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 QUARTER ENDED December 31, 1998

                                    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, 1998 and March 31, 1998 (Unaudited)
                                 (In thousands)

                                     ASSETS
                                                 December 31   March 31
                                                 -----------   --------
Operating investment properties:
   Land                                           $    2,342   $   7,351
   Building and improvements                           5,437      40,616
                                                  ----------   ---------
                                                       7,779      47,967
   Less accumulated depreciation                      (2,207)    (14,044)
                                                  ----------   ---------
                                                       5,572      33,923

Investments in unconsolidated joint
  ventures, at equity                                 30,234      30,237
Cash and cash equivalents                             12,652       6,202
Escrowed cash                                             76         398
Accounts receivable                                      299         236
Prepaid expenses                                           2          31
Deferred rent receivable                                 145         737
Deferred expenses, net                                    90         510
                                                  ----------   ---------
                                                  $   49,070   $  72,274
                                                  ==========   =========

                        LIABILITIES AND PARTNERS' CAPITAL

Accounts payable and accrued expenses             $      348   $     427
Net advances from consolidated ventures                  154         115
Tenant security deposits                                   -         111
Bonds payable                                              -       2,171
Mortgage notes payable                                 9,171      19,369
Other liabilities                                          -         331
Partners' capital                                     39,397      49,750
                                                  ----------   ---------
                                                  $   49,070   $  72,274
                                                  ==========   =========







                             See accompanying notes.



<PAGE>


               PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
                      CONSOLIDATED STATEMENTS OF OPERATIONS
   For the three and nine months ended December 31, 1998 and 1997 (Unaudited)
                      (In thousands, except per Unit data)

                                  Three Months Ended    Nine Months Ended
                                      December 31,         December 31,      
                                  ------------------    -----------------
                                   1998       1997        1998      1997
                                   ----       ----        ----      ----
Revenues:
   Rental income and expense
     reimbursements               $ 2,102   $1,152      $ 4,725   $3,714
   Interest and other income          227      104          513      304
                                  -------   ------      -------   ------
                                    2,329    1,256        5,238    4,018
Expenses:
   Property operating expenses        633      379        1,267    1,083
   Depreciation and amortization      693      506        1,744    1,556
   Interest expense                 1,436      507        2,392    1,455
   Real estate taxes                  197      129          470      400
   General and administrative         194      217          452      506
                                  -------   ------      -------   ------
                                    3,153    1,738        6,325    5,000
                                  -------   ------      -------   ------
Operating loss                       (824)    (482)      (1,087)    (982)

Gains on sale of operating
   investment properties           10,456        -       10,456        -

Consolidated venture 
   partners' share
   of operations                     (331)       -         (331)       -

Partnership's share of gain
   on sale of unconsolidated 
   operating investment
   property                             -        -        5,848        -

Partnership's share of
  unconsolidated
  ventures' income                    194      176          396      398
                                  -------   ------      -------   ------

Net income (loss)                 $ 9,495  $  (306)     $15,282   $ (584)
                                  =======  =======      =======   ======

Net income (loss) per 1,000
  Limited Partnership Unit        $ 69.93  $ (2.25)     $ 112.55  $(4.30)
                                  =======  =======      ========  ======

Cash distributions per 1,000
  Limited Partnership Unit        $147.21  $  2.21      $ 190.63  $ 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, 1998 and 1997 (Unaudited)
                                 (In thousands)

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

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

Balance at March 31, 1998                           $   (554)   $  50,304
Cash distributions                                        (9)     (25,626)
Net income                                               152       15,130
                                                    --------    ---------
Balance at December 31, 1998                        $   (411)   $  39,808
                                                    ========    =========






















                             See accompanying notes.



<PAGE>


               PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
        For the nine months ended December 31, 1998 and 1997 (Unaudited)
         Increase (Decrease) in Cash and Cash Equivalents (In thousands)

                                                       1998        1997
                                                       ----        ----
Cash flows from operating activities:
   Net income (loss)                               $  15,282    $    (584)
   Adjustments to reconcile net income 
     (loss) to net cash provided by 
     operating activities:
     Gains  on  sale of operating investment 
       properties                                    (10,456)           -
     Consolidated venture partners' share 
       of operations                                     331            -
     Partnership's  share of gain on
       sale of unconsolidated operating
       investment property                            (5,848)           -
     Partnership's share of unconsolidated
       ventures' income                                 (396)        (398)
     Depreciation and amortization                     1,744        1,556
     Amortization of deferred financings costs             -           33
     Changes in assets and liabilities:
      Escrowed cash                                      322           (8)
      Accounts receivable                                (63)          36
      Prepaid expenses                                    29           (7)
      Deferred rent receivable                            62           75
      Deferred expenses                                 (588)          (8)
      Accounts payable and accrued expenses              (79)         261
      Advances from consolidated ventures                 39         (483)
      Tenant security deposits                          (111)         (61)
                                                   ---------    ---------
         Total adjustments                           (15,014)         996
                                                   ---------    ---------
         Net cash provided by operating
           activities                                    268          412
                                                   ---------    ---------

Cash flows from investing activities:
   Net proceeds from sales of operating
     investment properties                            37,776            -
   Distributions from unconsolidated ventures          7,238        2,486
   Additional investments in unconsolidated
     ventures                                           (991)        (844)
   Additions to operating investment properties       (1,862)        (181)
                                                   ---------    ---------
         Net cash provided by investing 
          activities                                  42,161        1,461
                                                   ---------    ---------

Cash flows from financing activities:
   Distributions to partners                         (25,635)        (900)
   Repayment of principal on bonds                      (146)           -
   Repayment of principal on long term debt          (10,198)        (290)
                                                   ---------    ---------
         Net cash used in financing activities       (35,979)      (1,190)
                                                   ---------    ---------

Net increase in cash and cash equivalents              6,450          683

Cash and cash equivalents, beginning of period         6,202        5,322
                                                   ---------    ---------
Cash and cash equivalents, end of period           $  12,652    $   6,005
                                                   =========    =========

Cash paid during the period for interest           $   2,392    $   1,422
                                                   =========    =========

Supplemental Schedule of Noncash Financing Activities:

  Assumption of bonds payable by buyer of 
   operating investment property                   $   2,025    $       -
                                                   =========    =========

                             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, 1998. 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, 1998 and March 31, 1998 and  revenues  and
expenses for each of the three- and  nine-month  periods ended December 31, 1998
and 1997. 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, 1998 and 1997 is $176,000 and $172,000, 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 the  nine-month
periods ended  December 31, 1998 and 1997 is $11,000 and $13,000,  respectively,
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,  1998,  the   Partnership  had  investments  in  two
unconsolidated joint venture partnerships (three at December 31, 1997) 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.

      On July 2, 1998, Richmond Gables Associates,  a joint venture in which the
Partnership  held an interest,  sold The Gables at Erin Shades  Apartments to an
unrelated  third  party  for  $11,500,000.  After  deducting  closing  costs and
property  adjustments  of $320,000,  The Gables joint venture  received net sale
proceeds  of  $11,180,000.  These  net sale  proceeds  were  split  between  the
Partnership  and its  co-venture  partner  in  accordance  with the terms of The
Gables joint venture  agreement.  The Partnership  received  $10,602,000 and the
non-affiliated  co-venture  partner received $578,000 as their share of the sale
proceeds. From its share of the proceeds, the Partnership prepaid its refinanced
original  zero coupon loan secured by the  property  and the related  prepayment
fee, the sum of which was $5,449,000. The Partnership distributed the $5,153,000
of net  proceeds  from the sale of The  Gables,  along  with an  amount  of cash
reserves that exceeded  expected future  requirements,  in the form of a special
distribution  totalling  approximately  $5,243,000,  or $39 per original  $1,000
investment,  on July 20, 1998. In accordance  with the  Partnership's  policy to
recognize  significant  lag period  transactions in the period which they occur,
the Partnership accelerated the recognition of the operating results of Richmond
Gables  Associates  during the quarter ended  December 31, 1998 and recognized a
gain of $5,848,000 on the sale of the Gables operating investment property.

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

                    Condensed Combined Summary of Operations
         For the three and nine months ended September 30, 1998 and 1997
                                 (in thousands)

                                  Three Months Ended     Nine Months Ended
                                      September 30,         September 30,       
                                  ------------------     ----------------- 
                                    1998       1997        1998      1997
                                    ----       ----        ----      ----
Revenues:
   Rental revenues and 
     expense recoveries           $ 2,298   $2,402        $7,518    $7,153
   Interest and other income            9      117            61       356
                                  -------   ------        ------    ------
                                    2,307    2,519         7,579     7,509

Expenses:
   Property operating expenses        765      619         2,161     2,386
   Real estate taxes                  561      593         1,551     1,660
   Interest expense                    91      198           923       594
   Depreciation and amortization      672      901         2,399     2,383
                                  -------   ------        ------    ------
                                    2,089    2,311         7,034     7,023
                                  -------   ------        ------    ------
Operating income                      218      208           545       486

Gain on sale of operating
  investment property                   -        -         6,433         -
                                  -------   ------        ------    ------
Net income                        $   218   $  208        $6,978    $  486
                                  =======   ======        ======    ======

Net income:
   Partnership's share 
     of combined income           $   211   $  191        $6,289    $  442
   Co-venturers' share 
     of combined income                 7       17           689        44
                                  -------   ------        ------    ------
                                  $   218   $  208        $6,978    $  486
                                  =======   ======        ======    ======

               Reconciliation of Partnership's Share of Operations
         For the three and nine months ended December 31, 1998 and 1997
                                 (in thousands)

                                 Three Months Ended     Nine Months Ended
                                    December 31,           December 31,  
                                 ------------------     -----------------
                                    1998       1997        1998      1997
                                    ----       ----        ----      ----

   Partnership's share of 
     operations, as shown above   $   211   $   191     $6,289    $   442
   Amortization of excess basis       (17)      (15)       (45)       (44)
                                  -------   -------     ------    -------
   Partnership's share of
     unconsolidated ventures' 
     net income                   $   194   $   176     $6,244    $   398
                                  =======   =======     ======    =======

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

                                   Three Months Ended     Nine Months Ended
                                      December 31,           December 31,  
                                 ------------------     -----------------
                                    1998       1997        1998      1997
                                    ----       ----        ----      ----

   Partnership's share of
      unconsolidated
      ventures' income            $   194   $   176      $   396    $  398
   Partnership's share of 
      gain on sale of 
      unconsolidated 
      operating investment 
      property                          -         -        5,848         -
                                  -------   -------     --------    ------
                                  $   194   $   176     $  6,244    $  398
                                  =======   =======     ========    ======
<PAGE>

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

      The  Partnership's  balance  sheet  at  December  31,  1998  includes  one
operating investment property (three at March 31, 1998) owned by a joint venture
in which  the  Partnership  has a  controlling  interest;  West  Ashley  Shoppes
Associates.  The  Partnership's  policy  is to  report  the  operations  of  the
consolidated  joint  ventures on a  three-month  lag.  The West  Ashley  Shoppes
Shopping Center consists of approximately 135,000 square feet of leasable retail
space located in Charleston, South Carolina.

      On November 20, 1998,  Hacienda Park Associates,  a joint venture in which
the  Partnership  had a controlling  interest,  sold the Hacienda  Business Park
property to an unrelated third party for $25 million.  The property consisted of
four separate office/R&D buildings comprising approximately 185,000 square feet,
located in  Pleasanton,  California.  The  Partnership  received net proceeds of
approximately   $20,861,000  after  deducting  closing  costs  of  approximately
$278,000,  net closing  proration  adjustments  of  approximately  $89,000,  the
repayment of the existing  first mortgage note of  approximately  $3,769,000 and
accrued interest of approximately $3,000.

      On December 21, 1998, Atlanta Asbury Partnership, a joint venture in which
the  Partnership  had a  controlling  interest,  sold the  Asbury  Commons to an
unrelated third party for $13.345  million.  The Asbury Commons  Apartments is a
204-unit  residential  apartment  complex  located  in  Atlanta,   Georgia.  The
Partnership  received net proceeds of  approximately  $5,613,000 after deducting
closing  costs of  approximately  $291,000,  closing  proration  adjustments  of
approximately   $90,000,   the  repayment  of  the  existing  mortgage  note  of
approximately  $6,598,000,  accrued  interest  of  approximately  $10,000  and a
prepayment penalty of approximately $743,000.

      The  Partnership's  policy is to report the operations of the consolidated
joint ventures on a three-month lag. However,  the Partnership's  policy is also
to record significant lag-period transactions in the period in which they occur.
Accordingly,  the  Partnership  accelerated  the  recognition  of the  operating
results of Hacienda Park  Associates and Atlanta Asbury  Partnership  during the
quarter ended December 31, 1998 and recorded gains of $9,051,000 and $1,405,000,
respectively, on the sales of the operating investment properties. The following
is a combined  summary of property  operating  expenses for Saratoga  Center and
EG&G  Plaza  (through  the  date of sale in  1998),  Asbury  Commons  Apartments
(through the date of sale in 1998) and the West Ashley Shoppes  Shopping  Center
for the three and nine months ended September 30, 1998 and 1997 (in thousands):

                                  Three Months Ended     Nine Months Ended
                                     September 30,          September 30,     
                                  ------------------    ------------------ 
                                   1998       1997        1998      1997
                                   ----       ----        ----      ----
     Property operating expenses:
        Repairs and maintenance   $   192    $   128     $  374   $  361
        Utilities                      77         57        161      169
        Salaries and related costs    137         48        251      127
        Insurance                      39         17         72       50
        Management fees                59         36        134      118
        Administrative and other      129         93        275      258
                                  -------    -------     ------   ------
                                  $   633    $   379     $1,267   $1,083
                                  =======    =======     ======   ======

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

      Bonds  payable  consisted of the Hacienda  Park joint  venture's  share of
liabilities  for bonds issued by the City of  Pleasanton,  California for public
improvements that benefited Hacienda Business Park and the operating  investment
property and were secured by liens on the  operating  investment  property.  The
bonds for which the operating investment property was subject to assessment bore
interest  at  rates  ranging  from  5%  to  7.87%,   with  an  average  rate  of
approximately   7.2%.   Principal  and  interest  were  payable  in  semi-annual
installments  and due to mature in years 2004 through  2017.  As a result of the
sale of the  Hacienda  Park  property  on  November  20,  1998 (see Note 4), the
liability for the bond assessments was transferred to the buyer of the operating
investment property.

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

      Mortgage  notes  payable  on  the  consolidated   balance  sheets  of  the
Partnership at December 31, 1998 and March 31, 1998 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,  1998 and  March  31,
     1998.                                        $ 9,171        $ 9,282

     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 required 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
     March 31, 1998. The loan was repaid
     in full during fiscal 1999 from the
     proceeds   of  the   sale   of  the
     operating  investment property (see
     Note 4).                                           -          6,707

     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 required 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 March 31,  1998.
     The loan was repaid in full  during
     fiscal  1999 from the  proceeds  of
     the    sale   of   the    operating
     investment property (see Note 4).                  -          3,380  
                                                  -------        ------- 
                                                  $ 9,171        $19,369 
                                                  =======        =======


      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 bore interest at 8.72% and was scheduled to mature in 7 years. As discussed
further  in Note 3, The  Gables  Apartments  was  sold on July 2,  1998 and this
mortgage loan was repaid in full. On February 10, 1995, the  Partnership  repaid
an outstanding  zero coupon loan secured by Gateway Plaza  (formerly  Loehmann's
Plaza), 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 Gateway
Plaza shopping  center,  carries an annual interest rate of 9.04% and matures on
February 15, 2003. The loan requires monthly  principal and interest payments of
$34,000.  Legal  liability for the repayment of the new mortgage loan secured by
the Gateway Plaza property rests with the related  unconsolidated joint venture.
Accordingly  the  mortgage  loan  liability  is  recorded  on the  books  of the
unconsolidated  joint venture.  The Partnership  has indemnified  Daniel/Metcalf
Associates   Partnership  and  the  related   co-venture   partner  against  all
liabilities, claims and expenses associated with this borrowing.

<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, 1998 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 remaining investments in the Partnership's  portfolio. As part of that plan,
as discussed  further below, The Gables  Apartments was marketed for sale during
the quarter ended June 30, 1998 and sold during the quarter ended  September 30,
1998. In addition, during the first quarter the Partnership began the process of
marketing the Hacienda  Business  Park  property for sale. As discussed  further
below,  this sale  transaction  closed  during  the  third  quarter.  Also,  the
Partnership began marketing the Asbury Commons  Apartments in the second quarter
of fiscal  1999 and  completed  a sale of the  property  at the end of the third
quarter.  With  regard to the  three  remaining  commercial  office  and  retail
properties,  the  Partnership  is  working  with  each  property's  leasing  and
management team to develop and implement  programs that will protect and enhance
value and maximize cash flow at each property  while at the same time  exploring
potential  sale  opportunities.  These programs  include  pursuing a new leasing
opportunity at 625 North Michigan  Avenue,  which is noted below, and completing
leasing  programs  currently  underway at Gateway Plaza and West Ashley Shoppes.
Although there are no assurances, it is currently contemplated that sales of the
Partnership's  remaining  assets could be completed prior to the end of calendar
1999.

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

      On November 20, 1998,  Hacienda  Park  Associates,  a joint venture in the
Partnership had an interest, sold the Hacienda Business Park property located in
Pleasanton,  California,  to an  unrelated  third  party  for $25  million.  The
Hacienda Park property  consisted of one building  known as Saratoga  Center and
two attached buildings known as Gibraltar Center.  The Partnership  received net
proceeds  of  approximately   $20,862,000   after  deducting  closing  costs  of
approximately  $278,000,  net closing  proration  adjustments  of  approximately
$88,000,  the repayment of the existing  first  mortgage  note of  approximately
$3,769,000 and accrued interest of approximately $3,000. As a result of the sale
of the Hacienda  Park  property,  the  Partnership  made a special  distribution
totalling approximately $19,492,000,  or $145 per original $1,000 investment, on
December 4, 1998.  Approximately  $1,370,000  of the total net proceeds from the
sale of the  Hacienda  Park  property has been added to the  Partnership's  cash
reserves for potential  investment in 625 North  Michigan  Avenue because of the
recently approved retail development rights for this property. Given the current
strength of the local  Pleasanton  market  conditions,  during the quarter ended
June 30, 1998 management  interviewed potential real estate brokers and selected
a national real estate firm that is a leading seller of R&D/office properties to
market Hacienda Park for sale. A marketing  package was subsequently  finalized,
and  comprehensive  sales efforts  began in June. As a result of those  efforts,
several offers were received. After completing an evaluation of these offers and
the relative strength of the prospective purchasers, the Partnership selected an
offer.  A purchase and sale  agreement  was signed on September 21, 1998 with an
unrelated  third-party   prospective  buyer  and  a  non-refundable  deposit  of
$1,500,000 was made on October 21, 1998. The prospective buyer completed its due
diligence work in early November and closed on this  transaction on November 20,
1998,  as  described  above.  In  accordance  with the  Partnership's  policy of
recording significant lag-period transactions in the period in which they occur,
the Partnership accelerated the recognition of the operating results of Hacienda
Park  Associates  during the quarter ended December 31, 1998 and recorded a gain
of $9,051,000 on the sale of the operating investment property.

      On December 21, 1998, Atlanta Asbury Partnership, a joint venture in which
the Partnership  had an interest,  sold the property known as the Asbury Commons
Apartments located in Atlanta,  Georgia, to an unrelated third party for $13.345
million. The Partnership received net proceeds of approximately $5,613,000 after
deducting closing costs of approximately $291,000, closing proration adjustments
of  approximately  $90,000,  the  repayment  of the  existing  mortgage  note of
approximately  $6,598,000,  accrued  interest  of  approximately  $10,000  and a
prepayment  penalty  of  approximately  $743,000.  Despite  incurring  a sizable
prepayment  penalty on the repayment of the  outstanding  first  mortgage  loan,
management  believed that a current sale of the Asbury  Commons  property was in
the best  interests  of the Limited  Partners  due to the  exceptionally  strong
market  conditions  that exist at the present time and which  resulted in a very
favorable sale price.  As previously  reported,  the  Partnership had selected a
regional  real  estate  firm  with a  strong  background  in  selling  apartment
properties to market the Asbury Commons  property for sale. Sales materials were
finalized  and an extensive  marketing  campaign  began in September  1998. As a
result of these sale efforts,  seven offers were received.  After  completing an
evaluation  of  these  offers  and  the  relative  strength  of the  prospective
purchasers,  the  Partnership and its co-venture  partner  selected an offer and
negotiated a purchase and sale  agreement.  A purchase  and sale  agreement  was
signed on November 9, 1998, and the buyer made a deposit of $250,000.  After the
completion of the buyer's due  diligence,  the  transaction  closed as described
above on December 21,  1998.  In  accordance  with the  Partnership's  policy of
recording significant lag-period transactions in the period in which they occur,
the Partnership  accelerated the recognition of the operating results of Atlanta
Asbury  Partnership  during the quarter  ended  December 31, 1998 and recorded a
gain  of  $1,405,000  on the  sale of the  operating  investment  property.  The
Partnership  plans to  distribute  the net proceeds  from the sale of the Asbury
Commons property in the form of a special capital  distribution of approximately
$6,453,000,  or $48 per original $1,000  investment,  to be paid on February 12,
1999,  along with the  regular  quarterly  distribution  for the  quarter  ended
December 31, 1998.  With the sale of Hacienda  Business Park, the Asbury Commons
Apartments and The Gables Apartments, the near-term planned sales of West Ashley
Shoppes and Gateway  Plaza  Shopping  Center,  and the  resulting  reduction  in
distributable  cash flow to be  received  by the  Partnership,  the payment of a
regular quarterly  distribution will be discontinued  beginning with the quarter
ending March 31,  1999.  A final  regular  quarterly  distribution  of $2.21 per
original  $1,000  investment  will be made on February  12, 1999 for the quarter
ended December 31, 1998.

      The 625 North  Michigan  Office  Building  in Chicago,  Illinois,  was 96%
leased and 95% occupied at December 31, 1998.  During the third  quarter,  a new
tenant  signed a lease and took  occupancy  of 2,602  square  feet of space.  In
addition,  one tenant occupying 2,115 square feet renewed its lease.  During the
second  quarter,  a lease was  signed  with an  existing  tenant  that  occupies
approximately  8,000  square feet.  This tenant will  relocate and expand into a
total of 10,200 square feet.  The space is still being  renovated in preparation
for the  tenant's  occupancy  which is now expected to occur by the end of March
1999. The downtown  Chicago real estate market continues to display an improving
trend.  A  competitive  office  property  within the local  market has  recently
obtained  approvals to convert its lower floors into a hotel. This should result
in the  removal of 290,000  square  feet of office  space  from the  market.  In
addition,  an office  tenant at that  property has  recently  completed a 62,000
square foot expansion, which brings the occupancy level in the building's office
portion to 100%. In this local market,  where there is no current or planned new
construction of office space, this reduction in vacant office space has resulted
in a reduction in the market  vacancy  level and places more upward  pressure on
rental rates.  The higher  effective rents currently being achieved at 625 North
Michigan are expected to increase cash flow and value as new tenants sign leases
and existing tenants sign lease renewals in calendar year 1999. Retail and hotel
development  in  the  local  market  continues,  as  evidenced  by  plans  for a
Nordstrom's-anchored  95,000  square  foot  retail  development  which  recently
received  preliminary approval from the City. This proposed  development,  which
will be located  two blocks  from 625 North  Michigan,  is part of a master plan
that  includes  several  new  hotels,   entertainment  and  parking   facilities
encompassing  five city  blocks.  Management  continues  to analyze a  potential
project for the property which includes an upgrade to the building lobby and the
addition of a major retail  component to the building's  North  Michigan  Avenue
frontage.  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 significant  positive effect on
the market value of the 625 North  Michigan  property.  During the quarter ended
June 30, 1998,  preliminary  approval was received  from the City to enclose the
arcade  sections of the first floor of the 625 North  Michigan  building,  which
opens  the way for  this  potential  retail  development.  Formal  approval  was
received at the September  meeting of the City  Council.  Now that this approval
has been obtained, the Partnership is exploring potential sale opportunities for
this property.

      Gateway Plaza Shopping Center (formerly  Loehmann's Plaza Shopping Center)
in Overland  Park,  Kansas was 95% leased and  occupied as of December 31, 1998.
The  property's  management  team reports that the  increased  customer  traffic
levels in the Center have been maintained since the opening of the 13,410 square
foot Gateway  2000  Country  Store.  During the third  quarter,  two new tenants
signed  leases and took  occupancy of 3,943  square  feet.  Over the next twelve
months,  five leases  representing  a total of 27,486  square feet will  expire.
Three  tenants,  which occupy  6,487  square  feet,  are expected to renew their
leases,  while the other two tenants  which occupy  20,999  square feet will not
renew their leases.  One of these tenants closed its store at the end of January
1999.  This tenant  operated  the 13,000  square foot Alpine Hut store which has
experienced  operational  difficulties  and will be closing  its  business.  The
property's  leasing  team is  actively  working to lease this space and has held
discussions  with two  prospective  tenants to lease  4,289  square  feet of the
13,000 square feet. As previously reported, a tenant occupying 6,875 square feet
is also  experiencing  operational  difficulties;  however,  this  tenant  is in
compliance  with the  payment  schedule  that allows the tenant to fully pay its
current rent while  repaying all of the past due amounts by the end of May 1999.
Because of the consistent improvement in occupancy levels over the past year and
the strong  performance  of the  center's  new anchor  tenant,  the  Partnership
believes it is the appropriate time to market the property for sale.  During the
third quarter,  the  Partnership  selected a national real estate firm that is a
leading seller of this property type to market Gateway Plaza for sale.

      As previously  reported,  in the second quarter of fiscal 1998 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.  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 a period of six and a half  years.  The new tenant,
Waccamaw,  a national  home goods  retailer,  opened its new store in March 1998
which brought the occupancy level at the property up to 95%, where it remains as
of December 31, 1998. As Waccamaw has generated significant  additional customer
traffic into the Center,  the leasing team has received  stronger  interest from
prospective tenants for the remaining available 7,650 square feet of shop space.
Subsequent  to the quarter  end, the leasing team signed a lease for nearly half
of the vacant space with one of these prospects.  The tenant,  which will occupy
3,150 square feet,  will take occupancy next quarter.  In addition,  the leasing
term is actively  negotiating with a tenant which would occupy 1,050 square feet
in one of the two remaining vacant shops.  During the third quarter,  a two-year
lease renewal was signed with an existing tenant.  Over the next 12 months, only
two leases  representing a total of 3,500 square feet will expire.  One of these
tenants  which  occupied  1,050  square feet moved from the Center at the end of
January  1999.  As  previously  reported,  with an occupancy  level of 95% and a
stable base of tenants, the Partnership believes it is an opportune time to sell
West Ashley  Shoppes.  As part of a plan to market the  property  for sale,  the
Partnership  selected a national  real estate  firm that is a leading  seller of
this type of property.  Preliminary  sales  materials  were prepared and initial
marketing  efforts were undertaken.  A marketing  package was then finalized and
comprehensive sale efforts began in November 1998.

      At December 31, 1998, the Partnership and its consolidated  joint ventures
had available cash and cash equivalents of approximately $12,652,000.  Such cash
and cash  equivalents  include the net proceeds from the sale of Asbury  Commons
which will be  distributed  to the Limited  Partners on February  12,  1999,  as
discussed further above. The remainder of such cash and cash equivalent  amounts
will be utilized for the working capital  requirements of the  Partnership,  the
capital needs of the  Partnership's  three remaining  commercial  properties (as
discussed further above),  and for distributions to the partners.  The source of
future  liquidity  and  distributions  to the partners is expected to be through
cash generated from operations of the Partnership's  income-producing investment
properties  and  proceeds   received  from  the  sale  or  refinancing  of  such
properties.  Such sources of liquidity are expected to be sufficient to meet the
Partnership's needs on both a short-term and long-term basis.

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

Results of Operations
Three Months Ended December 31, 1998
------------------------------------

      The  Partnership  had net income of $9,495,000  for the three months ended
December  31, 1998 as compared to a net loss of $306,000  for the same period in
the prior year. The favorable change in net income (loss) was primarily a result
of the gains  realized from the sale of two  consolidated  operating  investment
properties   during  the  current  period.   As  discussed  further  above,  the
Partnership  sold the consolidated  Hacienda  Business Park on November 20, 1998
and realized a gain of $9,051,000.  The Partnership  also sold the  consolidated
Asbury  Commons  Apartments  on  December  21,  1998  and  realized  a  gain  of
$1,405,000.

      The Partnership's  share of  unconsolidated  ventures' income increased by
$18,000 for the three months ended December 31, 1998,  when compared to the same
period in the prior year, primarily due to the sale of The Gables at Erin Shades
Apartments on July 2, 1998.  The Gables joint  venture had an operating  loss of
$62,000  during the third  quarter of the prior year.  In  addition,  net income
increased  at Gateway  Plaza  during the  current  quarter by $46,000  due to an
increase  in rental  income.  Rental  income  increased  due to an  increase  in
occupancy.  The increase in net income at Gateway Plaza and decrease in net loss
at The Gables  were  partially  offset by a decrease  in net income at 625 North
Michigan which was primarily due to an increase in real estate taxes.

      The gains realized from the sales of the Hacienda Business Park and Asbury
Commons Apartments and the increase in the Partnership's share of unconsolidated
ventures'  income were  partially  offset by an  increase  in the  Partnership's
operating loss of $342,000 for the current  three-month  period. The increase in
the  Partnership's  operating  loss was  primarily  a result of an  increase  in
interest  expense  due to the  prepayment  penalty of  $743,000  incurred on the
payoff of the debt  secured  by the  Asbury  Commons  Apartments,  as  discussed
further  above.  The  impact  of the  prepayment  penalty  on the  Partnership's
operating loss was partially offset by the additional  operating  results of the
Hacienda Business Park and Asbury Commons joint ventures included in the current
period due to the acceleration of the lag-period recognized upon the sale of the
properties, as discussed further above.

Nine Months Ended December 31, 1998
-----------------------------------

      The  Partnership  had net income of $15,282,000  for the nine months ended
December  31, 1998 as compared to a net loss of $584,000  for the same period in
the prior year. The favorable change in net income (loss) was primarily a result
of the gains  realized from the sale of three  operating  investment  properties
during the current period.  As discussed further above, the Partnership sold the
consolidated  Hacienda Business Park on November 20, 1998 and realized a gain of
$9,051,000.  In addition,  the Partnership sold the consolidated  Asbury Commons
Apartments  on  December  21,  1998  and  realized  a gain  of  $1,405,000.  The
Partnership  also  realized  a gain from the sale of the  unconsolidated  Gables
Apartments, which was sold on July 2, 1998, in the amount of $5,848,000.

      The gains realized from the sales of the  consolidated  Hacienda  Business
Park and Asbury Commons Apartments and the unconsolidated Gables Apartments were
partially offset by an increase in the Partnership's  operating loss of $105,000
for the current nine-month  period. The increase in the Partnership's  operating
loss was  primarily  a result of an  increase  in  interest  expense  due to the
prepayment penalty of $743,000 incurred on the payoff of the debt secured by the
Asbury  Commons  Apartments,  as  discussed  further  above.  The  impact of the
prepayment  penalty on the Partnership's  operating loss was partially offset by
the additional  operating  results of the Hacienda Park and Asbury Commons joint
ventures  included  in  the  current  period  due  to  the  acceleration  of the
lag-period  recognized  upon the sale of the  properties,  as discussed  further
above.

      The Partnership's  share of  unconsolidated  ventures' income decreased by
$2,000 for the nine months  ended  December  31, 1998 when  compared to the same
period in the prior year.  This  decrease is  primarily a result of the $472,000
prepayment  penalty  incurred  on the  pay-off  of the Gables  debt and  various
write-offs of  unamortized  deferred  expenses  associated  with the sale of The
Gables at Erin Shades  Apartments.  The increase in operating loss at The Gables
was offset by increases in net income at both the 625 North Michigan and Gateway
Plaza joint  ventures due to  increases in rental  income at both of the related
operating investment properties.


<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:

     A Current  Report on Form 8-K dated  November 20, 1998 was filed during the
current quarter to report the sale of the Hacienda Business Park property and is
hereby incorporated herein by reference.  In addition,  a Current Report on Form
8-K dated  December 21, 1998 was filed  subsequent  to the quarter end to report
the sale of the Asbury Commons Apartments and is hereby  incorporated  herein by
reference



<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 10, 1999