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, 1997

                                       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 of organization)                                     (I.R.S. Employer
                                                          Identification  No.)

265 Franklin Street, Boston, Massachusetts                         02110
------------------------------------------                         -----
(Address of principal executive office)                          (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 Depositary Receipts representing
                       Units of Limited Partner Interests

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
---------                                                 -------------------
The Prospectus of the registrant                          Parts II and IV
dated April 23, 1987, as supplemented

<PAGE>


               PAINEWEBBER INSURED MORTGAGE PARTNERS 1-B, L.P.
                                1997 FORM 10-K

                              TABLE OF CONTENTS

Part   I                                                               Page

Item  1       Business                                                 I-1

Item  2       Properties                                               I-3

Item  3       Legal Proceedings                                        I-3

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


Part  II

Item  5       Market for the Registrant's Depositary Units of Limited
                 Partnership Interest 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-5

Item  9       Changes in and Disagreements with Accountants on 
                 Accounting and Financial Disclosure                   II-5


Part III

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

Item 11       Executive Compensation                                   III-3

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-13


<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-4 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, 1997
have totalled approximately $48,940,000,  or $897 per original $1,000 investment
for the Partnership's earliest investors. Such distributions include a return of
capital totalling  approximately  $455 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
a special  distribution of $47.13 per original  $1,000  investment paid on March
14, 1997 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, 1997 totalled  approximately $545 per $1,000 investment.
Through July 31, 1997,  the  Partnership  had  received  $132,000 of  Contingent
Interest payments from its Participating Insured Mortgage Loans.

      As of July 31, 1997, the Partnership holds Participating  Insured Mortgage
Loans secured by GNMA securities as described below.

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

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

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


(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.  Certain 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.

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 1997, along
with an average for the year, are presented below:

                                              Percent Occupied At
                                 ----------------------------------------------
                                                                        Fiscal
                                                                        1997
                                 10/31/96    1/31/97  4/30/97   7/31/97 Average
                                 --------    -------  -------   ---------------

Quarter Mill Apartments            98%        98%       98%       99%     98%

Emerald Cove Apartments            96%        90%       91%       94%     93%

Item 3.  Legal Proceedings

     In  November  1994,  a series of  purported  class  actions  (the "New York
Limited Partnership Actions") were filed in the United States District Court for
the Southern District of New York concerning PaineWebber Incorporated's sale and
sponsorship of various limited partnership and REIT investments, including those
offered by the  Partnership.  The  lawsuits  were  brought  against  PaineWebber
Incorporated  and Paine  Webber  Group,  Inc.  (together  "PaineWebber"),  among
others, by allegedly dissatisfied  partnership  investors.  In March 1995, after
the  actions  were  consolidated  under  the  title  In re  PaineWebber  Limited
Partnership Litigation,  the plaintiffs amended their complaint to assert claims
against  a  variety  of  other  defendants,  including  First  Insured  Mortgage
Partners, Inc. and Properties Associates 1988 ("PA1988"),  which are the General
Partners of the Partnership and affiliates of PaineWebber.  On May 30, 1995, the
court certified class action treatment of the claims asserted in the litigation.

     The amended complaint in the New York Limited  Partnership  Actions alleged
that, in connection with the sale of interests in PaineWebber  Insured  Mortgage
Partners 1-B,  L.P.,  PaineWebber,  First Insured  Mortgage  Partners,  Inc. and
PA1988 (1) failed to provide adequate disclosure of the risks involved; (2) made
false and misleading representations about the safety of the investments and the
Partnership's  anticipated  performance;  and (3)  marketed the  Partnership  to
investors for whom such  investments  were not  suitable.  The  plaintiffs,  who
purported  to be suing on behalf of all  persons  who  invested  in  PaineWebber
Insured Mortgage Partners 1-B, L.P., also alleged that following the sale of the
partnership interests,  PaineWebber,  First Insured Mortgage Partners,  Inc. and
PA1988  misrepresented  financial  information about the Partnerships  value and
performance.  The amended  complaint  alleged that  PaineWebber,  First  Insured
Mortgage Partners, Inc. and PA1988 violated the Racketeer Influenced and Corrupt
Organizations  Act  ("RICO") and the federal  securities  laws.  The  plaintiffs
sought  unspecified  damages,  including  reimbursement for all sums invested by
them in the  partnerships,  as well as disgorgement of all fees and other income
derived  by  PaineWebber  from  the  limited  partnerships.   In  addition,  the
plaintiffs also sought treble damages under RICO.

     In January 1996,  PaineWebber signed a memorandum of understanding with the
plaintiffs in the New York Limited Partnership Actions outlining the terms under
which the parties have agreed to settle the case. Pursuant to that memorandum of
understanding,  PaineWebber  irrevocably  deposited  $125 million into an escrow
fund under the  supervision of the United States District Court for the Southern
District of New York to be used to resolve the  litigation in accordance  with a
definitive  settlement  agreement  and plan of  allocation.  On July  17,  1996,
PaineWebber and the class plaintiffs submitted a definitive settlement agreement
which  provides for the  complete  resolution  of the class  action  litigation,
including  releases in favor of the  Partnership and PWPI, and the allocation of
the $125 million settlement fund among investors in the various partnerships and
REITs at issue in the case. As part of the settlement,  PaineWebber  also agreed
to provide class members with certain financial  guarantees  relating to some of
the  partnerships  and REITs.  The details of the  settlement are described in a
notice mailed  directly to class members at the direction of the court.  A final
hearing on the fairness of the proposed  settlement  was held in December  1996,
and in March 1997 the court announced its final approval of the settlement.  The
release of the $125 million of settlement  proceeds had been delayed pending the
resolution  of an appeal of the  settlement  agreement  by two of the  plaintiff
class  members.  In July 1997, the United States Court of Appeals for the Second
Circuit upheld the settlement  over the objections of the two class members.  As
part of the settlement agreement, PaineWebber agreed not to seek indemnification
from the related  partnerships and real estate investment trusts at issue in the
litigation  (including the  Partnership)  for any amounts that it is required to
pay under the settlement.

     In February 1996,  approximately  150 plaintiffs  filed an action  entitled
Abbate v.  PaineWebber  Inc. in  Sacramento,  California  Superior Court against
PaineWebber   Incorporated  and  various  affiliated   entities  concerning  the
plaintiffs' purchases of various limited partnership interests,  including those
offered by the  Partnership.  The complaint  alleged,  among other things,  that
PaineWebber and its related entities committed fraud and  misrepresentation  and
breached  fiduciary  duties  allegedly  owed to the  plaintiffs  by  selling  or
promoting  limited   partnership   investments  that  were  unsuitable  for  the
plaintiffs and by overstating the benefits,  understating  the risks and failing
to state  material  facts  concerning  the  investments.  The  complaint  sought
compensatory  damages of $15 million plus punitive damages against  PaineWebber.
In July 1996,  approximately  15 plaintiffs  filed an action entitled Barstad v.
PaineWebber Inc. in Maricopa County,  Arizona Superior Court against PaineWebber
Incorporated  and  various  affiliated   entities   concerning  the  Plaintiffs'
purchases of various limited partnership  interests,  including those offered by
the Partnership.  The complaint is substantially similar to the complaint in the
Abbate action described above, and sought compensatory  damages of $752,000 plus
punitive damages. In September 1996, the court dismissed many of the plaintiffs'
claims in both the Abbate and Barstad actions as barred by applicable securities
arbitration  regulations.  Mediation  with  respect to the  Abbate  and  Barstad
actions was held in December 1996. As a result of such  mediation,  a settlement
between  PaineWebber  and the  plaintiffs  was reached  which  provided  for the
complete  resolution of both actions.  Final releases and dismissals with regard
to these actions were received during fiscal 1997.

     Based on the  settlement  agreements  discussed  above  covering all of the
outstanding  unitholder   litigation,   management  does  not  expect  that  the
resolution  of these  matters will have a material  impact on the  Partnership's
financial statements, taken as a whole.

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

Item 4.  Submission of Matters to a Vote of Security Holders
     None.


<PAGE>

                                   PART II

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

      At July 31, 1997, there were 3,391 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.  The
General Partner will not redeem or repurchase Units.

      Effective with the distribution made on September 15, 1997 for the quarter
ended July 31, 1997, the Partnership's  Distribution Reinvestment Plan (DRP) has
been terminated and all  distributions  to Unitholders  will be in made in cash.
The Partnership's DRP, which had been in effect since inception, was designed to
enable Unitholders to have their distributions from the Partnership  invested in
additional  Units of the  Partnership.  The terms under which the Plan  operated
prior to its  termination  are outlined in detail in the  Prospectus,  a copy of
which Prospectus, as supplemented, is incorporated herein by reference.

      Reference is made to Item 6 below for a discussion  of cash  distributions
made to the Unitholders during fiscal 1997.

Item 6.  Selected Financial Data

                 PaineWebber Insured Mortgage Partners 1-B, L.P.
          For the years ended July 31, 1997, 1996, 1995, 1994 and 1993
                      (In thousands, except per Unit data)

                             1997       1996       1995       1994     1993
                             ----       ----       ----       ----     ----

Revenues                  $ 2,193     $ 2,331   $ 2,410    $ 2,447    $ 3,283

Gain on sale of
  investments                   -           -         -          -    $   386

Net income                $ 1,709     $ 1,806   $ 1,898    $ 1,885    $ 3,058

Net income per Unit of
  Depositary Receipt      $  3.07     $  3.24   $  3.41    $  3.38    $  5.49

Regular quarterly cash
  distributions per Unit 
  of Depositary Receipt   $  4.61     $  5.08   $  5.22    $  5.34    $  7.33

Special cash distributions
  from excess reserves and
  investment prepayment
  transactions per Unit
  of Depositary Receipt   $  4.71           -         -          -    $ 22.70

Total assets              $25,971     $29,243   $30,315    $30,888    $31,639

      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'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 slightly above both the
aggregate  face  value  and  amortized  cost,  which  includes  any  unamortized
discounts or premiums.  As of July 31, 1997,  the  Partnership's  two  remaining
Participating  Insured Mortgage Loans, which carry coupon interest rates of 8.5%
and 8.75%, 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 MBS  investments to fall below face
value and/or amortized cost.  However,  fluctuating  market  conditions will not
result in realized  gains or losses  unless the  Partnership's  investments  are
prepaid or sold prior to maturity.  Secondary market sales of the  Partnership's
investments  would likely only occur as part of a formal plan of liquidation for
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.  The  distribution  of excess  reserves  resulted in an
increase in net cash used in  financing  activities  compared to the prior year.
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,  have 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  will  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%, of which  approximately
5.5% is expected to represent net  investment  income and 1% is expected to be a
return of capital.  If the actual  prepayment levels exceed  anticipated  levels
through the second quarter of fiscal 1998, the Partnership is expected to make a
Special  Distribution of these excess amounts in March 1998, and each subsequent
March, if warranted by future principal prepayment levels.

     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 93% for the year ended July 31, 1997 compared to
96% for fiscal  1996.  The  decline in  average  occupancy  is mainly due to the
competition  from several newly  developed  properties  which have opened in its
local  Charlotte,  North  Carolina  submarket  during fiscal 1997 and which have
offered rental concessions in order to accelerate their leasing progress. During
the second  quarter of fiscal 1997,  the  property's  leasing  team  initiated a
program  which  offered  rental  concessions  on selected unit types in order to
increase occupancy levels which decreased to an average of 90% for that quarter.
There  continues to be a substantial  amount of new competition in the northeast
section of the Charlotte  market where Emerald Cove is located.  With over 1,000
additional  apartment units completed in the property's local market area during
fiscal  1997 and 246 new  apartment  units under  construction  as of the fiscal
year-end, as well as an additional 627 apartment units proposed,  the property's
management and leasing team  anticipates that occupancy levels may remain in the
low-to-mid  90% range in the short term.  In light of these  competitive  market
conditions,  there are no rental rate  increases  currently  planned for Emerald
Cove, and it is likely that rental concessions will remain necessary in order to
maintain  occupancy  levels.  The property had an average occupancy level of 94%
for the fourth quarter of fiscal 1997.  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.  Although  the  owner  of  Emerald  Cove  has  initiated
discussions of prepayment on several occasions over the past three fiscal years,
no viable prepayment  transaction has materialized from such discussions.  There
are no ongoing prepayment discussions with the Emerald Cove owner at the present
time.

     The Quarter Mill  Apartments  continued  its strong  operating  performance
during fiscal 1997, with an average  occupancy level of 98%, compared to 96% for
fiscal 1996.  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.  A strong local
rental  market,  combined with below market  rental rates at Quarter  Mill,  has
resulted in consistently  high occupancy levels at the property.  Although there
has been new multi-family  construction  activity in the Richmond area, there is
no new directly  competitive  development  under  construction or planned in the
property's immediate market area. 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 1997, 1996 and 1995, the Partnership received
approximately $49,000, $46,000 and $37,000,  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. To
date,  no  proposals  to prepay  the loan have been  received  from the owner of
Quarter Mill. 

     At July  31,  1997,  the  Partnership  had cash  and  cash  equivalents  of
approximately $1,310,000. 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.

Results of Operations
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 can be attributed 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.  As noted above,  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 reflects 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.

1995 Compared to 1994
---------------------

     For the year ended July 31, 1995,  the  Partnership  reported net income of
$1,898,000, which represented an increase in net income of $13,000 when compared
to fiscal 1994.  This  increase in net income  resulted from declines in general
and  administrative  and management fee expenses.  Management  fees decreased by
$27,000 during fiscal 1995 due to a decline in the average outstanding principal
balances of the  Partnership's  investments,  upon which such fees are partially
based.  General and  administrative  expenses declined by $22,000 in fiscal 1995
mainly due to certain  non-recurring  professional  fees  incurred  in the prior
year.  The decline in expenses  during  fiscal  1995 was  partially  offset by a
reduction in total revenues of $37,000.  Interest income from the  Partnership's
debt securities declined by $142,000, despite the receipt of contingent interest
of  approximately  $37,000 from the Quarter Mill investment  during fiscal 1995.
The decrease in interest income from  Participating  Insured  Mortgage Loans and
non-participating  MBS  resulted  from  a  decline  in the  average  outstanding
principal balances of such investments due to scheduled  principal  amortization
and  prepayments  on the  MBS.  The  high  level  of MBS  principal  prepayments
experienced  during  fiscal  1994  substantially  increased  the  balance of the
Partnership's  cash reserves and contributed to an increase of $105,000 in money
market interest income for fiscal 1995. The increased  earnings on invested cash
reserves was also  partially  attributable  to the higher  interest rates earned
during fiscal 1995.

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 surged in the past 12
months. Existing apartment properties in such markets have generally experienced
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 investments secured by 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.

Inflation
---------

      The  Partnership  completed  its eighth full year of  operations in fiscal
1997.  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.

      The directors of First  Insured  Mortgage  Partners,  Inc. had the primary
responsibility  for  selecting  and  negotiating  investments  on  behalf of the
Partnership after  consultation with the GNMA issuer.  Before any investment was
consummated,  it required  approval by both a majority of the Board of Directors
of First Insured Mortgage Partners,  Inc. and by a majority of the disinterested
directors  of First  Insured  Mortgage  Partners,  Inc. For the purposes of this
section,  "disinterested director" meant any member of the Board of Directors of
First Insured Mortgage Partners,  Inc. who was not an officer or director of the
GNMA issuer.

      (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                        38     8/22/96
Terrence E. Fancher      Director                              44     9/10/96
Walter V. Arnold         Senior Vice President and Chief
                           Financial Officer                   50     2/23/87*
David F. Brooks          First Vice President and Assistant 
                           Treasurer                           55     2/23/87*
Timothy J. Medlock       Vice President and Treasurer          36     2/25/92
Thomas W. Boland         Vice President and Controller         35     7/31/97
Dorothy F. Haughey       Secretary                             71     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) A number 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:


<PAGE>


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

     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,  1997 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, the 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.  Certain  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 $175,000 were
earned by the  General  Partner and its  affiliates  for the year ended July 31,
1997. 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 $38,000 for the year ended July 31, 1997.

      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, 1997 is $95,000,  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 $8,000  (included in general and  administrative  expenses)  for managing the
Partnership's  cash  assets for the year ended July 31,  1997.  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
        1997.


   (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 27, 1997

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 27, 1997
   -----------------------                     ----------------
   Bruce J. Rubin
   Director



By:/s/ Terrence E. Fancher               Date: October 27, 1997
   -----------------------                     ----------------
   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
Exhibit No.         Description of Document           Report or Other 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,  1997
                                                      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, 1997 and 1996                           F-3

  Statements of income for the years ended July 31, 1997, 1996
      and 1995                                                          F-4

  Statements  of changes in partners'  capital  (deficit)  for the
      years ended July 31, 1997, 1996 and 1995                          F-5

  Statements of cash flows for the years ended July 31, 1997, 1996
      and 1995                                                          F-6

  Notes to financial statements                                         F-7

  Schedule IV - Investments in Mortgage Loans on Real Estate            F-13


  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,  1997 and 1996,  and the  related
statements of income, changes in partners' capital (deficit), and cash flows for
each of the three  years in the period  ended  July 31,  1997.  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, 1997 and 1996,  and the results of its operations
and its cash  flows for each of the three  years in the  period  ended  July 31,
1997, 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 22, 1997


<PAGE>


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

                                BALANCE SHEETS
                            July 31, 1997 and 1996
                   (In thousands, except for per Unit data)

                                    ASSETS

                                                        1997             1996
                                                        ----             ----
Investments in Debt Securities:
   Mortgage-Backed Securities available for sale      $  5,379       $  6,280
   Participating Insured Mortgage Loans available
     for sale                                           18,586         18,539
                                                      --------       --------
                                                        23,965         24,819

Cash and cash equivalents                                1,310          3,637
Interest and other receivables                             165            172
Deferred expenses, net of accumulated
  amortization of $619 ($535 in 1996)                      531            615
                                                      --------       --------
                                                      $ 25,971       $ 29,243
                                                      ========       ========

                         LIABILITIES AND PARTNERS' CAPITAL


Accounts payable - affiliates                         $     29       $     30
Accounts payable and accrued expenses                       39             51
                                                      --------       --------
      Total liabilities                                     68             81

Partners' capital:
   General Partner:
     Capital contributions                                   1              1
     Cumulative net income                                 238            221
     Cumulative cash distributions                        (241)          (221)

   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                              23,158         21,466
     Net unrealized holding gain on debt securities        908            715
     Cumulative cash distributions                     (48,940)       (43,799)
                                                      --------       --------
      Total partners' capital                           25,903         29,162
                                                      --------       --------
                                                      $ 25,971       $ 29,243
                                                      ========       ========











                           See accompanying notes.


<PAGE>


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

                             STATEMENTS OF INCOME
               For the years ended July 31, 1997, 1996 and 1995
                     (In thousands, except per Unit data)


                                               1997        1996       1995
                                               ----        ----       ----
Revenues:
   Interest income - Debt Securities        $ 2,045    $  2,139    $  2,233
   Interest income - Money Market               148         192         177
                                            -------    --------    --------
                                              2,193       2,331       2,410

Expenses:
   General and administrative                   187         219         195
   Management fees                              213         222         233
   Amortization expense                          84          84          84
                                            -------    --------    --------
                                                484         525         512
                                            -------    --------    --------

Net income                                  $ 1,709    $  1,806    $  1,898
                                            =======    ========    ========


Net income per Unit of Depositary 
  Receipt                                   $  3.07     $  3.24     $  3.41
                                            =======     =======     =======

Cash distributions per Unit of Depositary 
  Receipt                                   $  9.32     $  5.08     $  5.22
                                            =======     =======     =======



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, 1997, 1996 and 1995
                                 (In thousands)


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

Balance at July 31, 1994                     $   1    $ 30,818      $ 30,819

Net unrealized holding gain on debt
  securities                                     -         424           424

Net income                                      19       1,879         1,898

Cash distributions                             (19)     (2,877)       (2,896)
                                             -----    --------      --------

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

Net unrealized holding loss on debt
  securities                                     -         (68)          (68)

Net income                                      19       1,787         1,806

Cash distributions                             (19)     (2,802)       (2,821)
                                             -----    --------      --------
Balance at July 31, 1996                         1      29,161        29,162

Net unrealized holding gain on debt
  securities                                     -         193           193

Net income                                      17       1,692         1,709

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

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















                           See accompanying notes.

<PAGE>


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

                            STATEMENTS OF CASH FLOWS
                For the years ended July 31, 1997, 1996 and 1995
                Increase (Decrease) in Cash and Cash Equivalents
                                 (In thousands)

                                                 1997         1996      1995
                                                 ----         ----      ----
Cash flows from operating activities:
  Net income                                   $ 1,709     $ 1,806    $ 1,898
  Adjustments to reconcile net income to net
   cash provided by operating activities:
     Amortization expense                           84          84         84
     Amortization of discount/premium on
         mortgage securities                        17          17         17
     Changes in assets and liabilities:
      Interest and other receivables                 7          10          7
      Accounts payable - affiliates                 (1)         (4)        (2)
      Accounts payable and accrued expenses        (12)         15          3
                                               -------     -------    -------
         Total adjustments                          95         122        109
                                               -------     -------    -------
         Net cash provided by 
           operating activities                  1,804       1,928      2,007

Cash flows from investing activities:
  Principal collections on Mortgage-Backed
     Securities                                    953       1,185      1,049
  Principal collections on Participating 
     Insured Mortgage Loans                         77          71         64
                                               -------     -------    -------
         Net cash provided by investing 
           activities                            1,030       1,256      1,113
                                               -------     -------    -------

Cash flows from financing activities:
  Distributions to Unitholders and partners     (5,161)     (2,821)    (2,896)
                                               -------     -------    -------
         Net cash used in financing activities  (5,161)     (2,821)    (2,896)
                                               -------     -------    -------

Net (decrease) increase in cash and cash 
  equivalents                                   (2,327)        363        224

Cash and cash equivalents, beginning of year     3,637       3,274      3,050
                                               -------     -------    -------

Cash and cash equivalents, end of year         $ 1,310     $ 3,637    $ 3,274
                                               =======     =======    =======














                           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.

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, 1997 and 1996 and revenues and expenses for each
of the three  years in the period  ended July 31,  1997.  Actual  results  could
differ from the estimates and assumptions used.

      The  Partnership  accounts for investments 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, 1997 and 1996 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. Information regarding
the fair value of the Partnership's  debt securities is disclosed in Notes 4 and
5. The  related  discounts  or  premiums  for these  GNMA  securities  are being
amortized  using the  straight-line  method,  which  approximates  the effective
interest method, over a period of 15 years.

      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  amount  of  cash  and  cash
equivalents  approximates  fair  value as of July  31,  1997 and 1996 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.
Acquisition fees and expenses are being amortized using the straight-line method
over 15 years (the expected holding period of the investments).

      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.

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.  Certain  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 $175,000,
$184,000 and $193,000 were earned by the General  Partner and its affiliates for
the years ended July 31, 1997, 1996 and 1995, 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 $38,000, $38,000 and
$40,000 for the years ended July 31, 1997, 1996 and 1995, respectively. Accounts
payable - affiliates  at July 31, 1997 and 1996 consists of $29,000 and $30,000,
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,  1997,  1996  and  1995 is  $95,000,  $88,000  and  $100,000,  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 $8,000, $18,000 and $14,000 (included in general and administrative expenses)
for managing the  Partnership's  cash assets during fiscal 1997,  1996 and 1995,
respectively.


<PAGE>


4.    Mortgage-Backed Securities
      --------------------------

      At  July  31,  1997  and  1996  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):
                              July 31, 1997                   July 31, 1996
                    -------------------------------  --------------------------
                     Estimated                        Estimated
                     Market      Face     Amortized   Market   Face    Amortized
     Description     Value       Value    Cost        Value    Value   Cost
     ------------    ------      -----    ----        -----    -----   ----
    9.5% GNMA Pool  $ 1,799    $ 1,664   $ 1,652     $ 2,228 $ 2,071   $ 2,055

    9.0% GNMA Pool      268        260       270         362     347       358

    8.0% GNMA Pool    3,016      2,907     3,037       3,363   3,326     3,468

    7.5% GNMA Pool      296        290       287         327     330       328
                    -------    -------   -------     ------- -------   -------
                    $ 5,379    $ 5,121   $ 5,246     $ 6,280 $ 6,074   $ 6,209
                    =======    =======   =======     ======= =======   =======

      As discussed further in Note 2, the  Partnership's  investments in MBS are
carried  at fair  value as of July 31,  1997 and  1996.  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,  1997  and 1996 are  comprised  of the  following  (in
thousands):

                                        July 31, 1997         July 31, 1996
                                    --------------------   -------------------
    GNMA                            Estimated              Estimated
    Certificate           Interest  Market     Amortized   Market    Amortized
    Number    Property    Rate      Value       Cost       Value      Cost
    ------    --------    ----      -----       ----       -----      ----

    279985  Quarter Mill  8.50%    $  7,417    $  7,166    $  7,441  $  7,198
    279119  Emerald Cove  8.75%      11,169      10,645      11,098    10,697
                                   --------    --------    --------  --------
                                   $ 18,586    $ 17,811    $ 18,539  $ 17,895
                                   ========    ========    ========  ========

      As  discussed  further  in  Note  2,  the  Partnership's   investments  in
Participating  Insured  Mortgage  Loans are carried at fair value as of July 31,
1997 and 1996.  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 the reported  financial results
of the  underlying  properties  and 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:

      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 $53,533 are due through maturity,
on October 15,  2031.  Scheduled  principal  repayments  of  $150,236  have been
received through July 31, 1997.

      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.  The premium is being amortized on the
straight-line  method, which approximates the effective interest method, over 15
years.  Monthly  payments of  principal  and  interest  totalling  approximately
$81,114  are due  through  maturity,  on August 15,  2031.  Scheduled  principal
repayments of $196,367 have been received through July 31, 1997.

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 may 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  will  have  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  will  be  evidenced  by  a
Subordinated Promissory Note of such project owner which will in turn be secured
by a second mortgage on the applicable Project.  The obligations of each project
owner to pay  Contingent  Interest is or will be 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 1997,  1996 and 1995, the  Partnership  received  approximately  $49,000,
$46,000 and  $37,000,  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 1997, 1996 and 1995 statements of income. No
amounts of Contingent Interest were received prior to fiscal 1995.

      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,  1997,  the  Partnership  distributed  $488,000  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, 1997.



<PAGE>

<TABLE>


Schedule IV - Investments in Mortgage Loans on Real Estate

                                        PAINEWEBBER INSURED MORTGAGE PARTNERS 1-B, L.P.
                                                         July 31, 1997
                                                        (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        $  7,166        $  7,417        N/A
Apartment Complex                                            principal payable
Richmond, VA                                                 monthly ($53,533)
Pool #279985                                                 through maturity.


Emerald Cove Apts.     8.75%          8/15/2031              Interest and          10,587          11,169        N/A
Apartment Complex                                            principal payable
Charlotte, NC                                                monthly ($81,114)
Pool #279119                                                 through maturity.
                                                                                 --------        --------
TOTALS                                                                           $ 17,753        $ 18,586
                                                                                 ========        ========


                                                  1997              1996            1995
                                                  ----              ----            ----

   Balance at beginning of year                 $18,539           $18,639           $18,374
     Collections of principal                       (77)              (71)              (64)
     Amortization of premium                         (7)               (7)               (7)
     Net unrealized holding gains (losses)          131               (22)              336
                                                -------           -------           -------
   Balance at close of year                     $18,586           $18,539           $18,639
                                                =======           =======           =======
</TABLE>