UNITED STATES SECURITIES AND EXCHANGE COMMISSION

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

                                    FORM 10-K

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

                       FOR FISCAL YEAR ENDED JULY 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: 0-18076


                 PAINEWEBBER INSURED MORTGAGE PARTNERS 1-B, L.P.
                ------------------------------------------------
             (Exact name of registrant as specified in its charter)


            Delaware                                           04-3038480
            --------                                           ----------
(State or other jurisdiction of                             (I.R.S. Employer
incorporation or organization)                              Identification No.)


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


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

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

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

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

                      UNITS OF LIMITED PARTNERSHIP INTEREST
                                (Title of class)

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

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

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

                       DOCUMENTS INCORPORATED BY REFERENCE

Documents                                                   Form 10-K Reference
---------                                                   -------------------
Prospectus of registrant dated                                    Part IV
April 23, 1987, as supplemented

<PAGE>
                 PAINEWEBBER INSURED MORTGAGE PARTNERS 1-B, L.P.
                                 1998 FORM 10-K

                                TABLE OF CONTENTS


Part   I                                                                Page

Item  1     Business                                                    I-1

Item  2     Properties                                                  I-3

Item  3     Legal Proceedings                                           I-3

Item  4     Submission of Matters to a Vote of Security Holders         I-3


Part  II

Item  5     Market for the Partnership's Limited Partnership
              Interests and   Related Security Holder Matters           II-1

Item  6     Selected Financial Data                                     II-1

Item  7     Management's Discussion and Analysis of Financial
               Condition  and Results of Operations                     II-2

Item  8     Financial Statements and Supplementary Data                 II-6

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


Part III

Item  10    Directors and Executive Officers of the Partnership         III-1

Item  11    Executive Compensation                                      III-2

Item  12    Security Ownership of Certain Beneficial Owners
               and Management                                           III-3

Item  13    Certain Relationships and Related Transactions              III-3


Part  IV

Item  14    Exhibits, Financial Statement Schedules and
              Reports on Form 8-K                                       IV-1

Signatures                                                              IV-2

Index to Exhibits                                                       IV-3

Financial Statements and Supplementary Data                       F-1 to F-14

<PAGE>
                                    
      This Form 10-K contains  forward-looking  statements within the meaning of
Section 27A of the  Securities  Act of 1933 and  Section  21E of the  Securities
Exchange Act of 1934. The  Partnership's  actual results could differ materially
from those set forth in the  forward-looking  statements.  Certain  factors that
might cause such a difference  are  discussed in Item 7 in the section  entitled
"Certain Factors Affecting Future Operating  Results"  beginning on page II-5 of
this Form 10-K.

                                    PART I

Item 1.  Business

      PaineWebber  Insured Mortgage Partners 1-B, L.P. (the  "Partnership") is a
Delaware limited  partnership formed primarily for the purpose of investing in a
diversified   portfolio  of  federally  insured  or  coinsured   mortgage  loans
("Participating  Insured  Mortgage  Loans")  through  the  purchase  of  certain
mortgage-backed securities ("GNMA Securities") guaranteed as to their payment of
principal and interest by the Government National Mortgage Association ("GNMA").
On May 16, 1988, the Partnership commenced the sale of Limited Partner Interests
(the  "Units"),  which are evidenced by Depositary  Receipts (at $100 per Unit).
Depositary  Receipts  were  offered  to the public by  PaineWebber  Incorporated
("PWI"), as sales agent, pursuant to a Registration Statement on Form S-11 filed
under the Securities Act of 1933  (Registration No.  33-11911).  The Partnership
sold  551,604  Units of  Depositary  Receipts  from May 16, 1988 to May 1, 1989,
representing  capital  contributions of approximately  $55,160,000.  Unitholders
will not be required to make any additional capital contributions.

      The Units  represent an interest  assigned to persons who purchased  Units
("Unitholders")  from the initial limited partner of the Partnership pursuant to
the  Partnership  Agreement,  which  interest  is the  equivalent  of a  limited
partnership  interest.  Although  Unitholders  are not  limited  partners of the
Partnership,  as  Unitholders  they are entitled to the same economic  benefits,
including the same share of income, gains, losses, deductions,  credits and cash
distributions,  as if they were limited  partners  holding the number of limited
partnership interests represented by their Units.

     The Partnership originally invested in three Participating Insured Mortgage
Loans,  which  were  originated  under or in  connection  with  Federal  Housing
Administration   ("FHA")   insurance   programs  to  finance  or  refinance  the
acquisition,  construction or substantial  rehabilitation of privately owned and
operating  multi-family  residential  rental  projects,  (the  "Projects").  The
Partnership  purchased each of the GNMA  Securities with proceeds raised through
its  public   offering  from  an  FHA-approved   mortgagee/coinsurer   and  GNMA
issuer/servicer.  The Partnership was expected to make an investment in a fourth
Participating Insured Mortgage Loan and entered into a commitment to fund a $4.5
million loan on a to-be-built project in Orlando,  Florida.  During fiscal 1991,
the  prospective  borrower  elected not to proceed with the Orlando  development
and, as a result,  the  commitment  to  purchase  the  related  GNMA  securities
subsequently  expired.  The efforts of the General  Partner to obtain a suitable
investment to replace the expired commitment were not successful,  in large part
due to changes  instituted by the  Department  of Housing and Urban  Development
which made the type of insured financing that the Partnership can invest in very
difficult  to obtain.  As a result,  the General  Partner  decided to return the
majority of the previously committed funds to the Unitholders. A distribution of
approximately  $4  million  was paid to the  Unitholders  in June of  1991.  The
remainder of the previously  committed funds was added to the Partnership's cash
reserves.  As discussed further below, one of the Partnership's Insured Mortgage
Loans was repaid in full during fiscal 1992,  and the proceeds were  distributed
to the Unitholders in June of 1993.

      Each  Participating  Insured  Mortgage  Loan  has two  components,  a base
component  consisting of the principal amount of the mortgage loan plus interest
at a stated rate thereon and a contingent component providing for the payment of
contingent  interest  ("Contingent  Interest")  from net cash flow from  Project
operations  and from  capital  appreciation,  if any,  realized as a result of a
Project sale or  refinancing.  The principal of and the stated  interest on each
Participating  Insured  Mortgage Loan is coinsured by the FHA ("FHA  Insurance")
and is  represented  by a GNMA  Security,  the interest rate on which (the "Base
Interest")  is equal to the stated  interest rate on the  Participating  Insured
Mortgage Loan minus  certain  fixed fees payable to GNMA and the FHA  mortgagee.
Neither FHA  Insurance  nor any GNMA  security  will  provide for or support the
payment of Contingent Interest.

      The  Partnership  has also invested in  non-participating  mortgage-backed
securities ("MBS") backed by single-family or multi-family mortgage loans issued
or originated in connection  with the housing  programs of GNMA.  Investments in
non-participating  MBS were  limited  to no more  than 30% of the  original  net
offering proceeds.

      Until May 1992, the Partnership held a Participating Insured Mortgage loan
with respect to an  apartment  complex  known as the  Casablanca  Apartments  in
Boynton  Beach,  Florida.  During  fiscal  1992,  the  owner  of the  Casablanca
Apartments  complex defaulted on the scheduled debt service payments to the GNMA
issuer.  The default  triggered the prepayment  provisions of the  Partnership's
GNMA mortgage-backed security.  Consequently,  on May 26, 1992, GNMA prepaid the
outstanding  balance of the  principal and accrued  interest to the  Partnership
pursuant to the terms of the mortgage-backed security agreement. The Partnership
distributed  the  proceeds  received  from  the  Casablanca  prepayment,   which
aggregated $12,521,000, to the Unitholders concurrent with the regular quarterly
distribution paid on June 15, 1993.

      The  objectives  of  the  Partnership  are to  protect  and  preserve  the
Partnership's  capital, to make quarterly  distributions of cash attributable to
payments  of  principal  and  interest   (including   Contingent   Interest)  on
Participating  Insured  Mortgage  Loans and MBS and to provide gains through the
appreciation of properties financed with Participating Insured Mortgage Loans.

      Cumulative cash  distributions  to the  Unitholders  through July 31, 1998
have totalled approximately $51,429,000,  or $942 per original $1,000 investment
for the Partnership's earliest investors. Such distributions include a return of
capital totalling  approximately  $472 per $1,000 investment  resulting from the
expired commitment and the prepayment  discussed above, along with the scheduled
amortization  of  mortgage   principal  and  principal   prepayments   from  the
Partnership's mortgage-backed securities. The return of capital to date includes
special  distributions of $47.13 and $10.00 per original $1,000  investment paid
on March 14, 1997 and March 13, 1998,  respectively,  which resulted from excess
Partnership  reserves  which had  accumulated  from  prepayment  activity on the
non-participating MBS. Quarterly  distributions had been paid at a rate of 8.25%
per annum on Unitholders'  remaining invested capital from inception through the
distribution  made on March 14, 1997 for the  quarter  ended  January 31,  1997.
Beginning  with the  distribution  made on June 13, 1997 for the  quarter  ended
April 30, 1997, the Partnership  reduced the regular  distribution  rate to 6.5%
per  annum  due to a  decline  in  the  rate  of  principal  prepayments  on the
non-participating  MBS.  Unitholders'  remaining capital accounts as of July 31,
1998 totalled  approximately $528 per $1,000 investment.  Through July 31, 1998,
the Partnership had received  $186,000 of Contingent  Interest payments from its
Participating Insured Mortgage Loans.

      As of July 31, 1998, the Partnership holds Participating  Insured Mortgage
Loans secured by GNMA securities as described below.
<TABLE>
<CAPTION>

GNMA
Certificate    Property Name,                       Date of      Interest       Maturity
Number         and Location (1)          Size       Acquisition  Rate           Date
------         ----------------          ----       -----------  ----           ----
<S>            <C>                       <C>        <C>          <C>            <C>

 279985     Quarter Mill Apartments     266 Units   08/02/89     8.50%          10/15/31
            Richmond, VA

 279119     Emerald Cove Apartments     276 Units   10/16/89     8.75%          08/15/31
            Charlotte, NC
</TABLE>


(1) See Notes to the  Financial  Statements  filed with this Annual Report for a
    description of the  agreements  through which the  Partnership  has acquired
    these investments.

      The future  performance  of the  Partnership  will depend,  in part,  upon
future interest rate fluctuations,  which cannot be predicted.  In addition, the
Partnership's  overall  operating  performance  is  subject  to all of the risks
normally  associated with real estate  investments,  including:  reliance on the
owners' operating skills,  including their ability to maintain occupancy levels,
meet operating  expenses,  maintain the property and maintain adequate insurance
coverage;  adverse changes in general and/or local economic conditions;  changes
in  governmental  regulations,  real estate zoning laws, or tax laws;  and other
circumstances over which the Partnership may have little or no control.

      The  Partnership  is engaged  solely in the  business of investing in real
estate  through  Participating  Insured  Mortgage  Loans and  conventional  MBS,
therefore,   presentation  of  information   about  industry   segments  is  not
applicable.  The Partnership has no employees.  Subject to the General Partner's
overall  authority,  the business of the  Partnership  is managed by PaineWebber
Properties Incorporated ("PWPI"), a wholly-owned subsidiary of PWI.

      The General  Partner of the Partnership  (the "General  Partner") is First
Insured Mortgage Partners,  L.P., a Delaware limited partnership.  First Insured
Mortgage  Partners,  Inc.  (the  "Managing  General  Partner"),  a  wholly-owned
subsidiary of PaineWebber Group, Inc.  ("PaineWebber"),  is the Managing General
Partner  of the  General  Partner.  PWI and  Properties  Associates  1988,  L.P.
("PA1988"),  a Virginia  limited  partnership,  are the limited  partners of the
General Partner.  The officers and directors of the Managing General Partner and
certain  limited  partners of PA1988 are also  officers and directors of PWI and
PWPI. The initial limited  partner of the Partnership is PaineWebber  Depositary
Corporation, a wholly-owned subsidiary of PaineWebber.

      The terms of  transactions  between the  Partnership and affiliates of the
General  Partner  of the  Partnership  are set forth in Items 11 and 13 below to
which reference is hereby made for a description of such terms and transactions.
<PAGE>

Item 2. Properties

      The  Partnership  owns  no  real  estate.  The  Partnership  has  acquired
Participating Insured Mortgage Loans secured by the properties referred to under
Item 1 above to which  reference is made for the name,  location and description
of each property.

     Occupancy   figures  for  the   properties   securing   the   Partnership's
Participating  Insured Mortgage Loans for each fiscal quarter during 1998, along
with an average for the year, are presented below:

                                           Percent Occupied At
                                 ----------------------------------------------
                                                                        Fiscal
                                                                        1998
                                 10/31/97    1/31/98  4/30/98   7/31/98 Average
                                 --------    -------  -------   ------- -------

Quarter Mill Apartments            98%        98%       98%       98%     98%

Emerald Cove Apartments            95%        96%       95%       96%     96%

Item 3.  Legal Proceedings

      The Partnership is not subject to any material pending legal proceedings.

Item 4.  Submission of Matters to a Vote of Security Holders

      None.


<PAGE>
                                   
                                   PART II

Item 5.  Market for the Registrant's  Depositary Units of Limited Partnership
Interest and Related Security Holder Matters

      At July 31, 1998, there were 3,122 investors holding  Depositary  Receipts
in the Partnership. There is currently no public market for the resale of Units,
and it is not  anticipated  that a public  market for Units will  develop.  Upon
request,  the General  Partner will endeavor to assist a Unitholder  desiring to
transfer his Units and may utilize the services of PWI in this regard. The price
to be paid for the Units will be subject to negotiation by the  Unitholder.  The
General Partner will not redeem or repurchase Units.

      Reference is made to Item 6 below for a discussion  of cash  distributions
made to the Unitholders during fiscal 1998.

Item 6.  Selected Financial Data

                 PaineWebber Insured Mortgage Partners 1-B, L.P.
          For the years ended July 31, 1998, 1997, 1996, 1995 and 1994
                      (In thousands, except per Unit data)

                             1998       1997       1996       1995     1994
                             ----       ----       ----       ----     ----

Revenues                  $ 2,000     $ 2,193   $ 2,331   $  2,410    $ 2,447

Net income                $ 1,412     $ 1,709   $ 1,806   $  1,898    $ 1,885

Net income per Unit of
  Depositary Receipt      $  2.53     $  3.07   $  3.24   $   3.41    $  3.38

Regular quarterly cash
  distributions per 
  Unit of Depositary 
  Receipt                 $  3.51     $  4.61   $  5.08   $   5.22    $  5.34

Special cash distributions
  from excess reserves and
  investment prepayment
  transactions per Unit
  of Depositary Receipt   $  1.00     $  4.71        -           -          -

Total assets              $24,837     $25,971   $29,243    $30,315    $30,888

      The above selected  financial data should be read in conjunction  with the
financial  statements  and  related  notes  appearing  elsewhere  in this Annual
Report.

      The regular quarterly cash  distributions  shown above include a return of
capital component  resulting from the normal principal  amortization on all debt
securities and principal prepayments on the non-participating MBS.

      The above net income and cash distributions per Unit of Depositary Receipt
are based  upon the  551,604  Units of  Depositary  Receipt  of the  Partnership
outstanding during each year.

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

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

      The Partnership  offered  depositary units (at $100 per Unit) representing
limited  partnership  interests  to the public  from May 16, 1988 to May 1, 1989
pursuant to a  Registration  Statement  filed under the  Securities Act of 1933.
Gross proceeds of  approximately  $55,160,000  were received by the  Partnership
from the offering and,  after  deducting  selling  expenses and offering  costs,
approximately $42,908,000 was invested in mortgage securities.  Approximately $4
million of uninvested  offering proceeds was returned to the Unitholders in June
of 1991 after a proposed  investment,  for which such funds had been  committed,
could  not be  completed.  The  Partnership  originally  invested  approximately
$30,697,000  in  three  Participating   Insured  Mortgage  Loans  originated  in
connection with Federal Housing  Administration ("FHA") insurance to finance the
construction of multi-family  residential rental projects.  The Partnership also
originally    invested    approximately    $12,211,000   in    non-participating
mortgage-backed  securities ("MBS")  collateralized by pools of single-family or
multi-family mortgage loans that are guaranteed by GNMA. In May 1992, one of the
Participating Insured Mortgage Loans was prepaid at par as a result of a default
by the underlying property owner. Proceeds from this prepayment were distributed
to  the   Unitholders  in  June  1993  after  an  examination  of   reinvestment
alternatives failed to identify any suitable replacement investments.

     The Partnership is currently analyzing potential disposition strategies for
its  remaining  investments.  As part  of  these  efforts,  the  Partnership  is
evaluating the current  economic  benefits it would receive if the owners of the
Emerald Cove  Apartments  and the Quarter Mill  Apartments  were to prepay their
participating  loans within the next one to two years.  The current  strength of
the national real estate market and the favorable  interest rate environment for
the sale or refinancing of multi-family  apartment  properties has increased the
likelihood of one or both of the Partnership's participating loans being prepaid
in the near term.  While the Partnership  cannot require either of the owners to
prepay their  loans,  the  Partnership  could  possibly  sell one or both of the
participating  loans  and some or all of the  non-participating  mortgage-backed
security  pools.  In this  regard,  a key  consideration  is the strength of the
buying markets for these types of investments.  Also, as part of any sale of its
two  participating  mortgage loans, the Partnership would expect to receive fair
value for its  entitlement  to  participate in potential cash flow increases and
capital  appreciation  from  each  property  as well as for its  entitlement  to
receive prepayment  penalties if either of the participating  loans were prepaid
by the property owners.  As discussed  further below, as of the present date the
amounts of the prepayment penalties which could be received on the two remaining
participating  loans  range  from  6% to 2% of  the  outstanding  loan  balances
depending on the date of the prepayment. Although no assurances can be given, it
is  currently  contemplated  that  sales  or  prepayments  of the  Partnership's
remaining  investments  could be completed within the next one to two years. The
disposition  of all of the  Partnership's  investments  would be  followed  by a
formal liquidation of the Partnership.

      The Partnership's non-participating MBS have coupon interest rates ranging
from 7.5% to 9.5%.  Based on current market interest rate levels,  the aggregate
market value of these securities at the present time is above both the aggregate
face value and  amortized  cost,  which  includes any  unamortized  discounts or
premiums.  As of July 31, 1998, the  Partnership's  two remaining  Participating
Insured  Mortgage  Loans,  which carry coupon  interest rates of 8.5% and 8.75%,
also had  estimated  market  values  slightly  above  their face values due to a
variety of factors,  including the participation  features.  Increases in market
interest rates and/or  deterioration in general real estate market conditions in
the near  term  could  cause the  aggregate  market  value of the  Participating
Insured Mortgage Loans and the portfolio of non-participating MBS investments to
fall  below  face  value  and/or   amortized   cost.  In  the  event  that  such
circumstances  were to occur,  management  is not  prohibited  from  selling any
security at a loss and may do so if it is believed  that such a sale would be in
the best interests of the Partnership.

     Over the past  several  years,  generally  low market  interest  rates have
prompted  a  high  level  of  refinancing  activity,  resulting  in  significant
prepayments on the Partnership's  non-participating  mortgage-backed securities.
Such prepayments had the effect of reducing the Partnership's  investment income
and cash flows from operating  activities and increasing the outstanding balance
of the  Partnership's  cash  reserves.  Since it was deemed  unlikely that there
would be a default on either of the  Partnership's  two  remaining  multi-family
participating  loans,  and  since  the  current  rates of  return  available  on
non-participating   mortgage-backed   security   investments   did  not  warrant
reinvestment by the Partnership, management concluded during fiscal 1997 that it
would be in the best  interests of the  Unitholders to return the portion of the
Partnership's  cash  reserves  which  exceeded  expected  future   requirements.
Consequently, the Partnership distributed approximately $2,600,000 of its excess
reserves,  or $47.13 per original $1,000 investment,  in a special  distribution
made on March  14,  1997.  Regular  quarterly  distributions  are  comprised  of
investment  income  and  return of  capital  which  results  from the  scheduled
amortization  of mortgage  principal  on all of the debt  securities  as well as
principal   prepayments   from  the   non-participating   GNMA   mortgage-backed
securities.  Such principal  prepayments are unpredictable  and, as noted above,
had been high during recent years but declined during fiscal 1997,  resulting in
a reduction in cash flows from  investing  activities.  Based on this decline in
the rate of principal  prepayments and the  expectation  that this decline would
continue  in  the  future,   the  Partnership   reduced  the  regular  quarterly
distribution  rate effective for the payment made on June 13, 1997 for the third
quarter of fiscal 1997. The  distribution  rate declined from 8.25% per annum to
6.5%.  During fiscal 1998,  however,  actual  principal  prepayment  levels were
higher than  projected  resulting  in an  increase in cash flows from  investing
activities.  As a result, the Partnership made a special capital distribution of
excess cash  totaling  approximately  $552,000,  or $10.00 per  original  $1,000
investment,  to the  Limited  Partners  on March 13,  1998  concurrent  with the
regular   quarterly   distribution  for  the  period  ended  January  31,  1998.
Distributions are expected to continue to be made at a rate of 6.5% per annum on
remaining  invested  capital  for the  balance of  calendar  year 1998,  and the
Partnership's  cash  reserve  levels  will be  reviewed  again in early  1999 to
determine whether another special capital distribution will be made in 1999.

      The Partnership's two remaining  Participating  Insured Mortgage Loans are
secured by the Emerald Cove and Quarter Mill apartment complexes.  The occupancy
level at Emerald Cove  averaged 96% for the year ended July 31, 1998 compared to
93% for  fiscal  1997.  Due to the  increased  competition  from  several  newly
developed  properties in the local  Charlotte,  North Carolina  submarket during
fiscal 1997, the use of rental concessions had been necessary at Emerald Cove to
maintain  the  property's  occupancy  levels.  However,  because the  property's
occupancy increased during fiscal 1998, the property's leasing team discontinued
offering  rental  concessions  on both new and renewal  leases.  The  property's
rental  rates  and  occupancy  levels  remain  comparable  to those of  directly
competitive  properties  in the local market.  Prepayment  of the  Partnership's
Emerald Cove  Participating  Insured Mortgage Loan was restricted  through March
1997 and then requires a prepayment  penalty which declines ratably,  from 5% to
2%, over the next four  years.  During the quarter  ended  April 30,  1998,  the
Emerald Cove owner informed the Partnership that the property was being actively
marketed for sale and asked that the Partnership specify the terms upon which it
would accept prepayment of the participating loan. During the quarter ended July
31, 1998, the owner of the Emerald Cove  Apartments  approached the  Partnership
regarding a prepayment of the participating mortgage loan as part of a potential
sale of the Emerald  Cove  property.  However,  subsequent  to the July 31, 1998
fiscal year end, the  Partnership  was informed that the potential buyer and the
owner were not able to agree on final terms and that a sale would not occur.  As
previously  reported,  the owner of the Emerald Cove  Apartments  has  initiated
discussions  of prepayment on several  occasions  over the past four years,  but
none of those  discussions  have  resulted  in a  prepayment  transaction.  As a
result,  as noted above, the Partnership is presently  reviewing other potential
disposition options for its Participating Insured Mortgage Loan investments.

      The Quarter Mill  Apartments  continued its strong  operating  performance
during  fiscal 1998,  with an average  occupancy  level of 98%,  unchanged  from
fiscal 1997.  Because  Quarter Mill  Apartments  participates  in the Low Income
Housing  Tax  Credit  Program,  its rental  rates are based on the  metropolitan
area's median family income,  rather than on market rent levels.  As of July 31,
1998,  average  rental  rates on new leases  being signed were up 3.75% from one
year earlier.  A strong local rental  market,  combined with below market rental
rates at Quarter Mill, has resulted in consistently high occupancy levels at the
property.  Property operations continue to generate small amounts of excess cash
flow, a portion of which is payable to the  Partnership as Contingent  Interest.
During  fiscal  1998,  1997 and 1996,  the  Partnership  received  approximately
$54,000,  $49,000 and $46,000,  respectively,  representing its 30% share of the
surplus cash, as defined.  The Quarter Mill Participating  Insured Mortgage Loan
became open to prepayment in February 1996 with a specified  prepayment  penalty
which declines ratably, from 10% to 2%, over five years. During fiscal 1998, the
Partnership  and  the  owner  of  Quarter  Mill  engaged  in  very   preliminary
discussions  concerning  a potential  prepayment  of the  Participating  Insured
Mortgage  Loan.  However,  to date no  proposals  to  prepay  the loan have been
received from the owner of Quarter Mill.

      At July 31,  1998,  the  Partnership  had cash  and  cash  equivalents  of
approximately $1,702,000. Such amounts will be utilized for distributions to the
Unitholders and for the working capital  requirements  of the  Partnership.  The
source of future  liquidity and  distributions to the Unitholders is expected to
be  primarily  through  interest  income  and  principal   repayments  from  the
Partnership's  mortgage securities,  money-market  interest income from invested
cash  reserves,   and  to  a  lesser  extent  from   Contingent   Interest  from
Participating  Insured Mortgage Loans and Net Project Residuals from the sale or
refinancing of the properties securing such investments.

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

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

      For the year ended July 31 1998,  the  Partnership  reported net income of
$1,412,000,  compared to net income of $1,709,000 for fiscal 1997. This $297,000
decrease in net income resulted from a $193,000  decline in total revenues and a
$104,000  increase in operating  expenses.  The decline in total revenues can be
attributed to a $126,000 decrease in interest income from Participating  Insured
Mortgage Loans and non-participating MBS and a $67,000 reduction in money market
interest  income.  The decline in interest  income  from  Participating  Insured
Mortgage Loans and non-participating MBS resulted mainly from a reduction in the
average  outstanding  principal  balances of such  investments  due to scheduled
principal amortization on all of the debt securities and prepayments on the MBS.
In addition,  the amortization of the net premium on the Partnership's  mortgage
securities increased by $43,000 in fiscal 1998 as a result of an acceleration in
the amortization  rate due to a reassessment of the expected  remaining  holding
period of the  investments.  These  unfavorable  changes in interest income were
offset  slightly by an  increase in  Contingent  Interest.  Contingent  Interest
received from the Quarter Mill investment  increased from $49,000 in fiscal 1997
to $54,000 in fiscal  1998.  The decrease in money  market  interest  income was
mainly  the  result of a  decrease  in the  average  outstanding  balance of the
Partnership's  invested cash reserves subsequent to the special distributions of
excess cash  reserves  made on March 14, 1997 and March 13,  1998,  as discussed
further above.  The increase in operating  expenses is attributable to a $23,000
increase  in general  and  administrative  expenses  and a $93,000  increase  in
amortization expense.  General and administrative expenses were higher primarily
due to increases in the costs of certain required  professional services for the
year ended July 31, 1998.  Amortization expense increased by $93,000 as a result
of an  acceleration  in the  amortization  rate  of the  Partnership's  deferred
expenses.  Beginning in fiscal 1998, as noted above, the Partnership reduced the
expected holding period of its remaining  investments,  which resulted in higher
non-cash amortization charges for the year ended July 31, 1998.


1997 Compared to 1996
---------------------

      For the year ended July 31 1997,  the  Partnership  reported net income of
$1,709,000,  compared to net income of $1,806,000 for fiscal 1996.  This $97,000
decrease in net income resulted from a $138,000  decline in total revenues which
was partially offset by a $41,000 reduction in operating  expenses.  The decline
in total revenues was  attributable to a $97,000 decline in interest income from
Participating  Insured  Mortgage Loans and  non-participating  MBS and a $44,000
decline in money market  interest  income.  The decline in interest  income from
Participating  Insured Mortgage Loans and  non-participating MBS resulted from a
reduction in the average outstanding  principal balances of such investments due
to  scheduled  principal   amortization  on  all  of  the  debt  securities  and
prepayments  on the MBS.  This was offset  slightly by an increase in Contingent
Interest.   Contingent  Interest  received  from  the  Quarter  Mill  investment
increased from $46,000 in fiscal 1996 to $49,000 in fiscal 1997. The decrease in
money market  interest  income was mainly the result of a decline in the average
outstanding  balance of the Partnership's  invested cash reserves  subsequent to
the $2.6 million special  distribution of excess cash reserves made on March 14,
1997, as discussed  further above. The decrease in operating  expenses  resulted
from a $32,000  reduction  in general and  administrative  expenses and a $9,000
decline in management fees. General and administrative expenses decreased due to
a  reduction  in  certain  required  professional   services.  The  decrease  in
management fees reflected the declining  principal balances of the Partnership's
outstanding mortgage securities, upon which such fees are primarily based.

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

      For the year ended July 31, 1996, the  Partnership  reported net income of
$1,806,000,  which  represents a decrease in net income of $92,000 when compared
to fiscal 1995.  This decrease was primarily due to a decrease in total revenues
of $79,000.  The decrease in total revenues can be attributed to the decrease in
interest income from Participating  Insured Mortgage Loans and non-participating
MBS which  aggregated  $94,000.  This  decrease  resulted  from a decline in the
average  outstanding  principal  balances of such  investments  due to scheduled
principal amortization on all of the debt securities and prepayments on the MBS.
Partially  offsetting  this decrease in total  revenues was an increase in money
market interest of $15,000. The increase in money market interest was mainly due
to an increase  in the average  outstanding  balance of the  Partnership's  cash
reserves resulting from the MBS prepayment activity.  The decrease in net income
was also partly due to an increase  in general  and  administrative  expenses of
$24,000 which resulted mainly from an increase in certain required  professional
services during fiscal 1996.  Management fees decreased by $11,000 during fiscal
1996 due to the lower outstanding  principal  balances of the Partnership's debt
securities on which the fees are partially  based.  Such decreases have occurred
since the Partnership was fully invested due to scheduled principal amortization
and prepayment activity in the non-participating MBS pools.

Certain Factors Affecting Future Operating Results
--------------------------------------------------

      The following factors could cause actual results to differ materially from
historical results or those anticipated:

      Interest  Rate Risk.  The  Partnership's  investments  are  structured  to
provide maximum safety of principal.  The Partnership's principal investments in
both  Participating  Insured  Mortgage  Loans and  conventional  mortgage-backed
securities  are  100%  guaranteed  by  GNMA  in the  event  of  defaults  by the
underlying property owners. Obligations of GNMA are backed by the full faith and
credit of the Federal  government.  The Partnership does face potential interest
rate  risk in the  event  that the  Partnership,  as  expected,  liquidates  its
investments  in  Participating  Insured  Mortgage  Loans  and  non-participating
mortgage-backed  securities  prior  to the  scheduled  maturity  dates  of  such
investments. Depending on the general level of market interest rates at the time
of the  sale of any of the  Partnership's  mortgage  security  investments,  the
market  value of the  investments  may be higher or lower  than the  outstanding
principal  balances.  Nonetheless,  since the  Partnership is not required to be
liquidated  prior to the  scheduled  maturity  dates,  management  can limit the
exposure  to  market  risk  by  attempting  to  time  the   liquidation  of  the
Partnership's investments to coincide with a period of favorable interest rates.
However,  management is not  prohibited  from selling any security at a loss and
may do so if it is believed  that such a sale would be in the best  interests of
the Partnership.  The market value of the  Partnership's  Participating  Insured
Mortgage Loans is also affected by the value,  if any, that is attributed to the
participation  features of such loans. Such value is impacted by the real estate
investment and competitive risks outlined below. The Partnership is also subject
to possible  reinvestment risk to the extent that its principal  investments are
prepaid prior to the Partnership's expected liquidation period. Depending on the
general level of market  interest  rates at the time of such a  prepayment,  the
Partnership  or an  individual  Unitholder  might be unable to earn a comparable
yield on a similar low-risk investment upon the reinvestment of such funds.

      Real Estate  Investment  Risks.  Real property  investments are subject to
varying degrees of risk.  Revenues and property values may be adversely affected
by the  general  economic  climate,  the local  economic  climate and local real
estate conditions,  including (i) the perceptions of prospective  tenants of the
attractiveness of the property; (ii) the ability to retain qualified individuals
to provide  adequate  management  and  maintenance  of the  property;  (iii) the
inability  to  collect  rent due to  bankruptcy  or  insolvency  of  tenants  or
otherwise;  and (iv) increased  operating costs.  Real estate values may also be
adversely  affected by such  factors as  applicable  laws,  including  tax laws,
interest rate levels and the availability of financing.

      Competition.  The  financial  performance  of the real estate  investments
securing the Partnership's debt securities will be significantly impacted by the
competition  from  comparable  properties  in  their  local  market  areas.  The
occupancy  levels and rental rates  achievable at the  properties  are largely a
function  of supply  and  demand in the  markets.  In many  markets  across  the
country,  development of new multi-family properties has increased significantly
over the past two years.  Existing apartment properties in such markets could be
expected to experience  increased  vacancy levels,  declines in effective rental
rates and, in some cases, declines in estimated market values as a result of the
increased competition.  There are no assurances that these competitive pressures
will not adversely affect the operations  and/or market values of the properties
securing the Partnership's investments in the future.

      Availability of a Pool of Qualified Buyers.  The availability of a pool of
qualified  and  interested  buyers  for the  Partnership's  remaining  assets is
critical  to the  Partnership's  ability to realize  the  estimated  fair market
values of such  investments at the time of their final  dispositions.  Demand by
buyers  of  multi-family  apartment  properties  is  affected  by many  factors,
including  the  size,  quality,  age,  condition  and  location  of the  subject
property,  potential environmental liability concerns, the liquidity in the debt
and equity markets for asset acquisitions,  the general level of market interest
rates  and the  general  and  local  economic  climates.  Demand  by  buyers  of
mortgage-backed  securities  is largely a function of the current  interest rate
environment, although general real estate market factors are considered as well.

Inflation
---------

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

      Inflation in future  periods is likely to cause  increases in  Partnership
operating  expenses  without a  corresponding  increase in  revenues,  which are
principally derived from fixed interest rates on debt securities.

Item 8.  Financial Statements and Supplementary Data

      The financial  statements and  supplementary  data for the Partnership are
included under Item 14 of this Annual Report.

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

      None.


<PAGE>
                                   PART III

Item 10.  Directors and Executive Officers of the Partnership

      Under the Partnership Agreement,  exclusive management  responsibility for
and control over the affairs of the Partnership  rests with the General Partner,
First Insured Mortgage Partners,  L.P., a Delaware limited partnership formed in
February 1987. The day-to-day  operating  responsibility  for the Partnership is
delegated to PWPI by the General Partner.  However,  the General Partner retains
general   responsibility  for  partnership  business  and  oversees  partnership
activities.  The General Partner also supervises the  registration and marketing
of the Units,  approves  all  budgets for the  Partnership  prepared by PWPI and
makes all final  decisions  with respect to the  Partnership's  investments  and
their acquisition and disposition.

      Certain of the officers and directors of the Managing  General  Partner of
the  General  Partner,  First  Insured  Mortgage  Partners,   Inc.,  a  Delaware
corporation  and a  wholly-owned  subsidiary of  PaineWebber,  are also officers
and/or  directors of PWI and PWPI.  Such officers and directors will devote only
so much of their time to the business of the Partnership as in their judgment is
reasonably required.

      (a) and (b) The names and ages of the directors and executive  officers of
the Managing General Partner of the General Partner are as follows:
                                                                     Date 
                                                                     elected
  Name                    Office                               Age   to Office
  ----                    ------                               ---   ---------

Bruce J. Rubin           President, Chief Executive 
                           Officer and Director                39     8/22/96
Terrence E. Fancher      Director                              45     9/10/96
Walter V. Arnold         Senior Vice President and Chief
                           Financial Officer                   51     2/23/87*
David F. Brooks          First Vice President and Assistant
                           Treasurer                           56     2/23/87*
Timothy J. Medlock       Vice President and Treasurer          37     2/25/92
Thomas W. Boland         Vice President and Controller         36     7/31/97
Dorothy F. Haughey       Secretary                             72     2/23/87*

*  The date of incorporation of the Managing General Partner.

    (c) There  are no other  significant  employees  of First  Insured  Mortgage
Partners, Inc. in addition to the directors and officers mentioned above.

    (d) There is no family relationship among any of the foregoing directors and
officers of the  Managing  General  Partner of the General  Partner.  All of the
foregoing  directors  and  officers  have been  elected to serve  until the next
annual meeting of the Managing General Partner.

    (e) All of the directors and officers of the Managing  General  Partner hold
similar  positions in affiliates of the Managing General Partner,  which are the
corporate general partners of other real estate limited  partnerships  sponsored
by PWI. The business  experience  of each of the  directors  and officers of the
Managing General Partner is as follows:

      Bruce J. Rubin is  President,  Chief  Executive  Officer and Director of
the  Managing  General  Partner.  Mr.  Rubin  was  named  President  and Chief
Executive  Officer of PWPI in August 1996. Mr. Rubin joined  PaineWebber  Real
Estate Investment  Banking in November 1995 as a Senior Vice President.  Prior
to joining PaineWebber,  Mr. Rubin was employed by Kidder,  Peabody and served
as  President  for KP Realty  Advisers,  Inc.  Prior to his  association  with
Kidder,  Mr.  Rubin  was a  Senior  Vice  President  and  Director  of  Direct
Investments at Smith Barney  Shearson.  Prior  thereto,  Mr. Rubin was a First
Vice  President  and a real  estate  workout  specialist  at  Shearson  Lehman
Brothers.  Prior to  joining  Shearson  Lehman  Brothers  in 1989,  Mr.  Rubin
practiced  law in the Real  Estate  Group at  Willkie  Farr &  Gallagher.  Mr.
Rubin is a graduate of Stanford University and Stanford Law School.

      Terrence E.  Fancher was  appointed a Director of the  Managing  General
Partner in September  1996. Mr. Fancher is the Managing  Director in charge of
PaineWebber's  Real Estate Investment  Banking Group. He joined PaineWebber as
a result  of the  firm's  acquisition  of  Kidder,  Peabody.  Mr.  Fancher  is
responsible  for the origination  and execution of all of  PaineWebber's  REIT
transactions,  advisory assignments for real estate clients and certain of the
firm's real estate debt and principal  activities.  He joined Kidder,  Peabody
in 1985 and,  beginning in 1989, was one of the senior executives  responsible
for  building   Kidder,   Peabody's  real  estate   department.   Mr.  Fancher
previously  worked for a major law firm in New York City.  He has a J.D.  from
Harvard  Law  School,  an M.B.A.  from  Harvard  Graduate  School of  Business
Administration and an A.B. from Harvard College.

      Walter V. Arnold is a Senior Vice President and Chief Financial Officer of
the Managing  General  Partner and a Senior Vice  President and Chief  Financial
Officer of PWPI which he joined in 1985.  Mr. Arnold joined PWI in 1983 with the
acquisition  of Rotan Mosle,  Inc.  where he had been First Vice  President  and
Controller  since 1978, and where he continued until joining PWPI. Mr. Arnold is
a Certified Public Accountant licensed in the state of Texas.

      David F. Brooks is a First Vice  President and Assistant  Treasurer of the
Managing  General Partner and a First Vice President and Assistant  Treasurer of
PWPI. Mr. Brooks joined PWPI in March 1980. From 1972 to 1980, Mr. Brooks was an
Assistant Treasurer of Property Capital Advisors, Inc. and also, from March 1974
to February  1980,  the  Assistant  Treasurer of Capital for Real Estate,  which
provided real estate investment, asset management and consulting services.

      Timothy J.  Medlock is a Vice  President  and  Treasurer  of the  Managing
General  Partner and a Vice  President  and Treasurer of PWPI which he joined in
1986.  From 1986 to August of 1989,  Mr. Medlock served as the Controller of the
Managing General Partner and PWPI. From 1983 to 1986, Mr. Medlock was associated
with Deloitte Haskins & Sells. Mr. Medlock graduated from Colgate  University in
1983 and received his Masters in Accounting from New York University in 1985.

      Thomas W. Boland is a Vice  President  and  Controller  of the  Managing
General  Partner and a Vice  President and  Controller of PWPI which he joined
in 1988.  From 1984 to 1987,  Mr.  Boland was  associated  with Arthur Young &
Company.  Mr. Boland is a Certified  Public  Accountant  licensed in the state
of  Massachusetts.  He holds a B.S. in Accounting  from Merrimack  College and
an M.B.A. from Boston University.

      Dorothy F.  Haughey  is  Secretary  of the  Managing  General  Partner,
Assistant  Secretary of PaineWebber  and Secretary of PWI. Ms. Haughey joined
PaineWebber in 1962.

      (f) None of the directors and officers were involved in legal  proceedings
which are  material to an  evaluation  of his or her ability or  integrity  as a
director or officer.

      (g)  Compliance  With  Exchange Act Filing  Requirements:  The  Securities
Exchange Act of 1934 requires the officers and directors of the Managing General
Partner, and persons who own more than ten percent of the Partnership's  limited
partnership units, to file certain reports of ownership and changes in ownership
with the Securities and Exchange Commission. Officers, directors and ten-percent
beneficial  holders are required by SEC  regulations to furnish the  Partnership
with copies of all Section 16(a) forms they file.

      Based solely on its review of the copies of such forms received by it, the
Partnership  believes  that,  during  the year  ended  July 31,  1998 all filing
requirements  applicable to the officers and  directors of the Managing  General
Partner and ten-percent beneficial holders were complied with.

Item 11.  Executive Compensation

      The  directors  and officers of the Managing  General  Partner  receive no
current or proposed remuneration from the Partnership.

      The General  Partner is  entitled to receive a share of the  Partnership's
cash distributions and a share of profits and losses.  These items are described
under Item 13.

      The Partnership paid cash  distributions to the Unitholders on a quarterly
basis at a rate of 8.25% per annum on remaining  invested  capital from November
15, 1988 to March 14, 1997.  Effective for the distribution payment made on June
13, 1997 for the quarter ended April 30, 1997, the distribution rate was lowered
to 6.5% per annum on remaining  invested  capital.  However,  the  Partnership's
Units of Depositary  Receipts are not actively traded on any organized exchange,
and,  accordingly,  no  accurate  price  information  exists  for  these  Units.
Therefore,  a presentation of historical  Unitholder  total returns would not be
meaningful.

Item 12.  Security Ownership of Certain Beneficial Owners and Management

      (a) The  Partnership is a limited  partnership  issuing  Depositary  Units
which  represent  units of assigned  limited  partnership  interest,  not voting
securities.  All the  outstanding  stock of the Managing  General Partner of the
General Partner, First Insured Mortgage Partners, Inc., is owned by PaineWebber.
PA1988 is a Virginia limited partnership,  certain limited partners of which are
also  officers  of PWPI.  PaineWebber  Depositary  Corporation  (the  "Corporate
Limited  Partner"),  a Delaware  corporation  and an  affiliate  of the  General
Partner,  is  the  Initial  Limited  Partner.  No  Unitholder  is  known  by the
Partnership to own beneficially more than 5% of the outstanding interests of the
Partnership.

      (b) The  directors  and  officers of the Managing  General  Partner do not
directly own any Units of limited  partnership  interest of the Partnership.  No
director or officer of the Managing General Partner possesses a right to acquire
beneficial   ownership  of  Units  of  limited   partnership   interest  of  the
Partnership.

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

Item 13.  Certain Relationships and Related Transactions

      The General Partner of the Partnership is First Insured Mortgage Partners,
L.P. (the "General  Partner"),  a wholly-owned  subsidiary of PaineWebber  Group
Inc.  ("PaineWebber").  The Managing  General  Partner of the General Partner is
First Insured  Mortgage  Partners,  Inc.,  (the  "Managing  General  Partner") a
wholly-owned  subsidiary  of  PaineWebber.  The  officers  and  directors of the
Managing  General  Partner are also  officers  and/or  directors of  PaineWebber
Properties  Incorporated  ("PWPI").  Properties Associates 1988, L.P. ("PA1988")
and  PaineWebber  Incorporated  ("PWI") are the limited  partners of the General
Partner.  PA1988 is a Virginia limited  partnership in which certain officers of
PWPI are the  individual  limited  partners.  Subject  to the  Managing  General
Partner's overall authority, the business of the Partnership is managed by PWPI,
which is a  wholly-owned  subsidiary  of PWI.  The  General  Partner  and  other
PaineWebber  affiliates  will receive fees and  compensation,  determined  on an
agreed-upon  basis, in consideration of various services performed in connection
with  the  sale  of the  Units,  the  management  of  the  Partnership  and  the
acquisition, management, financing and disposition of Partnership investments.

      The  Partnership  entered into a Sales  Agreement with PWI under which PWI
acted as sales agent for the offering of Units.  In connection  with the sale of
Units,  PWI  was  to be  paid  sales  commissions  of up to 6% of  the  offering
proceeds. Sales commissions paid to PWI aggregated $3,278,000 through the end of
the offering period.

      Origination  fees were  payable  directly to the  General  Partner and its
affiliates by project  owners in  recognition  of the  participation  feature of
their  Participating  Insured  Mortgage  Loans in an  amount  equal to 2% of the
principal balance of each Participating Insured Mortgage Loan.

      In connection  with the  acquisition of mortgage  securities,  the General
Partner and its affiliates were to receive  acquisition fees in an amount not to
exceed 1.5% of the gross offering  proceeds for services  rendered in connection
with the investment by the Partnership in mortgage securities.  Acquisition fees
of  $827,000  were  paid  by the  Partnership  to the  General  Partner  and its
affiliates.   The  General   Partner  and  its   affiliates   also   received  a
non-accountable  acquisition  expense  allowance  of 1.5% of the Gross  Offering
Proceeds.  Acquisition expenses in excess of 1.5% of the Gross Offering Proceeds
were  to be  paid  by the  General  Partner.  Acquisition  expenses  aggregating
$827,000 were paid to the General Partner and its affiliates.

      For services  rendered in managing the  business of the  Partnership,  the
Partnership shall pay the General Partner and its affiliates an Asset Management
Fee  equal to  0.75%  per  annum of the  outstanding  principal  balance  of the
mortgage  securities of the Partnership.  Asset management fees of $168,000 were
earned by the  General  Partner and its  affiliates  for the year ended July 31,
1998. PWPI also furnishes  additional asset management and advisory  services to
the Partnership and receives  additional  asset  management fees as compensation
for such  services.  The  additional  management  fees  paid by the  Partnership
totalled $33,000 for the year ended July 31, 1998.

      Generally,  all distributable cash, as defined, for each fiscal year shall
be  distributed  quarterly  in the  ratio of 97% to the  Unitholders,  1% to the
General Partner and 2% to PWPI as the additional  asset  management fee referred
to  above.   Capital   distributions   (including   distributions  of  principal
repayments) will be distributed 100% to the Unitholders until they have received
the return of their capital  contributions and then to the General Partner until
it has  received  a return  of its  capital  contribution.  Thereafter,  capital
distributions shall be distributed in varying proportions to the Unitholders and
General Partner, as specified in the Partnership Agreement.

      Pursuant to the terms of the Partnership Agreement, taxable income or loss
of the Partnership  will be allocated 98.98% to the Unitholders and 1.02% to the
General Partner. Income or loss arising from a sale or refinancing of investment
properties  will  be  allocated  to the  Unitholders  and  the  General  Partner
generally as residual proceeds are distributed.

      An affiliate  of the General  Partner  performs  certain  accounting,  tax
preparation, securities law compliance and investor communications and relations
services  for the  Partnership.  The total costs  incurred by this  affiliate in
providing  such services are allocated  among  several  entities,  including the
Partnership.  Included in general and administrative expenses for the year ended
July 31, 1998 is $94,000,  representing  reimbursements to this affiliate of the
General Partner for providing such services to the Partnership.

      The  Partnership  uses the  services  of Mitchell  Hutchins  Institutional
Investors,  Inc. ("Mitchell Hutchins") for the managing of cash assets. Mitchell
Hutchins is a  subsidiary  of  Mitchell  Hutchins  Asset  Management,  Inc.,  an
independently operated subsidiary of PaineWebber.  Mitchell Hutchins earned fees
of $6,000  (included in general and  administrative  expenses)  for managing the
Partnership's  cash  assets for the year ended July 31,  1998.  Fees  charged by
Mitchell  Hutchins are based on a percentage  of invested  cash  reserves  which
varies  based on the total  amount of  invested  cash  which  Mitchell  Hutchins
manages on behalf of PWPI.


<PAGE>





                                    PART IV


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

   (a) The following documents are filed as part of this report:

        (1) and (2)    Financial Statements and Schedules:

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


        (3)  Exhibits:

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


   (b)  No  reports on Form 8-K were  filed  during  the last  quarter of fiscal
        1998.


   (c)  Exhibits

             See (a)(3) above.


   (d)  Financial Statement Schedules

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





















                                     


<PAGE>

                                  SIGNATURES


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

                  PAINEWEBBER INSURED MORTGAGE PARTNERS 1-B, L.P.

                    By: First Insured Mortgage Partners, Inc.
                        -------------------------------------
                           Managing General Partner


                              By: /s/Bruce J. Rubin
                                  ------------------ 
                                  Bruce J. Rubin
                                  President and
                                  Chief Executive Officer


                              By: /s/  Walter V. Arnold
                                  ---------------------
                                  Walter V. Arnold
                                  Senior Vice President and
                                  Chief Financial Officer


                              By: /s/ Thomas W. Boland
                                  --------------------
                                  Thomas W. Boland
                                  Vice President and Controller

Dated:  October 20, 1998

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


By /s/ Bruce J. Rubin                    Date:  October 20, 1998
   -----------------------                      ----------------
   Bruce J. Rubin
   Director



By:/s/ Terrence E. Fancher               Date:  October 20, 1998
   -----------------------                      ----------------
   Terrence E. Fancher
   Director










                      


<PAGE>


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

               PAINEWEBBER INSURED MORTGAGE PARTNERS 1-B, L.P.

                              INDEX TO EXHIBITS



                                                         Page Number in the
                                                         Report or Other
Exhibit No.         Description of Document              Reference
-----------          -----------------------------       -----------------------

(3) and (4)         Prospectus  of the  Registrant       Filed       with    the
                    dated  April  23,   1987,   as       Commission pursuant  to
                    supplemented.                        Rule      424(c)    and
                                                         incorporated herein  by
                                                         reference.

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

(13)                Annual Reports to Unitholders        No   Annual  Report for
                                                         the year ended July 31,
                                                         1998 has been  sent  to
                                                         the Unitholders.   An
                                                         Annual Report  will  be
                                                         sent to the Unitholders
                                                         subsequent   to    this
                                                         filing.

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

<PAGE>
                          ANNUAL REPORT ON FORM 10-K
                       Item 14(a) (1) and (2) and 14(d)

               PAINEWEBBER INSURED MORTGAGE PARTNERS 1-B, L.P.

                      INDEX TO FINANCIAL STATEMENTS AND
                        FINANCIAL STATEMENT SCHEDULES



                                                                    Reference
                                                                    ---------

PaineWebber Insured Mortgage Partners 1-B, L.P.:

  Report of independent auditors                                        F-2

  Balance sheets as of July 31, 1998 and 1997                           F-3

  Statements of income and  comprehensive  income for the years 
     ended July 31, 1998, 1997 and 1996                                 F-4

  Statements  of changes in partners'  capital  (deficit)  for the 
     years ended July 31, 1998, 1997 and 1996                           F-5

  Statements of cash flows for the years ended July 31, 1998, 
     1997 and 1996                                                      F-6

  Notes to financial statements                                         F-7

  Schedule IV - Investments in Mortgage Loans on Real Estate            F-14


  Other  schedules  have been  omitted  since the  required  information  is not
present or not  present  in amounts  sufficient  to  require  submission  of the
schedule,  or because the  information  required  is  included in the  financial
statements, including the notes thereto.


<PAGE>




                        REPORT OF INDEPENDENT AUDITORS






The Partners
PaineWebber Insured Mortgage Partners 1-B, L.P.:

      We have audited the  accompanying  balance sheets of  PaineWebber  Insured
Mortgage  Partners  1-B,  L.P.  as of July 31,  1998 and 1997,  and the  related
statements  of income and  comprehensive  income,  changes in partners'  capital
(deficit),  and cash flows for each of the three years in the period  ended July
31, 1998. Our audits also included the financial  statement  schedule  listed in
the  Index at Item  14(a).  These  financial  statements  and  schedule  are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits.

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

      In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of PaineWebber Insured Mortgage
Partners 1-B, L.P. at July 31, 1998 and 1997,  and the results of its operations
and its cash  flows for each of the three  years in the  period  ended  July 31,
1998, in conformity with generally accepted accounting principles.  Also, in our
opinion,  the related financial statement schedule,  when considered in relation
to the  basic  financial  statements  taken as a whole,  presents  fairly in all
material respects the information set forth therein.







                                /s/ Ernst & Young LLP
                                ---------------------
                                ERNST & YOUNG LLP

Boston, Massachusetts
October 2, 1998


<PAGE>


               PAINEWEBBER INSURED MORTGAGE PARTNERS 1-B, L.P.

                                BALANCE SHEETS
                            July 31, 1998 and 1997
                   (In thousands, except for per Unit data)

                                    ASSETS

                                                         1998          1997
                                                         ----          ----
Investments in Debt Securities:
   Mortgage-Backed Securities available for sale     $   4,178      $   5,379
   Participating Insured Mortgage Loans available
      for sale                                          18,447         18,586
                                                     ---------      ---------
                                                        22,625         23,965

Cash and cash equivalents                                1,702          1,310
Interest and other receivables                             156            165
Deferred expenses, net of accumulated
  amortization of $796 ($619 in 1997)                      354            531
                                                     ---------      ---------
                                                     $  24,837      $  25,971
                                                     =========      =========

                         LIABILITIES AND PARTNERS' CAPITAL


Accounts payable - affiliates                        $      27      $      29
Accounts payable and accrued expenses                       50             39
                                                     ---------      ---------
      Total liabilities                                     77             68

Partners' capital:
   General Partner:
     Capital contributions                                   1              1
     Cumulative net income                                 252            238
     Cumulative cash distributions                        (257)          (241)

   Corporate  Limited Partner and Unitholder 
       Interests ($100 per Unit,  
       551,604 Units issued):
     Capital contributions, net of offering costs       50,779         50,779
     Cumulative net income                              24,556         23,158
     Accumulated unrealized holding gains on debt
       securities                                          858            908
     Cumulative cash distributions                     (51,429)       (48,940)
                                                     ---------      ---------
      Total partners' capital                           24,760         25,903
                                                     ---------      ---------
                                                     $  24,837      $  25,971
                                                     =========      =========











                           See accompanying notes.


<PAGE>


                 PAINEWEBBER INSURED MORTGAGE PARTNERS 1-B, L.P.

                  STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
                For the years ended July 31, 1998, 1997 and 1996
                      (In thousands, except per Unit data)


                                               1998        1997       1996
                                               ----        ----       ----
Revenues:
   Interest income - Debt Securities        $ 1,919     $ 2,045     $ 2,139
   Interest income - Money Market                81         148         192
                                            -------     -------     -------
                                              2,000       2,193       2,331

Expenses:
   General and administrative                   210         187         219
   Management fees                              201         213         222
   Amortization expense                         177          84          84
                                            -------     -------     -------
                                                588         484         525
                                            -------     -------     -------

Net income                                  $ 1,412     $ 1,709     $ 1,806

Other comprehensive income:
   Unrealized holding gains
     (losses) on debt securities                (50)        193         (68)
                                            -------     -------     -------
Comprehensive income                        $ 1,362     $ 1,902     $ 1,738
                                            =======     =======     =======


Net income per Unit of Depositary
  Receipt                                   $  2.53     $  3.07     $  3.24
                                            =======     =======     =======

Cash distributions per Unit of Depositary
  Receipt                                   $  4.51     $  9.32     $  5.08
                                            =======     =======     =======

   The above net income and cash  distributions  per Unit of Depositary  Receipt
are based upon the 551,604 Units outstanding during each year.


















                           See accompanying notes.


<PAGE>
                 PAINEWEBBER INSURED MORTGAGE PARTNERS 1-B, L.P.

              STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
                For the years ended July 31, 1998, 1997 and 1996
                                 (In thousands)


                                                       Corporate
                                                       Limited
                                           General     Partner and
                                           Partner     Unitholders    Total
                                           -------     -----------    -----

Balance at July 31, 1995                    $    1       $30,244    $ 30,245

Comprehensive income:
   Net income                                   19         1,787       1,806

   Net unrealized holding losses on
      debt securities                            -           (68)        (68)
                                            ------       -------    --------
                                                19         1,719       1,738

Cash distributions                             (19)       (2,802)     (2,821)
                                            ------       -------    --------

Balance at July 31, 1996                         1        29,161      29,162

Comprehensive income:
   Net income                                   17         1,692       1,709

   Net unrealized holding gains on
     debt securities                             -           193         193
                                            ------       -------    --------
                                                17         1,885       1,902

Cash distributions                             (20)       (5,141)     (5,161)
                                            ------       -------    --------

Balance at July 31, 1997                        (2)       25,905      25,903

Comprehensive income:
   Net income                                   14         1,398       1,412

   Net unrealized holding losses on 
     debt securities                             -           (50)        (50)
                                            ------       -------    --------
                                                14         1,348       1,362

Cash distributions                             (16)       (2,489)     (2,505)
                                            ------       -------    --------
Balance at July 31, 1998                    $   (4)      $24,764    $ 24,760
                                            ======       =======    ========










                           See accompanying notes.

<PAGE>


               PAINEWEBBER INSURED MORTGAGE PARTNERS 1-B, L.P.

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

                                                 1998         1997      1996
                                                 ----         ----      ----
Cash flows from operating activities:
  Net income                                 $   1,412   $   1,709  $   1,806
  Adjustments to reconcile net income to net
   cash provided by operating activities:
     Amortization expense                          177          84         84
     Amortization of discount/premium on
         mortgage securities                        60          17         17
     Changes in assets and liabilities:
      Interest and other receivables                 9           7         10
      Accounts payable - affiliates                 (2)         (1)        (4)
      Accounts payable and accrued expenses         11         (12)        15
                                             ---------   ---------  ---------
         Total adjustments                         255          95        122
                                             ---------   ---------  ---------
             Net cash provided by operating
                activities                       1,667       1,804      1,928
                                             ---------   ---------  ---------

Cash flows from investing activities:
  Principal collections on Mortgage-Backed
     Securities                                  1,146         953      1,185
  Principal collections on Participating
     Insured Mortgage Loans                         84          77         71
                                             ---------   ---------  ---------
         Net cash provided by investing
           activities                            1,230       1,030      1,256
                                             ---------   ---------  ---------

Cash flows from financing activities:
  Distributions to Unitholders and partners     (2,505)     (5,161)    (2,821)
                                             ---------   ---------  ---------
         Net cash used in financing 
           activities                           (2,505)     (5,161)    (2,821)
                                             ---------   ---------  ---------

Net increase (decrease) in cash and 
   cash equivalents                                392      (2,327)       363

Cash and cash equivalents, beginning of year     1,310       3,637      3,274
                                             ---------   ---------  ---------

Cash and cash equivalents, end of year       $   1,702   $   1,310  $   3,637
                                             =========   =========  =========















                           See accompanying notes.


<PAGE>


               PAINEWEBBER INSURED MORTGAGE PARTNERS 1-B, L.P.
                        Notes to Financial Statements
                               

1.    Organization and Nature of Operations
      -------------------------------------

      PaineWebber  Insured  Mortgage  Partners  1-B,  L.P.,  a Delaware  limited
partnership,  was  organized  for the  purpose  of  investing  in a  diversified
portfolio  of  federally  insured or coinsured  mortgage  loans  ("Participating
Insured  Mortgage  Loans")  through  the  purchase  of  certain  mortgage-backed
securities   ("GNMA   securities").   The   Partnership  has  also  invested  in
non-participating  mortgage-backed securities ("MBS") backed by single-family or
multi-family  mortgage loans issued or originated in connection with the housing
programs of the Government National Mortgage Association  ("GNMA").  Investments
in  non-participating  MBS were  limited to no more than 30% of the original net
offering  proceeds.  On May 16,  1988,  the  Partnership  commenced  the sale of
Limited Partnership  Interests (the "Units"),  which are evidenced by Depositary
Receipts  (at $100 per Unit).  The  Partnership's  initial  capital  was $3,000,
representing  capital  contributions of $1,000 by the General Partner and $2,000
by the Corporate  Limited  Partner  (PaineWebber  Depositary  Corporation).  The
Partnership issued 551,604 Units from May 16, 1988 to May 1, 1989,  representing
capital  contributions of $55,160,425.  The Units represent an interest assigned
to persons who purchased Units  ("Unitholders") from the initial limited partner
of the Partnership pursuant to the Partnership Agreement,  which interest is the
equivalent  of a limited  partnership  interest.  Although  Unitholders  are not
limited  partners of the  Partnership,  as Unitholders  they are entitled to the
same  economic  benefits,  including  the same share of income,  gains,  losses,
deductions,  credits and cash  distributions,  as if they were limited  partners
holding the number of limited partnership interests represented by their Units.

      The  Partnership   originally  invested  in  three  Participating  Insured
Mortgage  Loans,  which were  originated  under or in  connection  with  Federal
Housing  Administration  ("FHA") insurance  programs to finance or refinance the
acquisition,  construction or substantial  rehabilitation of privately owned and
operating  multi-family  residential  rental  projects,  (the  "Projects").  The
Partnership  purchased each of the GNMA  Securities with proceeds raised through
its  public   offering  from  an  FHA-approved   mortgagee/coinsurer   and  GNMA
issuer/servicer.  The Partnership was expected to make an investment in a fourth
Participating Insured Mortgage Loan and entered into a commitment to fund a $4.5
million loan on a to-be-built project in Orlando,  Florida.  During fiscal 1991,
the  prospective  borrower  elected not to proceed with the Orlando  development
and, as a result,  the  commitment  to  purchase  the  related  GNMA  securities
subsequently  expired.  The efforts of the General  Partner to obtain a suitable
investment to replace the expired commitment were not successful,  in large part
due to changes  instituted by the  Department  of Housing and Urban  Development
which made the type of insured financing that the Partnership can invest in very
difficult  to obtain.  As a result,  the General  Partner  decided to return the
majority of the previously committed funds to the Unitholders. A distribution of
approximately  $4  million  was paid to the  Unitholders  in June of  1991.  The
remainder of the previously  committed funds was added to the Partnership's cash
reserves.  Until May 1992, the Partnership held a Participating Insured Mortgage
loan with respect to an apartment complex known as the Casablanca  Apartments in
Boynton  Beach,  Florida.  During  fiscal  1992,  the  owner  of the  Casablanca
Apartments  complex defaulted on the scheduled debt service payments to the GNMA
issuer.  The default  triggered the prepayment  provisions of the  Partnership's
GNMA mortgage-backed security.  Consequently,  on May 26, 1992, GNMA prepaid the
outstanding  balance of the  principal and accrued  interest to the  Partnership
pursuant to the terms of the mortgage-backed security agreement. The Partnership
distributed  the  proceeds  received  from  the  Casablanca  prepayment,   which
aggregated $12,521,000, to the Unitholders concurrent with the regular quarterly
distribution paid on June 15, 1993.

      The Partnership is currently  analyzing potential  disposition  strategies
for its remaining investments.  As part of these efforts, the Partnership is now
evaluating the current  economic  benefits it would receive if the owners of the
Emerald  Cove  Apartments  and  Quarter  Mill  Apartments  were to prepay  their
participating  loans  within  the next one to two years.  While the  Partnership
cannot require either of the owners to prepay their loans, the Partnership could
possibly  sell  one or both of the  participating  loans  and some or all of the
non-participating  mortgage  backed  securities  pools.  In this  regard,  a key
consideration  is  the  strength  of the  buying  markets  for  these  types  of
investments.  Also, as part of any sale of its two participating mortgage loans,
the  Partnership  would  expect to  receive  fair value for its  entitlement  to
participate in potential cash flow increases and capital  appreciation from each
property,  as well as for its  entitlement  to receive  prepayment  penalties if
either of the participating loans were prepaid by the property owners.  Although
no  assurances  can  be  given,  it is  currently  contemplated  that  sales  or
prepayments of the Partnership's remaining investments could be completed within
the  next  one to  two  years.  The  disposition  of  all  of the  Partnership's
investments would be followed by a formal liquidation of the Partnership.

<PAGE>

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

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

     The  Partnership  accounts for investments in debt securities in accordance
with  Statement of  Financial  Accounting  Standards  No. 115,  "Accounting  for
Certain  Investments in Debt and Equity  Securities"  (SFAS No. 115).  Under the
provisions  of SFAS No.  115,  investments  in debt and  equity  securities  are
classified as either trading securities, held-to-maturity, or available for sale
based  on  management's  intentions  as  to  their  ultimate  disposition.   The
Partnership's  debt  securities have been classified as available for sale as of
July 31, 1998 and 1997 and are stated at fair value on the accompanying  balance
sheets at those  dates.  In  accordance  with SFAS No. 115,  the net  unrealized
holding  gain or loss as of the date that the  statement  was first  applied was
recorded  as an  adjustment  of the balance of a separate  component  of equity.
Future unrealized holding gains or losses on securities  classified as available
for sale are reported as a net amount in the separate  component of equity until
realized.  Unrealized  holding  gains  or  losses  on debt  securities  are also
recognized  as a component  of other  comprehensive  income in  accordance  with
Statement of Financial  Accounting  Standards No. 130, "Reporting  Comprehensive
Income," which the Partnership adopted in fiscal 1998. Information regarding the
fair value of the  Partnership's  debt securities is disclosed in Notes 4 and 5.
Beginning  in fiscal  1998,  the related  discounts  or premiums  for these GNMA
securities  are being  amortized  using the effective  interest  method over the
expected  remaining  holding period of the investments of three years.  Prior to
fiscal 1998,  the premium and discounts  were being  amortized over the original
estimated  holding  period  of  fifteen  years.  The  effect  of this  change in
accounting estimate was to decrease interest income by $31,000 in fiscal 1998.

      In addition to the debt securities  which are carried at fair value on the
Partnership's  balance sheets,  the cash and cash  equivalents  appearing on the
accompanying  balance sheets  represent  financial  instruments  for purposes of
Statement of Financial  Accounting  Standards No. 107,  "Disclosures  about Fair
Value  of  Financial  Instruments."  The  carrying  amounts  of  cash  and  cash
equivalents  approximate  fair  value  as of July  31,  1998 and 1997 due to the
short-term maturities of these instruments.

      Deferred  expenses  consist of legal fees incurred in connection  with the
organization of the Partnership  and acquisition  fees and acquisition  expenses
paid to the General  Partner and its affiliates as  compensation  for analyzing,
structuring and negotiating the Partnership's investments.  Organizational costs
have been  amortized  using the  straight-line  method over a five-year  period.
Beginning in fiscal  1998,  acquisition  fees and  expenses are being  amortized
using the  straight-line  method over the expected  remaining holding periods of
the investments of three years.  Prior to fiscal 1998, the acquisition  fees and
expenses were being  amortized  over the original  estimated  holding  period of
fifteen years. The effect of this change in accounting  estimate was to increase
amortization  expense by $93,000 in fiscal  1998.  In April 1998,  the  American
Institute of Certified  Public  Accountants  issued  Statement of Position 98-5,
"Reporting on the Costs of Start-Up Activities" (SOP 98-5). The acquisition fees
and expenses paid by the Partnership would meet the definition of start-up costs
under the provisions of SOP 98-5, which requires that entities expense the costs
of start-up  activities  as incurred.  SOP 98-5 is required to be adopted by all
entities for financial  statements for fiscal years beginning after December 15,
1998. The effect on the Partnership of adopting SOP 98-5 when required in fiscal
2000 would be that the remaining  unamortized  acquisition  fees and expenses of
$177,000  would all be expensed in the first  quarter of fiscal year 2000 rather
than ratably over the entire fiscal year.

      For purposes of reporting cash flows, the Partnership considers all highly
liquid  investments  with  original  maturities  of 90  days  or less to be cash
equivalents.  The Partnership's cash reserves and excess cash flow are generally
invested in money market  instruments,  principally  overnight  investment-grade
commercial paper.

     No provision for income taxes has been made as the liability for such taxes
is that of the  partners  and  Unitholders  rather  than  the  Partnership.  The
principal  differences between the Partnership's  accounting on a federal income
tax basis and the accompanying  financial statements prepared in accordance with
generally accepted accounting principles relate to the recognition of unrealized
gains and losses on debt  securities and the  calculation of amortization on the
premiums and discounts on debt securities.

3.    The Partnership Agreement and Related Party Transactions
      --------------------------------------------------------

      The General Partner of the Partnership is First Insured Mortgage Partners,
L.P. (the "General  Partner"),  a wholly-owned  subsidiary of PaineWebber  Group
Inc.  ("PaineWebber").  The Managing  General  Partner of the General Partner is
First Insured  Mortgage  Partners,  Inc.,  (the  "Managing  General  Partner") a
wholly-owned  subsidiary  of  PaineWebber.  The  officers  and  directors of the
Managing  General  Partner are also  officers  and/or  directors of  PaineWebber
Properties  Incorporated  ("PWPI").  Properties Associates 1988, L.P. ("PA1988")
and  PaineWebber  Incorporated  ("PWI") are the limited  partners of the General
Partner.  PA1988 is a Virginia limited  partnership in which certain officers of
PWPI are the  individual  limited  partners.  Subject  to the  Managing  General
Partner's overall authority, the business of the Partnership is managed by PWPI,
which is a  wholly-owned  subsidiary  of PWI.  The  General  Partner  and  other
PaineWebber  affiliates  will receive fees and  compensation,  determined  on an
agreed-upon  basis, in consideration of various services performed in connection
with  the  sale  of the  Units,  the  management  of  the  Partnership  and  the
acquisition, management, financing and disposition of Partnership investments.

      The  Partnership  entered into a Sales  Agreement with PWI under which PWI
acted as sales agent for the offering of Units.  In connection  with the sale of
Units,  PWI  was  to be  paid  sales  commissions  of up to 6% of  the  offering
proceeds. Sales commissions paid to PWI aggregated $3,278,000 through the end of
the offering period.

      Origination  fees were  payable  directly to the  General  Partner and its
affiliates by project  owners in  recognition  of the  participation  feature of
their  Participating  Insured  Mortgage  Loans in an  amount  equal to 2% of the
principal balance of each Participating Insured Mortgage Loan.

      In connection  with the  acquisition of mortgage  securities,  the General
Partner and its affiliates were to receive  acquisition fees in an amount not to
exceed 1.5% of the gross offering  proceeds for services  rendered in connection
with the investment by the Partnership in mortgage securities.  Acquisition fees
of  $827,000  were  paid  by the  Partnership  to the  General  Partner  and its
affiliates.   The  General   Partner  and  its   affiliates   also   received  a
non-accountable  acquisition  expense  allowance  of 1.5% of the Gross  Offering
Proceeds.  Acquisition expenses in excess of 1.5% of the Gross Offering Proceeds
were  to be  paid  by the  General  Partner.  Acquisition  expenses  aggregating
$827,000 were paid to the General Partner and its affiliates.

      For services  rendered in managing the  business of the  Partnership,  the
Partnership shall pay the General Partner and its affiliates an Asset Management
Fee  equal to  0.75%  per  annum of the  outstanding  principal  balance  of the
mortgage  securities  of the  Partnership.  Asset  management  fees of $168,000,
$175,000 and $184,000 were earned by the General  Partner and its affiliates for
the years ended July 31, 1998, 1997 and 1996, respectively.  PWPI also furnishes
additional  asset  management  and  advisory  services  to the  Partnership  and
receives additional asset management fees as compensation for such services. The
additional management fees paid by the Partnership totalled $33,000, $38,000 and
$38,000 for the years ended July 31, 1998, 1997 and 1996, respectively. Accounts
payable - affiliates  at July 31, 1998 and 1997 consists of $27,000 and $29,000,
respectively,  of  management  fees  payable  to the  General  Partner  and  its
affiliates.

      Generally,  all distributable cash, as defined, for each fiscal year shall
be  distributed  quarterly  in the  ratio of 97% to the  Unitholders,  1% to the
General Partner and 2% to PWPI as the additional  asset  management fee referred
to  above.   Capital   distributions   (including   distributions  of  principal
repayments) will be distributed 100% to the Unitholders until they have received
the return of their capital  contributions and then to the General Partner until
it has  received  a return  of its  capital  contribution.  Thereafter,  capital
distributions shall be distributed in varying proportions to the Unitholders and
General Partner, as specified in the Partnership Agreement.

      Pursuant to the terms of the Partnership Agreement,  taxable income or tax
loss of the Partnership will be allocated 98.98% to the Unitholders and 1.02% to
the  General  Partner.  Income or loss  arising  from a sale or  refinancing  of
investment  properties  will be  allocated  to the  Unitholders  and the General
Partner generally as residual proceeds are distributed. Allocations of income or
loss  for  financial  reporting  purposes  have  been  made in  conformity  with
allocations  of  taxable  income  or tax  loss  set  forth  in  the  Partnership
Agreement.

      Included in general and  administrative  expenses for the years ended July
31,  1998,  1997  and  1996  is  $94,000,  $95,000  and  $88,000,  respectively,
representing reimbursements to an affiliate of the General Partner for providing
certain  financial,  accounting  and  investor  communication  services  to  the
Partnership.

      The  Partnership  uses the  services  of Mitchell  Hutchins  Institutional
Investors,  Inc. ("Mitchell Hutchins") for the managing of cash assets. Mitchell
Hutchins is a  subsidiary  of  Mitchell  Hutchins  Asset  Management,  Inc.,  an
independently operated subsidiary of PaineWebber.  Mitchell Hutchins earned fees
of $6,000, $8,000 and $18,000 (included in general and administrative  expenses)
for managing the  Partnership's  cash assets during fiscal 1998,  1997 and 1996,
respectively.
<PAGE>
4.    Mortgage-Backed Securities
      --------------------------

      At  July  31,  1998  and  1997  the  Partnership  held   non-participating
mortgage-backed  securities  ("MBS")  backed by  single-family  or  multi-family
mortgage loans issued or originated in connection  with the housing  programs of
the Government National Mortgage Association  ("GNMA"),  and guaranteed by GNMA,
as follows (in thousands):
<TABLE>
<CAPTION>

                                  July 31, 1998                      July 31, 1997
                         ------------------------------      ------------------------------
                         Estimated                           Estimated
                         Market      Face     Amortized      Market      Face     Amortized
     Description         Value       Value    Cost           Value       Value    Cost
     ------------        ------      -----    ---------      -----       -----    ---------
    <S>                  <C>        <C>       <C>           <C>         <C>       <C>
  
    9.5% GNMA Pool       $ 1,394    $ 1,294   $ 1,286       $ 1,799     $ 1,664   $ 1,652

    9.0% GNMA Pool           178        174       181           268         260       270

    8.0% GNMA Pool         2,382      2,289     2,376         3,016       2,907     3,037

    7.5% GNMA Pool           224        218       216           296         290       287
                         -------    -------   -------       -------     -------   -------
                         $ 4,178    $ 3,975   $ 4,059       $ 5,379     $ 5,121   $ 5,246
                         =======    =======   =======       =======     =======   =======
</TABLE>


      As discussed further in Note 2, the  Partnership's  investments in MBS are
carried  at fair  value as of July 31,  1998 and  1997.  Investments  in MBS are
valued based on quoted market  prices.  The amortized cost of the MBS represents
the  face  value of the  securities  net of  unamortized  premium  or  discount.
Investments  in  non-participating  MBS were  limited to no more than 30% of the
original  net  offering  proceeds  per the terms of the  Partnership's  offering
prospectus.

      The 9.5% MBS,  which were  purchased  at a discount on December  14, 1988,
carry a coupon  interest rate of 9.5% per annum and include loans with scheduled
maturities  between  June  2009 and  December  2009.  The 9.0% MBS,  which  were
purchased  at a premium on November 16, 1989,  carry a coupon  interest  rate of
9.0% per annum and include loans with scheduled maturities between June 2001 and
September  2002.  The 8.0% MBS,  which were  purchased  at a premium on July 30,
1992,  carry a coupon  interest  rate of 8.0% per annum and  include  loans with
scheduled  maturities  in June 2022.  The 7.5% MBS,  which were  purchased  at a
discount on October 30, 1992,  carry a coupon  interest  rate of 7.50% per annum
and include loans with scheduled maturities in March 2022. The loans included in
these GNMA pool programs may be prepaid, without penalty, at any time.

5.    Investments in Participating Insured Mortgage Loans
      ---------------------------------------------------

      Participating   Insured   Mortgage   Loans  secured  by  GNMA   securities
outstanding  at July  31,  1998  and 1997 are  comprised  of the  following  (in
thousands):

                                        July 31, 1998          July 31, 1997
                                   ---------------------    -------------------
 GNMA                               Estimated               Estimated
 Certificate              Interest  Market      Amortized   Market     Amortized
 Number      Property     Rate      Value       Cost        Value      Cost
 ------      --------     ----      -----       ----        -----      ----

    279985  Quarter Mill  8.50%     $  7,403    $  7,132    $ 7,417    $  7,166
    279119  Emerald Cove  8.75%       11,044      10,576     11,169      10,645
                                    --------    --------    -------    --------
                                    $18,447     $ 17,708    $18,586    $17,811
                                    =======     ========    =======    =======

      As  discussed  further  in  Note  2,  the  Partnership's   investments  in
Participating  Insured  Mortgage  Loans are carried at fair value as of July 31,
1998 and 1997.  Investments in  Participating  Insured Mortgage Loans, for which
quoted market prices are not  available,  are valued by an  independent  pricing
service which  determines the valuations  based on a comparison of recent market
trades of  securities  with  similar  characteristics.  Because of the  inherent
uncertainty of valuations,  estimated values,  as reflected  herein,  may differ
from the values that would have been used had a ready market for the  securities
existed.  Descriptions of the properties financed by the Partnership's loans and
the loan agreements themselves are summarized below:
<PAGE>
      Quarter Mill Apartments
      -----------------------

      The  Partnership  acquired  a  Participating  Insured  Mortgage  Loan with
respect to a 266-unit apartment complex known as Quarter Mill Apartments located
in Richmond,  Virginia (the "Virginia  Project").  Construction  of the Virginia
Project was completed in November of 1990. Initial closing of this Participating
Insured Mortgage loan took place on August 2, 1989. The project owner is Amurcon
Corporation.  The Base Component of this Participating  Insured Mortgage Loan is
coinsured by FHA and  represented by GNMA  Securities with an initial face value
of $7,316,600,  which GNMA Securities bore interest at the rate of 10.25% during
construction  of the Virginia  Project and 8.50%  thereafter.  Effective  May 1,
1991, the  construction  loan was converted to a permanent loan with a principal
balance of  $6,525,000.  On June 21,  1991 an  additional  $791,600  was funded,
completing  the  Partnership's  investment of  $7,316,600.  Monthly  payments of
principal and interest totalling approximately $53,547 are due through maturity,
on October 15,  2031.  Scheduled  principal  repayments  of  $184,949  have been
received through July 31, 1998.

      Emerald Cove Apartments
      -----------------------

     The Partnership acquired a Participating Insured Mortgage Loan with respect
to a 276-unit  apartment  complex known as Emerald Cove Apartments in Charlotte,
North  Carolina  (the  "North  Carolina  Project").   Initial  closing  of  this
Participating  Insured Mortgage Loan took place on October 16, 1989. The project
owners  are  Ronald  Curry  and  Ralph  Abercia.  The  Base  Component  of  this
Participating  Insured Mortgage Loan is coinsured by FHA and represented by GNMA
Securities  with an initial  face value of  $10,783,900  at closing,  which GNMA
Securities bore interest at the rate of 10.25% during  construction of the North
Carolina  Project and 8.75%  thereafter.  During  fiscal 1992,  the  Partnership
funded its remaining  commitment on the investment of  approximately  $1,184,000
and,  effective May 1, 1992,  the  investment  was converted to a permanent loan
with a  principal  balance of  $10,776,500.  The  Partnership  paid a premium of
$107,840 to the GNMA issuer to obtain the original  loan  commitment  due to the
fact that the permanent  loan interest  rate was higher than  comparable  market
rates at the time of the initial closing.  Beginning in fiscal 1998, the premium
is being  amortized  using  the  effective  interest  method  over the  expected
remaining holding period of the investment of three years. Prior to fiscal 1998,
the premium was being  amortized over the original  estimated  holding period of
fifteen years. The effect of this change in accounting  estimate was to decrease
interest  income by $12,000 in fiscal 1998.  Monthly  payments of principal  and
interest totalling approximately $81,133 are due through maturity, on August 15,
2031. Scheduled principal repayments of $245,429 have been received through July
31, 1998.

PROVISIONS  APPLICABLE TO BOTH OF THE PARTICIPATING  INSURED MORTGAGE LOANS OF
THE PARTNERSHIP:

      The closing of the  Participating  Insured  Mortgage  Loans was subject to
conditions  with  respect  to  satisfactory  completion  of  construction.   The
Partnership  purchased  the  GNMA  Securities  representing  each  of the  above
Participating  Insured  Mortgage  Loans with proceeds  raised through its public
offering from an FHA-approved mortgagee/coinsurer and GNMA issuer/servicer.

      As required by the Partnership's  investment  criteria,  the Participating
Insured  Mortgage Loans could not be repaid by the applicable  project owner, in
whole  or in  part,  for a  period  of five  years  from  the  date  of  initial
endorsement of each such Loan for FHA Insurance (unless required or permitted by
HUD or as a result of the partial or total  destruction or  condemnation  of the
Project).  The Participating Insured Mortgage Loans may thereafter be prepaid at
various  premiums which decline over the next  four-to-five-year  period.  After
nine or ten  years  from  the date of  initial  endorsement  of a  Participating
Insured  Mortgage  Loan for FHA  Insurance,  such  loan may be  prepaid  without
premium.  Although  the  permanent  phase  of each  such  Participating  Insured
Mortgage Loan has a term of  approximately  40 years,  payable in  substantially
equal  installments  consisting of principal  and interest over such term,  each
loan provides the Partnership  with the option to require such loan be repaid in
full  beginning  not later than the twelfth  anniversary  of its date of initial
endorsement for FHA Insurance.

      The  Contingent  Component of the  Participating  Insured  Mortgage  Loans
provides for the payment of Contingent  Interest equal to 25% of the Net Project
Cash Flow,  if any,  (30% for the  Virginia  Project) and 25% of the Net Project
Residuals, if any, derived from the applicable Project; provided,  however, that
to the extent the applicable  Project fails to generate  certain minimum amounts
of Net  Project  Cash  Flow,  the share of Net  Project  Residuals  to which the
Partnership  is  entitled  may be  increased  to up to 50%.  In  addition to the
deduction for the outstanding  principal  balance of the first mortgage relating
to each Participating Insured Mortgage Loan, Net Project Residuals shall also be
reduced  by  certain  FHA-approved  development  costs  and by  certain  amounts
advanced by the  applicable  project owner from its own funds to fund  operating
deficits or provide working capital for the applicable  Project.  The obligation
of a project  owner to pay  Contingent  Interest is evidenced by a  Subordinated
Promissory  Note of such  project  owner  which in turn is  secured  by a second
mortgage on the applicable Project. The obligations of each project owner to pay
Contingent Interest is secured by a lien on all of the interests in such project
owner.  Neither FHA Insurance nor any GNMA Security will provide for the payment
of Contingent Interest with respect to any Participating  Insured Mortgage Loan.
No  Contingent  Interest  has been  earned  with  respect  to the  Emerald  Cove
Participating  Insured Mortgage Loan to date. During fiscal 1998, 1997 and 1996,
the  Partnership   received   approximately   $54,000,   $49,000,  and  $46,000,
respectively,  representing  its 30% share of the surplus cash  generated by the
Quarter  Mill  property.  Such  amounts are  included in interest  income on the
accompanying  1998,  1997 and 1996 statements of income.  Cumulative  Contingent
Interest received from the Quarter Mill property totalled approximately $186,000
as of July 31, 1998.

      The future  performance  of the  Partnership  will depend,  in part,  upon
future interest rate fluctuations,  which cannot be predicted.  In addition, the
Partnership's  overall  operating  performance  is  subject  to all of the risks
normally  associated with real estate  investments,  including:  reliance on the
owners' operating skills,  including their ability to maintain occupancy levels,
meet operating  expenses,  maintain the property and maintain adequate insurance
coverage;  adverse changes in general and/or local economic conditions;  changes
in  governmental  regulations,  real estate zoning laws, or tax laws;  and other
circumstances over which the Partnership may have little or no control.

6.    Subsequent Event
      ----------------

      On  September  15,  1998,  the  Partnership  distributed  $474,000  to the
Unitholders,  $4,000  to the  General  Partner  and  $9,000  to PWPI as an asset
management fee for the quarter ended July 31, 1998.



<PAGE>
<TABLE>




Schedule IV - Investments in Mortgage Loans on Real Estate

                                        PAINEWEBBER INSURED MORTGAGE PARTNERS 1-B, L.P.
                                                         July 31, 1998
                                                        (In thousands)
<CAPTION>

                                                                                                 Carrying      Amount of loans
                       Coupon           Final maturity       Periodic            Face amount     amount of     subject to delinquent
Description            Interest rate    date                 payment terms       of mortgages    mortgages     principal or interest
-----------            -------------    ----                 -------------       ------------    ---------     ---------------------
<S>                   <C>               <C>                  <C>                  <C>            <C>                <C>

GNMA Single Loan Pool:

Quarter Mill Apts.     8.50%            10/15/2031           Interest and         $  7,132        $ 7,403            N/A
Apartment Complex                                            principal payable
Richmond, VA                                                 monthly ($53,547)
Pool #279985                                                 through maturity.


Emerald Cove Apts.     8.75%             8/15/2031           Interest and           10,538         11,044            N/A
Apartment Complex                                            principal payable
Charlotte, NC                                                monthly ($81,133)
Pool #279119                                                 through maturity.
                                                                                  --------        -------
TOTALS                                                                            $ 17,670        $18,447
                                                                                  ========        =======



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

   Balance at beginning of year                   $18,586           $18,539           $18,639
     Collections of principal                         (84)              (77)              (71)
     Amortization of premium                          (19)               (7)               (7)
     Net unrealized holding gains (losses)            (36)              131               (22)
                                                  -------           --------          -------
   Balance at close of year                       $18,447           $18,586           $18,539
                                                  =======           =======           =======

</TABLE>