UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                                   FORM 10-K

(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 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 0-10225
                       -------

BALCOR PENSION INVESTORS-II
-----------------------------------------------------
(Exact name of registrant as specified in its charter)

           Illinois                                      36-3114027
-------------------------------                      ------------------- 
(State or other jurisdiction of                       (I.R.S. Employer
incorporation or organization)                       Identification No.)

2355 Waukegan Road                               
Bannockburn, Illinois                                        60015
----------------------------------------           -------------------     
(Address of principal executive offices)                   (Zip Code)

Registrant's telephone number, including area code (847) 267-1600
                                                   --------------
Securities registered pursuant to Section 12(b) of the Act:  None
                                                             ----
Securities registered pursuant to Section 12(g) of the Act:

Limited Partnership Interests
-----------------------------
(Title of class)

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 [   ]

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 ]
<PAGE>
                                    PART I

Item 1. Business
----------------

Balcor Pension Investors-II (the "Registrant") is a limited partnership formed
in 1981 under the laws of the State of Illinois. The Registrant raised
$85,010,000 from sales of Limited Partnership Interests. The Registrant has
retained cash reserves from the sale of its real estate investments for
contingencies which exist or may arise. The Registrant's operations currently
consist of interest income earned on short-term investments and the payment of
administrative expenses.

The Registrant originally funded thirty-three loans, and subsequently funded
three additional loans and acquired thirteen properties through foreclosure.
The Registrant currently has no loans in its portfolio and has disposed of all
of its real property investments.  

The Partnership Agreement provides for the dissolution of the Registrant upon
the occurrence of certain events, including the disposition of all interests in
real estate. The Registrant sold its final real estate investment in December
1996. The Registrant has retained a portion of the cash from the property sales
to satisfy obligations of the Registrant as well as establish a reserve for
contingencies. The timing of the termination of the Registrant and final
distribution of cash will depend upon the nature and extent of liabilities and
contingencies which exist or may arise. Such contingencies may include legal
and other fees and costs stemming from litigation involving the Registrant
including, but not limited to, the lawsuit discussed in "Item 3. Legal
Proceedings". Due to this litigation, the Registrant will not be dissolved and
reserves will be held by the Registrant until the conclusion of all
contingencies. There can be no assurances as to the time frame for conclusion
of these contingencies.

See "Management's Discussion and Analysis of Financial Condition and Results of
Operation - Liquidity and Capital Resources" for information regarding the
Registrant's Year 2000 readiness.

The Registrant no longer has an ownership interest in any real estate
investment. The General Partner is not aware of any material potential
liability relating to environmental issues or conditions affecting real estate
formerly owned by the Registrant.

The officers and employees of Balcor Mortgage Advisors, the General Partner of
the Registrant, and its affiliates perform services for the Registrant. The
Registrant currently has no employees engaged in its operations.

Item 2. Properties
------------------
As of December 31, 1998, the Registrant did not own any properties. 

In the opinion of the General Partner, the Registrant has obtained adequate
insurance coverage for property liability and property damage matters.

See Notes to Financial Statements for other information regarding former real
property investments.
<PAGE>
Item 3.  Legal Proceedings
--------------------------

Dee vs. Walton Street Capital Acquisition II, LLC
-------------------------------------------------

On June 14, 1996, a proposed class and derivative action complaint was filed,
Dee vs. Walton Street Capital Acquisition II, LLC (Circuit Court of Cook
County, Illinois, County Department, Chancery Division ("Chancery Court"), Case
No. 96 CH 06283) (the "Dee Case"), naming the General Partner and the general
partners (the "Balcor Defendants") of nine other limited partnerships sponsored
by The Balcor Company (together with the Registrant, the "Affiliated
Partnerships"), as well as the Affiliated Partnerships, as defendants.
Additional defendants were Insignia Management Group ("Insignia") and Walton
Street Capital Acquisition II, LLC ("Walton") and certain of their affiliates
and principals (collectively, the "Walton and Insignia Defendants"). The
complaint alleged, among other things, that the tender offers for the purchase
of limited partnership interests in the Affiliated Partnerships made by a joint
venture consisting of affiliates of Insignia and Walton were coercive and
unfair.  

On July 1, 1996, another proposed class action complaint was filed in the
Chancery Court, Anderson vs. Balcor Mortgage Advisors (Case No. 96 CH 06884)
(the "Anderson Case"). An amended complaint consolidating the Dee and Anderson
Cases (the "Dee/Anderson Case") was filed on July 25, 1996.  

The complaint seeks to assert class and derivative claims against the Walton
and Insignia Defendants and alleges that, in connection with the tender offers,
the Walton and Insignia Defendants misused the Balcor Defendants' and
Insignia's fiduciary positions and knowledge in breach of the Walton and
Insignia Defendants' fiduciary duty and in violation of the Illinois Securities
and Consumer Fraud Acts. The plaintiffs amended their complaint on October 8,
1996, adding additional claims. The plaintiffs requested certification as a
class and derivative action, unspecified compensatory damages and rescission of
the tender offers. Each of the defendants filed motions to dismiss the
complaint for failure to state a cause of action. On January 7, 1997, the
Chancery Court denied the plaintiffs' motion for leave to amend the complaint
and dismissed the matter for failure to state a cause of action, with
prejudice.

On February 3, 1997, the plaintiffs filed a Notice of Appeal of the Chancery
Court's order to the Appellate Court of Illinois. Oral arguments before the
Appellate Court were held on March 18, 1998. On November 12, 1998, the
Appellate Court issued an opinion affirming the Chancery Court's dismissal of
the case. On December 3, 1998, the plaintiffs filed a notice of intent to
appeal the Appellate Court's ruling to the Illinois Supreme Court. 

The Balcor Defendants intend to vigorously contest this action. No class has
been certified as of this date. The Registrant believes it has meritorious
defenses to contest the claims. It is not determinable at this time how the
outcome of this action will impact the remaining cash reserves of the
Registrant.
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
-----------------------------------------------------------

No matters were submitted to a vote of the Limited Partners of the Registrant
during 1998.
<PAGE>
                                    PART II

Item 5. Market for the Registrant's Common Equity and Related Stockholder
-------------------------------------------------------------------------
Matters
-------

There has not been an established public market for Limited Partnership
Interests and it is not anticipated that one will develop. For information
regarding previous distributions, see "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources", below.

As of December 31, 1998, the number of record holders of Limited Partnership
Interests of the Registrant was 5,238.

Item 6. Selected Financial Data
-------------------------------

                                      Year ended December 31,                 
                    ----------------------------------------------------------
                       1998        1997        1996        1995        1994  
                   ------------ ----------  ----------  ----------  ----------

Total income          $269,302   $250,695  $6,247,758  $4,965,565    $5,025,224
Recovery of losses
  on loans, real
  estate and 
  accrued interest
  receivable              None       None   3,402,517     700,000     1,200,000
Provision for
  losses on loans,
  real estate and
  accrued interest
  receivable              None       None     284,573     700,000     1,200,000
Income (loss) before
  gains on sale of 
  assets and
  extraordinary item    94,434    (49,574)  5,326,428   3,911,624     3,296,690
Net income (loss)       94,434    (49,574) 13,286,853   3,911,624     3,296,690
Net income (loss) per
  average number of
  Limited Partnership 
  Interests outstanding
  -Basic and Diluted      1.23       (.01)     139.42       46.12         38.23
Total assets         5,201,873  5,704,763  19,533,757  36,089,582    41,439,470
Mortgage notes
  payable                 None       None        None  12,138,360    12,296,687
Distributions per
  Limited Partner-
  ship Interest(A)        7.13     173.40(B)   213.00      103.18         82.50
<PAGE>
(A) These amounts include distributions of Original Capital of $125.95, $112.00
$41.18 and $62.50 per Limited Partnership Interest for the years 1997, 1996,
1995 and 1994, respectively.

(B) In addition to the above distribution, a special distribution of $.47 per
Interest was paid to class members including certain current investors in the
Partnership pursuant to the settlement of a class action lawsuit.

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

Operations
----------

Summary of Operations
---------------------

Balcor Pension Investors - II (the "Partnership") recognized net income during
1998 as interest income on short-term investments exceeded administrative
expenses. During 1997, interest income on short-term investments exceeded
administrative expenses; however, the Partnership paid additional expenditures
related to certain of the Partnership's properties sold in 1996 which resulted
in a net loss for 1997. During 1996, the Partnership recognized significant
gains on the sales of its five remaining properties, which were generating
income from operations prior to their sales and recognized a recovery of a loss
related to the Alzina Office Building loan. As a result, the Partnership
recognized net income in 1996 as compared to a net loss during 1997. Further
discussion of the Partnership's operations is summarized below.

1998 Compared to 1997
---------------------

During 1997, the Partnership paid additional expenditures related to certain of
the properties sold during 1996, which resulted in a loss from operations of
real estate held for sale.

Due to higher average cash balances in 1997 as a result of the investment of
proceeds received in connection with the 1996 property and loan sales prior to
distribution to Limited Partners in 1997, interest income on short-term
investments was higher during 1997 as compared to 1998.

The Partnership recognized other income during 1997 primarily in connection
with partial refunds of prior years' insurance premiums relating to the
Partnership's properties.

Primarily due to lower accounting and professional fees and bank charges,
administrative expenses decreased during 1998 as compared to 1997. In addition,
during February 1997, the General Partner made a payment relating to the
settlement of certain litigation to original investors who previously sold
their Interests in the Partnership, which was accounted for as an
administrative expense.
<PAGE>
1997 Compared to 1996
---------------------

Due to the sale of the Partnership's interest in the Alzina Office Building
loan in 1996, the Partnership recognized a gain of $306,759 and net interest
income on loan receivable ceased during 1996. 

Income from operations of real estate held for sale represented the net
operations of the properties acquired by the Partnership through foreclosure.
During 1996, the Partnership sold the Parkway Distribution Center and
Cumberland Pines, Hollowbrook and Sherwood Acres - Phases I and II apartment
complexes, which were generating income from operations prior to their sales,
resulting in income from operations of real estate held for sale for 1996. The
Partnership recognized gains in connection with four of these sales totaling
$8,227,212. The Partnership did not recognize any gain or loss in connection
with the sale of Hollowbrook Apartments.

Due to higher average cash balances in 1997, as a result of the timing of the
distribution of the proceeds received in connection with the 1996 property and
loan sales, interest income on short-term investments increased during 1997 as
compared to 1996. 

The Alzina Office Building loan bore interest at a contractually-fixed interest
rate. The loan also provided for a participation by the Partnership in
increases in the value of the collateral property when the loan was repaid or
refinanced. In addition, the loan agreement allowed the Partnership to receive
a percentage of rental income exceeding a base amount. This participation
income was reflected in the accompanying Statements of Income and Expenses when
received. The Partnership received participation income on the Alzina Office
Building loan during 1996.

Provisions were charged to income when the General Partner believed an
impairment had occurred to the value of its properties or in a borrower's
ability to repay a loan or in the value of the collateral property.
Determinations of fair value were made periodically on the basis of performance
under the terms of the loan agreement, assessments of property operations and
the property's estimated sales price less closing costs. Determinations of fair
value represented estimations based on many variables which affected the value
of real estate, including economic and demographic conditions. During 1996, the
Partnership recognized a recovery of $3,302,517 related to the Alzina Office
Building loan, a provision of $284,573 related to the Hollowbrook Apartments, a
recovery of $100,000 and a write off of a previously established allowance of
$684,573 related to the Partnership's real estate held for sale. The provision
was recognized to provide for a change in the estimate of the fair value of the
Hollowbrook Apartments.

Legal, consulting, printing and postage costs incurred in connection with a
response to a tender offer during 1996 resulted in a decrease in administrative
expenses during 1997 as compared to 1996. In addition, lower legal and
portfolio management fees during 1997 contributed to the decrease in
administrative expenses.
<PAGE>
In connection with the 1996 sale of the Sherwood Acres-Phases I and II
apartment complexes, the Partnership paid prepayment penalties of $453,928 and
wrote-off the remaining unamortized deferred expenses related to the properties
of $99,229. In addition, the Partnership paid a prepayment penalty in
connection with the 1996 sale of the Parkway Distribution Center of $20,389.
These amounts totaling $573,546 were recognized as debt extinguishment expenses
in 1996 and classified as extraordinary items for financial statement purposes.

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

The cash position of the Partnership decreased by approximately $761,000 as of
December 31, 1998 when compared to December 31, 1997 primarily due to the
distribution made to Limited Partners in January 1998 from remaining available
Cash Flow reserves. The Partnership generated cash flow of approximately
$111,000 from its operating activities primarily as a result of the interest
income earned on its short-term investments, net of the payment of
administrative expenses. The Partnership used cash of approximately $872,000 to
fund its financing activities which consisted of the payment of distributions
to the Partners and an increase in restricted cash and cash equivalents
principally from interest income earned on the Early Investment Incentive Fund
and distributions to the Fund. 

The Partnership Agreement provides for the dissolution of the Partnership upon
the occurrence of certain events, including the disposition of all interests in
real estate. The Partnership sold its final real estate investment in December
1996. The Partnership has retained a portion of the cash from the property
sales to satisfy obligations of the Partnership as well as establish a reserve
for contingencies. The timing of the termination of the Partnership and final
distribution of cash will depend upon the nature and extent of liabilities and
contingencies which exist or may arise. Such contingencies may include legal
and other fees and costs stemming from litigation involving the Partnership
including, but not limited to, the lawsuit discussed in "Item 3. Legal
Proceedings". Due to this litigation, the Partnership will not be dissolved and
reserves will be held by the Partnership until the conclusion of all
contingencies. There can be no assurances as to the time frame for conclusion
of these contingencies.

In February 1997, the Partnership discontinued the repurchase of Interests from
Limited Partners. As of December 31, 1998, there were 8,136 Interests and cash
of $3,933,560 held in the Early Investment Incentive Fund.

The Partnership made distributions totaling $7.13, $173.40 and $213.00 per
Interest in 1998, 1997 and 1996, respectively. See Statement of Partners'
Capital for additional information. Distributions were comprised of $7.13 of
Cash Flow in 1998, $47.45 of Cash Flow and $125.95 of Mortgage Reductions in
1997 and $101.00 of Cash Flow and $112.00 of Mortgage Reductions in 1996.

Limited Partners have received distributions totaling $1,750.21 per $1,000
Interest. Of this amount, $1,101.08 represents Cash Flow from operations and
$649.13 represents a return of Original Capital. No additional distributions
are anticipated to be made prior to the termination of the Partnership. 
<PAGE>
However, after paying final partnership expenses, any remaining cash reserves
will be distributed. Amounts allocated to the Early Investment Incentive Fund
will also be distributed at that time.

The Partnership sold all of its remaining real property investments and
distributed a majority of the proceeds from these sales to Limited Partners in
1996 and 1997. Since the Partnership no longer has any operating assets, the
number of computer systems and programs necessary to operate the Partnership
has been significantly reduced. The Partnership relies on third party vendors
to perform most of its functions and has implemented a plan to determine the
Year 2000 compliance status of these key vendors. The Partnership is within its
timeline for having these plans completed prior to the year 2000.

The Partnership's plan to determine the Year 2000 compliance status of its key
vendors involves the solicitation of information from these vendors through the
use of surveys, follow-up discussions and review of data where needed. The  
Partnership has sent out surveys to these vendors and received back a majority
of these surveys. While the Partnership cannot guarantee Year 2000 compliance
by its key vendors, and in many cases will be relying on statements from these
vendors without independent verification, preliminary surveys indicate that the
key vendors performing services for the Partnership are aware of the issues and
are working on a solution to achieve compliance before the year 2000. The
Partnership is in the process of developing a contingency plan in the event any
of its key vendors are not Year 2000 compliant prior to the year 2000. As part
of its contingency plan, the Partnership will identify replacement vendors in
the event that current vendors are not substantially Year 2000 compliant by
June 30, 1999. The Partnership does not believe that failure by any of its key
vendors to be Year 2000 compliant by the year 2000 would have a material effect
on the business, financial position or results of operations of the
Partnership.

Certain statements in this report constitute "forward looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended. These
statements may include statements regarding income or losses as well as
assumptions relating to the foregoing.

The forward-looking statements made by the Partnership are subject to known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Partnership to differ from any
future results, performance or achievements expressed or implied by the
forward-looking statements. 

Item 7a. Quantitative and Qualitative Disclosures About Market Risk
-------------------------------------------------------------------

The supplemental financial information specified by Item 305 of Regulation S-K
is not applicable.

Item 8. Financial Statements and Supplementary Data
---------------------------------------------------

See Index to Financial Statements in this Form 10-K.
<PAGE>
The supplemental financial information specified by Item 302 of Regulation S-K
is not applicable.

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

There have been no changes in or disagreements with accountants on any matter
of accounting principles, practices or financial statement disclosure.
<PAGE>
                                   PART III

Item 10. Directors and Executive Officers of the Registrant
-----------------------------------------------------------

(a) Neither the Registrant nor Balcor Mortgage Advisors, its General Partner,
has a Board of Directors.

(b, c & e) The names, ages and business experience of the executive officers
and significant employees of the General Partner of the Registrant are as
follows:

          TITLE                              OFFICERS
          -----                              ---------

Chairman, President and Chief                Thomas E. Meador
   Executive Officer
Senior Vice President                        Alexander J. Darragh
Senior Managing Director, Chief              Jayne A. Kosik
   Financial Officer, Treasurer
   and Assistant Secretary                           

Thomas E. Meador (age 51) joined Balcor in July 1979. He is Chairman,
President and Chief Executive Officer and has responsibility for all ongoing
day-to-day activities at Balcor. He is a member of the board of directors of
The Balcor Company. He is also a Senior Vice President of American Express
Company and is responsible for its real estate operations worldwide. Prior to
joining Balcor, Mr. Meador was employed at the Harris Trust and Savings Bank in
the commercial real estate division where he was involved in various lending
activities. Mr. Meador received his M.B.A. degree from the Indiana University
Graduate School of Business. 

Mr. Meador is on the Board of Directors of Grubb & Ellis Company, a publicly
traded commercial real estate firm. Mr. Meador was elected to the Board of
Grubb & Ellis Company in May 1998. Mr. Meador is also a director of AMLI
Commercial Properties Trust, a private real estate investment trust that owns
office and industrial buildings in the Chicago, Illinois area. Mr. Meador was
elected to the Board of AMLI Commercial Properties Trust in August 1998.

Alexander J. Darragh (age 44) joined Balcor in September 1988 and is
responsible for real estate advisory services for Balcor and American Express
Company. Mr. Darragh received masters' degrees in Urban Geography from Queen's
University and in Urban Planning from Northwestern University.

Jayne A. Kosik (age 41) joined Balcor in August 1982 and, as Chief Financial
Officer, is responsible for Balcor's financial, human resources and treasury
functions. Ms. Kosik is also a member of the board of directors of The Balcor
Company. From June 1989 until October 1996, Ms. Kosik had supervisory
responsibility for accounting functions relating to Balcor's public and private
partnerships. She is also Treasurer and a Senior Managing Director of The
Balcor Company. Ms. Kosik is a Certified Public Accountant.

(d) There is no family relationship between any of the foregoing officers.
<PAGE>
(e) None of the foregoing officers or employees are currently involved in any
material legal proceedings nor were any such proceedings terminated during the
fourth quarter of 1998.

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

The Registrant has not paid and does not propose to pay any remuneration to the
executive officers and directors of Balcor Mortgage Advisors, the General
Partner. The executive officers receive compensation from The Balcor Company
(but not from the Registrant) for services performed for various affiliated
entities, which may include services performed for the Registrant. However, the
General Partner believes that any such compensation attributable to services
performed for the Registrant is immaterial to the Registrant. See Note 9 of
Notes to Financial Statements for information relating to transactions with
affiliates.

Item 12. Security Ownership of Certain Beneficial Owners and Management
-----------------------------------------------------------------------

(a) No person owns of record or is known by the Registrant to own beneficially
more than 5% of the outstanding Limited Partnership Interests of the
Registrant.

(b) The Registrant, through the Early Investment Incentive Fund, Balcor
Mortgage Advisors and their officers and partners own as a group the following
Limited Partnership Interests of the Registrant:

                                  Amount
                               Beneficially
         Title of Class            Owned       Percent of Class
         --------------        -------------   ----------------

         Limited Partnership  8,188 Interests        9.6%
           Interests

Relatives of the officers and affiliates of the partners of the General Partner
do not own any additional interests.

In addition, Balcor LP Corp., an affiliate of the General Partner, holds title
to one Limited Partnership Interest in the Partnership due to an instance in 
which a Limited Partner abandoned title to his Limited Partnership
Interest. Balcor LP Corp. is a nominee holder only of such Interest and has
disclaimed any economic or beneficial ownership in said Interest. All
distributions of cash payable with respect to such Interest held by Balcor LP
Corp. are returned to the Partnership for distribution to other Limited
Partners in accordance with the Partnership Agreement.

(c) The Registrant is not aware of any arrangements, the operation of which may
result in a change of control of the Registrant.
<PAGE>
Item 13. Certain Relationships and Related Transactions
-------------------------------------------------------

(a, b) See Note 4 of Notes to Financial Statements for information relating to
the Partnership Agreement and the allocation of distributions and profits and
losses.

See Note 9 of Notes to Financial Statements for additional information relating
to transactions with affiliates.

(c) No management person is indebted to the Registrant.

(d) The Registrant has no outstanding agreements with any promoters.
<PAGE>

                                   PART IV

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

(a)
(1 & 2) See Index to Financial Statements in this Form 10-K.

(3) Exhibits:

(3) The Amended and Restated Agreement of Limited Partnership and Amended and
Restated Certificate of Limited Partnership, previously filed as Exhibits 3(a)
and 3(b) to Amendment No. 1 to the Registrant's Registration Statement on Form
S-11 dated May 7, 1981 (Registration No. 2-70841), are incorporated herein by
reference.

(4) Form of Subscription Agreement previously filed as Exhibit 4(a) to
Amendment No. 1 to the Registrant's Registration Statement on Form S-11 dated
May 7, 1981 (Registration No. 2-70841) and Form of Confirmation regarding
Interests in the Registrant set forth as Exhibit 4.2 to the Registrant's Report
on Form 10-Q for the quarter ended June 30, 1992 (Commission File No. 0-10225)
are incorporated herein by reference.

(27) Financial Data Schedule of the Registrant for 1998 is attached hereto.

(b) Reports on Form 8-K: No Reports were filed on Form 8-K during the quarter
ended December 31, 1998.

(c) Exhibits: See Item 14(a)(3) above.
<PAGE>
SIGNATURES

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

                         BALCOR PENSION INVESTORS-II

                         By:/s/Jayne A. Kosik               
                             ------------------------
                               Jayne A. Kosik
                               Senior Managing Director and Chief
                               Financial Officer (Principal 
                               Accounting and Financial Officer)
                               of Balcor Mortgage Advisors,
                               the General Partner

Date: March 19, 1999               
      --------------

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
Registrant and in the capacities and on the dates indicated.

       Signature                     Title                       Date    
-------------------------------------------------------      ------------

                         President and Chief Executive
                         Officer (Principal Executive
                         Officer) of Balcor Mortgage
                         Advisors, the General Partner                    
/s/Thomas E. Meador                                          March 19, 1999
--------------------                                         --------------
   Thomas E. Meador
                         Senior Managing Director and Chief
                         Financial Officer (Principal 
                         Accounting and Financial Officer) 
                         of Balcor Mortgage Advisors, the 
                         General Partner                                   
/s/Jayne A Kosik                                             March 19, 1999
--------------------                                         --------------
   Jayne A. Kosik
<PAGE>
                         INDEX TO FINANCIAL STATEMENTS

Report of Independent Accountants

Financial Statements:

Balance Sheets, December 31, 1998 and 1997

Statements of Partners' Capital, for the years ended December 31, 1998, 1997
and 1996

Statements of Income and Expenses, for the years ended December 31, 1998, 1997
and 1996

Statements of Cash Flows, for the years ended December 31, 1998, 1997 and 1996

Notes to Financial Statements

Financial Statement Schedules are omitted for the reason that they are
inapplicable or equivalent information has been included elsewhere herein.
<PAGE>
                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Partners of
Balcor Pension Investors-II:

In our opinion, the accompanying balance sheets and the related statements of
partners' capital, of income and expenses and of cash flows present fairly, in 
all material respects, the financial position of Balcor Pension Investors-II An
Illinois Limited Partnership (the "Partnership") at December 31, 1998 and 1997,
and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. 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 of these statements in accordance with generally accepted
auditing standards which 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, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.

As described in Note 2 to the financial statements, the partnership agreement
provides for the dissolution of the Partnership upon the disposition of all its
real estate interests. As of December 31, 1998, the Partnership no longer has
an ownership interest in any real estate investment. Upon resolution of the
litigation described in Note 13 to the financial statements, the Partnership
intends to cease operations and dissolve.


PricewaterhouseCoopers LLP


Chicago, Illinois
March 17, 1999
<PAGE>
                          BALCOR PENSION INVESTORS-II
                       (An Illinois Limited Partnership)

                                BALANCE SHEETS
                          December 31, 1998 and 1997

                                    ASSETS

                                                 1998            1997
                                             -------------   -------------
Cash and cash equivalents                    $  1,246,766    $  2,007,987
Cash and cash equivalents - Early Investment
  Incentive Fund                                3,933,560       3,659,687
Accounts and accrued interest receivable           21,547          37,089
                                             -------------   -------------
                                             $  5,201,873    $  5,704,763
                                             =============   =============

                       LIABILITIES AND PARTNERS' CAPITAL

Accounts payable                             $     20,848    $     24,414
Due to affiliates                                  32,496          27,638
                                             -------------   -------------
     Total liabilities                             53,344          52,052
                                             -------------   -------------
Commitments and contingencies

Limited Partners' capital (85,010 
  Interests issued)                            10,164,136      10,617,808

Less Interests held by Early Investment
  Incentive Fund (8,136 in 1998 and 1997)      (5,015,607)     (5,015,607)
                                             -------------   -------------
                                                5,148,529       5,602,201
General Partner's capital                            None          50,510
                                             -------------   -------------
     Total partners' capital                    5,148,529       5,652,711
                                             -------------   -------------
                                             $  5,201,873    $  5,704,763
                                             =============   =============

The accompanying notes are an integral part of the financial statements.
<PAGE>
                          BALCOR PENSION INVESTORS-II
                       (An Illinois Limited Partnership)
                                               
                        STATEMENTS OF PARTNERS' CAPITAL
             for the years ended December 31, 1998, 1997 and 1996

                                 Partners' Capital (Deficit) Accounts
                              -------------------------------------------
                                               General         Limited
                                  Total        Partner         Partners
                              ------------- -------------   -------------

Balance at December 31, 1995  $ 23,579,501  $ (1,387,610)   $ 24,967,111

Repurchase of 826 Limited
  Partnership Interests           (289,903)                     (289,903)
Cash distributions (A)         (17,140,072)     (715,501)    (16,424,571)
Deemed distribution (B)            (93,119)                      (93,119)
Net income for the year
  ended December 31, 1996       13,286,853     2,499,352      10,787,501
                              ------------- -------------   -------------
Balance at December 31, 1996    19,343,260       396,241      18,947,019

Cash distributions (A)         (13,679,938)     (336,144)    (13,343,794)
Cash contribution                   38,963        38,963
Net loss for the year
  ended December 31, 1997          (49,574)      (48,550)         (1,024)
                              ------------- -------------   -------------
Balance at December 31, 1997     5,652,711        50,510       5,602,201

Cash distributions (A)            (598,616)      (50,510)       (548,106)
Net income for the year
  ended December 31, 1998           94,434                        94,434
                              ------------- -------------   -------------
Balance at December 31, 1998  $  5,148,529          None    $  5,148,529
                              ============= =============   =============

(A) Summary of cash distributions paid per Limited Partnership Interest:

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

            First Quarter     $       7.13  $     120.50 (C)$       6.00
            Second Quarter            None         52.90            6.00
            Third Quarter             None          None          114.00
            Fourth Quarter            None          None           87.00

(B) This amount represents a state withholding tax paid on behalf of the 
    Limited Partners relating to the gain on the sale of the Cumberland 
    Pines Apartments.

(C) In addition to the above distribution, a special distribution of
    $0.47 per Interest was paid to class members including certain 
    current investors in the Partnership pursuant to the settlement of a 
    class action lawsuit.

The accompanying notes are an integral part of the financial statements.
<PAGE>
                          BALCOR PENSION INVESTORS-II
                       (An Illinois Limited Partnership)
                                               
                       STATEMENTS OF INCOME AND EXPENSES
             for the years ended December 31, 1998, 1997 and 1996

                                   1998          1997            1996
                              ------------- -------------   -------------
Income:
  Interest on loans 
    receivable                                              $    940,283
  Less interest on loans 
    payable - underlying
    mortgages                                                    177,681
                                                            -------------
  Net interest income 
    on loans                                                     762,602
  (Loss) income from 
    operations of real estate 
    held for sale                           $   (146,539)      1,347,251
  Interest on short-term 
    investments               $    269,302       383,076         324,895
  Participation income                                           410,493
  Recovery of losses on loans,
    real estate and accrued
    interest receivable                                        3,402,517
  Other income                                    14,158
                              ------------- -------------   -------------
    Total income                   269,302       250,695       6,247,758
                              ------------- -------------   -------------
Expenses:
  Provision for potential 
    losses on loans, real 
    estate and accrued 
    interest receivable                                          284,573
  Administrative                   174,868       300,269         636,757
                              ------------- -------------   -------------
    Total expenses                 174,868       300,269         921,330
                              ------------- -------------   -------------
Income (loss) before gain on 
  sale of loan receivable, 
  gains on sales of 
  real estate and 
  extraordinary item                94,434       (49,574)      5,326,428

Gain on sale of loan 
  receivable                                                     306,759
Gains on sales of real estate                                  8,227,212
                              ------------- -------------   -------------
Income (loss) before
  extraordinary item                94,434       (49,574)     13,860,399
 
The accompanying notes are an integral part of the financial statements.
<PAGE>
                          BALCOR PENSION INVESTORS-II
                       (An Illinois Limited Partnership)
                                               
                       STATEMENTS OF INCOME AND EXPENSES
             for the years ended December 31, 1998, 1997 and 1996
                                  (Continued)

                                   1998          1997            1996
                              ------------- -------------   -------------
Extraordinary Item:
  Debt extinguishment expense                                   (573,546)
                              ------------- -------------   -------------
Net income (loss)             $     94,434  $    (49,574)   $ 13,286,853
                              ============= =============   =============
Income (loss) before
  extraordinary item allocated
  to General Partners                 None  $    (48,550)   $  2,542,368
                              ============= =============   ============= 
Income (loss) before  
extraordinary item allocated 
  to Limited Partners         $     94,434  $     (1,024)   $ 11,318,031
                              ============= =============   =============
Income (loss) before
  extraordinary item per
  average number of Limited 
  Partnership Interests 
  outstanding (76,874 in 1998
  and 1997 and 77,375 in
  1996) - Basic and Diluted   $       1.23  $      (0.01)   $     146.28
                              ============= =============   =============
Extraordinary item allocated
  to General Partner                  None          None    $    (43,016)
                              ============= =============   =============
Extraordinary item allocated
  to Limited Partners                 None          None    $   (530,530)
                              ============= =============   =============
Extraordinary item per
  average number of Limited
  Partnership Interests 
  outstanding (77,375 in 1996)
  - Basic and Diluted                 None          None    $      (6.86)
                              ============= =============   =============
Net income (loss) allocated 
  to General Partner                  None  $    (48,550)   $  2,499,352
                              ============= =============   =============
Net income (loss) allocated                   
  to Limited Partners         $     94,434  $     (1,024)   $ 10,787,501
                              ============= =============   =============
Net income (loss) per average 
  number of Limited                           
  Partnership Interests        
  outstanding (76,874 in 1998
  and 1997 and 77,375 in
  1996) - Basic and Diluted   $       1.23  $      (0.01)   $     139.42
                              ============= =============   =============

The accompanying notes are an integral part of the financial statements.
<PAGE>
                          BALCOR PENSION INVESTORS-II
                       (An Illinois Limited Partnership)
                                               
                           STATEMENTS OF CASH FLOWS
             for the years ended December 31, 1998, 1997 and 1996

                                   1998          1997            1996
                              ------------- -------------   -------------
Operating activities:
  Net income (loss)           $     94,434  $    (49,574)   $ 13,286,853
  Adjustments to reconcile 
    net income (loss) to net
    cash provided by operating
    activities:
      Debt extinguishment
        expense                                                   99,229
      Gains on sales of loan
        receivable                                              (306,759)
      Gains on sales of real 
        estate                                                (8,227,212)
      Recovery of losses on 
        loans, real estate 
        and accrued interest
        receivable                                            (3,402,517)
      Provision for potential
        losses on loans, real
        estate and accrued 
        interest receivable                                      284,573
      Amortization of
        deferred expenses                                         52,601
      Net change in:
        Escrow deposits                                          113,962
        Accounts and accrued
          interest receivable       15,542       674,369        (461,193)
        Prepaid expenses                                          77,752
        Accounts payable            (3,566)      (86,534)        (86,932)
        Due to affiliates            4,858       (51,911)         60,179
        Other liabilities                                       (154,471)
                              ------------- -------------   -------------
  Net cash provided by
    operating activities           111,268       486,350       1,336,065
                              ------------- -------------   -------------

Investing activities:
  Proceeds from sale of loan
    receivable                                                 9,153,755
  Costs incurred in connection
    with sale of loan 
    receivable                                                  (339,500)
  Improvements to real estate                                   (327,184)
  Proceeds from sales of 
    real estate                                               36,887,019       
    
The accompanying notes are an integral part of the financial statements.
<PAGE>
                          BALCOR PENSION INVESTORS-II
                       (An Illinois Limited Partnership)
                                               
                           STATEMENTS OF CASH FLOWS
             for the years ended December 31, 1998, 1997 and 1996
                                  (Continued)

                                   1998          1997            1996
                              ------------- -------------   -------------
                                   
  Costs incurred in connection
    with sales of real estate                               $   (998,826)
                                                            -------------
  Net cash provided by 
    investing activities                                      44,375,264
                                                            -------------
Financing activities:
  Distributions to Limited 
    Partners                  $   (548,106) $(13,343,794)    (16,424,571)
  Deemed distribution to 
    Limited Partners                                             (93,119)
  Distributions to General 
    Partner                        (50,510)     (336,144)       (715,501)
  Contribution by General 
    Partner                                       38,963
  Increase in cash and cash 
    equivalents - Early 
    Investment Incentive 
    Fund                          (273,873)   (1,689,860)     (1,660,834)
  Repurchase of Limited 
    Partnership Interests                                       (289,903)
  Principal payments on 
    underlying loans 
    payable                                                     (437,583)
  Principal payments on 
    mortgage notes payable                                      (137,122)
  Repayment of mortgage 
    notes payable                                            (12,001,238)
                              ------------- -------------   -------------
  Net cash used in
    financing activities          (872,489)  (15,330,835)    (31,759,871)
                              ------------- -------------   -------------

Net change in cash and cash
  equivalents                     (761,221)  (14,844,485)     13,951,458
Cash and cash equivalents 
  at beginning of year           2,007,987    16,852,472       2,901,014
                              ------------- -------------   -------------
Cash and cash equivalents
  at end of year              $  1,246,766  $  2,007,987    $ 16,852,472
                              ============= =============   =============

The accompanying notes are an integral part of the financial statements.
<PAGE>
                          BALCOR PENSION INVESTORS-II
                       (An Illinois Limited Partnership)

                         NOTES TO FINANCIAL STATEMENTS

1. Nature of Partnership's Business:

Balcor Pension Investors - II (the "Partnership") has retained cash reserves
from the sale of its real estate investments for contingencies which exist or
may arise. The Partnership's operations currently consist of interest income
earned on short-term investments and the payment of administrative expenses.

2. Partnership Termination:

The Partnership Agreement provides for the dissolution of the Partnership upon
the occurrence of certain events, including the disposition of all interests in
real estate. The Partnership sold its final real estate investment in December
1996. The Partnership has retained a portion of the cash from the property
sales to satisfy obligations of the Partnership as well as establish a reserve
for contingencies. The timing of the termination of the Partnership and final
distribution of cash will depend upon the nature and extent of liabilities and
contingencies which exist or may arise. Such contingencies may include legal
and other fees and costs stemming from litigation involving the Partnership
including, but not limited to, the lawsuit discussed in Note 13 of Notes to
Financial Statements. Due to this litigation, the Partnership will not be
dissolved and reserves will be held by the Partnership until the conclusion of
all contingencies. There can be no assurances as to the time frame for
conclusion of these contingencies.

3. Accounting Policies:

(a) The preparation of the financial statements in conformity with generally
accepted accounting principles requires the General Partner 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 vary from those estimates.

(b) Income on loans was recorded as earned in accordance with the terms of the
related loan agreements. The accrual of interest was discontinued when a loan
became ninety days contractually delinquent or sooner when, in the opinion of
the General Partner, an impairment had occurred in the value of the collateral
property securing the loan. Income on non-accrual loans or loans which were
otherwise not performing in accordance with their terms was recorded on a cash
basis.

Various loan agreements provided for participation by the Partnership in
increases in value of the collateral property when the loan was repaid or
refinanced. In addition, certain loan agreements allowed the Partnership to
receive a percentage of rental income exceeding a base amount. Participation
income was reflected in the accompanying Statements of Income and Expenses when
received.
<PAGE>
Income from operations of real estate held for sale was reflected in the
accompanying Statements of Income and Expenses net of related direct operating
expenses.

(c) Losses on loans receivable were charged to income and an allowance account
was established when the General Partner believed the loan balance would not be
recovered. The General Partner assessed the collectibility of each loan on a
periodic basis through a review of the collateral property's operations, the
property's value and the borrower's ability to repay the loan.  Upon
foreclosure, the loan net of the allowance was transferred to real estate held
for sale after the fair value of the property, less costs of disposal was
assessed. Upon the transfer to real estate held for sale, a new basis in the
property was established.

(d) The General Partner periodically assessed, but not less than on an annual
basis, the fair value of its real estate properties held for sale. The General
Partner estimated the fair value of its properties based on the current sales
price less estimated closing costs. Changes in the property's fair value was
recorded by an adjustment to the property allowance account and was recognized
in the income statement as an increase or decrease through recovery income or a
provision for loss in the period the change in fair value was determined. The
General Partner considered the methods referred to above to result in a
reasonable measurement of a property's fair value, unless other factors
affecting the property's value indicated otherwise.

(e) Deferred expenses, which consisted of financing fees, were amortized over
the terms of the respective agreements and upon sale, any remaining unamortized
balance was recognized as debt extinguishment expense and classified as an
extraordinary item. Leasing commissions were amortized over the life of each
respective lease and upon sale, any remaining unamortized balance was
recognized as amortization expense, which was included in income from
operations of real estate held for sale for financial statement purposes.
 
(f) The Partnership calculates the fair value of its financial instruments
based on estimates using present value techniques. The Partnership includes
this additional information in the notes to the financial statements when the
fair value is different than the carrying value of those financial instruments.
When the fair value reasonably approximates the carrying value, no additional
disclosure is made.

(g) The Partnership recorded repurchases of Interests by the Early Investment
Incentive Fund as a reduction of Partners' Capital (see Note 4 of Notes to
Financial Statements). Cash and cash equivalents not utilized to repurchase
Interests, but which are part of the Early Investment Incentive Fund, are
classified as restricted assets of the Partnership.

(h) Revenue is recognized on an accrual basis in accordance with generally
accepted accounting principles. 

(i) Income from operating leases with significant abatements and/or scheduled
rent increases was recognized on a straight line basis over the respective
lease term. Service income included reimbursements for operating costs such as
real estate taxes, maintenance and insurance and was recognized as revenue in
the period the applicable costs were incurred.
<PAGE>
(j) Cash and cash equivalents include all unrestricted, highly liquid
investments with an original maturity of three months or less. Cash or cash
equivalents are held or invested in one financial institution.

(k) The Partnership is not liable for Federal income taxes and each partner
recognizes his proportionate share of the Partnership income or loss in his tax
return; therefore, no provision for income taxes is made in the financial
statements of the Partnership.

(l) For financial statement purposes, prior to 1996, the partners were
allocated income and losses in accordance with the provisions in the
Partnership Agreement. In order for the capital account balances to
appropriately reflect the partners' remaining economic interests in the
Partnership, the income (loss) allocations have been adjusted.

(m) Statement of Financial Accounting Standards, No. 128, "Earnings Per Share"
was adopted by the Partnership effective for the year ended December 31, 1997
and has been applied to the prior earnings period presented in the financial
statements. Since the Partnership has no dilutive securities, there is no
difference between basic and diluted net income (loss) per Limited Partnership
Interest. 

(n) Certain reclassifications of a prior year's information were made to
conform to the 1998 presentation.

4. Partnership Agreement:

The Partnership was organized on January 23, 1981. The Partnership Agreement
provided for the admission of Limited Partners through the sale of Limited
Partnership Interests at $1,000 per Interest, 85,010 of which were sold on or
prior to March 15, 1982, the termination date of the offering.

The Partnership Agreement provides that profits and losses are allocated 92.5%
to the Limited Partners, of which 2.5% relates to the Early Investment
Incentive Fund, and 7.5% to the General Partner. For financial statement
purposes, prior to 1996, the partners were allocated income and losses in
accordance with the provisions in the Partnership Agreement. In order for the
capital account balances to appropriately reflect the partners' remaining
economic interests in the Partnership, the income (loss) allocations have been
adjusted. 

Mortgage Reductions were distributed entirely to Limited Partners. To the
extent that Cash Flow was distributed, distributions were made as follows: (i)
90% of such Cash Flow was distributed to the Limited Partners, (ii) 7.5% of
such Cash Flow was distributed to the General Partner, and (iii) 2.5% of such
Cash Flow was set aside in the Early Investment Incentive Fund ("Fund") for
payment on dissolution of the Partnership to certain Early Investors if
necessary for them to receive a return of their Original Capital plus a
specified cumulative return based on the date of investment. Amounts placed in
the Fund were, at the sole discretion of the General Partner and subject to
certain limitations, used to repurchase Interests from existing Limited
Partners. Distributions of Cash Flow and Mortgage Reductions pertaining to such
<PAGE>
repurchased Interests were paid to the Fund. In February 1997, the Partnership
discontinued the repurchase of Interests from Limited Partners. To the extent
that amounts in the Fund were not utilized to repurchase Interests, such
amounts have been invested in short-term interest bearing instruments with
interest thereon being earned by the Fund. As of December 31, 1998, there were
8,136 Interests and cash of $3,933,560 held in the Fund. The General Partner
will not receive any distributions from the Fund.

5. Interest Expense:

During the year ended December 31, 1996, the Partnership incurred and paid
interest expense of $960,788.

6. Loan Receivable Sale:

In August 1996, the Partnership sold its interest in the $11,324,000 Alzina
Office Building loan for $9,153,755. The purchaser acquired the Alzina Office
Building loan receivable subject to the existing underlying mortgage loan in
the amount of $2,816,504. From the proceeds of the sale, the Partnership paid
$339,500 in selling costs. For financial statement purposes, the Partnership
recognized a gain of $306,759 from the sale of its interest in this loan.  The
Partnership also recognized a recovery of the previously established loss
allowance related to this loan of $3,302,517.  

7. Allowance for Losses on Loans and Real Estate Held for Sale:

There was no activity recorded in the allowance for losses on loans and real
estate held for sale during the years ended December 31, 1998 and 1997.

Activity recorded in the allowance for losses on loans and real estate held for
sale during the year ended December 31, 1996 is described in the table below:

                                                  1996          
                                             -----------   
    Loans:
     Balance at beginning of year            $ 3,302,517          
     Recovery of provision 
       previously charged to income          (3,302,517)
                                             -----------   
    Balance at the end of year                      None
                                             ===========
    Real Estate Held for Sale:
     Balance at beginning of year              $ 500,000   
     Provision charged to income                 284,573         
     Recovery of provision
      previously charged
      to income                                (100,000)
     Direct write-off of
      real estate held for
      sale against allowance                   (684,573)
                                              -----------              
    Balance at the end of year                      None
                                              ===========             
<PAGE>
8. Management Agreements:

The Partnership's properties were managed by a third party management company
prior to the sale of the properties. These management agreements provided for
annual fees of 3% to 6% of gross operating receipts.

9. Transactions with Affiliates:
Fees and expenses paid and payable by the Partnership to affiliates are:

                             Year Ended       Year Ended       Year Ended
                              12/31/98         12/31/97         12/31/96   
                           --------------   --------------   --------------
                            Paid  Payable    Paid  Payable    Paid  Payable
                           ------ -------   ------ -------   ------ -------
Mortgage servicing fees      None    None     None    None   $8,011    None
Reimbursement of expenses
  to the General Partner,
  at cost:
    Accounting             $4,490  $4,082  $22,232  $5,635   13,645 $11,075
    Data processing         2,112     872    1,910   1,248    1,756    None
    Legal                   3,478   3,173   10,233   2,647   11,805   9,274
    Portfolio management   26,407  24,369   57,989  15,085   62,240  47,597
    Other                   3,023    None   11,849   3,023   19,934  11,603

Prior to May 1995, the Partnership participated in an insurance deductible
program with other affiliated partnerships in which the program paid claims up
to the amount of the deductible under the master insurance policy for its
properties. The program was administered by an affiliate of the General Partner
who received no fee for administering the program. However, the General Partner
was reimbursed for program expenses. The Partnership paid premiums to the
deductible insurance program relating to claims for periods prior to May 1,
1995 of $8,915 in 1996.

The General Partner made a contribution of $38,963 in 1997 in connection with
the settlement of certain litigation as further discussed in Note 12 of Notes
to Financial Statements.

10. Sales of Real Estate:

(a) In December 1996, the Partnership sold the Hollowbrook Apartments in an all
cash sale for $3,000,000. From the proceeds of the sale, the Partnership paid
$192,595 in selling costs. The basis of the property was $3,491,978. For
financial statement purposes, the Partnership recognized no gain or loss from
the sale of this property. The Partnership wrote off $684,573 against the
previously established loss allowance related to this property.

(b) In December 1996, the Partnership sold the Parkway Distribution Center in
an all cash sale for $6,050,000. The purchaser was given a credit of $87,981
relating to certain tenant vacancies, resulting in a net sale price of
$5,962,019. From the proceeds of the sale, the Partnership paid $653,040 to the
third party mortgage holder in full satisfaction of the first mortgage loans,
$225,750 in selling costs and $20,389 in prepayment penalties. The basis of the
<PAGE>
property was $5,176,850. For financial statement purposes, the Partnership
recognized a gain of $559,419 from the sale of this property. The Partnership
also recognized a recovery of the previously established loss allowance related
to this property of $100,000.  

(c) In October 1996, the Partnership sold the Sherwood Acres - Phases I and II
apartment complexes in an all cash sale for $18,725,000. From the proceeds of
the sale, the Partnership paid $11,348,198 to the third party mortgage holder
in full satisfaction of the first mortgage loans, $427,281 in selling costs and
$453,928 in prepayment penalties. The basis of the property was $14,504,194.
For financial statement purposes, the Partnership recognized a gain of
$3,793,525 from the sale of these properties.

(d) In June 1996, the Partnership sold the Cumberland Pines Apartments in an
all cash sale for $9,200,000. From the proceeds of the sale, the Partnership
paid $153,200 in selling costs. In addition, the Partnership paid a state
withholding tax of $93,119 relating to the gain on the sale of the property
which has been recorded as a deemed distribution for financial statement
purposes. The basis of the property was $5,172,532. For financial statement
purposes, the Partnership recognized a gain of $3,874,268 from the sale of this
property.

11. Extraordinary Item:

In connection with the 1996 sale of the Sherwood Acres-Phases I and II
apartment complexes, the Partnership paid prepayment penalties of $453,928 and
wrote off the remaining unamortized deferred expenses related to the property
of $99,229.  In addition, the Partnership paid a prepayment penalty in
connection with the 1996 sale of the Parkway Distribution Center of $20,389.
These amounts totaling $573,546 were recognized as debt extinguishment expenses
in 1996 and classified as extraordinary items for financial statement purposes.

12. Settlement of Litigation:

A settlement received final approval by the court in November 1996 in the class
action, Paul Williams and Beverly Kennedy et al. vs. Balcor Pension Investors,
et al. upon the terms described in the notice to class members in September
1996. The General Partner made a contribution of $38,963 to the Partnership, of
which the plaintiffs' counsel received $3,896 pursuant to the settlement
agreement. In February 1997, the General Partner made a settlement payment of
the remaining $35,067 ($0.47 per Interest) to members of the class pursuant to
the settlement. Of the settlement amount, $13,828 was paid to original
investors who held their Limited Partnership Interests at the date of the
settlement and was recorded as a distribution to Limited Partners in the
Financial Statements. The remaining portion of the settlement of $21,239 was
paid to original investors who previously sold their Interests in the
Partnership. This amount was recorded as an administrative expense in the
Financial Statements. Similar contributions and payments were made on the
seven other partnerships included in the lawsuit in addition to those payments
described above. The Balcor Company paid an additional $635,000 to the
plaintiffs' class counsel and The Balcor Company received approximately
$946,000 from the eight partnerships as a reimbursement of its legal expenses,
of which $67,039 was the Partnership's share. The settlement had no material
impact on the Partnership.
<PAGE>
13. Contingency:

The Partnership is currently involved in a lawsuit, Dee vs. Walton Street
Capital Acquisition II, LLC, whereby the Partnership, the General Partner and
certain third parties have been named as defendants seeking damages relating to
tender offers to purchase interests in the Partnership and nine affiliated
partnerships initiated by the third party defendants in 1996. The defendants
continue to vigorously contest this action. The action has been dismissed with
prejudice, which dismissal was affirmed by the Illinois Appellate Court.
Plaintiffs have filed a further appeal to the Illinois Supreme Court. It is not
determinable at this time how the outcome of this action will impact the
remaining cash reserves of the Partnership. The Partnership believes that it
has meritorious defenses to contest the claims.
<PAGE>