UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                    FORM 10-K

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

                      FOR FISCAL YEAR ENDED: MARCH 31, 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: 0-12085

                      PAINE WEBBER GROWTH PROPERTIES TWO LP

  Delaware                                                       04-2798594
  --------                                                       ----------
(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                                    Part IV
October 6, 1983, as supplemented

<PAGE>


                      PAINE WEBBER GROWTH PROPERTIES TWO LP
                                 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-3

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

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-7

Item     9        Changes in and Disagreements with Accountants
                     on Accounting and Financial Disclosure             II-7

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-3

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-36



<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-5 of
this Form 10-K.

                                     PART I

Item 1.  Business

         Paine Webber Growth Properties Two LP (the  "Partnership") is a limited
partnership formed in June 1983 under the Uniform Limited Partnership Act of the
State of  Delaware  for the  purpose  of  investing  in a  portfolio  of  rental
apartment and commercial  properties  which had potential for near-term  capital
appreciation.  It is the  Partnership's  intention  to enhance  the value of the
properties through the use of capital reserves and by reinvesting cash flow from
operations.  The  Partnership  sold  $33,410,000  in Limited  Partnership  Units
(33,410  Units at $1,000  per Unit)  from  October  6, 1983 to  October  5, 1984
pursuant to a Registration Statement on Form S-11 filed under the Securities Act
of 1933  (Registration  No.  2-84814).  Limited Partners will not be required to
make any additional  capital  contributions.  Net proceeds of the  Partnership's
offering were  originally  invested in four operating  properties  through joint
venture  partnerships.  Through March 31, 1997,  three of these  investments had
been sold, including two during fiscal 1996.

         As of March 31, 1997, the  Partnership  owned,  through a joint venture
partnership, an interest in the operating property set forth below:

<TABLE>
<CAPTION>

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

Oregon Portland Associates              525                    4/26/84          Fee ownership of land and
Portland Center, Apartment              apartment                               improvements (through
and Office Complex                      units and                               joint venture)
Portland, Oregon                        28,328
                                        sq. ft.
                                        office
                                        space

</TABLE>

         (1)  See Notes to the Financial  Statements of the Partnership filed in
              Item  14(a)(1)  of this  Annual  Report for a  description  of the
              long-term  mortgage  indebtedness  secured  by  the  Partnership's
              operating  property  investment  and  for  a  description  of  the
              agreement  through  which the  Partnership  has acquired this real
              estate investment.

         The Partnership's principal investment objectives are to invest the net
cash proceeds from the offering of limited partnership units in rental apartment
properties with the goals of obtaining:

(1) capital  appreciation;  
(2) tax losses  during the early years of operations from deductions generated 
    by investments;  
(3) equity build-up through principal repayments  of  mortgage   loans  on  
    Partnership properties; and 
(4) cash distributions from rental income.

         The  primary  investment   objective  of  the  Partnership  is  capital
appreciation.  The Partnership may sacrifice  attainment of its other objectives
to the extent  required  to achieve  the  capital  appreciation  objective.  The
Partnership's success in meeting its capital appreciation  objective will depend
upon  the  proceeds  received  from  the  final  liquidation  of  the  remaining
investment,  the  Portland  Center  Apartments,   which  comprised  41%  of  the
Partnership's  original investment  portfolio.  The amount of such proceeds will
ultimately  depend upon the value of the underlying  investment  property at the
time of such liquidation, which cannot be determined at the present time. Of the
three  investments  that the Partnership has sold to date, two have been sold at
sizable  gains on the  original  investment  and the third was sold at a sizable
loss. In September  1986, the joint venture which owned The Hamlet,  an 864-unit
apartment property located in Montgomery Village, Maryland, sold the property to
an unrelated third party for $38 million, which consisted of $36 million in cash
and a $2 million second mortgage note. The Hamlet  Apartments had been purchased
by the  Partnership's  joint  venture  investee in 1984 for $26.8  million.  The
Partnership  received a distribution of almost $13 million in 1986 from the cash
proceeds of the sale.  Through  September  1991,  when the second  mortgage note
receivable  matured,  the Partnership had received an additional $2.4 million in
principal  and  interest   payments  from  the  note.  In  September  1995,  the
Partnership  sold its  interest  in Hudson  Partners,  which  owned  the  Hudson
Apartments,  to the co-venture partner for $350,000.  The Hudson Apartments is a
144-unit complex located in Tyler,  Texas.  While the proceeds received from the
sale  were  substantially  below  the  amount  of  the  Partnership's   original
investment in the Hudson joint venture, which totalled $2.6 million,  management
believed that the offer was  reflective  of the fair value of the  Partnership's
interest and that it was an  opportune  time to dispose of this  investment.  In
March 1996, the joint venture which owned the Walker House  Apartments  sold the
operating investment property to an unrelated third party for $10.6 million. The
Walker House  Apartments,  a 196-unit  complex  located in  Montgomery  Village,
Maryland,  had been purchased by the  Partnership's  joint venture  investee for
$7.8 million in 1984. After repayment of the existing mortgage debt, transaction
costs, and the co-venturer's share of the proceeds, the Partnership received net
proceeds of approximately $5.3 million from the sale of Walker House.

         The  Partnership  has  generated  tax  losses  from  operations   since
inception.  However,  the  benefits  of  such  losses  to  investors  have  been
significantly  reduced by changes in federal  income tax law  subsequent  to the
organization of the  Partnership.  Through March 31, 1997, the Limited  Partners
had received  cumulative cash  distributions  of approximately  $22,884,000,  or
approximately $685 per original $1,000 investment for the Partnership's earliest
investors. This return includes distributions totalling $445 per original $1,000
unit from the sale of The Hamlet Apartments, including an amount of $45 per Unit
distributed in fiscal 1992 as a result of the collection of the note  receivable
taken back at the time of the sale, $11 per original $1,000  investment from the
sale of the  Partnership's  investment  in the Hudson  Apartments,  $169.48  per
original $1,000  investment from the sale of the Walker House Apartments and $12
per original $1,000 investment from a distribution of Partnership  reserves that
exceeded future reserve requirements.

         As noted  above,  the  Partnership  continues  to retain  an  ownership
interest in one operating  investment  property.  The Portland Center investment
property  is  located  in a real  estate  market  in which it faces  significant
competition for the revenues it generates.  The apartment  complex competes with
numerous projects of similar type, generally on the basis of price, location and
amenities.  The property also competes 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 actively for multi-family properties in many markets
has  escalated  significantly.  The Portland  Center  property  also has a small
amount of  leasable  commercial  space.  The  property  competes  for  long-term
commercial  tenants with a number of other properties  generally on the basis of
price, location and tenant improvement allowances. Conditions in the real estate
markets for  multi-family  apartment  properties have improved over the past two
years and have had a positive  impact on the  performance of the Portland Center
Apartments.  As a result,  growing interest from  institutional and local buyers
for well-located,  quality apartment properties like Portland Center has emerged
in recent  months.  Given the current buyer  interest in the Portland  apartment
rental market, management believes that this may be the appropriate time to sell
the property.  Management is currently focusing on a potential near-term sale of
this property and the possible  completion of a Partnership  liquidation  by the
end of calendar year 1997.  However, no assurances can be given that both a sale
of the property and a liquidation of the  Partnership  will be completed  within
this time frame.

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

         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 PW Growth Properties,  Inc. and Properties  Associates.  Second PW Growth
Properties,  Inc. (the "Managing General Partner"), a wholly-owned subsidiary of
PaineWebber,  is the managing general partner of the Partnership.  The associate
general partner is Properties  Associates (the "Associate General  Partner"),  a
Massachusetts  general  partnership,  certain general partners of which are also
officers of the Adviser and the Managing General Partner.

         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  owns,  through a joint venture
partnership, an interest in the property referred to under Item 1 above to which
reference is made for the name, location, and the description of the property.

         Occupancy  figures for each fiscal quarter  during 1997,  along with an
average for the year, are presented below for the remaining property:

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

Portland Center                 94%        94%        95%       94%       94%

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 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 PW Growth  Properties,  Inc. and Properties
Associates,  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 Paine Webber Growth
Properties Two LP, PaineWebber, Second PW Growth Properties, Inc. and Properties
Associates (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 Paine  Webber
Growth  Properties  Two  LP,  also  alleged  that  following  the  sale  of  the
partnership  interests,  PaineWebber,  Second PW  Growth  Properties,  Inc.  and
Properties   Associates   misrepresented   financial   information   about   the
Partnership's  value  and  performance.   The  amended  complaint  alleged  that
PaineWebber,  Second  PW  Growth  Properties,  Inc.  and  Properties  Associates
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.

     Based on the  settlement  agreement  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 this  matter  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  2,982  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 Units will develop.  The Managing  General Partner will
not redeem or repurchase Units.

         Reference  is made to Item 6 below for a  disclosure  of the  amount of
cash distributions per Unit made to the Limited Partners during fiscal 1997.

Item 6.  Selected Financial Data

                      PaineWebber Growth Properties Two LP
          For the years ended March 31, 1997, 1996, 1995, 1994 and 1993
                    (in thousands, except for per Unit data)
<TABLE>
<CAPTION>

                                 1997            1996              1995              1994            1993
                                 ----            ----              ----              ----            ----
<S>                                <C>            <C>             <C>                <C>            <C> 

Revenues                         $   304        $   259         $    227           $   201         $    202

Operating income (loss)          $    45        $   (51)        $    (65)          $   (15)        $     22

Partnership's share of
 ventures' losses                $  (230)       $  (134)        $   (161)          $  (309)        $   (867)

Partnership's share of
 gain on sale of
 operating investment
 property                              -       $  4,226                -                 -                -

Loss on writedown
 of investment to
 fair value                            -              -         $ (2,019)                -                -

Net income (loss)                $  (185)      $  4,041         $ (2,245)          $  (324)        $   (845)

Per Limited Partnership Unit:

  Net income (loss)              $ (5.48)       $117.36         $ (66.54)          $ (9.60)        $ (25.05)

  Cash distributions:
     Operations                  $ 17.53       $  21.26         $   8.68                 -                -     

     Sales and
     other capital 
     proceeds                    $169.48       $  23.00                -                -                 -

Total assets                     $   905       $  6,726         $  4,180          $  6,671         $  7,021

</TABLE>


     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 Limited Partnership Unit information is based upon the 33,410
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  offered limited  partnership  interests to the public from
October 1983 to October 1984 pursuant to a  Registration  Statement  filed under
the Securities Act of 1933.  Gross proceeds of $33,410,000  were received by the
Partnership   and,  after  deducting   selling   expenses  and  offering  costs,
approximately  $26,690,000 was initially  invested in three joint ventures which
owned four operating investment properties. Through March 31, 1997, three of the
four  original  investments  had  been  sold.  The  sales  of the  Walker  House
Apartments and the Partnership's interest in the Hudson Apartments during fiscal
1996 have left the  Partnership  with one remaining  real estate  investment,  a
majority   interest  in  the  joint  venture  which  owns  the  Portland  Center
Apartments. The Partnership does not have any commitments for additional capital
expenditures  or  investments  but may be called  upon to  advance  funds to its
remaining  joint  venture  investment  in  accordance  with  the  joint  venture
agreement.  The  Partnership's  primary  objective has been to achieve long-term
capital  appreciation of the operating  investment  properties  through property
upgrades and subsequent rental income increases. 

     While the  Partnership  continues  to be  optimistic  about  the  near-term
prospects  for  Portland  Center and the  downtown  Portland  apartment  market,
management  believes that it may be the  appropriate  time to sell the property.
There  appears to be growing  interest from  institutional  and local buyers for
well-located,  quality  apartment  properties like Portland Center. As a result,
management  has  decided to market the  property  for sale and formal  marketing
efforts are currently underway. Management is currently focusing on completing a
potential  near-term  sale of this property and the possible  liquidation of the
Partnership prior to December 31, 1997. There are no assurances,  however,  that
both a sale of the  remaining  investment  property and the  liquidation  of the
Partnership  will be  completed  within  this  time  frame.  If  completed,  the
Partnership's share of the net proceeds from the sale of Portland Center,  along
with  the  remaining   Partnership  cash  reserves  after  the  payment  of  all
liquidation-related expenses, would be distributed to the Limited Partners prior
to the  liquidation of the  Partnership.  

     The  investment in the Portland  Center joint venture  comprised 41% of the
Partnership's  original  investment  portfolio.  Portland  Center is a  525-unit
high-rise  apartment building located in Portland,  Oregon,  which also contains
28,000  square  feet of  leasable  commercial  space.  As  previously  reported,
management continues to be in the process of using the excess cash reserves from
the  December  1993  Portland  Center  loan  refinancing  to  complete  a  major
renovation program at the property,  which includes upgrades to the common areas
and many individual  apartment units.  The property's  apartment units are being
upgraded  on a  turnover  basis.  As of March  31,  1997,  59% of the  apartment
interiors  had been fully  renovated and an  additional  37% had been  partially
renovated.  To date,  management  has been able to lease the renovated  units at
substantial rental rate increases,  averaging approximately 10% above the rental
rate  prior  to the  renovations.  The  implementation  of the  planned  capital
improvements at Portland Center,  which will continue  throughout calendar 1997,
is expected to support  management's  ability to increase rents and add value to
the  property  while  the  sale  efforts  are in  process.  As a  result  of the
improvement  in the net cash flow of the Portland  Center joint  venture  during
fiscal 1997, the Partnership expects to increase its quarterly distribution rate
from 4.25% to 5% per annum on a Limited  Partner's  remaining capital account of
$362.52 per original  $1,000 Unit. The  distribution  increase will be effective
for the payment to be made on August 15,  1997 for the  quarter  ending June 30,
1997.


<PAGE>


      The  mortgage  debt  obtained  by the  Portland  Center  joint  venture in
December 1993 contains a five-year  prohibition on prepayment.  The loan becomes
prepayable  beginning in December 1998 with a prepayment penalty which begins at
5% of the  outstanding  principal  balance and declines by 1% annually  over the
next five years.  While the loan cannot be prepaid  prior to December  1998,  it
could be assumed by a buyer of the  property  for a fee,  subject to approval by
the  lender and the U.S.  Department  of Housing  and Urban  Development,  which
insured the mortgage loan. The requirement that a buyer would have to assume the
outstanding  mortgage obligation could limit management's ability to effectively
market the property  for sale prior to December  1998 because of the reserve and
reporting requirements associated with a HUD loan. However, the loan does have a
favorable interest rate of 7.125% per annum and does not mature until January 1,
2029. In addition,  management's  analysis of market conditions completed during
the third  quarter  of fiscal  1997 to  assess  whether  it might be in the best
interests of the Limited Partners to seek a sale of the Portland Center property
in the near term revealed favorable  results.  Market conditions for residential
apartment  properties  in the Pacific  Northwest  in general and in the downtown
Portland  market in  particular  are very strong at the present time as a result
of, among other factors,  healthy  employment gains,  local  restrictions on new
construction, a limited amount of buildable land sites and several projects that
have converted  rental units into  condominiums.  Such favorable  conditions may
result in the Partnership receiving a greater return on the current sale of this
investment  property  even prior to the  completion  of the ongoing  improvement
program and prior to the expiration of the loan prepayment  restrictions.  Under
the terms of the Portland Center joint venture  agreement,  both the Partnership
and the co-venturer  have certain first refusal rights with respect to a sale of
the  property.  The  Partnership  would  expect to  recognize a sizable gain for
financial reporting purposes upon the sale of the Portland Center property.

     The  occupancy  level in Portland  Center's  commercial  space has risen 8%
since  September 1996 to reach 80% as of March 31, 1997. Two new tenants account
for this  improvement.  It is  expected  that the  commercial  space will be 94%
occupied by the end of June 1997. This projection is based upon new leases which
were  signed   subsequent   to  year-end  and  a  recent   decision  to  utilize
approximately  2,500  square feet of the vacant  commercial  space for a fitness
center.  The new fitness  center opened in May 1997 and is an important  amenity
for the  exclusive  use of Portland  Center  residents.  It replaces  the former
fitness area of 1,200  square feet which will be  converted  to rentable  office
space.  Once the  conversion is finished,  there will be a total of 1,800 vacant
square feet, or 6% of the property's  commercial  space,  available for lease as
office space.

     The proposed light-rail  transportation  system for downtown Portland which
has been  discussed in previous  reports is presently on hold.  Portland  voters
rejected funding for this project in the November 1996 election. This light-rail
system,  as proposed,  included a nearby station that would have been convenient
for the tenants at Portland Center.

     As  previously  reported,  in March 1996 the joint  venture which owned the
Walker House Apartments sold the operating  investment  property to an unrelated
third party for  $10,650,000.  The existing  mortgage  balance of $5,011,000 was
repaid in  conjunction  with the sale,  and the venture  paid  closing  costs of
approximately  $364,000.  In  addition,  the joint  venture  had excess  working
capital as of the date of the sale in the amount of approximately  $235,000. The
net proceeds  available after the sale transaction  totalled  approximately $5.5
million,  of which the  co-venture  partner was  entitled to $220,000  under the
terms of the joint venture agreement.  The Partnership received the remainder of
the net sale proceeds of approximately $5.3 million.  The Partnership's share of
the  net  proceeds  was  distributed  to  the  Limited  Partners  as  a  special
distribution  in the amount of  approximately  $5,312,000,  or $159 per original
$1,000 investment,  paid concurrently with the regular quarterly distribution on
May 15, 1996. An additional special distribution of approximately  $350,000,  or
$10.48  per  original  $1,000  investment,  was  made on  December  13,  1996 in
connection  with the Walker  House  transaction.  Because the sale of the Walker
House  Apartments  was a  taxable  transaction  in the  state of  Maryland,  the
Partnership  withheld  Maryland  state  income  tax equal to the  amount of this
special  distribution on behalf of most Limited  Partners,  as required by state
law.

     At March 31, 1997, the Partnership had available cash and cash  equivalents
of  approximately  $905,000.  Such  cash and cash  equivalents,  along  with the
expected operating cash flow from the Portland Center property, will be utilized
for the working capital needs of the Partnership  and for  distributions  to the
partners.  The source of future  liquidity and  distributions to the partners is
expected to be through  proceeds  received from the sale or  refinancing  of the
remaining  investment  property.  These  sources of liquidity are expected to be
sufficient to meet the  Partnership's  needs on both a short-term  and long-term
basis.

<PAGE>


Results of Operations
1997 Compared to 1996
---------------------

     The  Partnership  reported a net loss of $185,000  for the year ended March
31,  1997,  compared  to net  income  of  $4,041,000  for the  prior  year.  The
unfavorable  change in the  Partnership's net operating results is primarily the
result  of the  $4,226,000  gain  realized  on the  sale  of  the  Walker  House
Apartments  in fiscal  1996.  A $96,000  favorable  change in the  Partnership's
operating  income (loss) was effectively  offset by an increase of a like amount
in the  Partnership's  share of  ventures'  losses.

     The  favorable  change  in the  Partnership's  operating  income  (loss) is
primarily  due to a $43,000  increase in interest and other income and a $51,000
decrease in the  Partnership's  operating  expenses.  Interest  and other income
increased partly due to higher outstanding cash reserve balances for the current
year as a result of the  temporary  investment of the Walker House sale proceeds
prior to the May 15, 1996 special distribution,  as discussed further above. The
Partnership's  operating expenses decreased  primarily due to a $38,000 decrease
in general and  administrative  expenses  stemming  from a reduction  in certain
required professional services in the current year. In addition, management fees
declined  by $13,000  due to the return of  capital  associated  with the Walker
House and Hudson  transactions  and the related  reduction  in the amount of the
ongoing Partnership distributions upon which management fees are based.

     The  Partnership  recognized  a net  loss of  $230,000  from  its  share of
ventures'  operations  for the year ended March 31,  1997,  as compared to a net
loss of  $134,000  for the same  period  in the prior  year.  This  increase  in
ventures'  losses is primarily  attributable to the inclusion of $122,000 in net
income  attributable  to the Walker  House  joint  venture  in the prior  year's
results.  As discussed  further  above,  the Walker House joint venture sold its
operating  property  during the fourth quarter of fiscal 1996. The impact of the
Walker House sale on the  Partnership's  share of ventures'  losses was slightly
offset by a decrease in the net loss from the Portland Center joint venture as a
result of an increase in rental  income.  Rental  income  from  Portland  Center
increased by approximately 11% over fiscal 1996 due to increases in rental rates
and an increase in the property's  average  occupancy level. The increase in the
venture's  rental  income was  partially  offset by an  increase  in repairs and
maintenance  and  depreciation  charges  as a result  of the  venture's  ongoing
overall  enhancement  and capital  improvement  program,  as  discussed  further
above.

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

     The Partnership  reported net income of $4,041,000 for the year ended March
31, 1996,  compared to a net loss of $2,245,000  for fiscal 1995.  The favorable
change in the  Partnership's  net operating  results was primarily the result of
the gain of $4,226,000 on the sale of the Walker House Apartments in fiscal 1996
and the write down of the carrying value of the Partnership's  investment in the
Hudson joint  venture,  of  $2,019,000,  which was  recorded in fiscal 1995.  In
addition,  a decrease  in the  Partnership's  operating  loss of  $14,000  and a
decrease  in the  Partnership's  share  of  ventures'  losses  of  $27,000  also
contributed to the change in net operating results between fiscal 1996 and 1995.
Operating loss decreased mainly due to an increase in interest income of $18,000
and a decrease in general  and  administrative  expenses  of  $24,000.  Interest
income increased as a result of a higher average outstanding cash balance during
fiscal  1996 due to the  receipt  of  proceeds  from the sale of the  Hudson and
Walker  House   investments   and  an  increase  in  the  operating   cash  flow
distributions  from the Portland  Center joint venture.  The decrease in general
and administrative expenses is primarily attributable to lower professional fees
being  incurred  in fiscal  1996 for the  completion  of the annual  independent
valuation of the Partnership's  operating  properties.  The favorable changes in
operating  loss were  partially  offset by an  increase in  management  fees for
fiscal 1996.  The Adviser  began to earn  management  fees in the second half of
fiscal  1995 with the  commencement  of regular  quarterly  operating  cash flow
distributions.

     The Partnership's share of ventures' losses decreased in fiscal 1996 mainly
as a result of a reduction  in net losses from the Hudson  joint  venture due to
the sale of the  Partnership's  interest in September 1995. A slight increase in
net loss at the  Portland  Center joint  venture of $15,000 was almost  entirely
offset by an  increase in net income from the Walker  House joint  venture.  Net
income from Walker House increased  mainly due to an additional two and one-half
months of  operations  being  recorded in fiscal 1996 in order to eliminate  the
three month  reporting lag through the date of the sale in March 1996.  Net loss
at Portland Center increased slightly due to additional depreciation and repairs
and maintenance  expenses  associated with the renovation program in progress at
the property,  as discussed further above. Such incremental expenses offset a 6%
increase in the venture's gross revenues.  Average  occupancy at Portland Center
actually  decreased  from 93% for calendar  1994 to 91% for calendar 1995 due to
management's  initiative  to  increase  rental  rates in order to turn  over the
apartment  units to accelerate the pace of the interior unit  renovations at the
property. Management has stepped up its marketing efforts as the unit renovation
program has progressed, and occupancy had increased to 94% for the quarter ended
March 31, 1996.

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

     The Partnership  reported a net loss of $2,245,000 for the year ended March
31, 1995,  compared to a net loss of $324,000  for fiscal 1994.  The increase in
net loss was  primarily  the  result of a  write-down  of  $2,019,000  which the
Partnership  recorded in fiscal 1995 to adjust the carrying  value of the Hudson
investment to $350,000.  An increase of $50,000 in the  Partnership's  operating
loss also  contributed  to the increase in net loss for fiscal  1995.  Operating
loss   increased   due  to  increases  in   management   fees  and  general  and
administrative  expenses. The Partnership incurred management fees in the amount
of $29,000 for fiscal 1995. As a result of the commencement of regular quarterly
distributions  of operating  cash flow in fiscal 1995, the Adviser began to earn
asset  management  fees  in  an  amount  equal  to  approximately   10%  of  the
distributable cash of the Partnership.  An increase of approximately  $34,000 in
interest  income on Partnership  cash reserves offset the increase in management
fees.  The increase in interest  income can be attributed to higher average cash
balances and slightly  higher  interest  rates during  fiscal 1995.  General and
administrative  expenses  increased  by  $47,000 in fiscal  1995,  mainly due to
higher  professional fees related to the completion of an independent  valuation
of the Partnership's operating properties which began in late fiscal 1994.

     A significant  decline in the Partnership's share of ventures' losses, from
$309,000 in fiscal 1994 to $161,000 in fiscal 1995,  partially offset the Hudson
write-down  and the  increase in the  Partnership's  operating  loss.  Operating
results at Portland Center for calendar 1994 showed the most  improvement  among
the joint  ventures,  with a $390,000  increase in revenues over calendar  1993.
Such  increases  in rental  income were  attributable  to rental rate  increases
implemented at the property in conjunction with the ongoing renovation  program.
Occupancy at Portland  Center  actually  declined  during the fourth  quarter of
fiscal 1995 to 89% as  management  implemented  a program to  accelerate  tenant
turnover in order to complete the renovation program more quickly. Revenues were
up slightly at the Walker House and Hudson  Apartments  as well during  calendar
1994. Both properties  maintained  occupancy  levels in the high 90's throughout
calendar  1994 while  implementing  small rental rate  increases.  The favorable
changes in revenues were offset,  in part,  by an increase in mortgage  interest
expense  at  Portland  Center of  $286,000  as a result of the  increase  in the
mortgage  loan balance as a result of the December 1993  refinancing.  Despite a
significant reduction in the interest rate on the Portland Center loan, interest
and related  charges  exceeded  their  prior  level due to the higher  principal
balance and the payment of mortgage  insurance  premiums  required under the HUD
financing  agreement.  Property  operating  expenses  at  Portland  Center  also
increased  mainly  due  to  the  capital  improvement  program,  which  included
significant repairs and maintenance expenses.

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.

      Competition. The financial performance of the Partnership's remaining real
estate  investment  will  be  significantly  impacted  by the  competition  from
comparable  properties in its local market area. The occupancy levels and rental
rates  achievable at the property are largely a function of supply and demand in
the market.  To date the pace of job and population  growth in the Portland area
has kept pace with the rate of new apartment development  activity.  However, in
many other markets across the country development of new multi-family properties
has surged in the past 12  months.  Existing  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.  There  are no  assurances  that  such  an  increase  in
development  activity will not affect the Portland  Center  property in the near
term.

      Impact  of  Joint  Venture  Structure.  The  ownership  of  the  remaining
investment through a joint venture partnership could adversely impact the timing
of the  Partnership's  planned  liquidation and the amount of proceeds  received
from  the  disposition  of  the  final  investment.  It  is  possible  that  the
Partnership's co-venture partner 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  agreement,  any  conflict
between the partners could result in delays in completing a sale of the 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  asset  is
critical to the  Partnership's  ability to realize the  current  estimated  fair
market  value of the  Portland  Center  investment  property and to complete the
liquidation  of  the  Partnership  on  a  timely  basis.  Demand  by  buyers  of
multi-family  apartment  properties is affected by many  factors,  including the
size,  quality,  age, condition and location of the subject property,  potential
environmental liability concerns, the existing debt structure,  the liquidity in
the debt and equity markets for asset acquisitions,  the general level of market
interest rates and the general and local economic climates.

INFLATION
---------

         The  Partnership  completed its  thirteenth  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  property.  Tenants at the
Partnership's apartment complex have short-term leases,  generally of six months
to one year in  duration.  Rental  rates at the property 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.


<PAGE>



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 PW Growth
Properties, Inc., a Delaware corporation,  which is a wholly-owned subsidiary of
PaineWebber.  The Associate  General  Partner of the  Partnership  is Properties
Associates,  a Massachusetts  general  partnership,  certain general partners of
which are also  officers of the Adviser and the Managing  General  Partner.  The
Managing  General  Partner  has overall  authority  and  responsibility  for the
Partnership's operation,  however, the day-to-day business of the Partnership is
managed by the Adviser pursuant to an advisory contract.

         (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          6/1/83  *
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 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 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 a 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. He began his career in 1974 with Arthur Young & Company in Houston. 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.  Mr. Brooks joined the Adviser 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  were  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 renumeration from the Partnership.

     The  Partnership  is required to pay certain fees to the  Adviser,  and 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  began paying cash  distributions  to the Unitholders on a
quarterly  basis at a rate of 3% per  annum on the  remaining  invested  capital
effective  for the second  quarter  of fiscal  1995.  The  annual  rate has been
increased  gradually in  subsequent  quarters to the current  level of 4.25% per
annum for the quarter  ended March 31, 1996 and will  increase to 5.0% per annum
beginning  with the  distribution  to be made on August 15, 1997 for the quarter
ended June 30, 1997.  However,  the Partnership's  Limited Partnership Units are
not actively traded on any organized exchange, and no efficient secondary market
exists. Accordingly, no accurate price information is available for these Units.
Therefore,  a presentation of historical  unitholder  total returns would not be
meaningful.


<PAGE>


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  PW  Growth  Properties,  Inc.,  is owned by
PaineWebber.   Properties  Associates,  the  Associate  General  Partner,  is  a
Massachusetts  general  partnership,  certain general partners of which are also
officers of the Adviser and the Managing General Partner.  Properties Associates
is also the  Initial  Limited  Partner of the  Partnership  and owns one Unit of
Limited Partnership  Interest. No limited partner is known by the Partnership to
own beneficially more than 5% of the outstanding interests of the Partnership.

         (b) Neither the officers and directors of the Managing  General Partner
nor the general partners of the Associate General Partner, individually, own any
Units of limited partnership interest of the Partnership. No officer or director
of the  Managing  General  Partner,  nor any  general  partner of the  Associate
General Partner,  possesses a right to acquire beneficial  ownership of Units of
limited partnership interest of the Partnership.

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

Item 13.  Certain Relationships and Related Transactions

         The  General   Partners  of  the   Partnership  are  Second  PW  Growth
Properties,  Inc. (the "Managing General Partner"), a wholly-owned subsidiary of
PaineWebber Group Inc. ("PaineWebber") and Properties Associates (the "Associate
General Partner"), a Massachusetts general partnership, certain general partners
of  which  are  also  officers  of  PaineWebber  Properties   Incorporated  (the
"Adviser") and the Managing  General  Partner.  Subject to the Managing  General
Partner's overall  authority,  the business of the Partnership is managed by the
Adviser  pursuant  to  an  advisory  contract.  The  Adviser  is a  wholly-owned
subsidiary of PaineWebber  Incorporated  ("PWI"),  a wholly-owned  subsidiary of
PaineWebber.  The  General  Partners,  the  Adviser  and PWI  receive  fees  and
compensation,  determined on an agreed upon basis, in  consideration  of various
services  performed in connection with the sale of the Units,  the management of
the Partnership and the  acquisition,  management,  financing and disposition of
Partnership investments.  In addition, the General Partners and their affiliates
are reimbursed for their direct expenses  relating to the offering of units, the
administration of the Partnership and the operations of the  Partnership's  real
property investments.

         All  distributable  cash,  as  defined,  for each  fiscal  year will be
distributed  quarterly in the ratio of 99% to the Limited Partners and 1% to the
General  Partners.  All sale or  refinancing  proceeds  shall be  distributed in
varying  proportions  to the Limited and General  Partners,  as specified in the
Partnership Agreement.

         Pursuant to the terms of the Partnership Agreement,  taxable income and
tax  losses  of  the  Partnership  from  both  current  operations  and  capital
transactions  generally will be allocated 99% to the Limited  Partners and 1% to
the General  Partners,  except that the General  Partners  shall be allocated an
amount of taxable  income  from a capital  transaction  at least  sufficient  to
eliminate   their  deficit   capital   account   balance.   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.

         Under the  advisory  contract,  the  Adviser  has  specific  management
responsibilities: to administer the day-to-day operations of the Partnership and
to report  periodically  the  performance  of the  Partnership  to the  Managing
General Partner. The Adviser is due to be paid an annual management fee of up to
1% of the gross offering proceeds outstanding. However, during the quarter ended
June 30, 1991 the Partnership  reached a limitation on the cumulative  amount of
management  fees  that can be  earned  by the  Adviser  under  the  terms of the
original  Prospectus.  Future  management  fees will only be earned in an amount
equal  to  10%  of  the  Distributable  Cash,  as  defined,   generated  by  the
Partnership.  During the second half of fiscal 1995, the Partnership  instituted
the payment of quarterly distributions which have continued through fiscal 1997.
Accordingly, the Adviser was paid management fees of $58,000 for fiscal 1997.

         An  affiliate  of  the  Managing   General  Partner   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  $61,000,
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 $7,000  (included in general and  administrative  expenses)  for managing the
Partnership's  cash assets during the year ended March 31, 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 Adviser.



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

         (b)      No Current  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.

                      PAINE WEBBER GROWTH PROPERTIES TWO LP


                         By:  Second PW Growth Properties, 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 27, 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 27, 1997
   ----------------------                                     -------------
     Bruce J. Rubin
     Director




By:/s/ Terrence E. Fancher                            Date: June 27, 1997
   -----------------------                                  -------------
     Terrence E. Fancher
     Director


<PAGE>


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

                      PAINE WEBBER GROWTH PROPERTIES TWO LP

                                INDEX TO EXHIBITS
<TABLE>
<CAPTION>

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

(3) and (4)    Prospectus of the Partnership               Filed with the Commission
               dated October 6, 1983, as                   pursuant to Rule 424(c) and
               supplemented, with particular               incorporated herein by reference.
               reference to the Amended and
               Restated Certificate and
               Agreement of Limited Partnership


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


(13)           Annual Report to Limited Partners           No Annual Report for fiscal year
                                                           1997 has been sent to the Limited
                                                           Partners.  An Annual Report will be
                                                           sent to the Limited Partners
                                                           subsequent to this filing.


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

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

</TABLE>

<PAGE>

                           ANNUAL REPORT ON FORM 10-K
                      Item 14(a)(1) and (2) and Item 14(d)
                      PAINE WEBBER GROWTH PROPERTIES TWO LP
         INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

                                                                      Reference
                                                                      ---------
Paine Webber Growth Properties Two LP:

     Reports of independent auditors                                       F-3

     Balance sheets as of March 31, 1997 and 1996                          F-5

     Statements of operations for the years ended March 31,
       1997, 1996 and 1995                                                 F-6

     Statements of changes in partners' capital (deficit) for the years
     ended March 31, 1997, 1996 and 1995                                   F-7

     Statements of cash flows for the years ended March 31, 1997,
        1996 and 1995                                                      F-8

     Notes to financial statements                                         F-9

     Schedule III-Real Estate and Accumulated Depreciation                 F-19

Oregon Portland Associates:

     Report of independent auditors                                        F-20

     Balance sheets as of December 31, 1996 and 1995                       F-21

     Statements of operations for the years ended December 31,
       1996, 1995 and 1994                                                 F-22

     Statements of changes in venturers' capital (deficit) for the
       years ended December 31, 1996, 1995 and 1994                        F-23

     Statements of cash flows for the years ended December 31,
       1996, 1995 and 1994                                                 F-24

     Notes to financial statements                                         F-25

Montgomery Village HWH Associates:

     Independent Auditors' Report                                          F-29

     Balance sheets as of December 31, 1995 and 1994                       F-30

     Statements of operations for the years ended December 31,
        1995, 1994 and 1993                                                F-31




<PAGE>


                           ANNUAL REPORT ON FORM 10-K

                      Item 14(a)(1) and (2) and Item 14(d)

                      PAINE WEBBER GROWTH PROPERTIES TWO LP

         INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
                                   (continued)

                                                                     Reference
                                                                     ---------

     Statements of changes in partners' equity for the years ended
        December 31, 1995, 1994 and 1993                               F-32

     Statements of cash flows for the years ended December 31,
        1995, 1994 and 1993                                            F-33

     Notes to financial statements                                     F-34




     Other  schedules  have been omitted since the required  information  is not
present or is 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
Paine Webber Growth Properties Two LP:

     We have  audited the  accompanying  balance  sheets of  PaineWebber  Growth
Properties Two LP as of March 31, 1997 and 1996,  and the related  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 audit 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. The financial statements of Montgomery Village HWH
Associates  as of  December  31, 1995 and 1994 and for the years then ended have
been audited by other auditors whose report has been furnished to us; insofar as
our  opinion on the  financial  statements  relates to  Montgomery  Village  HWH
Associates  as of December  31, 1995 and for each of the two years in the period
ended  December 31, 1995, it is based solely on their  report.  In the financial
statements, the Partnership's equity in the net income of Montgomery Village HWH
Associates is stated at $122,000 and $105,000, respectively, for the years ended
March 31, 1996 and 1995.
 
     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 and the report of other auditors provide a reasonable
basis for our opinion.

     In our opinion,  based on our audits and the report of other auditors,  the
financial statements referred to above present fairly, in all material respects,
the financial position of PaineWebber Growth Properties Two LP at March 31, 1997
and 1996,  and the 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,  based on our audits and
the report of other auditors,  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 13, 1997


<PAGE>


                           Reznick Fedder & Silverman
                          Certified Public Accountants
                       217 East Redwood Street, Suite 1900
                               Baltimore, MD 21202



                          INDEPENDENT AUDITORS' REPORT



The Partners
Montgomery Village HWH Associates:

        We have audited the  accompanying  balance sheets of Montgomery  Village
HWH  Associates  as of December 31, 1995 and 1994 and the related  statements of
operations,  changes  in  partners'  equity and cash flows for each of the three
years in the period ended December 31, 1995. These financial  statements are the
responsibility of 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  statements  referred to above  present
fairly, in all material  respects,  the financial position of Montgomery Village
HWH  Associates  as of  December  31,  1995  and  1994  and the  results  of its
operations,  the changes in partners'  equity and its cash flows for each of the
three years in the period ended December 31, 1995, in conformity  with generally
accepted accounting principles.






                                           /s/Reznick Fedder & Silverman
                                              --------------------------
                                              Reznick Fedder & Silverman


Baltimore,  Maryland 
January 5, 1996, except for Note E, 
as to which the date is
March 13, 1996





<PAGE>


                      PAINE WEBBER GROWTH PROPERTIES TWO LP

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

                                     ASSETS

                                                    1997           1996
                                                    ----           ----

Investments in joint ventures, at equity          $     -         $    257
Cash and cash equivalents                             905            6,278
Accounts receivable                                     -              191
                                                  -------         --------
                                                  $   905         $  6,726
                                                  =======         ========


                        LIABILITIES AND PARTNERS' CAPITAL


Equity in losses of joint venture in excess
  of investment and advances                     $    618         $      -
Accounts payable and accrued expenses                  46               46
                                                 --------         --------
    Total liabilities                                 664               46

Partners' capital:
   General Partners:
     Capital contributions                              1                1
     Cumulative net income                              7                9
     Cumulative cash distributions                    (16)             (10)

   Limited Partners ($1,000 per Unit,
       33,410 Units outstanding):
     Capital contributions, net o
       offering costs                               29,778            29,778
     Cumulative net losses                          (6,645)           (6,462)
     Cumulative cash distributions                 (22,884)          (16,636)
                                                  ---------       ----------
    Total partners' capital                            241             6,680
                                                  --------        ----------
                                                  $    905        $    6,726
                                                  ========        ==========
















                             See accompanying notes.


<PAGE>


                      PAINE WEBBER GROWTH PROPERTIES TWO LP

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


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

Revenues:
     Interest and other income                    $    111        $      68          $      50
     Reimbursements from affiliate                     193              191                177
                                                  --------        ---------          ---------
                                                       304              259                227

Expenses:
     Management fees                                    58               71                 29
     General and administrative                        201              239                263
                                                  --------        ---------          ---------
                                                       259              310                292
                                                  --------        ---------          ---------

Operating income (loss)                                 45              (51)               (65)

Partnership's share of ventures' losses               (230)            (134)              (161)

Partnership's share of gain on sale of
     operating investment property                       -            4,226                  -

Loss on write-down of investment to fair value           -                -             (2,019)
                                                 ---------        ---------          ---------
             
Net income (loss)                                $    (185)       $   4,041          $  (2,245)
                                                ==========        =========          =========

Per Limited Partnership Unit:

  Net income (loss)                             $   (5.48)       $ 117.36            $  (66.54)
                                                =========        ========            =========

  Cash distributions                            $  187.01       $   44.26            $    8.68
                                                =========       =========            =========
</TABLE>


The above per  Limited  Partnership  Unit  information  is based upon the 33,410
Limited Partnership Units outstanding during each year.














                             See accompanying notes.


<PAGE>


                      PAINE WEBBER GROWTH PROPERTIES TWO LP

                   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              $    (88)     $ 6,751       $ 6,663

Net loss                                    (22)      (2,223)       (2,245)

Cash distributions                           (3)        (290)         (293)
                                       --------      -------      --------


Balance at March 31, 1995                  (113)       4,238         4,125

Net income                                  120        3,921         4,041

Cash distributions                           (7)      (1,479)       (1,486)
                                       --------     --------     ---------

Balance at March 31, 1996                     -        6,680         6,680

Net loss                                     (2)        (183)         (185)

Cash distributions                           (6)      (6,248)       (6,254)
                                       --------     --------     ---------

Balance at March 31, 1997              $     (8)    $    249     $     241
                                       ========     ========     =========























                             See accompanying notes.


<PAGE>


                      PAINE WEBBER GROWTH PROPERTIES TWO LP

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

<TABLE>
<CAPTION>

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

Cash flows from operating activities:
     Net income (loss)                                                $  (185)         $  4,041       $ (2,245)
     Adjustments to reconcile net income (loss) to net cash
       provided by (used in) operating activities:
         Partnership's share of gain on sale of
           operating investment property                                    -            (4,226)             -
         Reimbursements from affiliate                                   (193)             (191)          (177)
         Partnership's share of ventures' losses                          230               134            161
         Loss on write-down of investment to fair value                     -                 -          2,019
         Changes in assets and liabilities:
           Accounts receivable                                            191                 -              -
           Accounts payable and accrued expenses                            -                (9)            47
                                                                     --------         ---------      ---------
              Total adjustments                                           228            (4,292)         2,050
                                                                     --------         ---------      ---------
              Net cash provided by (used in) operating activities          43              (251)          (195)

Cash flows from investing activities:
     Distributions from joint ventures                                    838             6,629          1,034
     Additional investments in joint ventures                               -               (17)            (7)
     Proceeds from sale of investment                                       -               350              -
                                                                    ---------         ---------     ----------
              Net cash provided by investing activities                   838             6,962          1,027

Cash flows from financing activities:
     Distributions to partners                                         (6,254)           (1,486)          (293)
                                                                   ----------         ---------     ----------

Net (decrease) increase in cash and cash equivalents                   (5,373)            5,225            539

Cash and cash equivalents, beginning of year                            6,278             1,053            514
                                                                   ----------         ---------    -----------

Cash and cash equivalents, end of year                             $      905         $   6,278    $    1,053
                                                                   ==========         =========    ==========


</TABLE>










                             See accompanying notes.




<PAGE>

                     PAINE WEBBER GROWTH PROPERTIES TWO LP
                       NOTES TO FINANCIAL STATEMENTS

1.   Organization and Nature of Operations

         Paine Webber Growth Properties Two LP (the  "Partnership") is a limited
partnership organized pursuant to the laws of the State of Delaware in June 1983
for the purpose of investing in a portfolio of rental  apartment and  commercial
properties  which  have  potential  for  near-term  capital  appreciation.   The
Partnership  authorized  the  issuance  of Units (at  $1,000  per Unit) of which
33,410,  representing capital contributions of $33,410,000,  were subscribed and
issued  between  October  1983  and  October  1984.  The  net  proceeds  of  the
Partnership's  offering were  originally  invested in four operating  investment
properties, through joint venture partnerships. Through March 31, 1997, three of
these investments had been sold. The joint venture that owns the remaining asset
is currently in the process of marketing the final investment property for sale.
Management  is currently  focusing on completing a potential  near-term  sale of
this property and the possible  liquidation of the Partnership prior to December
31, 1997.  There are no assurances,  however,  that both a sale of the remaining
investment  property and the  liquidation of the  Partnership  will be completed
within this time frame. See Note 4 for a further discussion of the Partnership's
investments.

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
investment in one joint venture  partnership (three in fiscal 1996) which own or
owned  operating  properties.  The  Partnership  accounts for its investments in
joint venture  partnerships using the equity method because the Partnership does
not have majority  voting  control in the ventures.  Under the equity method the
investment in a joint venture is carried at cost adjusted for the  Partnership's
share of the venture's earnings and losses and  distributions.  All of the joint
venture  partnerships are or were required to maintain their accounting  records
on a  calendar  basis for  income  tax  reporting  purposes.  As a  result,  the
Partnership  recognizes  its share of the income or loss from the joint ventures
based on financial  information  which is three months in arrears to that of the
Partnership.  See Note 4 for a description of the joint venture partnerships and
a discussion  of the  significant  lag-period  transaction  recognized in fiscal
1996.

         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 is made in the  accompanying  financial
statements as the  liability for such taxes is that of the partners  rather than
the Partnership.

           The cash and cash  equivalents  on the  accompanying  balance  sheets
represent   financial   instruments  for  purposes  of  Statement  of  Financial
Accounting  Standards  No.  107,  "Disclosures  about  Fair  Value of  Financial
Instruments." The carrying amount of these assets  approximates their fair value
as of  March  31,  1997  and  1996  due to the  short-term  maturities  of these
instruments.

         No  provision  for  income  taxes  has  been  made in the  accompanying
financial  statements as the liability for such taxes is that of the  individual
partners  rather  than  the  Partnership.   Upon  sale  or  disposition  of  the
Partnership's  investments,  the taxable gain or the tax loss  incurred  will be
allocated  among the partners.  In cases where the disposition of the investment
involves the lender  foreclosing on the  investment,  taxable income could occur
without  distribution of cash. This income would represent passive income to the
partners  which  could be  offset by each  partners'  existing  passive  losses,
including any passive loss carryovers from prior years.


<PAGE>


3.   The Partnership Agreement and Related Party Transactions

         The  General   Partners  of  the   Partnership  are  Second  PW  Growth
Properties,  Inc. (the "Managing General Partner"), a wholly-owned subsidiary of
PaineWebber Group Inc. ("PaineWebber") and Properties Associates (the "Associate
General Partner"), a Massachusetts general partnership, certain general partners
of  which  are  also  officers  of  PaineWebber  Properties   Incorporated  (the
"Adviser") and the Managing  General  Partner.  Subject to the Managing  General
Partner's overall  authority,  the business of the Partnership is managed by the
Adviser  pursuant  to  an  advisory  contract.  The  Adviser  is a  wholly-owned
subsidiary of PaineWebber  Incorporated  ("PWI"),  a wholly-owned  subsidiary of
PaineWebber.  The  General  Partners,  the  Adviser  and PWI  receive  fees  and
compensation,  determined on an agreed upon basis, in  consideration  of various
services  performed in connection with the sale of the Units,  the management of
the Partnership and the  acquisition,  management,  financing and disposition of
Partnership investments.  In addition, the General Partners and their affiliates
are reimbursed for their direct expenses  relating to the offering of units, the
administration of the Partnership and the operations of the  Partnership's  real
property investments.

         All  distributable  cash,  as  defined,  for each  fiscal  year will be
distributed  quarterly in the ratio of 99% to the Limited Partners and 1% to the
General  Partners.  All sale or  refinancing  proceeds  shall be  distributed in
varying  proportions  to the Limited and General  Partners,  as specified in the
Partnership Agreement.

         Pursuant to the terms of the Partnership Agreement,  taxable income and
tax  losses  of  the  Partnership  from  both  current  operations  and  capital
transactions  generally will be allocated 99% to the Limited  Partners and 1% to
the General  Partners,  except that the General  Partners  shall be allocated an
amount of taxable  income  from a capital  transaction  at least  sufficient  to
eliminate   their  deficit   capital   account   balance.   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.

         Under the  advisory  contract,  the  Adviser  has  specific  management
responsibilities: to administer the day-to-day operations of the Partnership and
to report  periodically  the  performance  of the  Partnership  to the  Managing
General Partner. The Adviser is due to be paid an annual management fee of up to
1% of the gross offering proceeds outstanding. However, during the quarter ended
June 30, 1991 the Partnership  reached a limitation on the cumulative  amount of
management  fees  that can be  earned  by the  Adviser  under  the  terms of the
original  Prospectus.  Future  management fees are limited further to 10% of the
Distributable  Cash, as defined,  of the Partnership.  For the years ended March
31,  1997,  1996 and 1995,  the Adviser  earned  $58,000,  $71,000 and  $29,000,
respectively,  in  management  fees as a result of the  commencement  of regular
quarterly distributions effective for the second quarter of fiscal 1995.

         In connection with investing  Partnership  capital,  the Adviser earned
acquisition fees of up to 9% of the gross proceeds of the offering. A portion of
these  acquisition  fees  ($718,000) were deferred at the time the joint venture
interests  were acquired and were payable from  distributable  net cash flow, as
defined, generated by the operating investment properties. As of March 31, 1992,
all deferred acquisition fees had been paid in full.

         In connection with the sale of the properties,  the Adviser may receive
real estate brokerage commissions in an amount of up to 2% of the selling prices
of properties sold upon the disposition of Partnership investments.  Payments of
such amounts is  subordinated  to the payment of certain  amounts to the Limited
Partners.  To date  the  Adviser  has not  received  any real  estate  brokerage
commissions.

         Included in general  and  administrative  expenses  for the years ended
March 31, 1997,  1996 and 1995 are $61,000,  $69,000 and $72,000,  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 $7,000, $3,000, and $2,000 (included in general and administrative  expenses)
for  managing  the  Partnership's  cash assets  during the years ended March 31,
1997, 1996 and 1995, respectively.

4.   Investments in Joint Venture Partnerships

         As of March 31, 1997 and 1996, the Partnership has an investment in one
joint  venture  (three at March 31,  1995).  Except  as noted  below,  the joint
ventures are accounted for on the equity method in the  Partnership's  financial
statements.  For income tax reporting  purposes,  the joint ventures are or were
required to maintain  their  accounting  records on a calendar year basis.  As a
result,  the  Partnership  accounts for its joint venture  investments  based on
financial  information  which  is  three  months  in  arrears  to  that  of  the
Partnership.  On September 12, 1995,  the  Partnership  sold its interest in the
Hudson  Apartments joint venture to its co-venture  partner for $350,000.  As of
March 31, 1995,  the  Partnership's  investment  in the Hudson joint venture was
reclassified  to investment held for sale and written down to its net realizable
value of $350,000.  Subsequent to the writedown,  the Partnership  accounted for
this  investment  on the cost  method  during the period of time in fiscal  1996
which it took for the sale  transaction to be completed.  On March 13, 1996, the
joint  venture  which  owned the  Walker  House  Apartments  sold the  operating
investment property to an unrelated third party. Due to the Partnership's policy
of accounting for  significant  lag-period  transactions  in the period in which
they  occur,  the  gain on this  transaction  was  recognized  in  fiscal  1996.
Accordingly,  in addition to the operations for the twelve months ended December
31,  1995,  the  Partnership's  share of  ventures'  losses in fiscal  1996 also
reflects  the  Partnership's  share of Walker  House  operations  for the period
January 1, 1996  through the date of sale.  Such  operations  in  calendar  1996
reflected  total  revenues of $360,000 and total  expenses of $414,000 for a net
loss of $54,000, of which the Partnership's share was $53,000.

         Condensed  combined financial  statements of these joint ventures,  for
the periods indicated, are as follows. As a result of the transactions described
above,  the  condensed  balance  sheet as of December 31, 1996 and 1995 includes
only the accounts of the Portland Center joint venture.  The condensed  combined
statement of operations  for the year ended  December 31, 1996 includes only the
results of the Portland Center joint venture.  The condensed  combined statement
of operations  for the year ended  December 31, 1995 includes the results of the
Portland  Center joint  venture for calendar  1995 and the results of the Walker
House joint  venture for the fourteen  and one-half  months from January 1, 1995
through  the date of the sale on March 13,  1996.  And  finally,  the  condensed
combined  statement of operations  for the year ended December 31, 1994 includes
the results of all three joint ventures.

                        Condensed Combined Balance Sheets
                           December 31, 1996 and 1995
                                 (in thousands)
                                     Assets

                                                  1996           1995
                                                  ----           ----
                                                                          

     Current assets                            $    1,938        $   1,814
     Operating investment property, net            18,280           19,126
     Other assets                                   2,839            3,079
                                                ---------        ---------
                                                $  23,057        $  24,019
                                                =========        =========

                       Liabilities and Venturers' Deficit

     Current liabilities                        $     737        $     859
     Other liabilities                                494              913
     Long-term mortgage debt, less 
        current portion                            22,351           22,540

     Partnership's share of combined deficit         (413)            (183)
     Co-venturers' share of combined deficit         (112)            (110)
                                                ---------        ---------
                                                $  23,057        $  24,019
                                                ==========       =========

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

                                                  1996           1995
                                                  ----           ----

     Partnership's share of 
        combined deficit
        at December 31, 
        as shown above                           $   (413)       $    (183)
     Reimbursement of management 
        fees and expenses
        receivable from 
        joint venture (1)                              494              913
     Timing difference due 
        to contributions 
        (distributions)
        made subsequent to 
        December 31 (see Note 2)                      (699)            (473)
                                                 ----------       ----------
     Investment in joint venture
        at equity, at March 31                   $     (618)      $      257
                                                 ==========       ==========


(1)  In  accordance  with the  Portland  Center  joint  venture  agreement,  the
     Partnership recorded  reimbursement  revenues for the years ended March 31,
     1997, 1996 and 1995 of $193,000, $191,000 and $177,000,  respectively,  for
     the  reimbursement  of certain  Partnership  expenses.  The Portland Center
     joint venture records a comparable  reimbursement  expense in its statement
     of operations  which is reflected in the  Partnership's  share of ventures'
     losses.  Accordingly,  the  accounting  for  these  reimbursements  has  no
     material  effect  on  the  Partnership's  net  capital  or its  results  of
     operations.  The reimbursements due the Partnership are payable only out of
     net cash flow of the  operating  property and are  cumulative to the extent
     not paid. A cumulative total of $494,000 and $913,000 remained unpaid as of
     March  31,  1997 and 1996,  respectively,  which is  recorded  in the joint
     venture investment balance on the accompanying balance sheet.

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

<TABLE>
<CAPTION>


                                                                  1996              1995             1994
                                                                  ----              ----             ----
<S>                                                               <C>                <C>            <C> 
Revenues:
     Rental revenues and expense recoveries                     $   6,054        $   7,549          $   7,757
     Interest and other income                                        199              337                233
                                                                ---------        ---------          ---------
                                                                    6,253            7,886              7,990

Expenses:
     Property operating expenses                                    3,351            3,945              3,874
     Interest expense                                               1,780            2,373              2,684
     Depreciation and amortization                                  1,354            1,703              1,621
                                                                ---------       ----------         ----------
                                                                    6,485            8,021              8,179
                                                                ---------       ----------         ----------
Operating loss                                                       (232)            (135)              (189)

Gain on sale of operating investment property                           -            4,580                  -
                                                                ---------       ----------         ----------

Net income (loss)                                               $    (232)      $    4,445         $     (189)
                                                                =========       =========          ==========

Net income (loss):
    Partnership's share of combined net income (loss)           $    (230)      $    4,092         $     (161)
    Co-venturers' share of combined net income (loss)                  (2)             353                (28)
                                                                ---------       ----------         ----------
                                                                $    (232)      $    4,445         $     (189)
                                                               ==========       ==========         ==========
</TABLE>


<PAGE>


         The Partnership's  share of the combined net income (loss) of the joint
ventures is presented as follows on the  accompanying  statements  of operations
(in thousands):

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

Partnership's share of ventures' losses      $  (230)     $  (134)     $  (161)
Partnership's share of gain on sale of
  operating investment property                    -        4,226            -
                                             -------      -------      -------
                                             $ (230)      $ 4,092      $  (161)
                                             ======       =======      =======

         Investment  in joint  venture,  at  equity,  is the  Partnership's  net
investment in the Portland Center joint venture partnership.  This joint venture
is subject to a partnership  agreement  which  determines  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 investment in this
joint venture is restricted as to distributions.

         The cash  distributions  received from the Partnership's  joint venture
investments during fiscal 1997, 1996 and 1995 are as follows (in thousands):

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

     Montgomery Village HWH Associates      $    -       $ 5,656       $    445
     Oregon Portland Associates                838           973            586
     Hudson Partners                             -             -              3
                                            ------        ------       --------
                                            $  838       $ 6,629       $  1,034
                                            ======       =======       ========

         A description of the ventures' properties,  relevant sales transactions
and the terms of the joint venture agreements are summarized below:

(a)  Montgomery Village HWH Associates
     ---------------------------------

         On  December  29,  1983,  the  Partnership   acquired  an  interest  in
Montgomery Village HWH Associates,  a Maryland general partnership  organized to
purchase  and  operate  The Hamlet and Walker  House,  two  apartment  complexes
located  in  Montgomery  Village,  Maryland  with a total  of 1,060  units.  The
Partnership  is a  general  partner  in the  joint  venture.  The  Partnership's
co-venture  partner  is  an  affiliate  of  General  American  Real  Estate  and
Development, Inc. The properties were purchased on March 9, 1984.

         The aggregate cash  investment by the  Partnership for its interest was
approximately  $12,982,000  (including an acquisition  fee of $1,100,000 paid to
the  Adviser  and  fees  aggregating  $150,000  paid  to  an  affiliate  of  the
co-venturer).  In addition,  acquisition fees aggregating $350,000 were deferred
at the time of purchase and were paid to the Adviser from distributable net cash
flow and net sale proceeds of the joint  venture.  The apartment  complexes were
acquired subject to nonrecourse mortgages totalling approximately $24,639,000 at
the time of closing.  On November 29, 1989,  the joint  venture  refinanced  the
mortgage debt secured by the Walker House Apartments,  replacing its original $4
million,  9.75% loan with a $5.1 million,  9.5% nonrecourse loan due in December
of 1996.

         On September 30, 1986, The Hamlet  Apartments was sold. The sales price
was  $38,000,000,  with  $36,000,000  paid in cash and the remainder paid in the
form of a  second  mortgage  note of  $2,000,000.  The  Partnership  received  a
distribution of $12,973,283 and was allocated a gain of $9,320,750 from the sale
in 1986.  The note bore interest at 9% with  principal  and interest  payable on
September 30, 1991. The joint venture received  $500,000 during calendar 1988 as
partial  prepayment  of the note and, on August 23, 1988,  the partners  entered
into an agreement for the distribution of this amount. The co-venturer  received
$427,000 of the $500,000  consisting of $100,000 for deferred  consulting  fees,
$177,000  as  compensation  owed for  negotiating  the sale of The  Hamlet,  and
$150,000 for capital  proceeds  distributions  deferred at the time of the sale.
The remaining $73,000 was paid to the Adviser as deferred  acquisition fees. The
joint  venture  received  $2,357,295  from the maturity of the note and interest
receivable  related  to the  sale  of The  Hamlet  in  September  of  1991.  The
Partnership  received the entire amount of the  proceeds.  The proceeds from the
note were used to make a special  distribution of approximately  $1.5 million to
the Limited Partners and to pay previously  deferred management fees owed to the
Adviser totalling  approximately $731,000. The remainder of the $2.4 million was
added to the Partnership's cash reserves.

         On March 13, 1996, the Walker House Apartments  property was sold to an
unrelated  third  party  for  $10,650,000.  The  existing  mortgage  balance  of
$5,011,000  was paid off in  conjunction  with the sale,  and the  venture  paid
closing  costs of  approximately  $364,000.  In addition,  the joint venture had
excess cash as of the date of the sale in the amount of approximately  $235,000.
The net proceeds from this sale totalled  approximately  $5.5 million,  of which
the  co-venture  partner was  entitled to $220,000  under the terms of the joint
venture  agreement.  The  Partnership  received  the  remainder  of the net sale
proceeds of approximately  $5.3 million.  During fiscal 1997, the  Partnership's
share of the net sale  proceeds  was  distributed  to the Limited  Partners as a
special  distribution in the amount of $159 per original $1,000  investment paid
concurrently  with  the  regular  quarterly  distribution  on May 15,  1996.  An
additional amount of $10.48 per original $1,000 investment related to the Walker
House sale was distributed to the Limited Partners in December 1996.

         The joint venture agreement  provided that distributable net cash flow,
to the extent that it exceeded minimums,  as defined,  would be allocated 99% to
the Partnership and 1% to the co-venturer, as a distribution to the partners.

         Taxable income and tax loss from operations in each year were allocated
99% to the  Partnership  and 1% to the  co-venturer.  Allocations  of the  joint
venture operations between the partners for financial  accounting  purposes have
been made in conformity with the allocations of taxable income or tax loss.

         Upon sale or  refinancing,  the  Partnership  was entitled to an amount
equal to its investment in the properties  plus a 7% simple,  cumulative  return
per annum on its investment as a first priority,  after payment of mortgage debt
and any deferred fees then payable.  Next, any accrued  subordinated  management
fees were to be paid. Proceeds were then to be applied to the payment of accrued
interest and then principal on any outstanding  operating notes. The co-venturer
was then to  receive  an amount  equal to its  remaining  investment.  Remaining
proceeds were to be split between the Partnership and the co-venturer in varying
proportions in accordance with the joint venture agreement.

         Taxable  income  resulting  from a sale of the properties was allocated
between the  Partnership  and the  co-venturer  generally as sales proceeds were
distributed.

(b)  Oregon Portland Associates
     --------------------------

         On October 28,  1983,  the  Partnership  acquired an interest in Oregon
Portland  Associates,  a newly formed Oregon  general  partnership  organized to
purchase and operate Portland Center, a residential apartment and office complex
located  in  Portland,  Oregon  with a total of 525  apartment  units and 28,328
square feet of office space.  The  Partnership is a general partner in the joint
venture.  The  Partnership's  co-venture  partner  is an  affiliate  of  Golub &
Company. The property was purchased on April 26, 1984.

         The aggregate cash  investment by the  Partnership for its interest was
approximately  $11,097,000  (including  acquisition fees of $800,000 paid to the
Adviser and  $280,000  paid to an affiliate  of the  co-venturer).  In addition,
acquisition fees aggregating  $280,000 were deferred at the time of purchase and
were  paid to the  Adviser  out of net  cash  flow  of the  joint  venture.  The
apartment  complex  was  acquired  subject  to  nonrecourse   mortgage  balances
totalling  approximately  $18,493,000 at the time of the closing.  During fiscal
1994, the joint venture  refinanced its  outstanding  debt obligation with a new
nonrecourse  loan  in  the  amount  of  approximately   $23  million  issued  in
conjunction  with an insured loan program of the Department of Housing and Urban
Development  (HUD). The loan,  which is fully assumable,  has a 35-year maturity
and bears  interest  at a fixed  rate of 7.125%  per  annum.  As part of the HUD
insured  loan  program,  the joint  venture  was  required to  establish  escrow
accounts for  replacement  reserves and other required  repairs.  The balance of
these restricted  escrow deposits totalled  approximately  $2.1 million and $2.3
million  as of  December  31,  1996 and  1995,  respectively.  The  excess  loan
proceeds,  after  repayment of the  outstanding  indebtedness,  were used to pay
transaction costs and to fund the required escrow accounts.

         Pursuant to the agreement,  the  Partnership  is to be reimbursed  each
year by the joint venture for the joint  venture's  share of the  management fee
and expenses (a "deferred  fee")  allocable to or incurred by the Partnership in
connection with the management of the property.  These fees are payable only out
of net cash flow, as defined, and are cumulative to the extent not paid.

         The joint  venture  agreement  provides that net cash flow, as defined,
will be allocated  first to the payment of any deferred fees then payable,  then
to the payment of interest  and  principal  on any loans made by the partners to
the joint venture,  and any remaining  amounts 99% to the  Partnership and 1% to
the  co-venturer  as a  distribution  to the partners.  Such  distributions  are
subject to the terms of the first mortgage and a regulatory agreement.

         Net proceeds  (after  repayment  of  third-party  indebtedness  and the
establishment  of any necessary  reserves)  from a sale or  refinancing  will be
distributed first to the payment of all deferred fees then payable,  then to the
payment of principal  and interest on certain  loans made by the partners to the
joint  venture.  The  Partnership  will  then  receive  an  amount  equal to its
investment  in the property  plus a 6%  noncompounded  cumulative  return on its
investment.  Interest and principal on any remaining  loans made by the partners
to the joint venture will then be paid.  Next, the  co-venturer  will be paid an
amount equal to its remaining  investment.  Any remaining proceeds will be split
between  the  Partnership  and the  co-venturer  in  varying  proportions  which
increase in the co-venturer's  favor from 5% to 40% in accordance with the joint
venture  agreement.  Such  payments to the  partners,  except for the payment of
interest and principal on any remaining  loans as described  above,  will not be
made if a partner's  account in the joint venture equals zero,  until sufficient
distributions  have  been  made to the  other  partner  in order  to bring  that
partner's  capital  account  to  zero.  Under  the  terms of the  joint  venture
agreement,  both the Partnership and the co-venturer  have certain first refusal
rights with respect to a sale of the operating investment property.

         Taxable income and tax loss from  operations in each year are allocated
99% to the  Partnership  and 1% to the  co-venturer.  Allocations  of the  joint
venture operations between the partners for financial  accounting  purposes have
been made in  conformity  with the  allocations  of taxable  income or tax loss.
Taxable  income  and tax  loss  resulting  from a sale of the  property  will be
allocated  between  the  Partnership  and the  co-venturer  generally  as  sales
proceeds are distributed.

         The  joint  venture  originally  entered  into  a  property  management
agreement with an affiliate of the co-venturer, cancellable at the Partnership's
option upon the occurrence of certain  events,  that provided for management and
leasing  commission fees to be paid to the property manager.  The management fee
was 5% of  gross  rents,  as  defined.  In  September  of 1989  the  Partnership
exercised its right to terminate the contract and hired an unaffiliated party to
manage  the  property.  The  joint  venture  continues  to pay a  joint  venture
management  fee to the  original  property  manager.  This fee is equal to 1% of
gross rents, as defined.

         In the event the joint venture requires  additional  funds,  such funds
are to be provided 90% by the  Partnership and 10% by the co-venturer as capital
contributions  or interim  borrowings in accordance  with the terms of the joint
venture  agreement.  During fiscal 1994,  the  Partnership  advanced 100% of the
funds  required  by the  venture  to  close  the  debt  refinancing  transaction
described above.  Such advances,  which totalled  approximately  $117,000,  were
repaid in full during fiscal 1995, including accrued interest.  All such amounts
are  reflected  as  distributions   received  in  the  Partnership's   financial
statements.

(c) Hudson Partners
    ---------------

         On  November  20, 1984 the  Partnership  acquired an interest in Hudson
Partners,  a Texas  general  partnership  organized  to purchase and operate the
Hudson Apartments,  a residential apartment complex located in Tyler, Texas with
a total of 144 apartment  units.  The  Partnership  was a general partner in the
joint venture. The Partnership's original co-venture partner was an affiliate of
the Trammel Crow organization. The property was purchased on November 20, 1984.

         On October 31, 1989,  the  co-venturer  assigned  its entire  ownership
interest in Hudson Partners to Second PW Growth Properties,  Inc., ("Growth II")
the Managing  General Partner of the  Partnership.  The assignment  included all
prior interests,  obligations and  responsibilities  of the original  co-venture
partner.  On October 30, 1990, an amended and restated  joint venture  agreement
was entered  into,  whereby:  the  Partnership  assigned its entire  partnership
interest to PaineWebber Hudson Partners, Ltd. ("PW Hudson"),  Growth II withdrew
from the joint venture,  and Hudson  Associates Ltd.  (Associates)  was admitted
into the joint venture in exchange for a $600,000 cash capital contribution.  PW
Hudson  was a Texas  limited  partnership  between  the  Partnership  as general
partner  and  Growth II as a limited  partner.  Associates  is an  affiliate  of
Horn-Barlow Companies. During fiscal 1995, the co-venture partner approached the
Partnership  about the possibility of purchasing the  Partnership's  interest in
the  Hudson  joint  venture  in  conjunction  with the  refinancing  transaction
discussed below. In the first quarter of fiscal 1996, the Partnership  agreed to
sell its interest in Hudson  Partners for  $350,000.  While such  proceeds  were
substantially  below  the  amount  of  the  Partnership's  original  investment,
management  believed that the offer was  reflective of the current fair value of
the Partnership's  interest and that it was an opportune time to dispose of this
investment.  The  completion  of this  transaction  remained  contingent  upon a
potential  new mortgage  lender  advancing  sufficient  funds to the  co-venture
partner for the purpose of purchasing the Partnership's  interest.  Nonetheless,
since it was the Partnership's intention to sell its interest, the investment in
Hudson  Partners was separately  classified as an investment held for sale as of
March 31, 1995 and its net  carrying  value was written  down to  $350,000.  The
write-down  resulted in the  recognition of a loss of $2,019,000 in fiscal 1995.
On September 12, 1995, the  co-venturer  closed on the  refinancing  transaction
which  provided  funds  for the  consummation  of the sale of the  Partnership's
interest at the agreed upon price of $350,000.

         The aggregate cash  investment by the  Partnership for its interest was
approximately  $2,611,000 (including acquisition fees of $183,000 to the Adviser
and $66,000 to an affiliate of the co-venturer).  In addition,  acquisition fees
aggregating $88,000 were deferred and paid to the Adviser from distributable net
cash flow of the joint venture,  as defined.  The apartment complex was acquired
subject  to a  nonrecourse  mortgage  balance of  $4,500,000  at the time of the
closing.  In October 1990, the  Partnership  paid $3,149,939 on the old mortgage
and the remaining principal balance of $1,995,318, plus the accrued and deferred
interest balance of $216,566, were forgiven by the lender. A substantial portion
of the $3,149,939  payment was funded by a new $2,666,000  nonrecourse  mortgage
note payable  entered into on October 30, 1990,  which bore  interest at 10% per
annum and matured in November 1995.

         The net profits and losses of the joint  venture were  allocated 99% to
the Partnership and 1% to the co-venturer through October 30, 1990.  Thereafter,
in accordance with the terms of the restated joint venture agreement,  income or
gain were to be allocated,  first, to Associates  until such time as it had been
allocated  cumulative income or gain equal to the cumulative  amount, if any, of
its Preferred Return,  as defined,  and LC Preferred Return, if any, as defined,
distributed to it during the year, and, second to PW Hudson and Associates until
such time as they had been allocated  cumulative  income or gain equal to, or in
proportion  to,  if  there  was  insufficient  income  or gain,  the  respective
cumulative  distributions  to them during the year  relative  to  proceeds  from
Capital Transactions, as defined. Losses were to be allocated equally between PW
Hudson and Associates.  Allocations of the joint venture's  operations among the
partners for financial accounting purposes have been made in conformity with the
allocations of taxable income or tax loss.

         The  income  and  losses of PW Hudson  in each  fiscal  year were to be
allocated  99.99% to the Partnership  and .01% to Growth II.  Available cash was
first be used to repay  interest  and  principal  on  Optional  Loans,  and then
distributed 99.99% to the Partnership and .01% to Growth II.

         The joint  venture had  initially  entered  into a property  management
agreement with an affiliate of the original co-venturer.  In August of 1990, the
Partnership  terminated  that  contract and entered  into a property  management
contract with an affiliate of Associates  that provided for a management  fee to
be paid at the rate of 5% of monthly gross rents, as defined in the agreement.

5.    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 PW Growth  Properties,  Inc. and Properties
Associates,  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 Paine Webber Growth
Properties Two LP, PaineWebber, Second PW Growth Properties, Inc. and Properties
Associates (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 Paine  Webber
Growth  Properties  Two  LP,  also  alleged  that  following  the  sale  of  the
partnership  interests,  PaineWebber,  Second PW  Growth  Properties,  Inc.  and
Properties   Associates   misrepresented   financial   information   about   the
Partnership's  value  and  performance.   The  amended  complaint  alleged  that
PaineWebber,  Second  PW  Growth  Properties,  Inc.  and  Properties  Associates
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
pendng 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.

     Based on the  settlement  agreement  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 this  matter  will have a  material  impact on the  Partnership's
financial statements, taken as a whole.
<PAGE>

6.   Subsequent Event

     On May 15,  1997,  the  Partnership  distributed  $129,000  to the  Limited
Partners  and $1,000 to the General  Partners  for the  quarter  ended March 31,
1997.



<PAGE>




<TABLE>
<CAPTION>

Schedule III - Real Estate and Accumulated Depreciation



                                                                 PAINEWEBBER GROWTH PROPERTIES TWO LP
                                                         SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
                                                                           December 31, 1996
                                                                            (In thousands)

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

Apartment 
 Complex
Portland, 
 Oregon       $22,540       $4,700   $19,453      $7,433       $4,700   $26,886    $31,586   $13,306     4/26/84       7-25 yrs.
              =======       ======   =======      ======       ======   =======    =======   =======

Notes

(A)  The  aggregate  cost of real estate  owned at December 31, 1996 for Federal income tax purposes is approximately $36,276.

(B)  See Note 4 to the financial  statements  for a description of the agreement though which the Partnership owns an interest in
     the above property and for a discussion of the debt encumbering the operating investment property.

(C) Reconciliation of real estate owned:
                                                                1996              1995             1994
                                                                ----              ----             ----

         Balance at beginning of period                         $40,487          $39,649           $37,738
         Increase due to acquisition and improvements               508              839             1,911
         Decrease due to sale of Walker House                    (9,409)               -                 -
         Decrease due to disposals                                    -               (1)                -
                                                                -------          -------           -------
         Balance at end of period                               $31,586          $40,487           $39,649
                                                                ========         =======           =======

(D) Reconciliation of accumulated depreciation:

         Balance at beginning of period                         $15,452          $13,832           $12,474
         Depreciation expense                                     1,354            1,621             1,358
         Decrease due to sale of Walker House                    (3,500)               -                 -
         Write-offs due to disposals                                  -               (1)                -
                                                                -------          ------            -------
         Balance at end of period                               $13,306          $15,452           $13,832
                                                                =======          =======           =======


</TABLE>


<PAGE>





                         REPORT OF INDEPENDENT AUDITORS


The Partners
Oregon Portland Associates:

     We have  audited the  accompanying  balance  sheets of the Oregon  Portland
Associates (an Oregon General Partnership) as of December 31, 1996 and 1995, and
the related  statements of operations,  changes in venturers' capital (deficit),
and cash flows for each of the three  years in the  period  ended  December  31,
1996. These financial  statements are the  responsibility  of the  Partnership's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

     We conducted  our audits in accordance  with  generally  accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

     In our opinion,  the financial statements referred to above present fairly,
in all material respects,  the financial position of Oregon Portland  Associates
at December 31, 1996 and 1995,  and the results of its  operations  and its cash
flows for each of the three  years in the  period  ended  December  31,  1996 in
conformity with generally accepted accounting principles.





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



Boston, Massachusetts
February 12, 1997



<PAGE>


                           OREGON PORTLAND ASSOCIATES
                         (AN OREGON GENERAL PARTNERSHIP)

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

                                     Assets
                                                    1996                1995
                                                    ----                ----
Current assets:
     Cash and cash equivalents                    $    903          $     939
     Tenant receivables                                22                   9
     Repair escrow deposits                            32                  32
     Mortgage escrow deposits - restricted            344                 359
     Tenant security deposits - held in trust         354                 216
     Prepaid real estate taxes                        248                 222
     Prepaid insurance                                 25                  29
     Other assets                                      10                   8
                                                 --------           ---------
         Total current assets                       1,938               1,814

HUD reserve for replacements                        2,123               2,299

Operating investment property, at cost:
     Land                                           4,700               4,700
     Buildings and improvements                    23,134              22,874
     Equipment                                      3,752               3,504
                                                 --------           ---------
                                                   31,586              31,078
     Less accumulated depreciation                (13,306)            (11,952)
                                                ----------          ---------
Net operating investment property                  18,280              19,126

Deferred financing costs and deferred leasing
     commissions, net of accumulated
      amortization of $161 ($98 in 1995)              716                 780
                                                ---------           ---------
                                                $  23,057           $  24,019
                                                =========           =========

                       Liabilities and Venturers' Deficit

Current liabilities:
     Current portion of long-term debt         $     189            $     176
     Accounts payable and accrued expenses           292                  372
     Prepaid rental and other deferred income         43                  113
     Tenant security deposits                        178                  188
     Payable to property manager and affiliates       35                   10
                                               ---------            ---------
         Total current liabilities                   737                  859

Long-term debt                                    22,351               22,540
Management fee and expense reimbursement due
     to majority partner                             494                  913
Venturers' deficit                                  (525)                (293)
                                               ----------           ---------
                                               $  23,057            $  24,019
                                               ==========           =========


                             See accompanying notes.


<PAGE>


                           OREGON PORTLAND ASSOCIATES
                         (AN OREGON GENERAL PARTNERSHIP)

                            STATEMENTS OF OPERATIONS
              For the years ended December 31, 1996, 1995 and 1994
                                 (In thousands)

                                        1996              1995            1994
                                        ----              ----            ----
Revenues:
     Rental income                     $ 6,054           $ 5,456        $ 5,295
     Interest income                       119               217             74
     Other income                           80                76             73
                                       -------           -------        -------
                                         6,253             5,749          5,442
Expenses:
     Interest and amortization
       of related financing fees         1,780             1,808          1,943
     Depreciation                        1,354             1,319          1,059
     Repairs and maintenance               961               675            504
     Utilities                             351               298            296
     Real estate taxes, net of
       refunds of $15 in 1994              469               455            468
     Professional fees                      38                34             30
     General and administrative            370               279            243
     Salaries and related costs            436               465            446
     Management and related fees           501               504            521
     Insurance                              95                93            106
     Security                              130                77             68
                                       -------          --------       --------
         Total expenses                  6,485             6,007          5,684
                                       -------          --------       --------
Net loss                               $  (232)         $   (258)      $   (242)
                                       =======          ========       ========












                             See accompanying notes.



<PAGE>


                           OREGON PORTLAND ASSOCIATES
                         (AN OREGON GENERAL PARTNERSHIP)

              STATEMENTS OF CHANGES IN VENTURERS' CAPITAL (DEFICIT)
              For the years ended December 31, 1996, 1995 and 1994
                                 (In thousands)


                                       Majority           Minority
                                       Partner            Partner        Total
                                       -------            -------        ------

Balance at December 31, 1993          $    312            $   (105)     $   207

Net loss                                  (240)                 (2)        (242)
                                      --------            ---------     --------

Balance at December 31, 1994                72                (107)         (35)

Net loss                                  (255)                 (3)        (258)
                                      --------           ---------      --------

Balance at December 31, 1995              (183)               (110)        (293)

Net loss                                  (230)                 (2)        (232)
                                      --------           ---------      -------

Balance at December 31, 1996         $    (413)          $    (112)     $  (525)
                                     =========           =========      =======















                             See accompanying notes.


<PAGE>


                           OREGON PORTLAND ASSOCIATES
                         (AN OREGON GENERAL PARTNERSHIP)

                                                                      
                            STATEMENTS OF CASH FLOWS
              For the years ended December 31, 1996, 1995 and 1994
                     Increase (Decrease) in Cash and Cash Equivalents
                                                    
                                 (In thousands)
<TABLE>
<CAPTION>

                                                                         1996           1995               1994
                                                                         ----           ----               ----
<S>                                                                      <C>            <C>                 <C> 
                                                                     
Cash flows from operating activities:
     Net loss                                                        $   (232)       $    (258)        $   (242)
     Adjustments to reconcile net loss
     to net cash provided by operating activities:
       Depreciation                                                     1,354             1,319            1,059
       Amortization of deferred financing costs                            56                27               57
       Amortization of deferred leasing commissions                         6                 4                9
       Interest added to HUD reserve for replacements                    (109)             (195)               -
       Net changes in operating assets and liabilities:
         Tenant receivables                                               (13)                -                2
         Mortgage escrow deposits                                        (123)              (39)            (130)
         Prepaid real estate taxes                                        (26)               28               16
         Prepaid insurance                                                  4                 8              (11)
         Other assets                                                      (2)               12              164
         Accounts payable and accrued expenses                            (79)               75              125
         Prepaid rental and other deferred income                         (71)               73                8
         Tenant security deposits                                         (10)               16              (24)
         Payable to property manager and affiliates                        25                 1              (41)
         Management fee and expense reimbursement due
           to majority partner                                           (419)             (502)             (62)
                                                                   ----------           -------        ---------
           Net cash provided by operating activities                      361               569              930

Cash flows from investing activities:
     Additions to operating investment property, net                     (508)             (809)          (1,866)
     Repair escrow withdrawals                                              -             1,010              363
     HUD reserve for replacements - deposits                              (79)              (79)             (77)
     HUD reserve for replacements - withdrawals                           366               278              441
     Increase in deferred leasing commissions                               -               (18)               -
                                                                  -----------          --------        ---------
           Net cash (used in) provided by investing activities           (221)              382           (1,139)

Cash flows from financing activities:
     Debt payments                                                       (176)             (164)            (141)
     Repayment of loan from majority partner                                -                 -             (117)
                                                                 ------------          --------        ---------
           Net cash used in financing activities                         (176)             (164)            (258)
                                                                 ------------          --------        ---------

Net (decrease) increase in cash and cash equivalents                      (36)              787             (467)

Cash and cash equivalents, beginning of year                              939               152              619
                                                                 ------------          --------        ---------
Cash and cash equivalents, end of year                           $        903          $    939        $     152
                                                                 ============          ========        =========

Cash paid during the year for interest                           $      1,613          $  1,624        $   1,510
                                                                 ============          ========        =========

</TABLE>




                             See accompanying notes.


<PAGE>


                            OREGON PORTLAND ASSOCIAES
                         (AN OREGON GENERAL PARTNERSHIP)
                          NOTES TO FINANCIAL STATEMENTS


1.  Summary of significant accounting policies
    Organization
    ------------

         Oregon  Portland   Associates,   an  Oregon  General  Partnership  (the
"Partnership"),  was  organized  on  October  28,  1983  in  accordance  with an
agreement between PaineWebber Growth Properties Two LP ("majority  partner") and
Libra Portland Partners ("minority  partner").  The Partnership was organized to
purchase and operate the residential portion (and a limited amount of commercial
office  space) (the  "property")  of the Portland  Center (the  "Project")  from
Portland Center  Associates  ("PCA" or "seller").  Portland Center is located in
Portland, Oregon and was purchased on April 26, 1984 by the Partnership.

         At the date of  purchase,  the  Project  was  encumbered  under a first
mortgage  and was  subject to a  regulatory  agreement  with the  Department  of
Housing and Urban Development  ("HUD").  PCA received a wraparound mortgage note
from the Partnership  for a portion of the purchase price,  and PCA continues to
own and operate a portion of the  Project.  While the first  mortgage  was still
outstanding,  the Partnership  was required to sign a regulatory  agreement with
HUD containing  restrictive  covenants which,  among other things,  limit annual
distributions  of net  operating  receipts to "surplus  cash" (as defined in the
regulatory  agreement).  The  regulatory  agreement also requires that a reserve
fund  for   replacements  for  the  property  be  funded  monthly  and  that  no
distributions  (as  defined  in the  regulatory  agreement)  be  made  from  the
property's  operations,  except upon  satisfaction of certain  conditions in the
regulatory agreement.

         The  Partnership  refinanced the wraparound  mortgage during 1993. This
mortgage is also subject to a regulatory  agreement with HUD. The new regulatory
agreement contains the same restrictive covenants as described above.

2.   Use of Estimates

         The  preparation  of financial  statement in conformity  with generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that  affect the  reported  amounts of assets and  liabilities  and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements  and the  reported  amounts  of  revenues  and  expenses  during  the
reporting period. Actual results could differ from the estimates and assumptions
used.

     Credit Risk
     -----------

         Financial  instruments  which  potentially  subject the  Partnership to
concentrations  of credit risk include cash and cash  equivalents and restricted
cash accounts. The Partnership places its cash deposits with credit worthy, high
quality financial  institutions.  The concentration of such cash deposits is not
deemed to create a significant risk to the Partnership.

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

         The Partnership considers all highly liquid investments with a maturity
of three months or less when purchased to be cash equivalents.

     Operating Investment Property
     -----------------------------

         Operating  investment  property is 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."  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.

         The  acquisition  of the assets  involved  the issuance of a wraparound
mortgage which had been discounted; accordingly, these assets were reduced by an
amount  equal to the  original  discount.  Maintenance  and repair  expenses are
charged to operations  when incurred,  while major renewals and  betterments are
capitalized.

     Depreciation of buildings and improvements is provided on the straight-line
method over an estimated useful life of 15 to 25 years. Equipment is depreciated
on the  straight-line  method over  estimated  useful lives ranging from 5 to 10
years.

         The  apartment  units are  leased for terms of one year or less and the
commercial property for terms of five years or less.

     Deferred Financing Costs and Deferred Leasing Commissions
     ---------------------------------------------------------

         Deferred financing costs consist principally of fees and costs incurred
in conjunction with securing  refinancing for the mortgage  payable.  These fees
are being amortized (and are included in interest  expense) over the term of the
loan  utilizing a method that  approximates  the  level-yield  method.  Deferred
leasing commissions are amortized over the term of the related lease.

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

         The  Partnership  is not a  taxable  entity,  and  the  results  of its
operations  are includable in the tax returns of the partners.  Accordingly,  no
income tax  provision  or benefit is  reflected  in the  accompanying  financial
statements.

     Fair Value of Financial Instruments
     -----------------------------------

         The carrying  amount of cash and cash  equivalents  approximates  their
fair value due to the short-term maturities of these instruments. The fair value
of the  Partnership's  long-term debt is estimated  using a discounted cash flow
analysis,  based on the  current  market  rate for  similar  types of  borrowing
arrangements.

     Reclassifications
     -----------------

         Certain  amounts  in  the  financial  statements  presented  have  been
reclassified to conform prior years' data to the current year presentation.

3.   Partnership Agreement

         The Partnership Agreement (the "Agreement") provides that net cash flow
(as  defined  in the  Agreement)  be  distributed  as  follows,  subject  to the
provisions of the HUD  regulatory  agreement  (discussed in Note 1): first,  for
payment of any deferred fees currently payable; second, for payment of interest,
then principal on any loans made by the partners to the  Partnership' and third,
99% to the majority partner and 1% to the minority partner.

         Per the Agreement,  net income or loss is allocated 99% to the majority
partner and 1% to the minority partner.

         Net capital proceeds (after  repayment of third-party  indebtedness and
establishing any necessary  reserves) from a sale or refinancing  (after payment
of any deferred fees and any principal and interest on certain loans made by the
partners to the  Partnership)  will be  distributed  as follows:  first,  to the
majority  partner  until it has  received a return of its  investment  plus a 6%
simple,  cumulative return on such investment;  second,  for payment of interest
then principal of the minority partner's remaining  investment;  and thereafter,
to the  majority  partner  and  minority  partner in varying  percentages  which
increase in the minority partner's favor (5% to 40%) as the cumulative return on
the majority partner's investment increases.

         The above  payments,  except the payment of interest then  principal on
any remaining loans made by the partners to the Partnership, will not be made to
a  partner  if  its  capital  account  in the  Partnership  equals  zero,  until
sufficient  distributions  are made to the other partner to bring that partner's
capital account to zero.

         Additional  cash, after initial capital  requirements,  required by the
Partnership,  is to be provided, either in the form of a capital contribution or
a loan to the  Partnership,  90% by the majority partner and 10% by the minority
partner, unless otherwise agreed to by the partners.

4.   Related Party Transactions

         Pursuant to the  Agreement,  the majority  partner is to be  reimbursed
each year by the Partnership for the  Partnership's  share of the management fee
and expenses (a "deferred fee") allocable to or incurred by the majority partner
in connection with the management of the property.  Management fees and expenses
incurred  totalled  $193,000,  $191,000  and  $217,000  in 1996,  1995 and 1994,
respectively.   At  December  31,  1996  and  1995,   $494,000   and   $913,000,
respectively,  of the amounts  previously accrued have not been paid. These fees
are  payable  out of net  cash  flow  or net  capital  proceeds  from a sale  or
refinancing,  as defined, and are cumulative to the extent not paid. During 1996
and 1995,  $612,000 and $693,000 of fees and expenses  were paid to the majority
partner.

         The Partnership had a property management contract with an affiliate of
the minority partner that provided for management and leasing commission fees to
be paid to the property manager.  The management fee was 5% of "gross rents," as
defined. As of September 1, 1989, the Partnership changed property managers, the
new property  manager being a third party. The new management fee is based on 4%
of "gross rents", as defined, and was $244,000,  $221,000 and $215,000 for 1996,
1995 and 1994,  respectively.  The  Partnership  continues to pay a  Partnership
management  fee to the  original  property  manager.  This fee is equal to 1% of
"gross rents",  as defined,  and was $61,000,  $55,000 and $54,000 in 1996, 1995
and 1994, respectively.

         The Partnership has an agreement with the new property  manager whereby
the property manager arranges and supervises construction  improvement projects,
and in turn  receives  a fee  equal  to 2.5% of the  gross  contract  amount  on
non-HUD-related construction.  There were no such fees paid during 1996, 1995 or
1994. On  HUD-related  construction,  commencing  January 1, 1994,  the property
manager  receives  a fee of $3,000  per month,  not to exceed  $75,000.  Fees of
$3,000, $36,000 and $36,000 were paid in 1996, 1995 and 1994, respectively.

5.   Long-term debt

         Long-term debt  aggregated  $22,540,000 and $22,716,000 at December 31,
1996 and 1995,  respectively  (fair value  approximates  the  carrying  value at
December  31,  1996  and  1995).  The  borrowing  is  secured  by the  operating
investment  property and bears interest at 7.125% with principal and interest of
$149,000 due monthly  through January 1, 2029. This loan is subject to the terms
of a HUD regulatory agreement as disclosed in Note 1.

         Principal  maturities on the mortgage for years ending  December 31 are
as follows (in thousands):

                           Year                      Amount
                           ----                      ------

                           1997                     $   189
                           1998                         203
                           1999                         218
                           2000                         234
                           2001                         270
                           Thereafter                21,426
                                                    -------
                                                    $22,540
                                                    =======

         In  conjunction  with the  mortgage,  the  Partnership  was required to
deposit portions of the proceeds into various escrow accounts. The repair escrow
deposits  are  to be  expended  on  specific  nonrecurring  landscape  and  site
improvements  to the property.  From this account,  $1,010,000 and $363,000 were
expended during 1995 and 1994,  respectively.  No amounts were expended from the
repair  escrow  during  1996.  The HUD  reserve  for  replacements  is an amount
stipulated  by HUD as  required  by the  regulatory  agreement  to fund  ongoing
interior betterments and replacements to the property.


<PAGE>


                                                                      

                                                               
                           Reznick Fedder & Silverman
                       217 East Redwood Street, Suite 1900
                            Baltimore, MD 21202-3316



                          INDEPENDENT AUDITORS' REPORT



To the Partners
Montgomery Village HWH Associates

     We have audited the accompanying  balance sheets of Montgomery  Village HWH
Associates  as of December  31, 1996 and 1995,  and the  related  statements  of
operations,  changes  in  partners'  equity and cash flows for each of the three
years in the period ended December 31, 1995. These financial  statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

     We conducted  our audits in accordance  with  generally  accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

     In our opinion,  the financial statements referred to above present fairly,
in all material  respects,  the  financial  position of  Montgomery  Village HWH
Associates at December 31, 1996 and 1995, and the results of its operations, the
changes in partners'  equity,  and its cash flows for each of the three years in
the period ended  December 31,  1995,  in  conformity  with  generally  accepted
accounting principles.






                         /s/ Reznick Fedder & Silverman
                             --------------------------
                             Reznick Fedder & Silverman


Baltimore,  Maryland 
January 5, 1996,
except for Note E,
as to which the date is March 13, 1996



<PAGE>


                        MONTGOMERY VILLAGE HWH ASSOCIATES

                                 BALANCE SHEETS
                           December 31, 1995 and 1994
                                 (In thousands)

                                     ASSETS

                                                  1995              1994
                                                  ----              ----

CURRENT ASSETS:
   Cash and cash equivalents                    $   123           $  107
   Escrow deposits                                  191              205
   Accounts receivable                               24               49
   Prepaid expenses                                  68               63
   Other current assets                              16                -
                                               --------        ---------
         Total current assets                       422              424
                                                -------           ------

RENTAL PROPERTY
   Land                                           1,211            1,211
   Buildings, improvements and furniture
     and fixtures                                 8,198            8,168
                                                -------          -------
                                                  9,409            9,379
   Less accumulated depreciation                  3,500            3,198
                                                -------          -------

                                                  5,909            6,181
                                                -------          -------

DEFERRED EXPENSES, net of accumulated
   amortization of $104 and $87                      16               33
                                                -------           ------
                                                $ 6,347           $6,638
                                                ======            ======

                        LIABILITIES AND PARTNERS' EQUITY

CURRENT LIABILITIES:
   Current maturities of long-term debt         $4,953            $   31
   Accounts payable and accrued expenses            22                55
   Accrued interest payable                         39                39
   Tenant security deposits payable                 67                63
   Rents received in advance                         7                13
   Other current liabilities                         4                 8
                                                ------            ------
         Total current liabilities               5,092               209

LONG-TERM DEBT, net of current maturities            -             4,952

PARTNERS' EQUITY                                 1,255             1,477
                                                ------           -------
                                                $6,347            $6,638
                                                ======            ======





                        See notes to financial statements

<PAGE>


                        MONTGOMERY VILLAGE HWH ASSOCIATES

                            STATEMENTS OF OPERATIONS
                  Years ended December 31, 1995, 1994 and 1993
                                 (In thousands)


                                        1995             1994            1993
                                        ----             ----            ----
Revenue
   Rents                                $1,740            $1,683         $1,637
   Interest income                           6                10              8
   Other revenue                            31                23             47
                                        ------            ------         ------
         Total revenue                   1,777             1,716          1,692
                                        ------            ------         ------

Expenses
   Mortgage interest                       472               475            477
   Depreciation and amortization           320               316            316
   Repairs and maintenance                 124               134            154
   Utilities                               267               267            273
   Real estate taxes and licenses          129               128            130
   Salaries and related costs              140               145            135
   General and administrative               59                56             55
   Management fees                          62                60             58
   Insurance                                25                24             24
   Bad debts                                 2                 5              7
                                     ---------        ----------       --------

         Total expenses                  1,600             1,610          1,629
                                        ------           -------        -------
         EXCESS OF REVENUE 
          OVER EXPENSES                $   177           $   106       $     63
                                       =======           =======       ========









                        See notes to financial statements

<PAGE>


                        MONTGOMERY VILLAGE HWH ASSOCIATES

                    STATEMENTS OF CHANGES IN PARTNERS' EQUITY
                  Years ended December 31, 1995, 1994 and 1993
                                 (In thousands)

                                        Growth II       MVLP          Total
                                        ---------       ----          -----

Partners' equity (deficit),
  December 31, 1992                      $2,106        $  (103)        $2,003

Distributions                              (200)             -           (200)

Excess of revenue over expenses              63              -             63
                                       --------        -------        --------

Partners' equity (deficit),
  December 31, 1993                       1,969          (103)          1,866

Distributions                              (481)          (15)           (496)

Excess of revenue over expenses             106             1             107
                                        -------      --------         -------

Partners' equity (deficit),
  December 31, 1994                       1,594          (117)          1,477

Distributions                              (395)           (4)           (399)

Excess of revenue over expenses             175             2             177
                                       --------      --------         --------

Partners' equity (deficit),
  December 31, 1995                    $  1,374      $  (119)         $ 1,255
                                       ========      =======          =======





                        See notes to financial statements


<PAGE>


                        MONTGOMERY VILLAGE HWH ASSOCIATES

                            STATEMENTS OF CASH FLOWS
                  Years ended December 31, 1995, 1994 and 1993
                                 (In thousands)

<TABLE>
<CAPTION>

                                                                          1995             1994              1993
                                                                          ----             ----              ----
<S>                                                                        <C>             <C>                <C>

Cash flows from operating activities:
   Excess of revenue over expenses                                       $   177           $  106         $   63
   Adjustments to reconcile excess of revenue
     over expenses to net cash provided by
     operating activities:
     Depreciation and amortization                                           320              316            316
     Changes in assets and liabilities:
       Decrease (increase) in accounts receivable                             25                8            (32)
       Decrease (increase) in escrow deposits                                 14               25            (22)
       (Increase) decrease in prepaid expenses                                (5)               3             (2)
       (Increase) decrease in other current assets                           (16)              51            (51)
       (Decrease) increase in accounts payable
         and accrued expenses                                                (33)              32            (22)
       Increase in tenant security deposits                                    4                6              3
       (Decrease) increase in rents received in advance                       (6)              11              -
       (Decrease) increase in other current liabilities                       (3)               3              -
                                                                         -------           ------         ------
           Net cash provided by operating activities                         477              561            253
                                                                         -------           ------         ------

Cash flows from investing activities:
   Additions to rental property                                              (30)             (45)           (29)
                                                                         ------           -------         ------
           Net cash used in investing activities                             (30)             (45)           (29)
                                                                         ------           -------         ------

Cash flows from financial activities:
   Distributions to partners                                                (400)            (491)          (200)
   Principal payments on long-term debt                                      (31)             (28)           (25)
                                                                         -------          -------        -------
           Net cash used in financial activities                            (431)            (519)          (225)
                                                                         ------           -------        -------

NET INCREASE (DECREASE) IN CASH
  AND CASH EQUIVALENTS                                                        16               (3)            (1)

Cash and cash equivalents, beginning of year                                 107              110            111
                                                                         -------          -------        -------

Cash and cash equivalents, end of year                                   $   123          $   107        $   110
                                                                         =======          =======        =======

Supplemental disclosure of cash flow information:
  Cash paid during the year for interest                                 $   472          $   475        $   477
                                                                         =======          =======        =======



</TABLE>




                        See note to financial statements


<PAGE>

                        MONTGOMERY VILLAGE HWH ASSOCIATES
                          NOTES TO FINANCIAL STATEMENTS
                        DECEMBER 31, 1995, 1994 AND 1993


NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         Montgomery  Village HWH Associates (the  Partnership)  was organized on
     December 29, 1983,  in  accordance  with a  partnership  agreement  between
     PaineWebber  Growth Properties Two LP (Growth II) and General American Real
     Estate and Development, Inc. (GARE). In 1985, GARE transferred its interest
     in  the  Partnership  to  Montgomery  Village  Limited  Partnership  (MVLP)
     effective June 15, 1984.

         The  Partnership  was organized to purchase and operate two residential
     apartment  complexes  (Walker House and The Hamlet) in Montgomery  Village,
     Montgomery County, Maryland. On September 30, 1986, The Hamlet was sold.

          All  leases  between the  Partnership  and tenants of the property are
     operating leases.

     Use of Estimates
     ----------------

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

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

          For  the purpose of  reporting  cash flows,  the  Partnership  treat
     all highly liquid investments with original  maturities at date of purchase
     of 90 days or less as cash equivalents.

     Rental Property
     ---------------

         Rental property is carried at cost.  Depreciation is computed on a
     straight-line basis over estimated useful lives of 5 to 30 years.

     Deferred Expenses
     -----------------

         Deferred expenses consist of permanent mortgage fees and other expenses
     incurred in  connection  with the  Partnership's  mortgage  which are being
     amortized,  using the straight-line method, over the seven-year term of the
     mortgage.

     Rental Income
     -------------

         No  provision  or benefit for income  taxes has been  included in these
     financial statements since taxable income or loss passes through to, and is
     reportable by, the partners individually.

NOTE B - RELATED PARTY TRANSACTIONS

         Under an  agreement  dated August 30, 1988,  the  Partnership  received
     $500,000  as a  partial  prepayment  of the  note and  interest  receivable
     related to the sale of The Hamlet.  MVLP received  $427,000 of the $500,000
     prepayment,  consisting of $100,000 of deferred  consulting fees,  $177,000
     for a  disposition  fee  (compensation  for  negotiating  the  sale  of The
     Hamlet),  and $150,000 for capital proceeds  distributions  deferred at the
     time of the sale of The Hamlet.  The  partners  agreed that these  payments
     represented full and complete compensation to MVLP and their affiliates for
     all rights or claims MVLP or their affiliates had, or may have with respect
     to capital proceeds from the sale of The Hamlet. Accordingly,  the partners
     agreed  that MVLP and its  affiliates  will not be  entitled to any further
     distributions of capital proceeds until Growth II has received at least the
     amount set forth in the  agreement,  consisting of the Growth II Investment
     and other  stipulated  returns.  On  September  30, 1991,  the  Partnership
     received payment of the remaining principal balance of the note and accrued
     interest   receivable  related  to  the  sale  of  The  Hamlet,   totalling
     approximately  $2,357,000.  As discussed  above, and in accordance with the
     terms of the agreement, the entire amount of these proceeds was distributed
     to Growth II.

         Any net proceeds arising from the refinancing,  sale, exchange or other
     disposition  of the property or any part thereof,  and after payment of any
     debt  other  than  loans  made  by the  partners  to the  Partnership,  the
     establishment of any reasonable reserves for taxes and the payment of other
     costs and expenses, will be distributed in the following order of priority:
     1) to Growth II, an amount equal to the Growth II  Investment,  as defined,
     2) to Growth II, until Growth II has received a  cumulative,  noncompounded
     return at the rate of 7% per annum on the Growth II Investment,  3) payment
     of accrued  interest and then unpaid  principal  balance of any outstanding
     Default Notes and then Operating  Notes,  as defined,  4) to MVLP an amount
     equal to the MVLP  Investment,  as defined,  and 5) any remaining  proceeds
     distributed to Growth II and MVLP in varying  percentages,  until Growth II
     has received  certain  cumulative,  noncompounded  returns on the Growth II
     Investment, as set forth in the Partnership agreement.

NOTE C - ESCROW DEPOSITS

         The Partnership  and debt agreements  provide that cash escrow accounts
     be maintained for real estate taxes, insurance premiums and tenant security
     deposits,  as  well  as  a  reserve  for  capital  expenditures,   property
     enhancement and other improvement  expenditures.  These escrow accounts are
     under  the  control  of the  mortgage  lender  and may only be used for the
     purposes specified in the agreement.  The loan agreement requires that real
     estate tax and insurance  premium  liabilities be fully funded on a current
     basis and that the  Partnership  add an  amount of $3,267  per month to the
     capital  reserve  account.  Such reserves were fully funded at December 31,
     1995 and 1994.

          At  December 31, 1995 and 1994, cash was on deposit in escrow  for the
     following purposes (in thousands)

                                            1995              1994
                                            ----              ----

     Real estate taxes                     $  34             $  49
     Insurance premium                        12                 7
     Tenant security deposits                 65                64
     Capital reserve                          80                85
                                            ----              ----
                                            $191              $205
                                            ====              ====


<PAGE>


NOTE D - LONG-TERM DEBT

     Long-term  debt  outstanding  at December 31, 1995 and 1994 consists of the
following (in thousands):

                                                  1995           1994
                                                  ----           ---- 

     9.5% mortgage, payable in 
     monthly installments of 
     principal and  interest 
     in the amount of $42 with 
     a final  balloon  payment 
     of $4,919 due December 
     1, 1996                                    $4,953            $4,983

     Less current maturities                     4,953                31
                                                ------            ------
                                                $    -            $4,952
                                                ======            ======

         The liability of the  Partnership  under the mortgage is limited to the
underlying  value of the real  estate,  plus other  amounts  deposited  with the
lender.

         Management believes the fair value of the Partnership's  long-term debt
approximates its carrying value.

NOTE E - SUBSEQUENT EVENT

     On March 13, 1996, the Partnership  sold the project for  $10,650,000.  The
existing  mortgage  balance  of  approximately  $5,000,000  was paid off and the
Partnership paid closing costs of approximately  $235,000. The net proceeds from
the  sale  of  approximately  $5,400,000  was  distributed  to the  partners  in
accordance with the joint venture agreement.