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 DECEMBER 31, 1997

                                       OR

|_|        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
               SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

           For the transition period from ______ to _______ .


                            Commission File Number:  0-15705


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


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


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


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


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>

            PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP

                           CONSOLIDATED BALANCE SHEETS
                December 31, 1997 and March 31, 1997 (Unaudited)
                              (In thousands)

                                  ASSETS
                                                   December 31    March 31
                                                   -----------    --------
Operating investment properties:
   Land                                             $  7,351      $  7,351
   Buildings and improvements                         40,199        40,018
                                                    --------      --------
                                                      47,550        47,369
   Less accumulated depreciation                     (13,633)      (12,155)
                                                    --------      --------
                                                      33,917        35,214

Investments in unconsolidated ventures, 
  at equity                                           30,540        31,784
Cash and cash equivalents                              6,005         5,322
Escrowed cash                                            287           279
Accounts receivable                                      115           151
Prepaid expenses                                          57            50
Deferred rent receivable                                 757           832
Deferred expenses, net                                   543           646
Net advances to consolidated ventures                     83             -
                                                    --------      --------
                                                    $ 72,304      $ 74,278
                                                    ========      ========

                        LIABILITIES AND PARTNERS' CAPITAL

Accounts payable and accrued expenses               $    532      $    271
Net advances from consolidated ventures                    -           400
Tenant security deposits                                  55           116
Bonds payable                                          2,197         2,297
Mortgage notes payable                                19,460        19,650
Other liabilities                                        331           331
Partners' capital                                     49,729        51,213
                                                    --------      --------
                                                    $ 72,304      $ 74,278
                                                    ========      ========






                             See accompanying notes.



<PAGE>


               PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP

                      CONSOLIDATED STATEMENTS OF OPERATIONS
   For the three and nine months ended December 31, 1997 and 1996 (Unaudited)
                      (In thousands, except per Unit data)

                                    Three Months Ended    Nine Months Ended
                                       December 31,          December 31,
                                    ------------------    -----------------
                                      1997      1996        1997     1996
                                      ----      ----        ----     ----
Revenues:
   Rental income and expense
     reimbursements                 $ 1,152    $ 1,194     $ 3,714   $ 3,773
   Interest and other income            104        138         304       318
                                    -------    -------     -------   -------
                                      1,256      1,332       4,018     4,091

Expenses:
   Property operating expenses          379        372       1,083     1,038
   Depreciation and amortization        506        518       1,556     1,531
   Interest expense                     507        494       1,455     1,492
   Real estate taxes                    129        146         400       355
   General and administrative           217         93         506       372
                                    -------    -------     -------   -------
                                      1,738      1,623       5,000     4,788
                                    -------    -------     -------   -------
Operating loss                         (482)      (291)       (982)     (697)

Partnership's share of
  unconsolidated ventures' income       176         67         398       272
                                    -------    -------     -------   -------

Net loss                            $  (306)  $  (224)     $  (584)  $  (425)
                                    =======   =======      =======   =======

Net loss per 1,000 Limited
  Partnership Units                 $ (2.25)  $ (1.65)     $ (4.30)  $ (3.13)
                                    =======   =======      =======   =======

Cash distributions per 1,000 
  Limited Partnership Units         $  2.21   $  2.21      $  6.63   $  6.63
                                    =======   =======      =======   =======


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





                             See accompanying notes.
<PAGE>

               PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP

        CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
        For the nine months ended December 31, 1997 and 1996 (Unaudited)
                                 (In thousands)

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

Balance at March 31, 1996                           $  (494)   $ 56,173
Cash distributions                                       (9)       (891)
Net loss                                                 (4)       (421)
                                                    -------    --------
Balance at December 31, 1996                        $  (507)   $ 54,861
                                                    =======    ========

Balance at March 31, 1997                           $  (539)   $ 51,752
Cash distributions                                       (9)       (891)
Net loss                                                 (6)       (578)
                                                    -------    --------
Balance at December 31, 1997                        $  (554)   $ 50,283
                                                    =======    ========


















                             See accompanying notes.



<PAGE>


               PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
        For the nine months ended December 31, 1997 and 1996 (Unaudited)
                Increase (Decrease) in Cash and Cash Equivalents
                                 (In thousands)

                                                          1997        1996
                                                          ----        ----
Cash flows from operating activities:
   Net loss                                            $   (584)    $   (425)
   Adjustments to reconcile net loss to net cash
     provided by operating activities:
     Partnership's share of unconsolidated 
       ventures' income                                    (398)        (272)
     Depreciation and amortization                        1,556        1,531
     Amortization of deferred financings costs               33           24
     Changes in assets and liabilities:
      Escrowed cash                                          (8)        (113)
      Accounts receivable                                    36           53
      Prepaid expenses                                       (7)         (25)
      Deferred rent receivable                               75          (67)
      Deferred expenses                                      (8)         (57)
      Accounts payable and accrued expenses                 261          238
      Advances (to) from consolidated ventures             (483)         329
      Tenant security deposits                              (61)          20
                                                       --------     --------
        Total adjustments                                   996        1,661
                                                       --------     --------
        Net cash provided by operating activities           412        1,236

Cash flows from investing activities:
   Distributions from unconsolidated ventures             2,486        1,966
   Additional investments in unconsolidated ventures       (844)      (1,240)
   Payment of leasing commissions                             -          (52)
   Additions to operating investment properties            (181)        (357)
                                                       --------     --------
        Net cash provided by investing activities         1,461          317
                                                       --------     --------

Cash flows from financing activities:
   Distributions to partners                               (900)        (900)
   Repayment of principal on long term debt                (290)        (268)
                                                       --------     --------
        Net cash used in financing activities            (1,190)      (1,168)
                                                       --------     --------

Net increase in cash and cash equivalents                   683          385

Cash and cash equivalents, beginning of period            5,322        5,126
                                                       --------     --------
Cash and cash equivalents, end of period               $  6,005     $  5,511
                                                       ========     ========

Cash paid during the period for interest               $  1,422     $  1,493
                                                       ========     ========
                             See accompanying notes.


<PAGE>
            PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
                Notes to Consolidated Financial Statements
                                   (Unaudited)

1.    General
      -------

      The accompanying financial statements,  footnotes and discussion should be
read in conjunction with the financial statements and footnotes contained in the
Partnership's Annual Report for the year ended March 31, 1997. In the opinion of
management, the accompanying financial statements,  which have not been audited,
reflect all adjustments  necessary to present fairly the results for the interim
period. All of the accounting  adjustments reflected in the accompanying interim
financial statements are of a normal recurring nature.

      The  accompanying  financial  statements have been prepared on the accrual
basis of accounting in accordance with generally accepted accounting  principles
which  requires  management to make  estimates and  assumptions  that affect the
reported amounts of assets and liabilities and disclosures of contingent  assets
and  liabilities  as of December  31, 1997 and March 31, 1997 and  revenues  and
expenses for each of the three-month  and nine-month  periods ended December 31,
1997 and 1996.  Actual  results could differ from the estimates and  assumptions
used.

2.    Related Party Transactions
      --------------------------

      Included in general and administrative  expenses for the nine months ended
December 31, 1997 and 1996 is $172,000 and $164,000, respectively,  representing
reimbursements  to an affiliate of the Managing  General  Partner for  providing
certain  financial,  accounting  and  investor  communication  services  to  the
Partnership.

      Also  included  in general  and  administrative  expenses  for both of the
nine-month  periods  ended  December 31, 1997 and 1996 is $13,000,  representing
fees earned by an affiliate,  Mitchell Hutchins Institutional  Investors,  Inc.,
for managing the Partnership's cash assets.

3.    Investments in Unconsolidated Joint Ventures
      --------------------------------------------

      As of  December  31,  1997,  the  Partnership  had  investments  in  three
unconsolidated   joint  venture  partnerships  which  own  operating  investment
properties  as  described  further  in  the  Partnership's  Annual  Report.  The
unconsolidated joint venture partnerships are accounted for on the equity method
in the Partnership's  financial statements because the Partnership does not have
a voting control interest in these joint ventures.  The Partnership's  policy is
to recognize its share of ventures' operations three months in arrears.

      Summarized  operations  of the  unconsolidated  joint  ventures,  for  the
periods indicated, are as follows.

                    Condensed Combined Summary of Operations
         For the three and nine months ended September 30, 1997 and 1996
                                 (in thousands)

                                   Three Months Ended      Nine Months Ended
                                      September 30,          September 30,
                                   ------------------      -----------------
                                    1997       1996         1997      1996
                                    ----       ----         ----      ----
Revenues:
   Rental revenues and 
    expense recoveries            $2,402      $2,368       $7,153     $7,228
   Interest and other income         117          20          356         68
                                  ------      ------       ------     ------
                                   2,519       2,388        7,509      7,296

Expenses:
   Property operating expenses       619         675        2,386      2,135
   Real estate taxes                 593         545        1,660      1,658
   Interest expense                  198         200          594        602
   Depreciation and amortization     901         812        2,383      2,423
                                  ------      ------       ------     ------
                                   2,311       2,232        7,023      6,818
                                  ------      ------       ------     ------
Net income                        $  208      $  156       $  486     $  478
                                  ======      ======       ======     ======

Net income:
   Partnership's share of 
     combined income              $  191      $   82       $  442     $  316
   Co-venturers' share of
     combined income                  17          74           44        162
                                  ------      ------       ------     ------
                                  $  208      $  156       $  486     $  478
                                  ======      ======       ======     ======
<PAGE>

               Reconciliation of Partnership's Share of Operations
         For the three and nine months ended December 31, 1997 and 1996
                                 (in thousands)

                                   Three Months Ended      Nine Months Ended
                                      December 31,            December 31,
                                 --------------------    --------------------
                                    1997       1996         1997      1996
                                    ----       ----         ----      ----
   Partnership's share of 
      operations, as shown above  $  191     $   82      $  442      $  316
   Amortization of excess basis      (15)       (15)        (44)        (44)
                                  ------     ------      ------      ------
   Partnership's share of 
      unconsolidated
      ventures' income            $  176     $   67      $  398      $  272
                                  ======     ======      ======      ======

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

      The  Partnership's  balance sheets at December 31, 1997 and March 31, 1997
include three operating  investment  properties owned by joint ventures in which
the  Partnership  has a controlling  interest;  Saratoga  Center and EG&G Plaza,
owned by Hacienda  Park  Associates,  the Asbury  Commons  Apartments,  owned by
Atlanta Asbury Partnership,  and the West Ashley Shoppes shopping center,  owned
by West Ashley Shoppes  Associates.  The  Partnership's  policy is to report the
operations of these  consolidated  joint ventures on a three-month lag. Saratoga
Center and EG&G Plaza consists of four separate office/R&D  buildings comprising
approximately  185,000 square feet,  located in Pleasanton,  California.  Asbury
Commons  Apartments  is a  204-unit  residential  apartment  complex  located in
Atlanta,   Georgia.   The  West  Ashley  Shoppes  shopping  center  consists  of
approximately   135,000  square  feet  of  leasable   retail  space  located  in
Charleston, South Carolina.

      The  following is a combined  summary of property  operating  expenses for
Saratoga  Center and EG&G Plaza,  Asbury Commons  Apartments and the West Ashley
Shoppes  shopping  center for the three and nine months ended September 30, 1997
and 1996 (in thousands):

                                   Three Months Ended      Nine Months  Ended
                                      September 30,          September 30,
                                   ------------------     ------------------
                                     1997       1996         1997      1996
                                     ----       ----         ----      ----
    Property operating expenses:
      Repairs and maintenance      $  128     $  128       $  361    $  355
      Utilities                        57         59          169       149
      Salaries and related costs       48         51          127       133
      Insurance                        17         17           50        50
      Management fees                  36         44          118       123
      Administrative and other         93         73          258       228
                                   ------     ------       ------    ------
                                   $  379     $  372       $1,083    $1,038
                                   ======     ======       ======    ======

5.    Bonds Payable
      -------------

      Bonds  payable  consist  of the  Hacienda  Park joint  venture's  share of
liabilities  for bonds issued by the City of  Pleasanton,  California for public
improvements  that benefit Hacienda  Business Park and the operating  investment
property  and are secured by liens on the  operating  investment  property.  The
bonds for which the operating  investment property is subject to assessment bear
interest  at  rates  ranging  from  5%  to  7.87%,   with  an  average  rate  of
approximately   7.2%.   Principal  and  interest  are  payable  in   semi-annual
installments  and mature in years 2004 through  2017. In the event the operating
investment  property is sold,  the liability for the bond  assessments  would be
transferred  to the buyer.  Therefore,  the Hacienda Park joint venture would no
longer be liable for the bond assessments.
<PAGE>
6.    Mortgage Notes Payable
      ----------------------

      Mortgage  notes  payable  on  the  consolidated   balance  sheets  of  the
Partnership at December 31, 1997 and March 31, 1997 consist of the following (in
thousands):
                                                December 31       March 31
                                                -----------       --------

     9.125% mortgage note payable by the
Partnership  to  an  insurance   company
secured by the 625 North Michigan Avenue
operating investment property. The terms
of the note were modified  effective May
31,  1994.  The  loan  requires  monthly
principal  and interest  payments of $83
through  maturity  on  May 1,  1999.  In
addition,   the  loan  requires  monthly
deposits   to  a   capital   improvement
escrow.  The fair value of the  mortgage
note  approximated its carrying value at
December  31, 1997 and March 31, 1997.           $ 9,317         $ 9,418

     8.75%  mortgage note payable by the
consolidated  Atlanta Asbury Partnership
to an insurance  company  secured by the
Asbury  Commons   operating   investment
property.   The  loan  requires  monthly
principal  and interest  payments of $55
through  maturity on October  15,  2001.
The  fair  value  of the  mortgage  note
approximated   its  carrying   value  at
September  30,  1997  and  December  31,
1996.                                              6,751           6,806

     9.04%  mortgage note payable by the
consolidated Hacienda Park Associates to
an  insurance  company  secured  by  the
Saratoga Center and EG&G Plaza operating
investment  property.  The loan requires
monthly  principal and interest payments
of $36  through  maturity on January 20,
2002.  The fair  value  of the  mortgage
note  approximated its carrying value at
September  30,  1997  and  December  31,
1996.                                              3,392           3,426
                                                 -------         -------
                                                 $19,460         $19,650
                                                 =======         =======

      On November 7, 1994,  the  Partnership  repaid  certain  outstanding  zero
coupon  loans  secured by The Gables  Apartments  and the  Richland  Terrace and
Richmond Park apartment  complexes of  approximately  $2,353,000 and $2,106,000,
respectively,  with the proceeds of a new $5.2 million loan obtained by Richmond
Gables  Associates  and secured by The Gables  Apartments.  The new $5.2 million
loan bears interest at 8.72% and matures in 7 years.  The loan requires  monthly
principal  and  interest  payments  of  $43,000.   On  February  10,  1995,  the
Partnership  repaid an  outstanding  zero coupon loan secured by the  Loehmann's
Plaza shopping center, of approximately  $4,093,000,  with the proceeds of a new
$4 million loan obtained by  Daniel/Metcalf  Associates  Partnership  along with
additional funds contributed by the Partnership.  The $4 million loan is secured
by the Loehmann's  Plaza  shopping  center,  carries an annual  interest rate of
9.04% and matures on February 15, 2003. The loan requires monthly  principal and
interest  payments of $34,000.  Legal  liability  for the  repayment  of the new
mortgage loans secured by the Gables and Loehmann's  Plaza properties rests with
the respective  unconsolidated  joint  ventures.  Accordingly  the mortgage loan
liabilities  are recorded on the books of these  unconsolidated  joint ventures.
The Partnership has indemnified  Richmond Gables  Associates and  Daniel/Metcalf
Associates  Partnership  and  the  related  co-venture  partners,   against  all
liabilities, claims and expenses associated with these borrowings.




<PAGE>



            PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP

                   MANAGEMENT'S DISCUSSION AND ANALYSIS
             OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

      The following  discussion of financial condition includes  forward-looking
statements  which  reflect  management's  current  views with  respect to future
events and  financial  performance  of the  Partnership.  These  forward-looking
statements  are  subject to certain  risks and  uncertainties,  including  those
identified  in Item 7 of the  Partnership's  Annual  Report on Form 10-K for the
year ended March 31, 1997 under the heading  "Certain  Factors  Affecting Future
Operating  Results",  which could cause actual results to differ materially from
historical  results  or  those  anticipated.  The  words  "believe",   "expect",
"anticipate,"  and  similar  expressions  identify  forward-looking  statements.
Readers  are  cautioned  not to place undue  reliance  on these  forward-looking
statements,  which were made based on facts and conditions as they existed as of
the date of this report.  The  Partnership  undertakes no obligation to publicly
update or revise  any  forward-looking  statements,  whether  as a result of new
information, future events or otherwise.

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

      In light of the continued strength in the national real estate market with
respect to multi-family  apartment properties and the recent improvements in the
office/R&D  property markets,  management believes that this may be an opportune
time to sell the Partnership's  remaining operating investment properties.  As a
result, management is currently focusing on potential disposition strategies for
the six remaining investments in the Partnership's portfolio. Although there are
no  assurances,  it is currently  contemplated  that sales of the  Partnership's
remaining assets could be completed within the next 2 to 3 years.

      As discussed in the Annual Report,  management discovered the existence of
certain potential  construction problems at the Asbury Commons Apartments during
fiscal 1997. The initial analysis of the construction problems at Asbury Commons
revealed  extensive  deterioration  of the wood trim and  evidence of  potential
structural  problems  affecting  the exterior  breezeways,  the decks of certain
apartment unit types and the stairway towers. A design and construction team was
organized  to further  evaluate  the  potential  problems,  make  cost-effective
remediation  recommendations  and  implement the repair  program.  Based on this
evaluation, the structural problems may be more extensive and cost significantly
more than originally estimated. It will also require further investigation which
together with eventual  construction  repair work may result in  disruptions  to
property  operations  while units are possibly  taken out of service for testing
and repairs. The cost of the repair work required to remediate this situation is
currently  estimated  at between  approximately  $1.5 to $2 million.  During the
third  quarter of fiscal 1998,  bid  application  packages were  distributed  to
pre-qualified  contractors.  It is anticipated that the  construction  contracts
will be executed and that repair and  replacement  work will commence during the
quarter  ending March 31,  1998.  During the first  quarter of fiscal 1998,  the
Partnership   filed  a  warranty   claim   against  the   manufacturer   of  the
wood-composite siding used throughout Asbury Commons. During the second quarter,
the  Partnership  filed  a  warranty  claim  against  the  manufacturer  of  the
fiberglass-composite  roofing  shingles  installed  when the property was built.
While  there  can  be no  assurances  regarding  the  Partnership's  ability  to
successfully  recover any damages  relating to the siding and roofing  shingles,
the  Partnership  will  diligently  pursue  these and other  potential  recovery
sources.  Subsequent  to the quarter end, the  Partnership  reached a settlement
agreement with the original developer of the Asbury Commons property.  Under the
terms of this agreement,  the Partnership  expects to receive payments  totaling
$200,000 during the fourth quarter of fiscal 1998. The Partnership believes that
it has  adequate  cash  reserves  to fund  the  repair  work at  Asbury  Commons
regardless  of whether any  additional  recoveries  are  realized.  Nonetheless,
because of the seriousness of the construction  problems at Asbury Commons,  the
Partnership has suspended the  distribution  increase which was planned to begin
in the fourth  quarter of fiscal 1997. The  Partnership  had planned to increase
the distribution rate from 1% to 2.5% per annum on a Limited Partner's remaining
capital account of $882 per original $1,000 investment. However, in light of the
magnitude  of the  repair  work  required  at Asbury  Commons,  as well as other
potential near-term capital needs of the Partnership's commercial properties, as
discussed  further  below,  management  concluded  that it would be  prudent  to
continue distributions at a conservative level for the foreseeable future.

      The average  occupancy level at the Asbury Commons  Apartments was 92% for
the quarter ended  December 31, 1997,  compared to 96% for the prior quarter and
89% for the same  period  one year  ago.  In March  1997,  a  national  property
management  firm was hired to take over  management at Asbury Commons  effective
April 1, 1997.  The new  management  firm has completed  its initial  market and
positioning  surveys for Asbury Commons.  The property's  management and leasing
team is confident that the property will perform at average  occupancies similar
to comparable properties in the market, including newly constructed communities,
once the repair program  discussed above has been  completed.  The team has also
indicated  that  effective  rents can be  increased  at Asbury  Commons  through
improved signage, targeted advertising and promotion, and selected unit interior
upgrades.  During  the  third  quarter  of  fiscal  1998,  construction  of  new
apartments  in the  immediate  market  area  consisted  of the final  phase of a
300-unit  community.  The outlook for additional  apartment  construction in the
local  market  over the next  year is more  moderate  than  the  activity  which
occurred in calendar 1996 and 1997.

      Gateway 2000 Plaza (formerly Loehmann's Plaza Shopping Center) in Overland
Park,  Kansas was 91% leased as of December 31, 1997 and  physical  occupancy at
the Center increased to 89% from 84% as of the end of the prior quarter.  During
the third  quarter,  the  property's  leasing team signed a lease  expansion and
extension  agreement  with an existing  3,815 square foot tenant to occupy 4,830
square  feet.  The 1,015 square foot  expansion  area was carved out of the rear
portion of an adjacent 2,958 square foot space that has been available for lease
for over two years.  The 2,958 square foot space has been difficult to lease due
to its narrow but very deep  configuration.  With the signing of this  expansion
agreement,  the leasing team is now marketing the more  attractive  1,943 square
foot front portion of this space. The leasing team is also in final negotiations
with a  prospective  tenant to lease a vacant 4,980  square foot space.  If this
lease is executed, only three spaces, comprising 5,879 square feet, or less than
4% of the Center would remain available for lease. As previously  reported,  the
property's  leasing team signed a 13,410 square foot lease,  representing  9% of
the Center's  leasable  area,  with  Gateway  2000 Country  Stores to occupy the
former  Loehmann's  space.  Gateway  2000 Country  Stores,  a  manufacturer  and
retailer  of  personal  computers,  opened its new store on June 30,  1997.  The
property's  management  team reports that customer  traffic levels in the Center
have  increased  since the openings of both the 13,410 square foot Gateway store
and the  re-opening  of the expanded  13,000 square foot Alpine Hut store during
the first quarter of fiscal 1998.

      A portion of the funds  required to pay for the capital  improvement  work
related to the leasing and expansion projects at Gateway 2000 Plaza was expected
to come from a $550,000  Renovation and Occupancy  Escrow withheld by the lender
from the  proceeds  of a $4  million  loan  secured  by the  property  which was
obtained in February  1995.  Funds were to be released from the  Renovation  and
Occupancy  Escrow  to  reimburse  the  venture  for  the  costs  of the  planned
renovations in the event that the venture satisfied certain requirements,  which
included specified occupancy and rental income thresholds.  If such requirements
were not met  within 18 months  from the date of the loan  closing,  the  lender
would have the right to apply the  balance of the escrow  account to the payment
of loan  principal.  As of  August  1996,  18  months  from the date of the loan
closing, such requirements had not been met. Therefore, the lender had the right
to apply the balance of the escrow account to the payment of loan principal.  In
addition, the lender required that the Partnership  unconditionally  guaranty up
to  $1,400,000 of the loan  obligation.  This guaranty was to be released in the
event that the joint venture  satisfied the  requirement  for the release of the
Renovation  and Occupancy  Escrow funds or upon the  repayment,  in full, of the
entire  outstanding  mortgage loan liability.  During the quarter ended December
31, 1997,  management  requested and received the release of the  Renovation and
Occupancy Escrow Funds and the termination of the  unconditional  guaranty.  The
escrow funds will be used to replenish the Partnership's reserves.

      As reported  in the second  quarter,  the leasing  team at the West Ashley
Shoppes  Shopping Center signed a lease for the previously  vacant 36,416 square
foot former Children's Palace space. As previously  reported,  Children's Palace
closed its retail  store at the  center in May 1991 and  subsequently  filed for
bankruptcy  protection from creditors.  This anchor space at West Ashley Shoppes
had been vacant for the past six and a half years. The new tenant,  Waccamaw,  a
national home goods retailer, anticipates opening its new store during the first
calendar quarter of 1998. The Partnership will fund tenant improvement costs and
leasing  commissions  for  the  new  Waccamaw  store  out of its  existing  cash
reserves.  As Waccamaw should generate  significant  additional customer traffic
into the Center, the leasing team anticipates stronger interest from prospective
tenants for the remaining  available  7,750 square feet of shop space.  With the
signing of the Waccamaw  Pottery lease during the current  quarter,  West Ashley
Shoppes was 95% leased as of December 31, 1997.

      The 625 North Michigan Office Building in Chicago, Illinois,  remained 89%
leased at  December  31,  1997,  unchanged  from the prior  quarter.  During the
quarter  ended  December 31, 1997,  two tenants  renewed a total of 5,288 square
feet and  expanded  their  spaces by a total of 2,276  square  feet.  One tenant
occupying  1,378 square feet vacated its space.  During the next twelve  months,
leases  for  eight  tenants  occupying  19,685  square  feet  will  expire.  The
property's  leasing team expects  seven of the eight  tenants  occupying  16,302
square feet to renew,  and the remaining space is expected to be leased to a new
tenant.  Currently,  the property's leasing team is negotiating with a potential
new tenant  which  would  occupy  22,000  square feet of space.  This lease,  if
completed,  would increase the property's  occupancy by 7%. Occupancy levels and
rental  rates in the local  market  continue to improve  steadily.  The elevator
modernization project is nearing completion now that all four low-rise elevators
and three of the four high-rise cars are complete.  The remaining  high-rise car
is  expected  to be  completed  by the  end of the  fourth  quarter.  Management
continues  to  analyze a  potential  project  to  upgrade  the  building  lobby,
recapture  currently  unleasable  first  floor  space,  and  convert  all of the
leasable first floor space at 625 North  Michigan to retail usage.  Rental rates
paid by high-end  retailers on North Michigan Avenue are  substantially  greater
than those paid by office  tenants.  While the costs of such a project  would be
substantial,  it could have a significantly  positive effect on the market value
of the 625 North Michigan  property.  A comprehensive  cost-benefit  analysis of
this potential project is expected to be completed over the next several months.

      The four  buildings  comprising  the  Hacienda  Business  Park  investment
property in Pleasanton,  California, remained 100% leased to four tenants at the
end of the third quarter.  The local market continues to experience  rental rate
growth with market  occupancy  levels over 98%. During May, a new BART (Bay Area
Rapid Transit) station opened which will serve this Pleasanton office market. As
previously reported, one of the property's tenants, which occupied 51,683 square
feet,  or 28%  of the  property's  leasable  area,  under  several  leases  with
expiration  dates in 1998, 1999 and 2001,  announced that it would relocate from
Hacienda  Business  Park into a new  building  under  construction  in the local
market. One of the buildings at Hacienda Park contains 41,656 square feet and is
fully leased by this tenant. The tenant's remaining 10,027 square feet is leased
in an adjoining building. While this tenant has the right to sublease the space,
subject to various  approval rights by the Partnership,  it remains  responsible
for rental  payments and the contractual  share of operating  expenses until the
leases  expire.  During the quarter,  this tenant began  exercising its right to
sub-lease the 41,656  square foot  building it vacated.  The tenant signed three
sub-leases  for 11,706,  12,254 and 11,706  square  feet.  The  leasing  team is
actively  working to secure a replacement  tenant for the remaining 5,990 square
feet of available space. Management is currently reviewing the Pleasanton office
market  to assess  the  appropriate  timing  for the sale of the  Hacienda  Park
property.

      The  average  occupancy  level at The  Gables  Apartments  was 95% for the
quarter ended  December 31, 1997,  compared to 96% for the previous  quarter and
90% for the same period a year ago.  The high  occupancy  figures,  coupled with
favorable  rental rate growth over the past year,  reflect a healthy  demand for
apartments  resulting from strong job, household formation and population growth
in the Richmond,  Virginia market. As job growth is projected to continue during
the next few years,  the economic  outlook for Richmond  remains  positive.  Two
significant  new  employers  in the  Richmond  market  include  the  White  Oaks
semiconductor  plant,  which is nearly  completed  and projected to employ 1,500
people,  and the  recently  completed  Capital One credit  facility,  which will
employ  up to  1,000  people.  While  there  are  three  apartment  communities,
comprising approximately 900 units, under construction in the local market, only
one 280-unit community is considered competition for The Gables Apartments.  The
other  communities  are  located  at least  five miles from The Gables and offer
larger units at significantly higher rents. Given the currently favorable market
conditions in Richmond and for apartment properties in general, management plans
to explore the  potential for a near term sale of The Gables  Apartments  during
calendar 1998.

      At December 31, 1997, the Partnership and its consolidated  joint ventures
had available cash and cash equivalents of approximately  $6,005,000.  Such cash
and  cash   equivalent   amounts  will  be  utilized  for  the  working  capital
requirements   of  the   Partnership,   for   reinvestment  in  certain  of  the
Partnership's  properties including the anticipated  construction repair work at
Asbury Commons and the capital needs of the Partnership's  commercial properties
(as discussed further above) and for  distributions to the partners.  The source
of future liquidity and  distributions to the partners is expected to be through
cash generated from operations of the Partnership's  income-producing investment
properties  and  proceeds   received  from  the  sale  or  refinancing  of  such
properties.  Such sources of liquidity are expected to be sufficient to meet the
Partnership's needs on both a short-term and long-term basis.

Results of Operations
Three Months Ended December 31, 1997
------------------------------------

      The Partnership reported a net loss of $306,000 for the three months ended
December  31,  1997,  as compared to net loss of $224,000 for the same period in
the prior year.  This  unfavorable  change in the  Partnership's  net  operating
results is primarily attributable to an increase in the Partnership's  operating
loss which was  partially  offset by an increase in the  Partnership's  share of
unconsolidated  ventures' income. The Partnership's  operating loss increased by
$191,000, when compared to the same period in the prior year, due to an increase
in total expenses of $115,000 and a decrease in total revenues of $76,000.

      The  $115,000  increase  in total  expenses is mainly  attributable  to an
increase  in general  and  administrative  expenses  of  $124,000.  General  and
administrative  expenses  increased  primarily  due to an  increase  in  certain
required  professional fees,  including legal fees related to the examination of
potential   recovery  sources  for  the  repair  costs  at  the  Asbury  Commons
Apartments,  as  discussed  further  above.  As  discussed  further  above,  the
Partnership  is still in the process of assessing  the magnitude of the required
repairs at Asbury  Commons and expects to begin to incur repair costs during the
fourth quarter of fiscal 1998.

      The decrease in the Partnership's  revenues consisted of a $42,000 decline
in rental income from the consolidated joint ventures and a $34,000 reduction in
interest and other  income.  Rental income  decreased  mainly due to declines in
rental income at the  consolidated  Asbury Commons and West Ashley Shoppes joint
ventures  which was  partially  offset by an  increase  in rental  income at the
consolidated Hacienda Park joint venture. Rental income decreased at West Ashley
Shoppes due to a decrease in average  occupancy  and  substantial  decreases  in
common area  maintenance  reimbursements  and insurance  reimbursements.  Rental
income  decreased  at Asbury  Commons  due to a decrease  in average  occupancy.
Rental income at Hacienda Park increased  mainly due to the expansion of a major
tenant and a lease renewal of another major tenant, both at substantially higher
rates,  during  fiscal 1997.  Interest and other  income  decreased  mainly as a
result of  reductions  in  miscellaneous  income at the West  Ashley  and Asbury
Commons consolidated joint ventures.

      The Partnership's  share of  unconsolidated  ventures' income increased by
$55,000  primarily  due to an  increase of $154,000 in net income at the Gateway
2000 Plaza joint venture which was partially  offset by a decrease of $42,000 in
net income at the 625 North Michigan joint venture.  Net income increased at the
Gateway  2000 joint  venture due to an increase in rental  income as a result of
the increase in average occupancy referred to above. Net income decreased at the
625 North  Michigan  joint  venture  primarily due to an increase in repairs and
maintenance expenses as a result of the elevator modernization project discussed
above.

Nine Months Ended December 31, 1997
-----------------------------------

      The Partnership  reported a net loss of $584,000 for the nine months ended
December 31, 1997,  as compared to a net loss of $425,000 for the same period in
the prior year.  This  increase in the  Partnership's  net loss  resulted from a
$285,000 increase in the Partnership's operating loss which was partially offset
by a $126,000  increase in the Partnership's  share of unconsolidated  ventures'
income.  The increase in the  Partnership's  operating  loss was  primarily  the
result of  increases in general and  administrative,  property  operating,  real
estate  taxes  and   depreciation  and   amortization   expenses.   General  and
administrative  expenses  increased by $134,000  primarily due to an increase in
certain  required  professional  fees,  including  legal  fees  related  to  the
examination of potential recovery sources for repair costs at the Asbury Commons
Apartments, as discussed further above. Property operating expenses increased by
$45,000  primarily due to an increase in utilities expense at Asbury Commons and
repair and maintenance expenses at Hacienda Park. Real estate taxes increased by
$45,000 mainly due to higher tax expense at Hacienda Park based on the fact that
the prior year expense included  successful tax appeals and refunds from the tax
periods of 1994 and 1995.  Depreciation  and amortization  expense  increased by
$25,000 due to small increases at all three  consolidated  joint ventures during
the current nine-month  period. In addition,  rental income decreased by $59,000
mainly due to declines in rental income at the  consolidated  Asbury Commons and
West  Ashley  Shoppes  joint  ventures.   These   unfavorable   changes  in  the
Partnership's  operating  loss were  partially  offset by a decrease in interest
expense.  Interest  expense  decreased  by  $37,000  mainly  as a result  of the
scheduled amortization of the outstanding mortgage principal balances.

      The Partnership's  share of  unconsolidated  ventures' income increased by
$126,000  for the  current  nine-month  period  primarily  due to an increase of
$275,000 in net income at Gateway 2000 Plaza joint  venture  which was partially
offset by a decrease of $141,000 in net income at the 625 North  Michigan  joint
venture. Net income increased at Gateway 2000 Plaza due to an increase in rental
income as a result of the increase in average  occupancy  referred to above. Net
income  decreased at the 625 North  Michigan  joint venture  primarily due to an
increase  in  repairs  and  maintenance  expenses  as a result  of the  elevator
modernization project discussed above.


<PAGE>


                                     PART II
                                Other Information

Item 1. Legal Proceedings    NONE

Item 2. through 5.           NONE

Item 6. Exhibits and Reports on Form 8-K

(a)  Exhibits:    NONE

(b) Reports on Form 8-K:

     No Current Reports on Form 8-K were filed during the period covered by this
report.




<PAGE>



            PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP


                                SIGNATURES

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


                                    PAINEWEBBER EQUITY PARTNERS TWO
                                          LIMITED PARTNERSHIP


                                    By:  Second Equity Partners, Inc.
                                         Managing General Partner



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






Dated:  February 12, 1998