UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                             ----------------------

                                    FORM 10-Q

             (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
                      THE SECURITIES EXCHANGE ACT OF 1934.
                FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
                                       OR
          ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                        SECURITIES EXCHANGE ACT OF 1934.
                 FOR THE TRANSITION PERIOD FROM ______ TO ______



                         Commission File Number 33-14582
                        PAINEWEBBER R&D PARTNERS II, L.P.
             (Exact name of registrant as specified in its charter)



              DELAWARE                                      13-3437420
   (State or other jurisdiction of                       (I.R.S. Employer
   incorporation or organization)                       Identification No.)


1285 AVENUE OF THE AMERICAS, NEW YORK, NEW YORK                 10019
   (Address of principal executive offices)                  (Zip code)

       Registrant's telephone number, including area code: (212) 713-2000

                             ----------------------

      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
                                               ---    ---

                             ----------------------


<PAGE>

                             SPECIAL NOTE REGARDING
                           FORWARD LOOKING STATEMENTS



      The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Except for the historical information
contained herein, the matters discussed herein are forward-looking statements.
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors that may cause the actual results, performance or achievements
of PaineWebber R&D Partners II, L.P. or industry results to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. Such factors include, among others,
the following: general economic and business conditions; fluctuations in the
value of securities for which only a limited, or no, public market exists;
dependence on the development of new technologies; dependence on timely
development and introduction of new and competitively priced products; the need
for regulatory approvals; the Sponsor Companies (hereinafter defined) having
insufficient funds to commercialize products to their maximum potential; the
restructuring of Sponsor Companies; the dependence of PaineWebber R&D Partners
II, L.P. on the skills of certain scientific personnel; and the dependence of
PaineWebber R&D Partners II, L.P. on the General Partner (hereinafter defined).

<PAGE>

                        PAINEWEBBER R&D PARTNERS II, L.P.
                        (A DELAWARE LIMITED PARTNERSHIP)


                                    FORM 10-Q
                               SEPTEMBER 30, 1997



                                           Table of Contents

PART I.   FINANCIAL INFORMATION                                    Page

Item 1.   Financial Statements

          Statements of Financial Condition (unaudited) at           2
          September 30, 1997 and December 31, 1996

          Statements of Operations
          (unaudited) for the three months and nine months
          ended September 30, 1997 and 1996                          3

          Statement of Changes in Partners' Capital
          (unaudited) for the nine months
          ended September 30, 1997                                   4

          Statements of Cash Flows
          (unaudited) for the nine months
          ended September 30, 1997 and 1996                          5

          Notes to Financial Statements
          (unaudited)                                                6-12

Item 2.   Management's Discussion and Analysis of Financial         13-14
          Condition and Results of Operations

PART II.  OTHER INFORMATION

Item 1.   Legal Proceedings                                         15-16

Item 5.   Other Information                                         16

Item 6.   Exhibits and Reports on Form 8-K                          16

          Signatures                                                17

All schedules are omitted either because they are not applicable or the
information required to be submitted has been included in the financial
statements or notes thereto.


<PAGE>

                         PART I - FINANCIAL INFORMATION
                         ------------------------------

ITEM 1. FINANCIAL STATEMENTS
----------------------------

PAINEWEBBER R&D PARTNERS II, L.P.
(A DELAWARE LIMITED PARTNERSHIP)

STATEMENTS OF FINANCIAL CONDITION
(unaudited)
                                                September 30,      December 31,
                                                    1997               1996
--------------------------------------------------------------------------------
Assets:

     Cash                                        $    6,999         $    5,028
                                                                   
     Marketable securities, at market value         145,731            899,197
                                                                   
     Investments, at fair value                   5,036,252          1,633,000
                                                                   
     Due from product development project           886,544               --
                                                                   
     Advances to product development projects          --              135,519
                                                                   
     Royalty income receivable                        6,001            774,834
                                                 ----------         ----------
Total assets                                     $6,081,527         $3,447,578
                                                 ==========         ==========
                                                                   
Liabilities and partners' capital:                                 
                                                                   
     Due to product development project          $     --           $  297,000
                                                                   
     Accrued liabilities                            156,876             97,188
                                                                   
     Partners' capital                            5,924,651          3,053,390
                                                 ----------         ----------
Total liabilities and partners' capital          $6,081,527         $3,447,578
                                                 ==========         ==========
--------------------------------------------------------------------------------
See notes to financial statements.

                                       2
<PAGE>


PAINEWEBBER R&D PARTNERS II, L.P.
(A DELAWARE LIMITED PARTNERSHIP)

STATEMENTS OF OPERATIONS
(unaudited)

For the three months ended September 30,                 1997           1996
--------------------------------------------------------------------------------
Revenues:
     Interest income                                 $    14,984    $    15,290
     Income from product development projects          1,499,381        280,128
     Realized gain from sale of product
       development projects                                 --          552,001
     Unrealized  appreciation of  investments
      and marketable securities                          683,701        393,250
                                                     -----------    -----------
                                                       2,198,066      1,240,669
                                                     -----------    -----------

Expenses:
     General and administrative costs                    125,335         46,878
                                                     -----------    -----------

Net income                                           $ 2,072,731    $ 1,193,791
                                                     ===========    ===========

Net income per partnership unit:
     Limited partners (based on 8,257 units)         $    248.52    $    143.13
     General partner                                 $ 20,727.31    $ 11,937.91


--------------------------------------------------------------------------------
For the nine months ended September 30,                  1997           1996
--------------------------------------------------------------------------------
Revenues:
     Interest income                                 $    71,305    $    36,400
     Income from product development projects          6,552,481        485,615
     Realized gain on sale of product 
      development projects                                  --          552,001
     Unrealized appreciation (depreciation) of
      investments and marketable securities            1,371,828     (1,562,050)
     Realized gain  (loss) on sale of 
        investments and marketable securities            540,000        (53,421)
                                                     -----------    -----------
                                                       8,535,614       (541,455)
                                                     -----------    -----------

Expenses:
     Expenditures under product development
      projects                                            20,483           --
     Management fee                                         --          137,010
     General and administrative costs                    222,608        150,207
                                                     -----------    -----------
                                                         243,091        287,217
                                                     -----------    -----------
Net income (loss)                                    $ 8,292,523    $  (828,672)
                                                     ===========    ===========

Net income (loss) per partnership unit:
     Limited partners (based on 8,257 units)         $    994.26    $    (99.36)
     General partner                                 $ 82,925.23    $ (8,286.72)
--------------------------------------------------------------------------------
See notes to financial statements.

                                       3
<PAGE>

PAINEWEBBER R&D PARTNERS II, L.P.
(A DELAWARE LIMITED PARTNERSHIP)

STATEMENT OF CHANGES IN PARTNERS' CAPITAL
(unaudited)

For the nine months ended                Limited        General
September 30, 1997                       Partners       Partner         Total
--------------------------------------------------------------------------------
Balance at January 1, 1997             $ 3,018,776     $ 34,614     $ 3,053,390

Net income                               8,209,598       82,925       8,292,523
Cash distributions                      (5,367,050)     (54,212)     (5,421,262)
                                       -----------     --------     -----------
Balance at September 30, 1997          $ 5,861,324     $ 63,327     $ 5,924,651
                                       ===========     ========     ===========


See notes to financial statements.

                                       4
<PAGE>

PAINEWEBBER R&D PARTNERS II, L.P.
(A DELAWARE LIMITED PARTNERSHIP)

STATEMENTS OF CASH FLOWS
(unaudited)

For the nine months ended September 30,                  1997            1996
--------------------------------------------------------------------------------

Cash flows from operating activities:
Net income  (loss)                                   $ 8,292,523    $  (828,672)
Adjustments to reconcile net income (loss) to cash
  provided by operating activities:
Unrealized  (appreciation) depreciation of
  investments and marketable securities               (1,371,828)     1,562,050

Decrease (increase) in operating assets:
  Marketable securities                                  753,466        861,996
  Investments                                         (2,031,424)        49,126
  Interest receivable                                       --            5,518
  Due from product development project                  (886,544)          --
  Advances to product development projects               135,519         28,866
  Royalty income receivable                              768,833         10,158

(Decrease) increase in operating liabilities:
  Due to product development project                    (297,000)          --
  Accrued liabilities                                     59,688        (23,901)
                                                     -----------    -----------
Cash provided by operating activities                  5,423,233      1,665,141
                                                     -----------    -----------

Cash flows from financing activities:
  Distributions to partners                           (5,421,262)    (1,666,024)
                                                     -----------    -----------

Increase (decrease) in cash                                1,971           (883)

Cash at beginning of period                                5,028          5,858
                                                     -----------    -----------

Cash at end of period                                $     6,999    $     4,975
                                                     ===========    ===========

--------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
The Partnership paid no cash for interest or taxes during the nine months ended
September 30, 1997 and 1996.
--------------------------------------------------------------------------------
See notes to financial statements.

                                       5

<PAGE>
                        PAINEWEBBER R&D PARTNERS II, L.P.
                        (A DELAWARE LIMITED PARTNERSHIP)


                          NOTES TO FINANCIAL STATEMENTS
                                   (UNAUDITED)


1.    ORGANIZATION AND BUSINESS


      The financial information as of and for the periods ended September 30,
1997 and 1996 is unaudited. However, in the opinion of management of PaineWebber
R&D Partners II, L.P. (the "Partnership"), such information includes all
adjustments, consisting only of normal recurring accruals, necessary for a fair
presentation. The results of operations reported for the interim periods ended
September 30, 1997, are not necessarily indicative of results to be expected for
the year ended December 31, 1997. These financial statements should be read in
conjunction with the most recent annual report of the Partnership on Form 10-K
for the year ended December 31, 1996, and the previously issued quarterly
reports on Forms 10-Q for the quarters ended March 31 and June 30, 1997.

      The Partnership is a Delaware limited partnership that commenced
operations on September 30, 1987 with a total of $72.0 million available for
investment. PWDC Holding Company (the "Manager") is the general partner of
PaineWebber Technologies II, L.P. (the "General Partner"), which is the general
partner of the Partnership. PWDC Holding Company is a wholly owned subsidiary of
Paine Webber Development Corporation ("PWDC"), an indirect, wholly owned
subsidiary of Paine Webber Group Inc. ("PWG"). The Partnership will terminate on
December 31, 2012, unless its term is extended or reduced by the General
Partner.

     The principal objective of the Partnership is to provide long-term capital
appreciation to investors through investing in the development and
commercialization of new products with technology companies ("Sponsor
Companies"), which are expected to address significant market opportunities. The
Partnership has been engaged in diverse product development projects (the
"Projects") including product development contracts, participation in other
partnerships and investments in securities of the Sponsor Companies. Once the
product development phase is completed, the Sponsor Companies have the option to
license and commercialize the products resulting from the product development
project, and the Partnership has the right to receive payments based upon the
sale of such products. The Partnership obtained warrants to purchase the common
stock of Sponsor Companies. These warrants have the potential to provide
additional capital appreciation to the Partnership which is not directly
dependent upon the outcome of the Projects (see Note 5).

                                       6
<PAGE>

                        PAINEWEBBER R&D PARTNERS II, L.P.
                        (A DELAWARE LIMITED PARTNERSHIP)


                          NOTES TO FINANCIAL STATEMENTS
                                   (UNAUDITED)


(NOTE 1 CONTINUED)

      All distributions to the limited partners of the Partnership (the "Limited
Partners") and the General Partner (collectively, the "Partners") from the
Partnership have been made pro rata in accordance with their respective net
capital contributions. The following table sets forth the proportion of each
distribution to be received by the Limited Partners and the General Partner,
respectively:

                                                         LIMITED    GENERAL
                                                         PARTNERS   PARTNER
                                                         --------   -------
I.   Until the value of the aggregate
     distributions for each limited partnership
     unit ("Unit") equals $10,000 plus simple
     interest on such amount accrued at 7% per
     annum for each Unit sold at the Initial
     Closing (6% per annum for each subsequent
     Unit sold up to the 5,000th Unit and 5% per
     annum for each Unit sold thereafter)
     ("Contribution Payout")........................        99%        1%

II.  After Contribution Payout and until the value
     of the aggregate distributions for each Unit
     equals $50,000 ("Final Payout")..............          80%       20%

III. After Final Payout...........................          75%       25%

      For the nine months ended September 30, 1997, the Partnership made cash
distributions totaling $5,421,262 ($650 per Unit; $54,212 to the General
Partner). At September 30, 1997, the Partnership has made cash and security
distributions, as valued on the dates of distribution, since inception of $2,516
and $7,206 per Unit, respectively.

      Effective August 18, 1997, the General Partner discontinued the right of
Limited Partners to transfer Units except for transfers that may occur as of the
result of the laws of descent and distribution or by operation of law (see Note
8 - Subsequent Events).

         On August 15,1997, BioRoyalties, L.L.C., on behalf of Pharmaceutical
Royalties, L.L.C. and Pharmaceutical Royalty Investments Ltd., commenced a
tender offer to purchase any and all Units at a price per Unit of $3,650, net to
the seller in cash and subject to reduction for certain distributions (as
hereafter amended, the "Tender Offer") (see Note 8 - Subsequent Events).

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      The financial statements are prepared in conformity with generally
accepted accounting principles which require management to make certain
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.

      Marketable securities consist of a money market fund and common stock
which are recorded at market value. Marketable securities are not considered
cash equivalents for the Statements of Cash Flows.

                                       7
<PAGE>

                        PAINEWEBBER R&D PARTNERS II, L.P.
                        (A DELAWARE LIMITED PARTNERSHIP)


                          NOTES TO FINANCIAL STATEMENTS
                                   (UNAUDITED)

(NOTE 2 CONTINUED)

      Realized and unrealized gains or losses are determined on a specific
identification method and are reflected in the Statements of Operations during
the period in which the change in value occurs.

      The Partnership invests in product development contracts with Sponsor
Companies either directly or through product development limited partnerships.
The Partnership expenses product development costs when incurred by the Sponsor
Companies and such costs are reflected as expenditures under product development
projects in the accompanying Statements of Operations. Income received and/or
accrued from investments in Projects is reflected in the Statements of
Operations for the period in which the income is earned.

      The Partnership carries warrants at a zero value in cases where the
Sponsor Company's stock is not publicly traded or the exercise period has not
been attained. To the extent that the Partnership's warrants are currently
exercisable and the Sponsor Company's stock is publicly traded, the warrants are
carried at intrinsic value (the excess of market price per share over the
exercise price per share), which approximates fair value.

3.    MARKETABLE SECURITIES AND INVESTMENTS

      MARKETABLE SECURITIES:


      The Partnership held the following marketable securities:

                                      SEPTEMBER 30, 1997     DECEMBER 31, 1996
                                      ------------------     -----------------
                                      MARKET        COST      MARKET     COST
                                      ------        ----      ------     ----

Money market fund                  $   12,555   $   12,555   $799,097   $799,097
Centocor, Inc. 
     (2,800 common shares)            133,176       37,324    100,100     37,324
                                   ----------   ----------   --------   --------
                                   $  145,731   $   49,879   $899,197   $836,421
                                   ==========   ==========   ========   ========

      In February 1996, the Partnership exercised its warrant to purchase 2,800
common shares of Centocor, Inc. ("Centocor") at an exercise price of $37,324
($13.33 per share). At September 30, 1997, Centocor common stock had a market
value of $47.563 per share as compared to $31.0625 and $35.75 per share at June
30, 1997 and December 31, 1996, respectively. Accordingly, the Partnership
recognized unrealized appreciation of $46,201 and $33,076 for the three months
and nine months ended September 30, 1997.

                                       8
<PAGE>

                        PAINEWEBBER R&D PARTNERS II, L.P.
                        (A DELAWARE LIMITED PARTNERSHIP)


                          NOTES TO FINANCIAL STATEMENTS
                                   (UNAUDITED)

(NOTE 3 CONTINUED)

INVESTMENTS:

      The Partnership held the following investments:

                                                    SEPTEMBER 30,   DECEMBER 31,
                                                        1997           1996
Cygnus, Inc.
                            255,000 common shares    $5,036,252       $       --
Cygnus, Inc.                                                        
     Warrant to purchase:   255,000 common shares            --        1,173,000
OEC Medical Systems, Inc.                                           
     Warrant to purchase:   200,000 common shares            --          460,000
                                                     ----------       ----------
                                                     $5,036,252       $1,633,000
                                                     ----------       ----------
                                                                   

In September 1997, the Partnership exercised its warrant for 255,000 shares of
Cygnus, Inc. ("Cygnus") at an aggregate exercise price of $2,524,500 ($9.90 per
share). At September 30, 1997, the market price per share was $19.75 as compared
to $17.25 and $14.50 as of June 30, 1997 and December 31, 1996, respectively.
Accordingly, the Partnership recognized unrealized appreciation for the three
months and nine months ended September 30, 1997 of $637,500 and $1,338,750,
respectively. During the nine months ended September 30, 1997, the Partnership
sold its warrant to purchase shares of OEC Medical Systems, Inc. ("OEC") for
proceeds of $1,000,000 and recognized a gain in the amount of $540,000. At
December 31, 1996, the Partnership recorded its warrants to purchase common
shares of Cygnus and OEC (with an exercise price of $12.70 per share) as
investments with carrying values equal to their intrinsic values (which
approximate fair value). At September 30, 1996, the Partnership recorded its
investment in a warrant to purchase 300,000 Cygnus shares (45,000 shares were
subsequently exercised and sold by the Partnership during 1996) at a market
value of $17.125 per share as compared to carrying values of $15.25 and $22.375
per share at June 30, 1996 and December 31, 1995, respectively. Accordingly, the
Partnership recognized unrealized appreciation of $562,500 and unrealized
depreciation of $1,575,000 for the three months and nine months ended September
30, 1996, respectively.


4.  RELATED PARTY TRANSACTIONS

      Commencing July 1, 1996, the Manager elected to discontinue the quarterly
management fee charged to the Partnership for management and administrative
services. The management fees paid by the Partnership to the Manager in 1996
were $137,010.

      The money market fund invested in by the Partnership is managed by an
affiliate of PaineWebber Incorporated ("PWI").

                                       9
<PAGE>

                        PAINEWEBBER R&D PARTNERS II, L.P.
                        (A DELAWARE LIMITED PARTNERSHIP)


                          NOTES TO FINANCIAL STATEMENTS
                                   (UNAUDITED)

(NOTE 4 CONTINUED)

      PWDC and PWI, and its affiliates, have acted in an investment banking
capacity for several of the Sponsor Companies. In addition, PWDC and its
affiliates have direct limited partnership interests in some of the same
Projects as the Partnership.

5.  PRODUCT DEVELOPMENT PROJECTS

     Of the Partnership's nine original Projects, three are currently active:
Centocor Partners III, L.P. ("CP III"); Genzyme Development Partners, L.P.; and
Synergen Clinical Partners, L.P.

      On January 31, 1997, pursuant to the provisions of the Partnership
Purchase Option Agreement between Centocor and the Partnership, Centocor
exercised its option to purchase the limited partnership interests of CP III,
including those owned by the Partnership. The Partnership received an initial
payment and will receive future quarterly payments based on sales of ReoPro, a
drug developed by CP III. For the three months and nine months ended September
30, 1997, the Partnership received and/or accrued income from CP III in the
amounts of $1,493,324 and $6,529,019, respectively, which have been included in
the accompanying Statements of Operations.

      On July 2, 1996, the Partnership and FOCUS Surgery, Inc. ("FOCUS") entered
into a Letter Agreement whereby the Partnership consented to the sale by FOCUS
to Takai Hospital Supply Co. of the technology developed under the product
development agreement between FOCUS and the Partnership free and clear of the
Partnership's interests therein. In exchange, the Partnership received $562,000
and recognized a gain upon the sale of the technology for this amount for the
periods ended September 30, 1996.

      If the Projects produce any product for commercial sale, the Sponsor
Companies have the option to enter into joint ventures or royalty agreements
with the Partnership to manufacture and market the products developed. In
addition, the Sponsor Companies have the option to purchase the Partnership's
interest in the technology. In consideration for such purchase options, the
Partnership received warrants to purchase shares of common stock of the Sponsor
Companies. In September 1997, the Partnership exercised its warrant to purchase
Cygnus shares (see Marketable Securities). The Partnership's warrant to purchase
193,000 shares of Cayenne Software, Inc. at an exercise price of $16.19 per
share expired in June 1997. The Partnership did not exercise the warrant since,
during the exercise period, the market price of the stock never exceeded the
exercise price of the warrant. As of September 30, 1997, the Partnership held no
warrants.

6.  INCOME TAXES

      The Partnership is not subject to federal, state or local income taxes.
Accordingly, the individual Partners are required to report their distributive
shares of realized income and loss on their individual federal and state income
tax returns.

                                       10
<PAGE>

                        PAINEWEBBER R&D PARTNERS II, L.P.
                        (A DELAWARE LIMITED PARTNERSHIP)


                          NOTES TO FINANCIAL STATEMENTS
                                   (UNAUDITED)

7.  LEGAL PROCEEDING

      On July 12, 1995, the Partnership commenced a derivative action against
Centocor and Centocor Development Corporation III ("CDC III") in the Chancery
Court of Delaware (the "Court") arising from certain agreements entered into by
Centocor and Eli Lilly & Company ("Lilly") in July 1992. The Partnership's
complaint alleges, among other things that: at least $25 million of the $100
million paid by Lilly to Centocor represents profits from the sale of ReoPro, a
Centocor drug, that Centocor is required to share with CP III; and because of
the Lilly transaction, Centocor was required to increase the percentages of
profits and revenues from ReoPro that it pays to CP III investors. Centocor had
taken the position that only $500,000 of the $100 million had to be shared with
CP III and that Centocor had no obligation to increase the percentages of ReoPro
profits and revenues that it pays to CP III investors. The Partnership sought to
proceed on behalf of CP III. The complaint seeks to require Centocor and CDC III
to pay damages to CP III and to increase the percentages of future ReoPro
profits and revenues that Centocor must pay to CP III and its investors.

      Centocor answered the Partnership's complaint, as well as a similar
complaint filed by John E. Abdo, another limited partner of CP III, denying the
material allegations of those complaints and asserting purported affirmative
defenses and third-party claims against PWG, PWDC and PWI.

      In April and July 1996, Mr. Abdo moved to amend his complaint to assert
claims on behalf of CP III against two of PWDC's nominees to the CDC III Board
of Directors. On July 12, 1996, counsel chosen by Centocor to represent CP III
moved to disqualify the Partnership from serving as a plaintiff in this action,
alleging that Mr. Abdo should by the sole plaintiff because the Partnership has
conflicts of interest with CP III and its other limited partners, including
conflicts arising out of the alleged claims against the PWDC nominees. Mr. Abdo
and Centocor also moved to disqualify the Partnership. In January 1997, the
Court granted, in part, Mr. Abdo's motion to amend his complaint to assert
claims against the PWDC nominees. The Court has not ruled on the motions to
disqualify.

       In June 1997, the parties to the Partnership's action entered into an
agreement to settle the action. The agreement provides, among other things, for
Centocor to pay to CP III investors (including the Partnership, a former limited
partner in CP III) in the aggregate: $10.8 million, net of attorneys' fees and
expenses as may be awarded by the Court; an additional $5.0 million, if and when
cumulative world-wide sales of ReoPro exceed $600 million; and possible
additional payments totaling $2.2 million, depending upon regulatory
developments in Japan.

      The agreement further provides for revisions to the ReoPro royalties
payable by Centocor to CP III investors through 2007. Under the agreement, those
royalties would be paid based on revenues from end-sales by Lilly and other
distributors, as opposed to Centocor's revenues on its sales to distributors.
For 1997 and 1998, Centocor would pay an aggregate of 6.5% of the first $175
million of United States end-sale revenues, 3.25% of such revenues above $175
million, and 3.25% of foreign end-sales revenues. For 1999 through 2007,
Centocor would pay an aggregate of 6.5% of the first $250 million of United
States end-sale revenues, 4% of such revenues above $250 million, and 3.25% of
foreign end-sales revenues. Depending upon the future success of ReoPro, PWDC
believes that the adjustments may result in an increase over what Centocor would
have paid in the absence of the litigation and settlement. In any event, the
agreement provides that investors will not receive less than Centocor would
otherwise have paid based on Centocor's sales of ReoPro.

                                       11
<PAGE>

                        PAINEWEBBER R&D PARTNERS II, L.P.
                        (A DELAWARE LIMITED PARTNERSHIP)


                          NOTES TO FINANCIAL STATEMENTS
                                   (UNAUDITED)

(NOTE 7 CONTINUED)

      On June 27, 1997, the Court entered an order: preliminarily approving the
settlement; providing for notice to a class consisting of all holders of CP III
Class A and C limited partnership interests as of the close of business on
January 31, 1997, and all holders of CP III Class B limited partnership
interests as of the close of business on May 31, 1997, and their transferees,
successors, and assigns, other than defendants; and designating the
Partnership's counsel as counsel for the class.

      Mr. Abdo and Pharmaceutical Partners, L.P., another former limited partner
of CP III, have objected to the proposed settlement. They have asserted, among
other things, that the consideration is inadequate and that the proposed
allocations of the consideration among the classes of former limited partners of
CP III improperly favors the Partnership. On September 4, 1997, the Court held a
hearing on the objections and reserved decision.

      PWDC has been advancing, and may continue to advance, the funds necessary
to pay the Partnership's legal fees and expenses relating to this litigation. In
the event of a recovery on behalf of CP III, the Court may award legal fees and
expenses to the Partnership's counsel to be paid out of the CP III recovery.
Counsel for the Partnership has stated that they intend to apply to the Court
for an award of fees and expenses in an amount up to $1.5 million. Counsel for
Mr. Abdo has stated that he intends to object to any such application, and, if
the settlement is approved, will himself apply for an award of fees and
expenses. It is anticipated that: the net proceeds of any recovery will be
distributed to the limited partners of CP III, including the Partnership, on a
pro rata basis; the Partnership and/or its counsel will reimburse PWDC; and any
remaining Partnership proceeds will be distributed to the Partners of the
Partnership on a pro rata basis.

8. SUBSEQUENT EVENTS

      The Tender Offer expired on October 7, 1997.

      Effective October 8, 1997, the General Partner removed the previously
imposed restrictions on transferability of Units to permit, subject to the
approval of the General Partner, transfers in addition to those that occur as a
result of the laws of descent and distribution or by operation of law.

                                       12
<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-------------------------------------------------------------------------------
        OF OPERATIONS
        -------------

LIQUIDITY AND CAPITAL RESOURCES

      Partners' capital increased from $3.1 million at December 31, 1996, to
$5.9 million at September 30, 1997, resulting primarily from the recognition of
income of $8.3 million for the nine months ended September 30, 1997 (as more
fully explained in Results of Operations below) offset by cash distributions to
the Partners of $5.4 million.

      The Partnership's working capital is invested in marketable securities and
a money market fund. Liquid assets at September 30, 1997 and December 31, 1996,
were $0.2 million and $0.9 million, respectively. The decrease of $0.7 million
was due to proceeds received from a Project of $6.5 million and the sale of an
investment for proceeds of $1.0 million offset by a cash distribution of $5.4
million; the exercise of a warrant for Cygnus common stock at a price of $2.5
million; and a payment to a Project of $0.3 million. The balance of liquid
assets will be used for the payment of administrative costs related to managing
the Partnership's investments.

RESULTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THE THREE MONTHS ENDED
------------------------------------------------------------------------
SEPTEMBER 30, 1996:
-------------------

      Net income for the quarters ended September 30, 1997 and 1996 was $2.1
million and $1.2 million, respectively. The favorable variance of $0.9 million
resulted primarily from an increase in revenues of this amount.

      Revenues for the quarters ended September 30, 1997 and 1996 were $2.2
million and $1.3 million, respectively. The increase of $0.9 million was due
primarily to an increase in unrealized appreciation of investments and
marketable securities of $0.3 million and an increase of $1.2 million in income
from product development projects and a decrease in realized gain from sale of
product development projects of $0.6 million. Unrealized appreciation of
investments and marketable securities for the quarters ended September 30, 1997
and 1996 was $0.7 million and $0.4 million, respectively. Unrealized
appreciation for the three months ended September 30, 1997, was due primarily to
an increase in the market value per share of Cygnus stock from $17.25 at June
30, 1997 to $19.75 as of September 30, 1997. Accordingly, the Partnership
recognized unrealized appreciation of $0.6 million on its investment of 0.25
million shares. During the quarter ended September 30, 1996, the Partnership
recognized unrealized appreciation of $0.6 million resulting from the increase
in market value of Cygnus common stock from $15.25 per share at June 30, 1996 to
$17.125 per share at September 30, 1996. For the same period, the Partnership
recognized unrealized depreciation of $0.2 million attributable to the
Partnership's investment in a warrant to purchase 0.2 million shares of OEC
Medical Systems, Inc. resulting from the decline in the market value per share
from $13.625 at June 30, 1996 to $12.50 at September 30, 1996. On January 31,
1997, Centocor exercised its option to purchase the limited partnership
interests of CP III (including those owned by the Partnership) for an initial
payment plus the right to receive quarterly future payments based upon sales of
certain products developed by CP III. For the quarter ended September 30, 1997,
the Partnership accrued income due from CP III in the amount of $1.5 million.
For this same period in 1996 the Partnership accrued income from product
development projects of $0.3 million. For the three months ended September 30,
1996, the Partnership sold its interests in product development programs with
FOCUS and CLI for proceeds of $0.6 million and recognized a gain from the sales
of this amount.

                                       13
<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-------------------------------------------------------------------------------
        OF OPERATIONS
        -------------

NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
--------------------------------------------------------------------------------
30, 1996:
---------

      Net income (loss) for the nine months ended September 30, 1997 and 1996
was $8.3 million and $(0.8) million, respectively. The favorable variance of
$9.1 million resulted primarily in an increase in revenues of $9.0 million.

      Revenues for the nine months ended September 30, 1997 and 1996 were $8.5
million and $(0.5) million, respectively. The increase of $9.0 million was due
primarily to increases of $6.1 million in income from product development
projects; $0.6 million in gain on the sale of investments and marketable
securities; and unrealized appreciation of investments of $3.0 million offset by
a decrease of $0.6 million in realized gain on sale of product development
projects (see three months ended September 30, 1997 compared to three months
ended September 30, 1996). On January 31, 1997, Centocor exercised its option to
purchase the limited partnership interests of CP III (including those owned by
the Partnership). The Partnership received an initial payment and the right to
receive future payments based upon sales of certain products developed by CP
III. For the nine months ended September 30, 1997, the Partnership received
and/or accrued income due in connection with its investment in CP III of $6.6
million. During the same period in 1996 the Partnership accrued income from
product development projects of $0.5 million. During the nine months ended
September 30, 1997, the Partnership sold its warrant to purchase 200,000 shares
of OEC for proceeds of $1.0 million and recognized a gain of $0.5 million from
the sale. Unrealized appreciation (depreciation) of investments and marketable
securities for the nine months ended September 30, 1997 and 1996 was $1.4
million and $(1.6) million, respectively, resulting primarily from its
investments in Cygnus. For the nine months ended September 30, 1997, the
Partnership recognized unrealized appreciation of $1.3 million with respect to
its investment of 0.25 million common shares of Cygnus. The market value of the
shares increased from $14.50 per share as of December 31, 1996 to $19.75 per
share at September 30, 1997. As of September 30, 1996, the Partnership
recognized unrealized depreciation of $1.6 million on its warrant to purchase
0.3 million Cygnus shares to reflect a decrease in the market value per share of
Cygnus stock from $22.375 at December 31, 1995 to $17.125 at September 30, 1996.

                                       14
<PAGE>

                           PART II. OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS.
-------    ------------------

           ACTION AGAINST CENTOCOR, INC. AND CENTOCOR DEVELOPMENT 
           ------------------------------------------------------ 
           CORPORATION III
           ---------------

               Information regarding this action was disclosed on the
          Partnership's Form 10-K for the year ended December 31, 1996 and the
          Partnership's Forms 10-Q for the quarters ended March 31 and June 30,
          1997. In June 1997, the parties to the Partnership's action entered
          into an agreement to settle the action. The agreement provides, among
          other things, for Centocor to pay to CP III investors (including the
          Partnership, a former limited partner in CP III) in the aggregate:
          $10.8 million, net of attorneys' fees and expenses as may be awarded
          by the Court; an additional $5.0 million, if and when cumulative
          world-wide sales of ReoPro exceed $600 million; and possible
          additional payments totaling $2.2 million, depending upon regulatory
          developments in Japan.

                 The agreement further provides for revisions to the ReoPro
          royalties payable by Centocor to CP III investors through 2007. Under
          the agreement, those royalties would be paid based on revenues from
          end-sales by Lilly and other distributors, as opposed to Centocor's
          revenues on its sales to distributors. For 1997 and 1998, Centocor
          would pay an aggregate of 6.5% of the first $175 million of United
          States end-sale revenues, 3.25% of such revenues above $175 million,
          and 3.25% of foreign end-sales revenues. For 1999 through 2007,
          Centocor would pay an aggregate of 6.5% of the first $250 million of
          United States end-sale revenues, 4% of such revenues above $250
          million, and 3.25% of foreign end-sales revenues. Depending upon the
          future success of ReoPro, PWDC believes that the adjustments will
          result in an increase over what Centocor would have paid in the
          absence of the litigation and settlement. In any event, the agreement
          provides that investors will not receive less than Centocor would
          otherwise have paid based on Centocor's sales of ReoPro.

                On June 27, 1997, the Court entered an order: preliminarily
          approving the settlement; providing for notice to a class consisting
          of all holders of CP III Class A and C limited partnership interests
          as of the close of business on January 31, 1997, and all holders of CP
          III Class B limited partnership interests as of the close of business
          on May 31, 1997, and their transferees, successors, and assigns, other
          than defendants; and designating the Partnership's counsel as counsel
          for the class.

                John E. Abdo and Pharmaceutical Partners, L.P., who are former
          limited partners of CP III, have objected to the proposed settlement.
          They have asserted, among other things, that the consideration is
          inadequate and that the proposed allocations of the consideration
          among the classes of former limited partners of CP III improperly
          favors the Partnership. On September 4, 1997, the Court held a hearing
          on the objections and reserved decision.

           IN RE:  PAINEWEBBER PARTNERSHIP LITIGATION
           ------  ----------------------------------

                Information regarding this action was disclosed on the
          Partnership's Form 10-K for the year ended December 31, 1996 and the
          Partnership's Form 10-Q for the quarter ended March 31, 1997.

                                       15
<PAGE>

ITEM 1.    LEGAL PROCEEDINGS

           ACTION AGAINST AMGEN BOULDER, INC.
           ----------------------------------

                  Information regarding this action was disclosed on the
           Partnership's Form 10-K for the year ended December 31, 1996 and the
           Partnership's Forms 10-Q for the quarters ended March 31 and June 30,
           1997.

                  On June 19, 1997, the parties in the action advised the court
           that they had reached an agreement in principle to supplement the
           proposed settlement and to resolve the Partnership's objection to
           such proposed settlement. The agreement in principle was subject to
           final documentation. The court ordered that such documentation be
           filed by July 3, 1997. On July 3, 1997, the parties informed the
           court that they had been unable to reach agreement on final
           documentation. On July 24, 1997, the plaintiffs moved the court to
           enforce the settlement agreement. That motion was withdrawn, and the
           parties again sought to negotiate final documentation. To date the
           parties have not resolved their differences. On October 16, 1997, the
           plaintiffs re-noticed their motion to enforce the settlement
           agreement.

ITEM 5.    OTHER INFORMATION
-------    -----------------

                  Effective August 18, 1997, the General Partner discontinued
           the right of Limited Partners to transfer Units except for transfers
           that may occur as a result of the laws of descent and distribution or
           by operation of law. Effective October 8, 1997, the General Partner
           removed the restrictions on the transferability of Units subject to
           the consent of the General Partner.

                  On August 15,1997, BioRoyalties, L.L.C., on behalf of
           Pharmaceutical Royalties, L.L.C. and Pharmaceutical Royalty
           Investments Ltd., commenced a tender offer to purchase any and all
           Units at a price per Unit of $3,650, net to the seller in cash and
           subject to reduction for certain distributions (as hereafter amended,
           the "Tender Offer"). The Tender Offer expired on October 7, 1997.

ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K.
-------    ---------------------------------

           A)    EXHIBITS:

                 None

           B)    REPORTS ON FORM 8-K:

                 None
                                       16
<PAGE>

                                   SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on this 14th day of
November 1997.

                  PAINEWEBBER R&D PARTNERS II, L.P.


                  By:    PaineWebber Technologies II, L.P.
                         (General Partner)


                  By:    PWDC Holding Company
                         (general partner of the General Partner)


                  By:    Dhananjay M. Pai/s/
                         -------------------------------
                         Dhananjay M. Pai
                         President*


                  By:    Anthony M. DiIorio/s/
                         -------------------------------
                         Anthony M. DiIorio
                         Principal Financial and Accounting Officer*













*  The capacities listed are with respect to PWDC Holding Company, the Manager,
   as well as PWDC, the parent company of the Manager.

                                       17