 1994
                                 (In thousands)

                                                1996        1995        1994
                                                ----        ----        ----
Revenues:
   Rental income and expense reimbursements  $  9,297    $ 11,844    $ 12,204
   Interest and other income                      343         330         289
                                             --------    --------    --------
                                                9,640      12,174      12,493

Expenses:
   Real estate taxes                            2,212       2,248       2,565
   Depreciation expense                         2,896       2,756       3,092
   Property operating expenses                    602         908         760
   Repairs and maintenance                        879       1,093       1,037
   Management fees                                318         459         463
   Professional fees                               82          88         122
   Salaries                                       591         882         844
   Advertising                                     46          71          64
   Interest expense on long-term debt             663       1,535         309
   Interest on note payable to venturer             -         100         100
   General and administrative                     438         564         485
   Amortization expense                           262         948         329
   Bad debt expense                                45           1         317
   Other                                            8         111          78
                                             --------    --------   ---------
                                                9,042      11,764      10,565
                                             --------    --------   ---------

Operating income                                  598         410       1,928

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

Net income                                        598       8,778       1,928

Contributions from venturers                    2,303       1,494         385

Distributions to venturers                     (3,735)    (19,187)    (17,146)

Venturers' capital, beginning of year          50,805      59,720      74,553
                                             --------    --------   ---------

Venturers' capital, end of year              $ 49,971    $ 50,805   $  59,720
                                             ========    ========   =========




                             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, 1996, 1995 and 1994
                Increase (Decrease) in Cash and Cash Equivalents
                                 (In thousands)

<CAPTION>
                                                               1996        1995        1994
                                                               ----        ----        ----

<S>                                                          <C>             <C>        <C>

Cash flows from operating activities:
   Net income                                                 $   598     $  8,778    $  1,928
   Adjustments to reconcile net income to
     net cash provided by operating activities:
     Depreciation and amortization                              3,158        3,704       3,421
     Amortization of deferred financing costs                      41          169          11
     Gains on sale of operating investment properties               -       (8,368)          -
     Changes in assets and liabilities:
      Accounts receivable, net                                     57          228         125
      Prepaid expenses                                            (18)           5           1
      Other current assets                                          -            -          13
      Escrowed funds                                               20          129      (1,219)
      Deferred expenses                                          (230)        (269)       (230)
      Other assets                                                172           16         297
      Accounts payable and accrued expenses                       102         (144)        (12)
      Accounts payable - affiliates                              (21)            6         (67)
      Tenant security deposits                                     12           75          47
      Accrued real estate taxes                                   (30)        (262)       (183)
                                                              --------    --------    --------
          Total adjustments                                     3,263       (4,711)      2,204
                                                              --------    --------    --------
           Net cash provided by operating activities            3,861        4,067       4,132
                                                              -------     --------    --------

Cash flows from investing activities:
   Additions to operating investment properties                (2,206)      (2,044)     (1,171)
   Purchase of investment securities                                -            -        (534)
   Proceeds from sale of investment securities                      -            -       1,264
   Proceeds from sales of operating
     investment properties                                          -       15,542           -
   Selling costs from sale                                       (190)        (587)          -
   Increase in restricted cash                                    (18)        (550)          -
                                                              -------     --------    --------
           Net cash (used in) provided by
               investing activities                            (2,414)      12,361        (441)
                                                               ------     --------    --------

Cash flows from financing activities:
   Proceeds from issuance of long-term debt                         -        3,829      12,600
   Principal payments on long-term debt                          (115)        (891)        (19)
   Repayment of partner advances                                    -          (86)          -
   Repayment of note payable to partner                             -       (1,000)          -
   Distributions to venturers                                  (3,786)     (19,241)    (17,122)
   Capital contributions from venturers                         2,303        1,494         385
   Payment of deferred loan costs                                   -          (31)       (249)
                                                              -------     --------    --------
           Net cash used in financing activities               (1,598)     (15,926)     (4,405)
                                                              -------     --------    --------

Net (decrease) increase in cash and cash equivalent             (151)          502        (714)
Cash and cash equivalents, beginning of year                      751          249         963
                                                              -------     --------    --------
Cash and cash equivalents, end of year                        $   600     $    751    $    249
                                                              =======     ========    ========

Cash paid during the year for interest                        $   801     $  1,071    $    164
                                                              =======     ========    ========
                                                See accompanying notes.
</TABLE>


<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,  1996 and 1995 and
    revenues  and  expenses  for each of the  three  years in the  period  ended
    December 31, 1996.
    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 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.


<PAGE>


    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, 1996 and 1995 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.  SFAS No. 121 also  addresses the  accounting  for
    long-lived assets that are expected to be disposed of.

       Through  December  31,  1994,  depreciation  expense  was  computed  on a
    straight-line  basis  over  the  estimated  useful  life  of the  buildings,
    improvements  and  equipment,  generally  5  to  31.5  years.  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.


<PAGE>


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  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, 1996, 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.


<PAGE>


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.

       Accounts payable - affiliates was $0 and $21,000 at December 31, 1996 and
    1995  respectively.  Accounts  payable-  affiliates  at  December  31,  1995
    included $15,000 owed to EP2 for organization  costs paid in connection with
    the formation of Portland  Pacific  Associates and $6,000 payable to related
    parties of Portland Pacific  Associates in connection with services rendered
    to the venture.  These  obligations were settled in 1996 in conjunction with
    the liquidation of the joint venture.

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 1996,
    1995 or 1994.

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):

                  1997           $   5,745
                  1998               5,286
                  1999               4,821
                  2000               4,502
                  2001               2,533
                  Thereafter         5,067
                                 ---------
                                 $  27,954
                                 =========

       Leases  with four  tenants  of the 625  North  Michigan  Office  Building
    accounted  for  approximately  $3,008,000,  or 59%,  of the  rental  revenue
    generated by that property for 1996.

7.  Long-Term Debt

        Long term debt  payable at December  31,  1996 and 1995  consists of the
     following (in thousands):

                                                      1996          1995
                                                      ----          ----
     9.04%  mortgage  note payable to an
     insurance  company  secured  by the
     Loehmann's      Plaza     operating
     investment   property.   The   loan
     requires   monthly   principal  and
     interest  payments  of $35  through
     maturity on February  15, 2003 (see
     discussion below).                                $ 3,915       $ 3,963
<PAGE>

     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).  5,067
     5,134
                                                         8,982         9,097
    Less:  current portion                                (125)         (115)
                                                       -------       -------
                                                       $ 8,857       $ 8,982
                                                       =======       =======

       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, 1996 and 1995.

       On January 27, 1995 the Loehmann's  Plaza joint venture  obtained a first
    mortgage loan secured by the venture's 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 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 fair value of this
    mortgage note  approximated  its carrying  value as of December 31, 1996 and
    1995.  Funds may be released from the  Renovation  and  Occupancy  Escrow to
    reimburse  the  Loehmann's  Plaza  joint  venture  for the costs of  certain
    planned  renovations,  referred  to in Note 9, in the  event  that the joint
    venture satisfies certain requirements which include specified occupancy and
    rental income thresholds.  As of August 1996, 18 months from the date of the
    loan closing, such requirements had not been met. Therefore,  the lender may
    apply the balance of the escrow account to the payment of loan principal. As
    of December 31, 1996, such application of escrow funds by the lender had not
    occurred. In addition, the lender required that EP2 unconditionally guaranty
    up to $1,400,000 of the loan  obligation.  This guaranty will be released in
    the event that the joint venture  satisfies 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.

       The closing of the Loehmann's 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.


<PAGE>


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

                  1997              $    125
                  1998                   137
                  1999                   150
                  2000                   163
`                 2001                 4,810
                  Thereafter           3,597
                                    --------
                                    $  8,982
                                    ========

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 Loehmann's  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, 1996, the aggregate
    indebtedness of EP2 and its affiliated  partnership  which is secured by the
    625 North Michigan Office Building was approximately $15,868,000.  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.


<PAGE>


9.  Property Renovation

       During 1996 and 1995, the Loehmann's 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 is estimated to be between  $2,000,000 and
    $2,500,000.  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, 1996
                                                     (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  $ 15,868    $ 8,112    $35,682   $6,358     $ 8,112  $42,040   $50,152   $15,547      1968      12/16/86  5 -17 yrs.

Shopping 
 Center
Overland 
 Park, KS       3,915      6,265      8,874    3,763       6,215   12,687    18,902     3,222      1980      9/30/87   7 - 31.5 yrs

Apartment
 Complex
Richmond, VA    5,067        963      7,906     (271)       895     7,703     8,598     3,481      1987      9/1/87    10 - 27.5 yrs
             --------    -------    -------   ------    -------   -------   -------   -------    
             $ 24,850    $15,340    $52,462   $9,850    $15,222   $62,430   $77,652   $22,250
             ========    =======    =======   ======    =======   =======   =======   =======
Notes
(A) The  aggregate  cost of real estate  owned at December  31, 1996 for Federal income tax  purposes is approximately  $75,862,000.
(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:
                                           1996              1995        1994
                                           ----              ----        ----

  Balance at beginning of period        $ 75,772          $ 92,328   $  92,013
  Acquisitions and improvements            2,206             2,044       1,221
  Decrease due to sales                        -           (18,600)          -
  Write-offs due to disposals               (326)                -        (906)
                                        --------          --------   ---------
  Balance at end of period              $ 77,652          $ 75,772   $  92,328
                                        ========          ========   =========

(D) Reconciliation of accumulated depreciation:

  Balance at beginning of period        $ 19,680          $ 20,971   $  18,785
  Depreciation expense                     2,896             2,756       3,092
  Decrease due to sales                        -            (4,047)          -
  Write-offs due to disposals               (326)                -        (906)
                                        --------          --------   ---------
  Balance at end of period              $ 22,250          $ 19,680   $  20,971
                                        ========          ========   =========
</TABLE>