UNITED STATES SECURITIES AND EXCHANGE COMMISSION

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

                                    FORM 10-K

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

                      FOR FISCAL YEAR ENDED MARCH 31, 1998

                                       OR

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

               For the transition period from ______ to _______ .


Commission File Number: 0-12085


                      PAINE WEBBER GROWTH PROPERTIES TWO LP
        ----------------------------------------------------------------
             (Exact name of registrant as specified in its charter)


            Delaware                                           04-2798594
            --------                                           ----------
(State or other jurisdiction of                             (I.R.S. Employer
incorporation or organization)                              Identification No.)


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


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

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

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

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

                      UNITS OF LIMITED PARTNERSHIP INTEREST
                      -------------------------------------
                                (Title of class)

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

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

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

                       DOCUMENTS INCORPORATED BY REFERENCE

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

Prospectus of registrant dated                                    Part IV
October 6, 1983, as supplemented


<PAGE>
                      PAINE WEBBER GROWTH PROPERTIES TWO LP
                                 1998 FORM 10-K

                                TABLE OF CONTENTS


Part   I                                                                Page

Item  1     Business                                                    I-1

Item  2     Properties                                                  I-3

Item  3     Legal Proceedings                                           I-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-6

Item  9     Changes in and Disagreements with Accountants on
               Accounting and Financial Disclosure                      II-6


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-34

<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, 1998,  three of these  investments had
been sold.

      As of March 31,  1998,  the  Partnership  owned,  through a joint  venture
partnership, an interest in the operating property set forth below:

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

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

      (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.

      As noted above, the Partnership's  only remaining real estate asset is the
Portland  Center  Apartments.  Since  the first  quarter  of  fiscal  1998,  the
Partnership  has  been  focusing  on a  near-term  sale  of the  property  and a
liquidation of the Partnership.  The property has been marketed  extensively and
sale packages have been  distributed to  international,  national,  regional and
local  prospective  purchasers.  As a result of these efforts,  the  Partnership
received 13 offers, most of which were substantially in excess of the property's
1996 year-end  appraised  value.  The prospective  purchasers were then asked to
submit best and final offers, of which seven were received.  After completing an
evaluation of the best and final offers, the Partnership  selected an offer and,
on  November  25,  1997,  signed  an  agreement  to sell  Portland  Center  to a
prospective buyer.  During the fourth quarter,  the prospective buyer decided to
terminate  the  purchase  and sale  agreement  and  discontinued  its efforts to
acquire the property.  The Partnership  subsequently  re-opened discussions with
the other  prospective  purchasers who had  previously  submitted best and final
offers.  These  prospective  purchasers were then provided with updated property
information,  which included  financial  statements,  a physical  evaluation and
environmental  assessment.  Following negotiations,  the Partnership selected an
offer  from one of these  prospective  buyers  and  signed a  purchase  and sale
agreement.   Because  the  Partnership's   joint  venture  agreement  gives  the
co-venture  partner a right of first  refusal to  purchase  the  property,  this
purchase and sale  agreement  was then  submitted to the partner for its review.
Under the terms of the  agreement,  the partner must decide  whether to agree to
buy the  property  at the  price  and on the terms  offered  by the  prospective
purchaser,  or to waive  its  first  refusal  right  and agree to a sale to this
prospective  purchaser.  On June 12, 1998, the co-venture  partner  notified the
Partnership that it would be exercising its right to buy the property. Under the
terms of the joint venture agreement,  the co-venturer has an additional 90 days
to close the transaction.  Any sale remains contingent upon, among other things,
the satisfactory completion of the buyer's due diligence. As a result, there are
no assurances that a near-term sale will be completed.  Nonetheless,  management
expects  to  close a sale and  complete  a  liquidation  of the  Partnership  in
calendar year 1998.  Following the  completion of a sale of the Portland  Center
Apartments,  the net sale proceeds along with the  Partnership's  remaining cash
reserves, after paying liquidation-related  expenses, will be distributed to the
Limited Partners.

      The Partnership's  principal investment objectives have been 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  with  certainty at the
present time.  Notwithstanding  this, the offers to purchase the Portland Center
property,  discussed  further above, are for amounts which would result in a net
return  to the  Partnership  well  in  excess  of  its  original  $11.1  million
investment in the Portland Center joint venture.  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,  1998,  the Limited  Partners had received
cumulative cash  distributions  of approximately  $23,490,000,  or approximately
$703 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. Over the past two years,
development  activity for multi-family  properties in many markets has escalated
significantly.  However, in the downtown Portland,  Oregon market where Portland
Center is located,  physical and political constraints on the development of new
multi-family properties have limited the addition of new supply to the market of
existing  apartment  units. 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.

      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,  1998,  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  1998,  along with an
average  for the  year,  are  presented  below for the  Partnership's  remaining
property:

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

Portland Center                   94%         94%       94%       88%      93%

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  agreed to settle the case.  Pursuant to that  memorandum  of
understanding,  PaineWebber  irrevocably  deposited  $125 million into an escrow
fund under the  supervision of the United States District Court for the Southern
District of New York to be used to resolve the  litigation in accordance  with a
definitive  settlement  agreement  and plan of  allocation.  On July  17,  1996,
PaineWebber and the class plaintiffs submitted a definitive settlement agreement
which  provides for the  complete  resolution  of the class  action  litigation,
including  releases in favor of the  Partnership and PWPI, and the allocation of
the $125 million settlement fund among investors in the various partnerships and
REITs at issue in the case. As part of the settlement,  PaineWebber  also agreed
to provide class members with certain financial  guarantees  relating to some of
the  partnerships  and REITs.  The details of the  settlement are described in a
notice mailed  directly to class members at the direction of the court.  A final
hearing on the fairness of the proposed  settlement  was held in December  1996,
and in March 1997 the court announced its final approval of the settlement.  The
release of the $125 million of settlement  proceeds had been delayed pending the
resolution  of an appeal of the  settlement  agreement  by two of the  plaintiff
class  members.  In July 1997, the United States Court of Appeals for the Second
Circuit upheld the settlement  over the objections of the two class members.  As
part of the settlement agreement, PaineWebber 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,  management believes that the resolution of
this  matter  will not 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,  1998  there  were  2,965  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.  Upon request, the Managing General
Partner will endeavor to assist a Unitholder  desiring to transfer his Units and
may utilize the  services  of PWI in this  regard.  The price to be paid for the
Units will be subject to negotiation  by the  Unitholder.  The Managing  General
Partner will not redeem or repurchase Units.

      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 1998.

Item 6.  Selected Financial Data

                      PaineWebber Growth Properties Two LP
         For the years ended March 31, 1998, 1997, 1996, 1995 and 1994
                    (in thousands, except for per Unit data)
<TABLE>
<CAPTION>
                              1998      1997        1996         1995        1994
                              ----      ----        ----         ----        ----
<S>                           <C>       <C>         <C>          <C>         <C>   

Revenues                      $   249   $   304    $    259     $   227      $   201

Operating (loss) income       $   (13)  $    45    $    (51)    $   (65)     $   (15)

Partnership's share of
  ventures' income (losses)   $   280   $  (230)   $   (134)    $  (161)     $  (309)

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)             $   267   $  (185)   $  4,041     $(2,245)     $  (324)

Per Limited Partnership Unit:

  Net income (loss)           $  7.91   $ (5.48)   $ 117.36     $(66.54)     $ (9.60)

  Cash distributions:
    Operations                $ 18.13   $ 17.53    $  21.26     $  8.68            -

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

Total assets                  $   696   $   905    $  6,726     $ 4,180      $ 6,671
</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. 

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.
<PAGE>

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, 1998, three of the
four  original  investments  had been sold.  The fiscal  1987 sale of The Hamlet
Apartments and 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,  an 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.

      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  over the past  year.  Given the
current  buyer  interest in the Portland  apartment  rental  market,  management
believes  that  this  would  be the  appropriate  time  to  sell  the  property.
Accordingly,  since the first  quarter of fiscal 1998 the  Partnership  has been
focusing  on a  near-term  sale  of  the  property  and  a  liquidation  of  the
Partnership.  The property has been marketed  extensively and sale packages have
been  distributed to  international,  national,  regional and local  prospective
purchasers.  As a result of these efforts,  the Partnership  received 13 offers,
most of which  were  substantially  in excess of the  property's  1996  year-end
appraised value.  The prospective  purchasers were then asked to submit best and
final offers,  of which seven were received.  After  completing an evaluation of
the best and final offers,  the  Partnership  selected an offer and, on November
25,  1997,  signed an  agreement to sell the  Portland  Center  Apartments  to a
prospective buyer.  During the fourth quarter,  the prospective buyer decided to
terminate  the  purchase  and sale  agreement  and  discontinued  its efforts to
acquire the property.  The Partnership  subsequently  re-opened discussions with
the other  prospective  purchasers who had  previously  submitted best and final
offers.  These  prospective  purchasers were then provided with updated property
information,  which included  financial  statements,  a physical  evaluation and
environmental  assessment.  Following negotiations,  the Partnership selected an
offer  from one of these  prospective  buyers  and  signed a  purchase  and sale
agreement.   Because  the  Partnership's   joint  venture  agreement  gives  the
co-venture  partner a right of first  refusal to  purchase  the  property,  this
purchase and sale  agreement  was then  submitted to the partner for its review.
Under the terms of the  agreement,  the partner must decide  whether to agree to
buy the  property  at the  price  and on the terms  offered  by the  prospective
purchaser,  or to waive  its  first  refusal  right  and agree to a sale to this
prospective  purchaser.  On June 12, 1998, the co-venture  partner  notified the
Partnership that it would be exercising its right to buy the property. Under the
terms of the joint venture agreement,  the co-venturer has an additional 90 days
to close the transaction.  Any sale remains contingent upon, among other things,
the  satisfactory  completion of the buyer's due diligence.  As a result , there
are  no  assurances  that a  near-term  sale  will  be  completed.  Nonetheless,
management expects to close a sale and complete a liquidation of the Partnership
in calendar year 1998. Following the completion of a sale of the Portland Center
Apartments,  the net sale proceeds along with the  Partnership's  remaining cash
reserves  after paying  liquidation-related  expenses will be distributed to the
Limited Partners.

      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.  Under the teams of the potential sale  transaction  described  above, the
prospective buyer has agreed to assume the existing first mortgage loan.

      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.  During  fiscal  1998,  the
Portland Center Apartments  maintained  consistently high occupancy levels while
implementing significant increases in rental rates. The occupancy level averaged
93% for the year, which compares to the average  occupancy level of 94% achieved
for fiscal 1997. However,  the occupancy level did decline to 88% for the fourth
quarter  of  fiscal  1998.  This  decrease  is  attributable  to a change in the
property  management  company.  Following  the  transition  in  management,  the
retention of existing tenants has increased, new leases have been signed and the
occupancy  level has been climbing.  Several key strategies have been adopted to
further  enhance the property's  occupancy  level.  These  strategies  include a
significantly  expanded  marketing  program,  the hiring of  additional  leasing
agents and visible  physical  improvements,  such as power washing the walkways,
painting the entrances of the  residential  buildings,  planting new flowers and
installing  new  directional  signage and banners.  In addition,  the  apartment
interiors  continue  to be  upgraded  as units are  leased to new  tenants.  The
commercial  space  at  Portland  Center  continues  to be  well  leased  with an
occupancy level of 98% as of March 31, 1998. As previously reported, the ongoing
renovation work at the Portland Center  Apartments has been the primary strategy
for generating higher rental rates,  maintaining  occupancy levels and enhancing
the property's overall competitive  position in the marketplace.  The renovation
program  began in  fiscal  year 1995 and  focuses  on the  interiors  of the 525
apartment  units.  As of  year-end,  63% of the  apartment  units had been fully
renovated and all of the remaining units had been partially renovated.  To date,
management  has been  able to lease  the fully  renovated  units at  substantial
rental rate increases,  averaging  approximately 10% above the rental rate prior
to the renovations. The healthy occupancy levels and increasing rental rates, in
combination with the property's  positive attributes and a strong local economy,
have resulted in a materially  higher  property value which was reflected in the
sale offers received in connection with the marketing  process  described above.
The demand for rental units in Portland's  downtown  market has remained  steady
and is being fueled by solid economic growth,  as well as physical and political
constraints that have limited the construction of new apartments in the downtown
area. As a result of these constraints, there are no new apartment properties in
the immediate  vicinity of Portland Center currently under  development or being
added to the  market.  While there are no  assurances  that the  potential  sale
transaction  described  above  will be  successfully  consummated,  the offer to
purchase the Portland  Center  property is for an amount which would result in a
net return to the Partnership well in excess of its original $11.1 million gross
investment in the Portland Center joint venture.

      At March 31, 1998, the Partnership had available cash and cash equivalents
of  approximately  $696,000.  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  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.

      As noted above, the Partnership  expects to be liquidated  during calendar
year 1998.  Notwithstanding  this, the Partnership believes that it has made all
necessary modifications to its existing systems to make them year 2000 compliant
and does not expect that additional  costs associated with year 2000 compliance,
if any, will be material to the Partnership's results of operations or financial
position.

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

      The  Partnership  reported net income of $267,000 for the year ended March
31, 1998,  compared to a net loss of $185,000 for the prior year.  The favorable
change in the  Partnership's  net operating results is primarily the result of a
favorable  change of $510,000 in the  Partnership's  share of  venture's  income
(loss) from the Portland  Center  Apartments.  The  Partnership  recognized  net
income of $280,000 from its share of the operations of the Portland Center joint
venture for the year ended March 31, 1998, as compared to a net loss of $230,000
for the prior year. This favorable change in Portland Center's operating results
was mainly due to an  increase in rental  income of  $210,000  and a decrease in
repairs and maintenance  expenses of $392,000.  Rental income  increased due, in
part, to the extensive  capital  improvement  program at the property during the
past few  years.  The  capital  improvement  program,  combined  with a  general
improvement in overall market  conditions,  has allowed the property to generate
higher  rental  rates,  maintain  occupancy  levels and enhance  the  property's
overall  competitive  position  in  the  marketplace.  Repairs  and  maintenance
expenses decreased in the current year as the ongoing renovation work approached
completion.  The  increase  in rental  income and the  decline  in  repairs  and
maintenance expenses were partially offset by increases in certain other expense
categories,  mainly salaries  expense which was $89,000 higher than in the prior
year.

      The favorable change in the Partnership's share of venture's income (loss)
was partially  offset by an unfavorable  change in the  Partnership's  operating
income (loss). The Partnership  reported an operating loss of $13,000 for fiscal
1998 as  compared  to  operating  income of $45,000  during  fiscal  1997.  This
unfavorable  change was primarily due to a decrease in interest and other income
of  $57,000.   Interest  and  other  income  declined  primarily  due  to  lower
outstanding  cash  reserve  balances  for the  current  year as a result  of the
temporary  investment of the Walker House sale proceeds during fiscal 1997 prior
to the May 15, 1996 special distribution.  

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 was 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) was
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 fiscal 1997
as a result of the temporary  investment of the Walker House sale proceeds prior
to the May 15, 1996 special distribution.  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
during fiscal 1997. In addition,  management fees declined by $13,000 due to the
return of capital  associated with the Walker House and Hudson sale 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 prior year.  This  increase  in  ventures'  losses was
primarily  attributable to the inclusion of $122,000 in net income  attributable
to the Walker House joint venture in the fiscal 1996  results.  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 was primarily  attributable to a reduction in costs
incurred  in  fiscal  1996 in  connection  with  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.

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
remaining property 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  remaining
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  downtown
Portland area has kept pace with the rate of new apartment development activity,
which has been limited by certain physical and political  constraints.  However,
in many  other  markets  across  the  country  development  of new  multi-family
properties  has  increased   significantly  in  the  past  two  years.  Existing
properties  in such markets could be expected to  experience  increased  vacancy
levels,  declines in  effective  rental  rates and,  in some cases,  declines in
estimated market values as a result of the increased  competition.  There are no
assurances  that such an increase in  development  activity  will not affect the
Portland Center property in the future.

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

      Inflation  in future  periods may  increase  revenues as well as operating
expenses at the  Partnership's  operating  investment  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              38      8/22/96
Terrence E. Fancher     Director                            44      10/10/96
Walter V. Arnold        Senior Vice President and Chief 
                          Financial Officer                 50      10/29/85
David F. Brooks         First Vice President and
                          Assistant Treasurer               55      6/1/83 *
Timothy J. Medlock      Vice President and Treasurer        37      6/1/88
Thomas W. Boland        Vice President and Controller       35      12/1/91

*  The date of incorporation of the Managing General Partner

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

      (d) There is no family  relationship among any of the foregoing  directors
or executive officers of the Managing General Partner of the Partnership. All of
the foregoing directors and 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  and  Controller  of the  Managing
General  Partner and a Vice  President and  Controller of the Adviser which he
joined in 1988.  From 1984 to 1987,  Mr.  Boland was  associated  with  Arthur
Young & Company.  Mr. Boland is a Certified Public Accountant  licensed in the
state of  Massachusetts.  He holds a B.S. in Accounting from Merrimack College
and an M.B.A. from Boston University.

      (f) None of the directors and officers 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,  1998,  all filing
requirements  applicable to the officers and  directors of the Managing  General
Partner and ten-percent beneficial holders were complied with.

Item 11.  Executive Compensation
--------------------------------

      The directors and officers of the  Partnership's  Managing General Partner
receive no current or proposed 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 was then
increased  gradually in subsequent  quarters to the level of 4.25% per annum for
the quarter  ended March 31, 1996 and then was  increased  to 5.25% per annum on
remaining  invested capital  beginning with the distribution  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.

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 1998.
Accordingly,  the  Adviser was paid  management  fees of $61,000 for fiscal 1998
under the terms of the advisory contract.

      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, 1998 is $63,000,  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 $4,000  (included in general and  administrative  expenses)  for managing the
Partnership's  cash assets during the year ended March 31, 1998. Fees charged by
Mitchell  Hutchins are based on a percentage  of invested  cash  reserves  which
varies  based on the total  amount of  invested  cash  which  Mitchell  Hutchins
manages on behalf of the 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 1998.

      (c)   Exhibits

                  See (a) (3) above.

      (d)   Financial Statement Schedules

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























                                     


<PAGE>
                                  SIGNATURES


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

                                    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 and Controller

Dated:  June 26, 1998

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





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




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




                                  


<PAGE>


                          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>  

      (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
                                                            1998 has been sent to the Limited
                                                            Partners.  An Annual Report will be
                                                            sent to the Limited Partners
                                                            subsequent to this filing.


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

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


<PAGE>


                                     
                          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, 1998 and 1997                         F-5

   Statements of operations for the years ended March 31, 1998, 
     1997 and 1996                                                      F-6

   Statements of changes in partners' capital (deficit) for the years
     ended March 31, 1998, 1997 and 1996                                F-7

   Statements of cash flows for the years ended March 31, 1998,
     1997 and 1996                                                      F-8

   Notes to financial statements                                        F-9

   Schedule III-Real Estate and Accumulated Depreciation                F-17

Oregon Portland Associates:

   Report of independent auditors                                       F-18

   Balance sheets as of December 31, 1997 and 1996                      F-19

   Statements of operations for the years ended December 31,
     1997, 1996 and 1995                                                F-20

   Statements of changes in venturers' capital (deficit) for the
      years ended December 31, 1997, 1996 and 1995                      F-21

   Statements of cash flows for the years ended December 31, 
     1997, 1996 and 1995                                                F-22

   Notes to financial statements                                        F-23


<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
                                                                    ---------

Montgomery Village HWH Associates:

   Independent Auditors' Report                                        F-27

   Balance sheets as of December 31, 1995 and 1994                     F-28

   Statements of operations for the years ended December 31,
      1995, 1994 and 1993                                              F-29

   Statements of changes in partners' equity for the years
     ended December 31, 1995, 1994 and 1993                            F-30

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

   Notes to financial statements                                       F-32




   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, 1998 and 1997,  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, 1998. Our audits also included the
financial  statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Partnership's  management.
Our  responsibility  is to express an opinion on these financial  statements and
schedule based on our audits. The financial statements of Montgomery Village HWH
Associates  have been audited by other  auditors whose report has been furnished
to us; insofar as our opinion on the financial  statements of PaineWebber Growth
Properties  Two  LP  relates  to  data  included  for  Montgomery   Village  HWH
Associates, 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 for the year ended March 31, 1996.

     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, 1998
and 1997,  and the results of its  operations and its cash flows for each of the
three years in the period ended March 31, 1998,  in  conformity  with  generally
accepted accounting  principles.  Also, in our opinion,  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 12, 1998


<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, 1998 and 1997
                   (In thousands, except for per Unit data)

                                    ASSETS

                                                      1998              1997
                                                      ----              ----

Cash and cash equivalents                          $    696         $     905
                                                   ========         =========


                 LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)


Losses from joint venture in excess
  of investment and advances                       $     777        $     618
Accounts payable and accrued expenses                     23               46
                                                   ---------        ---------
      Total liabilities                                  800              664

Partners' capital:
  General Partners:
   Capital contributions                                   1                1
   Cumulative net income                                  10                7
   Cumulative cash distributions                         (22)             (16)

  Limited Partners ($1,000 per Unit, 
    33,410 Units outstanding):
   Capital contributions, net of offering costs       29,778           29,778
   Cumulative net losses                              (6,381)          (6,645)
   Cumulative cash distributions                     (23,490)         (22,884)
                                                   ---------        ---------
         Total partners' capital (deficit)              (104)             241
                                                   ---------        ---------
                                                   $     696        $     905
                                                   =========        =========


















                           See accompanying notes.


<PAGE>


                    PAINE WEBBER GROWTH PROPERTIES TWO LP

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

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

Revenues:
   Interest and other income             $      54    $    111    $      68
   Reimbursements from affiliate               195         193          191
                                         ---------   ---------    ---------
                                               249         304          259

Expenses:
   Management fees                              61          58           71
   General and administrative                  201         201          239
                                        ----------   ---------    ---------
                                               262         259          310
                                        ----------   ---------    ---------

Operating (loss) income                        (13)         45          (51)

Partnership's share of ventures'
  income (losses)                              280        (230)        (134)

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

Net income (loss)                       $      267   $    (185)   $   4,041
                                        ==========   ==========   =========

Per Limited Partnership Unit:

  Net income (loss)                     $     7.91   $   (5.48)   $  117.36
                                        ==========   =========    =========

  Cash distributions                    $    18.13   $  187.01    $   44.26
                                        ==========   =========    =========


      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, 1998, 1997 and 1996
                                 (In thousands)

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

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

Net income                                    3          264           267

Cash distributions                           (6)        (606)         (612)
                                       --------     --------      --------

Balance at March 31, 1998              $    (11)    $    (93)     $   (104)
                                       ========     ========      ========






















                           See accompanying notes.


<PAGE>


                      PAINE WEBBER GROWTH PROPERTIES TWO LP

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

<TABLE>
<CAPTION>

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

Cash flows from operating activities:
   Net income (loss)                                        $    267    $  (185)    $  4,041
   Adjustments to reconcile net income (loss) to net cash
     (used in) provided by operating activities:
      Partnership's share of gain on sale of
        operating investment property                             -           -       (4,226)
      Reimbursements from affiliate                            (195)       (193)        (191)
      Partnership's share of ventures' income (losses)         (280)        230          134
      Changes in assets and liabilities:
        Accounts receivable                                       -         191            -
        Accounts payable and accrued expenses                   (23)          -           (9)
                                                            -------     -------     --------
         Total adjustments                                     (498)        228       (4,292)
                                                            -------     -------     --------
         Net cash (used in) provided by operating
           activities                                          (231)         43         (251)

Cash flows from investing activities:
   Distributions from joint ventures                            634         838        6,629
   Additional investments in joint ventures                       -           -          (17)
   Proceeds from sale of investment                               -           -          350
                                                            -------     -------     --------
         Net cash provided by investing activities              634         838        6,962

Cash flows from financing activities:
   Distributions to partners                                   (612)     (6,254)      (1,486)
                                                            -------     -------     --------

Net (decrease) increase in cash and cash equivalents           (209)     (5,373)       5,225

Cash and cash equivalents, beginning of year                    905       6,278        1,053
                                                            -------     -------     --------
Cash and cash equivalents, end of year                      $   696     $   905     $  6,278
                                                            =======     =======     ========

</TABLE>










                           See accompanying notes.
<PAGE>
                     PAINEWEBBER 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, 1998, 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, 1998.  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
remaining investment.

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

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

      The accompanying financial statements include the Partnership's investment
in one joint venture  partnership (three in fiscal 1996) which owns an operating
property.  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.

      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,
1998 and 1997 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.

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,  1998,  1997 and 1996,  the Adviser  earned  $61,000,  $58,000 and  $71,000,
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,  1998,  1997  and 1996  are  $63,000,  $61,000  and  $69,000,  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 $4,000, $7,000, and $3,000 (included in general and administrative  expenses)
for  managing  the  Partnership's  cash assets  during the years ended March 31,
1998, 1997 and 1996, respectively.

4.  Investments in Joint Venture Partnerships
    -----------------------------------------

      As of March 31, 1998 and 1997,  the  Partnership  has an investment in one
joint  venture.  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 joint  venture's
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.
<PAGE>

      Condensed combined financial  statements of these joint ventures,  for the
periods indicated, are as follows.

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

   Current assets                                       $   1,750   $   1,938
   Operating investment property, net                      17,621      18,280
   Other assets                                             2,552       2,839
                                                        ---------   ---------
                                                        $  21,923   $  23,057
                                                        =========   =========

                      Liabilities and Venturers' Deficit
                      ----------------------------------

   Current liabilities                                  $     670   $     737
   Other liabilities                                            -         494
   Long-term mortgage debt, less current portion           22,148      22,351

   Partnership's share of combined deficit                   (779)       (413)
   Co-venturers' share of combined deficit                   (116)       (112)
                                                        ---------   ---------
                                                        $  21,923   $  23,057
                                                        =========   =========

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

   Partnership's share of combined deficit
      at December 31, as shown above                    $    (779)  $    (413)
   Reimbursement of management fees and expenses
      receivable from joint venture (1)                         2         494
   Timing difference due to contributions 
      (distributions) made subsequent to 
      December 31 (see Note 2)                                  -        (699)
                                                        ---------   ---------
   Investment in joint venture, at equity, at March 31  $    (777)  $    (618)
                                                        =========   =========

(1)In  accordance  with  the  Portland  Center  joint  venture  agreement,   the
   Partnership  recorded  reimbursement  revenues  for the years ended March 31,
   1998, 1997 and 1996 of $195,000, $193,000 and $191,000, 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 $2,000 and $494,000  remained unpaid as of March 31, 1998
   and 1997,  respectively,  which is recorded in the joint  venture  investment
   balance on the accompanying balance sheets.
<PAGE>

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

                                             1997        1996        1995
                                             ----        ----        ----
Revenues:
   Rental revenues and expense recoveries  $ 6,264     $ 6,054     $  7,549
   Interest and other income                   168         199          337
                                           -------     -------     --------
                                             6,432       6,253        7,886

Expenses:
   Property operating expenses               3,020       3,351        3,945
   Interest expense                          1,769       1,780        2,373
   Depreciation and amortization             1,360       1,354        1,703
                                           -------     -------     --------
                                             6,149       6,485        8,021
                                           -------     -------     --------
Operating income (loss)                        283        (232)        (135)

Gain on sale of operating investment 
  property                                       -           -        4,580
                                           -------     -------     --------
Net income (loss)                          $   283    $   (232)    $  4,445
                                           =======    ========     ========

Net income (loss):
    Partnership's share of 
       combined net income (loss)          $    280   $   (230)    $  4,092
    Co-venturers' share of combined
       net income (loss)                          3         (2)         353
                                           --------   --------     --------
                                           $    283   $   (232)    $  4,445
                                           ========   ========     ========

      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):

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

Partnership's share of ventures'
  income (losses)                          $    280   $   (230)    $   (134)
Partnership's share of gain on sale of
  operating investment property                   -          -        4,226
                                           --------   ---------    -------- 
                                           $    280   $    (230)   $  4,092
                                           ========   =========    ========

      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 1998, 1997 and 1996 are as follows (in thousands):

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

   Oregon Portland Associates                 $   634     $   838     $   973
   Montgomery Village HWH Associates                -           -       5,656
   Hudson Partners                                  -           -           -
                                              -------     -------     -------
                                              $   634     $   838     $ 6,629
                                              =======     =======     =======

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

(a)  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  $1.9 million and $2.1
million  as of  December  31,  1997 and  1996,  respectively.  The  excess  loan
proceeds,  after  repayment of the  outstanding  indebtedness,  were used to pay
transaction costs and to fund the required escrow accounts.

      As discussed in Note 1, the investment in the Portland  Center  Apartments
is the Partnership's  only remaining real estate asset.  Since the first quarter
of fiscal 1998,  the  Partnership  has been focusing on a near-term  sale of the
property and a liquidation  of the  Partnership.  The property has been marketed
extensively and sale packages have been distributed to international,  national,
regional and local  prospective  purchasers.  As a result of these efforts,  the
Partnership  received 13 offers,  most of which were  substantially in excess of
the property's 1996 year-end  appraised value.  The prospective  purchasers were
then asked to submit best and final offers, of which seven were received.  After
completing an evaluation of the best and final offers, the Partnership  selected
an offer and, on November  25,  1997,  signed an  agreement to sell the Portland
Center  Apartments to a prospective  buyer.  During the fourth quarter of fiscal
1998, the prospective buyer decided to terminate the purchase and sale agreement
and  discontinued   its  efforts  to  acquire  the  property.   The  Partnership
subsequently re-opened discussions with the other prospective purchasers who had
previously  submitted  best  and  final  offers.  Following  negotiations,   the
Partnership  selected an offer from one of these prospective buyers and signed a
purchase and sale agreement.  Because the Partnership's  joint venture agreement
gives the co-venture  partner a right of first refusal to purchase the property,
this  purchase  and sale  agreement  was then  submitted  to the partner for its
review.  Under the terms of the  agreement,  the partner must decide  whether to
agree  to buy  the  property  at the  price  and on  the  terms  offered  by the
prospective  purchaser,  or to waive its first refusal right and agree to a sale
to this prospective purchaser. On June 12, 1998, the co-venture partner notified
the Partnership that it would be exercising its right to buy the property. Under
the terms of the joint venture  agreement,  the co-venturer has an additional 90
days to close the  transaction.  Any sale remains  contingent  upon, among other
things, the satisfactory  completion of the buyer's due diligence.  As a result,
there are no assurances  that a near-term  sale will be completed.  Nonetheless,
management expects to close a sale and complete a liquidation of the Partnership
in calendar year 1998. Following the completion of a sale of the Portland Center
Apartments,  the net sale proceeds along with the  Partnership's  remaining cash
reserves  after paying  liquidation-related  expenses will be distributed to the
Limited Partners.

      Pursuant  to  the  joint  venture  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.

      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.

(b)  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.  For financial reporting  purposes,  the
Partnership was allocated a gain of $4,226,000 from the sale of the Walker House
property   which  it  recognized  in  fiscal  1996.   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 were
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.

(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 a  refinancing  of the venture's
first mortgage loan. 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.  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.

5.  Subsequent Event
    ----------------

      On May 15,  1998,  the  Partnership  distributed  $159,000  to the Limited
Partners  and $2,000 to the General  Partners  for the  quarter  ended March 31,
1998.

<PAGE>
<TABLE>

Schedule III - Real Estate and Accumulated Depreciation
                                          PAINEWEBBER GROWTH PROPERTIES TWO LP
                                  SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
                                                   December 31, 1997
                                                     (In thousands)
<CAPTION>

                                                 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      $22,351        $4,700  $19,453      $8,134     $4,700   $27,587      $32,287    $14,666      4/26/84      5-25 yrs.
             =======        ======  =======      ======     ======   =======      =======    =======

Notes

(A) The  aggregate  cost of real estate  owned at December  31, 1997 for Federal income tax purposes is  approximately  $36,977.  
(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:
                                                            1997        1996        1995
                                                            ----        ----        ----

      Balance at beginning of period                        $31,586     $40,487     $39,649
      Increase due to acquisition and improvements              701         508         839
      Decrease due to sale of Walker House                        -      (9,409)          -
      Decrease due to disposals                                   -           -          (1)
                                                            -------     -------     -------
      Balance at end of period                              $32,287     $31,586     $40,487
                                                            =======     =======     =======

(D) Reconciliation of accumulated depreciation:

      Balance at beginning of period                        $13,306     $15,452     $13,832
      Depreciation expense                                    1,360       1,354       1,621
      Decrease due to sale of Walker House                        -      (3,500)          -
      Write-offs due to disposals                                 -            -         (1)
                                                            -------     -------     -------
      Balance at end of period                              $14,666     $13,306     $15,452
                                                            =======     =======     =======
</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, 1997 and 1996, 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,
1997. 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, 1997 and 1996,  and the results of its  operations  and its cash
flows for each of the three years in the period  ended  December  31,  1996,  in
conformity with generally accepted accounting principles.





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



Boston, Massachusetts
January 30, 1998



<PAGE>


                           OREGON PORTLAND ASSOCIATES
                         (AN OREGON GENERAL PARTNERSHIP)

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

                                     Assets
                                     ------
                                                            1997         1996
                                                            ----         ----
Current assets:
   Cash and cash equivalents                              $   440    $    903
   Tenant receivables                                          34          22
   Repair escrow deposits                                      32          32
   Mortgage escrow deposits - restricted                      319         344
   Tenant security deposits - held in trust                   629         354
   Prepaid real estate taxes                                  255         248
   Prepaid insurance                                           26          25
   Other assets                                                15          10
                                                          -------    --------
      Total current assets                                  1,750       1,938

HUD reserve for replacements                                1,899       2,123

Operating investment property, at cost:
   Land                                                     4,700       4,700
   Buildings and improvements                              23,510      23,134
   Equipment                                                4,077       3,752
                                                          -------    --------
                                                           32,287      31,586
   Less accumulated depreciation                          (14,666)    (13,306)
                                                          -------    --------
Net operating investment property                          17,621      18,280

Deferred financing costs and deferred leasing
   commissions, net of accumulated
    amortization of $225 ($161 in 1996)                       653         716
                                                          -------    --------
                                                          $21,923    $ 23,057
                                                          =======    ========
                       Liabilities and Venturers' Deficit
                       ----------------------------------

Current liabilities:
   Current portion of long-term debt                      $   203    $    189
   Accounts payable and accrued expenses                      187         292
   Prepaid rental and other deferred income                    58          43
   Tenant security deposits                                   181         178
   Payable to property manager and affiliates                  34          35
   Distribution payable to minority partner                     7           -
                                                          -------    --------
      Total current liabilities                               670         737

Long-term debt                                             22,148      22,351
Management fee and expense reimbursements due
   to majority partner                                          -         494
Venturers' deficit                                           (895)       (525)
                                                          -------    --------
                                                          $21,923    $ 23,057
                                                          =======    ========


                             See accompanying notes.


<PAGE>


                           OREGON PORTLAND ASSOCIATES
                         (AN OREGON GENERAL PARTNERSHIP)

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

                                                1997         1996        1995
                                                ----         ----        ----
Revenues:
   Rental income                              $ 6,264     $ 6,054     $ 5,456
   Interest income                                 93         119         217
   Other income                                    75          80          76
                                              -------     -------     -------
                                                6,432       6,253       5,749
Expenses:
   Interest and amortization of related 
     financing fees                             1,769       1,780       1,808
   Depreciation                                 1,360       1,354       1,319
   Repairs and maintenance                        569         961         675
   Utilities                                      373         351         298
   Real estate taxes                              503         469         455
   Professional fees                               26          38          34
   General and administrative                     334         370         279
   Salaries and related costs                     525         436         465
   Management and related fees                    501         501         504
   Insurance                                      103          95          93
   Security                                        86         130          77
                                              -------     -------     -------
                                                6,149       6,485       6,007
                                              -------     -------     -------
Net income (loss)                             $   283     $  (232)    $  (258)
                                              =======     =======     =======
























                             See accompanying notes.



<PAGE>


                           OREGON PORTLAND ASSOCIATES
                         (AN OREGON GENERAL PARTNERSHIP)

              STATEMENTS OF CHANGES IN VENTURERS' CAPITAL (DEFICIT)
              For the years ended December 31, 1997, 1996 and 1995
                                 (In thousands)


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

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)

Partner distributions                      (646)           (7)        (653)

Net income                                  280             3          283
                                        -------      --------    ---------

Balance at December 31, 1997            $ (779)     $    (116)   $    (895)
                                        ======      =========    =========



























                             See accompanying notes.


<PAGE>


                           OREGON PORTLAND ASSOCIATES
                         (AN OREGON GENERAL PARTNERSHIP)

                            STATEMENTS OF CASH FLOWS
              For the years ended December 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)                                             $   283   $  (232)   $   (258)
   Adjustments to reconcile net income (loss)
   to net cash provided by operating activities:
     Depreciation                                                  1,360     1,354       1,319
     Amortization of deferred financing costs                         57        56          27
     Amortization of deferred leasing commissions                      6         6           4
     Interest added to HUD reserve for replacements                  (80)     (109)       (195)
     Net changes in operating assets and liabilities:
      Tenant receivables                                             (12)      (13)          -
      Mortgage escrow deposits                                      (250)     (123)        (39)
      Prepaid real estate taxes                                       (7)      (26)         28
      Prepaid insurance                                               (1)        4           8
      Other assets                                                    (5)       (2)         12
      Accounts payable and accrued expenses                         (105)      (79)         75
      Prepaid rental and other deferred income                        16       (71)         73
      Tenant security deposits                                         3       (10)         16
      Payable to property manager and affiliates                      (1)       25           1
      Management fee and expense reimbursements due
        to majority partner                                          494)     (419)       (502)
                                                                  ------   -------    --------
        Net cash provided by operating activities                    770       361         569
                                                                  ------   -------    --------

Cash flows from investing activities:
   Additions to operating investment property, net                  (701)     (508)       (809)
   Repair escrow withdrawals                                           -         -       1,010
   HUD reserve for replacements - deposits                           (79)      (79)        (79)
   HUD reserve for replacements - withdrawals                        382       366         278
   Increase in deferred leasing commissions                            -         -         (18)
                                                                  ------   -------    --------
        Net cash (used in) provided by investing activities         (398)     (221)        382
                                                                  ------   -------    --------

Cash flows from financing activities:
   Debt payments                                                    (189)     (176)       (164)
   Distributions to partners                                        (646)        -           -
                                                                  ------   -------    --------
        Net cash used in financing activities                       (835)     (176)      (164)
                                                                  ------   -------    --------

Net (decrease) increase in cash and cash equivalents                (463)      (36)        787

Cash and cash equivalents, beginning of year                         903       939         152
                                                                  ------   -------    --------

Cash and cash equivalents, end of year                            $  440   $   903    $    939
                                                                  ======   =======    ========

Cash paid during the year for interest                            $1,600   $ 1,613    $  1,624
                                                                  ======   =======    ========
</TABLE>




                             See accompanying notes.


<PAGE>


                           OREGON PORTLAND ASSOCIATES
                         (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 (see Note 5).

      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,  $193,000  and  $191,000  in 1997,  1996 and 1995,
respectively.  At December 31, 1996,  $494,000 of the amounts previously accrued
had not been paid. During 1997, these fees and expenses were paid in full. 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 1997,
1996 and  1995,  $687,000,  $612,000  and  $693,000,  respectively,  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 $246,000,  $244,000 and $221,000 for 1997,
1996 and 1995,  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,  $61,000 and $55,000 in 1997, 1996
and 1995, 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 1997, 1996 or
1995. 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 and $36,000 were paid in 1996, and 1995, respectively.  No fees were paid
in 1997.

5.  Long-term debt
    --------------

      Long-term debt aggregated $22,351,000 and $22,540,000 at December 31, 1997
and 1996,  respectively  (fair value approximates the carrying value at December
31,  1997 and  1996).  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 loan for years ending December 31 are
as follows (in thousands):

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

                  1998             $   203
                  1999                 218
                  2000                 234
                  2001                 252
                  2002                 270
                  Thereafter        21,174
                                   -------
                                   $22,351
                                   =======

      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 was expended during
1995. No amounts were expended from the repair escrow during 1997 and 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, 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 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, 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>


                        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)

                                                  1995        1994        1993
                                                  ----        ----        ----

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





                        See note to financial statements


<PAGE>


                        MONTGOMERY VILLAGE HWH ASSOCIATES
                          NOTE TO FINANCIAL STATEMENTS


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 treats 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
                                                =====       =====

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.