<PAGE>
 
                                                                     1996
--------------------------------------------------------------------------------
Prudential Acquisition                                               Annual
Fund I, L.P.                                                         Report


<PAGE>
 
                      PRUDENTIAL ACQUISITION FUND I, L.P.
                           LETTER TO THE UNITHOLDERS
                      FOR THE YEAR ENDED DECEMBER 31, 1996
 
                                       1
 <PAGE>
<PAGE>

Deloitte &
   Touche LLP
                        --------------------------------------------------------
                        Two World Financial Center     Telephone: (212) 436-2000
                        New York, New York 10281-1414  Facsimile: (212) 436-5000

 
                          INDEPENDENT AUDITORS' REPORT
 
To the Partners of Prudential Acquisition Fund I, L.P.
New York, New York
 
We have audited the accompanying statement of net assets in process of
liquidation of Prudential Acquisition Fund I, L.P. (a Delaware Limited
Partnership) as of December 31, 1996. In addition, we have audited the
accompanying statement of financial condition of Prudential Acquisition Fund I,
L.P. as of December 31, 1995, 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, 1996. 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.
 
As discussed in Notes A and B to the financial statements, the Partnership's
limited partners have approved the dissolution and ultimate liquidation of the
Partnership. As a result, the Partnership has changed its basis of accounting
from the going-concern basis to the liquidation basis effective December 31,
1996.
 
In our opinion, such financial statements present fairly, in all material
respects, (1) the net assets in process of liquidation of Prudential Acquisition
Fund I, L.P. at December 31, 1996, (2) its financial condition at December 31,
1995 and (3) the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles on the bases described in the preceding
paragraph.
 
/s/ Deloitte & Touche LLP

March 24, 1997

-----------------
Deloitte Touche
Tohmatsu
International
-----------------
 
                                       2
 <PAGE>
<PAGE>
 
                      PRUDENTIAL ACQUISITION FUND I, L.P.
                            (a limited partnership)
                            STATEMENT OF NET ASSETS
                          (in process of liquidation)
                               December 31, 1996
 
<TABLE>
<S>                                                                                   <C>
--------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents                                                             $   928,108
Due from General Partners at liquidation                                                  707,252
Other assets                                                                               92,600
                                                                                      ------------
Total assets                                                                            1,727,960
                                                                                      ------------
LIABILITIES
Estimated liquidation costs                                                               295,000
Due to affiliates                                                                          35,819
Other liabilities                                                                         209,007
                                                                                      ------------
Total liabilities                                                                         539,826
                                                                                      ------------
Contingencies
Net assets available to Limited and General Partners                                  $ 1,188,134
                                                                                      ------------
                                                                                      ------------
Limited partnership units issued and outstanding                                           70,124
                                                                                      ------------
                                                                                      ------------
--------------------------------------------------------------------------------------------------
</TABLE>
 
                        STATEMENT OF FINANCIAL CONDITION
                             (going concern basis)
                               December 31, 1995
<TABLE>
<S>                                                                                   <C>
--------------------------------------------------------------------------------------------------
ASSETS
Property held for sale                                                                $17,712,532
Investment in joint venture, net                                                        9,057,964
Cash and cash equivalents                                                                 750,153
Deferred rent                                                                             391,978
Other assets                                                                               48,236
                                                                                      ------------
Total assets                                                                          $27,960,863
                                                                                      ------------
                                                                                      ------------
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Accounts payable and accrued expenses                                                 $   513,226
Tenant security deposits                                                                   18,724
                                                                                      ------------
Total liabilities                                                                         531,950
                                                                                      ------------
Partners' capital
Limited partners (70,124 units issued and outstanding)                                 27,428,913
General partners                                                                               --
                                                                                      ------------
Total partners' capital                                                                27,428,913
                                                                                      ------------
Total liabilities and partners' capital                                               $27,960,863
                                                                                      ------------
                                                                                      ------------
--------------------------------------------------------------------------------------------------
</TABLE>
 
                The accompanying notes are an integral part of these statements

                                       3

<PAGE>
 
                      PRUDENTIAL ACQUISITION FUND I, L.P.
                            (a limited partnership)
                            STATEMENTS OF OPERATIONS
                             (going concern basis)
 
<TABLE>
<CAPTION>
                                                                    Year ended December 31,
                                                            ----------------------------------------
                                                               1996           1995           1994
<S>                                                         <C>            <C>            <C>
----------------------------------------------------------------------------------------------------
REVENUES
Rental income                                               $2,079,886     $2,965,764     $3,048,468
Recovery of expenses                                           768,562        843,567        944,412
Interest income                                                 81,717         41,266         18,702
Joint venture equity income (loss)                             260,504       (654,903)       193,516
                                                            ----------     ----------     ----------
                                                             3,190,669      3,195,694      4,205,098
                                                            ----------     ----------     ----------
EXPENSES
Property operating                                           1,307,631      1,283,302      1,294,770
Real estate taxes                                              371,701        519,140        524,807
General and administrative                                     275,333        532,600        256,455
Provision for loss on impairment of assets                          --             --        770,000
Depreciation and amortization                                       --      1,203,812      1,336,456
                                                            ----------     ----------     ----------
                                                             1,954,665      3,538,854      4,182,488
                                                            ----------     ----------     ----------
Income (loss)--going concern basis                           1,236,004       (343,160)        22,610
Gain on sale of properties                                   2,284,166             --             --
Estimated liquidation costs                                   (295,000)            --             --
                                                            ----------     ----------     ----------
Net income (loss)                                           $3,225,170     $ (343,160)    $   22,610
                                                            ----------     ----------     ----------
                                                            ----------     ----------     ----------
ALLOCATION OF NET INCOME (LOSS)
Limited partners                                            $2,982,295     $ (583,724)    $ (148,813)
                                                            ----------     ----------     ----------
                                                            ----------     ----------     ----------
General partners                                            $  242,875     $  240,564     $  171,423
                                                            ----------     ----------     ----------
                                                            ----------     ----------     ----------
Net income (loss) per limited partnership unit              $    42.53     $    (8.32)    $    (2.12)
                                                            ----------     ----------     ----------
                                                            ----------     ----------     ----------
----------------------------------------------------------------------------------------------------
</TABLE>
 
                   STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
                             (going concern basis)
<TABLE>
<CAPTION>
                                                             LIMITED         GENERAL
                                                             PARTNERS       PARTNERS         TOTAL
<S>                                          <C>           <C>              <C>           <C>
------------------------------------------------------------------------------------------------------
Partners' capital--December 31, 1993                       $ 31,869,390     $     --      $ 31,869,390
Net income (loss)                                              (148,813)     171,423            22,610
Distributions                                                (1,542,849)    (171,423 )      (1,714,272)
                                                           ------------     ---------     ------------
Partners' capital--December 31, 1994                         30,177,728           --        30,177,728
Net income (loss)                                              (583,724)     240,564          (343,160)
Distributions                                                (2,165,091)    (240,564 )      (2,405,655)
                                                           ------------     ---------     ------------
Partners' capital--December 31, 1995                         27,428,913           --        27,428,913
Net income                                                    2,982,295      242,875         3,225,170
Distributions                                               (29,930,326)    (242,875 )     (30,173,201)
Effect of restoration provision of
  partnership agreement                                         707,252           --           707,252
                                                           ------------     ---------     ------------
Net assets--December 31, 1996                              $  1,188,134     $     --      $  1,188,134
                                                           ------------     ---------     ------------
                                                           ------------     ---------     ------------
------------------------------------------------------------------------------------------------------
</TABLE>
 
                The accompanying notes are an integral part of these statements
 
                                       4
 <PAGE>
<PAGE>
 
                      PRUDENTIAL ACQUISITION FUND I, L.P.
                            (a limited partnership)
                            STATEMENTS OF CASH FLOWS
                             (going concern basis)
<TABLE>
<CAPTION>
                                                                   Year ended December 31,
                                                         --------------------------------------------
                                                             1996            1995            1994
<S>                                                      <C>              <C>             <C>
-----------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Rental income received                                   $  2,385,701     $ 3,066,379     $ 3,095,522
Recovery of expenses received                                 773,731         848,260         963,285
Interest received                                              81,717          41,266          18,702
Tenant security deposits received (returned)                  (18,724)          2,532          (2,331)
Real estate taxes paid                                       (417,428)       (519,958)       (524,648)
Property operating expenses paid                           (1,314,973)     (1,384,557)     (1,165,577)
General and administrative expenses paid                     (454,034)       (362,220)       (265,529)
Distributions from joint venture income                       260,504              --         193,516
                                                         ------------     -----------     -----------
Net cash provided by operating activities                   1,296,494       1,691,702       2,312,940
                                                         ------------     -----------     -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capitalized property expenditures                             (90,426)       (262,240)       (344,539)
Net proceeds from sale of properties                       20,087,124              --              --
Distributions from joint venture in excess of income        9,057,964       1,080,000         319,484
                                                         ------------     -----------     -----------
Net cash provided by (used in) investing activities        29,054,662         817,760         (25,055)
                                                         ------------     -----------     -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Distributions to partners                                 (30,173,201)     (2,405,655)     (1,714,272)
                                                         ------------     -----------     -----------
Net increase in cash and cash equivalents                     177,955         103,807         573,613
Cash and cash equivalents at beginning of year                750,153         646,346          72,733
                                                         ------------     -----------     -----------
Cash and cash equivalents at end of year                 $    928,108     $   750,153     $   646,346
                                                         ------------     -----------     -----------
                                                         ------------     -----------     -----------
-----------------------------------------------------------------------------------------------------
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH PROVIDED BY
OPERATING ACTIVITIES
Net income (loss)                                        $  3,225,170     $  (343,160)    $    22,610
                                                         ------------     -----------     -----------
Adjustments to reconcile net income (loss) to net
  cash
  provided by operating activities:
Gain on sale of properties                                 (2,284,166)             --              --
Depreciation and amortization                                      --       1,203,812       1,336,456
Provision for loss on impairment of assets                         --              --         770,000
Distributions from joint venture income                       260,504              --         193,516
Joint venture equity (income) loss                           (260,504)        654,903        (193,516)
Changes in:
Deferred rent                                                 391,978         107,621          34,070
Other assets                                                  (44,364)        (31,361)         24,275
Estimated liquidation costs                                   295,000              --              --
Accounts payable and accrued expenses                        (268,400)         97,355         127,860
Tenant security deposits                                      (18,724)          2,532          (2,331)
                                                         ------------     -----------     -----------
Total adjustments                                          (1,928,676)      2,034,862       2,290,330
                                                         ------------     -----------     -----------
Net cash provided by operating activities                $  1,296,494     $ 1,691,702     $ 2,312,940
                                                         ------------     -----------     -----------
                                                         ------------     -----------     -----------
-----------------------------------------------------------------------------------------------------
</TABLE>
 
                The accompanying notes are an integral part of these statements
 
                                       5
 <PAGE>
<PAGE>
 
                      PRUDENTIAL ACQUISITION FUND I, L.P.
                            (a limited partnership)
                         NOTES TO FINANCIAL STATEMENTS
 
A. General
 
   Prudential Acquisition Fund I, L.P. (the ``Partnership''), a Delaware limited
partnership, was formed on February 16, 1983 and will terminate in accordance
with a vote of the limited partners as described below. 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'').
 
   The Partnership had invested in and operated a real estate investment
portfolio which consisted of five properties: two office buildings, a warehouse
and two shopping centers. The shopping centers were acquired through a joint
venture agreement with Prudential Realty Acquisition Fund II, L.P., an
affiliated limited partnership (``Joint Venture''). All of the Partnership's
properties have been sold as of December 31, 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. 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. Pursuant to the approval of the
plan of liquidation, the General Partners sold all the properties of the
Partnership during 1996. See Notes C and E for further information regarding
these sales.
 
B. Summary of Significant Accounting Policies
 
Basis of accounting
 
   The Partnership adopted the liquidation basis of accounting effective
December 31, 1996. Accordingly, the net assets of the Partnership at December
31, 1996 are stated at liquidation value, i.e., the assets have been valued at
their estimated net realizable values and the liabilities include estimated
amounts to be incurred through the date of liquidation of the Partnership. The
actual remaining net proceeds from liquidation will depend upon a variety of
factors and are likely to differ from the amounts reflected in the accompanying
financial statements. Prior to December 31, 1996, the books and records of the
Partnership were maintained on a going concern accrual basis of accounting.
 
   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.
 
   Certain reclassifications have been made to prior year balances to conform
with the current year's financial statement presentation.
 
Property
 
   Prior to December 31, 1995, property investments were depreciated using the
straight-line method over their estimated economic lives ranging from 5 to 35
years, depending on property type. As of December 31, 1995, the properties were
accounted for as assets held for sale and were recorded at the lower of their
carrying value or their estimated fair value less costs to sell. In addition,
depreciation ceased for financial reporting purposes as of December 31, 1995.
 
Investment in Joint Venture
 
   The Partnership accounted for its investment in the Joint Venture which owned
two shopping centers (the ``Shopping Centers'') using the equity method.
 
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.
 
                                       6
 <PAGE>
<PAGE>
 
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 Partnership Agreement, as amended 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) and
depreciation are 90% to the limited partners and 10% to the General Partners for
financial and tax reporting purposes. To the extent that cash distributions to
the General Partners exceed the 10% allocation of income for tax reporting
purposes (creating an increase in their existing deficit capital balances), the
General Partners will receive a special allocation of additional income for the
difference. Distributions of cash from operations are made in accordance with
the Partnership Agreement and are allocated 90% to the limited partners and 10%
to the General Partners.
 
   Income from a Terminating Sale, as defined in the Partnership Agreement, is
allocated first to all partners having negative capital account balances, to the
extent of such balances, and then to the limited partners until their capital
accounts equal their Original Invested Capital plus an amount equal to 15%
interest per year cumulative on their Adjusted Invested Capital, as those terms
are defined in the Partnership Agreement. Loss from a Terminating Sale is
allocated 10% to the General Partners and 90% to the limited partners. However,
the deficiency in the capital accounts of the General Partners cannot exceed
$707,252, (the maximum obligation of the General Partners upon the liquidation
of the Partnership), as more fully described in Section 5.4 of the Partnership
Agreement. Accordingly, at December 31, 1996, the Partnership recorded a
receivable from the General Partners of this amount. Sales proceeds from a
Terminating Sale are distributed to the partners having positive capital account
balances.
 
C. Property
 
   The Partnership's directly-owned properties at December 31, 1995 were:
 
<TABLE>
          <S>                                                                <C>
          Norwest Center Office Building--
            Rochester, MN                                                    $ 5,793,788
          Norwalk Industrial Warehouse--
            Norwalk, CA                                                        5,967,467
          One Executive Center Office Building--
            Albuquerque, NM                                                    5,951,277
                                                                             -----------
                                                                             $17,712,532
                                                                             -----------
                                                                             -----------
</TABLE>
 
   Pursuant to the plan of sale and complete liquidation and dissolution of the
Partnership, the Partnership has sold all of its properties as of December 31,
1996.
 
   In 1994, the properties' carrying value had been reduced to the lower of
depreciated cost or estimated fair value based on third party appraisals. As a
result, a provision for loss on impairment of assets of $770,000 was recorded
for the year ended December 31, 1994. No additional provisions were required in
1995 or 1996.
 
   The Partnership sold, for cash, its interest in Norwalk Industrial, a 180,000
square foot industrial warehouse located in Norwalk, California, on August 6,
1996 for a gross sales price of $6,600,000 less costs to sell and pro-rations of
approximately $300,000. In addition, approximately $300,000 of deferred rent and
other assets were written-off relating to the sale of the property. The gross
sales price represented 100% of the appraised value of the property based upon
an appraisal dated as of December 31, 1995. The purchaser of the Norwalk
property was NNW Real Estate, Inc., a California corporation and an affiliate of
the property's sole tenant, Weber Distribution, under a Purchase and Sale
Agreement dated April 11, 1996. On August 13, 1996, as a result of this sale, a
distribution of $89.82 per unit was made to the limited partners.
 
   The Partnership sold, for cash, its interest in One Executive Center, a
114,000 square foot five-story office building located in Albuquerque, New
Mexico, on October 17, 1996 for a gross sales price of $7,300,000 less costs to
sell and pro-rations of approximately $409,000. The gross sales price was in
excess of the
                                       7
 <PAGE>
<PAGE>
appraised value. The purchaser of the One Executive Center property was WHEXC
Real Estate Limited Partnership, a Delaware limited partnership.
 
   The Partnership also sold, for cash, its interest in Norwest Center, a 97,000
square foot multi-tenant office building located in Rochester, Minnesota, on
October 18, 1996 for a gross sales price of $6,900,000 less costs to sell and
pro-rations of approximately $245,000. The gross sales price was in excess of
98% of the appraised value. The purchaser of the Norwest Center property was
Norwest Bank Minnesota South, N.A., a national banking association.
 
   On November 1, 1996, a distribution of $200 per unit was made to the limited
partners consisting of $193.17 per unit from the sale of the One Executive
Center and Norwest Center properties and $6.83 per unit from previous
undistributed cash flow from operations.
 
D. Income Taxes
 
   The following is a reconciliation of net income (loss) reported for financial
reporting purposes with net income (loss) reported for tax reporting purposes.
 
<TABLE>
<CAPTION>
                                                                     Year ended December 31,
                                                             ---------------------------------------
<S>                                                          <C>             <C>           <C>
                                                                1996           1995          1994
----------------------------------------------------------------------------------------------------
Net income (loss) per financial statements                   $ 3,225,170     $(343,160)    $  22,610
                                                             -----------     ---------     ---------
Tax gain on sale of properties greater than financial
  statement amount                                             4,635,339            --            --
Tax depreciation greater than financial statement
  depreciation                                                (1,606,462)     (451,170)     (330,406)
Joint Venture financial statement income less (greater)
  than income for tax purposes                                (7,181,714)      933,103       (64,845)
Estimated liquidation costs recorded for financial
  statement purposes only                                        295,000            --            --
Provision for loss on impairment of assets                            --            --       770,000
Lease concessions and other                                      543,528       109,883        34,555
                                                             -----------     ---------     ---------
Total adjustments                                             (3,314,309)      591,816       409,304
                                                             -----------     ---------     ---------
Tax basis net income (loss)                                  $   (89,139)    $ 248,656     $ 431,914
                                                             -----------     ---------     ---------
                                                             -----------     ---------     ---------
</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 initial charge to partners' capital of syndication costs,
for book purposes, when the Partnership was formed.
 
E. Investment in Joint Venture
 
   The Partnership had a 54% interest in the Joint Venture with an affiliated
limited partnership. The sale of the two shopping centers owned by the Joint
Venture occurred on March 26, 1996 for a gross sales price of $15,500,000 less
costs to sell and pro-rations resulting in a $56,000 loss on the sale. A
distribution was made in April 1996 in the amount of $121.00 per unit which
represented $112.66 per unit from the sale of the Shopping Centers by the Joint
Venture, and $8.34 per unit from current and prior undistributed cash flow from
operations.
 
   Subsequently, on December 18, 1996, an agreement was signed by and between
the Partnership and Prudential Realty Acquisition Fund II, L.P., an affiliated
limited partnership, outlining the terms of the dissolution of the Joint
Venture. As of December 31, 1996, all remaining assets of the Joint Venture were
distributed in liquidation in accordance with this agreement.
 
   The total assets and partners' capital of the Joint Venture as of December
31, 1995 were $17,094,071 and $16,767,372, respectively. The total revenues for
the Joint Venture for the years ended December 31, 1995 and 1994 were $4,037,347
and $3,613,077, respectively. The net loss for the Joint Venture for the year
ended December 31, 1995 was $1,204,227 and the net income for the Joint Venture
for the year ended December 31, 1994 was $366,919.
 
                                       8
 <PAGE>
<PAGE>
 
   The carrying value of the Joint Venture's properties was 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.
 
F. 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,
                                                  ----------------------------------
                                                    1996         1995         1994
<S>                                               <C>          <C>          <C>
------------------------------------------------------------------------------------
Prudential-Bache Properties, Inc. and
  affiliates
General and administrative                        $127,600     $118,400     $ 89,400
Estimated liquidation costs                        120,000           --           --
                                                  --------     --------     --------
                                                   247,600      118,400       89,400
                                                  --------     --------     --------
Prudential Realty Partnerships, Inc. and
  affiliates
General and administrative                          42,100       87,200       41,500
Estimated liquidation costs                         15,000           --           --
                                                  --------     --------     --------
                                                    57,100       87,200       41,500
                                                  --------     --------     --------
                                                  $304,700     $205,600     $130,900
                                                  --------     --------     --------
                                                  --------     --------     --------
</TABLE>
 
   Expenses payable to the General Partners and their affiliates (which are
included in accounts payable and accrued expenses) as of December 31, 1996 and
1995 are $35,800 and $74,000, respectively.
 
   In addition, the General Partners and their affiliates performed 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 was $13,800, $38,400 and $30,900 for
the years ended December 31, 1996, 1995, and 1994, respectively.
 
   Prudential Securities Incorporated (``PSI''), an affiliate of the General
Partners, owns 175 limited partnership units at December 31, 1996.
 
G. Subsequent Event
 
   On March 5, 1997, a lawsuit captioned Madison Partnership Liquidity Investors
VIII, LLC (``Madison'') v. Prudential-Bache Properties, Inc. was filed in the
Court of Chancery in the State of Delaware. The suit alleges a breach of
contract with Madison and a breach of fiduciary duty to Madison, as well as
intentional interference with the contract between Madison and the purported
tendering limited partners. The suit seeks injunctive and declaratory relief
demanding that the Partnership's transfer agent effectuate the purported
transfers to Madison, pursuant to the tender offer made by Madison to the
limited partners. The lawsuit does not name the Partnership as a defendant but
does name PBP. The distribution amounts in excess of Madison's tender offer
price, with respect to the Units that are the subject of this lawsuit, have been
escrowed by the Partnership's transfer agent pending a resolution of this issue.
PBP is preparing an answer to the complaint at this time.
 
                                       9
 <PAGE>
<PAGE>
 
                      PRUDENTIAL ACQUISITION FUND I, L.P.
                            (a limited partnership)
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS
 
Liquidity and Capital Resources
 
   As more fully described in Notes A, C and E to the financial statements, the
Partnership sold all its properties in 1996 for net proceeds of approximately
$28 million. During 1996, the Partnership paid distributions from the net
proceeds from these sales aggregating $395.65 per unit. In addition,
distributions of $31.17 per unit were paid to the limited partners from cash
flow from operations. The Partnership has retained funds for a contingency
reserve and to meet current and future operating costs until the liquidation of
the Partnership. The Partnership intends to liquidate in 1997 and will
distribute any remaining funds at such time. Estimated costs expected to be
incurred through the date of liquidation of the Partnership have been accrued in
the accompanying financial statements.
 
   At December 31, 1996, the Partnership recorded a receivable from the General
Partners in the amount of $707,252. This amount represents the maximum
obligation of the General Partners, payable upon the liquidation of the
Partnership, in accordance with the Partnership Agreement. See Note B for
further information.
 
Results of Operations
 
   All significant fluctuations between 1995 and 1996 were due to the sale of
all the Partnership's properties during 1996 and the accrual of estimated costs
relating to the liquidation of the Partnership.
 
1995 vs. 1994
 
   The Partnership recorded a net loss of $343,000 for the year ended December
31, 1995 as compared to net income of $23,000 for the year ended December 31,
1994. As discussed in further detail below, the variance between these amounts
were primarily the result of the timing and magnitude of the provisions for loss
on impairment of assets recorded for the Partnership and Joint Venture
properties. The Partnership's pro rata share of provisions for loss on
impairment of assets recorded for the Joint Venture properties was $1,269,000 in
1995. A $770,000 provision for loss on impairment of assets was recorded in 1994
relating to the directly-owned properties. Other fluctuations between periods
are discussed below.
 
Directly-Owned Properties
 
   As of December 31, 1995 and 1994, the Norwalk Industrial property in Norwalk,
California was 100% leased. Rental income for 1995 decreased $59,000 as compared
to 1994 primarily as a result of an adjustment in the first quarter of 1994 to
properly reflect the impact of additional free rent concessions given to its
sole tenant. Operating expenses for 1995 were comparable to 1994.
 
   The Norwest Center property in Rochester, Minnesota was 92% and 92% leased
(88% and 87% occupied) as of December 31, 1995 and 1994, respectively. Rental
income for 1995 was comparable to 1994 while operating expenses decreased
$40,000 as compared to 1994 due to lower cleaning, utility and professional
fees.
 
   The One Executive Center office property in Albuquerque, New Mexico was 99%
and 100% leased as of December 31, 1995 and 1994, respectively. Rental income
for the year ended December 31, 1995 decreased $21,000 as compared to 1994 due
to the decrease in occupancy. Operating expenses in 1995 were comparable to
1994.
 
   Depreciation and amortization for the year ended December 31, 1995 decreased
$133,000 as compared to 1994 as several tenant improvements at One Executive
Center became fully depreciated during 1994. In addition, there was a lower
depreciable basis at One Executive Center in 1995 as a result of an impairment
provision recorded in the fourth quarter of 1994.
 
   General and administrative expenses increased $276,000 for the year ended
December 31, 1995 as compared to 1994 mainly due to costs relating to the
preparation and review of the Consent Solicitation Statement and increased costs
to administer the Partnership.
 
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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. 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.
 
   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. Real estate taxes for the year ended December 31, 1995
increased $91,000 as compared to 1994 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. 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
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.
 
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                               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 Acquisition Fund I, L.P.
        c/o Prudential-Bache Properties, Inc.
        Client Services Department
        P.O. Box 2016
        New York, New York 10272-2016
 
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Peck Slip Station                        BULK RATE
P.O. Box 2016                          U.S. POSTAGE
New York, NY 10272-2016                   PAID
                                      Automatic Mail
 
PAF/17003
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