<PAGE>
 
                                                      1995
--------------------------------------------------------------------------------
Prudential Realty Acquisition                         Annual
Fund II, L.P.                                         Report
 <PAGE>
<PAGE>
 
                  PRUDENTIAL REALTY ACQUISITION FUND II, L.P.
                           LETTER TO THE UNITHOLDERS
                      FOR THE YEAR ENDED DECEMBER 31, 1995
 

                                       1
<PAGE>
 
                          INDEPENDENT AUDITORS' REPORT
 
To the Partners of Prudential Realty Acquisition Fund II, L.P.
New York, New York
 
We have audited the accompanying statements of financial condition of Prudential
Realty Acquisition Fund II, L.P. (a Delaware Limited Partnership) as of December
31, 1995 and 1994, and the related statements of operations, changes in
partners' capital and cash flows for each of the three years in the period ended
December 31, 1995. These financial statements are the responsibility of the
General Partners. 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 the
General Partners, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
 
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Prudential Realty Acquisition Fund II, L.P.
as of December 31, 1995 and 1994, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1995 in
conformity with generally accounting principles.
 
Deloitte & Touche LLP
 
March 26, 1996
 
                                       2
 <PAGE>
<PAGE>
 
                  PRUDENTIAL REALTY ACQUISITION FUND II, L.P.
                            (a limited partnership)
                       STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
                                                                               December 31,
                                                                       -----------------------------
                                                                           1995             1994
<S>                                                                    <C>              <C>
----------------------------------------------------------------------------------------------------
ASSETS
Land                                                                   $ 2,230,456      $ 2,480,456
Buildings and improvements                                               9,872,229       10,320,045
Less: accumulated depreciation                                          (3,009,417 )     (2,629,911 )
Investment in joint venture, net                                         8,475,910       10,005,072
                                                                       ------------     ------------
Property                                                                17,569,178       20,175,662
Cash and cash equivalents                                                  164,475          378,129
Mortgage loan receivable, net                                              450,000          450,000
Other assets                                                               148,029           14,194
                                                                       ------------     ------------
Total assets                                                           $18,331,682      $21,017,985
                                                                       ------------     ------------
                                                                       ------------     ------------
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Accounts payable and accrued expenses                                  $   412,851      $   120,100
Tenant security deposits                                                    52,000           52,000
                                                                       ------------     ------------
Total liabilities                                                          464,851          172,100
                                                                       ------------     ------------
Contingencies
Partners' capital
Limited partners (44,503 units issued and outstanding)                  17,866,831       20,845,885
General partners                                                                --               --
                                                                       ------------     ------------
Total partners' capital                                                 17,866,831       20,845,885
                                                                       ------------     ------------
Total liabilities and partners' capital                                $18,331,682      $21,017,985
                                                                       ------------     ------------
                                                                       ------------     ------------
----------------------------------------------------------------------------------------------------
                  The accompanying notes are an integral part of these statements
</TABLE>
 
                                       3
 <PAGE>
<PAGE>
 
                  PRUDENTIAL REALTY ACQUISITION FUND II, L.P.
                            (a limited partnership)
                            STATEMENTS OF OPERATIONS
 
<TABLE>
<CAPTION>
                                                                    Year ended December 31,
                                                           ------------------------------------------
                                                              1995            1994           1993
<S>                                                        <C>             <C>            <C>
-----------------------------------------------------------------------------------------------------
REVENUES
Rental income                                              $ 1,286,758     $1,380,623     $ 1,335,741
Recovery of expenses                                           125,065        152,486         161,033
Other income                                                    52,773          3,895           4,466
Interest income                                                 27,608         17,368          58,486
Joint venture equity income (loss)                            (609,162)       113,565      (6,665,416)
                                                           -----------     ----------     -----------
                                                               883,042      1,667,937      (5,105,690)
                                                           -----------     ----------     -----------
EXPENSES
Depreciation and amortization                                  379,506        379,524         376,306
Real estate taxes                                               88,244        143,612         157,070
General and administrative                                     479,498        265,465         204,852
Property operating                                              85,278         38,005          70,773
Provision for loan loss                                             --             --         884,852
Provision for loss on impairment of assets                   1,000,000      1,400,000              --
                                                           -----------     ----------     -----------
                                                             2,032,526      2,226,606       1,693,853
                                                           -----------     ----------     -----------
Net loss                                                   $(1,149,484)    $ (558,669)    $(6,799,543)
                                                           -----------     ----------     -----------
                                                           -----------     ----------     -----------
ALLOCATION OF NET LOSS
Limited partners                                           $(1,332,441)    $ (726,812)    $(6,967,648)
                                                           -----------     ----------     -----------
                                                           -----------     ----------     -----------
General partners                                           $   182,957     $  168,143     $   168,105
                                                           -----------     ----------     -----------
                                                           -----------     ----------     -----------
Net loss per limited partnership unit                      $    (29.94)    $   (16.33)    $   (156.57)
                                                           -----------     ----------     -----------
                                                           -----------     ----------     -----------
-----------------------------------------------------------------------------------------------------
</TABLE>
 
                   STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
<TABLE>
<CAPTION>
                                                              LIMITED        GENERAL
                                                             PARTNERS       PARTNERS         TOTAL
<S>                                           <C>           <C>             <C>           <C>
-----------------------------------------------------------------------------------------------------
Partners' capital--December 31, 1992                        $31,566,581     $     --      $31,566,581
Net income (loss)                                            (6,967,648)     168,105       (6,799,543)
Distributions                                                (1,512,631)    (168,105 )     (1,680,736)
                                                            -----------     ---------     -----------
Partners' capital--December 31, 1993                         23,086,302           --       23,086,302
Net income (loss)                                              (726,812)     168,143         (558,669)
Distributions                                                (1,513,605)    (168,143 )     (1,681,748)
                                                            -----------     ---------     -----------
Partners' capital--December 31, 1994                         20,845,885           --       20,845,885
Net income (loss)                                            (1,332,441)     182,957       (1,149,484)
Distributions                                                (1,646,613)    (182,957 )     (1,829,570)
                                                            -----------     ---------     -----------
Partners' capital--December 31, 1995                        $17,866,831     $     --      $17,866,831
                                                            -----------     ---------     -----------
                                                            -----------     ---------     -----------
-----------------------------------------------------------------------------------------------------
                   The accompanying notes are an integral part of these statements
</TABLE>
 
                                       4
<PAGE>
 
                  PRUDENTIAL REALTY ACQUISITION FUND II, L.P.
                            (a limited partnership)
                            STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                    Year ended December 31,
                                                          -------------------------------------------
                                                             1995            1994            1993
<S>                                                       <C>             <C>             <C>
-----------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Rental income received                                    $ 1,212,689     $ 1,472,176     $ 1,273,534
Recovery of expenses received                                  65,299         151,592         161,033
Other income received                                          52,773           3,895           4,466
Interest received                                              27,608          17,368          70,161
Property operating expenses paid                              (51,303)        (29,517)        (71,690)
General and administrative expenses paid                     (327,724)       (281,959)       (182,730)
Real estate taxes paid                                        (43,242)       (143,612)       (157,070)
Distributions from joint venture income                            --         113,565              --
                                                          -----------     -----------     -----------
Net cash provided by operating activities                     936,100       1,303,508       1,097,704
                                                          -----------     -----------     -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Principal payments received on mortgage loan                       --          55,000           6,105
Capitalized property expenditures                            (240,184)             --        (141,587)
Distributions from joint venture in excess of income          920,000         323,435         667,000
                                                          -----------     -----------     -----------
Net cash provided by investing activities                     679,816         378,435         531,518
                                                          -----------     -----------     -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Distributions to partners                                  (1,829,570)     (1,681,748)     (1,680,736)
                                                          -----------     -----------     -----------
Net increase (decrease) in cash and cash equivalents         (213,654)            195         (51,514)
Cash and cash equivalents at beginning of year                378,129         377,934         429,448
                                                          -----------     -----------     -----------
Cash and cash equivalents at end of year                  $   164,475     $   378,129     $   377,934
                                                          -----------     -----------     -----------
                                                          -----------     -----------     -----------
-----------------------------------------------------------------------------------------------------
RECONCILIATION OF NET LOSS TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
Net loss                                                  $(1,149,484)    $  (558,669)    $(6,799,543)
                                                          -----------     -----------     -----------
Adjustments to reconcile net loss to net cash
  provided by operating activities:
Depreciation and amortization                                 379,506         379,524         376,306
Distributions from joint venture income                            --         113,565              --
Joint venture equity (income) loss                            609,162        (113,565)      6,665,416
Provision for loan loss                                            --              --         884,852
Provision for loss on impairment of assets                  1,000,000       1,400,000              --
Changes in:
Other assets                                                 (133,835)         90,659         (50,532)
Accounts payable and accrued expenses                         230,751          (8,006)         21,205
                                                          -----------     -----------     -----------
Total adjustments                                           2,085,584       1,862,177       7,897,247
                                                          -----------     -----------     -----------
Net cash provided by operating activities                 $   936,100     $ 1,303,508     $ 1,097,704
                                                          -----------     -----------     -----------
                                                          -----------     -----------     -----------
-----------------------------------------------------------------------------------------------------
                   The accompanying notes are an integral part of these statements
</TABLE>
 
                                       5
 <PAGE>
<PAGE>
 
                  PRUDENTIAL REALTY ACQUISITION FUND II, L.P.
                            (a limited partnership)
                         NOTES TO FINANCIAL STATEMENTS
 
A. General
 
   Prudential Realty Acquisition Fund II, L.P. (the ``Partnership''), a Delaware
limited partnership, was formed on August 10, 1984 and will terminate on
December 31, 2009 unless ended sooner under the provisions of the Amended and
Restated Partnership Agreement (the ``Partnership Agreement''). The Partnership
was formed to acquire and manage income-producing commercial real estate. The
general partners of the Partnership are Prudential Realty Partnerships, Inc.
(``PRP'') and Prudential-Bache Properties, Inc. (``PBP'') (collectively, the
``General Partners''). At December 31, 1995, the Partnership owns two
properties, holds a mortgage loan and has a 46% interest in a joint venture
which owns two shopping centers (the ``Joint Venture'').
 
   The two shopping centers owned by the Joint Venture were sold on March 26,
1996 for a gross sales price of $15,500,000 less estimated costs to sell.
 
   In January 1996, the General Partners mailed to all limited partners a
Consent Solicitation Statement (the ``Statement') asking for their written
consent to approve (i) a plan of sale of the remaining assets of the Partnership
and (ii) the complete liquidation and dissolution of the Partnership, as more
fully described in the Statement. On March 11, 1996, the limited partners
holding a majority of the Units approved the plan of sale and complete
liquidation and dissolution of the Partnership. Although no time schedule has
been adopted for this plan, the Partnership does expect to begin to actively
market all of its properties in 1996. It is not expected that the Partnership's
eventual total distributions, including sales proceeds, will equal the partners'
initial investments.
 
B. Summary of Significant Accounting Policies
 
Basis of accounting
 
   The books and records of the Partnership are maintained on the accrual basis
of accounting in accordance with generally accepted accounting principles. The
preparation of financial statements in conformity with generally accepted
accounting principles requires the General Partners to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
 
Property
 
   Effective December 31, 1995, the Partnership adopted 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.'' Under SFAS No.
121, impairment of properties to be held and used is determined to exist when
estimated amounts recoverable through future operations on an undiscounted basis
are below the properties' carrying value. If a property is determined to be
impaired, it should be recorded at the lower of its carrying value or its
estimated fair value. For properties that are held for sale, SFAS No. 121 states
that they should be recorded at the lower of carrying amount or estimated fair
value less costs to sell and that depreciation should cease. As of December 31,
1995, the properties are accounted for as assets held for sale. The 
implementation of SFAS No. 121 did not have a significant impact on the
Partnership's financial position as of December 31, 1995.
 
   The determination of estimated fair value is based, not only upon future cash
flows, which rely upon estimates and assumptions including expense growth,
occupancy and rental rates, but also upon market capitalization and discount
rates as well as other market indicators. The General Partners believe that the
estimates and assumptions used are appropriate in evaluating the carrying amount
of the Partnership's properties. However, changes in market conditions and
circumstances may occur in the near term which would cause these estimates and
assumptions to change, which, in turn, could cause the amounts ultimately
realized upon the sale or other disposition of the properties to differ
materially from their estimated fair value. Such changes may also require
write-downs in the future.
 
   Prior to December 31, 1995, the Partnership carried its property investments
at the lower of depreciated cost or estimated amounts recoverable through future
operations and ultimate disposition of the property.
                                       6
 <PAGE>
<PAGE>
Property investments were depreciated or amortized using the straight-line
method over their estimated economic lives which ranged from 5 to 31.5 years
depending on property type. A provision for loss on impairment of assets was
recorded when estimated amounts recoverable through future operations and
ultimate disposition of the property on a undiscounted basis were below
depreciated cost. However, property investments were reduced to estimated fair
value when the property was considered to be permanently impaired and the
depreciated cost exceeded the estimated fair value.
 
   Buildings and improvements include furniture and fixtures, tenant
improvements and capitalized leasing costs. Tenant improvements and capitalized
leasing costs were amortized over the lives of their respective leases.
Capitalized leasing costs, net of accumulated amortization, were $221,816 and $0
as of December 31, 1995 and 1994, respectively.
 
Investment in Joint Venture
 
   The Partnership accounts for its investment in the Joint Venture using the
equity method. Costs incurred in the acquisition of the investment
(approximately $1,100,000) that were in excess of the Partnership's basis in the
Joint Venture are being amortized over a twenty-year period and are included in
Joint Venture equity income (loss).
 
   The two shopping centers owned by the Joint Venture were sold on March 26,
1996 for a gross sales price of $15,500,000 less costs to sell.
 
Cash and cash equivalents
 
   Cash and cash equivalents include short-term investments with original
maturities of three months or less. They are carried at cost plus accrued
interest, which approximates market value.
 
Income taxes
 
   The Partnership is not required to provide for, or pay, any Federal or state
income taxes. Income tax attributes that arise from its operations are passed
directly to the individual partners. The Partnership may be subject to other
state and local taxes in jurisdictions in which it operates.
 
Profit and loss allocations and distributions
 
   Pursuant to Section 11 of the Amended Partnership Agreement (effective
January 1, 1987), the General Partners have the right to specially allocate
gross or net income, in certain circumstances in an amount sufficient to restore
the deficit balances in their capital accounts. Allocations of income (loss) are
90% to the limited partners and 10% to the General Partners for financial and
tax reporting purposes provided that depreciation for tax purposes is allocated
1% to the General Partners and 99% to the units which were not originally owned
by Tax Exempt Holders. To the extent that cash distributions to the General
Partners exceed the 10% allocation of income for tax reporting purposes
(creating deficit capital account balances in excess of their allowable deficit
capital account balances), the General Partners receive a special allocation of
additional income for the difference.
 
   Distributions of cash are made in accordance with the Partnership Agreement
and are allocated 90% to the limited partners and 10% to the General Partners.
Proceeds from the sale of the properties and liquidation of the Partnership will
be distributed in accordance with the Partnership Agreement.
 
C. Property
 
   The Partnership's directly-owned properties are comprised of the following:
 
<TABLE>
<CAPTION>
                                                       December 31,
                                                --------------------------
                                                   1995           1994
<S>                                             <C>            <C>
--------------------------------------------------------------------------
Rancho Cucamonga, CA - Tash
  Distribution Warehouse                        $ 5,552,419    $ 6,468,295
Franklin, MA - Thermo Instruments
  Office/Research facility                        3,540,849      3,702,295
                                                -----------    -----------
                                                $ 9,093,268    $10,170,590
                                                -----------    -----------
                                                -----------    -----------
</TABLE>
 
                                       7
 <PAGE>
<PAGE>
 
   The properties' have been valued at the lower of the carrying amount or
estimated fair value less costs to sell based on third party appraisals. As a
result, provisions for loss on impairment of assets of $1,000,000 and $1,400,000
were recorded for the years ended December 31, 1995 and 1994, respectively.
 
   The Partnership's warehouse in Rancho Cucamonga, California was leased to
TASH Distribution (``TASH''). In December 1995, TASH notified the Partnership
that it had become insolvent and would vacate the building, which it did, in
March 1996. The Partnership is presently seeking to re-lease the property.
Revenues from this property represented 54%, 57% and 56% of the Partnership's
rental income from directly-owned properties for the years ended December 31,
1995, 1994 and 1993, respectively.
 
   The Eight Forge Park industrial office building located in Franklin (suburban
Boston), Massachusetts is leased to Thermo Instrument Systems, Inc. under a
lease expiring in June 1997. One of two subsidiaries of the tenant, representing
70% of the leased space, vacated its space in the third quarter of 1995.
However, the tenant continues to honor its lease commitment. Revenues from Eight
Forge Park represented 46%, 43% and 44% of the Partnership's rental income from
directly-owned properties for the years ended December 31, 1995, 1994 and 1993,
respectively.
 
D. Mortgage Loan Receivable
 
   The mortgage loan receivable, secured by an office/warehouse building in
Golden Valley, Minnesota, matured on May 15, 1993 with a balance due of
$1,389,852. The borrower remains in default. A court appointed receiver is
collecting rent from the property which has been used to fund operating expenses
and taxes at the property. The Partnership received $55,000 in 1994 which was
recorded as a reduction of the mortgage loan receivable. The Partnership also
received $50,000 in 1995 which was recorded as other income in the financial
statements.
 
   Environmental studies performed on the property have shown environmental
contamination. A ``No Association'' letter has been obtained from the Minnesota
Pollution Control Agency which states that the Partnership will not be
identified as a responsible party due to its investigative actions. The
Partnership is under no obligation to do any remediation work.
 
   The Partnership recorded an allowance for loan loss of $884,852 in 1993 and
$150,000 in the third quarter of 1995. The third quarter 1995 provision was
reversed as of December 31, 1995 to reflect the estimated sales proceeds less
costs to sell based upon an agreement effective March 6, 1996 by which a
purchaser has agreed to purchase the mortgage loan for $400,000. Subject to the
conditions in the agreement, the Partnership will assign the mortgage to the
purchaser at closing, presently scheduled for March 29, 1996 but in no event
later than April 4, 1996. The purchaser is accepting the assignment of the
mortgage and any responsibility it may incur from such assignment for any
further remediation costs at the underlying property. However, there is no
assurance that the sale will be consummated.
 
E. Income Taxes
 
   The following is a reconciliation of net loss reported for financial
reporting purposes with net income reported for tax reporting purposes.
 
<TABLE>
<CAPTION>
                                                                 Year ended December 31,
                                                         ----------------------------------------
                                                            1995           1994          1993
     <S>                                                 <C>            <C>           <C>
     --------------------------------------------------------------------------------------------
     Net loss per financial statements                   $(1,149,484)   $ (558,669)   $(6,799,543)
     Joint Venture financial statement income less
       (greater) than income for tax purposes                842,919        (7,186)     6,336,366
     Provision for loan loss                                      --            --        884,852
     Provision for loss on impairment of assets            1,000,000     1,400,000             --
     Tax depreciation less than depreciation per
       financial statements                                   11,137        15,858         12,827
                                                         -----------    ----------    -----------
     Tax basis net income                                $   704,572    $  850,003    $   434,502
                                                         -----------    ----------    -----------
                                                         -----------    ----------    -----------
</TABLE>
 
   The differences between the tax basis and book basis of partners' capital are
primarily attributable to the cumulative effect of the book-to-tax income (loss)
adjustments and the recording of distributions to partners.
 
                                       8
 <PAGE>
<PAGE>
 
F. Leases
 
   The Partnership has two single tenant noncancellable operating leases at its
industrial office building and warehouse which account for all of the
Partnership's rental income. However, at the warehouse property in Rancho
Cucamonga, California, the tenant notified the Partnership that it had become
insolvent and would vacate the building, which it did, in January 1996. Future
minimum base rents at December 31, 1995 due under the noncancellable lease at
the industrial office building property in Franklin, Massachusetts are $587,506
in 1996 and $293,753 in 1997. The lease requires the lessee to reimburse the
Partnership for real estate taxes, insurance costs and other expenses.
 
G. Investment in Joint Venture
 
   The Partnership has a 46% interest in a Joint Venture with an affiliated
limited partnership. Presented below is summarized financial information for the
Joint Venture.
 
<TABLE>
<CAPTION>
                                                                           December 31,
                                                                   ----------------------------
                                                                       1995            1994
     <S>                                                           <C>             <C>
     ------------------------------------------------------------------------------------------
     Assets
     Land                                                          $  3,835,457    $  4,422,957
     Buildings and improvements                                      27,899,102      29,615,596
     Less: accumulated depreciation                                 (16,756,187)    (15,627,896)
                                                                   ------------    ------------
     Property                                                        14,978,372      18,410,657
     Accounts receivable, net                                           688,279         407,437
     Cash and cash equivalents                                        1,427,420       2,054,578
                                                                   ------------    ------------
     Total assets                                                  $ 17,094,071    $ 20,872,672
                                                                   ------------    ------------
                                                                   ------------    ------------
     Liabilities and partners' capital
     Total liabilities                                             $    326,699    $    901,073
                                                                   ------------    ------------
     Partners' capital
     Prudential Acquisition Fund I, L.P.                              9,009,238      10,739,520
     Prudential Realty Acquisition Fund II, L.P.                      7,758,134       9,232,079
                                                                   ------------    ------------
     Total partners' capital                                         16,767,372      19,971,599
                                                                   ------------    ------------
     Total liabilities and partners' capital                       $ 17,094,071    $ 20,872,672
                                                                   ------------    ------------
                                                                   ------------    ------------
</TABLE>
 
<TABLE>
<CAPTION>
                                                               Year ended December 31,
                                                     -------------------------------------------
                                                        1995            1994            1993
     <S>                                             <C>             <C>            <C>
     -------------------------------------------------------------------------------------------
     Revenues
     Rental income                                   $ 2,843,407     $2,613,050     $  2,514,661
     Recovery of expenses                              1,091,276        937,386        1,070,228
     Interest income                                     102,664         62,641           48,230
                                                     -----------     ----------     ------------
                                                       4,037,347      3,613,077        3,633,119
                                                     -----------     ----------     ------------
     Expenses
     Depreciation and amortization                     1,128,291      1,675,411        1,646,412
     Property operating                                1,101,079      1,034,603        1,266,862
     Real estate taxes                                   518,388        427,759          924,126
     General and administrative                          143,816        108,385          115,717
     Provisions for loss on impairment of assets       2,350,000             --       14,050,000
                                                     -----------     ----------     ------------
                                                       5,241,574      3,246,158       18,003,117
                                                     -----------     ----------     ------------
     Net income (loss)                               $(1,204,227)    $  366,919     $(14,369,998)
                                                     -----------     ----------     ------------
                                                     -----------     ----------     ------------
</TABLE>
 
                                       9
 <PAGE>
<PAGE>
 
   Investment in joint venture and joint venture equity income (loss) include
amortization of $55,218 annually of the Partnership's acquisition costs that
were in excess of the asset basis. Accumulated amortization at December 31, 1995
was $386,526.
 
   Effective December 31, 1995, the Joint Venture adopted 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.'' Under SFAS No.
121, impairment of properties to be held and used is determined to exist when
estimated amounts recoverable through future operations on an undiscounted basis
are below the properties' carrying value. If a property is determined to be
impaired, it should be recorded at the lower of its carrying value or its
estimated fair value. For properties that are held for sale, SFAS No. 121 states
that they should be recorded at the lower of carrying amount or estimated fair
value less costs to sell and depreciation should cease.
 
   The carrying value of the Joint Venture's properties were reduced by $850,000
during the second quarter of 1995 to reflect an impairment in value resulting
from lease defaults and market indications. In the fourth quarter of 1995, the
Joint Venture recorded a provision for loss on impairment of assets of
$1,500,000 to reflect the estimated net proceeds received from the sale of the
two shopping centers on March 26, 1996.
 
   The Joint Venture's properties were considered to be impaired in 1993 because
declines in net operating income had continued for an extended period of time
and the trend was not expected to change in the foreseeable future. Based on low
rental rates, which continued to decline in comparison to the average rental
rates charged by the competition, significant tenant concessions and oversupply
of retail space in the Joint Venture's submarket, a write-down of $17,500,000
was recorded at December 31, 1993 to reduce the Joint Venture's properties to
estimated fair value based on third party appraisals.
 
H. Related Parties
 
   The General Partners and their affiliates perform services for the
Partnership which include, but are not limited to: accounting and financial
management; registrar, transfer and assignment functions; asset management;
investor communications; printing and other administrative services. The amount
of reimbursement from the Partnership is limited by the provisions of the
Partnership Agreement. The costs and expenses incurred on behalf of the
Partnership which are reimbursable to the General Partners and their affiliates
are:
 
<TABLE>
<CAPTION>
                                                         Year ended December 31,
                                                    ----------------------------------
<S>                                                 <C>          <C>          <C>
                                                      1995         1994         1993
--------------------------------------------------------------------------------------
Prudential Realty Partnerships, Inc. and
  affiliates                                        $ 45,100     $ 30,400     $ 32,700
Prudential-Bache Properties, Inc. and affiliates     104,900       74,700       88,400
                                                    --------     --------     --------
                                                    $150,000     $105,100     $121,100
                                                    --------     --------     --------
                                                    --------     --------     --------
</TABLE>
 
   Expenses payable to the General Partners and their affiliates (which are
included in accrued expenses) as of December 31, 1995 and 1994 are $59,600 and
$47,100, respectively.
 
   In addition, the General Partners and their affiliates perform similar
services for the Joint Venture. The Partnership's allocable share of the costs
and expenses incurred on behalf of the Joint Venture which are reimbursable to
the General Partners and their affiliates were $32,800, $26,400 and $29,400 for
the years ended December 31, 1995, 1994 and 1993, respectively.
 
   Prudential Securities Incorporated (``PSI''), an affiliate of the General
Partners, owns 1,117 limited partnership units at December 31, 1995.
 
I. Contingencies
 
   On or about October 18, 1993, a putative class action, captioned Kinnes et
al. v. Prudential Securities Group Inc. et al. (CV-93-654), was filed in the
United States District Court for the District of Arizona, purportedly on behalf
of investors in the Partnership against the Partnership, PBP, PSI, and a number
of other defendants. Plaintiffs alleged violation of the federal Racketeer
Influenced and Corrupt Organizations Act (``RICO'') statutes, breach of
fiduciary duty, fraud and deceit, negligence, and demanded an accounting.
                                       10
 <PAGE>
<PAGE>
Plaintiffs sought unspecified compensatory, punitive and treble damages, and
rescission, including costs and attorneys' fees, but the only relief sought
against the Partnership was an accounting. The Prudential defendants filed a
motion to dismiss on December 22, 1993.
 
   On or about November 16, 1993, a putative class action captioned Connelly et
al. v. Prudential-Bache Securities Inc. et al. (CIV-93-713), was filed in the
United States District Court for the District of Arizona, purportedly on behalf
of investors in the Partnerships against the Partnership, PBP, PSI, and a number
of other defendants. An amended complaint was filed on December 6, 1993.
Plaintiffs alleged fraud, breach of fiduciary duty, negligent misrepresentation,
malpractice, and violation of federal securities laws and RICO statutes.
Plaintiffs sought unspecified compensatory, punitive and treble damages,
disgorgement and restitution of all earnings, profits, compensation and benefits
received by defendants, rescission, costs and attorneys' fees. Plaintiffs
subsequently filed a motion to consolidate the Connelly case with the Kinnes
action.
 
   By order of the Judicial Panel on Multidistrict Litigation dated April 14,
1994, the Kinnes case, together with a number of other actions not involving the
Partnership, and by order dated June 8, 1994, the Connelly case, were
transferred to a single judge of the United States District Court for the
Southern District of New York and consolidated for pretrial proceedings under
the caption In re Prudential Securities Incorporated Limited Partnerships
Litigation (MDL Docket No. 1005). On June 8, 1994, plaintiffs in the transferred
cases filed a complaint that consolidated the previously filed complaints and
named as defendants, among others, PSI, certain of its present and former
employees, PRP and PBP. The Partnership was not named as a defendant in the
consolidated complaint, but the name of the Partnership was listed as being
among the limited partnerships at issue in the case.
 
   On August 9, 1995, PRP, PBP, PSI and other Prudential defendants entered into
a Stipulation and Agreement of Partial Compromise and Settlement with legal
counsel representing plaintiffs in the consolidated actions. The court
preliminarily approved the settlement agreement by order dated August 29, 1995
and, following a hearing held November 17, 1995, found that the agreement was
fair, reasonable, adequate and in the best interests of the plaintiff class. The
court gave final approval to the settlement, certified a class of purchasers of
specific limited partnerships, including the Partnership, released all settled
claims by members of the class against the PSI settling defendants and
permanently barred and enjoined class members from instituting, commencing or
prosecuting any settled claim against the released parties. The full amount due
under the settlement agreement has been paid by PSI.
 
J. Subsequent Events
 
   In February 1996, a distribution of $470,000 was paid to the partners for the
quarter ended December 31, 1995. Limited partners received a total of $423,000,
which represents $9.50 per unit, and the General Partners received the
remainder.
 
   The two shopping centers owned by the Joint Venture were sold on March 26,
1996 for a gross sales price of $15,500,000 less costs to sell.
 
   The mortgage loan is subject to an agreement effective March 6, 1996 by which
a purchaser has agreed to purchase the mortgage loan for $400,000. Subject to
the conditions in the agreement, the Partnership will assign the mortgage to the
purchaser at closing, presently scheduled for March 29, 1996 but in no event
later than April 4, 1996. The purchaser is accepting the assignment of the
mortgage and any responsibility it may incur from such assignment for any
further remediation costs at the underlying property. However, there is no
assurance that the sale will be consummated.
 
                                       11
 <PAGE>
<PAGE>
 
                  PRUDENTIAL REALTY ACQUISITION FUND II, L.P.
                            (a limited partnership)
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS
 
Liquidity and Capital Resources
 
   The Partnership has a real estate investment portfolio consisting of two
commercial properties, a mortgage loan and an equity interest in a joint venture
(the ``Joint Venture'') which owned two shopping centers. The two shopping
centers owned by the Joint Venture were sold on March 26, 1996 for a gross sales
price of $15,500,000 less costs to sell. The sale of the property is expected to
result in a significant distribution during the second quarter of 1996.
 
   In January 1996, the General Partners mailed to all limited partners a
Consent Solicitation Statement (the ``Statement'') asking for their written
consent to approve (i) a plan of sale of the remaining assets of the Partnership
and (ii) the complete liquidation and dissolution of the Partnership, as more
fully described in the Statement. As of March 11, 1996, the majority of the
limited partners approved the plan of sale and complete liquidation and
dissolution of the Partnership. There is no specific time schedule for the sale
of the remaining properties or for the liquidation of the Partnership. However,
the Partnership expects to begin to actively market all of its remaining
properties in 1996. It is not expected that the Partnership's eventual total
distributions, including sales proceeds, will equal the partners' initial
investments.
 
   During the year ended December 31, 1995, the Partnership's cash and cash
equivalents decreased $214,000 primarily as a result of decreased rental
revenues and recovery of expenses from the directly-owned properties, an
increase in capitalized property expenditures and an increase in distributions
to partners partially offset by an increase in distributions from the Joint
Venture. The Joint Venture, in which the Partnership has a 46% interest, has
cash and cash equivalents of $1,427,000 at December 31, 1995 as compared to
$2,055,000 at December 31, 1994. This amount is anticipated to be sufficient to
pay outstanding liabilities, fund capital expenditures (including leasing
commissions and tenant improvements) and provide additional cash distributions
to the Partnership. Cash distributions to the Partnership from the Joint Venture
totalled $920,000 and $437,000 for the years ended December 31, 1995 and 1994,
respectively. The level of distributions of cash from the Joint Venture is
impacted by the operating results of its properties as well as the levels of
cash reserves it maintains. The Joint Venture expended $46,000 for capital
improvements during 1995.
 
   In connection with the capital improvements which are discussed in further
detail below, the amount of actual capital expenditures and their timing will
depend on the success of leasing efforts, the nature and timing of new leases
and lease renewals, ongoing evaluation of the need for the planned improvements
and optimal timing of their implementation as well as the timing of the sale of
the properties.
 
Cash Distributions
 
   Cash distributions paid to the limited partners and General Partners totalled
$1,830,000 and $1,682,000 for the years ended December 31, 1995 and 1994,
respectively, of which the limited partners received $1,647,000 and $1,514,000,
($37.00 and $34.00 per unit), respectively, and the General Partners received
the remainder. These amounts represent payments from current and prior
undistributed cash flow from operations of the directly-owned and Joint Venture
properties discussed below in Results of Operations.
 
   In February 1996, cash distributions of cash flow from operations of $470,000
were paid to the limited partners and General Partners. Limited partners
received $423,000 ($9.50 per unit) and the General Partners received the
remainder.
 
   The Partnership expects to have reduced cash flow in early 1996 as a result
of the vacancy from the industrial warehouse in Rancho Cucamonga, California of
its sole tenant in March 1996. Unless a new tenant can be found in the near
future, the Partnership may have to lower future distributions. Furthermore, the
amount of cash generated by the Partnership from operations of the
directly-owned properties, the amount expended for capital improvements, and the
amount of reserves set aside for anticipated capital improvements as well as the
timing of the sale of the Partnership's properties could affect the
Partnership's ability to make future distributions to the partners and the
amount of the distributions that may be made.
 
                                       12
 <PAGE>
<PAGE>
 
Capital Improvements--Directly-Owned Properties
 
   For the year ended December 31, 1995, the Partnership capitalized $302,000
for tenant improvements and leasing commissions. Projected capital expenditures
for the directly-owned properties for 1996 are estimated at $276,000 for tenant
improvements and leasing commissions at Eight Forge Park. These capital
improvements will be funded from either undistributed cash balances or cash
derived from future operations.
 
Capital Improvements--Joint Venture
 
   During 1995, the Joint Venture, in which the Partnership has a 46% interest,
expended $46,000 for capital improvements of which $16,000 represented building
and land improvements and $30,000 represented leasing commissions. Projected
capital expenditures for the Joint Venture for 1996 are estimated at $40,000 for
anticipated tenant improvements and leasing commissions.
 
Results of Operations
 
   The Partnership recorded net losses of $1,149,000, $559,000 and $6,800,000
for the years ended December 31, 1995, 1994 and 1993, respectively. As discussed
in further detail below, these losses were primarily the result of provisions
for loss on impairment of assets recorded for the Partnership and Joint Venture
properties. Provisions for losses on impairment of assets of $1,000,000 and
$1,400,000 were recorded in 1995 and 1994, respectively, to reflect the
directly-owned properties' estimated fair value. The Partnership's pro rata
share of provisions for loss on impairment of assets recorded for the Joint
Venture properties was $1,081,000 and $6,463,000 in 1995 and 1993, respectively.
Fluctuations between periods in other operating results are discussed below.
 
Directly-Owned Properties
 
   As of December 31, 1995 and 1994, the Eight Forge Park office building in
Franklin, Massachusetts was 100% leased by two subsidiaries of one company whose
lease expires in June 1997. One of the subsidiaries, representing 70% of the
leased space, vacated its space in the third quarter of 1995. However, the
tenant continues to honor its obligations under the lease. The Partnership is
currently discussing possible lease extensions and/or restructurings with the
remaining tenant. Rental income and operating expenses for the years ended
December 31, 1995 and 1994 were comparable to 1994 and 1993, respectively. A
$1,400,000 provision for loss on impairment of assets was recorded in 1994 to
reduce the Eight Forge Park property to its estimated fair value.
 
   In December 1995, TASH, the sole tenant of the warehouse facility in Rancho
Cucamonga, California, became insolvent and closed down its operations. Rental
income for the year ended December 31, 1995 decreased $94,000 as compared to
1994 due to rent concessions provided in 1995. Operating expenses for the year
ended December 31, 1995 increased $30,000 mainly due to increased professional
fees. Rental income increased $45,000 in 1994 as compared to 1993 due to a
scheduled rent increase. Operating expenses for the year ended December 31, 1994
were comparable to 1993. A $1,000,000 provision for loss on impairment of assets
was recorded for the year ended December 31, 1995 to reduce the Rancho Cucamonga
property to its estimated fair value.
 
   Other income for the year ended December 31, 1995 increased $49,000 as
compared to 1994 due to the receipt of $50,000 from the mortgage loan. See Note
D in the financial statements.
 
   Real estate taxes for the year ended December 31, 1995 decreased $55,000 as
compared to 1994 due to a refund received in the second quarter of 1995 from a
successful appeal of the 1992 and 1993 taxes at the Rancho Cucamonga warehouse
facility. Real estate taxes for the year ended December 31, 1994 were comparable
to 1993.
 
   General and administrative expenses for the year ended December 31, 1995
increased $214,000 as compared to 1994 primarily due to costs relating to the
preparation and review of the Consent Solicitation Statement and increased costs
to administer the Partnership. During 1994, general and administrative expenses
increased $61,000 as compared to 1993 primarily due to professional fees
associated with the mortgage loan receivable.
 
                                       13
 <PAGE>
<PAGE>
 
   Interest income for the year ended December 31, 1995 increased by $10,000 as
compared to 1994 due to higher average cash balances during 1995. Interest
income decreased $41,000 for the year ended December 31, 1994, as compared to
1993 as a result of the mortgage loan receivable defaulting in the second
quarter of 1993.
 
Joint Venture Properties
 
   As of December 31, 1995, Pine Island and Ridge Plaza were 94% and 81% leased
(88% and 71% occupied), respectively, as compared to 93% and 90% leased (93% and
80% occupied) as of December 31, 1994. Over the next twelve months, five leases
representing 7% of the rentable space are scheduled to expire at Pine Island. In
the third quarter of 1994, a new tenant who had signed a ten-year lease notified
the Joint Venture it would not occupy its space (approximately 10% of the leased
space of Ridge Plaza). The tenant is not making payments as required by its
lease. Negotiations continue with the tenant relating to a buy-out of the lease.
Occupancy further dropped at Ridge Plaza by 10% in April 1995 when a tenant was
evicted due to the non-compliance of an operating covenant. There are no
significant leases scheduled to expire in the next twelve months at Ridge Plaza.
A drug store which occupies 5% of the total space in Pine Island was acquired by
another chain in June 1995. The new owner closed the store during the third
quarter; however, it is required under its lease obligations to continue making
payments until expiration of the lease in 2003.
 
   Rental income for the year ended December 31, 1995 increased $230,000
compared to 1994 due to increased occupancy at Pine Island and the expiration of
free rent periods for several tenants during 1994 at Ridge Plaza. Rental income
for the year ended December 31, 1994 increased $98,000 as compared to 1993
mainly due to the increased average rental and occupancy rates at Pine Island.
 
   Property operating expenses for the year ended December 31, 1995 increased
$66,000 as compared to 1994 primarily due to an increase in provisions for
doubtful accounts. Property operating expenses for the year ended December 31,
1994 decreased $232,000 as compared to 1993 primarily due to provisions for
doubtful accounts recorded in 1993.
 
   Real estate taxes for the year ended December 31, 1995 increased $91,000 as
compared to 1994 and decreased $496,000 for the year ended December 31, 1994 as
compared to 1993 due to refunds received for prior periods at both Pine Island
and Ridge Plaza in the fourth quarter of 1994 as a result of a lower assessment
on the properties.
 
   Depreciation and amortization expense for the year ended December 31, 1995
decreased $547,000 as compared to 1994 because a vacated outparcel and related
tenant improvements at Ridge Plaza were demolished to provide additional parking
at the Joint Venture's properties in 1994. Additionally, in the third quarter of
1994, a tenant with a new ten-year lease notified the Joint Venture it would not
occupy its space. Negotiations are ongoing with the tenant relating to a buy-out
of the lease. As a result, depreciation and amortization expense in 1994
includes the write-off of related tenant improvements and leasing commissions of
$108,000. Furthermore, a tenant vacated its space at Pine Island in the third
quarter of 1994, resulting in a write-off of tenant improvements of $154,000.
Depreciation and amortization expense for the year ended December 31, 1994
increased $29,000 as compared to 1993 primarily due to the reasons mentioned
above, offset by the effect of a lower depreciable basis resulting from the
write-down of the Joint Venture properties in 1993.
 
   General and administrative expenses for the year ended December 31, 1995
increased $35,000 as compared to 1994 primarily due to costs relating to the
preparation and review of the Consent Solicitation Statement and increased costs
to administer the Joint Venture.
 
   The carrying value of the Joint Venture's properties were reduced by $850,000
during the second quarter of 1995 to reflect an impairment in value resulting
from lease defaults and market indications. In the fourth quarter of 1995, the
Joint Venture recorded a provision for loss on impairment of assets of
$1,500,000 to reflect the estimated net proceeds received from the sale of the
two shopping centers on March 26, 1996.
 
   The Joint Venture's properties were considered to be impaired in 1993 because
declines in net operating income had continued for an extended period of time
and the trend was not expected to change in the foreseeable future. Based on low
rental rates, which continued to decline in comparison to the average rental
rates charged by the competition, significant tenant concessions and oversupply
of retail space in the Joint Venture's submarket, the General Partners
considered this impairment to be permanent. As a result,
                                       14
 <PAGE>
<PAGE>
the depreciated cost basis of the properties was reduced to estimated fair value
based on third party appraisals through a write-down of $17,150,000 in 1993.
 
Mortgage Loan Receivable
 
   The mortgage loan receivable, secured by an office/warehouse building in
Golden Valley, Minnesota, matured on May 15, 1993 with a balance due of
$1,389,852. The borrower remains in default. See Note D to the financial
statements for further discussion.
 
                                       15
 <PAGE>
<PAGE>
 
                               OTHER INFORMATION
 
   The Partnership's Annual Report on Form 10-K filed with the Securities and
Exchange Commission is available to limited partners without charge upon written
request to:
 
       Prudential Realty Acquisition Fund II, L.P.
        c/o Prudential-Bache Properties, Inc.
        Client Services Department
        P.O. Box 2016
        New York, New York 10272-2016
 
                                       16
 <PAGE>
<PAGE>
Peck Slip Station
                                   BULK RATE
P.O. Box 2016
                                  U.S. POSTAGE
New York, NY 10272-2016
                                      PAID
                                 Automatic Mail
 
PRAF/170244
 <PAGE>