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, 1996
                                       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>


<TABLE>
<CAPTION>
                                             TABLE OF CONTENTS
<S>                           <C>                                            <C>

PART I.                       FINANCIAL INFORMATION                                          Page

Item 1.                       Financial Statements

                              Statements of Financial Condition (unaudited)                    2
                              at  September 30, 1996 and December 31, 1995

                              Statements of Operations
                              (unaudited) for the three months ended
                              September 30, 1996 and 1995                                      3

                              Statements of Operations
                              (unaudited) for the nine months ended
                              September 30, 1996 and 1995                                      3

                              Statement of Changes in Partners' Capital
                              (unaudited) for the nine months ended
                              September 30, 1996                                               4

                              Statements of Cash Flows
                              (unaudited) for the nine months ended
                              September 30, 1996 and 1995                                      5

                              Notes to Financial Statements
                              (unaudited)                                                    6-12

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

PART II.                      OTHER INFORMATION

Item 1.                       Legal Proceedings                                               15

Item 6.                       Exhibits and Reports on Form 8-K                                15

                              Signatures                                                      16
</TABLE>



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>
Page 2


                         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,
                                                           1996          1995
-----------------------------------------------------------------------------
Assets:

  Cash                                              $      4,975   $    5,858

  Marketable securities, at market value                 398,263    1,247,309

  Investments, at fair value                           2,167,500    3,791,626

  Interest receivable                                         -         5,518

  Investments in product development projects             160,390     189,256

  Royalty income receivable                                16,000      26,158
                                                    -------------  ----------
Total assets                                        $   2,747,128  $5,265,725
                                                    =============  ==========

Liabilities and partners' capital:

  Accrued liabilities                               $      73,585 $    97,486

  Partners' capital                                     2,673,543   5,168,239
                                                    -------------  ----------
Total liabilities and partners' capital             $   2,747,128 $ 5,265,725
                                                    =============  ==========

-----------------------------------------------------------------------------
See notes to financial statements.

<PAGE>
Page 3



PAINEWEBBER R&D PARTNERS II, L.P.
(a Delaware Limited Partnership)

Statements of Operations
(unaudited)

For the three months ended September 30,                 1996          1995
-----------------------------------------------------------------------------

Revenues:
  Interest income                                   $    15,290   $    18,624
  Income from product development project                16,000        29,132
  Realized gain from sale of product development
   projects                                             552,001             -
  Unrealized  appreciation of  investments
   and marketable securities                            393,250     2,651,841
  Equity in earnings of product development projects    264,128        82,820
                                                    -------------  ----------
                                                      1,240,669     2,782,417
                                                    -------------  ----------
Expenses:
  Management fee                                              -        47,953
  General and administrative costs                       46,878        70,098
                                                    -------------  ----------
                                                         46,878       118,051
                                                    -------------  ----------

Net income                                        $   1,193,791   $ 2,664,366
                                                    =============  ==========
Net income per partnership unit:
  Limited partners (based on 8,257 units)          $     143.13   $    319.45
  General partner                                  $  11,937.91   $ 26,643.66



-----------------------------------------------------------------------------
For the nine months ended September 30,                 1996          1995
-----------------------------------------------------------------------------
Revenues:
  Interest income                                 $     36,400   $     68,874
  Income from product development project               63,468         80,508
  Realized gain on sale of product development
   projects                                            552,001              -
  Unrealized (depreciation) appreciation of
   investments and marketable securities            (1,562,050)      2,694,573
  Realized gain on distribution of investments               -       2,656,630
  Realized loss on sale of marketable securities       (53,421)              -
  Equity in earnings of product development projects   422,147         247,855
                                                    -------------  -----------
                                                      (541,455)      5,748,440
                                                    -------------  -----------
Expenses:
  Management fee                                       137,010        299,117
  General and administrative costs                     150,207        224,834
                                                    -------------  ----------
                                                       287,217        523,951
                                                    -------------  ----------

Net income (loss)                                 $   (828,672)   $ 5,224,489
                                                    =============  ==========
Net income (loss) per partnership unit:
  Limited partners (based on 8,257 units)         $     (99.36)   $    626.41
  General partner                                 $  (8,286.72)   $ 52,244.89

-----------------------------------------------------------------------------
See notes to financial statements.

<PAGE>
Page 4
   
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, 1996                   Partners        Partner        Total
-----------------------------------------------------------------------------

Balance at January 1, 1996           $ 5,114,512   $    53,727  $5,168,239

Net loss                               (820,385)       (8,287)    (828,672)
Cash distribution                    (1,651,400)      (14,624)  (1,666,024)
                                     ----------     ---------   ----------
Balance at September 30, 1996        $2,642,727     $  30,816   $2,673,543
                                     ==========     =========   ==========
-----------------------------------------------------------------------------
See notes to financial statements.


<PAGE>
Page 5

PAINEWEBBER R&D PARTNERS II, L.P.
(a Delaware Limited Partnership)

Statements of Cash Flows
(unaudited)

For the nine months ended September 30,                 1996          1995
-----------------------------------------------------------------------------

Cash flows from operating activities:
Net income  (loss)                                  $   (828,672)  $ 5,224,489
Adjustments to reconcile net income (loss) to cash
  provided by operating activities:                                        
Unrealized depreciation (appreciation) of                                  
  investments and marketable securities                1,562,050    (2,694,573)
Realized gain on distribution of investments                   -    (2,656,630)
Equity in earnings of product development projects      (422,147)     (247,855)
                                                                           
 Decrease in operating assets:                                             

  Marketable securities                                  861,996      1,010,090
  Investments                                             49,126         91,970
  Interest receivable                                      5,518          2,079
  Royalty income receivable                               10,158         13,340
                                                                           
Decrease in operating liabilities:
  Accrued liabilities                                    (23,901)       (79,059)
                                                      -----------    ----------
Cash provided by operating activities                  1,214,128        663,851
                                                      -----------    ----------
Cash flows from investing activities:                                      
  Distributions from product development project         451,013        252,608
                                                      -----------    ----------
Cash flows from financing activities:                                      
  Distribution to partners                            (1,666,024)      (917,444)
                                                      -----------    ----------
Decrease in cash                                            (883)          (985)

Cash at beginning of period                                5,858          6,703
                                                      -----------    ----------
Cash at end of period                                $     4,975    $     5,718
                                                    =============   ===========
-------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
The Partnership paid no cash for interest or taxes during the nine months ended
September 30, 1996 and 1995.

Supplemental schedule of non-cash activities:
-----------------------------------------------------------------------------
For the nine months ended September 30,              1996            1995
-----------------------------------------------------------------------------
Distribution of investment to partners:
    Cygnus Therapeutic Systems common stock         $   -      $  12,903,629

-----------------------------------------------------------------------------
See notes to financial statements.


<PAGE>
Page 6

                      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, 1996 and 1995 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, 1996,
are not necessarily  indicative of results to be expected for the year
ended December 31, 1996.  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,  1995,  and  the previously
issued  quarterly  reports  for the quarters ended June 30,  1996  and
March 31, 1996.

   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  PaineWebber
Development Corporation ("PWDC"), an indirect, wholly owned subsidiary
of PaineWebber Group Inc.   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.   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.   In  connection  with  product
development projects  (the  "Projects"),  the  Partnership  sought  to
obtain  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).    In  addition,  the
Partnership  invested  as  a  limited  partner in product  development
limited  partnerships.   Such  partnerships  were  formed  to  develop
specific, new products through contracts  with Sponsor Companies.  The
Sponsor Companies conduct the Projects and  affiliates  of the Sponsor
Companies serve as general partners of the partnerships.   As a result
of  restructuring some of the original Projects, the Partnership  also
obtained restricted common stock in some of the Sponsor Companies.  As
such,   the   Partnership  is  engaged  in  diverse  Projects  through
contracts, participation  in  other  partnerships  and  investments in
securities of the Sponsor Companies.

   All  distributions to the limited partners of the Partnership  (the
"Limited   Partners")  and  the  General  Partner  (collectively,  the
"Partners")  from  the  Partnership will initially be 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:

<PAGE>
Page 7


                      PAINEWEBBER R&D PARTNERS II, L.P.
                       (a Delaware Limited Partnership)


                       NOTES TO FINANCIAL STATEMENTS
                                 (UNAUDITED)


(Note 1 Continued)
<TABLE>
<CAPTION>
                                                                                Limited Partners       General Partner
<S>              <C>                                                          <C>                   <C>

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     80%                   20%
                 Payout")...................................................

III.             After Final Payout.........................................      75%                   25%
</TABLE>

   For the three months ended September 30, 1996, the Partnership made a cash
distribution  of  $1,666,024 ($200 per Unit; $14,624 to the General Partner).
At  September  30,  1996,   the   Partnership  has  made  cash  and  security
distributions since inception of $1,785 and $7,206 per Unit, respectively.

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

   In accordance with the provisions of Statement of  Financial Accounting 
Standards  No.  115,  "Accounting  for Certain  Investments  in  Debt  and
Equity  Securities",  the Partnership accounted  for  its  investments  in
restricted  common  stock (where the restriction  period  expired  in  one
year or less) at market value with unrealized gains and  losses  reflected
in the Statements of Operations during the period in  which  the change in
value occurs.

   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.

   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  invested in Projects, further described  in  Note  5,
through one of the following two vehicles:


<PAGE>
Page 8

                      PAINEWEBBER R&D PARTNERS II, L.P.
                       (a Delaware Limited Partnership)


                       NOTES TO FINANCIAL STATEMENTS
                                 (UNAUDITED)

(Note 2 Continued)
     -  Product Development Contracts
        The  Partnership  paid  amounts  to  Sponsor  Companies  under  product
        development  contracts.   Such amounts were expensed by the Partnership
        when  incurred  by the Sponsor  Companies.   Income  from  the  Sponsor
        Companies is reflected  in  the Statements of Operations for the period
        in which the income is earned.

     -  Product Development Limited Partnerships
        The  Partnership  participates   as   a   limited  partner  in  product
        development limited partnerships formed to  develop  specific products.
        Such  participations are accounted for using the equity  method.   Such
        partnerships expensed product development costs when incurred.

   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.

   Certain reclassifications have been made in prior year amounts to conform to
current year presentations.

3. MARKETABLE SECURITIES AND INVESTMENTS

    MARKETABLE SECURITIES:

   The money market fund consists of obligations with maturities of one year or
less that are subject to fluctuations in value.


   The Partnership held the following marketable securities:

<TABLE>
<CAPTION>
                                                        SEPTEMBER 30, 1996                     December 31, 1995
                                             -------------------------------------      --------------------------------------
                                                   MARKET                 COST                 MARKET               COST
                                             -----------------     ---------------      ------------------    ----------------
<S>                                         <C>                   <C>                  <C>                   <C>
Money market fund                             $298,863                $   298,863       $  956,168            $  956,168
Alkermes, Inc. common stock (3,227 shares)          --                         --           25,616                22,589
Cygnus, Inc. common stock (11,867 shares)           --                         --          265,525                69,719
Centocor, Inc. common stock (2,800 shares)      99,400                     37,324               --                    --
                                              --------                 ----------       ----------            ----------
                                              $398,263                 $  336,187       $1,247,309            $1,048,476
                                              ========                 ==========       ==========            ==========
</TABLE>





<PAGE>
Page 9


                      PAINEWEBBER R&D PARTNERS II, L.P.
                       (a Delaware Limited Partnership)


                       NOTES TO FINANCIAL STATEMENTS
                                 (UNAUDITED)



(Note 3 Continued)

   In January 1996, the Partnership sold its  investment  of  3,227  common
shares  of Alkermes, Inc. for proceeds, net of commissions, of $34,090  and
recognized  a  gain  upon  the sale for the nine months ended September 30,
1996, of $8,474.  In February  1996, the Partnership exercised its warrants
to  purchase 2,800 common shares  of  Centocor,  Inc.  ("Centocor")  at  an
exercise  price  of  $37,324  ($13.33  per  share).  At September 30, 1996,
Centocor common stock had a market value of $35.50 per share as compared to
$29.875  per  share  at  June  30,  1996.   Accordingly,   the  Partnership
recognized  unrealized  appreciation  of  $15,750  for  the  quarter  ended
September  30, 1996.  In June 1996, the Partnership sold 11,867  shares  of
Cygnus, Inc.  ("Cygnus")  with  a carrying value as of December 31, 1995 of
$265,525 ($22.375 per share).  Proceeds,  net of commissions, were $203,630
resulting in a loss upon the sale for the nine  months  ended September 30,
1996 of $61,895.

INVESTMENTS:

The Partnership held the following investments:

<TABLE>
<CAPTION>

                                                               SEPTEMBER  30, 1996             DECEMBER  31, 1995
                                                             -----------------------         --------------------
<S>                                                        <C>                             <C>
Cygnus, Inc.
   Warrants to purchase 300,000 common shares                $2,167,500                          $3,742,500
Centocor, Inc.
   Warrants to purchase 2,800 common shares                         ---                              49,126
                                                             ----------                          ----------             
                                                             $2,167,500                          $3,791,626
                                                             ==========                          ==========
</TABLE>

    The  Partnership  records  its warrant to purchase 300,000 common shares of
Cygnus (with an exercise  price  of  $9.90  per  share) as an investment with a
carrying value equal to its intrinsic value (which  approximates fair value) --
(See Note 5).  The market value of Cygnus stock as of  September  30,  1996 was
$17.125 per share as compared to a market value of $15.25 and $22.375 per share
as  of  June  30,  1996  and December 31, 1995, respectively.  Accordingly, the
Partnership recognized unrealized appreciation of $562,500 for the three months
ended September 30, 1996,  and  unrealized  depreciation  of $1,575,000 for the
nine  months ended September 30, 1996.  At December 31, 1995,  the  Partnership
recorded  its  investment  in  Centocor  warrants  at  their intrinsic value of
$17.545  per share.  In February 1996, the Partnership exercised  its  warrants
for Centocor common shares (see Marketable Securities).






<PAGE>
Page 10


                      PAINEWEBBER R&D PARTNERS II, L.P.
                       (a Delaware Limited Partnership)


                       NOTES TO FINANCIAL STATEMENTS
                                 (UNAUDITED)



4. RELATED PARTY TRANSACTIONS

    The   Manager  received  an  annual  management  fee  for  management   and
administrative  services  provided  to the  Partnership. The management fee was
payable quarterly in advance and was adjusted annually on the first day of each 
fiscal  year in an amount proportionate  to  the  increase in the prior year in
the  Consumer  Price Index published by the United States  Department  of Labor.
Commencing July 1, 1996,  the Manager elected to discontinue the management fee
charged  to  the Partnership.    The management fees paid by the Partnership to 
the Manager were $137,010 and $299,117  for the nine months ended September 30,
1996 and 1995,  respectively.  Aggregate  management  fees  paid to the Manager
since January 1, 1995, were $484,080.

   The  Partnership's portfolio which consists  of   a  money  market  fund  is
managed by an affiliate of PaineWebber Incorporated ("PWI").

   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 the same Projects as
the Partnership.

5.  PRODUCT DEVELOPMENT PROJECTS

   The Partnership entered into nine Projects (Cadre Technologies Inc.;Centocor
Partners III, L.P.; Compression Labs, Incorporated; Cygnus; FOCUS Surgery  Inc.
(formerly  Focal  Surgery,  Inc.  (successor  to  Diasonics,  Inc.)); Genentech
Clinical  Partners  IV,  L.P.;  Genzyme  Development  Partners,  L.P.;   Rogers
Corporation; and Synergen Clinical Partners, L.P) which have been fully funded.
In  addition,  the  Partnership  purchased  $5.9  million  of  common  stock of
Alkermes, Inc. which was distributed to its Partners in 1993 and 1994.

   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.

   On  August  20,  1996,  the  Partnership  terminated the product development
program with Compression Labs Incorporated ("CLI").


<PAGE>
Page 11


                      PAINEWEBBER R&D PARTNERS II, L.P.
                       (a Delaware Limited Partnership)


                       NOTES TO FINANCIAL STATEMENTS
                                 (UNAUDITED)



(NOTE 5 CONTINUED)

  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 has
received warrants to purchase shares  of common stock of the Sponsor Companies.
At September 30, 1996, the market price per common share of Cygnus exceeded the
exercise  price  per share of the warrant  and,  accordingly,  the  Partnership
recorded this warrant  as  an  investment  with  a  carrying value equal to the
intrinsic value which approximates fair value (see Note  3).   At September 30,
1996, the Partnership owned the following warrants:

<TABLE>
<CAPTION>
                                    Number of Shares         Exercise                                  9/30/96
                                       that can be             Price              Exercise          Market Price
                                        Purchased            per Share             Period            per Share*
                                   -----------------    ----------------     -----------------    -----------------
<S>                               <C>                  <C>                  <C>                  <C>
                                                                                                    
Cayenne Software Inc.             193,000                $   16.19           Current to 6/97           $      4.250
Cygnus, Inc. (B)                  300,000                $    9.90           Current to 9/97           $     17.125
OEC Medical Systems, Inc. (C)     200,000                $   12.70           Current to 8/97           $     12.500
</TABLE>


* The share prices of these technology companies are generally highly volatile
and the shares are often thinly traded.  The market prices indicated as of 
September 30,  1996 may not be indicative of the ultimate values, if any, that 
may be realized by the Partnership.

<TABLE>
<CAPTION>

<S>  <C>

(A)  On July 19, 1996, Cadre Technologies Inc. ("Cadre") merged with Bachman
     Information Systems to form Cayenne Software Inc. ("Cayenne").  As a result of
     the merger, the Partnership's warrant to purchase 625,000 common shares of Cadre
     at an exercise price of $5.00 per share converted into a warrant to purchase
     193,000 common shares of Cayenne.

(B)  The carrying value of this warrant at its intrinsic value has been included in
     Investments in the accompanying Statements of Financial Condition.
(C)  In October 1993, Diasonics, Inc. completed a corporate restructuring under which
     Diasonics, Inc. was divided into three separate publicly traded companies:
     Diasonics Ultrasound, Inc., FOCUS Surgery Inc. and OEC Medical Systems, Inc.  The
     Partnership's warrant is to purchase the stock of OEC Medical Systems, Inc.

</TABLE>

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.



<PAGE>
Page 12

                      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 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 Centocor Partners  III, L.P. ("CP
III"); and because of the Lilly transaction, Centocor is required  to  increase
the  percentage  of  its profits from ReoPro that it pays to CP III.  Centocor,
however, has taken the  position that only $500,000 of the $100 million must be
shared  with  CP III and that  Centocor  has  no  obligation  to  increase  the
percentage of its  ReoPro  profits  that it pays to CP III.  The Partnership is
seeking  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 percentage of
future ReoPro profits that  Centocor  must  pay  to  CP  III.  There  can be no
assurance that the Partnership's claim will be successful.

   Centocor  has  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 Paine Webber Group Inc., PWDC and PWI.

   In April  1996,  Mr.  Abdo  moved to amend his complaint to assert claims on
behalf of CP III against one of  PWDC's  two  nominees  on the CDC III Board of
Directors.   In  July  1996,  Mr. Abdo moved to amend his complaint  to  assert
claims on behalf of CP III against  a  former  director of CDC III nominated by
PWDC.  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.  These
motions are pending.

   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.
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.


<PAGE>
Page 13


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

LIQUIDITY AND CAPITAL RESOURCES

   Partners' capital decreased from $5.1 million at December 31, 1995, to  $2.7
million at September  30, 1996, resulting from the recognition of a net loss of
$0.8 million for the nine  months  ended  September  30,  1996  (as  more fully
explained  in  Results  of  Operations  below)  and  a cash distribution to the
Partners of $1.6 million.

   The Partnership's working capital is invested in marketable securities and a
money market fund.  Liquid assets at September 30, 1996  and December 31, 1995,
were $0.4 million and $1.3 million, respectively.  The decrease of $0.9 million
was due primarily to the cash distribution remitted to the  Partners offset, in
part,  by  the  net  proceeds  realized  upon  the  sale of product development
projects of $0.6 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,  1996  compared  to  the  three months ended
September 30, 1995:

   The Partnership recognized net income for the quarters  ended  September 30,
1996 and 1995, of $1.2 million and $2.7 million, respectively. The  decrease in
net income of  $1.5 million was due primarily to a decrease in revenues of this
amount.

   Revenues decreased  from  $2.8  million for the three months ended September
30, 1995 to $1.3 million for the same  period  in  1996.   The decrease of $1.5
million  resulted  from  a  decline  in  unrealized appreciation of  marketable
securities and investments of $2.3 million offset by increases in realized gain
from  sale  of product development projects  of  $0.6  million  and  equity  in
earnings from  product  development projects of $0.2 million.  At September 30,
1995, the Partnership recorded its warrant to purchase 300,000 shares of Cygnus
common stock with a market  value of $18.375 per share and an exercise price of
$9.90 per share at its intrinsic  value  of  $2.6  million.   Accordingly,  the
Partnership  recognized  unrealized  appreciation  of this amount for the three
months ended September 30, 1995.  During the quarter  ended September 30, 1996,
the  Partnership recognized unrealized appreciation of $0.5  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 this same
period,  the Partnership recognized unrealized  depreciation  of  $0.2  million
attributable  to  the Partnership's investment in a warrant to purchase 200,000
shares of OEC Medical  Systems,  Inc.  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.  The Partnership recognized income  from  earnings generated by
its limited partnership investments of $0.3 million and $0.1  million  for  the
quarters ended September 30, 1996 and 1995, respectively.

   Expenses  of  the  Partnership decreased from $118,000 for the quarter ended
September 30, 1995 to $47,000  for  the same period in 1996.  Effective July 1,
1996  the  Manager  decided to  discontinue the  management  fee charged to the
Partnership.





<PAGE>
Page 14




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

NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1995:

   The  Partnership  recognized a net loss of $0.8 million for the nine months
ended September 30, 1996 as compared to net income of $5.2 million for this
same period in 1995.   The  unfavorable  variance  of $6.0 million resulted
from  a  decrease  in  revenues  of $6.2 million offset by  a  decrease  in
expenses of $0.2 million.

   Revenues for the nine months ended  September  30, 1996 and 1995 were ($0.5)
million and $5.7 million, respectively.  The decline  was  due  primarily  to a
decrease in realized gain on distribution of investments of $2.7 million and  a
decrease in unrealized appreciation of investments and marketable securities of
$4.3  million offset by an increase in the sale of product development projects
of $0.6  million  (see  three  months  ended September 30, 1996 compared to the
three months ended September 30, 1995).  In 1995 the Partnership distributed to
its Partners 1,518,074 shares of Cygnus common stock with a market value on the
date of distribution of $12.9 million ($8.50 per share).  The carrying value of
the shares as of December 31, 1994 was $10.2  million  ($6.75  per  share) and,
accordingly,  the Partnership recognized a gain upon the distribution  of  $2.7
million.  Unrealized appreciation for the nine months ended September 30, 1995,
was $2.6 million  primarily  attributable  to  its  investment  in a warrant to
purchase  300,000 shares of Cygnus (see three months ended September  30,  1996
compared to  three  months  ended  September 30, 1995).  During the nine months
ended September 30, 1996, the market  value of Cygnus declined from $22.375 per
share at December 31, 1995 to $17.125 per share at September 30, 1996 resulting
in the recognition of unrealized depreciation of  $1.6 million.

   Expenses of the Partnership, consisting  of  management fees and general and
administrative costs, decreased from $0.5 million  as  of September 30, 1995 to
$0.3 million as of September 30, 1996.  The decrease results, in part, from the
Manager's decision to discontinue the management fee charged to the Partnership
effective July 1, 1996.


<PAGE>
Page 15






                        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, 1995 and Forms 10-Q for the
        quarters ended June 30, 1996 and March 31, 1996.

        IN RE:  PAINEWEBBER PARTNERSHIP LITIGATION

           Information  regarding  this  action  was  disclosed  on  the
        Partnership's Form 10-K for the year  ended December 31, 1995 and  Form
        10-Q for the quarter ended June 30, 1996.  On July 17, 1996, the United
        States  District  Court  for  the  Southern District of  New York  (the
        "Court") granted preliminary approval of the proposed settlement of the
        class  action  litigation.  As part of the class action settlement, PWI
        agreed  to  pay  $125  million  and  additional  consideration to class
        members.  A  final  hearing  on  the  proposed  settlement commenced on
        October 25, 1996, and is scheduled to continue in November 1996.

        ACTION ENTITLED ABBATE V. PAINEWEBBER INC.

        Information  regarding  this  action  filed  in  Sacremento, California
        Superior  Court  against  PWI  and  various  affiliated  entities   was
        disclosed on the Partnership's Form 10-K for the year ended December 31,
        1995. In September, the California Superior Court dismissed many of the
        plaintiffs claims as barred by the  applicable  statutes of limitation.
        In June, 1996, additional complaints, similar to ABBATE VS. PAINEWEBBER
        INC. but involving fewer plaintiffs, have been filed in Sacramento, San
        Diego  and  Arizona.  Certain  of  these complaints have been dismissed
        with prejudice while others remain pending.

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

        a)      Exhibits:
 
                None

        b)      REPORTS ON FORM 8-K:
 
          On October 1, 1996, the Partnership filed a current report on Form 8-K
        relating  to  the election of a President of PaineWebber Development
        Corporation and PWDC Holding Company.





<PAGE>
Page 16


                                 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 1996.

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



          By:           /s/ Pierce R. Smith
                        --------------------------------------
                        Pierce R. Smith
                        Principal Financial and Accounting Officer




*The capacities listed are with respect to PWDC Holding Company, the Manager,
  as well as the general partner of the General Partner of the Registrant.





<PAGE>
Page 16


                                 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 1996.

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



          By:           /s/ Pierce R. Smith
                        --------------------------------------
                        Pierce R. Smith
                        Principal Financial and Accounting Officer




*The capacities listed are with respect to PWDC Holding Company, the Manager,
  as well as the general partner of the General Partner of the Registrant.