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 MARCH 31, 1999

                                       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: 0-15705

               PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
              -----------------------------------------------------
             (Exact name of registrant as specified in its charter)

            Virginia                                           04-2918819
            --------                                           ----------
(State or other jurisdiction of                             (I.R.S. Employer
incorporation or organization)                              Identification No.)

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

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

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

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

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

                          UNITS OF LIMITED PARTNERSHIP INTEREST
                                     (Title of class)

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

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

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

                            DOCUMENTS INCORPORATED BY REFERENCE
Documents                                                   Form 10-K Reference
---------                                                   -------------------
Prospectus of registrant
dated July 21, 1986, as supplemented                        Part IV

Current Report on Form 8-K of
registrant,  dated July 2, 1998                             Part IV

Current Report on Form 8-K of
registrant, dated November 20, 1998                         Part IV

Current Report on Form 8-K of
registrant, dated December 21, 1998                         Part IV

Current Report on Form 8-K of
registrant, dated May 14, 1999                              Part IV

<PAGE>
                   PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
                                      1999 FORM 10-K

                                    TABLE OF CONTENTS


Part   I                                                                Page

Item  1     Business                                                    I-1

Item  2     Properties                                                  I-3

Item  3     Legal Proceedings                                           I-4

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


Part  II

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

Item  6     Selected Financial Data                                     II-1

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

Item 7A     Market Risk Disclosures                                     II-9

Item  8     Financial Statements and Supplementary Data                 II-9

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


Part III

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

Item  11    Executive Compensation                                      III-2

Item  12    Security Ownership of Certain Beneficial Owners
               and Management                                           III-2

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-37


<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-7 of
this Form 10-K.

                                     PART I

Item 1.  Business

      PaineWebber Equity Partners Two Limited Partnership (the "Partnership") is
a  limited  partnership  formed  on May 16,  1986,  under  the  Uniform  Limited
Partnership Act of the State of Virginia to invest in a diversified portfolio of
existing, newly-constructed or to-be-built income-producing real properties such
as  apartments,  shopping  centers,  hotels,  office  buildings  and  industrial
buildings.  The  Partnership  had  authorized  the  issuance  of  a  maximum  of
150,000,000  Partnership  Units  (the  "Units")  at $1 per Unit,  pursuant  to a
Registration  Statement  on Form S-11  filed  under the  Securities  Act of 1933
(Registration  No.  33-5929).  On June 2,  1988,  the  offering  of Units in the
Partnership was completed and gross proceeds of  $134,425,741  had been received
by the Partnership. Limited Partners will not be required to make any additional
capital contributions.

      As of  March  31,  1999  the  Partnership  owned,  through  joint  venture
partnership,  interests in the operating  properties  set forth in the following
table, which consisted of one commercial office building and two retail shopping
centers.
<TABLE>
<CAPTION>

Name of Joint Venture                             Date of
Name and Type of Property                         Acquisition    Type of
Location                            Size          of Interest    Ownership (1)
-------------------------           ----          -----------    ------------------------
<S>                                 <C>            <C>            <C>

Chicago-625 Partnership            .38 acres;      12/16/86       Fee ownership of land
625 North Michigan Avenue          324,829 net                    and improvements
Office Tower                       leasable                       (through joint venture)
Chicago, Illinois                  square feet

Daniel/Metcalf Associates          19 acres;       9/30/87        Fee ownership of land
  Partnership                      142,363 net                    and improvements
Gateway Plaza Shopping             leasable                       (through joint venture)
 Center                            square feet
Overland Park, Kansas

West Ashley Shoppes Associates     17.25 acres;   3/10/88         Fee   ownership   of land
West Ashley Shoppes                134,406 net                    and improvements
Charleston, South Carolina         leasable                       (through joint venture)
                                   square feet
</TABLE>


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

      Originally,   the   Partnership   had   interests  in  ten  joint  venture
partnerships.  On November 2, 1995,  the joint  venture which owned the Richmond
Park Apartments and Richland  Terrace  Apartments sold the properties to a third
party for $11 million. The Partnership received net proceeds of approximately $8
million after deducting closing costs, the  co-venturer's  share of the proceeds
and repayment of a $2 million loan which  encumbered the property.  In addition,
on  December  29,  1995 the joint  venture  which  owned the  Treat  Commons  II
Apartments sold the property to a third party for  approximately  $12.1 million.
The  Partnership  received net  proceeds of  approximately  $4.1  million  after
deducting  closing  costs and the  repayment  of the existing  mortgage  note of
approximately  $7.3 million.  On May 31, 1990,  the joint venture that owned the
Highland  Village  Apartments  sold the  property at a gross sales price of $8.5
million.  Net proceeds from the sale were split between the  Partnership and its
co-venture partner, with the Partnership  receiving  approximately $7.7 million.
Also,  on November  29, 1989,  the  Partnership  entered into an agreement  with
Awbrey's Road II Associates Limited  Partnership (ARA) to sell the rights to its
interest in Ballston  Place - Phase II  Associates  which was to own and operate
Ballston  Place - Phase II, an apartment  complex in  Arlington,  Virginia.  The
Partnership received the $9 million which had been funded into escrow during the
construction phase of the project. In addition, the Partnership received certain
other compensation in connection with this transaction.

      On July 2, 1998, Richmond Gables Associates,  a joint venture in which the
Partnership  had an  interest,  sold the  property  known as The  Gables at Erin
Shades Apartments located in Richmond, Virginia, to an unrelated third party for
$11.5 million. The Partnership received net proceeds of approximately $5,153,000
after  deducting  closing costs of  approximately  $286,000,  closing  proration
adjustments of  approximately  $33,000,  the repayment of the existing  mortgage
note of  approximately  $4,977,000  and a  prepayment  penalty of  approximately
$472,000 and a payment of approximately $579,000 to the Partnership's co-venture
partner for its share of the sale proceeds in accordance  with the joint venture
agreement.

      On November 20, 1998,  Hacienda Park Associates,  a joint venture in which
the  Partnership  had an interest,  sold the  Hacienda  Business  Park  property
located in Pleasanton,  California, to an unrelated third party for $25 million.
The Hacienda Park property  consisted of one building  known as Saratoga  Center
and two attached buildings known as Gibraltar Center.  The Partnership  received
net proceeds of  approximately  $20,861,000  after  deducting  closing  costs of
approximately  $278,000,  net closing  proration  adjustments  of  approximately
$89,000,  the repayment of the existing  first  mortgage  note of  approximately
$3,769,000 and accrued interest of approximately $3,000.

      On December 21, 1998, Atlanta Asbury Partnership, a joint venture in which
the Partnership  had an interest,  sold the property known as the Asbury Commons
Apartments located in Atlanta,  Georgia, to an unrelated third party for $13.345
million. The Partnership received net proceeds of approximately $5,613,000 after
deducting closing costs of approximately $291,000, closing proration adjustments
of  approximately  $90,000,  the  repayment  of the  existing  mortgage  note of
approximately  $6,598,000,  accrued  interest  of  approximately  $10,000  and a
prepayment penalty of approximately  $743,000.  The Partnership received 100% of
the net sale  proceeds  in  accordance  with  the  terms  of the  joint  venture
agreement.

      In addition,  subsequent to year-end, on May 14, 1999, West Ashley Shoppes
Associates,  a joint venture in which the Partnership had an interest,  sold the
property known as West Ashley Shoppes located in Charleston,  South Carolina, to
an unrelated third party, for $8.1 million. On May 12, 1999, West Ashley Shoppes
Associates  had sold an adjacent  outparcel of land to another  unrelated  third
party for $280,000.  The May 14  transaction  involved the remaining real estate
owned by the joint  venture.  Accordingly,  the joint venture will be liquidated
once the final  operating  expenses  have been paid and the  remaining  net cash
assets have been distributed to the Partnership.  The Partnership received total
net proceeds from the two sale  transactions of  approximately  $8,070,000 after
deducting  closing  costs of  approximately  $225,000 and net closing  proration
adjustments of approximately $85,000.

      The Partnership's  investment objectives are to invest the proceeds raised
from the offering of limited  partnership  units in a  diversified  portfolio of
income-producing properties in order to:

(1)   preserve and protect Limited Partners' capital;
(2)   provide the Limited Partners with quarterly cash distributions,  a portion
      of which will be sheltered from current federal income tax liability; and
(3)   achieve long-term capital  appreciation in the value of the  Partnership's
      investment properties.

      Through March 31, 1999, the Limited Partners had received  cumulative cash
distributions totalling approximately $117,129,000,  or $901 per original $1,000
investment  for the  Partnership's  earliest  investors.  This  return  includes
distributions  of $38  per  original  $1,000  investment  from  the  sale of the
Richland  Terrace  Apartments and Richmond Park Apartments in November 1995, $23
per original $1,000  investment from the sale of the Treat Commons II Apartments
in  December  1995,  $57 per  original  $1,000  investment  from the sale of the
Highland Village Apartments in May 1990, $39 per original $1,000 investment from
the sale of The Gables at Erin Shades Apartments in July 1998, $145 per original
$1,000  investment from the sale of the Hacienda  Business Park in November 1998
and $48 per original  $1,000 from the sale of the Asbury  Commons  Apartments in
December  1998.  In  addition,  subsequent  to  year-end,  on June 15,  1999 the
Partnership  made a special  capital  distribution  of $61 per  original  $1,000
investment  which  represented the net proceeds from the sale of the West Ashley
Shoppes property. The proceeds of the Ballston Place transaction described above
were  retained by the  Partnership  to pay down debt and to bolster  reserves in
light of expected  future  capital  needs.  The  remaining  cash  distributions,
totalling $551.25 per original $1,000 investment for the Partnership's  earliest
investors,  have been from net rental income, and a substantial  portion of such
distributions  has been sheltered from current federal income tax liability.  As
reported  in the  Partnership's  Quarterly  Report on Form 10-Q for the  quarter
ended  December  31,  1998,  the sales of Asbury  Commons  Apartments,  Hacienda
Business Park and The Gables Apartments  significantly reduced the distributable
cash flow to be received by the Partnership during fiscal 1999. As a result, the
payment of a regular quarterly distribution has been discontinued beginning with
the quarter  ended March 31,  1999.  The final  regular  quarterly  distribution
payment was made on February 12, 1999 for the quarter ended December 31, 1998.

      The Partnership's  success in meeting its capital  appreciation  objective
will depend upon the proceeds  received  from the final  liquidation  of the two
remaining  investments.  The amount of such proceeds will ultimately depend upon
the  value  of the  underlying  investment  properties  at  the  time  of  their
liquidation, which cannot presently be determined.  Management has been focusing
on  potential  disposition  strategies  for  the  remaining  investments  in the
Partnership's  portfolio.  Subsequent  to the sale of West Ashley  Shoppes,  the
remaining  investments  consist of joint venture  interests in the Gateway Plaza
Shopping  Center  and  the 625  North  Michigan  Office  Building.  Although  no
assurances  can  be  given,  it is  currently  contemplated  that  sales  of the
Partnership's  remaining assets, which would be followed by a liquidation of the
Partnership, could be completed by the end of calendar year 1999.

      Both of the Partnership's  remaining investment  properties are located in
real estate markets in which they face significant  competition for the revenues
they generate. The Partnership's shopping center and office building compete for
long-term commercial tenants with numerous projects of similar type generally on
the basis of price, location and tenant improvement allowances.

      The  Partnership  has no real  property  investments  located  outside the
United States.  The Partnership is engaged solely in the business of real estate
investment, therefore presentation of information about industry segments is not
applicable.

      The  Partnership  has no  employees;  it  has,  however,  entered  into an
Advisory  Contract with  PaineWebber  Properties  Incorporated  (the "Adviser"),
which is  responsible  for the  day-to-day  operations of the  Partnership.  The
Adviser is a wholly-owned  subsidiary of  PaineWebber  Incorporated  ("PWI"),  a
wholly-owned subsidiary of PaineWebber Group Inc.
("PaineWebber").

      The general  partners of the  Partnership  (the  "General  Partners")  are
Second Equity Partners, Inc., and Properties Associates 1986, L.P. Second Equity
Partners,  Inc. (the "Managing General Partner"),  a wholly-owned  subsidiary of
PaineWebber  Group Inc.  is the  managing  general  partner of the  Partnership.
Properties  Associates 1986, L.P. (the "Associate General Partner"),  a Virginia
limited partnership,  certain limited partners of which are also officers of the
Managing  General Partner and the Adviser,  is the associate  general partner of
the Partnership.

      The terms of  transactions  between the  Partnership and affiliates of the
Managing  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

      As of March 31, 1999,  the  Partnership  had interests in three  operating
properties through joint venture partnerships.  These joint venture partnerships
and the related properties are referred to under Item 1 above to which reference
is made for the name, location and description of each property.

      Occupancy  figures  for each fiscal  quarter  during  1999,  along with an
average  for the  year,  are  presented  below  for each  property  in which the
Partnership had an interest during fiscal 1999.

                                             Percent Occupied At
                                ------------------------------------------------
                                                                        Fiscal
                                                                        1999
                                 6/30/98     9/30/98  12/31/98  3/31/99 Average
                                 -------     -------  --------  ------- -------

625 North Michigan Avenue         95%         95%        96%     93%     95%

Gateway Plaza Shopping Center     94%         94%        95%     87%     93%

West Ashley Shoppes (1)           95%         95%        95%     98%     96%

The Gables at Erin Shades (2)     93%         N/A        N/A     N/A     N/A

Saratoga Center & EG&G Plaza (3)  90%         95%        N/A     N/A     N/A

Asbury Commons Apartments (4)     92%         93%        N/A     N/A     N/A

(1) The property was sold subsequent to year-end,  on May 14, 1999, as described
    in Item 1.

(2) The property was sold on July 2, 1998, as described in Item 1.

(3) The property was sold on November 20, 1998, as described in Item 1.

(4) The property was sold on December 21, 1998, as described in Item 1.

Item 3.  Legal Proceedings

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

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

      None.


<PAGE>

                                     PART II


Item 5. Market for the Partnership's  Limited Partnership  Interests and Related
Security  Holder  Matters

     At  March  31,  1999,  there  were  8,251  record  holders  of Units in the
Partnership.  There is no public market for the Units, and it is not anticipated
that a public  market for the Units will  develop.  Upon  request  the  Managing
General  Partner will  endeavor to assist a Unitholder  desiring to transfer his
Units and may utilize the services of PWI in this  regard.  The price to be paid
for the Units will be subject to  negotiation  by the  Unitholder.  The Managing
General Partner will not redeem or repurchase Units.

     Reference  is made to Item 6 below for a discussion  of cash  distributions
made to the Limited Partners during fiscal 1999.

Item 6. Selected  Financial Data

              PaineWebber Equity Partners Two Limited Partnership
         For the years ended March 31, 1999, 1998, 1997, 1996 and 1995
                    (in thousands, except for per Unit data)


                                            Years ended March 31,
                          -----------------------------------------------------
                           1999 (1)     1998    1997 (2)    1996      1995
                           -------      ----    --------    ----      ----

Revenues                   $  5,754  $  5,487  $   5,369  $  5,069  $  4,729

Operating loss             $ (1,262) $   (991) $  (3,667) $ (1,508) $ (2,229)

Partnership's share of
  unconsolidated
  ventures' income         $    657  $    728  $     383  $    185  $  1,818

Partnership's share of
  loss on impairment
  of operating
  investment property      $ (2,517)        -          -         -         -

Interest income on note
  receivable from
  unconsolidated venture          -         -          -  $     80  $    107

Gain on sale of operating
  investment properties    $  9,930         -          -         -         -

Partnership's share of
  gains on sale of
  unconsolidated operating
  investment properties    $  6,031         -          -  $  6,766         -

Net income (loss)          $ 13,170  $   (263) $  (3,266) $  5,523  $   (304)

Per 1,000 Limited
 Partnership Units:
   Net income (loss)       $  97.00  $  (1.94) $  (24.04) $  40.68  $  (2.26)

   Cash distributions
    from operations        $   8.84  $   8.84  $    8.84  $  16.52  $  34.20

   Cash distributions
   from sale
   transactions            $ 232.00         -          -  $  61.00         -

Long-term debt             $  9,132  $ 21,540  $  21,947  $ 22,315  $ 22,635

Total assets               $ 39,989  $ 72,274  $  74,278  $ 78,722  $ 84,148

(1)   The Partnership's net income for the year ended March 31, 1999 includes an
      impairment loss of $2,517,000 related to the operating investment property
      owned by the unconsolidated Gateway Plaza joint venture. See Note 5 to the
      accompanying  financial  statements  for  a  further  discussion  of  this
      write-down.

(2)   The  Partnership's  operating  loss for  fiscal  1997  reflects  a loss of
      $2,700,000  recognized to reflect an  impairment in the carrying  value of
      one of the consolidated operating investment properties. See Note 4 to the
      accompanying financial statements for a further discussion.

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

      The above per 1,000 Limited  Partnership  Units  information is based upon
the 134,425,741 Limited Partnership Units outstanding during each year.

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

Information Relating to Forward-Looking Statements
--------------------------------------------------

      The following  discussion of financial condition includes  forward-looking
statements  which  reflect  management's  current  views with  respect to future
events and  financial  performance  of the  Partnership.  These  forward-looking
statements  are  subject to certain  risks and  uncertainties,  including  those
identified below under the heading  "Certain Factors  Affecting Future Operating
Results," which could cause actual results to differ  materially from historical
results or those anticipated.  The words "believe," "expect,"  "anticipate," and
similar expressions identify forward-looking  statements.  Readers are cautioned
not to place undue reliance on these forward-looking statements, which were made
based on facts and conditions as they existed as of the date of this report. The
Partnership   undertakes  no  obligation  to  publicly   update  or  revise  any
forward-looking  statements,  whether  as a result  of new  information,  future
events or otherwise.

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

      The  Partnership  commenced an offering to the public on July 21, 1986 for
up to 150,000,000 units (the "Units") of limited partnership interest (at $1 per
Unit)  pursuant to a  Registration  Statement  filed under the Securities Act of
1933. The  Partnership  raised gross proceeds of  $134,425,741  between July 21,
1986 and June 2, 1988.  The  Partnership  also received  proceeds of $23 million
from the  issuance of zero coupon  loans.  The loan  proceeds,  net of financing
expenses  of  approximately   $908,000,  were  used  to  pay  the  offering  and
organization  costs,  acquisition fees and  acquisition-related  expenses of the
Partnership  and to  fund  the  Partnership's  cash  reserves.  The  Partnership
originally invested approximately  $132,200,000 (net of acquisition fees) in ten
operating properties through joint venture investments.  Through March 31, 1999,
seven of these investments had been sold, including three during fiscal 1999. In
addition,  subsequent  to  year-end,  on May 14,  1999 the West  Ashley  Shoppes
property was sold, as described  below.  Following  this sale,  the  Partnership
retains an  interest in two  operating  properties,  which  consist of an office
complex  and a  retail  shopping  center.  The  Partnership  does  not  have any
commitments  for  additional  investments  but may be  called  upon to fund  its
portion of operating deficits or capital  improvement costs of its joint venture
investments in accordance with the respective joint venture agreements.

      As previously reported, in light of the continued strength in the national
real estate market and the  improvements  in the  office/R&D  property  markets,
management  believes  that  is an  opportune  time  to  sell  the  Partnership's
remaining  operating  investment  properties.  As a result,  management has been
focusing on potential  disposition  strategies for the remaining  investments in
the Partnership's portfolio.  With regard to the two remaining commercial office
and retail  properties,  the Partnership is working with each property's leasing
and  management  team to develop and  implement  programs  that will protect and
enhance  value and maximize  cash flow at each  property  while at the same time
exploring potential sale opportunities.  Although there are no assurances, it is
currently contemplated that sales of the Partnership's remaining assets could be
completed  prior to the end of calendar year 1999. The sale of the two remaining
real estate investments would be followed by the liquidation of the Partnership.

      On July 2, 1998, Richmond Gables Associates,  a joint venture in which the
Partnership  held an interest,  sold The Gables at Erin Shades  Apartments to an
unrelated  third  party  for  $11,500,000.  After  deducting  closing  costs and
property  adjustments  of $320,000,  The Gables joint venture  received net sale
proceeds  of  $11,180,000.  These  net sale  proceeds  were  split  between  the
Partnership  and its  co-venture  partner  in  accordance  with the terms of The
Gables joint venture  agreement.  The Partnership  received  $10,602,000 and the
non-affiliated  co-venture  partner received $578,000 as their share of the sale
proceeds. From its share of the proceeds, the Partnership prepaid its refinanced
original  zero coupon loan secured by the  property  and the related  prepayment
fee, the sum of which was  $5,449,000.  Despite  incurring a sizable  prepayment
penalty on the repayment of the  outstanding  first  mortgage  loan,  management
believed that a current sale of The Gables property was in the best interests of
the Limited  Partners due to the  exceptionally  strong market  conditions  that
exist at the  present  time and  which  resulted  in the  achievement  of a very
favorable selling price. In addition,  management was concerned that the rate of
job and  population  growth in the  Richmond,  Virginia  area  could  lead to an
increase  in new  development  activity  in the  near  future.  The  Partnership
distributed  the  $5,153,000 of net proceeds from the sale of The Gables,  along
with an amount of cash reserves that exceeded expected future  requirements,  in
the form of a special distribution totalling  approximately  $5,243,000,  or $39
per  original  $1,000  investment,  which was paid on July 20,  1998.  The joint
venture recognized a gain of $6,400,000 on the sale of the Gables property.  The
Partnership's share of such gain amounted to $6,031,000.

      On November 20, 1998,  Hacienda  Park  Associates,  a joint venture in the
Partnership had an interest, sold the Hacienda Business Park property located in
Pleasanton,  California,  to an  unrelated  third  party  for $25  million.  The
Hacienda Park property  consisted of one building  known as Saratoga  Center and
two attached buildings known as Gibraltar Center.  The Partnership  received net
proceeds  of  approximately   $20,862,000   after  deducting  closing  costs  of
approximately  $278,000,  net closing  proration  adjustments  of  approximately
$88,000,  the repayment of the existing  first  mortgage  note of  approximately
$3,769,000 and accrued interest of approximately $3,000. As a result of the sale
of the Hacienda  Park  property,  the  Partnership  made a special  distribution
totalling approximately $19,492,000,  or $145 per original $1,000 investment, on
December 4, 1998.  Approximately  $1,370,000  of the total net proceeds from the
sale of the Hacienda Park property was added to the Partnership's  cash reserves
for potential  investment in 625 North  Michigan  Avenue because of the recently
approved retail development rights for this property. Given the current strength
of the local  Pleasanton  market  conditions,  during the quarter ended June 30,
1998  management  interviewed  potential  real  estate  brokers  and  selected a
national real estate firm that is a leading  seller of R&D/office  properties to
market Hacienda Park for sale. A marketing  package was subsequently  finalized,
and  comprehensive  sales efforts  began in June. As a result of those  efforts,
several offers were received. After completing an evaluation of these offers and
the relative strength of the prospective purchasers, the Partnership selected an
offer.  A purchase and sale  agreement  was signed on September 21, 1998 with an
unrelated  third-party   prospective  buyer  and  a  non-refundable  deposit  of
$1,500,000 was made on October 21, 1998. The prospective buyer completed its due
diligence work in early November and closed on this  transaction on November 20,
1998, as described above.  The Partnership  recorded a gain of $8,389,000 on the
sale of the Hacienda Park operating investment property.

      On December 21, 1998, Atlanta Asbury Partnership, a joint venture in which
the Partnership  had an interest,  sold the property known as the Asbury Commons
Apartments located in Atlanta,  Georgia, to an unrelated third party for $13.345
million. The Partnership received net proceeds of approximately $5,613,000 after
deducting closing costs of approximately $291,000, closing proration adjustments
of  approximately  $90,000,  the  repayment  of the  existing  mortgage  note of
approximately  $6,598,000,  accrued  interest  of  approximately  $10,000  and a
prepayment  penalty  of  approximately  $743,000.  Despite  incurring  a sizable
prepayment  penalty on the repayment of the  outstanding  first  mortgage  loan,
management  believed that a current sale of the Asbury  Commons  property was in
the best  interests  of the Limited  Partners  due to the  exceptionally  strong
market  conditions  that exist at the present time and which  resulted in a very
favorable sale price.  As previously  reported,  the  Partnership had selected a
regional  real  estate  firm  with a  strong  background  in  selling  apartment
properties to market the Asbury Commons  property for sale. Sales materials were
finalized  and an extensive  marketing  campaign  began in September  1998. As a
result of these sale efforts,  seven offers were received.  After  completing an
evaluation  of  these  offers  and  the  relative  strength  of the  prospective
purchasers,  the  Partnership and its co-venture  partner  selected an offer and
negotiated a purchase and sale  agreement.  A purchase  and sale  agreement  was
signed on November 9, 1998, and the buyer made a deposit of $250,000.  After the
completion of the buyer's due  diligence,  the  transaction  closed as described
above on December 21, 1998. The Partnership recorded a gain of $1,541,000 on the
sale of the  Asbury  Commons  operating  investment  property.  The  Partnership
distributed the net proceeds from the sale of the Asbury Commons property in the
form of a special capital distribution of approximately  $6,453,000,  or $48 per
original $1,000  investment,  paid on February 12, 1999,  along with the regular
quarterly  distribution  for the quarter ended  December 31, 1998.  This special
distribution  included $42.18 per original $1,000  investment,  or approximately
$5,613,000,  of net sale  proceeds from the sale of Asbury  Commons,  along with
$5.82  per  original  $1,000  investment,   or  approximately  $840,000,   which
represented $783,000 of property escrows received subsequent to the November 20,
1998 sale of Hacienda  Business  Park and $57,000 of  Partnership  reserves that
exceeded  expected  future  requirements.  With the sale of the  Asbury  Commons
Apartments,  Hacienda Business Park and The Gables Apartments  properties during
fiscal  1999  and the  resulting  reduction  in  distributable  cash  flow to be
received by the Partnership, the payment of a regular quarterly distribution was
discontinued  beginning  with the quarter  ended March 31, 1999. A final regular
quarterly  distribution  of $2.21 per  original  $1,000  investment  was made on
February 12, 1999 for the quarter ended December 31, 1998.

      Subsequent to year-end, on May 14, 1999, West Ashley Shoppes Associates, a
joint venture in which the Partnership had an interest,  sold the property known
as West Ashley Shoppes located in Charleston,  South  Carolina,  to an unrelated
third party, for $8.1 million. In addition, on May 12, 1999, West Ashley Shoppes
Associates  had sold an adjacent  outparcel of land to another  unrelated  third
party for $280,000.  The May 14  transaction  involved the remaining real estate
owned by the joint  venture.  Accordingly,  the joint venture will be liquidated
once the final  operating  expenses  have been paid and the  remaining  net cash
assets have been distributed to the Partnership.  The Partnership received total
net proceeds from the two sale  transactions of  approximately  $8,070,000 after
deducting  closing  costs of  approximately  $225,000 and net closing  proration
adjustments of  approximately  $85,000.  As previously  reported,  with a strong
occupancy level and a stable base of tenants,  the  Partnership  believed it was
the opportune time to sell West Ashley Shoppes.  As part of a plan to market the
property for sale, the Partnership  selected a national real estate firm that is
a  leading  seller of this  property  type.  Preliminary  sales  materials  were
prepared and initial marketing efforts were undertaken.  A marketing package was
then  finalized  and  comprehensive  sale efforts  began in November  1998. As a
result  of  these  efforts,  ten  offers  were  received.  After  completing  an
evaluation  of  those  offers  and  the  relative  strength  of the  prospective
purchasers, the Partnership selected an offer. A purchase and sale agreement was
negotiated with an unrelated third-party  prospective buyer and a non-refundable
deposit of  $150,000  was made on  January  29,  1999.  This  prospective  buyer
completed its due diligence  review work and the  transaction  closed on May 14,
1999, as described  above. As a result of the sale of West Ashley  Shoppes,  the
Partnership made a Special Distribution of approximately  $8,200,000, or $61 per
original $1,000 investment, on June 15, 1999 to unitholders of record on May 14,
1999. The  Partnership  will recognize a gain of  approximately  $2.5 million in
fiscal 2000 in connection with the sale of the West Ashley Shoppes property.

      Gateway  Plaza  Shopping  Center,  a 143,300  square foot retail  property
located in Overland Park (Kansas City),  Kansas, was 87% leased and 81% occupied
at March 31, 1999.  This compared with 95% leased and occupied at the end of the
prior quarter and 91% leased and 89% occupied one year ago. Approximately 19,000
square  feet in 5 shop  spaces  remains to be leased.  As  reported in the third
quarter report, the tenant that operated the 13,000 square foot Alpine Hut store
at Gateway Plaza closed its business at the end of January 1999.  The property's
leasing team has been actively  negotiating  with  prospective  tenants to lease
this  space and has signed  leases  with 2 new  tenants to occupy  approximately
8,000 square feet of the 13,000 square foot total. One of these new tenants will
operate a 5,967 square foot delicatessen  which is expected to open in September
1999.  The other is an existing  tenant which will expand into 2,231 square feet
of the former  Alpine Hut space by July 31, 1999.  This tenant has also expanded
into an additional 780 square feet of previously vacant space. During the fourth
quarter of fiscal 1999, a tenant which  operated a 7,830 square foot men's store
exercised  their  option to close its store at  Gateway  Plaza.  The  property's
leasing team continues to pursue prospective  tenants for this vacant space. The
property's  leasing  team is also  working on lease  renewals  with two  tenants
occupying a total of 3,627 square feet. Both are expected to sign these renewals
during the first  quarter of fiscal  2000.  Over the next twelve  months,  three
leases representing a total of 15,510 square feet are scheduled to expire.

      As  previously  reported,  during fiscal 1999 the  Partnership  selected a
national  real estate  firm that is a leading  seller of this  property  type to
market  Gateway Plaza for sale.  Preliminary  sales  materials were prepared and
initial marketing efforts were undertaken in March 1999. A marketing package was
then finalized and  comprehensive  sale efforts began in early April 1999. As of
April 30, 1999, four offers were received. To reduce the prospective buyer's due
diligence work and the time required to complete it, updated  operating  reports
as well as  environmental  information  on the property were provided to the top
prospective  buyers,  who were  asked to  submit  best and final  offers.  After
completing  an  evaluation  of these  offers and the  relative  strength  of the
prospective  purchasers,  the  Partnership  selected an offer and  negotiated  a
purchase and sale agreement in May 1999.  However,  subsequently the prospective
buyer  decided to  terminate  the sales  contract at the  conclusion  of its due
diligence period. The Partnership is currently in the process of remarketing the
property.  As a result of the  marketing  efforts  undertaken  to date, it would
appear as though the drop in occupancy at Gateway  Plaza during  fiscal 1999 has
adversely  affected  the  property's  market  value.  Consequently,  the venture
recorded a reduction in the net carrying  value of the Gateway  Plaza  operating
property  totalling  $2,517,000 during the current year. This impairment loss is
included in the Partnership's  share of  unconsolidated  ventures' losses on the
accompanying statement of operations for the year ended March 31, 1999. In order
to facilitate a sale  transaction,  on March 29, 1999 the  Partnership  paid the
co-venturer  an  amount  equal  to  $141,000  in  return  for the  co-venturer's
agreement to exit the joint venture.  In connection  with the  transaction,  the
co-venturer  assigned  its  interest  in the  joint  venture  to  Second  Equity
Partners,  Inc.,  the Managing  General  Partner of the  Partnership.  This will
enable the  Partnership  to control  the  marketing  and sales  process  for the
Gateway Plaza property.

      The 625 North  Michigan  Office  Building  in Chicago,  Illinois,  was 95%
leased on average for the year ended March 31, 1999,  up from the average of 88%
achieved for fiscal 1998. Approximately 21,000 square feet in five suites remain
to be leased.  During the fourth  quarter of fiscal 1999, a new tenant  signed a
lease and took occupancy on 1,500 square feet of space. As previously  reported,
during fiscal 1999 an existing tenant that occupied  approximately  8,000 square
feet  relocated and expanded  into a total of 10,200 square feet.  The space was
renovated in  preparation  for the tenant's  occupancy,  which occurred in March
1999. In addition,  two tenants  expanded  their  existing  suites by a total of
2,724 square feet during the fourth quarter.  Over the next year,  twelve leases
representing  a total  of  20,770  square  feet are  scheduled  to  expire.  The
property's  leasing  team  expects that five of these  tenants  occupying  7,817
square  feet will  renew,  and that the  remaining  space  will be leased to new
tenants. The property's leasing team continues to negotiate with two prospective
tenants  that  would  lease a total  of  approximately  6,500  square  feet.  As
previously  reported,  the local market continues to display an improving trend.
In this local market,  where there is no current or planned new  construction of
office  space,  the market  vacancy  level at March 31, 1999 has been reduced to
10.1%,  which places more upward pressure on rental rates.  The higher effective
rents  currently  being  achieved at 625 North  Michigan  Avenue are expected to
increase  cash flow and value as new tenants  sign leases and  existing  tenants
sign lease  renewals in calendar year 1999.  The  Partnership  has been actively
working  with the  co-venture  partner on  potential  redevelopment  and leasing
opportunities with specialty and fashion retailers looking to locate stores near
the building.  These retailers pay significantly higher rental rates than office
rental rates.  Formal approval received from the City Council during fiscal 1999
to enclose  the arcade  sections  of the first  floor will  greatly  improve the
chances of adding a major retail  component  to the  building's  North  Michigan
Avenue  frontage.  Now that this approval has been obtained,  the Partnership is
simultaneously  exploring potential opportunities to sell this property with the
development rights.

      At March 31, 1999, the Partnership and its consolidated  joint venture had
available cash and cash equivalents of approximately  $6,181,000.  Such cash and
cash equivalent amounts will be utilized for the working capital requirements of
the  Partnership,  including  the capital needs of the  Partnership's  remaining
commercial properties (as discussed further above), and for distributions to the
partners.  The source of future  liquidity and  distributions to the partners is
expected to be through  cash  generated  from  operations  of the  Partnership's
income-producing  investment  properties and proceeds  received from the sale or
refinancing  of such  properties.  Such sources of liquidity  are expected to be
sufficient to meet the  Partnership's  needs on both a short-term  and long-term
basis.

      As noted above, the Partnership  expects to be liquidated prior to the end
of calendar year 1999.  Notwithstanding  this, the Partnership  believes that it
has made all necessary  modifications  to its existing systems to make them year
2000 compliant and does not expect that  additional  costs  associated with year
2000  compliance,  if any,  will be  material  to the  Partnership's  results of
operations or financial position.

Results of Operations
1999 Compared to 1998
---------------------

      The Partnership had net income of $13,170,000 for the year ended March 31,
1999 as compared to a net loss of $263,000 in the prior year.  The large  change
in the  Partnership's net operating results is a result of the gains realized on
the sales of three  operating  investment  properties  during  fiscal  1999.  As
discussed  further  above,  the  Partnership  realized gains on the sales of the
consolidated  Hacienda Business Park and Asbury Commons properties of $8,389,000
and $1,541,000,  respectively.  In addition, the Partnership's share of the gain
from  the  sale of the  unconsolidated  Gables  at Erin  Shades  Apartments  was
$6,031,000.

      The  gains  realized  on the  sales  of  the  three  operating  investment
properties were partially offset by an increase in the  Partnership's  operating
loss of  $271,000,  the  Partnership's  share of the fiscal 1999  Gateway  Plaza
impairment  loss of $2,517,000  (as discussed  further above) and an unfavorable
change in the Partnership's share of unconsolidated ventures' income of $71,000.
The  Partnership's  operating  loss  increased  primarily due to the increase in
interest  expense of  $641,000.  Interest  expense  increased as a result of the
prepayment  penalty of $743,000  incurred on the  repayment  of the  outstanding
first  mortgage loan secured by the Asbury Commons  Apartments.  The increase in
interest  expense was  partially  offset by an  increase  in interest  and other
income of  $294,000.  Interest and other  income  increased  due to the interest
income earned on the temporary  investment of the proceeds from the sales of the
three  operating  investment  properties  during fiscal 1999 pending the special
distributions to the Limited Partners. The Partnership's share of unconsolidated
ventures'  income  declined  during fiscal 1999  primarily due to an increase in
interest  expense.  Interest  expense  increased  as a result of the  prepayment
penalty of $472,000  incurred on the repayment of the outstanding first mortgage
loan  secured by The Gables at Erin Shades  Apartments.  In  addition,  interest
expense  increased  at Gateway  Plaza by  $166,000  as a result of  $171,000  of
interest expense being capitalized during the prior year as part of construction
loan  costs.  The  increases  in  interest  expense at The Gables at Erin Shades
Apartments  and at Gateway  Plaza were  partially  offset by an  increase in net
income at 625 North Michigan Avenue.  Net income increased at 625 North Michigan
Avenue due to an increase in rental income and a decrease in real estate taxes.

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

      The  Partnership  reported  a net  loss of  $263,000  for  fiscal  1998 as
compared to a net loss of $3,266,000 in fiscal 1997. This $3,003,000 decrease in
net loss was a result  of a  decrease  in the  Partnership's  operating  loss of
$2,676,000  and  an  increase  in  the  Partnership's  share  of  unconsolidated
ventures'  income of $345,000.  The decrease in operating  loss was  primarily a
result of the  recognition  of an impairment  loss of $2,700,000 on the carrying
value of the  consolidated  West Ashley Shoppes  property during fiscal 1997. In
addition,  rental income and expense  reimbursements from the consolidated joint
ventures  increased by $73,000 and  depreciation  expense  decreased by $64,000.
Rental income and expense reimbursements increased as a result of an increase in
rental income of $54,000 and an increase in expense  reimbursements  of $166,000
at the  Hacienda  Park  joint  venture.  These  increases  were the result of an
increase   in  rental   rates  and  the  timing  of  certain   real  estate  tax
reimbursements and expense escalation  billings.  This increase in rental income
and expense  reimbursements  at Hacienda Park was partially offset by a decrease
in rental  income at Asbury  Commons  of  $125,000  which was  partly  due to an
increase in leasing  concessions granted during fiscal 1998 in order to maintain
occupancy  levels at the property.  Depreciation  expense  decreased mainly as a
result  of a  decrease  in  deprecation  at West  Ashley  Shoppes.  Depreciation
decreased at this consolidated  joint venture due to the lower depreciable basis
of the venture's  operating  property due to the impairment  loss  recognized in
fiscal 1997. The decrease in impairment  loss, the increase in rental income and
expense  reimbursements and the decrease in depreciation  expense were partially
offset by  increases  in  general  and  administrative  and  property  operating
expenses of  $104,000  and  $91,000,  respectively.  General and  administrative
expenses increased primarily due to an increase in certain required professional
fees,  including  legal fees related to the  examination  of potential  recovery
sources for repair costs at the Asbury Commons  Apartments.  Property  operating
expenses  increased  primarily  due to  increases  in  repairs  and  maintenance
expenses at Hacienda Park and West Ashley Shoppes and administrative expenses at
Asbury Commons.  Repairs and maintenance  expense increased at Hacienda Park due
to the  replacement of an aging lawn sprinkler  system.  Repairs and maintenance
increased at West Ashley  Shoppes due to roof repairs.  Administrative  expenses
increased  at Asbury  Commons  mainly as a result of an increase in  advertising
costs.

      The increase in the Partnership's share of unconsolidated ventures' income
of $345,000 was primarily the result of an increase in the  Partnership's  share
of income from the Gateway Plaza Shopping Center (formerly  Loehmann's Plaza) of
$349,000.  The  increase in net income from  Gateway  Plaza was the result of an
increase in rental income of $316,000. Rental income increased mainly due to the
13,410 square foot lease,  representing 9% of the Center's leasable area, signed
with Gateway 2000 Country Stores which took occupancy in June 1997. In addition,
net income  increased at The Gables joint venture by $59,000 during fiscal 1998.
Net income  increased at this joint  venture due to an increase in rental income
resulting  from an  increase  in  average  occupancy  during  fiscal  1998.  The
increases  in net income at Gateway  Plaza  Shopping  Center and The Gables were
partially  offset by a decrease in net income at 625 North  Michigan of $54,000.
Net income at 625 North  Michigan  decreased  as a result of  increases  in real
estate  taxes and repairs and  maintenance  expenses of $147,000  and  $149,000,
respectively.  Real estate  taxes  increased  due to an increase in the assessed
value of the 625  North  Michigan  property.  Repairs  and  maintenance  expense
increased mainly due to the  modernization of the building's  elevator  controls
which was completed during fiscal 1998.

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

      The  Partnership  reported a net loss of  $3,266,000  for the fiscal  year
ended March 31, 1997 as compared to net income of $5,523,000 for the prior year.
This unfavorable change in the Partnership's net operating results was primarily
due to the gains recognized on the sales of the Richland  Terrace/Richmond  Park
and  Treat  Commons  II  properties  during  fiscal  1996  and  the  loss on the
impairment of the West Ashley  Shoppes  property  recognized in fiscal 1997. The
Partnership's  share of the gains on the sale of the  Richland  Terrace/Richmond
Park and Treat Commons II properties in fiscal 1996  (including the write-off of
unamortized excess basis) was $4,344,000 and $2,422,000,  respectively. As noted
above,  during fiscal 1997 the Partnership  recognized an impairment loss on the
carrying value of the consolidated West Ashley Shoppes property of $2,700,000.

      These unfavorable  changes in the Partnership's net operating results were
partially offset by an increase in rental income and expense  reimbursements and
reductions  in  interest  expense  and  property  operating  expenses  from  the
consolidated  joint  ventures,  along with a decline in Partnership  general and
administrative  expenses.  Rental revenues increased primarily due to a $280,000
increase  in income at Hacienda  Park due to an increase in both the  property's
average  occupancy  level and rental rates.  Occupancy at Hacienda Park averaged
100% for fiscal 1997 as compared to 98% for the prior year while the  property's
average  rental rate  increased  substantially  due to the  expansion of a major
tenant and a lease renewal of another major tenant, both at substantially higher
rates.  Small  increases  in  rental  revenues  at the  other  two  consolidated
properties,  Asbury  Commons and West Ashley  Shoppes,  also  contributed to the
increase in total rental  revenues for fiscal 1997.  Interest  expense  declined
mainly  due  to the  write  off  of  certain  unamortized  deferred  loan  costs
attributable  to the pay off zero coupon loans  refinanced  in fiscal 1996.  The
decline in property operating expenses was mainly attributable to a reduction in
repairs and  maintenance  costs at the  consolidated  West Ashley  Shoppes joint
venture. Partnership general and administrative expenses decreased primarily due
to the additional  professional fees incurred in fiscal 1996 associated with the
sales of the Treat Commons,  Richland Terrace and Richmond Park  properties,  as
well as a reduction in certain other  required  professional  fees during fiscal
1997.

      The Partnership's share of unconsolidated  ventures' income, excluding the
gains  recognized  from the sale of  Treat  Commons  II,  Richland  Terrace  and
Richmond Park in fiscal 1996, increased by $198,000 primarily due to an increase
of $81,000 in rental revenues from The Gables  Apartments,  an increase in other
income of  $71,000 at the 625 North  Michigan  joint  venture,  a  reduction  of
$86,000 in interest expense from the Loehmann's Plaza joint venture and declines
in property  operating  expenses  at all three  remaining  unconsolidated  joint
ventures. This favorable change occurred despite the fact that the Partnership's
share of unconsolidated  ventures' income in fiscal 1996 included the operations
of the Richland Terrace and Richmond Park properties which were sold on November
2, 1995 and  Treat  Commons  II which  was sold on  December  29,  1995.  Rental
revenues at The Gables  improved due to increases in both average  occupancy and
rental rates due to  improving  market  conditions.  Rental  revenues  were down
slightly  at both 625 North  Michigan  and  Loehmann's  Plaza due to declines in
occupancy.  The  reduction  in interest  expense at the  Loehmann's  Plaza joint
venture was due to the fact that a portion of the venture's  interest costs were
capitalized  during  fiscal  1997 as a  result  of the  property  expansion  and
renovation  project.  The  declines in property  operating  expenses  included a
$114,000  reduction  in bad debt  expense at  Loehmann's  Plaza,  a decrease  of
$35,000 in repairs and  maintenance  expenses at 625 North Michigan and declines
in salary and utility expenses  totalling  $49,000 at The Gables.  The favorable
changes  in  rental  revenues,  other  income,  interest  expense  and  property
operating  expenses  were  partially  offset by an  increase of $207,000 in real
estate tax expense of the 625 North Michigan joint venture during fiscal 1997.

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

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

      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.

      Effect of Uninsured Loss. The Partnership carries comprehensive liability,
fire,  flood,  extended  coverage and rental loss  insurance with respect to its
properties  with  insured  limits  and  policy  specifications  that  management
believes are customary for similar properties. There are, however, certain types
of  losses  (generally  of  a  catastrophic  nature  such  as  wars,  floods  or
earthquakes) which may be either uninsurable,  or, in management's judgment, not
economically  insurable.  Should an uninsured loss occur, the Partnership  could
lose both its  invested  capital in and  anticipated  profits  from the affected
property.

      Possible Environmental Liabilities. Under various federal, state and local
environmental laws,  ordinances and regulations,  a current or previous owner or
operator of real property may become liable for the costs of the  investigation,
removal and  remediation  of  hazardous or toxic  substances  on,  under,  in or
migrating from such property. Such laws often impose liability without regard to
whether the owner or operator knew of, or was  responsible  for, the presence of
such hazardous or toxic substances.

      The  Partnership is not aware of any  notification by any private party or
governmental  authority  of any  non-compliance,  liability  or  other  claim in
connection  with  environmental  conditions  at any of its  properties  that  it
believes  will  involve  any   expenditure   which  would  be  material  to  the
Partnership,  nor is the Partnership aware of any  environmental  condition with
respect to any of its properties that it believes will involve any such material
expenditure.  However,  there  can  be no  assurance  that  any  non-compliance,
liability, claim or expenditure will not arise in the future.

      Competition. The financial performance of the Partnership's remaining real
estate  investments  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. Limited new construction and healthy economic growth have
significantly  improved the supply and demand  fundamentals for office buildings
in many markets throughout the country over the past year. The commercial office
segment has begun to experience new development activity in selected areas after
several  years of virtually no new supply being added to the market.  The retail
segment of the real estate  market  continues  to suffer from an  oversupply  of
space in many markets  resulting from overbuilding in recent years and the trend
of  consolidations  and bankruptcies  among retailers  prompted by the generally
flat rate of growth in overall retail sales.  There are no assurances that these
competitive  pressures will not adversely  affect the  operations  and/or market
values of the Partnership's investment properties in the future.

      Impact  of  Joint  Venture  Structure.  The  ownership  of  the  remaining
investments through joint venture partnerships could adversely impact the timing
of the Partnership's planned dispositions of its remaining assets and the amount
of  proceeds  received  from  such   dispositions.   It  is  possible  that  the
Partnership's  co-venture  partners  could have  economic or business  interests
which are  inconsistent  with those of the  Partnership.  Given the rights which
both parties have under the terms of the joint venture agreements,  any conflict
between the partners  could result in delays in completing a sale of the related
operating  property and could lead to an impairment in the  marketability of the
property to third  parties for purposes of achieving  the highest  possible sale
price.  In the case of the Gateway Plaza joint venture,  subsequent to year-end,
the Partnership  bought out the subordinated  interest of the co-venture partner
and assigned it to the Managing General Partner of the Partnership. As a result,
no such conflicts should exist on this investment.

      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  properties  at the time of their final  dispositions.  Demand by
buyers of office and retail  properties is affected by many  factors,  including
the size,  quality,  age,  condition and location of the subject  property,  the
quality and stability of the tenant roster,  the terms of any long-term  leases,
potential  environmental  liability concerns,  the existing debt structure,  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.
<PAGE>

Inflation
---------

      The  Partnership  completed  its twelfth full year of operations in fiscal
1999.  The  effects of  inflation  and  changes  in prices on the  Partnership's
operating results to date have not been significant.

      Inflation  in future  periods may  increase  revenues as well as operating
expenses  at the  Partnership's  operating  investment  properties.  Most of the
existing  leases with tenants at the  Partnership's  shopping  center and office
building contain rental escalation and/or expense reimbursement clauses based on
increases  in tenant sales or property  operating  expenses.  Such  increases in
rental income would be expected to at least partially  offset the  corresponding
increases  in  Partnership  and  property   operating  expenses  resulting  from
inflation.  As noted above, the Gateway Plaza and 625 North Michigan  properties
have,  or have had in recent  years,  a  significant  amount of unleased  space.
During  a  period  of  significant   inflation,   increased  operating  expenses
attributable  to  space  which  remained  unleased  at such  time  would  not be
recoverable and would adversely affect the Partnership's net cash flow.

Item 7A.  Market Risk Disclosures

      As  discussed   further  in  the  notes  to  the  accompanying   financial
statements, the Partnership's financial instruments are limited to cash and cash
equivalents  and  mortgage  notes  payable.  The cash  equivalents  are invested
exclusively  in  short-term  money market  instruments  and the  long-term  debt
consists exclusively of fixed rate obligations.  The Partnership does not invest
in derivative financial instruments or engage in hedging transactions.  In light
of these facts, and due to the Partnership's  expected liquidation by the end of
calendar year 1999, management does not believe that the Partnership's financial
instruments have any material exposure to market risk factors.

Item 8.  Financial Statements and Supplementary Data

      The financial statements and supplementary data 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

      The Managing General Partner of the Partnership is Second Equity Partners,
Inc., a Virginia corporation,  which is a wholly-owned subsidiary of PaineWebber
Group,  Inc. The  Associate  General  Partner of the  Partnership  is Properties
Associates 1986, L.P., a Virginia limited partnership,  certain limited partners
of which are also officers of the Managing General Partner. The Managing General
Partner  has  overall  authority  and   responsibility   for  the  Partnership's
operations.

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

Bruce J. Rubin          President and Director                 39    8/22/96
Terrence E. Fancher     Director                               45    10/10/96
Walter V. Arnold        Senior Vice President and Chief
                          Financial Officer                    51    10/29/85
David F. Brooks         First Vice President and
                          Assistant Treasurer                  56    4/17/85  *
Thomas W. Boland        Vice President and Controller          36    12/1/91

*  The date of incorporation of the Managing General Partner.

      (c) There are no other significant  employees in addition to the directors
and executive officers mentioned above.

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

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

     Bruce J. Rubin is President 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 October  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 Senior Vice  President  and Chief  Financial
Officer of the Adviser which he joined in October 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 the
Adviser.  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 an Assistant  Treasurer
of the Adviser which he joined 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.

     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.

     (f) None of the  directors  and officers was 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 March 31, 1999, 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  Partnership's  Managing  General Partner
receive no current or proposed remuneration from the Partnership.

     The General  Partners are entitled to receive a share of  Partnership  cash
distributions  and a share of profits and losses.  These items are  described in
Item 13.

     The  Partnership  paid cash  distributions  to the  Limited  Partners  on a
quarterly basis at a rate of 5.25% per annum on invested capital from January 1,
1991  through the  quarter  ended June 30, 1994 and at a rate of 2% per annum on
invested  capital from July 1, 1994 through  September 30, 1995.  Effective with
the payment for the quarter ended December 31, 1995, the annualized distribution
rate was reduced to 1% on a Limited Partner's  remaining capital account,  where
it remained  through the quarter  ended  December 31, 1998.  The sales of Asbury
Commons  Apartments,  Hacienda  Business Park and The Gables  Apartments  during
fiscal 1999 significantly  reduced the distributable cash flow to be received by
the Partnership.  As a result,  the payment of a regular quarterly  distribution
has been discontinued beginning with the quarter ended March 31, 1999. The final
regular  quarterly  distribution  payment was made on February  12, 1999 for the
quarter  ended  December  31,  1998.  Furthermore,   the  Partnership's  Limited
Partnership  Units  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  Units of  limited
partnership  interest,  not voting securities.  All the outstanding stock of the
Managing  General  Partner,  Second  Equity  Partners  Fund,  Inc.  is  owned by
PaineWebber. Properties Associates 1986, L.P., the Associate General Partner, is
a Virginia  limited  partnership,  certain  limited  partners  of which are also
officers of the Managing  General  Partner.  No limited  partner 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,  nor any limited partner of
the Associate 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

     All  distributable  cash,  as  defined,  for  each  fiscal  year  shall  be
distributed  quarterly in the ratio of 99% to the Limited Partners and 1% to the
General  Partners until the Limited  Partners have received an amount equal to a
7.5% noncumulative  annual return on their adjusted capital  contributions.  The
General  Partners  will then receive  distributions  until they have received an
amount equal to 1.01% of total  distributions  of  distributable  cash which has
been made to all  partners and PWPI has received an amount equal to 3.99% of all
distributions  to all  partners.  The  balance  will be  distributed  95% to the
Limited Partners,  1.01% to the General Partners and 3.99% to PWPI.  Payments to
PWPI  represent  asset  management  fees for PWPI's  services  in  managing  the
business of the Partnership.  No management fees were earned for the fiscal year
ended March 31, 1999. All sale or  refinancing  proceeds shall be distributed in
varying  proportions  to the Limited and General  Partners,  as specified in the
amended Partnership Agreement.

      All taxable  income (other than from a Capital  Transaction)  in each year
will be allocated to the Limited Partners and the General Partners in proportion
to the amounts of  distributable  cash  distributed to them (excluding the asset
management fee) in that year or, if there are no  distributions of distributable
cash, 98.95% to the Limited Partners and 1.05% to the General Partners.  All tax
losses (other than from a Capital  Transaction)  will be allocated 98.95% to the
Limited Partners and 1.05% to the General  Partners.  Taxable income or tax loss
arising from a sale or refinancing of investment properties will be allocated to
the Limited  Partners and the General  Partners in  proportion to the amounts of
sale or  refinancing  proceeds  to which they are  entitled;  provided  that the
General Partners shall be allocated at least 1% of taxable income arising from a
sale or refinancing.  If there are no sale or refinancing proceeds,  tax loss or
taxable  income  from a sale or  refinancing  will be  allocated  98.95%  to the
Limited  Partners  and  1.05%  to  the  General  Partner.   Allocations  of  the
Partnership's  operations  between the General Partners and the Limited Partners
for  financial  accounting  purposes  have  been  made in  conformity  with  the
allocations of taxable income or tax loss.

      The Managing  General  Partner and its affiliates are reimbursed for their
direct expenses  relating to the offering of Units,  the  administration  of the
Partnership and the acquisition  and operations of the  Partnership's  operating
property investment.

      An affiliate of the Adviser 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 March 31,
1999 is $236,000,  representing reimbursements to this affiliate of the Managing
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 $21,000  included in general and  administrative  expenses  for  managing the
Partnership's  cash assets during fiscal 1999. 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 the
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 on the accompanying index to exhibits at page IV-3 are
             filed as part of this Report.

   (b)  No  reports on Form 8-K were  filed  during  the last  quarter of fiscal
        1998. However, a Current Report on Form 8-K dated May 14, 1999 was filed
        by the  Partnership  subsequent  to  year-end to report the sale of West
        Ashley Shoppes and is hereby incorporated herein by reference.

   (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 EQUITY PARTNERS
                                 TWO LIMITED PARTNERSHIP


                                 By: Second Equity 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:  June 28, 1999

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



By:/s/ Bruce J. Rubin                     Date: June 28 , 1999
   ---------------------------                  --------------
   Bruce J. Rubin
   Director




By:/s/ Terrence E. Fancher                Date: June 28, 1999
   ---------------------------                  -------------
   Terrence E. Fancher
   Director


<PAGE>


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

                    PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP


                                INDEX TO EXHIBITS
<TABLE>
<CAPTION>
                                                     Page Number in the Report
Exhibit No.   Description of Document                Or Other Reference
<S>           <C>                                    <C>

(3) and (4)   Prospectus of the Partnership          Filed with the Commission pursuant
              dated July 21, 1986, as                to Rule 424(c) and incorporated
              supplemented, with particular          herein by reference.
              reference to the Restated
              Certificate and Agreement of
              Limited Partnership


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


(13)          Annual Report to Limited Partners      No Annual Report for fiscal year
                                                     1999  has  been  sent to the Limited
                                                     Partners.  An Annual Report will be
                                                     sent to the Limited Partners
                                                     subsequent to this filing.


(22)          List of subsidiaries                   Included  in  Item I of Part I of his
                                                     Report  Page  I-1,  to which eference
                                                     is hereby made.

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

</TABLE>

<PAGE>

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

               PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP

         INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

                                                                      Reference
                                                                      ---------

PaineWebber Equity Partners Two Limited Partnership:

   Report of independent auditors                                         F-2

   Consolidated balance sheets as of March 31, 1999 and 1998              F-3

   Consolidated statements of operations for the years ended
     March 31, 1999, 1998 and 1997                                        F-4

   Consolidated statements of changes in partners' capital (deficit)
     for the years ended March 31, 1999, 1998 and 1997                    F-5

   Consolidated  statements  of cash flows for the years ended
      March 31,  1999, 1998 and 1997                                      F-6

   Notes to consolidated  financial statements                            F-7

   Schedule III - Real Estate and Accumulated Depreciation               F-25

Combined Joint Ventures of PaineWebber Equity Partners Two Limited Partnership:

   Report of independent auditors                                        F-26

   Combined balance sheets as of December 31, 1998 and 1997              F-27

   Combined statements of income and changes in venturers' capital
      for the years ended December 31, 1998, 1997 and 1996               F-28

   Combined statements of cash flows for the years ended
      December 31, 1998, 1997 and 1996                                   F-29

   Notes to combined financial statements                                F-30

   Schedule III - Real Estate and Accumulated Depreciation               F-37



   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 Equity Partners Two Limited Partnership:

      We  have  audited  the   accompanying   consolidated   balance  sheets  of
PaineWebber  Equity  Partners Two Limited  Partnership  as of March 31, 1999 and
1998,  and  the  related  consolidated  statements  of  operations,  changes  in
partners' capital  (deficit),  and cash flows for each of the three years in the
period ended March 31, 1999.  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 consolidated  financial  statements referred to above
present fairly, in all material respects, the consolidated financial position of
PaineWebber Equity Partners Two Limited  Partnership at March 31, 1999 and 1998,
and the  consolidated  results of its  operations and its cash flows for each of
the three years in the period ended March 31, 1999, 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
June 18, 1999


                                     <PAGE>


                         PAINEWEBBER EQUITY PARTNERS TWO
                               LIMITED PARTNERSHIP

                           CONSOLIDATED BALANCE SHEETS
                             March 31, 1999 and 1998
                    (In thousands, except for per Unit data)

                                           ASSETS
                                                       1999            1998
                                                       ----            ----
Operating investment properties:
   Land                                            $   2,342        $   7,351
   Building and improvements                           5,437           40,616
                                                   ---------        ---------
                                                       7,779           47,967
   Less accumulated depreciation                      (2,307)         (14,044)
                                                   ---------        ---------
                                                       5,472           33,923

Investments in unconsolidated joint
  ventures, at equity                                 27,774           30,237
Cash and cash equivalents                              6,181            6,202
Escrowed cash                                              -              398
Accounts receivable                                      346              236
Prepaid expenses                                           6               31
Deferred rent receivable                                 135              737
Deferred expenses, net of accumulated
  amortization of $165 ($883 in 1998)                     58              510
Other assets                                              17                -
                                                   ---------        ---------
                                                   $  39,989        $  72,274
                                                   =========        =========

                        LIABILITIES AND PARTNERS' CAPITAL

Accounts payable and accrued expenses              $     170        $     427
Net advances from consolidated ventures                  156              115
Tenant security deposits                                   -              111
Bonds payable                                              -            2,171
Mortgage notes payable                                 9,132           19,369
Other liabilities                                          -              331
                                                   ---------        ---------
      Total liabilities                                9,458           22,524

Partners' capital:
  General Partners:
   Capital contributions                                   1                1
   Cumulative net income                                 288              158
   Cumulative cash distributions                        (725)            (713)

  Limited Partners ($1 per Unit;
    134,425,741 Units issued):
   Capital contributions, net of offering costs      119,747          119,747
   Cumulative net income                              28,349           15,309
   Cumulative cash distributions                    (117,129)         (84,752)
                                                   ---------        ---------
      Total partners' capital                         30,531           49,750
                                                   ---------        ---------
                                                   $  39,989        $  72,274
                                                   =========        =========


                             See accompanying notes.


<PAGE>


                         PAINEWEBBER EQUITY PARTNERS TWO
                               LIMITED PARTNERSHIP

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                For the years ended March 31, 1999, 1998 and 1997
                    (In thousands, except for per Unit data)



                                               1999         1998        1997
                                               ----         ----        ----
Revenues:
   Rental income and expense
     reimbursements                         $   5,057   $   5,084    $  5,011
   Interest and other income                      697         403         358
                                            ---------   ---------    --------
                                                5,754       5,487       5,369
Expenses:
   Loss on impairment of operating
     investment property                            -           -       2,700
   Interest expense                             2,602       1,961       1,990
   Depreciation expense                         1,944       1,889       1,953
   Property operating expenses                  1,301       1,370       1,279
   Real estate taxes                              484         521         479
   General and administrative                     640         632         528
   Amortization expense                            45         105         107
                                            ---------   ---------    --------
                                                7,016       6,478       9,036
                                            ---------   ---------    --------

Operating loss                                 (1,262)       (991)     (3,667)

Gain on sale of operating investment
   properties                                   9,930           -           -

Other expense                                     331           -          18

Investment income:
   Partnership's share of unconsolidated
     ventures' income                             657         728         383
   Partnership's share of loss on impairment
     of operating investment property          (2,517)          -           -
   Partnership's share of gain on
     sale of unconsolidated operating
     investment property                        6,031           -            -
                                            ---------   ---------    --------
                                                4,171         728         383
                                            ---------   ---------    --------
Net income (loss)                           $  13,170   $    (263)   $ (3,266)
                                            =========   =========    ========

Net income (loss) per 1,000
  Limited Partnership Units                 $   97.00   $  (1.94)    $ (24.04)
                                            =========   ========     ========

Cash distributions per 1,000
  Limited Partnership Units                 $  240.84   $   8.84     $   8.84
                                            =========   ========     ========


      The above per 1,000 Limited  Partnership  Units  information is based upon
the 134,425,741 Limited Partnership Units outstanding during each year.




                             See accompanying notes.


<PAGE>


                         PAINEWEBBER EQUITY PARTNERS TWO
                               LIMITED PARTNERSHIP

        CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
                For the years ended March 31, 1999, 1998 and 1997
                                 (In thousands)


                                     General         Limited
                                     Partners        Partners      Total
                                     --------        --------      -----

Balance at March 31, 1996            $   (494)       $56,173      $ 55,679

Cash distributions                        (13)        (1,187)       (1,200)

Net loss                                  (32)        (3,234)       (3,266)
                                     --------        -------      --------

Balance at March 31, 1997                (539)        51,752        51,213

Cash distributions                        (12)        (1,188)       (1,200)

Net loss                                   (3)          (260)         (263)
                                     --------        -------       -------

Balance at March 31, 1998                (554)        50,304        49,750

Cash distributions                        (12)       (32,377)      (32,389)

Net income                                130         13,040        13,170
                                     --------        -------       -------

Balance at March 31, 1999            $   (436)       $30,967       $30,531
                                     ========        =======       =======























                             See accompanying notes.


<PAGE>

<TABLE>

                         PAINEWEBBER EQUITY PARTNERS TWO
                               LIMITED PARTNERSHIP

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                For the years ended March 31, 1999, 1998 and 1997
                Increase (Decrease) in Cash and Cash Equivalents
                                 (In thousands)
<CAPTION>


                                                                 1999          1998        1997
                                                                 ----          ----        ----
<S>                                                              <C>           <C>         <C>
Cash flows from operating activities:
  Net income (loss)                                              $  13,170     $  (263)   $  (3,266)
  Adjustments to reconcile net income (loss) to net
    cash provided by  operating activities:
   Loss on impairment of operating investment property                   -           -        2,700
   Gain on sale of operating investment properties                  (9,930)          -            -
   Consolidated venture partners' share of operations                 (331)          -            -
   Partnership's share of unconsolidated ventures' income             (657)       (728)        (383)
   Partnership's share of loss on impairment of operating
     investment property                                             2,517           -            -
   Partnership's share of gains on sale of unconsolidated
     operating investment properties                                (6,031)          -            -
   Depreciation and amortization                                     1,989       1,994        2,060
   Amortization of deferred financing costs                             26          44           44
   Changes in assets and liabilities:
     Escrowed cash                                                     398        (119)        (129)
     Accounts receivable                                              (110)        (85)         110
     Accounts receivable - affiliates                                    -           -           15
     Prepaid expenses                                                   25          19          (21)
     Deferred rent receivable                                           72          95         (101)
     Other assets                                                      (17)          -            -
     Accounts payable and accrued expenses                            (257)        156          (12)
     Advances to/from consolidated ventures                             41        (285)         478
     Tenant security deposits                                         (111)         (5)          20
     Other liabilities                                                   -           -          (18)
                                                                 ---------     -------    ---------
      Total adjustments                                            (12,376)      1,086        4,763
                                                                 ---------     -------    ---------
      Net cash provided by operating activities                        794         823        1,497
                                                                 ---------     -------    ---------

Cash flows from investing activities:
  Net proceeds from sales of operating investment properties        37,776           -            -
  Distributions from unconsolidated ventures                         7,771       3,240        2,744
  Additional investments in unconsolidated ventures                 (1,137)       (965)      (1,939)
  Additions to operating investment properties                      (1,862)       (598)        (444)
  Payment of leasing commissions and other deferred expenses          (591)        (13)         (94)
                                                                 ---------     -------    ---------
      Net cash provided by investing activities                     41,957       1,664          267
                                                                 ---------     -------    ---------

Cash flows from financing activities:
  Distributions to partners                                        (32,389)     (1,200)      (1,200)
  Repayment of principal on notes payable                          (10,237)       (281)        (257)
  Payments on district bond assessments                               (146)       (126)        (111)
                                                                 ---------     -------    ---------
      Net cash used in financing activities                        (42,772)     (1,607)      (1,568)
                                                                 ---------     -------    ---------

Net (decrease) increase in cash and cash equivalents                   (21)        880          196

Cash and cash equivalents, beginning of year                         6,202       5,322        5,126
                                                                 ---------     -------    ---------

Cash and cash equivalents, end of year                           $   6,181     $ 6,202    $   5,322
                                                                 =========     =======    =========

Supplemental disclosures:
   Cash paid during the year for interest                        $   2,576     $ 1,917    $   1,974
                                                                 =========     =======    =========
</TABLE>

                             See accompanying notes.


<PAGE>


               PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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

      PaineWebber Equity Partners Two Limited Partnership (the "Partnership") is
a limited partnership organized pursuant to the laws of the State of Virginia on
May 16,  1986  for the  purpose  of  investing  in a  diversified  portfolio  of
existing, newly-constructed or to-be-built income-producing real properties. The
Partnership  authorized  the  issuance of a maximum of  150,000,000  Partnership
Units  (the  "Units")  of  which   134,425,741   Units,   representing   capital
contributions of $134,425,741,  were subscribed and issued between June 1986 and
June 1988.

      The Partnership  originally  invested  approximately  $132,200,000 (net of
acquisition fees) in ten operating properties through joint venture investments.
Through  March 31, 1999,  seven of these  investments  had been sold,  including
three during fiscal 1999. In addition,  subsequent to year-end,  on May 14, 1999
the Partnership  sold the West Ashley Shoppes  property (see Note 4). After this
sale  transaction,   the  Partnership  retains  an  interest  in  two  operating
properties,  which consist an office complex and a retail shopping  center.  The
Partnership is currently  focusing on potential  disposition  strategies for the
remaining investments in its portfolio.  Although no assurances can be given, it
is currently contemplated that sales of the Partnership's remaining assets could
be  completed  by the end of  calendar  year  1999.  The  sale of the  remaining
investments would be followed by a liquidation of the Partnership.

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 March 31, 1999 and 1998 and revenues and expenses for each
of the three years in the period  ended March 31,  1999.  Actual  results  could
differ from the estimates and assumptions used.

      The   accompanying   financial   statements   include  the   Partnership's
investments in certain joint venture  partnerships  which own or owned operating
properties.  Except  as  described  below,  the  Partnership  accounts  for  its
investments in joint  ventures  using the equity method because the  Partnership
does not have majority  voting control in the ventures.  Under the equity method
the ventures are carried at cost  adjusted  for the  Partnership's  share of the
ventures'  earnings  or  losses  and  distributions.  All of the  joint  venture
partnerships  are required to maintain  their  accounting  records on a calendar
year basis for income  tax  reporting  purposes.  As a result,  the  Partnership
recognizes  its share of the  earnings or losses from the  unconsolidated  joint
ventures based on financial information which is three months in arrears to that
of the  Partnership.  See Note 5 for a description of the  unconsolidated  joint
venture partnerships.

      As  discussed  further  in Note 4, the  Partnership  acquired  control  of
Hacienda Park Associates on December 10, 1991 and the Atlanta Asbury Partnership
on February 14, 1992.  In addition,  the  Partnership  acquired  control of West
Ashley Shoppes Associates in May of 1994. Accordingly,  these joint ventures are
presented on a consolidated basis in the accompanying  financial statements.  As
discussed  above,  these joint  ventures  also have a December 31 year-end  and,
accordingly,  operations of the ventures are reported on a three-month  lag. All
material  transactions  between the Partnership and the joint ventures have been
eliminated upon  consolidation,  except for lag-period cash transfers.  Such lag
period cash  transfers are  accounted  for as advances to and from  consolidated
ventures on the accompanying balance sheets.

      The  operating  investment  properties  owned  by the  consolidated  joint
ventures are carried at cost, net of accumulated depreciation, or an amount less
than cost if indicators of impairment  are present in accordance  with Statement
of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment
of  Long-Lived  Assets and for  Long-Lived  Assets to Be Disposed Of," which the
Partnership  adopted in fiscal 1996. SFAS No. 121 requires  impairment losses to
be  recorded  on  long-lived  assets  used  in  operations  when  indicators  of
impairment are present and the undiscounted cash flows estimated to be generated
by those  assets are less than the  assets'  carrying  amount.  The  Partnership
generally assesses indicators of impairment by a review of independent appraisal
reports on each operating  investment  property.  Such  appraisals make use of a
combination of certain generally accepted valuation techniques, including direct
capitalization,  discounted  cash flows and comparable  sales  analysis.  During
fiscal 1997,  the  independent  appraisal of the West Ashley  Shoppes  operating
investment property indicated that certain operating assets,  consisting of land
and improvements  and building and  improvements,  were impaired.  In accordance
with SFAS No. 121, the consolidated West Ashley Shoppes joint venture recorded a
reduction  in the net  carrying  value of such assets  amounting  to  $2,700,000
relating to the land and  improvements  ($1,457,000),  building and improvements
($1,822,000) and related accumulated depreciation ($579,000).

      Through March 31, 1995,  depreciation  expense on the operating investment
properties carried on the Partnership's  consolidated balance sheet was computed
using the straight-line  method over the estimated useful lives of the operating
investment  properties,  generally five years for the furniture and fixtures and
thirty-one  and a half years for the buildings and  improvements.  During fiscal
1996,  circumstances  indicated  that the  consolidated  Hacienda Park operating
investment   property  might  be  impaired.   The   Partnership's   estimate  of
undiscounted  cash  flows  indicated  that the  property's  carrying  amount was
expected to be recovered,  but that the  reversion  value could be less than the
carrying amount at the time of disposition.  As a result of such assessment, the
joint venture  commenced  recording  additional  annual charges to  depreciation
expense to adjust the carrying  value of the Hacienda Park property such that it
will match the expected reversion value at the time of disposition.  Acquisition
fees paid to  PaineWebber  Properties  Incorporated  and  costs of  identifiable
improvements have been capitalized and are included in the cost of the operating
investment  properties.  Capitalized  construction  period interest and taxes of
West Ashley  Shoppes,  in the aggregate  amount of  approximately  $485,000,  is
included in the balance of operating  investment  properties on the accompanying
consolidated balance sheets. Maintenance and repairs are charged to expense when
incurred.

      For  long-term  commercial  leases,  rental  income is  recognized  on the
straight-line  basis over the term of the related lease  agreement,  taking into
consideration   scheduled  cost  increases  and  free-rent  periods  offered  as
inducements to lease the property.  Deferred rent receivable  represents  rental
income earned by Hacienda Park  Associates  and West Ashley  Shoppes  Associates
which  has  been  recognized  on the  straight-line  basis  over the term of the
related lease agreement.

      Deferred expenses at March 31, 1999 and 1998 include deferred  commissions
of West Ashley Shoppes Associates,  which are being amortized on a straight-line
basis over the term of the respective lease. Deferred expenses at March 31, 1998
included loan costs incurred in connection  with the Asbury Commons and Hacienda
Park  mortgage  notes  payable  described in Note 6, which were being  amortized
using  the  effective   interest  method  over  their   respective   terms.  The
amortization of such costs was included in interest  expense on the accompanying
statements  of  operations.  Deferred  expenses at March 31, 1998 also  included
legal fees associated with the  organization of the Hacienda Park joint venture,
which were  amortized on the  straight-line  basis over a sixty-month  term, and
deferred  commissions and lease  cancellation  fees of Hacienda Park Associates,
which  were  being  amortized  on a  straight-line  basis  over  the term of the
respective lease.

      Escrowed cash at March 31, 1998 included funds escrowed for the payment of
property taxes and tenant  security  deposits of the Asbury Commons and Hacienda
Park consolidated joint ventures.

      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.

      No  provision  for income  taxes has been made as the  liability  for such
taxes  is that  of the  partners  rather  than  the  Partnership.  Upon  sale or
disposition of the Partnership's  investments,  the taxable gain or the tax loss
incurred will be allocated among the partners.  The principal difference between
the Partnership's  accounting on a federal income tax basis and the accompanying
financial  statements  prepared in accordance with generally accepted accounting
principals  (GAAP)  relates to the methods  used to determine  the  depreciation
expense on the consolidated and unconsolidated  operating investment properties.
As a result of the difference in  depreciation,  the gains  calculated  upon the
sale of the operating investment  properties for GAAP purposes differ from those
calculated for federal income tax purposes.

      The cash and cash  equivalents,  escrowed cash, bonds payable and mortgage
notes  payable  appearing  on  the  accompanying   consolidated  balance  sheets
represent   financial   instruments  for  purposes  of  Statement  of  Financial
Accounting  Standards  No.  107,  "Disclosures  about  Fair  Value of  Financial
Instruments."  The carrying  amounts of cash and cash  equivalents  and escrowed
cash  approximate  their  fair  values as of March 31,  1999 and 1998 due to the
short-term  maturities  of  these  instruments.   It  was  not  practicable  for
management  to estimate the fair value of the bonds  payable  without  incurring
excessive costs due to the unique nature of such obligations.  The fair value of
mortgage notes payable is estimated using  discounted cash flow analysis,  based
on the current  market rates for similar  types of borrowing  arrangements  (see
Note 6).

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

      The General Partners of the Partnership are Second Equity  Partners,  Inc.
(the "Managing General Partner"), a wholly-owned subsidiary of PaineWebber Group
Inc.  ("PaineWebber")  and  Properties  Associates  1986,  L.P. (the  "Associate
General Partner"),  a Virginia limited partnership,  certain limited partners of
which are also  officers of the  Managing  General  Partner.  Affiliates  of the
General Partners 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 and the acquisition,  management, financing and disposition of
Partnership  properties.  The Managing  General  Partner and its  affiliates are
reimbursed  for their direct  expenses  relating to the  offering of Units,  the
administration  of the  Partnership  and the  acquisition  and operations of the
Partnership's operating property investment.

      All  distributable  cash,  as  defined,  for  each  fiscal  year  shall be
distributed  quarterly in the ratio of 99% to the Limited Partners and 1% to the
General  Partners until the Limited  Partners have received an amount equal to a
7.5% noncumulative  annual return on their adjusted capital  contributions.  The
General  Partners  will then receive  distributions  until they have received an
amount equal to 1.01% of total  distributions  of  distributable  cash which has
been made to all  partners and PWPI has received an amount equal to 3.99% of all
distributions  to all  partners.  The  balance  will be  distributed  95% to the
Limited Partners,  1.01% to the General Partners and 3.99% to PWPI.  Payments to
PWPI  represent  asset  management  fees for PWPI's  services  in  managing  the
business of the Partnership. Due to the reduction in the Partnership's quarterly
distribution  rate to 2% during fiscal 1992, no management  fees were earned for
the fiscal years ended March 31, 1999,  1998 and 1997,  in  accordance  with the
advisory  agreement.  All sale or  refinancing  proceeds shall be distributed in
varying  proportions  to the Limited and General  Partners,  as specified in the
amended Partnership Agreement.

      All taxable  income (other than from a Capital  Transaction)  in each year
will be allocated to the Limited Partners and the General Partners in proportion
to the amounts of  distributable  cash  distributed to them (excluding the asset
management fee) in that year or, if there are no  distributions of distributable
cash, 98.95% to the Limited Partners and 1.05% to the General Partners.  All tax
losses (other than from a Capital  Transaction)  will be allocated 98.95% to the
Limited Partners and 1.05% to the General  Partners.  Taxable income or tax loss
arising from a sale or refinancing of investment properties will be allocated to
the Limited  Partners and the General  Partners in  proportion to the amounts of
sale or  refinancing  proceeds  to which they are  entitled;  provided  that the
General Partners shall be allocated at least 1% of taxable income arising from a
sale or refinancing.  If there are no sale or refinancing proceeds,  tax loss or
taxable  income  from a sale or  refinancing  will be  allocated  98.95%  to the
Limited  Partners  and  1.05%  to  the  General  Partner.   Allocations  of  the
Partnership's  operations  between the General Partners and the Limited Partners
for  financial  accounting  purposes  have  been  made in  conformity  with  the
allocations of taxable income or tax loss.

      Included in general and administrative  expenses for the years ended March
31,  1999,  1998 and 1997 is  $236,000,  $230,000  and  $224,000,  respectively,
representing  reimbursements to an affiliate of the Managing 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  $21,000,  $17,000,  and  $13,000  (included  in general  and  administrative
expenses) for managing the  Partnership's  cash assets during fiscal 1999,  1998
and 1997, respectively.

4.  Operating Investment Properties
    -------------------------------

      The  Partnership's  balance sheet at March 31, 1999 includes one operating
investment  property (three at March 31, 1998): the West Ashley Shoppes Shopping
Center, owned by West Ashley Shoppes Associates.  As discussed further below, on
November  20,  1998  Hacienda  Park  Associates,  a joint  venture  in which the
Partnership  had an interest,  sold its  operating  investment  properties to an
unrelated third party. On December 31, 1998, Atlanta Asbury Partnership, a joint
venture  in which the  Partnership  had an  interest,  sold the  Asbury  Commons
Apartments to an unrelated  third party.  In May 1994, the  Partnership  and the
co-venturer  in the West Ashley joint  venture  executed a settlement  agreement
whereby the  Partnership  assumed  control over the affairs of the venture.  The
Partnership  obtained  controlling  interests  in the  Hacienda  Park and Asbury
Commons joint ventures during fiscal 1992. Accordingly, all three joint ventures
are presented on a consolidated basis in the accompanying  financial statements.
The Partnership's policy is to report the operations of these consolidated joint
ventures  on  a  three-month  lag.  Descriptions  of  the  operating  investment
properties  and the  agreements  through  which  the  Partnership  acquired  its
interests in the properties are provided below.

      Hacienda Park Associates
      ------------------------

      On December 24,  1987,  the  Partnership  acquired an interest in Hacienda
Park  Associates  (the  "joint  venture"),   a  California  general  partnership
organized in accordance with a joint venture  agreement  between the Partnership
and  Callahan  Pentz  Properties  (the  "co-venturer").  The joint  venture  was
organized to own and operate  three  buildings in the  Hacienda  Business  Park,
which is located in Pleasanton,  California,  consisting of Saratoga  Center,  a
multi-tenant  office  building  and  EG&G  Plaza,  originally  a  single  tenant
facility,  now  leased  to two  tenants.  Saratoga  Center,  completed  in 1985,
consists  of   approximately   83,000  net  rentable   square  feet  located  on
approximately 5.6 acres of land. Phase I of EG&G Plaza was completed in 1985 and
Phase II was completed in 1987.  Both phases together  consist of  approximately
102,000 net rentable  square feet located on  approximately 7 acres of land. The
aggregate cash  investment by the  Partnership  for its interest was $24,930,043
(including an acquisition fee of $890,000 paid to PWPI and certain closing costs
of $40,043).

      On November 20, 1998,  Hacienda Park Associates sold the Hacienda Business
Park  property to an  unrelated  third party for $25  million.  The  Partnership
received net proceeds of approximately $20,862,000 after deducting closing costs
of approximately  $278,000,  net closing proration  adjustments of approximately
$88,000,  the repayment of the existing  first  mortgage  note of  approximately
$3,769,000 and accrued interest of approximately $3,000. As a result of the sale
of the Hacienda  Park  property,  the  Partnership  made a special  distribution
totalling approximately $19,492,000,  or $145 per original $1,000 investment, on
December 4, 1998.  Approximately  $1,370,000  of the total net proceeds from the
sale of the Hacienda Park property were added to the Partnership's cash reserves
for potential  investment in the 625 North  Michigan  joint venture (see Note 5)
because of the recently  approved retail  development  rights for this property.
Given the current strength of the local Pleasanton market conditions, during the
quarter ended June 30, 1998 management interviewed potential real estate brokers
and selected a national real estate firm that is a leading  seller of R&D/office
properties  to  market   Hacienda  Park  for  sale.  A  marketing   package  was
subsequently  finalized,  and  comprehensive  sales  efforts began in June. As a
result of those  efforts,  several  offers were  received.  After  completing an
evaluation  of  these  offers  and  the  relative  strength  of the  prospective
purchasers, the Partnership selected an offer. A purchase and sale agreement was
signed on September 21, 1998 with an unrelated third-party prospective buyer and
a  non-refundable  deposit of  $1,500,000  was made on  October  21,  1998.  The
prospective  buyer completed its due diligence work in early November and closed
on this  transaction on November 20, 1998, as described  above.  The Partnership
recognized a gain of  $8,389,000 on the sale of the Hacienda  Plaza  property in
fiscal 1999.

      During the guaranty  period,  which was to have run from December 24, 1987
to December 24, 1991,  the  co-venturer  had  guaranteed  to fund all  operating
deficits,  capital costs and the Partnership's preference return distribution in
the event  that  cash  flow  from  property  operations  was  insufficient.  The
co-venturer   defaulted  on  the  guaranty   obligations   in  fiscal  1990  and
negotiations  between the  Partnership and the co-venturer to reach a resolution
of the default were ongoing  until fiscal  1992,  when the  venturers  reached a
settlement agreement. During fiscal 1992, the co-venturer assigned its remaining
joint venture interest to the Managing  General Partner of the Partnership.  The
co-venturer also executed a five-year promissory note in the initial face amount
of $300,000 payable to the Partnership  without  interest.  Unless prepaid,  the
balance of the note  escalates  as to the  principal  balance  annually  up to a
maximum of $600,000.  In  exchange,  it was agreed that the  co-venturer  or its
affiliates would have no further liability to the Partnership for any guaranteed
preference payments. Due to the uncertainty regarding the collection of the note
receivable,  such compensation  will be recognized as payments are received.  No
payments have been received to date. The $600,000 balance of the note receivable
became due and payable on October 31, 1996.  The  Partnership  will  continue to
pursue  collection  of this balance  during fiscal 2000.  However,  there are no
assurances that any portion of this balance will be collected.

      Per the terms of the joint venture  agreement,  net income from operations
was to be allocated  first to the  Partnership  to the extent of its  preference
return and then 75% to the  Partnership and 25% to the  co-venturer.  Net losses
from  operations  were to be  allocated  75% to the  Partnership  and 25% to the
co-venturer.

      Atlanta Asbury Partnership
      --------------------------

      On March 12, 1990, the Partnership  acquired an interest in Atlanta Asbury
Partnership (the "joint venture"),  a Georgia general  partnership  organized in
accordance  with a joint venture  agreement  between the  Partnership and Asbury
Commons/Summit  Limited  Partnership,  an  affiliate of Summit  Properties  (the
"co-venturer").  The joint  venture  was  organized  to own and  operate  Asbury
Commons Apartments,  a newly constructed 204-unit residential  apartment complex
located in Atlanta,  Georgia.  The aggregate cash  investment by the Partnership
for its  interest  was  $14,417,791  (including  an  acquisition  fee of $50,649
payable to PWPI and certain closing costs of $67,142).

      During  fiscal 1997,  the  Partnership  became aware of certain  potential
construction  problems at the Asbury Common Apartments.  The initial analysis of
the construction problems revealed extensive  deterioration of the wood trim and
evidence of potential structural problems affecting the exterior breezeways, the
decks of certain  apartment  unit types and the  stairway  towers.  A design and
construction team was organized to further evaluate the potential problems, make
cost-effective remediation recommendations and implement the repair program. The
cost of the repair work  required to remediate  this  situation was estimated at
approximately $1.5 million.  During fiscal 1998, the Partnership distributed bid
application  packages to  pre-qualified  contractors  and executed  construction
contracts for the repair work.  Repair and replacement work was completed during
fiscal 1999.  During fiscal 1998, the Partnership filed a warranty claim against
the manufacturer of the fiberglass-composite roofing shingles installed when the
property was built. During fiscal 1999, the manufacturer of the roofing shingles
agreed to provide the  Partnership  with the  materials  to replace the existing
roofing shingles.  Also during fiscal 1999, the Partnership reached a settlement
agreement with the original developer of the Asbury Commons property whereby the
developer  agreed  to pay the  Partnership  $200,000.  Under  the  terms of this
agreement,  the  Partnership  received a payment of  $100,000  during the fourth
quarter of fiscal 1998,  and received a final payment of $100,000  during fiscal
1999.  The payments were  recorded as  reductions  in the carrying  value of the
operating investment property during fiscal 1999.

      On December 21, 1998,  Atlanta Asbury  Partnership sold the property known
as the Asbury Commons  Apartments located in Atlanta,  Georgia,  to an unrelated
third  party for $13.345  million.  The  Partnership  received  net  proceeds of
approximately   $5,613,000  after  deducting   closing  costs  of  approximately
$291,000,  closing proration adjustments of approximately $90,000, the repayment
of the existing mortgage note of approximately  $6,598,000,  accrued interest of
approximately  $10,000  and a  prepayment  penalty  of  approximately  $743,000.
Despite  incurring  a  sizable  prepayment  penalty  on  the  repayment  of  the
outstanding first mortgage loan,  management believed that a current sale of the
Asbury Commons property was in the best interests of the Limited Partners due to
the  exceptionally  strong market  conditions that exist at the present time and
which resulted in a very favorable sale price.  The  Partnership  had selected a
regional  real  estate  firm  with a  strong  background  in  selling  apartment
properties to market the Asbury Commons  property for sale. Sales materials were
finalized  and an extensive  marketing  campaign  began in September  1998. As a
result of these sale efforts,  seven offers were received.  After  completing an
evaluation  of  these  offers  and  the  relative  strength  of the  prospective
purchasers,  the  Partnership and its co-venture  partner  selected an offer and
negotiated a purchase and sale  agreement.  A purchase  and sale  agreement  was
signed on November 9, 1998, and the buyer made a deposit of $250,000.  After the
completion of the buyer's due  diligence,  the  transaction  closed as described
above on December 21, 1998. The Partnership recorded a gain of $1,541,000 on the
sale  of the  Asbury  Commons  property  during  fiscal  1999.  The  Partnership
distributed the net proceeds from the sale of the Asbury Commons property in the
form of a special capital distribution of approximately  $6,453,000,  or $48 per
original $1,000 investment,  which was paid on February 12, 1999, along with the
regular  quarterly  distribution  for the quarter ended December 31, 1998.  This
special  distribution  included  $42.18  per  original  $1,000  investment,   or
approximately  $5,613,000, of net sale proceeds from the sale of Asbury Commons,
along with $5.82 per original  $1,000  investment,  or  approximately  $840,000,
which  represented  $783,000  of property  escrows  received  subsequent  to the
November  20, 1998 sale of  Hacienda  Business  Park and $57,000 of  Partnership
reserves that exceeded expected future requirements.

      During the  Guaranty  Period,  from March 13, 1990 to March 15,  1992,  as
defined,  the  co-venturer had agreed to  unconditionally  guarantee to fund all
operating  deficits,  capital  costs  and the  Partnership's  preference  return
distribution  in  the  event  that  cash  flow  from  property   operations  was
insufficient.  The co-venturer was not in compliance with the mandatory  payment
provisions of the Partnership agreement for the period from November 30, 1990 to
February 14, 1992.  On February  14,  1992, a settlement  agreement  between the
Partnership and the co-venturer was executed  whereby the co-venturer  agreed to
do the  following:  1) pay the  Partnership  $275,000;  (2) release all escrowed
purchase price funds,  amounting to $230,489,  to the joint venture;  (3) assign
99% of its joint venture interest to the Partnership and 1% of its joint venture
interest to the Managing  General  Partner and withdraw from the joint  venture;
and 4) reimburse the Partnership for legal expenses up to $10,000. In return the
co-venturer was released from its obligations under the joint venture agreement.

      Subsequent to the  withdrawal of the original  co-venture  partner and the
assignment  of its interest in the venture to the  Partnership  and the Managing
General Partner,  on September 26, 1994, the joint venture agreement was amended
and restated. The terms of the amended and restated venture agreement called for
net income to be allocated  as follows:  (1) 100% to the  Partnership  until the
Partnership   had  been   allocated  an  amount   equal  to  a  10%   cumulative
non-compounded  return on the  Partnership's  net  investment and any additional
contributions  made  by  the  Partnership,   and  (2)  thereafter,  99%  to  the
Partnership and 1% to the Managing General Partner.  Losses were to be allocated
99% to the Partnership and 1% to the Managing General Partner.

      West Ashley Shoppes Associates
      ------------------------------

      On March 10,  1988 the  Partnership  acquired  an  interest in West Ashley
Shoppes Associates (the "joint venture"),  a South Carolina general  partnership
organized in accordance with a joint venture  agreement  between the Partnership
and Orleans Road Development  Company, an affiliate of the Leo Eisenberg Company
(the  "co-venturer").  The joint  venture was  organized to own and operate West
Ashley Shoppes, a newly constructed shopping center located in Charleston, South
Carolina.  The  property  consists  of  134,000  net  rentable  square  feet  on
approximately 17.25 acres of land.

      The  aggregate  cash  investment by the  Partnership  for its interest was
$10,503,841  (including an acquisition  fee of $365,000 paid to PWPI and certain
closing costs of $123,841).  During the Guaranty Period,  from March 10, 1988 to
March 10, 1993, the co-venturer had agreed to unconditionally  guarantee to fund
any  deficits  and to ensure  that the joint  venture  could  distribute  to the
Partnership its preference return. During fiscal 1990, the co-venturer defaulted
on its  guaranty  obligation.  On  April  25,  1990,  the  Partnership  and  the
co-venturer entered into the second amendment to the joint venture agreement. In
accordance with the amendment, the Partnership contributed $300,000 to the joint
venture,  in  exchange  for the  co-venturer's  transfer  of rights  to  certain
out-parcel  land.  The  $300,000  was  then  repaid  to  the  Partnership  as  a
distribution  to  satisfy  the  co-venturer's  obligation  to fund net cash flow
shortfalls  in arrears at December 31, 1989.  Subsequent to the amendment to the
joint venture agreement,  the co-venturer  defaulted on the guaranty obligations
again. Net cash flow shortfall contributions of approximately $1,060,000 were in
arrears at December  31,  1993.  During  1991,  the  Partnership  had filed suit
against the co-venturer  and the individual  guarantors to collect the amount of
the cash flow shortfall  contributions in arrears.  In May 1994, the Partnership
and the co-venturer executed a settlement agreement to resolve their outstanding
disputes  regarding the net cash flow shortfall  contributions  described above.
Under the terms of the settlement agreement, the co-venturer assigned 96% of its
interest in the joint  venture to the  Partnership  and the  remaining 4% of its
interest in the joint venture to Second Equity Partners,  Inc. (SEPI),  Managing
General  Partner  of  the  Partnership.  In  return  for  such  assignment,  the
Partnership agreed to release the co-venturer from all claims regarding net cash
flow shortfall  contributions owed to the joint venture. In conjunction with the
assignment  of  its  interest  and  withdrawal  from  the  joint  venture,   the
co-venturer  agreed to release  certain  outstanding  counter claims against the
Partnership.

      Subsequent to year-end,  on May 14, 1999,  West Ashley Shoppes  Associates
sold the West  Ashley  Shoppes  property  to an  unrelated  third party for $8.1
million.  In addition,  on May 12, 1999, West Ashley Shoppes Associates had sold
an adjacent outparcel of land to another unrelated third party for $280,000. The
May 14  transaction  involved  the  remaining  real  estate  owned by the  joint
venture.  Accordingly,  the  joint  venture  will be  liquidated  once the final
operating  expenses  have been paid and the  remaining net cash assets have been
distributed to the Partnership. The Partnership received total net proceeds from
the two sale  transactions of approximately  $8,070,000 after deducting  closing
costs  of  approximately  $225,000  and net  closing  proration  adjustments  of
approximately  $85,000.  With a strong  occupancy  level  and a  stable  base of
tenants,  the Partnership believed it was the opportune time to sell West Ashley
Shoppes.  As part of a plan to market the  property  for sale,  the  Partnership
selected a national  real estate firm that is a leading  seller of this property
type.  Preliminary  sales materials were prepared and initial  marketing efforts
were undertaken.  A marketing package was then finalized and comprehensive  sale
efforts began in November  1998. As a result of these  efforts,  ten offers were
received.  After  completing  an  evaluation  of those  offers and the  relative
strength of the prospective  purchasers,  the  Partnership  selected an offer. A
purchase  and  sale  agreement  was  negotiated  with an  unrelated  third-party
prospective  buyer and a non-refundable  deposit of $150,000 was made on January
29, 1999. This prospective buyer completed its due diligence review work and the
transaction  closed on May 14, 1999, as described above. As a result of the sale
of  West  Ashley  Shoppes,  the  Partnership  made  a  Special  Distribution  of
approximately  $8,200,000,  or $61 per original $1,000  investment,  on June 15,
1999 to unitholders of record on May 14, 1999. The Partnership  will recognize a
gain of approximately $2.5 million in fiscal 2000 in connection with the sale of
the West Ashley Shoppes property.

      The terms of the joint venture  agreement called for net income or loss to
be allocated to the  Partnership  and the  co-venturer in the same proportion as
cash  distributions,  except for  certain  items  which were to be  specifically
allocated to the  partners,  as defined,  in the joint venture  agreement.  Such
items included the amortization of acquisition  fees and  organization  expenses
and  allocation  of  depreciation  related to  recording of the building at fair
value based upon its purchase price.

      The following is a combined summary of property operating expenses for the
consolidated  joint  ventures for the years ended December 31, 1998 (through the
date of sale for Hacienda Park Associates and Atlanta Asbury Partnership),  1997
and 1996 (in thousands):

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

      Property operating expenses:
        Utilities                            $     87    $    207    $    205
        Repairs and maintenance                   855         451         425
        Salaries and related costs                 30         224         210
        Administrative and other                  221         282         225
        Insurance                                  31          53          53
        Management fees                            77         153         161
                                             --------    --------    --------
                                             $  1,301    $  1,370    $  1,279
                                             ========    ========    ========

5.  Investments in Unconsolidated Joint Ventures
    --------------------------------------------

      The  Partnership  had  investments  in two  unconsolidated  joint  venture
partnerships which own operating investment  properties at March 31, 1999 (three
at March 31, 1998). As discussed further below, on July 2, 1998, Richmond Gables
Associates,  a joint venture in which the Partnership had an interest,  sold The
Gables at Erin Shades Apartments to an unrelated third party.
<PAGE>

    Condensed  combined  financial   statements  of  the  unconsolidated   joint
ventures, for the periods indicated, are as follows:

                        Condensed Combined Balance Sheets
                           December 31, 1998 and 1997
                                 (in thousands)

                                     Assets
                                                          1998         1997
                                                          ----         ----

      Current assets                                   $  1,261      $  1,234
      Operating investment properties, net               46,512        54,902
      Other assets                                        4,471         4,367
                                                       --------      --------
                                                       $ 52,244      $ 60,503
                                                       ========      ========

                       Liabilities and Venturers' Capital

      Current liabilities                              $  2,297      $  2,740
      Other liabilities                                     310           318
      Long-term debt                                      3,742         8,720
      Partnership's share of venturers' capital          27,142        29,874
      Co-venturers' share of venturers' capital          18,753        18,851
                                                       --------      --------
                                                       $ 52,244      $ 60,503
                                                       ========      ========

                    Condensed Combined Summary of Operations
              For the years ended December 31, 1998, 1997 and 1996
                                 (in thousands)

                                              1998         1997         1996
                                              ----         ----         ----
     Revenues:
      Rental revenues and expense
        reimbursements                     $  9,870    $  9,814     $  9,297
      Interest and other income                 410         481          343
                                           --------    --------     --------
                                             10,280      10,295        9,640

     Expenses:
      Loss due to impairment of
        operating investment property         2,517           -            -
      Property operating and other
        expenses                              2,828       3,230        3,009
      Real estate taxes                       1,868       2,323        2,212
      Interest on long-term debt              1,061         661          663
      Interest on note payable to venturer        -           -            -
      Depreciation and amortization           3,273       3,177        3,158
                                           --------    --------     --------
                                             11,547       9,391        9,042
                                           --------    --------     --------

     Operating income (loss)                 (1,267)        904          598
     Gains on sale of operating
       investment properties                  6,400           -            -
                                           --------    --------     --------
     Net income                            $  5,133    $    904     $    598
                                           ========    ========     ========

     Net income:
        Partnership's share of
          combined income                  $  4,250    $    786     $    441
        Co-venturers' share of
          combined income                       883         118          157
                                           --------    --------     --------
                                           $  5,133    $    904     $    598
                                           ========    ========     ========

                   Reconciliation of Partnership's Investment
                             March 31, 1999 and 1998
                                 (in thousands)
                                                           1999         1998
                                                           ----         ----
      Partnership's share of capital at
        December 31, as shown above                    $ 27,142    $  29,874
      Excess basis due to investments in joint
        ventures, net (1)                                 1,011        1,036
      Timing differences (2)                               (379)        (673)
                                                      --------     ---------
         Investments in unconsolidated joint
          ventures, at equity at March 31              $ 27,774    $  30,237
                                                       ========    =========
<PAGE>

      (1)At March 31, 1999 and 1998, the  Partnership's  investment  exceeds its
         share  of  the  joint  venture   partnerships'   capital   accounts  by
         approximately  $1,011,000 and  $1,036,000,  respectively.  This amount,
         which  relates  to  certain  costs  incurred  by  the   Partnership  in
         connection  with  acquiring  its joint  venture  investments,  is being
         amortized over the estimated  useful life of the investment  properties
         (generally 30 years).

      (2)The  timing  differences  between  the  Partnership's  share of capital
         account  balances  and its  investments  in joint  ventures  consist of
         capital  contributions  made to joint  ventures and cash  distributions
         received from joint ventures  during the period from January 1 to March
         31 in each year.  These  differences  result from the lag in  reporting
         period discussed in Note 2.

               Reconciliation of Partnership's Share of Operations
               For the years ended March 31, 1999, 1998 and 1997
                                 (in thousands)

                                              1999         1998         1997
                                              ----         ----         ----

      Partnership's share of operations,
         as shown above                    $  4,250    $     786      $    441
      Amortization of excess basis              (79)         (58)          (58)
                                           --------    ---------      --------
      Partnership's share of
         unconsolidated ventures'
         net income                        $  4,171    $     728      $    383
                                           ========    =========      ========

      The  Partnership's  share of the net  income of the  unconsolidated  joint
ventures is presented as follows in the accompanying statements of operations:

                                             1999          1998         1997
                                             ----          ----         ----

      Partnership's share of
         unconsolidated ventures'
         income                            $    657    $     728      $    383
      Partnership's share of loss on
        impairment of operating
        investment property                  (2,517)           -             -
      Partnership's share of gain on
        sale of unconsolidated operating
        investment property                   6,031            -             -
                                           --------    ---------      --------
                                           $  4,171    $     728      $    383
                                           ========    =========      ========

      Investments  in   unconsolidated   joint  ventures,   at  equity,  is  the
Partnership's  net  investment  in the joint venture  partnerships.  These joint
ventures are subject to Partnership  agreements which determine the distribution
of available  funds,  the disposition of the venture's  assets and the rights of
the partners,  regardless of the Partnership's  percentage ownership interest in
the venture. As a result,  substantially all of the Partnership's investments in
these joint ventures are restricted as to distributions.

      Investments  in   unconsolidated   joint  ventures,   at  equity,  on  the
accompanying balance sheets is comprised of the following equity method carrying
values (in thousands):
                                                          1999           1998
                                                          ----           ----

        Chicago-625 Partnership                        $   18,148     $ 18,131
        Richmond Gables Associates                              -         (244)
        Daniel/Metcalf Associates Partnership               9,626       12,350
                                                       ----------     --------
         Investments in unconsolidated joint ventures  $   27,774     $ 30,237
                                                       ==========     ========

      The  Partnership  received  cash  distributions  from  the  unconsolidated
ventures during the years ended March 31, 1999, 1998 and 1997 as set forth below
(in thousands):
                                                1999         1998        1997
                                                ----         ----        ----

        Chicago-625 Partnership            $    1,441   $   1,504    $  1,689
        Richmond Gables Associates              5,211         206         198
        Daniel/Metcalf Associates
          Partnership                           1,119       1,530         641
        TCR Walnut Creek Limited
          Partnership                               -           -         182
        Portland Pacific Associates                 -           -          34
                                           ----------   ---------    --------
                                           $    7,771   $   3,240    $  2,744
                                           ==========   =========    ========
<PAGE>

      A  description  of the  ventures'  properties  and the  terms of the joint
venture agreements are summarized as follows:

      a.  Chicago - 625 Partnership
          -------------------------

      The  Partnership  acquired an interest in Chicago - 625  Partnership  (the
"joint venture"), an Illinois general partnership organized on December 16, 1986
in  accordance  with a joint  venture  agreement  between  the  Partnership,  an
affiliate of the Partnership and  Michigan-Ontario  Limited, an Illinois limited
partnership and an affiliate of Golub & Company (the "co-venturer"),  to own and
operate 625 North Michigan Avenue Office Tower (the "property"). The property is
a 27-story  commercial  office tower  containing an aggregate of 324,829  square
feet of  leasable  space on  approximately  .38 acres of land.  The  property is
located in Chicago, Illinois.

      The aggregate  cash  investment  made by the  Partnership  for its current
interest was  $26,010,000  (including an acquisition  fee of $1,316,600  paid to
PWPI and certain  closing costs of $223,750).  At the same time the  Partnership
acquired  its interest in the joint  venture,  PaineWebber  Equity  Partners One
Limited  Partnership  (PWEP1), an affiliate of the Managing General Partner with
investment  objectives  similar  to  the  Partnership's  investment  objectives,
acquired an interest in this joint  venture.  PWEP1's  cash  investment  for its
current interest was $17,278,000  (including an acquisition fee of $383,400 paid
to PWPI).  During 1990,  the joint  venture  agreement  was amended to allow the
Partnership  and PWEP1 the  option to make  contributions  to the joint  venture
equal to total costs of capital improvements, leasehold improvements and leasing
commissions ("Leasing Expense Contributions")  incurred since April 1, 1989, not
in excess of the accrued and unpaid Preference Return due to the Partnership and
PWEP1.   Through   December  31,  1998,  the  Partnership  had  made  additional
contributions   totalling  $5,442,000  to  cover  these  leasing  expenses.  The
repayment  of  Leasing  Expense  Contributions  has a specific  priority  in the
distribution of net sale or refinancing proceeds in accordance with the terms of
the amended joint venture agreement, as discussed further below.

      During   calendar   1995,   circumstances   indicated   that  Chicago  625
Partnership's  operating  investment  property  might  be  impaired.  The  joint
venture's  estimate of  undiscounted  cash flows  indicated  that the property's
carrying amount was expected to be recovered, but that the reversion value could
be less than the carrying amount at the time of disposition. As a result of such
assessment,  the venture  commenced  recording  additional  annual  depreciation
charges to adjust the carrying value of the operating  investment  property such
that it will match the expected reversion value at the time of disposition.

      The joint venture agreement  provides for aggregate  distributions of cash
flow and sale or  refinancing  proceeds  to the  Partnership  and  PWEP1.  These
amounts  are  then  distributed  to the  Partnership  and  PWEP1  based on their
respective cash investments in the joint venture  exclusive of acquisition fees.
As a  result  of the  transfers  of the  Partnership's  interests  to  PWEP1  as
discussed above, cash flow  distributions and sale or refinancing  proceeds will
now be split approximately 59% to the Partnership and 41% to PWEP1.

      Net cash flow will be distributed as follows:  First, a preference return,
payable monthly, to the Partnership and PWEP1 of 9% of their respective net cash
investments,  as defined.  Second, to the payment of any unpaid accrued interest
and principal on all  outstanding  default notes.  Third,  to the payment of any
unpaid  accrued  interest and  principal  on all  outstanding  operating  notes.
Fourth,  70% in total to the Partnership  and PWEP1 and 30% to the  co-venturer.
The cumulative  unpaid and unaccrued  Preference  Return due to the  Partnership
totalled $9,365,000 at December 31, 1998.

      Profits for each fiscal year shall be  allocated,  to the extent that such
profits do not exceed the net cash flow for such fiscal year,  in  proportion to
the amount of such net cash flow  distributed  to the  Partners  for such fiscal
year.  Profits in excess of net cash flow shall be allocated 99% in total to the
Partnership and PWEP1 and 1% to the  co-venturer.  Losses shall be allocated 99%
in total to the Partnership and PWEP1 and 1% to the co-venturer.

      Proceeds from the sale or  refinancing  of the property shall be allocated
as follows:

      First, to the payment of all unpaid accrued  interest and principal on all
outstanding default notes. Second, to the Partnership, PWEP1 and the co-venturer
for the payment of all unpaid accrued  interest and principal on all outstanding
operating  notes.  Third,  100% to the  Partnership  and PWEP1  until  they have
received the  aggregate  amount of their  respective  Preference  Return not yet
paid.  Fourth,  100% to the  Partnership  and PWEP1 until they have  received an
amount equal to their respective net investments. Fifth, 100% to the Partnership
and PWEP1 until they have  received an amount equal to the PWEP Leasing  Expense
Contributions  less  any  amount  previously   distributed,   pursuant  to  this
provision.  Sixth, 100% to the co-venturer until it has received an amount equal
to  $6,000,000,  less any  amount  of  proceeds  previously  distributed  to the
co-venturer,  as defined. Seventh, 100% to the co-venturer until it has received
an amount  equal to any  reduction  in the amount of net cash flow that it would
have  received  had the  Partnership  not incurred  indebtedness  in the form of
operating  notes.  Eighth,  100% to the  Partnership  and PWEP1  until they have
received $2,067,500,  less any amount of proceeds previously  distributed to the
Partnership and PWEP1,  pursuant to this provision.  Ninth,  75% in total to the
Partnership and PWEP1 and 25% to the co-venturer until the Partnership and PWEP1
have  received  $20,675,000,  less  any  amount  previously  distributed  to the
Partnership  and  PWEP1,  pursuant  to  this  provision.   Tenth,  100%  to  the
Partnership  and PWEP1 until the  Partnership  and PWEP1 have received an amount
equal to a cumulative  return of 9% on the PWEP Leasing  Expense  Contributions.
Eleventh,  any  remaining  balance  will  be  distributed  55% in  total  to the
Partnership and PWEP1 and 45% to the co-venturer.

      Gains  resulting  from the sale of the  property  shall  be  allocated  as
follows:

      First,  capital  profits  shall be allocated to Partners  having  negative
capital  account  balances,  until the balances of the capital  accounts of such
Partners equal zero.  Second,  any remaining capital profits up to the amount of
capital  proceeds  distributed  to the  Partners  pursuant  to  distribution  of
proceeds of a sale or refinancing with respect to the capital transaction giving
rise to such capital profits shall be allocated to the Partners in proportion to
the amount of capital  proceeds so distributed to the Partners.  Third,  capital
profits in excess of capital  proceeds,  if any, shall be allocated  between the
Partners in the same proportions  that capital proceeds of a subsequent  capital
transaction  would be  distributed  if the  capital  proceeds  were equal to the
remaining amount of capital profits to be allocated.

      Capital losses shall be allocated as follows:

      First,  capital  losses shall be allocated to the Partners in an amount up
to and in proportion to their respective  positive capital  balances.  Then, all
remaining  capital losses shall be allocated 70% in total to the Partnership and
PWEP1 and 30% to the co-venturer.

      The Partnership has a property  management  agreement with an affiliate of
the co-venturer  that provides for management and leasing  commission fees to be
paid to the property  manager.  The  management fee is 4% of gross rents and the
leasing  commission  is 7%, as  defined.  The  property  management  contract is
cancellable  at the  Partnership's  option upon the occurrence of certain events
and is currently cancellable by the co-venturer at any time.

      b)  Richmond Gables Associates
          --------------------------

      On  September  1, 1987 the  Partnership  acquired  an interest in Richmond
Gables  Associates  (the  "joint  venture"),   a  Virginia  general  partnership
organized in accordance with a joint venture  agreement  between the Partnership
and  Richmond  Erin Shades  Company  Limited  Partnership,  an  affiliate of The
Paragon  Group (the  "co-venturer").  The joint venture was organized to own and
operate the Gables at Erin Shades, a newly constructed apartment complex located
in Richmond,  Virginia.  The property  consists of 224 units with  approximately
156,000 net rentable square feet on approximately 15.6 acres of land.

      The  aggregate  cash  investment by the  Partnership  for its interest was
$9,076,982  (including an  acquisition  fee of $438,500 paid to PWPI and certain
closing costs of $84,716).  On November 7, 1994,  the joint  venture  obtained a
$5,200,000  first mortgage note payable which bears interest at 8.72% per annum.
Principal and interest  payments of $42,646 are due monthly  through October 15,
2001 at which time the entire  unpaid  balance of principal and interest is due.
The net proceeds of the loan were recorded as a distribution  to the Partnership
by the  joint  venture.  The  Partnership  used  the  proceeds  of the  loan  in
conjunction  with the  retirement of the zero coupon loans  described in Note 6.
The Partnership  has  indemnified  the joint venture and the related  co-venture
partners,  against all  liabilities,  claims and  expenses  associated  with the
borrowing.

      On July 2, 1998, Richmond Gables Associates sold The Gables at Erin Shades
Apartments to an unrelated third party for $11,500,000.  After deducting closing
costs and property  adjustments of $320,000,  The Gables joint venture  received
net sale proceeds of $11,180,000. These net sale proceeds were split between the
Partnership  and its  co-venture  partner  in  accordance  with the terms of The
Gables joint venture  agreement.  The Partnership  received  $10,602,000 and the
non-affiliated  co-venture  partner received $578,000 as their share of the sale
proceeds. From its share of the proceeds, the Partnership prepaid its refinanced
original  zero coupon loan secured by the  property  and the related  prepayment
fee, the sum of which was  $5,449,000.  Despite  incurring a sizable  prepayment
penalty on the repayment of the  outstanding  first  mortgage  loan,  management
believed that a current sale of The Gables property was in the best interests of
the Limited  Partners due to the  exceptionally  strong market  conditions  that
exist at the  present  time and  which  resulted  in the  achievement  of a very
favorable  selling  price.  The  Partnership  distributed  the $5,153,000 of net
proceeds from the sale of The Gables, along with an amount of cash reserves that
exceeded  expected future  requirements,  in the form of a special  distribution
totalling approximately $5,243,000, or $39 per original $1,000 investment, which
was paid on July 20, 1998. The joint venture  recognized a gain of $6,400,000 on
the sale of the Gables property in fiscal 1999. The Partnership's  share of such
gain amounted to $6,031,000.

      Net income and loss were to be allocated as follows:  (1) depreciation was
to be  allocated  to the  Partnership,  (2)  income was to be  allocated  to the
Partnership and co-venturer in the same proportion as cash distributions. Losses
were to be allocated in amounts  equal to the positive  capital  accounts of the
Partnership  and  co-venturer  and (3) all other  profits  and losses were to be
allocated 70% to the Partnership and 30% to the co-venturer.

      The joint venture had entered into a management contract with an affiliate
of the co-venturer  which was cancellable at the option of the Partnership  upon
the  occurrence of certain  events.  The annual  management  fee was 5% of gross
rents, as defined.

      c)  Daniel/Metcalf Associates Partnership
          -------------------------------------

      The  Partnership   acquired  an  interest  in  Daniel/Metcalf   Associates
Partnership (the "joint venture"),  a Virginia general partnership  organized on
September 30, 1987 in  accordance  with a joint  venture  agreement  between the
Partnership  and Plaza 91 Investors,  L.P., an affiliate of Daniel Realty Corp.,
organized to own and operate Gateway Plaza Shopping Center (formerly  Loehmann's
Plaza),  a community  shopping  center  located in Overland  Park,  Kansas.  The
property,  which was 87% leased and 81% occupied as of March 31, 1999,  consists
of  approximately  142,000 net rentable square feet on approximately 19 acres of
land.

      During  fiscal 1999 the  Partnership  selected a national real estate firm
that is a leading seller of this property type to market Gateway Plaza for sale.
Preliminary  sales  materials were prepared and initial  marketing  efforts were
undertaken  in  March  1999.  A  marketing   package  was  then   finalized  and
comprehensive sale efforts began in early April 1999. As of April 30, 1999, four
offers were received.  To reduce the prospective  buyer's due diligence work and
the  time  required  to  complete  it,  updated  operating  reports  as  well as
environmental  information on the property were provided to the top  prospective
buyers,  who were asked to submit best and final  offers.  After  completing  an
evaluation  of  these  offers  and  the  relative  strength  of the  prospective
purchasers, the Partnership selected an offer and negotiated a purchase and sale
agreement in May 1999.  However,  subsequently the prospective  buyer decided to
terminate the sales contract at the conclusion of its due diligence period.  The
Partnership is currently in the process of remarketing the property. As a result
of the marketing efforts undertaken to date, it would appear as though a drop in
occupancy  at Gateway  Plaza  during  fiscal  1999 has  adversely  affected  the
property's market value.  Consequently,  the venture recorded a reduction in the
net carrying value of the Gateway Plaza operating property totalling  $2,517,000
during the current year. This  impairment loss is included in the  Partnership's
share of  unconsolidated  ventures'  losses  on the  accompanying  statement  of
operations  for the year ended March 31,  1999.  In order to  facilitate  a sale
transaction,  on March 29, 1999 the  Partnership  paid the co-venturer an amount
equal to $141,000 in return for the  co-venturer's  agreement  to exit the joint
venture.  In  connection  with the  transaction,  the  co-venturer  assigned its
interest in the joint  venture to Second  Equity  Partners,  Inc.,  the Managing
General Partner of the Partnership.  This will enable the Partnership to control
the marketing and sales process for the Gateway Plaza  property.  As a result of
the  assignment,  the  Gateway  Plaza  joint  venture  will  be  presented  on a
consolidated basis in the Partnership's financial statements beginning in fiscal
2000.

      The  aggregate  cash  investment by the  Partnership  for its interest was
$15,488,352  (including an acquisition  fee of $689,000 paid to PWPI and certain
closing costs of $64,352).  On February 10, 1995,  the joint venture  obtained a
first mortgage loan secured by the operating  investment property in the initial
principal amount of $4,000,000.  The proceeds of the loan, along with additional
funds contributed by the Partnership, were used to repay the portion of the zero
coupon note  liability  of the  Partnership  which was secured by the  operating
property (see Note 6). In addition, a portion of the proceeds were used to repay
the $700,000  mortgage  loan of the joint  venture and to establish a Renovation
and  Occupancy  Escrow in the amount of $550,000 as required by the new mortgage
loan.  The new first  mortgage loan was issued in the name of the joint venture,
bears  interest at an annual rate of 9.04% and matures on February 15, 2003. The
loan requires monthly principal and interest payments of $33,700.  Funds were to
be released from the  Renovation  and Occupancy  Escrow to reimburse the Gateway
Plaza joint venture for the costs of certain  planned  renovations  in the event
that the joint venture satisfied certain  requirements  which included specified
occupancy  and rental  income  thresholds.  As of August 1996,  eighteen  months
subsequent to the date of the loan closing,  such requirements had not been met.
Therefore,  the lender had the right to apply the balance of the escrow  account
to the payment of loan  principal.  In addition,  the lender  required  that the
Partnership  unconditionally  guaranty up to $1,400,000 of the loan  obligation.
This guaranty was to be released in the event that the joint  venture  satisfied
the requirement for the release of the Renovation and Occupancy  Escrow funds or
upon the repayment,  in full, of the entire outstanding mortgage loan liability.
During fiscal 1998, the venture achieved the aforementioned occupancy and rental
income thresholds. During the third quarter of fiscal 1998, management requested
and received the release of the  Renovation  and Occupancy  Escrow Funds and the
termination of the unconditional  guaranty. The escrow funds were distributed to
the Partnership and were used to replenish cash reserves.

      The closing of the February 1995 financing transaction described above was
executed in  conjunction  with an amendment to the  Partnership  Agreement.  The
purpose of the amendment was to establish the portion of the new first  mortgage
loan which was used to repay the borrowing of the Partnership  described in Note
6 (the "Partnership  Component") as the sole  responsibility of the Partnership.
Accordingly, any debt service payments attributable to the Partnership Component
will  be  deducted  from  the   Partnership's   share  of  operating  cash  flow
distributions  or  sale  or  refinancing  proceeds.  Furthermore,  all  expenses
associated with such portion of the new borrowing will be specifically allocated
to the  Partnership.  The  Partnership has agreed to indemnify the joint venture
and co-venture partner against all losses, damages, liabilities,  claims, costs,
fees and expenses  incurred in connection with the Partnership  Component of the
first  mortgage  loan. The portion of the new first mortgage loan which was used
to repay  the  joint  venture's  $700,000  mortgage  loan and to  establish  the
Renovation  and Occupancy  Escrow will be treated as a joint  venture  borrowing
subject to the terms and conditions of the original joint venture agreement.

      Net cash flow of the joint  venture  is to be  distributed  monthly in the
following  order of  priority:  (1) the  Partnership  will  receive a cumulative
preferred return (the "Preferred Return") of 9.25% on its initial net investment
of $14,300,000 from October,  1987 through September,  1989, 9.75% from October,
1989 through  September,  1990 and 10%  thereafter,  (2) to the  Partnership and
co-venturer for the payment of all unpaid accrued  interest and principal on all
outstanding  notes.  Any additional  cash flow shall be  distributed  75% to the
Partnership and 25% to the  co-venturer.  The  Partnership's  cumulative  unpaid
preferential return as of December 31, 1998 amounted to $3,763,000. If the joint
venture requires  additional funds after the Guaranty Period, and such funds are
not available from third party  sources,  they are to be provided in the form of
operating  and capital  deficit  loans,  75% by the  Partnership  and 25% by the
co-venturer.

      Proceeds from the sale or  refinancing of the property will be distributed
in  the  following  order  of  priority:  (1)  to  the  Partnership  and  to the
co-venturer,  to repay any additional capital contributions and loans and unpaid
preferential  returns,  (2) $15,015,000 to the Partnership,  (3) $200,000 to the
co-venturer and (4) 75% to the Partnership and 25% to the co-venturer.

      Taxable income will be allocated to the Partnership and the co-venturer in
any year in the same  proportions  as actual cash  distributions,  except to the
extent partners are required to make capital contributions,  as defined, then an
amount equal to such contribution will be allocated to the partners.  Profits in
excess  of net cash flow are  allocated  75% to the  Partnership  and 25% to the
co-venturer.  Losses  are  allocated  99%  to  the  Partnership  and  1% to  the
co-venturer. Contributions or loans made to the joint venture by the Partnership
or  co-venturer  will  result  in  a  loss  allocation  to  the  Partnership  or
co-venturer of an equal amount.

      The joint venture has entered into a management contract with an affiliate
of the original  co-venturer  cancellable at the option of the Partnership  upon
the occurrence of certain  events.  The annual  management fee is equal to 3% of
gross rents, as defined.

6.  Mortgage Notes Payable
    ----------------------

      Mortgage  notes  payable  on  the  consolidated   balance  sheets  of  the
Partnership at March 31, 1999 and 1998 consist of the following (in thousands):

                                                      1999              1998
                                                      ----              ----
     9.125%  mortgage note payable to an
     insurance  company  secured  by the
     625 North Michigan Avenue operating
     investment property (see discussion
     below).  The loan requires  monthly
     principal and interest  payments of
     $83  through  maturity  on  May  1,
     1999.  The  terms of the note  were
     modified  effective  May 31,  1994.
     The fair value of the mortgage note
     approximated  its carrying value at
     March 31, 1999 and 1998.                        $ 9,132         $ 9,282

     8.75%  mortgage  note payable to an
     insurance  company  secured  by the
     Asbury Commons operating investment
     property  (see  discussion  below).
     The loan required monthly principal
     and   interest   payments   of  $58
     through  maturity  on  October  15,
     2001.   The   fair   value  of  the
     mortgage  note   approximated   its
     carrying   value  at  December  31,
     1997.                                                 -           6,707

     9.04%  mortgage  note payable to an
     insurance  company  secured  by the
     Saratoga  Center and Hacienda Plaza
     operating  investment property (see
     discussion    below).    The   loan

<PAGE>

     required   monthly   principal  and
     interest  payments  of $29  through
     maturity on January 20,  2002.  The
     fair  value  of the  mortgage  note
     approximated  its carrying value at
     December    31,   1997.                               -           3,380
                                                     -------         -------
                                                     $ 9,132         $19,369
                                                     =======         =======

      The scheduled annual principal  payments to retire the remaining  mortgage
note payable are as follows (in thousands):

             Year ended March 31,

               2000         $    150
               2001            8,982
               2002                -
               2003                -
               2004                -
                            --------
                            $  9,132
                            ========

      On April 29, 1988, the  Partnership  borrowed  $6,000,000 in the form of a
zero coupon loan secured by the 625 North Michigan  Office  Building which had a
scheduled maturity date in May of 1995. The terms of the loan agreement required
that if the loan ratio,  as defined,  exceeded 80%, the Partnership was required
to deposit  additional  collateral  in an amount  sufficient  to reduce the loan
ratio to 80%. During fiscal 1994, the lender informed the Partnership that based
on an interim property appraisal, the loan ratio exceeded 80% and that a deposit
of additional collateral was required.  Subsequently,  the Partnership submitted
an appraisal  which  demonstrated  that the loan ratio exceeded 80% by an amount
less than previously  demanded by the lender.  In December 1993, the Partnership
deposited  additional  collateral  of  $208,876  in  accordance  with the higher
appraised  value.  The lender accepted the  Partnership's  deposit of additional
collateral but disputed  whether the  Partnership had complied with the terms of
the loan agreement  regarding the 80% loan ratio.  During the quarter ended June
30, 1994,  an agreement was reached with the lender of the zero coupon loan on a
proposal to refinance the loan and resolve the outstanding  disputes.  The terms
of the  agreement  called for the  Partnership  to make a principal  pay down of
$801,000,  including the  application of the additional  collateral  referred to
above. The maturity date of the loan, which now requires  principal and interest
payments on a monthly  basis as set forth  above,  was extended to May 31, 1999.
The terms of the loan  agreement  also required the  establishment  of an escrow
account for real estate taxes, as well as a capital  improvement escrow which is
to  be  funded  with  monthly   deposits   from  the   Partnership   aggregating
approximately $1 million through the scheduled  maturity date. Formal closing of
the modification and extension agreement occurred on May 31, 1994. Subsequent to
year-end,  the Partnership  negotiated a one-year extension of the maturity date
to May 31, 2000.  The interest rate of 9.125% and monthly  interest  payments of
$83,000 remain  unchanged.  The Partnership  paid an extension fee of $46,000 to
obtain the extension.

      On June 20, 1988, the Partnership borrowed $17,000,000 in the form of zero
coupon loans due in June of 1995. These notes bore interest at an annual rate of
10%,  compounded  annually.  As of March 31, 1994, such loans had an outstanding
balance,  including  accrued  interest,  of  approximately  $23,560,000 and were
secured by Saratoga  Center and EG&G Plaza,  Loehmann's  Plaza Shopping  Center,
Richland Terrace and Richmond Park Apartments,  West Ashley Shoppes,  The Gables
Apartments,  Treat Commons Phase II Apartments  and Asbury  Commons  Apartments.
During fiscal 1995, the remaining  balances of the zero coupon loans were repaid
from  the  proceeds  of five  new  conventional  mortgage  loans  issued  to the
Partnership's  joint venture  investees,  together with funds contributed by the
Partnership, as set forth below.

      On September 27, 1994, the Partnership  refinanced the portion of the zero
coupon  loan  secured  by the  Treat  Commons  Phase II  apartment  complex,  of
approximately $3,353,000,  with the proceeds of a new $7.4 million loan obtained
by the TCR Walnut Creek Limited Partnership joint venture. The $7.4 million loan
was secured by the Treat Commons apartment  complex,  carried an annual interest
rate of 8.54% and was scheduled to mature in 7 years. The Treat Commons property
was sold and this loan  obligation  was repaid in full on December 29, 1995.  On
September 28, 1994, the  Partnership  repaid the portion of the zero coupon loan
secured by the Asbury Commons apartment  complex,  of approximately  $3,836,000,
with the proceeds of a new $7 million loan obtained by the  consolidated  Asbury
Commons  joint  venture.  The $7 million loan was secured by the Asbury  Commons
apartment complex, carried an annual interest rate of 8.75% and was scheduled to
mature in 7 years. The loan required monthly  principal and interest payments of
$88,000.  As discussed in Note 4, the Asbury Commons  property was sold and this
loan  obligation  was repaid in full on December 21, 1998.  On October 22, 1994,
the Partnership  applied a portion of the excess proceeds from the  refinancings
of the Treat Commons and Asbury Commons  properties  described  above and repaid
the  portion  of the zero  coupon  loan which had been  secured  by West  Ashley
Shoppes of  approximately  $2,703,000 and made a partial  prepayment  toward the
portion of the zero coupon loan secured by Hacienda Business Park of $3,000,000.
On November 7, 1994, the Partnership repaid the portion of the zero coupon loans
secured by The Gables  Apartments  and the Richland  Terrace and  Richmond  Park
apartment  complexes of approximately  $2,353,000 and $2,106,000,  respectively,
with the proceeds of a new $5.2  million loan secured by The Gables  Apartments.
The new $5.2 million loan bore  interest at 8.72% and was scheduled to mature in
7 years. The loan required monthly  principal and interest  payments of $43,000.
As discussed in Note 5, The Gables  Apartments was sold and this loan obligation
was repaid in full on July 2, 1998. On February 9, 1995, the Partnership  repaid
the remaining  portion of the zero coupon loan secured by the Hacienda  Business
Park, of approximately $3,583,000,  with the proceeds of a new $3.5 million loan
obtained by the  consolidated  Hacienda Park Associates joint venture along with
additional  funds  contributed  by the  Partnership.  The $3.5  million loan was
secured by the Hacienda Business Park property,  carried an annual interest rate
of 9.04%  and was  scheduled  to mature in 7 years.  The loan  required  monthly
principal and interest payments of $36,000. As discussed in Note 4, the Hacienda
Business Park property was sold and this loan  obligation  was repaid in full on
November 20, 1998. On February 10, 1995, the  Partnership  repaid the portion of
the  zero  coupon  loan  secured  by  the  Gateway  Plaza  Shopping  Center,  of
approximately $4,093,000, with the proceeds of a new $4 million loan obtained by
the  Daniel/Metcalf  Associates  Partnership joint venture along with additional
funds  contributed  by the  Partnership.  The $4 million  loan is secured by the
Gateway  Plaza  Shopping  Center,  carries an annual  interest rate of 9.04% and
matures on February 15, 2003. The loan requires  monthly  principal and interest
payments of $34,000.  Legal liability for the repayment of the new mortgage loan
secured  by the  Gateway  Plaza  property  rests with the  unconsolidated  joint
venture. Accordingly the mortgage loan liability is recorded on the books of the
unconsolidated  joint venture.  The Partnership  has indemnified  Daniel/Metcalf
Associates   Partnership  and  the  related  co-venture  partner,   against  all
liabilities, claims and expenses associated with this borrowing.

7.  Bonds Payable
    -------------

      Bonds  payable  consisted of the Hacienda  Park joint  venture's  share of
liabilities  for bonds issued by the City of  Pleasanton,  California for public
improvements  that benefit Hacienda  Business Park and the operating  investment
property and were secured by liens on the  operating  investment  property.  The
bonds for which the operating investment property was subject to assessment bore
interest  at  rates  ranging  from  5%  to  7.87%,   with  an  average  rate  of
approximately   7.2%.   Principal  and  interest  were  payable  in  semi-annual
installments  and were due to  mature  in years  2004  through  2017.  Since the
operating  investment  property was sold on November 20, 1998, the liability for
the bond assessments has been transferred to the buyer. Therefore,  the Hacienda
Park joint venture is no longer liable for the bond assessments.

8.  Rental Revenue
    --------------

      The  building  owned by West Ashley  Shoppes  Associates  is leased  under
noncancellable, multi-year leases. Minimum future rentals due under the terms of
these leases at December 31, 1998 are as follows (in thousands):

                                    Future
                                    Minimum
                                    Contractual
                                    Payments
                                    --------

                  1999              $  888
                  2000                 837
                  2001                 756
                  2002                 471
                  2003                 210
                  Thereafter         1,142
                                    ------
                                    $4,304
                                    ======



<PAGE>

<TABLE>

Schedule III - Real Estate and Accumulated Depreciation

               PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
              SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
                                 March 31, 1999
                                 (In thousands)
<CAPTION>


                                                Cost
                             Initial Cost to  Capitalized                                                              Life on Which
                              Consolidated    Removed)                                                                 Depreciation
                                Joint        Subsequent to  Gross Amount at Which Carried at                           in Latest
                                  Ventures   Acquisition         End of Year                                           Income
                               Buildings &  Buildings &        Buildings &          Accumulated  Date of      Date     Statement
Description Encumbrances Land  Improvements Improvements Land  Improvements   Total Depreciation Construction Acquired is Computed
----------- ------------ ----  ------------ ------------ ----  ------------   ----- ------------ ------------ -------- -----------
<S>         <C>          <C>     <C>         <C>         <C>    <C>             <C>       <C>       <C>         <C>    <C>


Shopping
 Center
Charleston,
 SC         $   -       $4,243   $5,669      $(2,133)    $2,342  $5,437          $7,779   $2,307    1988        3/10/88 5 - 31.5 yrs

Notes:

(A) The  aggregate  cost of real estate  owned at December  31, 1998 for Federal income  tax  purposes  is  approximately  $10,314.

(B) See Notes 6 and 7 to the Financial  Statements for a description of the terms of the debt encumbering the
    properties.


(C) Reconciliation of real estate owned:
                                                          1998         1997       1996
                                                          ----         ----       ----

  Balance at beginning of period                       $  47,967   $  47,369   $  50,204
  Acquisitions and improvements                            1,862         598         444
  Dispositions                                           (42,050)          -           -
  Write off due to permanent impairment
    (see Note 2)                                               -           -      (3,279)
                                                      ----------   ---------   ---------

  Balance at end of period                            $    7,779   $  47,967   $  47,369
                                                      ==========   =========   =========

(D) Reconciliation of accumulated depreciation:

  Balance at beginning of period                      $   14,044      12,155   $  10,781
  Depreciation expense                                     1,944       1,889       1,953
  Dispositions                                           (13,681)          -           -
  Write off due to permanent impairment
    (see Note 2)                                               -           -        (579)
                                                    ------------   ---------   ---------

  Balance at end of period                           $     2,307   $  14,044   $  12,155
                                                     ===========   =========   =========

(E)Costs removed subsequent to acquisition  includes an impairment  writedown on the West Ashley  Shoppes  property in fiscal 1997
   (see Note 2),  $3,026 of fully depreciated  tenant  improvements  of the Hacienda joint venture  written off in
   calendar  1994,  as  well  as  certain  guaranty   payments  received  from  the co-venturers in the consolidated joint ventures
   (see Note 4).

</TABLE>


<PAGE>




                               REPORT OF INDEPENDENT AUDITORS






The Partners of
PaineWebber Equity Partners Two Limited Partnership:

      We have audited the  accompanying  combined balance sheets of the Combined
Joint  Ventures of  PaineWebber  Equity  Partners Two Limited  Partnership as of
December 31, 1998 and 1997,  and the related  combined  statements of income and
changes in venturers' capital, and cash flows for each of the three years in the
period ended December 31, 1998. Our audits also included the financial statement
schedule  listed in the Index at Item  14(a).  These  financial  statements  and
schedule  are  the   responsibility   of  the  Partnership's   management.   Our
responsibility  is to  express  an opinion  on these  financial  statements  and
schedule based on our audits.

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

      In our  opinion,  the  combined  financial  statements  referred  to above
present fairly, in all material respects, the combined financial position of the
Combined Joint Ventures of PaineWebber  Equity Partners Two Limited  Partnership
at December 31, 1998 and 1997, and the combined  results of their operations and
their cash flows for each of the three years in the period  ended  December  31,
1998, in conformity with generally accepted accounting principles.  Also, in our
opinion,  the related financial statement schedule,  when considered in relation
to the  basic  financial  statements  taken as a whole,  presents  fairly in all
material respects the information set forth therein.







                                        /s/ERNST & YOUNG LLP
                                        --------------------
                                        ERNST & YOUNG LLP





Boston,  Massachusetts
February 5, 1999,
except for Note 10, as to
which the date is
March 29, 1999.



<PAGE>


                           COMBINED JOINT VENTURES OF
               PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP

                             COMBINED BALANCE SHEETS
                           December 31, 1998 and 1997
                                 (In thousands)

                                     Assets

                                                            1998         1997
                                                            ----         ----
Current assets:
   Cash and cash equivalents                           $      412   $     395
   Accounts receivable, net of allowance for
     doubtful accounts of $45 ($45 in 1997)                   837         774
   Prepaid distribution to venturer                             -          37
   Prepaid expenses                                            12          28
                                                       ----------    --------
      Total current assets                                  1,261       1,234

Operating investment properties:
   Land                                                    13,332      15,222
   Buildings, improvements and equipment                   56,555      61,649
   Construction in progress                                     -       3,161
                                                       ----------    --------
                                                           69,887      80,032
   Less accumulated depreciation                          (23,375)    (25,130)
                                                       ----------    --------
                                                           46,512      54,902

Escrowed funds                                              1,325       1,144
Due from affiliates                                           269         269
Deferred expenses, net of accumulated
 amortization of $1,976 ($1,767 in 1997)                    1,612       1,635
Other assets                                                1,265       1,319
                                                       ----------    --------
                                                       $   52,244    $ 60,503
                                                       ==========    ========

                       Liabilities and Venturers' Capital

Current liabilities:
   Accounts payable and accrued expenses               $      312    $    481
   Accrued real estate taxes                                1,922       2,122
   Current portion - long-term debt                            63         137
                                                       ----------    --------
      Total current liabilities                             2,297       2,740

Tenant security deposits                                      260         268

Subordinated management fee payable to affiliate               50          50

Long-term debt                                              3,742       8,720

Venturers' capital                                         45,895      48,725
                                                       ----------    --------
                                                       $   52,244    $ 60,503
                                                       ==========    ========



                             See accompanying notes.


<PAGE>


                           COMBINED JOINT VENTURES OF
               PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP

         COMBINED STATEMENTS OF INCOME AND CHANGES IN VENTURERS' CAPITAL
              For the years ended December 31, 1998, 1997 and 1996
                                 (In thousands)

                                                1998        1997        1996
                                                ----        ----        ----
Revenues:
   Rental income and expense
     reimbursements                         $   9,870   $   9,814    $  9,297
   Interest and other income                      410         481         343
                                            ---------   ---------    --------
                                               10,280      10,295       9,640

Expenses:
   Loss due to impairment of operating
     investment property                        2,517           -           -
   Real estate taxes                            1,868       2,323       2,212
   Depreciation expense                         2,948       2,880       2,896
   Property operating expenses                    555         641         602
   Repairs and maintenance                        899       1,047         879
   Management fees                                297         314         318
   Professional fees                               71         107          82
   Salaries                                       575         634         591
   Advertising                                     17          60          46
   Interest expense on long-term debt           1,061         661         663
   General and administrative                     408         417         438
   Amortization expense                           325         297         262
   Bad debt expense                                 -           -          45
   Other                                            6          10           8
                                            ---------   ---------    --------
                                               11,547       9,391       9,042
                                            ---------   ---------    --------

Operating income (loss)                        (1,267)        904         598

Gain on sale of operating
  investment property                           6,400           -           -
                                            ---------   ---------    --------

Net income                                      5,133         904         598

Contributions from venturers                    1,772       2,160       2,303

Distributions to venturers                     (9,735)     (4,310)     (3,735)

Venturers' capital, beginning of year          48,725      49,971      50,805
                                            ---------   ---------    --------

Venturers' capital, end of year             $  45,895   $  48,725    $ 49,971
                                            =========   =========    ========












                             See accompanying notes.


<PAGE>
<TABLE>


                           COMBINED JOINT VENTURES OF
               PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP

                        COMBINED STATEMENTS OF CASH FLOWS
              For the years ended December 31, 1998, 1997 and 1996
                Increase (Decrease) in Cash and Cash Equivalents
                                 (In thousands)
<CAPTION>

                                                       1998        1997        1996
                                                       ----        ----        ----
<S>                                                    <C>         <C>          <C>

Cash flows from operating activities:
   Net income                                          $  5,133    $     904   $     598
   Adjustments to reconcile net income to
     net cash provided by operating activities:
     Loss due to impairment of operating
       investment property                                2,517            -           -
     Depreciation and amortization                        3,273        3,177       3,158
     Amortization of deferred financing costs                33           42          41
     Gain on sale of operating investment property       (6,400)           -           -
     Changes in assets and liabilities:
      Accounts receivable, net                              (63)        (137)         57
      Prepaid expenses                                       16           (1)        (18)
      Escrowed funds                                       (181)          43          20
      Deferred expenses                                    (335)        (366)       (230)
      Other assets                                          (54)          49         172
      Accounts payable and accrued expenses                (169)         109         102
      Accounts payable - affiliates                           -            -         (21)
      Tenant security deposits                               (8)           3          12
      Accrued real estate taxes                            (200)         105         (30)
                                                       --------    ---------   ---------
          Total adjustments                              (1,571)        3,024      3,263
                                                       --------    ---------   ---------
           Net cash provided by operating
              activities                                  3,562        3,928       3,861
                                                       --------    ---------   ---------

Cash flows from investing activities:
   Additions to operating investment properties          (1,847)      (2,380)     (2,206)
   Proceeds from sale of operating
     investment property                                 11,500            -           -
   Selling costs from sale                                 (286)           -        (190)
   Increase in restricted cash                                -          560         (18)
                                                       --------    ---------   ---------
           Net cash  provided by (used in)
               investing activities                       9,367       (1,820)     (2,414)
                                                       --------    ---------   ---------

Cash flows from financing activities:
   Principal payments on long-term debt                  (5,052)        (125)       (115)
   Distributions to venturers                            (9,679)      (4,348)     (3,786)
   Capital contributions from venturers                   1,819        2,160       2,303
                                                       --------    ---------   ---------
           Net cash used in financing activities        (12,912)      (2,313)     (1,598)
                                                       --------    ---------   ---------

Net  increase (decrease) in cash and cash
   equivalents                                               17         (205)       (151)
Cash and cash equivalents, beginning of year                395          600         751
                                                       --------    ---------   ---------
Cash and cash equivalents, end of year                 $    412    $     395   $     600
                                                       ========    =========   =========

Cash paid during the year for interest                 $  1,057    $     791   $     801
                                                       ========    =========   =========

</TABLE>



                                  See accompanying notes.


<PAGE>


                           COMBINED JOINT VENTURES OF
               PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
                     NOTES TO COMBINED FINANCIAL STATEMENTS


1  Organization
   ------------

      The  accompanying  financial  statements of the Combined Joint Ventures of
PaineWebber  Equity Partners Two Limited  Partnership  (Combined Joint Ventures)
include  the  accounts  of   Chicago-625   Partnership,   an  Illinois   general
partnership;  Richmond Gables Associates,  a Virginia general  partnership;  and
Daniel/Metcalf  Associates  Partnership,  a  Kansas  general  partnership.   The
financial  statements of the Combined  Joint  Ventures are presented in combined
form due to the nature of the relationship  between each of the co-venturers and
PaineWebber Equity Partners Two Limited Partnership ("EP2").

      The financial statements of the Combined Joint Ventures have been prepared
based on the periods that EP2 held an interest in the individual joint ventures.
The  dates of EP2's  acquisition  of  interests  in the  joint  ventures  are as
follows:
                                                       Date of Acquisition
                       Joint Venture                      of Interest
            ------------------------------------      -------------------

            Chicago-625 Partnership                   December 16, 1986
            Richmond Gables Associates                September 1, 1987 (1)
            Daniel/Metcalf Associates Partnership     September 30, 1987

      (1)On  July  2,  1998,  Richmond  Gables  Associates  sold  its  operating
         investment  property.  Richmond Gables Associates was liquidated during
         1998.

2.  Summary of Significant Accounting Policies
    ------------------------------------------

      Use of estimates
      ----------------

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

      Deferred expenses
      -----------------

      Deferred expenses include  capitalized debt issuance costs which are being
amortized on a straight-line  basis,  which  approximates the effective interest
method, over the terms of the related loans. Amortization of deferred loan costs
is  included  in  interest  expense  on the  accompanying  statement  of income.
Deferred expenses also include organization costs which are being amortized over
5 years and lease  commissions and rental  concessions which are being amortized
over the life of the applicable leases.

      Income tax matters
      ------------------

      The  Combined  Joint  Ventures  are  comprised  of entities  which are not
taxable and,  accordingly,  the results of their  operations are included on the
tax returns of the various  partners.  Accordingly,  no income tax  provision is
reflected in the accompanying combined financial statements.

      Cash and cash equivalents
      -------------------------

      For purposes of reporting cash flows, the Combined Joint Ventures consider
all highly liquid  investments,  money market funds and  certificates of deposit
purchased  with  original  maturities  of  three  months  or  less  to  be  cash
equivalents.

      Rental revenues
      ---------------

      Certain joint ventures have long-term  operating leases with tenants which
provide for fixed minimum rents and  reimbursements  of certain operating costs.
Rental  revenues are  recognized on a  straight-line  basis over the term of the
related lease agreements.

      Fair value of financial instruments
      -----------------------------------

      The  carrying  amounts of cash and cash  equivalents  and  escrowed  funds
approximate  their  respective  fair values at December 31, 1998 and 1997 due to
the short-term maturities of such instruments. Where practicable, the fair value
of long-term debt is estimated using discounted cash flow analysis, based on the
current market rates for similar types of borrowing arrangements.

      Operating investment properties
      -------------------------------

      Operating  investment  properties  are stated at cost,  net of accumulated
depreciation,  or an amount  less  than cost if  indicators  of  impairment  are
present in accordance with Statement of Financial  Accounting  Standards  (SFAS)
No. 121,  "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be  Disposed  Of," which was  adopted in 1995.  SFAS No. 121  requires
impairment  losses to be recorded on long-lived  assets used in operations  when
indicators of impairment are present and the  undiscounted  cash flows estimated
to be  generated by those assets are less than the assets  carrying  amount.  An
evaluation  of the operating  assets of  Daniel/Metcalf  Associates  Partnership
indicated that certain  operating  assets  consisting of land and  improvements,
building,  furniture and fixtures,  and tenant  improvements were impaired as of
December 31, 1998. In accordance with SFAS No. 121, the joint venture recorded a
reduction  in the net  carrying  value of such assets  amounting  to  $2,517,000
relating to land and improvements ($995,000), buildings ($1,902,000),  furniture
and fixtures ($42,000),  tenant improvements  ($223,000) and related accumulated
depreciation ($645,000).

      Through  December  31,  1994,  depreciation  expense  was  computed  on  a
straight-line basis over the estimated useful lives of the operating  investment
properties,  generally 5 years for the equipment and fixtures and 31.5 years for
the  buildings  and  improvements.  During 1995,  circumstances  indicated  that
Chicago 625 Partnership's  operating investment property might be impaired.  The
joint  venture's   estimate  of  undiscounted  cash  flows  indicated  that  the
property's carrying amount was expected to be recovered,  but that the reversion
value could be less that the carrying  amount at the time of  disposition.  As a
result of such assessment,  the venture  commenced  recording  additional annual
depreciation  charges to adjust the carrying  value of the operating  investment
property  such that it will match the  expected  reversion  value at the time of
disposition. The Combined Joint Ventures capitalized property taxes and interest
incurred during the construction  period of the projects along with the costs of
identifiable improvements.  The Combined Joint Ventures also capitalized certain
acquisition,  construction  and  guaranty  fees paid to  affiliates.  In certain
circumstances the carrying values of the operating properties have been adjusted
for mandatory payments received from venture partners.

3.  Joint Ventures
    --------------

      See Note 5 to the  financial  statements  of EP2  included  in this Annual
Report for a more detailed  description of the joint  ventures.  Descriptions of
the ventures' properties are summarized below:

      a.  Chicago-625 Partnership
          -----------------------

      The joint venture owns and operates 625 North Michigan  Avenue,  a 325,000
square foot office building located in Chicago, Illinois.

      b.  Richmond Gables Associates
          --------------------------

      The joint venture owned and operated The Gables of Erin Shades, a 224-unit
apartment  complex  located in  Richmond,  Virginia.  On July 2, 1998,  Richmond
Gables  Associates  sold The Gables at Erin Shades  Apartments  to an  unrelated
third  party  for  $11,500,000.  After  deducting  closing  costs  and  property
adjustments of $320,000,  The Gables joint venture received net sale proceeds of
$11,180,000.  These net sale proceeds were split between EP2 and its  co-venture
partner in accordance with the terms of The Gables joint venture agreement.  EP2
received $10,602,000 and the non-affiliated co-venture partner received $578,000
as their share of the sale proceeds. From its share of the proceeds, EP2 prepaid
its refinanced original zero coupon loan secured by the property and the related
prepayment  fee, the sum of which was  $5,449,000.  Despite  incurring a sizable
prepayment  penalty on the repayment of the  outstanding  first  mortgage  loan,
management  believed that a current sale of The Gables  property was in the best
interests of the Limited Partners of EP2 due to the exceptionally  strong market
conditions  that exist at the present time and which resulted in the achievement
of a very favorable selling price.

      c.  Daniel/Metcalf Associates Partnership
          -------------------------------------

      The joint  venture  owns and operates the Gateway  Plaza  Shopping  Center
(formerly  Loehmann's  Plaza),  a 142,000 square foot shopping center located in
Overland Park, Kansas.
<PAGE>

      The following description of the joint venture agreements provides certain
general information.

      Allocations of net income and loss
      ----------------------------------

      Except for certain items which are specifically allocated to the partners,
as  defined  in the  joint  venture  agreements,  the joint  venture  agreements
generally  provide that profits up to the amount of net cash flow  distributable
shall be allocated  between EP2 and the co-venturers in proportion to the amount
of net cash flow distributed to each partner for such year. Profits in excess of
net cash flow  shall be  allocated  between  59% -99% to EP2 and 1% - 41% to the
co-venturers.  Losses are allocated in varying proportions 59% - 100% to EP2 and
0% - 41% to the co-venturers as specified in the joint venture agreements.

      Gains or losses resulting from sales or other dispositions of the projects
shall be allocated as specified in the joint venture agreements.

      Distributions
      -------------

      The joint venture  agreements provide that distributions will generally be
paid from net cash flow monthly or  quarterly,  equivalent to 9% - 10% per annum
return on EP2's net investment in the joint ventures. Any remaining cash flow is
generally to be distributed  first,  to repay accrued  interest and principal on
certain loans and second,  to EP2 and the co-venturers  until they have received
their  accrued  preference  returns.  The  balance of any net cash flow is to be
distributed  in  amounts  ranging  from  59% - 75% to EP2  and  25% - 41% to the
co-venturers as specified in the joint venture agreements.

      Distributions of net proceeds upon the sale or disposition of the projects
shall  be made  in  accordance  with  formulas  provided  in the  joint  venture
agreements.

      Guaranty Period
      ---------------

      The joint venture agreements provided that during the Guaranty Periods (as
defined in the joint  venture  agreements),  in the event that net cash flow was
insufficient to fund operations including amounts necessary to pay EP2 preferred
distributions,  the  co-venturers  were to be required to fund amounts  equal to
such deficiencies. The co-venturers' obligation to fund such amounts pursuant to
their guarantees was generally to be in the form of capital contributions to the
joint  ventures.  For a  specified  period of time  subsequent  to the  Guaranty
Period,  one of the joint venture  agreements  required that mandatory  loans be
made to the joint  venture  by the  co-venturer  to the  extent  that  operating
revenues were insufficient to pay operating expenses.

      The  Guaranty  and  Mandatory  Loan  Periods  of the joint  ventures  were
generally  from the date EP2 entered a joint  venture for a period  ranging from
one to five years.

      The  expiration  dates of the Guaranty and Mandatory  Loan Periods for the
joint ventures were as follows:

                                      Guaranty Period     Mandatory Loan Period
                                      ---------------     ---------------------

      Chicago-625 Partnership         December 15, 1989            N/A
      Richmond Gables Associates      September 1, 1990            N/A
      Daniel/Metcalf Associates
        Partnership                   September 30, 1989    September 30, 1990

      As of December 31, 1998, the co-venturer in the Daniel/Metcalf  Associates
Partnership was obligated to make additional  capital  contributions of at least
$89,000 (subject to adjustment pending the venture partners' determination of an
additional  amount,  if any,  of working  capital  reserves  to be funded by the
co-venturer) with respect to cumulative  unfunded  shortfalls in EP2's preferred
return through September 30, 1990. Such additional  capital  contributions  were
not recorded as a receivable in the accompanying financial statements.

4.  Related Party Transactions
    --------------------------

      The Combined Joint Ventures  originally  entered into property  management
agreements with affiliates of the co-venturers, cancellable at EP2's option upon
the occurrence of certain  events.  The management  fees are equal to 3.5%-5% of
gross receipts, as defined in the agreements. Affiliates of certain co-venturers
also receive leasing commissions with respect to new leases acquired.

      The related  property  manager for the 625 North Michigan  property leases
space in the property  under a lease  agreement  extending  through  October 31,
2001. The 1998, 1997 and 1996 revenues include $184,000,  $178,000 and $175,000,
respectively, relating to this lease.
<PAGE>

5.  Capital Reserves
    ----------------

      The joint venture  agreements  generally  provide that reserves for future
capital  expenditures  be  established  and  administered  by  affiliates of the
co-venturers.  The  co-venturers  are to pay  periodically  into the reserve (as
defined) as funds are available  after paying all expenses and the EP2 preferred
distribution. No contributions were made to the reserves in 1998, 1997 or 1996.

6.  Rental Revenues
    ---------------

      Certain joint  ventures have  operating  leases with tenants which provide
for fixed minimum rents and  reimbursements of certain  operating costs.  Rental
revenues are  recognized on a  straight-line  basis over the life of the related
lease agreements.

      Minimum rental revenues to be recognized on the straight-line basis in the
future on noncancellable leases are as follows (in thousands):

                  1999            $  6,791
                  2000               6,364
                  2001               4,441
                  2002               3,350
                  2003               2,815
                  Thereafter         9,352
                                  --------
                                  $ 33,113
                                  ========

      Leases  with  four  tenants  of the 625  North  Michigan  Office  Building
accounted for approximately  $2,310,000, or 45%, of the rental revenue generated
by that property for 1998.

7.  Long-Term Debt
    --------------

     Long term debt  payable  at  December  31,  1998 and 1997  consists  of the
following (in thousands):

                                                      1998          1997
                                                      ----          ----

     9.04%  mortgage  note payable to an
     insurance  company  secured  by the
     Gateway Plaza operating  investment
     property. The loan requires monthly
     principal and interest  payments of
     $34  through  maturity  on February
     15, 2003 (see discussion  below).                $ 3,805        $ 3,862

     8.72%  mortgage  note payable to an
     insurance  company  secured  by the
     The  Gables  operating   investment
     property. The loan required monthly
     principal and interest  payments of
     $43 through maturity on October 15,
     2001  (see  discussion   below).                       -          4,995
                                                      -------        -------
                                                        3,805          8,857
     Less:  current  portion                              (63)          (137)
                                                      -------        -------
                                                      $ 3,742        $ 8,720
                                                      =======        =======

      On  November 7, 1994,  a mortgage  note  payable was  obtained by Richmond
Gables  Associates in the initial  principal amount of $5,200,000.  The mortgage
payable was  secured by a deed of trust on the  venture's  operating  investment
property and a collateral  assignment of the  venture's  interest in the leases.
The net proceeds from this  mortgage note payable were remitted  directly to EP2
per the  agreement  of the  partners.  EP2  used  the  proceeds  of the  loan in
conjunction with the repayment of the encumbrances described in Note 8. The fair
value of this mortgage note  approximated  its carrying value as of December 31,
1997. As discussed in Note 3, The Gables operating  investment property was sold
and this obligation was repaid in full on July 2, 1998.

      On January  27,  1995 the Gateway  Plaza  joint  venture  obtained a first
mortgage  loan,  secured by the operating  investment  property,  in the initial
principal amount of $4,000,000.  The proceeds of the loan were used to repay, in
full, a $700,000 mortgage loan outstanding at December 31, 1994 and to establish
a renovation  and occupancy  escrow in the amount of $550,000.  The remainder of
the  proceeds,  along with  additional  funds  contributed  by EP2, were used to
repay,  in full, the borrowing  described in Note 8. The new first mortgage loan
bears  interest at an annual rate of 9.04% and matures on February 15, 2003. The
loan requires monthly principal and interest payments of $34,000. On October 10,
1997, the  renovation and occupancy  escrow of $550,000 plus interest of $60,000
was released by the lender to EP2. At December 31, 1998 and 1997, the fair value
of the  mortgage  note  payable  approximated  its  carrying  value  based on an
estimate of the current  market  interest  rate which would have been charged if
the borrowing had been originated as of such dates.

      The closing of the Gateway Plaza financing transaction described above was
executed in conjunction  with an amendment to the Joint Venture  Agreement.  The
purpose of the amendment was to establish the portion of the new first  mortgage
loan which was used to repay the borrowing of EP2 described in Note 8 ("the PWEP
Component") as the sole  responsibility  of EP2.  Accordingly,  any debt service
payments  attributable  to the PWEP Component will be deducted from PWEP's share
of  operating  cash  flow   distributions  or  sale  or  refinancing   proceeds.
Furthermore, all expenses associated with such portion of the new borrowing will
be  specifically  allocated  to PWEP.  PWEP has  agreed to  indemnify  the joint
venture and the co-venturer against all losses,  damages,  liabilities,  claims,
costs,  fees and expenses  incurred in connection with the PWEP Component of the
first  mortgage  loan. The portion of the new first mortgage loan which was used
to repay the venture's  $700,000  mortgage loan and to establish the  Renovation
and Occupancy Escrow will be treated as a joint venture borrowing subject to the
terms and conditions of the original Joint Venture Agreement.

      The scheduled  annual  principal  payments to retire long-term debt are as
follows (in thousands):

                  1999             $      63
                  2000                    69
                  2001                    75
                  2002                    83
`                 2003                 3,515
                                   ---------
                                   $   3,805
                                   =========

8.  Encumbrances on Operating Investment Properties
    -----------------------------------------------

      Under the terms of the joint  venture  agreements,  EP2 is entitled to use
the joint  venture  operating  properties  as security  for certain  borrowings,
subject  to  various  restrictions.  EP2  (together  in  one  instance  with  an
affiliated  partnership)  had exercised its options pursuant to this arrangement
by  issuing  certain  zero  coupon  notes  between  April and June of 1988.  The
operating  investment  properties of all of the Combined Joint Ventures had been
pledged as  security  for these loans  which were  scheduled  to mature in 1995.
During calendar 1994, the portion of the zero coupon loans secured by The Gables
property was repaid in full from the proceeds of a new mortgage loan obtained by
the Gables  joint  venture as described in Note 7. On February 10, 1995 the zero
coupon note secured by Gateway Plaza,  due to mature in June of 1995, was repaid
in full with the proceeds of a loan obtained by this joint venture (see Note 7).

      The zero coupon loan secured by the 625 North Michigan Office Building had
required that if the loan ratio,  as defined,  exceeded 80%, then EP2,  together
with its affiliated  partnership,  was required to deposit additional collateral
in an amount sufficient to reduce the loan ratio to 80%. During 1993, the lender
informed EP2 and its affiliated  partnership  that based on an interim  property
appraisal,  the loan ratio exceeded 80% and demanded that additional  collateral
be deposited.  Subsequently,  EP2 and its  affiliated  partnership  submitted an
appraisal which  demonstrated that the loan ratio exceeded 80% by an amount less
than previously  demanded by the lender and deposited  additional  collateral in
accordance with the higher  appraised  value. The lender accepted the deposit of
additional  collateral,  but disputed whether EP2 and its affiliated partnership
had complied with the terms of the loan agreement  regarding the 80% loan ratio.
On May 31, 1994,  an agreement was reached with the lender to refinance the loan
and resolve the outstanding  disputes.  The terms of the agreement  extended the
maturity date of the loan to May 1999.  The new  principal  balance of the loan,
after a  principal  paydown  of  $1,342,000,  which  was  funded  by EP2 and its
affiliated  partnership  in  the  ratios  of  59%  and  41%,  respectively,  was
$16,225,000.  The new loan  bears  interest  at a rate of  9.125%  per annum and
requires the current  payment of interest and principal on a monthly basis based
on a  25-year  amortization  period.  Under the  terms of the  modification  and
extension  agreement,  this  loan  remains a direct  obligations  of EP2 and its
affiliate  and,  therefore,  is  not  reflected  in the  accompanying  financial
statements.  EP2 is required to make all loan payments and has  indemnified  the
joint  venture  and the other  partners  against  all  liabilities,  claims  and
expenses  associated  with this  borrowing.  At December 31, 1998, the aggregate
indebtedness of EP2 and its affiliated  partnership  which is secured by the 625
North Michigan  Office  Building was  approximately  $15,284,000.  Subsequent to
year-end,  EP2 and the affiliated partnership negotiated a one-year extension of
the  maturity  date to May 31,  2000.  The  interest  rate of 9.125% and monthly
principal  and  interest  payments  remain  unchanged.  The  terms  of the  loan
agreement also required the  establishment  of an escrow account for real estate
taxes,  as well as a  capital  improvement  escrow  which is to be  funded  with
monthly deposits from EP2 and its affiliated partnership  aggregating $1,750,000
through  the  scheduled  maturity  date of the loan.  Such escrow  accounts  are
recorded on the books of the joint  venture  and are  included in the balance of
escrowed cash on the accompanying balance sheets.
<PAGE>

9.  Property Renovation
    -------------------

      During 1997 and 1996,  the Gateway  Plaza joint venture  incurred  certain
architectural, engineering and other costs relating to a major renovation of its
operating  property.  These costs have been  capitalized and are included in the
construction in progress account in the  accompanying  balance sheet at December
31, 1997. The total cost of the renovation amounted to approximately  $3,200,000
as of December 31, 1997.

10.  Subsequent Event
    -----------------

      On March 29, 1999,  EP2 paid the  co-venturer  in the Gateway  Plaza joint
venture an amount equal to $141,000 in return for the co-venturer's agreement to
exit the joint venture.  In connection  with the  transaction,  the  co-venturer
assigned  its  interest in the  Gateway  Plaza  joint  venture to Second  Equity
Partners, Inc., the Managing General Partner of EP2.

<PAGE>
<TABLE>



Schedule III - Real Estate and Accumulated Depreciation

                           COMBINED JOINT VENTURES OF
               PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
              SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
                                December 31, 1998

                                 (In thousands)
<CAPTION>


                                                Cost
                             Initial Cost to  Capitalized                                                              Life on Which
                              Consolidated    Removed)                                                                 Depreciation
                                Joint        Subsequent to  Gross Amount at Which Carried at                           in Latest
                                  Ventures   Acquisition         End of Year                                           Income
                               Buildings &  Buildings &        Buildings &          Accumulated  Date of      Date     Statement
Description Encumbrances Land  Improvements Improvements Land  Improvements   Total Depreciation Construction Acquired is Computed
----------- ------------ ----  ------------ ------------ ----  ------------   ----- ------------ ------------ -------- -----------
<S>         <C>          <C>       <C>       <C>         <C>      <C>         <C>       <C>       <C>         <C>       <C>

COMBINED JOINT VENTURES:

Office
 Building
Chicago,
 IL         $15,284      $ 8,112   $35,682   $ 9,511     $ 8,112  $45,193     $53,305   $19,993   1968        12/16/86  5 - 17 yrs

Shopping
 Center
Overland
 Park, KS     3,805        6,265     8,874     1,443       5,220   11,362      16,582     3,382   1980        9/30/87   7 - 31.5 yrs
            -------     --------   -------   -------     -------  -------     -------   -------
            $19,089     $14,377    $44,556   $10,954     $13,332  $56,555     $69,887   $23,375
            =======     =======    =======   =======     =======  =======     =======   =======
Notes:

(A)  The  aggregate  cost of real estate  owned at December 31, 1998 for Federal income tax purposes is approximately $63,857.

(B)  See Notes 7 and 8 to the Combined Financial Statements for a description of  the terms of the debt encumbering the properties.

(C) Reconciliation of real estate owned:
                                                  1998        1997        1996
                                                  ----        ----        ----

  Balance at beginning of period             $  80,032    $ 77,652   $  75,772
  Acquisitions and improvements                  1,847       2,380       2,206
  Decrease due to sales                         (8,830)          -           -
  Write-offs due to impairment/disposals        (3,162)          -        (326)
                                             ---------   ---------   ---------
  Balance at end of period                   $  69,887   $  80,032   $  77,652
                                             =========   =========   =========

(D) Reconciliation of accumulated depreciation:

  Balance at beginning of period             $  25,130   $  22,250   $  19,680
  Depreciation expense                           2,948       2,880       2,896
  Decrease due to sales                         (4,058)          -           -
  Write-offs due to impairment/disposals          (645)          -        (326)
                                             ---------   ---------   ---------
  Balance at end of period                   $  23,375   $  25,130   $  22,250
                                             =========   =========   =========
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